UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549










FORM 20-F










(Mark One)



| ̈  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
    12(g) OF THE SECURITIES EXCHANGE ACT OF 1934                                            
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                 
|OR
|   |                                                                                                                                                 
|x  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012             
|   |                                                                                                                                                 
|OR
|   |                                                                                                                                                 
| ̈  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________ to_________
|   |                                                                                                                                                 
|OR
|   |                                                                                                                                                 
| ̈  | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934                                                 



Date of event requiring this shell company
report

Commission file number: 001-35109



|QIHOO
    360 TECHNOLOGY CO. LTD.                                                                                                                                                                                                                                                                                      
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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)                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                       
|Building No. 2
        6 Jiuxianqiao Road, Chaoyang District
        Beijing 100015, People’s
        Republic of China                                                                                                                                                                                                
|(Address of principal executive offices)                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                       
|Alex Zuoli Xu, Co-Chief Financial
        Officer
        Jue Yao, Co-Chief Financial Officer
        Building No. 2
        6 Jiuxianqiao Road, Chaoyang District
        Beijing 100015, People’s
        Republic of China
        Tel: (+86-10) 5878-1000
        Fax: (+86-10) 5682-2000
        E-mail: ir@360.cn
|(Name, Telephone, E-mail 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 registered
|--------------------------------------------------- |  | ---------------------------------------------
|American depositary
    shares, every two           |  | New York Stock
    Exchange                  
|representing
    three Class A ordinary shares, par |  |                                              
|value $0.001
    per 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)
|                



Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report.



123,472,524 Class A ordinary shares and 60,684,573 Class
B ordinary shares, par value $0.001 per share, as of December 31, 2012.



Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.

xYes ̈No



If this report is an annual or transition report, indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.

 ̈YesxNo



Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

xYes ̈No



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).

xYes ̈No



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



|Large
    accelerated filerx |  | Accelerated
    filer ̈ |  | Non-accelerated
    filer ̈
|---------------------------- |  | ---------------------- |  | --------------------------



Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:



|U.S.
    GAAPx |  | International
    Financial Reporting Standards as issuedby the International Accounting Standards Board ̈ |  | Other ̈
|-------------- |  | --------------------------------------------------------------------------------------------------------- |  | ------



*If “Other” has been checked in response to the
previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 ̈Item 17 ̈Item 18



If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 ̈YesxNo



(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)



Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court.



 ̈Yes ̈No











TABLE OF CONTENTS



|INTRODUCTION | 1                                                                               
|------------ | --------------------------------------------------------------------------------
|             |                                                                                 
|PART I       |                                                                                 
|             |                                                                                 
|Item 1.      | IDENTITY OF DIRECTORS,
    SENIOR MANAGEMENT AND ADVISERS                       
|             |                                                                                 
|Item 2.      | OFFER STATISTICS
    AND EXPECTED TIMETABLE                                     
|             |                                                                                 
|Item 3.      | KEY INFORMATION                                                                 
|             |                                                                                 
|Item 4.      | INFORMATION ON THE
    COMPANY                                                  
|             |                                                                                 
|Item 5.      | OPERATING AND FINANCIAL
    REVIEW AND PROSPECTS                                
|             |                                                                                 
|Item 6.      | DIRECTORS, SENIOR
    MANAGEMENT AND EMPLOYEES                                  
|             |                                                                                 
|Item 7.      | MAJOR SHAREHOLDERS
    AND RELATED PARTY TRANSACTIONS                           
|             |                                                                                 
|Item 8.      | FINANCIAL INFORMATION                                                           
|             |                                                                                 
|Item 9.      | THE OFFER AND LISTING                                                           
|             |                                                                                 
|Item 10.     | ADDITIONAL INFORMATION                                                          
|             |                                                                                 
|Item 11.     | QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|             |                                                                                 
|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                                                         
|             |                                                                                 
|Item 16A.    | AUDIT COMMITTEE
    FINANCIAL EXPERT                                            
|             |                                                                                 
|Item 16B.    | CODE OF ETHICS                                                                  
|             |                                                                                 
|Item 16C.    | PRINCIPAL ACCOUNTANT
    FEES AND SERVICES                                      
|             |                                                                                 
|Item 16D.    | EXEMPTIONS FROM
    THE LISTING STANDARDS FOR AUDIT COMMITTEES                  
|             |                                                                                 
|Item 16E.    | PURCHASES OF EQUITY
    SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      
|             |                                                                                 
|Item 16F.    | CHANGE IN REGISTRANT’S
    CERTIFYING ACCOUNTANT                                
|             |                                                                                 
|Item 16G.    | CORPORATE GOVERNANCE                                                            
|             |                                                                                 
|PART III     |                                                                                 
|             |                                                                                 
|Item 17.     | FINANCIAL STATEMENTS                                                            
|             |                                                                                 
|Item 18.     | FINANCIAL STATEMENTS                                                            
|             |                                                                                 
|Item 19.     | EXHIBITS                                                                        











INTRODUCTION



Unless the context otherwise requires,
in this annual report on Form 20-F:



| | · | “We,”
                                                                                                         “us,” “our,”
                                                                                                         and “our company”
                                                                                                         refer to Qihoo 360
                                                                                                         Technology Co. Ltd.,
                                                                                                         its subsidiaries and
                                                                                                         consolidated entities,
                                                                                                         collectively;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Qihoo
                                                                                                         360” refers to
                                                                                                         Qihoo 360 Technology
                                                                                                         Co. Ltd.;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Qizhi
                                                                                                         Software” refers
                                                                                                         to Qizhi Software (Beijing) Co., Ltd.;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Shares”
                                                                                                         or “ordinary shares”
                                                                                                         refers to our ordinary
                                                                                                         shares, including Class A
                                                                                                         and Class B ordinary
                                                                                                         shares, par value $0.001
                                                                                                         per share.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “ADSs”
                                                                                                         refers to our American
                                                                                                         depositary shares, every
                                                                                                         two of which represents
                                                                                                         three Class A ordinary
                                                                                                         shares;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “ADRs”
                                                                                                         refers to the American
                                                                                                         depository receipts,
                                                                                                         which, if issued, evidence
                                                                                                         our ADSs;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “China”
                                                                                                         or “PRC”
                                                                                                         refers to the People’s
                                                                                                         Republic of China, excluding,
                                                                                                         for the purpose of this
                                                                                                         annual report, Taiwan,
                                                                                                         Hong Kong and Macau;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “RMB”
                                                                                                         or “Renminbi”
                                                                                                         refers to the legal currency
                                                                                                         of China, and “$”
                                                                                                         or “U.S. dollars”
                                                                                                         refers to the legal currency
                                                                                                         of the United States;
                                                                                                         and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Names of certain companies provided in
this annual report are translated or transliterated from their original Chinese legal names.



Discrepancies in any table between the
amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.



This annual report on Form 20-F includes
our audited consolidated financial statements for the years ended December 31, 2010, 2011 and 2012.



This annual report contains translations
of certain Renminbi amounts into U.S. dollars at the rate of RMB6.2301 to $1.00, the noon buying rate in effect on December 30,
2012 in New York City for cable transfers of Renminbi as set forth in the H.10 statistical release of the U.S. Federal Reserve
Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or
could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See “Item 3. Key
Information — D. Risk Factors — Risks Related to Doing Business in China — Fluctuation in the value of the Renminbi
may have a material adverse effect on your investment.” On April 12, 2012, the noon buying rate was RMB6.1914 to $1.00.



We completed an initial public offering
of 13,927,420 ADSs on April 4, 2011. On March 30, 2011, we listed our ADSs on the New York Stock Exchange under the
symbol “QIHU.”



1







PART I



|Item 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------



Not Applicable.



|Item 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------



Not Applicable.



|Item 3. | KEY INFORMATION
|------- | ---------------



|A. | Selected Financial Data
|-- | -----------------------



The following selected
consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the selected consolidated
balance sheet data as of December 31, 2011 and 2012 have been derived from our audited financial statements included elsewhere
in this annual report. The selected consolidated financial data should be read in conjunction with those financial statements
and the accompanying notes and “Item 5. Operating and Financial Review and Prospects” below. Our consolidated financial
statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP.
Our historical results do not necessarily indicate our results expected for any future periods.



Our selected consolidated
statements of operations data for the years ended December 31, 2008 and 2009 and our consolidated balance sheets as of December 31,
2008, 2009 and 2010 have been derived from our audited consolidated financial statements, which are not included in this annual
report.



|                                                                                              |  | Year Ended December 31,                           |       
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | ------
|                                                                                              |  | 2008                                              |       
|                                                                                              |  | ($ in thousands, except share and per share data) |       
|Statement of Operations Data:                                                                 |  |                                                   |       
|Revenues:                                                                                     |  |                                                   |       
|Internet services                                                                             |  |                                                   | 5,795 
|Sale of third party anti-virus
    software                                                   |  |                                                   | 11,100
|Total revenues                                                                                |  |                                                   | 16,895
|Cost of revenues:                                                                             |  |                                                   |       
|Internet services                                                                             |  |                                                   | 1,147 
|Sale of third party anti-virus
    software                                                   |  |                                                   | 7,073 
|Total cost of revenues                                                                        |  |                                                   | 8,220 
|Subsidy income                                                                                |  |                                                   | —     
|Operating expenses:                                                                           |  |                                                   |       
|Selling and marketing                                                                         |  |                                                   | 2,732 
|General and administrative                                                                    |  |                                                   | 1,645 
|Product development (1)                                                                       |  |                                                   | 7,283 
|Impairment loss on intangible
    assets                                                      |  |                                                   | —     
|Total operating expenses                                                                      |  |                                                   | 11,660
|(Loss) income from operations                                                                 |  |                                                   | (2,985
|Interest income                                                                               |  |                                                   | 584   
|Other (expense) income                                                                        |  |                                                   | (164  
|Exchange (loss) gain                                                                          |  |                                                   | (360  
|Impairment loss on long-term investments                                                      |  |                                                   | —     
|Change in unrealized holding
    loss of trading securities                                   |  |                                                   | —     
|Gain on disposal of long-term
    investments and a subsidiary                                |  |                                                   | —     
|(Loss) income before income tax
    benefit (expense) and loss from equity method investments |  |                                                   | (2,925
|Income tax benefit (expense)                                                                  |  |                                                   | 179   
|Loss from equity method investments                                                           |  |                                                   | —     
|Net (loss) income                                                                             |  |                                                   | (2,746
|Add: Net loss attributable to
    noncontrolling interest                                     |  |                                                   | —     
|Net (loss) income attributable
    to Qihoo 360 Technology Co. Ltd.                           |  |                                                   | (2,746



2







(1) We changed the “research and development expenses”
to “product development expenses” in the statements of operations. This is mainly because our business has been growing
rapidly and along with the development of new products, we have devoted more resources to strengthening our existing products.
As such, we believe that “product development expenses” will better reflect the nature of such expenses.





|                                                                                         |  | Year Ended December 31,                           |           
|---------------------------------------------------------------------------------------- |  | ------------------------------------------------- | ----------
|                                                                                         |  | 2008                                              |           
|                                                                                         |  | ($ in thousands, except share and per share data) |           
|Net (loss) income attributable to ordinary shareholders of Qihoo 360 Technology Co. Ltd. |  |                                                   | (4,811    
|Net (loss) income per ordinary share—basic                                               |  |                                                   | (0.07     
|Net (loss) income per ordinary share—diluted                                             |  |                                                   | (0.07     
|Weighted average shares used in calculating net income per ordinary share—basic          |  |                                                   | 65,339,960
|Weighted average shares used in calculating net income per ordinary share—diluted        |  |                                                   | 65,339,960





|                          |  | As of December 31, |        
|------------------------- |  | ------------------ | -------
|                          |  | 2008               |        
|                          |  | ($ in thousands)   |        
|Balance Sheet Data:       |  |                    |        
|Cash and cash equivalents |  |                    | 23,262 
|Total assets              |  |                    | 33,943 
|Total current liabilities |  |                    | 1,987  
|Total liabilities         |  |                    | 4,948  
|Capital stock             |  |                    | 65     
|Noncontrolling interest   |  |                    | -      
|Total (deficit) equity    |  |                    | (16,175



3







|B. | Capitalization and Indebtedness
|-- | -------------------------------



Not Applicable.



|C. | Reasons for the Offer and Use of Proceeds
|-- | -----------------------------------------



Not Applicable.



|D. | Risk Factors
|-- | ------------



Risks Related to Our Business



If we fail to continue to innovate and provide attractive
products and services to attract and retain users, the effectiveness of our cloud-based security technology may be adversely affected
and we may lose users and customers for our revenue generating services.



Our success depends on our ability to continue
to provide attractive products and services that enable users to have a secure and high-quality Internet experience. In order
to attract and retain users and compete against our competitors, we must continue to invest significant resources in product development
to enhance our Internet security technology, improve our existing products and services, introduce additional high-quality products
and services and enhance user experience. We may not be able to expand our user base if our products and services do not meet
the needs of our users or are not effectively or timely brought to market. If we are unable to anticipate user preferences or
industry changes, or if we are unable to modify our products and services on a timely basis, our user base may not increase at
the expected rate, if at all, or even decrease. The effectiveness of our cloud-based security technology increases with the size
of our user cloud. If we fail to innovate and provide attractive products and services to attract and retain users, the effectiveness
of our cloud-based security technology may be adversely affected. Users may not choose to use our Internet security products and
Internet value-added services if our technology is ineffective, and customers may no longer choose our platform to deliver online
advertising if our user base does not grow. As Internet security technology continues to develop, our competitors may be able
to offer Internet security products and services that are, or are perceived to be, substantially similar to or better than our
own. This may force us to expend significant resources in order to remain competitive.



If we fail to keep up with rapid changes in technologies
and Internet-enabled devices, our business may be adversely affected.



The Internet industry is characterized
by rapid technological changes. Our future success will depend on our ability to respond to rapidly changing technologies, adapt
our services to evolving industry standards and improve the performance and reliability of our products and services. Our failure
to adapt to such changes could harm our business. In addition, changes in Internet-enabled devices resulting from technological
development may also adversely affect our business. For example, the number of people accessing the Internet through devices other
than personal computers, including mobile phones and other hand-held devices, has increased in recent years. In 2009, we began
to offer mobile security products and services in response to this market trend, and we currently have a full suite of mobile
products, such as mobile app stores and mobile browsers supporting both iOS and Android based mobile devices.   However,
if we are slow to develop products and services that are compatible with mobile devices, or if the products and services we develop
are not widely accepted and used by mobile device users, we may not be able to capture a significant share of this increasingly
important market. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other
technological changes could require substantial expenditures to modify or adapt our products, services or infrastructure. If we
fail to keep up with rapid technological changes to remain competitive, our future success may be adversely affected.



If we fail to leverage our user base to increase our
revenues, our results of operations and growth prospects could be harmed.



We generate revenues primarily through
online advertising and Internet value-added services, such as the offering of games, remote technical support and other Internet
value-added services. The attractiveness of our online advertising and Internet value-added services largely depends on our ability
to maintain and expand our user base, which in turn requires us to continuously invest significant resources in providing Internet
and mobile security products and services that retain and attract users. We plan to make significant investments in developing
and offering Internet products and services. However, we cannot assure you that our investments will maintain or expand our user
base or that our user base will successfully drive our revenue growth. If we fail to leverage our user base to promote games or
other Internet value-added services or to attract paying advertising customers, our business, results of operations and growth
prospects could be seriously harmed.



4







We generate a substantial and fast-growing portion of
our revenues from online advertising. If we fail to retain existing customers or attract new customers for our online advertising
services, our business, results of operations and growth prospects could be seriously harmed.



In the three years
ended December 31, 2010, 2011 and 2012, online advertising services accounted for 67.3%, 73.3% and 67.3% of our total revenues,
respectively. Our online advertising customers include, among others, third-party websites who pay us for displaying their links
on our 360 Personal Start-up Page  and other platform products , and search engines who pay us fees for generating search
queries from our 360 browsers and 360 Personal Start-up Page. Additionally, with the launch of our own search engine
in 2012 and our offering of search advertising services on our search engine in the beginning of the 2013, we expect to derive
revenues from search advertising services in the future. Our online advertising customers may not continue to do business with
us if their investments do not generate sales leads and ultimately revenues. If we fail to retain existing customers or attract
new customers for our online advertising services, our business, results of operations and growth prospects could be seriously
harmed.



Legal proceedings or allegations of impropriety against
us or our management could have a material adverse impact on our reputation, results of operation, financial condition and liquidity.



From time
to time, we have been, and may be in the future, subject to lawsuits or allegations brought by our competitors, individuals
or other entities against us or our management, including claims of unfair, unethical, fraudulent or otherwise
inappropriate business practices. Certain key members of our management team have also been in the past alleged to have
committed wrongdoings in their current and/or prior business affiliations.  Any such lawsuit or allegation, with or
without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong
doing by any key member of our management team could harm our reputation and user base and distract our management from
day-to-day operations of our company. We are currently involved in several lawsuits in PRC courts where our competitors
instituted proceedings or asserted counterclaims against us or we instituted proceedings or asserted counterclaims against
our competitors relating to anti-trust issues, unfair competition and defamation. See “Item 8. Financial Information
— A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings.” We
cannot assure you that we or key members of our management team will not be subject to lawsuits or allegations of a similar
nature in the future. Where we can make a reasonable estimate of the liability relating to pending litigation and determine
that an adverse liability resulting from such litigation is probable, we record a related contingent liability. As additional
information becomes available, we assess the potential liability and revise estimates as appropriate. In 2010, 2011 and 2012,
we did not record any contingent liabilities relating to pending litigation. However, when we record or revise our estimates
of contingent liabilities in the future, the amount of our estimates may be inaccurate due to the inherent uncertainties
relating to litigation. In addition, the outcomes of actions we institute against our competitors may not be successful or
favorable to us. These litigations and allegations may also generate negative publicity that significantly harms our
reputation, which may materially and adversely affect our user base and the number of our paying customers. In addition to
the related cost, managing and defending litigation and related indemnity obligations can significantly divert
management’s and the board of directors’ attention from operating our business. We may also need to pay damages
or settle the litigation with a substantial amount of cash. All of these could have a material adverse impact on our
business, results of operation and cash flows, as well as the trading price of our ADSs.



Our dependence on a limited number of customers for a
substantial portion of our online advertising revenues may cause significant fluctuations or declines in our revenues.



We depend on a limited
number of customers for a substantial portion of our online advertising revenues.  Revenues from our top five online advertising
customers comprised 35.1%, 27.9% and 21.3% of our total revenues in 2010, 2011 and 2012, respectively. We enter into non-exclusive,
short-term agreements with our online advertising customers which are typically renewed on a quarterly or annual basis. 
We anticipate that our dependence on a limited number of customers will continue for the foreseeable future. Consequently, any
of the following events may cause material fluctuations or declines in our revenues:



5







| | · | reduced,
                                                                                                         delayed or cancelled
                                                                                                         services required by
                                                                                                         our online advertising
                                                                                                         customers;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our
                                                                                                         online advertising customers’
                                                                                                         failure to pay for our
                                                                                                         services; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | loss
                                                                                                         of one or more of our
                                                                                                         significant online advertising
                                                                                                         customers and any failure
                                                                                                         to identify and acquire
                                                                                                         additional or replacement
                                                                                                         customers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If we lose the business
of one or more of our top online advertising customers, our business, results of operations and growth prospects may be materially
and adversely affected.



We face significant competition and may suffer from a
loss of users and customers as a result.



We face significant
competition from Internet security product and service providers and PRC-based Internet companies. The competitive standing of
an Internet security market player in China largely depends on the technological reputation of its brand, the size of its user
base, its technological expertise, the effectiveness of its security software as well as its business model. We compete in the
Internet security market with other anti-virus companies such as Beijing Kingsoft Security Software Co., Ltd., and Beijing
Rising Information Technology Co., Ltd. We also compete with PRC-based Internet companies that, like us, build Internet
platforms to offer value-added services and online advertising services. Our primary competitor in this market is Tencent Holdings
Limited, the largest Internet company in China in terms of revenue. In December 2012, Tencent’s QQ instant message
software, had an active user penetration rate in China of 93.6%, while our security products had an active user penetration rate
in China of 94.2%, according to iResearch. Additionally, in August 2012, we launched our general search service. Our primary competitors
in the search services market are Baidu Inc. and Sohu.com Inc. According to iResearch, in December 2012, Baidu and Sohu’s
Sogou search engine had 81.9% and 4.4%, respectively, of the PRC search traffic in terms of search page views, compared to 9.8%
for our search engine. See “Item 4. Information on the Company — B. Business Overview — Competition” for
description of our principal competitors in each of our product and services categories. Some of our competitors have significantly
greater financial resources than we do. They also have longer operating histories and more experience in attracting and retaining
users and managing customers than we do. They may use their experience and resources to compete with us in a variety of ways,
including by competing more intensely for users and customers, investing more heavily in research and development and making strategic
acquisitions. If any of our competitors provides better Internet products and services than we do, our user base and user traffic
could decline significantly. Any such decline could weaken our brand, result in losing users and customers and have a material
adverse effect on our results of operations.



Furthermore, in an
increasingly competitive environment, our competitors may adopt business practices or take other actions that could be harmful
to us, and we may have difficulties in obtaining remedies against such actions. Any increase in competition could erode our market
share, reduce our user base and customer base, and increase our marketing and product development expenditures, which could adversely
materially affect our business, financial condition and operating results.



Our competitors may cause their products to be incompatible
with ours, which may reduce our market share.



As two of the largest
providers of user-end software in China, we and Tencent may from time to time compete for users. On November 3, 2010, Tencent
issued a letter to users of Tencent QQ, Tencent’s popular instant message software, announcing its decision to disable the
widely used Tencent QQ on computers that had installed our security products, effectively requiring users to either stop
using Tencent QQ or uninstall our Internet security products. As a result, a significant number of users stopped using Tencent
QQ, or our Internet security products, or both. Due to the large number of Internet users that were affected, this incident was
extensively reported in the media and attracted government scrutiny. On November 21, 2010, the Ministry of Industry and Information
Technology, or the MIIT, ordered that Tencent and we end the dispute, apologize to affected users and ensure the compatibility
of products concerned. We lost some users in the first several days of this dispute before our user base quickly returned to its
prior level. Since then, the MIIT has increased its regulation of competition in the Internet industry, including “Certain
Provisions on the Regulation of Internet Information Service,” effective March 2012, which prevents software companies
that cause product incompatibility from competing in market.  However, our competitors may continue to make their products
incompatible with ours or direct and/or induce their users to not use our products, which may reduce our market share, negatively
affect our brand and reputation and materially and adversely affect our business, results of operations or financial condition.



6







If our expansion into new Internet businesses and overseas
markets is not successful, our future results of operations and growth prospects may be materially and adversely affected.



As part of our growth
strategy, we enter into new Internet businesses from time to time by leveraging our expansive user base to generate additional
revenue streams. We may also expand into overseas markets through investment or strategic alliances with local market participants.
Expansion into new businesses and new markets may present operating and marketing challenges that are different from those that
we currently encounter. For each new business or markets we enter into, we face competition from existing leading providers in
that business or market. If we cannot successfully address the new challenges and compete effectively against the existing leading
players in the new businesses or markets, we may not be able to develop a sufficiently large customer and user base, recover costs
incurred for marketing new businesses or developing new markets, or make a profit from these businesses or markets, and our future
results of operations and growth prospects may be materially and adversely affected.



Our business depends on a strong brand and reputation,
and if we are not able to maintain and enhance our brand or reputation or if there is negative publicity against us, our business
and operating results may be harmed.



We believe that our
“360” brand and our reputation have contributed significantly to the success of our business. We also believe that
maintaining and enhancing the “360” brand and our reputation are critical to increasing our number of users and customers.
As our market becomes increasingly competitive, our success in maintaining and enhancing our brand and reputation will depend
largely on our ability to remain as a leading provider of Internet and mobile security products and services in China, which may
become more expensive and challenging.



Historically, we have
developed our user base primarily by word-of-mouth and incurred limited brand promotion expenses. We began enhancing marketing
and brand promotion efforts in early 2010. However, we cannot assure you that our marketing and brand promotion activities in
the future will achieve the expected brand promotion effect. If we fail to maintain and further promote the “360”
brand or our reputation, or if we incur excessive expenses in this effort, our business and results of operations may be materially
and adversely affected. In addition, historically there has been negative publicity about our company, our products and services
and certain key members of our management team. Since 2011, Citron Research, Anonymous Analytics and certain other short-selling
organizations and individuals have issued a series of reports which portrayed our business and financial position in a negative
light.  Additionally, in recent years, certain of our competitors have also made accusations and negative remarks against
us in the news media. Although we have vigorously rebutted the key points of these reports and remarks, they still generated significant
negative publicity for our company. We cannot assure you that there will not be additional negative publicity of the similar nature
in the future. Any such negative publicity, regardless of its veracity, could harm our brand image and reputation and in turn
adversely affect our business, operating results and the trading price of our ADSs.



The success of our Internet value-added services depends
on our ability to accommodate user demand and source suitable third-party products and services.



We have derived, and
expect to continue to derive, a substantial portion of our revenues from our Internet value-added services, such as offering games
developed by third parties. The success of our Internet value-added services depends on our ability to respond adequately and
timely to accommodate our users’ demand for such value-added services and source suitable third-party products and services
on reasonable terms. If we are unable to continue to offer a variety of suitable value-added services that attract users and generate
revenue, our financial condition and operating results may be materially adversely affected.



If our Internet security products and services fail to
detect malware or malicious websites or otherwise do not work properly, we may experience negative publicity, damage to our reputation,
legal liability, declined revenues and increased expenses.



Our users rely on
our Internet security products and services for safe access to the Internet. New malware and malicious websites are continuously
being created and modified, and the detection technologies underlying our products and services may not detect all forms of malware
or malicious websites that our users are exposed to. Additionally, our users may experience errors, failures, or bugs in our products
that are undetected by our pre-launch testing, especially when our products and services are first introduced or when new updates
are first released. Failure to detect malware or malicious websites or defects in our products may result in security breaches,
disruption or damage to our users’ computers or networks and theft of confidential information or other negative consequences.
Any such event may damage our brand reputation, decrease our user and customer base, require large research and development and
marketing expenditures to remedy and may otherwise significantly affect our business and results of operations.



7







Furthermore, our Internet
security products and services may falsely identify programs or websites as malicious or otherwise undesirable. Parties whose
programs are incorrectly blocked by our products or services, or whose websites are incorrectly identified as unsafe or malicious,
may seek redress against us for labeling them as malicious and interfering with their businesses. In addition, falsely identifying
programs or websites as malicious may adversely affect our users’ confidence and trust in our products and decrease our
user base.



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



We have significantly expanded our operations
in recent years. Since our inception in 2005, we have expanded our product offering into a comprehensive suite of PRC and mobile
Internet products and services and have rapidly established a leading position in the PRC Internet market. We expect this expansion
to continue as we grow our user and customer base and explore new opportunities. To manage the further expansion of our business
and growth of our operations and personnel, we need to continuously improve our operational and financial systems, procedures
and controls, and expand, train, manage and maintain good relations with our growing employee base. In addition, we must maintain
and expand our relationships with other websites, Internet companies and other third parties. Our current and future personnel,
systems, procedures and controls may not be adequate to support our expanding operations. If we fail to manage our expansion effectively,
our business, results of operations and prospects may be materially and adversely affected.



Our limited operating history makes it difficult to evaluate
our future prospects and results of operations.



We have a limited operating history under
our current business model upon which you can evaluate the viability and sustainability of our business. Accordingly, you should
consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries
such as the Internet security industry in China. Some of these risks and uncertainties relate to our ability to:



| | · | maintain
                                                                                                         our leading position
                                                                                                         in the Internet security
                                                                                                         market in China;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | continue
                                                                                                         to offer new and innovative
                                                                                                         products and services
                                                                                                         to attract and retain
                                                                                                         a larger user base;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | attract
                                                                                                         additional customers
                                                                                                         and increase spending
                                                                                                         per customer;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increase
                                                                                                         awareness of our brand
                                                                                                         and continue to enhance
                                                                                                         user and customer loyalty;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | respond
                                                                                                         to competitive market
                                                                                                         conditions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | respond
                                                                                                         to changes in our regulatory
                                                                                                         environment;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | manage
                                                                                                         risks and uncertainties
                                                                                                         associated with intellectual
                                                                                                         property rights;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | maintain
                                                                                                         effective control of
                                                                                                         our costs and expenses;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | raise
                                                                                                         sufficient capital to
                                                                                                         sustain and expand our
                                                                                                         business;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | attract,
                                                                                                         retain and motivate qualified
                                                                                                         personnel; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | upgrade
                                                                                                         our technology and infrastructure
                                                                                                         to support increased
                                                                                                         traffic and expanded
                                                                                                         offerings of products
                                                                                                         and services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If we are unsuccessful in addressing any
of these risks and uncertainties, our business may be materially and adversely affected.



8







Interruption or failure of our own information technology
and communications systems or those of third-party service providers we rely upon could impair our ability to effectively provide
our products and services and protect the privacy of our users, which could damage our reputation and harm our operating results.



Our ability to provide
our products and services depends on the continuing operation of our information technology and communications systems. Any damage
to or failure of our systems could affect the performance and reliability of our Internet security products and services and directly
impact our users. Service interruptions may damage our brand and reduce our user base if our products and services are perceived
to be unreliable. Our systems are vulnerable to damage or interruption as a result of terrorist attacks, wars, earthquakes, floods,
fires, power loss, telecommunications failures, undetected errors or “bugs” in our software, computer viruses, interruptions
in access to our websites and servers through the use of “denial of service” or similar attacks, hacking or other
attempts to harm our systems and similar events. Our servers, which are hosted at third-party Internet data centers, are vulnerable
to break-ins, sabotage and vandalism. Additionally, the occurrence of a closure of an Internet data center by any of our third-party
providers without adequate notice could result in lengthy service interruptions. The steps we take to improve the reliability
of our systems will increase our cost and reduce our operating margin and may not be successful in reducing the frequency or duration
of service interruptions. Furthermore, our systems may not function properly as a result of third-party action, employee error,
malfeasance or otherwise, resulting in unauthorized access to our users’ data and information.  If we experience frequent
or persistent system failures affecting our products and services or are unable to prevent unauthorized access to our users’
data, our reputation and brand could be severely harmed.



Our strategy of acquiring and investing in complementary
businesses, assets and technologies may fail.



As part of our business strategy, we have
acquired, and intend to continue to selectively acquire and invest in, businesses, assets and technologies that complement our
existing business. Acquisitions and investments involve uncertainties and risks, including:



| | · | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | costs
                                                                                                         and difficulties of integrating
                                                                                                         acquired technologies
                                                                                                         into our existing products
                                                                                                         and services; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | diversion
                                                                                                         of resources and management
                                                                                                         attention.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our failure to address
these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition
or investment may require a significant amount of capital investment, which would decrease the amount of cash available for working
capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, we may dilute the value
of our ADSs and the underlying Class A ordinary shares. If we borrow funds to finance acquisitions, such debt instruments
may contain restrictive covenants that could, among other things, restrict us from distributing dividends. Such acquisitions may
also generate significant amortization expenses related to intangible assets.



Our success depends on the continuing and collaborative
efforts of our management team and other key personnel, and our business may be harmed if we lose their services.



Our future success
depends heavily upon the continuing services of our management team, in particular Mr. Hongyi Zhou, our chairman and chief
executive officer, and Mr. Xiangdong Qi, our director and president. If one or more of our executives or other key personnel
are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business
may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for
management and key personnel is intense, the pool of qualified candidates is limited, and we may not be able to retain the services
of our executives or key personnel, or attract and retain experienced executives or key personnel in the future.



If any of our executives
or other key personnel joins a competitor or forms a competing company, we may lose customers, distributors, know-how and
key personnel. Each of our executive officers and key employees has entered into an employment agreement with us that contains
confidentiality provisions. If any disputes arise between any of our executives or key personnel and us, we cannot assure you
the extent to which any of these agreements may be enforced.



9







We rely on highly skilled personnel. If we are unable
to retain or motivate them or hire additional qualified personnel, we may not be able to grow effectively.



Our performance and
future success depend on the talents and efforts of highly skilled individuals. We will need to continue to identify, hire, develop,
motivate and retain highly skilled personnel for all areas of our organization. Competition in the Internet industry for qualified
employees is intense. Our continued ability to compete effectively depends on our ability to attract new employees and to retain
and motivate our existing employees.



As competition in
the Internet industry intensifies, it may be more difficult for us to hire, motivate and retain highly skilled personnel. If we
do not succeed in attracting additional highly skilled personnel or retaining or motivating our existing personnel, we may be
unable to grow effectively.



We may not be able to prevent others from unauthorized
use of our intellectual property or brands, which could harm our business and competitive position.



We rely on a combination of copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights
and brands. We have registered our “Qihoo” and “Qihu” brands and our “360” logo with relevant
government authorities in China, the United States and Japan and have pending applications for the “Qihoo” and “Qihu”
brands and the “360” logo with relevant government authorities in the European Union. Notwithstanding the above, most
of our intellectual property rights and brands are subject to protection under PRC laws. The protection of intellectual property
rights and brands in China may not be as effective as those in the United States or other countries. The steps we have taken
may be inadequate to prevent the misappropriation of our technology or unauthorized use of our brands. Reverse engineering, unauthorized
copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without compensating
us. Moreover, unauthorized use of our technology could enable our competitors to offer products and services that are comparable
to or better than ours, which could harm our business and competitive position. From time to time, we may have to enforce our
intellectual property rights and brands through litigation. Such litigation may result in substantial costs and diversion of resources
and management attention.



Third parties may claim that we infringe their proprietary
rights, which could cause us to incur significant legal expenses and prevent us from promoting our products and services.



From time to time,
we may receive claims that we have infringed the intellectual property rights of others. Such claims may be based on our use of
trademarks, logos, technologies or other intellectual properties. Any such claim, with or without merit, could result in costly
litigation and distract our management from day-to-day operations. If we fail to successfully defend such claims, we could be
required to make unavailable or redesign our products and services, pay monetary amounts as damages, enter into royalty or licensing
arrangements, or satisfy indemnification obligations that we have with some of our users. Any royalty or licensing arrangements
that we may seek in such circumstances may not be available to us on commercially reasonable terms or at all. Also, if we acquire
technology to include in our products from third parties, our exposure to infringement actions may increase because we must rely
upon these third parties to verify the origin and ownership of such technology.



Further, we license
and use technologies from third parties in our products and services. These third-party technology licenses may not continue to
be available to us on acceptable terms or at all, and may expose us to additional liability. This liability, or our inability
to use any of this third-party software, could result in disruptions in our business that could materially and adversely affect
our operating results.



The successful operation of our business depends upon
the performance and reliability of the Internet infrastructure in China and the safety of our network and infrastructure.



Our business depends
on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through
state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. A more sophisticated
Internet infrastructure may not be developed in China. We may not have access to alternative networks in the event of disruptions,
failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not
support the demands associated with continued growth in Internet usage.



10







Although we believe
we have sufficient controls in place to prevent intentional disruptions, we expect our network and infrastructure to be targets
of attacks specifically designed to impede the performance of our products and services, misappropriate proprietary information
or harm our reputation. Because the techniques used by hackers to access or sabotage networks change frequently and may not be
recognized until launched against a target, we may be unable to anticipate these techniques. The theft, unauthorized use or publication
of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive
position, brand reputation and user base, and our users and customers may assert claims against us related to resulting losses
arising from security breaches. Our business could be subject to significant disruption and our results of operations may be affected.



If we fail to establish an effective system of internal
control, we may be unable to accurately and timely report our financial results or prevent fraud, and investor confidence and
the market price of our ADSs may be adversely impacted.



We are subject to
reporting obligations under U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require
a public company to include a management report on the company’s internal control over financial reporting in its annual
report, which contains management’s assessment of the effectiveness of the company’s internal control over financial
reporting. In addition, an independent registered public accounting firm must audit and report on the effectiveness of a public
company’s internal control over financial reporting.



Our management, including
our chief executive officer and chief financial officers, assessed the effectiveness of our internal control over financial reporting
as of December 31, 2012. Based on its assessment, our management concluded that, as of the end of our most recent fiscal year,
December 31, 2012, our internal control over financial reporting was effective. However, our failure to discover and address any
material weaknesses or control deficiencies in the future could result in inaccuracies in our financial statements and could also
impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis.
As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs,
may be materially and adversely affected. Moreover, ineffective internal control over financial reporting could significantly
hinder our ability to prevent fraud.



The audit report included in this annual report are prepared
by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits
of such inspection.



Our independent registered
public accounting firm that issues the audit reports included in our annual reports, as auditors of companies that are traded
publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States), or
the (PCAOB), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance
with the laws of the United States and professional standards.  Because our auditors are located in China, a jurisdiction
where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not
currently inspected by the PCAOB.



Inspections of other
firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality
control procedures, which may be addressed as part of the inspection process to improve future audit quality.  This lack
of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control
procedures.  As a result, investors may be deprived of the benefits of PCAOB inspections.



The inability of the
PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.



11







We have incurred increased costs as a result of being
a public company, and we cannot predict or estimate the amount of additional future costs we may incur or the timing of such costs.



As a public company, we have incurred significant
legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently
implemented by the SEC and the New York Stock Exchange require significantly heightened corporate governance practices for
public companies.  These rules and regulations have increased our legal, accounting and financial compliance costs and
made some of our corporate activities more time-consuming and costly. Also, we have incurred additional costs associated with
satisfying our public company reporting requirements. We are evaluating and monitoring developments with respect to these rules and
regulations, and we cannot predict or estimate the amount of additional future costs we may incur or the timing of such costs.



We may need additional capital, and we may be unable
to obtain such capital in a timely manner or on acceptable terms, or at all. Furthermore, our future capital needs may require
us to sell additional equity or debt securities that may dilute our shareholders or introduce covenants that may restrict our
operations or our ability to pay dividends.



To grow our business and remain competitive,
we may require additional capital. Our ability to obtain additional capital is subject to a variety of uncertainties, including:



| | · | our
                                                                                                         future financial condition,
                                                                                                         results of operations
                                                                                                         and cash flows;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | general
                                                                                                         market conditions for
                                                                                                         capital raising activities
                                                                                                         by companies offering
                                                                                                         Internet and mobile security
                                                                                                         products and services; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | economic,
                                                                                                         political and other conditions
                                                                                                         in China and internationally.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We may be unable to
obtain additional capital in a timely manner or on acceptable terms or at all. In addition, our future capital needs and other
business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional
equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that would restrict our operations or our ability to
pay dividends to our shareholders.



Our business, financial condition and results of operations
may be adversely affected by the downturn in the global or Chinese economy.



The global financial
markets have experienced significant disruptions since 2008 and 2009. A variety of factors, including the current European sovereign
debt crisis and concerns about the viability of the European Union and the Euro, could cause further disruptions to the global
economy. To the extent that there have been improvements in some areas, it is uncertain whether such recovery is sustainable.
China’s economy has also faced challenges. Since we derive substantially all of our revenues from China, our business and
prospects may be affected by economic conditions in China.



Moreover, a slowdown
in the global or Chinese economy or the recurrence of any financial disruptions may have a material and adverse impact on financings
available to us. The weakness in the economy could erode investors’ confidence, which constitutes the basis of the equity
markets. The recent financial turmoil affecting the financial markets and banking system may significantly restrict our ability
to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all. We are
uncertain about the extent to which the recent global financial and economic crisis, the European debt crisis and slowdown of
the Chinese economy may impact our business in the long term. There is a risk that our business, results of operations and prospects
would be materially and adversely affected by the global economic downturn and the slowdown of the Chinese economy.



12







Risks Related to Our Corporate Structure



In order to comply with PRC laws and regulations limiting
foreign ownership of Internet businesses, we conduct our Internet 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 materially and adversely affected.



The
PRC government restricts foreign investment in Internet businesses. See “Item 4. Information on the Company — B. Business
Overview — Regulation — Regulations Related to Our Business —Telecommunications Regulations.” Accordingly,
we conduct our business activities in China through a series of contractual arrangements with two of our consolidated variable
interest entities, or VIEs, namely Beijing Qihu Technology Company Limited, or Beijing Qihu, and Beijing Star World Technology
Co., Ltd., or Beijing Star World. We also entered into similar contractual arrangements with eleven other VIEs that do not have
significant business operations as of the date of this annual report. See “Item 4. Information on the Company3⁄4C. Organizational Structure.” These contractual arrangements
enable us to (i) have power to direct the activities that most significantly affect the economic performance of Beijing Qihu and
Beijng Star World and their subsidiaries, (ii) receive substantially all of the economic benefits from these VIEs and subsidiaries
in consideration for the services provided by our wholly owned subsidiary in China and (iii) have an exclusive option to purchase
all or part of the equity interests in these VIEs, when and to the extent permitted by PRC law or request any existing shareholder
of the VIEs to transfer all or part of the equity interests in these VIEs to another PRC person or entity designated by us at
any time in our discretion. For a description of these contractual arrangements, see “Item 7. Major Shareholders and Related
Party Transactions3⁄4B. Related Party Transactions3⁄4Contractual Arrangements among Qizhi Software, the VIEs and the Respective Shareholders of the VIEs.”



We believe our existing
corporate structure is in compliance with existing PRC laws and regulations and the contractual arrangements among our wholly-owned
subsidiaries and our VIEs in China are valid, binding and enforceable under, and do not violate, PRC laws or regulations currently
in effect. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC
laws and regulations. If the PRC government determines that our ownership structure, our contractual arrangements with our consolidated
affiliated entities and their shareholders or our businesses are in violation of any existing or future PRC laws or regulations,
it may revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to
collect revenues, block our websites, require us to restructure our operations, impose additional conditions or requirements with
which we may not be able to comply, impose restrictions on our business operations or on our customers or take other regulatory
or enforcement actions against us that could be harmful to our business.



The imposition of
any of these penalties could result in a material and adverse effect on our ability to conduct our business and our results of
operations. If any of these penalties results in our inability to direct the activities of our VIEs and their subsidiaries that
most significantly impact their economic performance or our failure to receive the economic benefits from VIEs and their subsidiaries,
we may not be able to consolidate our VIEs and their subsidiaries in our consolidated financial statements in accordance with
U.S. GAAP.



Our contractual arrangements with our VIEs and their
respective shareholders may not be as effective in providing control over the entity as direct ownership.



We rely on contractual
arrangements with our VIEs and their shareholders for the operation of our Internet business in China. These contractual arrangements
may not be as effective in providing us with control over our VIEs as direct ownership in these entities. If our VIEs or their
respective shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial
costs and resources to enforce these arrangements, and rely on legal remedies available under applicable PRC laws, including seeking
specific performance or injunctive relief and claiming damages. In particular, if shareholders of a VIE refuse to transfer their
equity interests in such VIEs to us or our designated persons when we exercise the purchase option pursuant to these contractual
arrangements, we may need to initiate legal actions to compel them to fulfill their contractual obligations.



If the applicable
PRC authorities invalidate our contractual arrangements for violation of PRC laws, rules and regulations, or any of our VIEs
or their shareholders terminate the contractual arrangements or fail to perform their obligations under these contractual arrangements,
our Internet and online advertising businesses in China would be materially disrupted, and the value of our ordinary shares would
decrease substantially. Furthermore, if we fail to renew these contractual arrangements upon their expiration and the relevant
foreign investment restrictions remain effective, we would not be able to continue our Internet business.



In addition, if any
of our VIEs or all or part of its assets become subject to court injunctions or asset freezes or liens or rights of third-party
creditors, we may be unable to continue some or all of our businesses, which could materially and adversely affect our business,
financial condition and results of operations. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding,
its shareholders or unrelated third-party creditors may claim rights to some or all of its assets. The occurrence of any of these
events may hinder our ability to operate our Internet business, which could in turn materially harm our business and our ability
to generate revenues and cause the market price of our ordinary shares to decline significantly.



13







Perfection of the pledges in our equity pledge agreements
with our VIEs and their registered shareholders may be adversely affected due to failure to register these equity pledge agreements.



Under our equity pledge
agreements with our VIEs and their registered shareholders, these registered shareholders have pledged all of their respective
equity interests in the VIEs to us. The purpose of such pledges is to secure the performance of the VIEs’ obligations under
the various VIE agreements, including the business operation agreements and technology development agreements. According to the
PRC Property Rights Law, which became effective on October 1, 2007, a pledge is not deemed to be validly created without
registration with the relevant local administration for industry and commerce. Ten of our VIEs have completed the pledge registration.
We are applying to register and update the equity pledges by the shareholders of our three other VIEs with the relevant offices
of the administration for industry and commerce. Although under PRC laws and regulations, the administration for industry and
commerce should register a pledge immediately upon receiving a complete application, the registration process could take longer
in practice. If the equity pledges are not successfully registered, they would not be deemed as validly created security interests
under the PRC Property Rights Law. If our VIEs breached their obligations under the agreements with us, there is a risk that we
may not be able to successfully enforce the pledges if the equity pledge agreements have not been registered with the relevant
administration for industry and commerce.



The shareholders of our VIEs may have potential conflicts
of interest with us, which may adversely affect our business.



The
registered shareholders of our VIEs are also our shareholders, directors, officers or employees. For example, Mr. Hongyi Zhou, our chairman and chief executive Officer, owned 17.7% of our outstanding ordinary shares and
37.8% of our voting interest as of December 31, 2012 and is one of the registered shareholders of Beijing 3G3W Science &
Technology Co., Ltd., a consolidated variable interest entity. In addition, Mr. Xiangdong Qi, our director and president,
owned 9.5% of our outstanding ordinary shares and 18.9% of voting interest as of December 31, 2012 and is one of the registered
shareholders of Beijing Qihu Technology Co., Ltd., a consolidated variable interest entity. Conflicts of interest
may arise between these shareholders’ duties to us and our VIEs. If such conflicts arise, these shareholders may not
act in our best interests and such conflicts of interest may not be resolved in our favor. In addition, these shareholders
may breach or cause our VIEs to breach or refuse to renew their existing contractual arrangements that allow us to exercise
effective control over them and to receive economic benefits from them. Currently, we do not have arrangements to address
potential conflicts of interest the shareholders of our VIEs may encounter in their capacity as beneficial owners of the
VIEs, on one hand, and as our shareholders, directors, officers or employees on the other hand. The laws of the Cayman
Islands provide that directors of a company owe a fiduciary duty to the company, which requires them to act in good faith and
in the best interests of the company and not to use their positions for personal gain. If certain shareholders of our VIEs do
not comply with their fiduciary duties to us as our designated directors, or if we cannot resolve any conflicts of interest
or disputes between us and such shareholders or any future beneficial owners of our VIEs, we would have to rely on legal
proceedings to remedy the situation, which could result in disruption of our business and substantial uncertainty as to the
outcome of any such legal proceedings.



Our contractual arrangements with our VIEs and their
respective shareholders may be subject to scrutiny by the PRC tax authorities and we could be required to pay additional taxes,
which could substantially reduce our consolidated net income and the value of your investment.



Arrangements and transactions among related
parties may be subject to audits or challenges by the PRC tax authorities. We could face material and adverse tax consequences
if the PRC tax authorities determine that our contractual arrangements with VIEs are not arm’s length transactions. If this
were to occur, the tax authorities could adjust our VIEs’ income in the form of a transfer pricing adjustment. A transfer
pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our
VIEs, which could in turn increase their tax liabilities. The PRC tax authorities could also impose late payment fees and other
penalties on our VIEs for under-paid taxes. In addition, any challenge by the PRC tax authorities may limit the ability of our
VIEs to receive any preferential tax treatments and other financial incentives. Our consolidated net income may be materially
and adversely affected if our VIEs’ tax liabilities increase or if our VIEs are found to be subject to late payment fees
or other penalties.



Risks Related to Regulation of Our Services and Products



We may be adversely affected by complexity, uncertainties
and changes in regulation of Internet and value-added telecommunications service companies.



The PRC government extensively regulates
the Internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the
Internet industry. These Internet-related laws and regulations are relatively new and still evolving, and their interpretation
and enforcement involve significant uncertainty. As a result, it may be difficult in certain circumstances to determine what actions
or omissions may be deemed to be violations of applicable laws and regulations. The following illustrates some of the risks and
uncertainties relating to PRC government regulation of the Internet industry:



14







| | · | 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 licensing
                                                                                                         practices that continue
                                                                                                         to evolve. 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.
                                                                                                         This may significantly
                                                                                                         disrupt our business,
                                                                                                         require us to compromise
                                                                                                         enforceability of related
                                                                                                         contractual arrangements,
                                                                                                         or subject us to sanctions,
                                                                                                         requirements to increase
                                                                                                         capital or other conditions
                                                                                                         or enforcement.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | New
                                                                                                         laws and regulations
                                                                                                         may be promulgated 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of the
complexity, uncertainties and constant changes in regulation in the Internet and value-added telecommunications companies, our
business activities and growth may be adversely affected if we do not respond to the changes in a timely manner or are found to
be in violation of the applicable laws, regulations and policies as a result of a different position from ours taken by the competent
authority in the interpretation of such applicable laws, regulations and policies.



If we fail to obtain or maintain
all required licenses, permits and approvals or if we are required to take actions that are time-consuming or costly, our business
operations may be materially and adversely affected.



We are required to
obtain applicable licenses, permits and approvals from different regulatory authorities in order to conduct our business. Over
the last several years, various governmental authorities in the PRC have issued regulations regulating specific aspects of Internet
content and services. Some of this legislation requires operators to obtain licenses, permits or approvals that were previously
not required. The government authorities may continue to pass new rules regulating the Internet sector. They may require
us to obtain additional licenses, permits or approvals so that we can continue to operate our existing businesses or otherwise
prohibit our operation of the types of businesses to which the new requirements apply. In addition, new regulations or new interpretations
of existing regulations may increase our costs of doing business and prevent us from efficiently delivering services and products
over the Internet and through mobile operators and expose us to potential penalties and fines. These regulations may also restrict
our ability to expand our customer and user base or to provide services in additional geographic areas.



Our security software
must be examined and approved by the PRC Ministry of Public Security, or the MPS, before it may be made available to users. We
believe that we have obtained the applicable permits for offering 360 Safe Guard and 360 Anti-Virus for download. However,
as the upgrades of our software become more frequent and such examination and approval by the MPS may be time consuming, we may
not be able to obtain such permits for all upgrades in a timely manner, which may subject us to various penalties and adversely
affect our business and results of operations.



In addition, we have
an online lottery business. Under the Tentative Administrative Measures on Internet Lottery Sale promulgated by the PRC Ministry
of Finance on September 26, 2010, a license is required for conducting online lottery business. Moreover, on January 18,
2012, the Implementation Rules of the Lottery Administration Regulations, or the Lottery Implementation Rules, were jointly
issued by the PRC Ministry of Finance, the Civil Affairs Bureau and the State General Administration of Sport, became effective
as of March 1, 2012 and explicitly stipulate that the welfare lotteries and sports lotteries sold without the Ministry of
Finance’s approval and the Lottery Issuing Authority’s and Lottery Sales Office’s commission may be categorized
as illegal lotteries. Therefore, in addition to Ministry of Finance’s approval, the Lottery Implementation Rules further
request the lottery sales agency to obtain proper authorization from the Lottery Issuing Authority and the Lottery Sales Office
to conduct lottery business. In December 2012, the Ministry of Finance issued the Lottery Distribution and Sale Administration
Measures, which became effective on January 1, 2013. These new measures expressly allow Internet lottery sales. However, there
are no associated implementation rules. As these measures and rules are newly released, we currently do not hold such a license,
and our online lottery business may be suspended by relevant governmental authorities. We plan to apply for this license if we
are required to do so under newly issued rules or regulations or by relevant government authorities. However, if we fail
to obtain this license if and when we are required to do so, we may be subject to regulatory penalties for lack of such license,
our reputation may be harmed and our business may be adversely affected.



15







If any of our games business activities
is deemed to be in violation of law, we may have to cease or modify our game operations, which could have a material and adverse
effect on our business and results of operations.



All games currently
offered by our platform are licensed by, and operated with, third-party game developers. Although we have obtained licenses which
we believe are sufficient for our game offerings, the MIIT or other competent government authorities may interpret existing or
promulgate and implement new laws, regulations or policies that may require us to cease or modify our games business in order
to avoid violation of any PRC laws or regulations. Any such modification to our games business may result in disruption of our
business, diversion of management attention and the incurrence of substantial costs. See also “Item 4. Information on the
Company—B. Business Overview—Regulation—Regulations Relating to Our Business—Games and Virtual Currency.”
In addition, we have applied for and requested our game business partners to obtain and maintain all necessary licenses. However,
we cannot assure you that we or all of our business partners have obtained or updated all necessary licenses, permits or registrations
with relevant governmental authorities. If we or any of such business partners fails to do so, we may not continue to operate
the affected games, which may adversely affect our business and results of operations.



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.



The MIIT has published
regulations that subject website operators to potential liability for content displayed on their websites and the actions of users
and others using their systems, including liability for violations of PRC laws and regulations prohibiting the dissemination of
content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local Internet service
provider to block any Internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped
the dissemination over the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau is
also authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating
to the protection of State secrets in the dissemination of online information. Furthermore, we are required to report any suspicious
content to relevant governmental authorities, and to undergo computer security inspections. If we fail to implement the relevant
safeguards against security breaches, our websites may be shut down and our business and business licenses may be revoked.



Although we attempt
to monitor the content posted on our websites or transmitted through our services, we are not able to control or restrict the
content generated or linked by the users to other Internet content providers. If the PRC regulatory authorities find any content
displayed on our websites objectionable, they may require us to limit or eliminate the dissemination of such information on our
websites. If third-party websites linked to or accessible through our websites operate unlawful activities, PRC regulatory authorities
may require us to report such unlawful activities to competent authorities and to remove the links to such websites, or they may
suspend or shut down the operation of such websites. PRC regulatory authorities may also temporarily block access to certain websites
for a period of time for reasons beyond our control. Any of these actions may reduce our user traffic and adversely affect our
business. In addition, we may be subject to penalties for violations of those regulations arising from information displayed on
or linked to our websites, including a suspension or shutdown of our online operations.



Implementation of laws and regulations relating to data
privacy in China could adversely affect our business.



Certain data and services
collected, provided or used by us or provided to and used by us or our users are currently subject to regulation in certain jurisdictions,
including China. The PRC Constitution states that PRC laws protect the freedom and privacy of communications of citizens and prohibit
infringement of such basic rights, and the PRC Contract Law prohibits contracting parties from disclosing or misusing the trade
secrets of the other party. Further, companies or their employees who illegally trade or disclose customer data may face criminal
charges. Although the definition and scope of “privacy” and “trade secret” remain relatively ambiguous
under PRC law, growing concerns about individual privacy and the collection, distribution and use of information about individuals
have led to national and local regulations that could increase our expenses.



16







On December 28, 2012,
the Standing Committee of the National People’ s Congress enacted the Decision to Enhance the Protection of Network Information,
or the Information Protection Decision, to further enhance the protection of users’ personal information in electronic form.
The Information Protection Decision provides that Internet content providers, or ICPs, must expressly inform their users of the
purpose, manner and scope of thecollection and use of users’ personal information by Internet information services providers,
or ICPs, publish the ICPs’ standards for their collection and use of users’ personal information, and collect and
use users’ personal information only with the consent of the users and only within the scope of such consent. The Information
Protection Decision also mandates that ICPs and their employees must keep strictly confidential users’ personal information
that ICPs collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information against
disclosure, damages and loss. Compliance with current regulations and regulations that may come into effect in these areas may
increase our expenses related to regulatory compliance, which could have a material adverse effect on our financial condition
and operating results.



Risks Related to Doing Business in China



Adverse changes in economic and
political policies of the PRC government could negatively impact China’s overall economic growth, which could materially
adversely affect our business.



We conduct substantially
all of our operations in China. Accordingly, our business, financial condition, results of operations and prospects depend significantly
on economic developments in China. China’s economy differs from the economies of most other countries in many respects,
including the amount of government involvement in the economy, the general level of economic development, growth rates and government
control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades,
this growth has remained uneven across different periods, regions and economic sectors.



The PRC government
also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Between late 2003 and 2008, the PRC government implemented a number of measures, such as increasing the People’s Bank of
China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines, which slowed the growth of credit.
In 2008 and 2009, however, in response to the global financial crisis, the PRC government loosened such requirements. Any actions
and policies adopted by the PRC government could negatively impact the Chinese economy, which could materially adversely affect
our business.



We may rely on dividends and other
distributions from our subsidiaries in China to fund our cash and financing requirements, and any limitation on the ability of
our subsidiaries to make payments to us could materially adversely affect our ability to conduct our business.



As an offshore holding
company, we may rely principally on dividends from our subsidiaries in China for our cash requirements, including to pay dividends
or make other distributions to our shareholders or to service our debt we may incur and to pay our operating expenses. The payment
of dividends by entities organized in China is subject to limitations. In particular, the PRC regulations permit our subsidiaries
to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with Chinese accounting standards
and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits
each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends.



If our subsidiaries
in China incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make
other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could
materially adversely limit our ability to grow, make investments or acquisitions, pay dividends and otherwise fund and conduct
our business.



PRC laws and regulations have established
more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult
for us to pursue growth through acquisitions in China.



Further to the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the
PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which
established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign
investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any
change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM
be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated
domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger
control review or security review.



17







The MOFCOM Security
Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on
Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated
on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise
by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign
investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect
investments, leases, loans, control through contractual arrangements or offshore transactions.



Further, if the business
of any target company that we plan to acquire falls into the scope of security review, we may not be able to successfully acquire
such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our
business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations
to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain
our market share.



PRC regulation of loans to, and
direct investments in, PRC entities by offshore holding companies may delay or prevent us from using the proceeds of our initial
public offering or other financing activities to make loans or capital contributions to our PRC operating subsidiaries, which
could materially adversely affect our liquidity and ability to fund and expand our business.



In utilizing the proceeds
we received from the 2011 initial public offering we completed in April 2011 or in other future financing activities, as
an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our PRC subsidiaries
by means of shareholder’s loans or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested
enterprises, cannot exceed statutory limits based on the amount of our investments in such subsidiaries, and shall be registered
with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Furthermore, any capital contributions
we make to our PRC subsidiaries shall be approved by the Ministry of Commerce, or MOFCOM, or its local counterparts. We may not
be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations
or approvals, our ability to provide loans or capital contributions to our PRC subsidiaries may be negatively affected, which
could adversely affect our liquidity and our ability to fund and expand our business.



In addition, SAFE
promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign
Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Under Circular 142, registered
capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope
approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested
companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to
repay RMB loans if they have not used the proceeds of such loans. Furthermore, SAFE promulgated a circular on November 9,
2010, or Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely
examined and the net proceeds to be settled in the manner described in the offering documents. In addition, to strengthen Circular
142, on November 9, 2011 the SAFE promulgated the Circular on Further Clarifying and Regulating Relevant Issues Concerning the
Administration of Foreign Exchange under Capital Account, or Circular 45, which prohibits a foreign invested company from converting
its registered capital in foreign exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted
loans, repaying inter-company loans, and repaying bank loans that have been transferred to a third party. Circular 142, Circular 59
and Circular 45 may significantly limit our ability to transfer the net proceeds from our initial public offering to our PRC subsidiaries
and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business
in the PRC.



18







Fluctuations in the value of the RMB may materially adversely
affect your investment.



The value of the RMB
against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in
political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC
government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted
to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar
peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010,
however, the RMB traded stably within a narrow range against the U.S. dollar.



There remains significant
international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more
significant appreciation of the RMB against foreign currencies. On June 20, 2010, the People’s Bank of China announced
that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Between June
20, 2010 and December 31, 2012, the RMB appreciated by approximately 9.1% against the U.S. dollar.



Our revenues and costs
are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant
fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues,
earnings and financial position, and the amount of and any dividends we may pay on our ADSs in U.S. dollars. In addition,
any fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation
losses for financial reporting purposes.



Governmental control of currency
conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.



The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our
Cayman Islands holding company primarily relies on dividend payments from our wholly-owned PRC subsidiaries to fund any cash and
financing requirements we may have. See “Item 7. Major Shareholders and Related Party Transactions3⁄4B. Related Party Transactions.”



Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements.
Therefore, Qizhi Software, Tianjin Qisi Technology Co., Ltd., or Tianjin Qisi, and Qifei Xiangyi (Beijing) Software Co., Ltd.,
or Qifei Xiangyi, may pay dividends in foreign currency to us without pre-approval from SAFE. However, approval from or registration
with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out
of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. With the prior approval from
SAFE, cash generated from the operations of our PRC subsidiary may be used to pay off debt they owe to entities outside China
in a currency other than the Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current
account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies
to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including
holders of our ADSs.



Uncertainties in the Chinese legal system could materially
adversely affect our business.



We conduct our business primarily through
our subsidiaries and affiliated entities in China. Our operations in China are governed by PRC laws and regulations. The PRC legal
system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.



In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing economic matters in general, and forms of foreign
investment (including wholly foreign-owned enterprises and joint ventures) in particular. These laws, regulations and legal requirements
are relatively new and amended frequently, and their interpretation and enforcement often raise uncertainties that could limit
the reliability of the legal protections available to us. In addition, the PRC legal system is based in part on government policies
and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violations of these policies and rules until the violations have occurred. Furthermore,
any litigation in China may be protracted and result in substantial costs and diversion of resources and management’s attention.
We cannot predict future developments in the PRC legal system. We may be required to procure additional permits, authorizations
and approvals for our operations, which we may not be able to obtain. Our inability to obtain such permits or authorizations may
materially adversely affect our business, financial condition and results of operations.



19







PRC regulations relating to the
establishment of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability
or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits to us, or may otherwise adversely affect us.



SAFE has promulgated
several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, effective on November 1,
2005. These regulations require PRC residents and PRC corporate entities to register with local branches of SAFE in connection
with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents
and may apply to any offshore acquisitions that we make in the future.



Under these foreign
exchange regulations, PRC residents who make or have previously made prior to the implementation of these foreign exchange regulations,
direct or indirect investments in special purpose vehicles, or SPVs, will be required to register those investments. In addition,
any PRC resident who is a direct or indirect shareholder of an SPV is required to update the previously filed registration with
the local branch of SAFE to reflect any material change. Moreover, the PRC subsidiaries of that SPV are required to urge the PRC
resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder fails to make the required
registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing
their profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV may
also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign
exchange registration requirements described above could result in liabilities for such PRC subsidiaries under PRC laws for evasion
of applicable foreign exchange restrictions. Furthermore, the responsible persons and other persons in such PRC subsidiaries who
are held directly liable for the violations may be subject to administrative sanctions.



These regulations
apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future. We have
notified holders of ordinary shares of our company whom we know are PRC residents to register with the local SAFE branch and update
their registrations as required under the SAFE regulations described above. We are aware that Mr. Hongyi Zhou, our chairman
and chief executive officer and principal shareholder and Mr. Xiangdong Qi, our director, president and principal shareholder,
both of whom are PRC residents, have registered with the relevant local SAFE branch. We, however, cannot provide any assurances
that all of our shareholders who are PRC residents will file all applicable registrations or update previously filed registrations
as required by these SAFE regulations. If SAFE determines that any of our beneficial owners who are PRC residents fails to comply
with the above SAFE rules, our PRC subsidiaries could be subject to fines and legal penalties, and SAFE could restrict our cross-border
investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute
dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from making distributions or
paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely
affected.



Failure to comply with the registration
requirements for employee share option plans may subject our PRC equity incentive plan participants or us to fines and other legal
or administrative sanctions.



In January 2007,
SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among
other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation
in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In March 2007, SAFE promulgated
the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership
Plan or Stock Option Plan of Overseas-Listed Company, or Circular 78, which has been replaced by a circular 7 issued by SAFE on
February 15, 2012, or Circular 7.



20







Under Circular 7,
PRC residents who participate in an employee stock option plan in an overseas publicly-listed company are required to register
with SAFE or its local office and complete certain other procedures. A PRC agent, which could be the PRC subsidiary of such overseas
publicly-listed company, is required to retain a financial institution with stock brokerage qualification at the listing place
or a qualified institution relating to the exercise or sale of share options.  We and our PRC employees, directors and senior
management who receive share options became subject to these regulations upon our initial public offering in the United States.
Our 2006 Employee Share Option Scheme, 2006 Employee Share Vesting Scheme and 2011 Share Incentive Plan have been filed with and
approved by SAFE. However, if we or our PRC optionees fail to comply with these regulations or any of our future share incentive
plans are not filed with or approved by SAFE, we or our PRC optionees may be subject to fines and other legal or administrative
sanctions.



We may be subject to PRC taxation
on our worldwide income.



Under the PRC Enterprise
Income Tax Law, or the New EIT Law, and its implementation rules, both effective from January 1, 2008, an enterprise
established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise
and is subject to a 25% enterprise income tax on its global income. The implementation rules define the term “de facto
management bodies” as establishments that carry out substantial and overall management and control over the manufacturing
and business operations, personnel, accounting and properties of an enterprise. The State Administration of Taxation, or the SAT,
issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises
on the Basis of De Facto Management Bodies, or Circular 82, which sets out certain specific criteria for determining whether
the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China.



In addition, the SAT
issued a bulletin on August 3, 2011 to provide more guidance on the implementation of the above circular with an effective date
to be September 1, 2011. The bulletin clarified resident status determination, post-determination administration, as well as competent
tax authorities. It also specifies that when provided with a copy of PRC tax resident determination certificate from an offshore
incorporated enterprise controlled by PRC residents, the payer should not withhold 10% income tax when paying the PRC-sourced
dividends, interest, royalties, etc. to the offshore incorporated enterprise controlled by PRC residents. Although both the circular
and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals,  the
determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT's general
position on how the “de facto management body” test should be applied in determining the tax residency status of offshore
enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises
or PRC individuals.



While we do not believe
we are considered a resident enterprise or meet the criteria under Circular 82, we cannot ensure you that the SAT will not
implement Circular 82 or amend the rules in the future to the effect that such rules will apply to us or our
wholly-owned subsidiaries in Hong Kong. If the PRC authorities were to subsequently determine that we should be treated as a resident
enterprise, a 25% enterprise income tax will be imposed on our global income, which could significantly increase our tax burden
and materially adversely affect our financial condition and results of operations.



Dividends we receive from our PRC
subsidiaries, dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding
taxes under PRC tax laws.



Under the New EIT
Law, dividends payable by a foreign-invested enterprise in China to its shareholders that are “non-resident enterprises”
are subject to a 10% withholding tax starting from January 1, 2008, unless such shareholders’ jurisdiction of incorporation
has a tax treaty with China that provides for a different arrangement. As of the date of this annual report, the Cayman Islands
have not entered into any such tax treaties with the PRC. If we are considered a “non-resident enterprise” under the
New EIT Law, dividends paid to us by our PRC subsidiaries will be subject to this 10% withholding tax, which would reduce
our net income and adversely affect our operating results.



Similarly, any gain
realized on the transfer of ADSs or shares by shareholders that are “non-resident enterprises” is also subject to
a 10% PRC withholding tax, if such gain is regarded as income derived from sources within the PRC. If we are considered to be
an “offshore-registered resident enterprise,” the dividends we pay to our shareholders that are “non-resident
enterprises” with respect to our ADSs or shares would be treated as income derived from sources within the PRC and be subject
to a 10% withholding tax. The gain that such shareholders realize from the transfer of our ADSs or shares may also be treated
as income derived from sources within the PRC and be subject to PRC income tax if such shareholders are considered as “non-resident
enterprises.”



21







Pursuant to the Notice
on How to Understand and Determine the Beneficial Owners in Tax Agreement, a “beneficial owner” under China’s
tax treaties and tax arrangements shall engage in substantive business activities. An agent or conduit company that is set up
for the purpose of avoiding or reducing taxes or transferring or accumulating profits will not be regarded as a beneficial owner
and, therefore, will not qualify for treaty benefits. We cannot assure you that any dividends to be distributed by us to our non-PRC
shareholders will be entitled to the benefits under the relevant withholding arrangement set out in a tax treaty between such
shareholders’ jurisdiction of incorporation and China.



If we are required
under the New EIT Law to withhold PRC income tax on our dividends payable to our non-PRC enterprise ADS holders, or if gain
from disposition of our ordinary shares or ADSs will be subject to PRC taxes, your investment in our ADSs may be materially adversely
affected.



Any change in the preferential tax
treatment we currently enjoy in the PRC may materially adversely impact our net income.



Pursuant to the New EIT
Law, enterprises that previously enjoyed preferential treatments of low tax rates will be subject to the new enterprise income
tax rate of 25% after a five-year transitional period. Moreover, tax exemption or reduction with fixed terms enjoyed by enterprises
including us will continue until the expiry of the prescribed period. Our operating subsidiary, Qizhi Software, our VIE, Beijing
Qihu and Beijing Star World Technology Co., Ltd, or Beijing Star World, receive preferential tax treatment in the PRC as “high
and new technology enterprises.” Our operating subsidiary, Tianjin Qisi, receives preferential tax treatment in the PRC
as “software enterprise.” As a result, subject to satisfaction of applicable criteria as confirmed by the competent
authorities, Qizhi Software was entitled to an exemption from the 15% reduced EIT tax rate in 2008 and a 50% reduction in the
15% reduced EIT tax rate in 2009 and 2010.  Qizhi Software received a renewal of its “high and new technology enterprises”
status in October 2011 and was entitled to a reduced EIT rate of 15% for 2011 and 2012.  Beijing Qihu was entitled to
a reduced EIT rate of 15% for 2010 and 2011. Beijing Qihu received a renewal of its “high and new technology enterprises”
status in July 2012 and and was entitled to a reduced EIT rate of 15% for 2012. Beijing Star World received its “high and
new technology enterprises” status in November 2011 and was entitled to a reduced EIT rate of 15% for 2011 and 2012.
Tianjin Qisi is entitled to “two-year exemption plus three-year half taxation rate” commencing from its first profitable
year, and began to enjoy the first year of its tax exemption from 2012. On April 21, 2010, the State Administration of Taxation
issued Circular 157, which seeks to provide additional guidance on the interaction of certain preferential tax rates under the
transitional rules of the New EIT Law. Prior to Circular 157, we understood that if a high and new technology enterprise was in
a tax holiday period where it was entitled to a 50% reduction in the tax rate, and it was also entitled to the 15% preferential
tax rate, it would be entitled to pay tax at a rate of 7.5%. Circular 157 appears on its face to have the effect that such an
entity is entitled to pay taxes at either the lower of 15% or 50% of the standard PRC tax rate. Circular 157 is newly issued and
the tax authorities may differ in explaining the rules, and there might be a risk that the competent tax authority may later decide
that Qizhi Software was not eligible for a 7.5% discounted tax rate and that a 12.5% preferential tax rate was instead applicable.
The PRC government could eliminate any of these preferential tax treatments before their scheduled expiration. Expiration, reduction
or elimination of such preferential tax treatments will increase our income tax expenses and in turn decrease our net income.



New labor laws in the PRC may adversely
affect our results of operations.



On June 29, 2007,
the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on
January 1, 2008 and was amended in 2012. The New Labor Contract Law imposes greater liabilities on employers and significantly
impacts the cost of an employer’s decision to reduce its workforce. Furthermore, the New Contract Labor Law requires
certain terminations to be based upon seniority and not the merits of employees. As a result, the New Labor Contract Law
could increase our operating expenses and limit our ability to significantly change or decrease our workforce.



Risks Related to Our ADSs



The market price for our ADSs has
fluctuated and may be volatile.



The market price
of our ADSs has fluctuated since we first listed our ADSs. Since our ADSs became listed on the NYSE on March 30, 2011,
the trading price of our ADSs have ranged from $13.71 to $36.21 per ADS, and the last reported trading price on
April 18, 2013 was $31.82 per ADS.



22







The market price for our ADSs may be highly
volatile and subject to wide fluctuations in response to factors including the following:



| | · | regulatory
                                                                                                         developments in our industry;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | · | actual
                                                                                                         or anticipated fluctuations
                                                                                                         in our quarterly results
                                                                                                         of operations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | changes
                                                                                                         in financial estimates
                                                                                                         by securities research
                                                                                                         analysts;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | negative
                                                                                                         publicity, studies or
                                                                                                         reports, including those
                                                                                                         issued by short-selling
                                                                                                         organizations;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | changes
                                                                                                         in conditions of Internet
                                                                                                         and mobile security industry;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | changes
                                                                                                         in performance and valuation
                                                                                                         of our peer or comparable
                                                                                                         companies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | announcements
                                                                                                         by us or our competitors
                                                                                                         of new services, acquisitions,
                                                                                                         strategic relationships,
                                                                                                         joint ventures or capital
                                                                                                         commitments;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | changes
                                                                                                         in our senior management;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | fluctuations
                                                                                                         in the exchange rate
                                                                                                         between the Renminbi
                                                                                                         and the U.S. dollar; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | sales
                                                                                                         or anticipated sales
                                                                                                         of additional ordinary
                                                                                                         shares or ADSs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, securities markets have experienced
significant price and volume fluctuations unrelated to the operating results of any particular companies. These market fluctuations
may also materially adversely affect the market price of our ADSs.



We may be classified as a passive foreign investment
company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary
shares.



Based on the current
and anticipated value of our assets, including goodwill, and composition of our income and assets, we do not believe we were a
passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31,
2011. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you
that we will not be a PFIC for any taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at
least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an
average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held
for the production of passive income.



We must make a separate
determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets
for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs and ordinary shares, fluctuations
in the market price of the ADSs and ordinary shares may cause us to become a PFIC. In addition, changes in the composition
of our income or assets may cause us to become a PFIC. If we are a PFIC for any taxable year during which a U.S. holder holds
an ADS or ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. holder. See
“ Item 10. Additional Information — E. Taxation — United States Federal Income Taxation — Passive
Foreign Investment Company.”



We may need additional capital, and the sale of additional
ADSs or other equity securities could result in additional dilution to our shareholders.



We believe that our current cash and cash
equivalents, anticipated cash flow from operations and the proceeds from our initial public offering will be sufficient to meet
our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources
are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would
restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.



23







Substantial future sales of our ADSs in the public market,
or the perception that these sales could occur, could cause the price of our ADSs to decline.



Additional sales of
our Class A ordinary shares in the public market, or the perception that these sales could occur, could cause the market
price of our ADSs to decline. As of December 31, 2012, we had 184,157,097 ordinary shares outstanding, including 123,472,524
Class A ordinary shares and 60,684,573 Class B ordinary shares. The majority of our ADSs are freely transferable
without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act.



In addition, certain
holders of our ordinary shares have the right to cause us to register the sale of those shares under the Securities Act. Registration
of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities
Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause
the price of our ADSs to decline.



Our memorandum and articles of association
contain anti-takeover provisions that could materially adversely affect the rights of holders of our ordinary shares and ADSs.



Our memorandum and
articles of association contain provisions that could limit the ability of others to acquire control of our company or cause us
to engage in change-of-control transactions. These provisions could deprive our shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender
offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders,
to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating,
optional or special rights and their qualifications, limitations or restrictions. These preferred shares may include dividend
rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may provide rights
and preferences that holders of our ordinary shares or ADSs do not have.



We could issue preferred
shares quickly on terms that could delay or prevent a change in control of our company or make removal of management more difficult.
If we issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares
and ADSs may be materially adversely affected.



Our dual-class ordinary share structure
with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing
any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.



We have a dual-class
voting structure such that our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares.
Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are
entitled to five votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering
in April 2011. As of December 31, 2012, Global Village Associates Limited, or Global Village, a holder of our ordinary shares
controlled by Mr. Hongyi Zhou, our chairman and chief executive officer, held 32,228,158 Class B ordinary shares. Young
Vision Company Limited, or Young Vision, a holder of our ordinary shares controlled by Mr. Xiangdong Qi, our director and
president, held 15,823,344 Class B ordinary shares. Sinor Honor Limited, or Sinor Honor, a holder of our ordinary shares
controlled by Mr. Shu Cao, our chief engineer, held 2,080,362 Class B ordinary shares. Sequoia Capital China I, L.P. and
its affiliates held 9,919,461 Class B ordinary shares. As of December 31, 2012, we had a total of 123,472,524 Class A
ordinary shares and 60,684,573 Class B ordinary shares outstanding. Each Class B ordinary share is convertible
into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible
to Class B ordinary shares under any circumstances. Upon any sale, pledge, transfer, assignment or disposition of Class B
ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary
shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.



Due to the disparate voting powers attached
to these two classes of shares, as of December 31, 2012, Mr. Hongyi Zhou, Mr. Xiangdong Qi, Mr. Shu Cao, Sequoia and
certain of our executive officers and investors holding Class B ordinary shares collectively owned approximately 71% of the voting
power of our outstanding ordinary shares and have considerable influence over matters requiring shareholder approval, including
election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated
control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger,
takeover or other change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.



24







You may not have the same voting rights as the holders
of our Class A ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.



Except as described
in this annual report and in the deposit agreement for our ADSs, holders of our ADSs are not able to exercise voting rights attaching
to the Class A ordinary shares represented by our ADSs on an individual basis. Holders of our ADSs may instruct the depositary
how to vote the Class A ordinary shares underlying their ADSs, and the depositary will endeavor to carry out those instructions.
However, you may not receive voting materials in time to instruct the depositary to vote, and you may not have the opportunity
to exercise a right to vote.



You may not be able to participate
in rights offerings and may experience dilution of your holdings as a result.



We may distribute
rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary
will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders
are either registered under the Securities Act or exempt from registration under the Securities Act with respect to all holders
of ADSs.



We are not obligated
to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a
registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration
under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience
dilution in their holdings as a result.



You may be subject to limitations
on transfer of your ADSs.



Your ADSs are transferable
on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it
deems doing so expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver,
transfer or register transfers of ADSs when our books or the books of the depositary are closed, when we or the depositary deem
it advisable to do so because of any requirement of law or of any government or governmental body, under any provision of the
deposit agreement or for any other reason.



We are a Cayman Islands company
and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law,
you may have less protection of your shareholder rights than you would under U.S. law.



Our corporate affairs
are governed by our memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman
Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders to institute actions
and the fiduciary responsibilities of our directors to us are to a large extent governed by the common law of the Cayman Islands.
The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as
well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands.
The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial precedent in the United States. In particular, the Cayman Islands
has a less developed body of securities law than the United States. In addition, Cayman Islands companies may not have standing
to initiate a shareholder derivative action before the federal courts of the United States. As a result, our public shareholders
may encounter more difficulty in protecting their interests against actions taken by the management, the board of directors or
the controlling shareholders of our company than they would as shareholders of a public company incorporated in the United States.



You may have difficulty enforcing
judgments obtained against us.



We are a Cayman Islands
company, and we conduct substantially all of our operations in the PRC. Substantially all of our assets are located outside of
the United States. In addition, most of our directors and officers are nationals and residents of countries other than the
United States. As a result, it may be difficult for you to effect service of process upon our directors and officers in the
United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability
provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents
of the United States and the substantial majority of whose assets are located outside of the United States.



25







Although there is
no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and
the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment
obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination
of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman
Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment
debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of
taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary
to natural justice or the public policy of the Cayman Islands.



We have incurred additional costs
as a result of becoming a public company, which could negatively impact our net income and liquidity.



We are a public company
in the United States and as such, we have incurred and will continue to incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules and regulations implemented
by the SEC and the New York Stock Exchange require significantly heightened corporate governance practices for public companies.
We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make
many corporate activities more time-consuming and costly.  If we fail to comply with these rules and regulations,
we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of
our ADSs could decline.



We are a “foreign private
issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may
not provide you the same information as U.S. domestic reporting companies or we may provide information at different times,
which may make it more difficult for you to evaluate our performance and prospects.



We are a foreign private
issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we
are subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic
reporting companies. For example, we are not required to issue quarterly reports or proxy statements. We are not required to disclose
detailed individual executive compensation information. Furthermore, our directors and executive officers are not required to
report equity holdings under Section 16 of the Exchange Act and are not subject to the insider short-swing profit disclosure
and recovery regime.



As a foreign private
issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure
that select groups of investors are not privy to specific information about an issuer before other investors. However, we are
still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act.
Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic
reporting companies, you should not expect to receive the same information about us and at the same time as the information provided
by U.S. domestic reporting companies.



|Item 4. | INFORMATION ON THE COMPANY
|------- | --------------------------



|A. | History and Development of the Company
|-- | --------------------------------------



We were incorporated
in the Cayman Islands as an exempted limited liability company on June 9, 2005. On December 31, 2010, we changed our
name from Qihoo Technology Company Limited to Qihoo 360 Technology Co. Ltd. We conduct our business operations
in China through our wholly-owned subsidiaries and affiliated entities. We formed a wholly-owned subsidiary, Qizhi Software, one
of our primary operating entities, in China in December 2005, and another wholly-owned subsidiary, Tianjin Qisi Technology
Co. Ltd., another operating entity, in China in September 2011. In August 2012, we formed our third wholly-owned subsidiary
in China, Qifei Xiangyi.



26







On March 30,
2011, we listed our ADSs on the New York Stock Exchange under the symbol “QIHU.” In April 2011, we completed
our initial public offering of our ADSs.



Our principal executive
offices are located at 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China. Our telephone
number is (+86-10) 5878-1000 and our fax number is (+86-10) 5682-2000. Our registered address in the Cayman Islands is located
at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.



For information regarding
our principal capital expenditures, see “Item 4. Information on the Company — D. Property, Plants and Equipment.”



Investors should contact
us for any inquiries through the address and telephone number of our principal executive offices. Our corporate website address
is www.360.cn . Our agent for service of process in the United States is Corporation Service Company, 1180 Avenue
of the Americas, Suite 210, New York, New York 10036-8401.



|B. | Business Overview
|-- | -----------------



Overview



We are a leading
Internet company in China. In December 2012, we had 456 million monthly active users of our PC-based products and
services, representing a user penetration rate among all Chinese PC Internet users of 96.5% in China, according to
iResearch.



Recognizing security
as a fundamental need of Internet and mobile users, we offer comprehensive high-quality Internet and mobile security products
free of charge. As a result, we have amassed a large and loyal user base, which we monetize primarily through offering different
forms of online marketing and Internet value-added services.



We are the No. 1
provider of Internet and mobile security products in China as measured by user base, according to iReseach. In December 2012,
we had 445 million monthly active PC Internet security product users, representing a user penetration rate of 94.2% in China,
according to iResearch. Our core Internet and mobile security products include:



| | · | 360 Safe
                                                                                                         Guard and 360 Anti-virus,
                                                                                                         the No. 1 and No. 2
                                                                                                         PC Internet security
                                                                                                         products in China, with
                                                                                                         418 million and
                                                                                                         379 million monthly
                                                                                                         active users in December 2012,
                                                                                                         respectively, according
                                                                                                         to iResearch; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 360 Mobile
                                                                                                         Safe, the No. 1
                                                                                                         mobile security product
                                                                                                         in China, was used by
                                                                                                         over 200 million smartphone
                                                                                                         users in China as of
                                                                                                         December 2012. 360
                                                                                                         Mobile Safe had an approximately
                                                                                                         70% share of the mobile
                                                                                                         security market as of
                                                                                                         December 2012, according
                                                                                                         to iResearch.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On top of our core
layer of Internet and mobile security product offerings, we have further developed various platform products to meet a full spectrum
of security related needs of Internet users and create trusted access points to the Internet. Our platform products include:



| | · | 360
                                                                                                         browsers, which together
                                                                                                         had 310 million
                                                                                                         monthly active users
                                                                                                         and a user penetration
                                                                                                         rate of 65.6% in China
                                                                                                         in December 2012,
                                                                                                         according to iResearch.
                                                                                                         The user penetration
                                                                                                         rate for 360 browsers
                                                                                                         is second only to Microsoft
                                                                                                         Internet Explorer in
                                                                                                         China. We also offer
                                                                                                         360 mobile browsers for
                                                                                                         smartphone users in China.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 360
                                                                                                         Personal Start-up Page,
                                                                                                         the default homepage of
                                                                                                         360 browsers and
                                                                                                         a key access point to
                                                                                                         popular Internet services
                                                                                                         and applications, had
                                                                                                         91 million average
                                                                                                         daily unique visitors
                                                                                                         and generated 450 million
                                                                                                         average daily clicks
                                                                                                         in the fourth quarter
                                                                                                         of 2012.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 360
                                                                                                         Search, a search engine
                                                                                                         using our proprietary
                                                                                                         search engine technology
                                                                                                         and the default search
                                                                                                         engine of our 360 browsers.
                                                                                                         It is also accessible at www.so.com.
                                                                                                         According to iResearch,
                                                                                                         360 Search had a market
                                                                                                         share of 9.8% in PRC
                                                                                                         search traffic in terms
                                                                                                         of search page views
                                                                                                         in December 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27







| | · | 360
                                                                                                         Mobile Assistant, a key
                                                                                                         Internet access point
                                                                                                         for smartphone users
                                                                                                         to browse, search, download
                                                                                                         and install applications
                                                                                                         to access mobile Internet.
                                                                                                         Since its launch in late
                                                                                                         2011, it has become one
                                                                                                         of the most popular mobile
                                                                                                         app platforms in China.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our products and services
are supported by our cloud-based security technology, which we believe is one of the most advanced and robust technologies in
the Internet security industry. Our cloud-based security technology enables us to continuously update and enhance our capabilities
to detect Internet security threats on a real-time basis. By utilizing this cloud architecture, we believe we are able to offer
superior performance through reduced usage of user computing resources, particularly in comparison to traditional Internet security
products. As the effectiveness of our cloud-based security technology increases with the size of our user cloud, growth of our
user base enhances our capabilities of detecting new Internet security threats, which in turn helps us to attract even more users.



Leveraging our large
user base, we are developing open platforms on which third-party Internet product and service providers, such as game developers,
e-commerce websites and software and application developers, offer their products and services. These open platforms allow us
to effectively monetize our large user base through online advertising and revenue sharing arrangements with third parties. For
example, our open platform for games enables our users to use their 360 accounts to access more than 110 games provided by over
80 developers. Our open platforms enable our users to securely access a wide variety of products and services, which in turn enhances
our users’ experience and loyalty and further grows our user base.



We have been able
to leverage our large user base and our strong brand recognition to grow our paying customer and user base. We generate revenues
primarily through offering the following services:



| | · | Online
                                                                                                         advertising.  
                                                                                                         We offer advertising
                                                                                                         services by providing
                                                                                                         marketing opportunities
                                                                                                         on 360 Personal Start-up
                                                                                                         Page and other platform
                                                                                                         products to our advertising
                                                                                                         customers. We also offer
                                                                                                         search referral services
                                                                                                         to search engine companies,
                                                                                                         although revenue from
                                                                                                         search referral services
                                                                                                         has diminished since
                                                                                                         we launched our own search
                                                                                                         engine in August 2012.
                                                                                                         In 2013, we started to
                                                                                                         offer search advertising
                                                                                                         services to our customers.
                                                                                                         We generally offer online
                                                                                                         advertising services
                                                                                                         to our customers on a
                                                                                                         pay-for-performance basis.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Internet
                                                                                                         value-added services.  We offer games
                                                                                                         developed by third parties
                                                                                                         to users and generate
                                                                                                         revenue through sharing
                                                                                                         of in-game item sales
                                                                                                         with game developers.
                                                                                                         We also provide remote
                                                                                                         technical support and
                                                                                                         other Internet value-added
                                                                                                         services to users, although
                                                                                                         our remote technical
                                                                                                         support services have
                                                                                                         been offered for free
                                                                                                         since May 2012 in order to enhance customer experience.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have grown significantly
since we commenced operations in 2005. Our revenue increased from $57.7 million in 2010 to $167.9 million in 2011 and
$329.0 million in 2012. We first became profitable in 2009. Our net income increased from $8.5 million in 2010 to $15.6 million
in 2011 and $46.7 million in 2012.



Products and Services



Core Security Products



Our two core Internet
security products are 360 Safe Guard and 360 Anti-Virus.



360 Safe Guard
is our flagship Internet security product and a one-stop solution for Internet security and system optimization. 360 Anti-Virus
is an anti-virus application that uses multiple scan engines to protect our users’ computers against all kinds of malware,
including traditional viruses, and may operate without Internet connection. These applications protect our users’ computers
against Trojans, viruses, worms, adware and other forms of malware.



These two core Internet
security products collectively provide users with robust and efficient protection against virus, malware and malicious websites,
protect users’ privacy by preventing unauthorized access to and control of their computer system and optimize overall computer
performance by removing unnecessary processes and unused junk files, automatically detecting and fixing vulnerabilities in operating
system and third-party applications, and providing other security and performance optimizing services.



28







In
December 2012, according to iResearch, 360 Safe Guard ranked first among all PC Internet security products in China
with 418 million monthly active users and a user penetration rate of 88.5% in China, and 360 Anti-Virus ranked
second only to 360 Safe Guard among all PC Internet security products in China and first among all anti-virus products
in China, with 379 million monthly active users and a user penetration rate of 80.2% in China.



360 Safe Guard
and 360 Anti-Virus both comprise multiple integrated security products. The main components of 360 Safe Guard and 360 Anti-Virus
include:



Cloud-based anti-malware.    We believe that our cloud-based anti-malware is one of the most advanced and robust technologies in
the Internet security industry. It relies on a large user base to provide information used to detect malware. Our centralized
server cloud collects data, such as samples of malware, from our user base. These samples are sent to our cloud-based analytic
systems for automatic real-time detection of new malware and updating of the blacklist and whitelist on a real-time basis.



During on-demand scans
on and real-time protection of our users’ computers, our cloud-based anti-malware submits the unique digital fingerprints
of files and web pages from a user’s computer to our cloud query engines for malware detection. Our cloud query engines
compare these fingerprints against our server-side blacklist and whitelist for matches before sending match results to the client
side. Any file that matches our blacklist is immediately removed, quarantined or dealt with based on the user’s instructions,
while a non-match to our whitelist is presumed to be suspicious and further analyzed by our other technologies.



Our cloud-based anti-malware
has the following advantages over traditional Internet security products:



| | · | it
                                                                                                         ensures minimal lag time
                                                                                                         between initial discovery
                                                                                                         of new malware on a single
                                                                                                         user’s computer
                                                                                                         or mobile device and
                                                                                                         protection of all users
                                                                                                         from that malware, thus
                                                                                                         providing real-time response
                                                                                                         to new threats and robust
                                                                                                         protection to our users;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our
                                                                                                         large user base provides
                                                                                                         large amounts of data
                                                                                                         from which we can detect
                                                                                                         many forms of newly created
                                                                                                         and variant malware,
                                                                                                         which significantly enhances
                                                                                                         our malware detection
                                                                                                         capabilities; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | it
                                                                                                         eliminates the need for
                                                                                                         a traditional signature
                                                                                                         database stored on a
                                                                                                         user’s computer,
                                                                                                         freeing up computer resources
                                                                                                         otherwise required by
                                                                                                         traditional Internet
                                                                                                         security products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
effectiveness of cloud-based anti-malware depends primarily on the size of the user cloud and the amount of information that
it provides. With over 400 million users reporting new and potential threats, our user community contributes to its
own protection.



360 Automatic
Vulnerability Detection and Fix.     Since most Trojan horses attack a computer through its vulnerabilities,
360 Automatic Vulnerability Detection and Fix assesses the security status of a computer and automatically identifies, downloads
and installs suitable vulnerability patches. It is a user-friendly tool for users to manage and safeguard the operating system
and applications on their computers.



360 WebShield.    360 WebShield is an application for secure Internet browsing. Using a blacklist of malicious
websites compiled through our user cloud and our server side detection system, 360 WebShield effectively blocks websites
that may contain automatically downloaded malware or phishing or fraudulent content and warn users against these websites. 360 WebShield
also filters advertisements, restores browser settings from and protects browser settings against unauthorized modification, scans
downloaded files and maintains a clean and stable browsing environment.



360 Privacy Protector.     360 Privacy
Protector protects users’ personal information and data stored on the hard drive of their computers. By identifying the
files accessed by software programs running on a user’s computer and allowing the user to decide whether to grant access,
it protects our users’ private files, including chat records and online banking information, against unauthorized access.
In addition, with 360 Privacy Protector, our users can monitor the status of webcams on their computers to prevent peeping,
utilize a strengthened and encrypted virtual drive to store their private and sensitive files with minimized risks of data loss
or leakage and clear unwanted access history or records.



Quick PC Health Check.     Quick
PC Health Check is a user-friendly tool to quickly monitor, diagnose and rate the security status and performance of a user’s
computer. It also provides a user-friendly “one-click fix” to solve identified security risks, shorten the startuptime and optimize system performance.



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360 Mobile Safe..
360 Mobile Safe was launched in November 2009 and is a security program for the Google Android, Apple iOS and Nokia Symbian
smartphone operating systems.It scans for malware using our cloud-based security technology, blocks spam text messages,
filters incoming phone calls based on user-input blacklists and whitelists, optimizes phone performance and speed and encrypts
data for privacy protection in the event that the phone is lost or stolen. As of December 2012, 360 Mobile Safe had
the largest share of China’s mobile security market, with approximately 70%, according to iResearch.



Cloud Storage



Our Cloud Storage
system offers users a space for file storage and the data backup. User data is encrypted and stored on our cloud servers in segments
with at least two copies to ensure data security and integrity. Our unique segmentation redundancy technology enables users to
restore a file with limited redundant data for high system reliability. Users can access and manage their files through PC software,
web page and mobile platforms and enjoy the real-time synchronization among these platforms.



Platform Products



360 Browsers.    Our 360 browsers, such as 360 Safe Browser and 360 Speed Browser, are based on dual-core technologies
and provide our users with a fast and secure browsing experience. According to iResearch, in December 2012, 360 browsers
had monthly active users of 310 million and user penetration rate of 65.6% in China. We also offer 360 Mobile Browser for the
iOS and Android operating systems.



Our 360 browsers can
automatically block malicious websites, identify them among search results and scan files downloaded through the browser for security
threats. Our 360 browsers also offer a “private browsing” option to allow users to surf the Internet anonymously without
leaving historical access records. Furthermore, in addition to the traditional browser function of rendering web pages, our 360
browsers serve as an entrance for Internet related services, which we believe leads to greater user loyalty. For example, the
microblog reminder function promptly notifies our users of new comments to and new followers
of their microblogs, enabling them to better utilize social networking applications. In addition, 360 browsers’ online bookmark
folders allow users to store their bookmarks in the cloud and access the bookmarks at any time in any location on PC and mobile
devices with their 360 accounts.  Also, 360 browsers offer password manager to help users easily access multiple personal
accounts on different online services through a secure cloud-based system. Through these additional features, we have been able
to increase our users’ reliance on and loyalty to our products and services.



We also offer 360
Mobile Browser for the iOS and Android operating systems. Our 360 mobile browsers’ cloud-based web page rendering may
reduce up to 90% of data traffic, which helps to optimize speed and user experience.  Using 360 accounts, users can seamless
synchroniz e bookmarks and personal settings between the Android, the iOS and PC platforms.



360 Personal
Start-up Page.     Launched in 2009, 360 Personal Start-up Page serves as user’s start-up
page aggregating popular and preferred web services and applications. As the default home page of our 360 browsers,
360 Personal Start-up Page allows users to access and utilize popular web applications from a convenient site. Eventually,
it will also automatically customize the contents and design based on users’ preference and habit. In the fourth quarter
of 2012, 360 Personal Start-up Page had 91 million average daily unique visitors and generated 450 million average daily
clicks.



360 Search.
In August 2012, we launched 360 Search, a search engine using our proprietary search technology and the default search
engine of our 360 browsers. 360 Search is accessible at www.so.com. According to iResearch, 360 Search had a market share of 9.8%
in PRC search traffic in terms of search page views in December 2012.



360 Mobile Assistant.    360 Mobile Assistant allows users to browse, search and obtain various mobile applications for mobile
devices, and through these applications access mobile Internet on a secure and user-friendly platform. We have established strong
relationships with software and application developers to provide a large number of mobile applications on 360 Mobile Assistant.
A substaintial majority of 360 Mobile Assistant users use the Android operating system.



30







Online Advertising



We utilize our extensive
user traffic to offer online advertising services, including online marketing services and search referral services.



We offer online marketing
services by providing links to our advertising customers’ websites or online applications on our platform products. We charge
fees to our customers on a cost over a time period or cost for performance basis.  Under both models, fees are directly or
indirectly determined based on the effectiveness of our advertising links, which is typically measured by active users, clicks,
transactions and other actions originated from our 360 Personal Start-up Page. Additionally, under both models, fees are determined
based on the industry of the customer and the location of the advertising link.



We also offer search
referral services to search engine companies. Our 360 browsers
and their default home page, 360 Personal Start-up Page, contain search boxes that may direct search traffic to search engines.
These search engine companies pay us a pre-determined fee for each search originated from search boxes in our 360 browsers
and 360 Personal Start-up Page. Google has historically been our primary search referral service customer. Since the launch of 360 Search, our proprietary search engine, in August 2012, revenues from
search referral services have become insignificant. Additionally, in October 2012, we and Google mutually agreed to terminate
the search referral contract entered between us, and we have not generated search referral revenues from Google since then.



In the beginning of
2013, we started to offer advertising services on our search engine, through both internal monetization systems and a newly formed
partnership with Google. We did not generate search advertising revenues in 2012.



Internet Value-added Services



We offer Internet
value-added services, including operating games developed by third parties and providing remote technical support and other Internet
value-added services to users.



We operate third-party
developed games on our game platform. We provide game players a safe and convenient gaming environment.  Our game portfolio
includes web games, client-based games and mobile games. Users can access and play these games directly through our game platform.
As of December 31, 2012, we offered over 110 games and had over 60 million registered users on our game platform. 
We share revenues from game operations with game developers pursuant to the terms of our cooperation agreements.



We also serve as an
agent for providing online distribution services and payment collection services, such as online lottery distribution, payment
collection for mobile charges, and distribution and payment collection of e-books, on behalf of third parties. We generally charge
commission as a percentage of the gross proceeds or collection amount. We provide payment collection services mainly through third-party
professional payment and settlement institutions.



Additionally, we
offered fee-based remote technical support services prior to May 2012. When users encountered security issues, they could
request our staff to provide live technical assistance and remote troubleshooting for a service fee on a per-case basis. We
also provided monthly and annual subscriptions for this service. In order to enchance customer experience, we have
offered remote technical support services for free since May 2012.



Our Technology



Cloud-based Technologies



We have developed
leading cloud-based security technology, cloud computing technology and cloud storage technology.



Our cloud-based security
technology is composed of three parts: a cloud-based database of blacklisted and whitelisted program files, the automatic scanning
and analysis of potential malware and malicious websites and 360 security software installed on users’ computers. It
compares the unique digital fingerprint of a program file to a blacklist of confirmed malware and malicious websites and whitelist
of confirmed safe program files stored on our central servers. The blacklist and whitelist are updated by information retrieved
from and submitted by our user cloud on a real-time basis. In December 2012, we scanned and analyzed an average of over 50
million suspicious file samples per day. Our blacklist contains over 1.5 billion malware samples, and our whitelist contains nearly
70 million safe program files.



31







We believe our cloud
computing technology is one of the most advanced proprietary server-side cloud computing technologies in the Internet and mobile
security industry. It combines the strengths of our large-scale parallel computing technology, our mass data storage technology,
our high performance inquiry and search engine technology and our QVM malware detection technology.



Our cloud storage
system is based on our unique segmentation redundancy technology, which enables us to restore a file with limited redundant data
and greatly improves the storage reliability and security for our users’ data. We possess know-how to customize servers
to store greater amounts of data with lower power consumption. In addition, we have developed software for users to implement
our cloud storage and data backup and restore technology, which supports automatic incremental backup of users’ designated
files while ensuring the safety and confidentiality of such files. Our cloud-based storage system also supports multi-device
cross platform synchronization and real-time sharing. It has already become an integrated part of our 360 browsers and other key
products.



Dual-core Browser



Our 360 browsers
integrate Trident, the core browser technology of Microsoft’s Internet Explorer and Webkit, the open-source core browser
technology of Google Chrome, and automatically switch between these two core technologies seamlessly to provide our users with
an optimized browsing experience. Webkit increases the speed of opening web pages, while Trident improves the compatibility of
our 360 browsers with online banking and video display web pages. We have also developed technologies to minimize the memory
usage of our 360 browsers to prevent decreases in performance after long periods of use, and isolate individual web page crashes
to prevent browser deadlocks when visiting certain pages. Our 360 browsers also incorporate multiple security features, including
the Microsoft DEP/NX exploit protection mechanism, anonymous browsing and the functions of 360 WebShield and sandbox technology.
Our 360 browsers also fully support HTML5, and achieved one of the highest benchmark scores in HTML5 testing among mainstream
browsers in the market, according to www.html5test.com.



Qihoo Search Engine Technology



Qihoo search engine
technology consists of our proprietary search technologies, including a scalable spider system for crawling web pages, a
scalable parallel computing platform for processing and analyzing web pages, a massive data storage platform, a high-performance
indexing system and a high-performance query engine technology. Core components of Qihoo search engine technology are also used
in our cloud-based security system to augment our ability to screen massive amounts of program files and Internet content and
quickly identify threats.



Web Page Analysis
Techniques enable our search engine to analyze the structure and contents of web pages, and to extract valuable information
from massive data flow on web pages. High performance artificial intelligence algorithms will then pick up the information and
automatically categorize web pages based on content, style and structure.



Anti-Spam Techniquesenable our search engine to identify various spam pages, malicious pages, phishing pages, invalid pages and pages with inappropriate
content by analyzing their structure, content, traffic patterns, hyperlink data and visiting logs. These techniques help our search
engine determine which pages should be included into the index based on quality and popularity.



Web Crawling Techniquesenable our search engine to identify high-quality web pages from a massive set of page addresses and to efficiently crawl
the pages by deploying a large scale distributed processing system and applying data mining algorithms and other high performance
data processing algorithms. We also develop multiple mode crawling systems that can adaptively crawl the newest web pages with
very small latency and refresh indices with high frequency, thus enhancing overall crawling efficiency.



Web Page Ranking
Techniques enable our search engine to present search results with rank orders that reflect content relevency. The techniques
incorporate a weighted average scoring system on page analysis, a traditional page ranking system on page popularity and a feedback
collecting system on page accuracy.



32







Natural Language
Processing Techniques enable our search engine to accurately analyze, understand, and predict users’ search queries,
therefore reducing the need for keyboard entry and lowering the bar for search usage in a multi-language and multi-cultural setting.
The techniques include word segmentation for both English and Chinese, query auto-completion, automatic spelling correction and
relevant query suggestion.



Qihoo
Computational Advertising Technology



Our Qihoo Computational
Advertising Platform - ClickEyes, provides targeted advertising services for hundreds of millions of Internet users every day,
including search advertising services and targeted display advertising services for our Personal Startup Pages. Our key computational
advertising technologies includes:



Auction System.Our auction system is a web-based general second-price auction system through which advertisers can upload their creative
and bid on separate keywords or bid words. The system automatically provides highly relevant advertisements based on the search
keywords or browsed pages of users. Our advertising ranking system evaluates context relevance, the weight of advertising websites,
click-through rates, keyword bids, as well as filtering criteria and other factors before ultimately displaying advertisements
to the users. Our system determines a minimum reserve price for each keyword with a dynamic mechanism.



Anti-fraud Techniques.
Our anti-fraud techniques use a statistical machine learning-based approach to implement a click anti-fraud mechnism, which ensures
the click validity of our advertisers. The system can identify and filter invalid or fraudulent clicks based on IP, click distribution,
cookies and other factors to ensure the integrity our advertising system.



Search Advertising
Delivery System. Our search advertising delivery system uses a query analysis model to analyze search users’ demand
and use machine learning tools to implement advertising rankings before eventually presenting to users. The system also automatically
optimizes advertisement placement based on user click feedback.



Display Advertising
Delivery System.Our display advertising delivery system analyzes the contents that user searched or visited through natural
language processing technology and automatically identifies users’ immediate preferences. The system then combines users’
short-term preferences with their long-term needs through a machine learning mechanism to deliver the targeted display advertisements
to users.



Mobile Security Technology



Our mobile security
products are based on our cloud technologies, providing various security solutions in secure communication, system optimization,
privacy protection and anti-spam. As of December 2012, our flagship mobile security product, 360 Mobile Safe, had more than 200
million smartphone users and over 70% share of smartphone security market. Our mobile security products cover various mobile operating
systems, including Android, iOS and Symbian.



Anti-Spam Technology.Based on intelligent analysis of behaviors of common communication spam, including SMS spam and coldcall/robocall spam, we
have built a cloud-based spam blacklist. 360 Mobile Safe utilize the blacklist to identify and block potential spam with high
efficiency and low power consumption. The technology also allows mobile users to report new spam to our cloud on a realtime basis,
benefiting our entire user base immediately. In 2012, 360 Mobile Safe blocked 71.2 billion spam SMSs and 35.2 billion spam calls.



Encryption and
Privacy Protection Technology. 360 Mobile Safe uses an high-strength cryptographic algorithm to encrypt user-specified private
data, such as call logs, address books, images, video and audio clips and other files. Users can backup their data to our password-protected
cloud storage services, and retrieve the data to any mobile device when needed. The technology also enables users to block unauthorized
access to their private information, such as location, address book, SMSs and call details, by third part apps.



Anti-Theft Technology.
Through the remote control command, our anti-theft technology can locate registered devices and triggers these devices to ring
loud alarm tones to help users find the devices. The technology also enables users to lock lost devices remotely and erase all
data in the devices to prevent breach of privacy.



33







QVM



QVM is our proprietary
technology that detects malware through an artificial-intelligence algorithm capable of machine learning to recognize new forms
of malware. QVM technology offers a robust model for recognizing malware characteristics using the massive amount of data that
we have compiled on confirmed malware in our blacklist and verified safe programs files in our whitelist. This model is used as
a basis for a detection algorithm which is automatically enhanced and updated with new malware samples submitted by our users
to our servers.



Program files that
do not appear in our blacklist and whitelist are scanned using QVM, and any “hits” returned by this technology are
presumed to be malicious and removed or quarantined. As malware is constantly being created or morphing, QVM has the advantage
of being able to detect threats that have not been previously identified.



360 HIPS



360 HIPS adopts
a proactive defense technology that focuses on monitoring behaviors and actions performed by malware rather than its programming
code signature or digital fingerprint. Generally, even if malware evades detection by our cloud-based security and QVM technologies,
it must still perform certain actions to achieve its creator’s intentions, such as modifying system settings and accessing
confidential information. 360 HIPS proactive defense technology monitors a computer’s running processes during procedures
such as web browsing, downloading, software installation and data transmission and assesses these actions based on a pre-determined
algorithm. If a process is deemed to be dangerous, the user is notified and information relating to that process is transmitted
to our central servers for further processing. This proactive defense technology takes advantage of the collective intelligence
and processing power of our cloud architecture to accurately and efficiently determine whether an action performed by a program
is malicious.



360 Sandbox Technology



360 Sandbox Technology
is a security system to provide users with protection in different processing environments, including online shopping, searches,
downloads, content streaming, removable disk installation and email services. Our two proprietary proactive defense technologies,
360 HIPS and the sandbox technology, enable this system to intelligently monitor the user’s behaviors and actions and provide
relevant protection through a pre-determined algorithm.  If a computing process is deemed to be suspicious, the user will
be notified and such process will be isolated in a virtual environment where malicious actions can be performed without actual
consequence to the user’s computer.



Malicious Web Page Detection
Technology



Our proprietary automated
detection system for malicious web pages is a core component of our cloud-based security system. It automatically tests and
recognizes malicious websites with an accuracy rate of over 99%. This detection system uses a collection of techniques, including
simulated vulnerability environments, search spiders, collections of suspicious websites compiled by our user base and monitoring
of browser processes and actions. We have also collected large amounts of data on phishing and fraudulent websites and used this
information and machine-learning technology to develop an artificially intelligent algorithm for recognition of phishing and fraudulent
websites.



System Rescue and Recovery Technology



Our system rescue
and recovery technology, along with our cloud-based security system, allows for the recovery of damaged systems with crucial files
that have been modified by malware or user error. It is able to restore the damaged system with optimal settings and correct system
files retrieved from our whitelist database on our server cloud. This technology also specifically aims to detect and remove sophisticated
Trojan horses.



System Performance Optimizing and
Power Saving Technologies



Our system performance
optimization technology assists our users to optimize the system settings and improve the system performance of their computers.
It manages hard drive, desktop, documents, Internet browsing and security settings to reduce system start-up time and increase
operating speed. It also cleans the registry, recycle bin, Internet access history and system patch files, improves hard
drive performance through testing and defragmentation and automatically updates and backs up system files.



34







Our hardware diagnosis
and power saving technology effectively diagnoses hardware status, saves power, prevents hardware malfunctions and prolongs the
battery life of a computer by closely monitoring its power consumption and the temperature of its key components. This technology
can be used on desktop, notebook and other personal computers.



Product Development



To maintain and enhance our leadership
position in the Internet industry, we will continue to invest in product development to enhance and increase our product offerings.
Our primary product development goals are to develop security products, cloud-based services, search engine related products,
mobile Internet products and other Internet products and services and strengthen our products and services and enhance user experience.
We also aim to focus our product development efforts on expanding our other Internet-based product offerings.



As of December 31, 2012, our product
development team consisted of 2,434 development and technical staff members, approximately 71.7% of whom held bachelor’s
or more advanced degrees.



Our internally developed technologies include
our cloud-based security system, QVM, 360 HIPS, Qihoo search engine technology, cloud storage and other technologies. See
“— Our Technology.”



Our product development expenses include
costs associated with new product development and enhancement for existing products, such as salaries and benefits, including
share-based compensation expenses, costs of bandwidth and utilities, license and technical service fees, and depreciation of equipment
and amortization of acquired intangible assets. Product development expenses represented 42.5%, 38.7% and 47.5% of total revenues
for each of the three years ended December 31, 2010, 2011 and 2012, respectively.



Network Infrastructure



Our network infrastructure
is administered by our operations department, which handles hardware, system and network operation and maintenance. Our systems
are designed for scalability and reliability to support growth in our user base. We lease bandwidth from telecommunication operators
such as China Telecom, China Unicom and China Mobile to connect to the national Internet backbone. We believe that our current
network facilities and broadband capacity provide us with sufficient capacity to carry out our current operations.



While we believe that
our network infrastructure and maintenance will likely prevent network interruption resulting from attacks by hackers, there remains
a possibility that such attacks could result in delays or interruptions on our network. For a further discussion, see “Item
3. Key Information — D. Risk Factors — Risks Related to Our Business — Interruption or failure of our own information
technology and communications systems or those of third-party service providers we rely upon could impair our ability to effectively
provide our products and services, which could affect our reputation and harm our operating results.”



Customers



Our customers primarily
comprise companies using our online advertising services, most of whom are third-party websites who place links on our platform
products (such as our 360 Personal Start-up Page) and search engines that pay us search referral fees for generating search traffic
from platform products.



In 2010, 2011 and
2012, we had 210, 350 and 860 customers that used our online advertising services. Our five largest customers accounted for
approximately 35.1%, 27.9% and 21.3% of our total revenues for the three years ended December 31, 2010, 2011 and 2012, respectively.



Game Developers



We operate third-party
developed games on our game platform and generate revenue from selling in-game currencies online which are used by game players
to purchase virtual items in these games.  We collect payments from game players in connection with the sale of in-game currencies
and remit certain agreed-upon percentages of the proceeds to the game developers.



35







Revenues
derived from our five largest game developers in aggregate accounted for approximately 18.0%, 13.5% and 15.4% of our total
revenues for the three years ended December 31, 2010, 2011 and 2012, respectively.



Suppliers



Our suppliers are
primarily providers of servers, network equipment and bandwidth that we need to maintain our network infrastructure and operations.
Our suppliers of servers, network equipment and office computers are all from China and primarily include Huawei, Lenovo,
Dell and other system integration suppliers. Under our framework agreements with those suppliers, we purchase servers, network
equipment and office computers based on our requirements for each purchase order. The framework agreements typically last for
one year, and certain of these agreements are automatically renewable for additional one-year terms unless terminated by either party.
Our primary Internet data center, or IDC, suppliers include China Telecom, China Unicom and China Mobile. Under our agreements
with IDC service providers, we lease server racks and bandwidth and the providers guarantee that the error rate, which is defined
as accumulated failure time per month, will not exceed a very limited duration per calendar month. The agreements typically last
for one year, some of which are automatically renewable for additional one-year terms unless terminated by either party.



Our
largest supplier accounted for approximately 9.4%, 14.8% and 29.5% of our total purchases for the three years ended
December 31, 2010, 2011 and 2012, respectively. Our five largest suppliers in aggregate accounted for approximately
34.5%, 43.4% and 56.2% of our total purchases for each of the three years ended December 31, 2010, 2011 and 2012,
respectively.



Sales and Marketing



We have historically
relied primarily on “word-of-mouth” from our large user base as a sales and marketing tool for our products and services.
Trust and reliance by over 450 million users is a key driver for the growth of our business, as potential new users hearing
positive feedback from their friends and colleagues are more likely to try our products and services, which in turn enhances our
“360” brand. Our public relations strategy has historically been focused on events related to our products and
services, such as the launch of a new product or service, the update of existing products and services and awards and certifications
we received for our products and services. Since the fourth quarter of 2012, we have also made significant sales and marketing
efforts to promote our products through industry participants in distribution channels, such as increasing our cooperation other
software companies.



Since 2010, we have
conducted advertising campaigns to reach a large number of potential users and customers. We also cooperate with mobile operators
to promote our mobile security products.  While we will continue to control our sales and marketing expenses in the future
by focusing on advertisements that we believe will provide significant benefits to our user base and brand recognition, we expect
to use more external sales and marketing channels to promote our brand, products and services as we expand our offerings.



Intellectual Property



We rely on a combination
of patent, copyright, trademark, software registration, non-competition and trade secret laws and agreements with our employees
to establish and protect our intellectual property rights. All of our employees enter into agreements requiring them to keep confidential
all proprietary and other information relating to our customers, methods, technologies, business practices and trade secrets.
These agreements also stipulate that all software, inventions, trade secrets, works of authorship, developments and other processes,
whether or not patentable or copyrightable, made by them during their employment are our property. Despite our precautions, it
may be possible for third parties to obtain and use our intellectual property without our authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property rights in the Internet and telecommunications-related industries
are uncertain and still evolving. Infringement and misappropriation of our intellectual property could materially harm our business.
See “Item 8. Financial Information — Legal and Administrative Proceedings.”



As of December 31,
2012, we had 168 registered trademarks in China and 21 registered trademarks outside of China, and held registered copyrights
to 183 software programs covering almost all of our products. As of December 31, 2012, we had 1,291 pending patent
applications and had received 11 authorized patents from various governmental authorities.



36







We have registered
the domain name “360.cn” with China Internet Network Information Center. In addition, we have registered 224 domain
names with various domain name registration services as of December 31, 2012.



We currently license
malware scanning engines and signature libraries and other security technologies from third parties, such as BitDefender SRL.



Competition



We primarily compete
with Internet security product and service providers and PRC-based Internet companies.



The Internet security
market in China is competitive among existing industry players, but contains high barriers to entry which make it difficult for
new entrants to succeed, including:



| | · | Brand.    The
                                                                                                         technological reputation
                                                                                                         of a brand is particularly
                                                                                                         important in the Internet
                                                                                                         security market, as users
                                                                                                         need to completely trust
                                                                                                         and rely on a service
                                                                                                         provider’s security
                                                                                                         software. To compete
                                                                                                         with the well-established
                                                                                                         brand of existing industry
                                                                                                         players, new entrants
                                                                                                         must commit significant
                                                                                                         resources to marketing
                                                                                                         and promotion.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | User
                                                                                                         base.    Cloud-based
                                                                                                         security technology has
                                                                                                         come to the forefront
                                                                                                         of the Internet security
                                                                                                         industry in recent years,
                                                                                                         and requires a large
                                                                                                         user cloud to be effective.
                                                                                                         It is difficult for new
                                                                                                         entrants with small user
                                                                                                         clouds that cannot detect
                                                                                                         malware effectively to
                                                                                                         attract users.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Technology.    Cloud-based
                                                                                                         security technology requires
                                                                                                         a significant amount
                                                                                                         of technological expertise,
                                                                                                         infrastructure and resources.
                                                                                                         New entrants face significant
                                                                                                         lag time in developing
                                                                                                         their own technologies
                                                                                                         and establishing the
                                                                                                         infrastructure necessary
                                                                                                         to operate.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Software.    Internet
                                                                                                         security software is
                                                                                                         generally mutually exclusive,
                                                                                                         meaning that an Internet
                                                                                                         user generally uses security
                                                                                                         software from a single
                                                                                                         software provider. It
                                                                                                         is difficult for new
                                                                                                         entrants to the market
                                                                                                         to capture users from
                                                                                                         existing and established
                                                                                                         brands.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Business
                                                                                                         model.    We
                                                                                                         have established our
                                                                                                         broad user base through
                                                                                                         providing high quality
                                                                                                         pan-security products
                                                                                                         free of charge and generate
                                                                                                         revenues by leveraging
                                                                                                         that user base. New entrants
                                                                                                         into the Internet security
                                                                                                         market do not have the
                                                                                                         user base or the brand
                                                                                                         recognition to follow
                                                                                                         this business model successfully.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



According
to iResearch, in December 2012, we had 445 million monthly active users of our PC-based products and
services, representing a user penetration rate among all Chinese PC Internet users of 94.2% in China. We believe that our
technological know-how, large user base and established reputation in the Internet security market provide us with
significant competitive advantages.



We also compete with PRC-based Internet
companies that build Internet platforms to offer similar value-added and online advertising services as we do. Our primary competitor
in this market is Tencent, the largest Internet company in China in terms of revenue. In December 2012, Tencent’s QQ instant
messaging software had an active user penetration rate in China of 93.6%, according to iResearch.



Additionally, in August 2012, we launched
our general search service. Our primary competitors in the search services market are Baidu Inc. and Sohu.com Inc. According to
iResearch, in December 2012, Baidu and Sohu’s Sogou search engine had 81.9% and 4.4%, respectively, of the PRC search traffic
in terms of search page views, compared to 9.8% for our search engine.



Regulation



This section sets
forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’
right to receive dividends and other distributions from us.



37







Regulations Relating to Our Business



Telecommunications Regulations



The PRC Telecommunications
Regulations implemented on September 25, 2000 sets out a regulatory framework for telecommunications services providers in
China. The Telecommunications Regulations require telecommunications services providers to obtain an operating license prior to
the commencement of their operations. The Telecommunications Regulations categorize telecommunications services into basic telecommunications
services and value-added telecommunications services. According to the Catalogue of Telecommunications Business attached to the
Telecommunications Regulations, information services provided via fixed network, mobile network and Internet belong to value-added
telecommunications services.



Foreign direct investment
in telecommunications companies in China is governed by the Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises promulgated in December 2001 and amended in September 2008, or the FITE Regulations. The FITE Regulations
requires foreign-invested telecommunications enterprises in China to be established as Sino-foreign equity joint ventures. In
addition, pursuant to the FITE Regulations and the relevant WTO agreements, foreign investors in a foreign-invested telecommunications
enterprise engaging in value-added telecommunications services may hold up to 50% of the equity interest of such enterprise. The
relevant rules do not impose geographic restrictions on the operations of a foreign-invested telecommunications enterprise.



However, for a foreign
investor to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent
performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added
telecommunications business overseas. Moreover, foreign investors that meet these requirements must obtain approvals from MIIT
and MOFCOM or their authorized local counterparts, which retain considerable discretion in granting approvals.



In July 2006,
MIIT publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating Value-added Telecommunications
Business, or the MIIT Notice, which reiterates certain provisions under the FITE Regulations. According to the MIIT Notice, if
any foreign investor intends to invest in a PRC telecommunications business, a foreign-invested telecommunications enterprise
must be established and such enterprise must apply for the relevant telecommunications business licenses. Under the MIIT Notice,
domestic telecommunications enterprises may not rent, transfer or sell a telecommunications license to foreign investors in any
form, nor may they provide any resources, premises, facilities and other assistance in any form to foreign investors for their
illegal operation of any telecommunications business in China.



On September 28,
2009, the PRC General Administration of Press and Publishing, or the GAPP, together with the National Copyright Administration,
and National Office of Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening on the
Administration of Pre-examination and Approval of Online Game and the Examination and Approval of Imported Online Game, or the
GAPP notice. The GAPP notice provides that foreign investors are not permitted to invest in online game operation businesses in
China through wholly foreign-owned entities, Sino-foreign equity joint ventures or cooperative joint venture investments and prohibits
foreign investors from gaining control over or becoming domestic online game operators through indirect ways such as establishing
other joint venture companies or contractual or technical arrangements. There are still substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including the MIIT circular and the GAPP notice.



Internet Content Services



On September 25,
2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, as
amended in 2011. According to the Internet Measures, commercial operators of Internet information services in China must obtain
a value-added telecommunications license, or ICP license, from the relevant government authorities.



Information Security and Censorship



National security
considerations are an important factor in the regulation of Internet content in China. According to the Decision of the Standing
Committee of the National People’s Congress on Maintaining Internet Security, the following actions may be regarded as violations
of laws and are subject to penalties, including criminal sanctions: (i) breaking into a computer or a system of strategic
importance; (ii) disseminating politically disruptive information; (iii) leaking state secrets; (iv) spreading
false commercial information; or (v) infringing intellectual property rights.



38







In addition, the MPS
promulgated measures on December 16, 1997 that prohibit the use of the Internet in ways which, among other things, result
in a leakage of national secrets or the distribution of socially destabilizing content. On December 13, 2005, the MPS promulgated
Provisions on Technological Measures for Internet Security Protection, or the Internet Protection Measures, which require all
ICPs to keep records of certain information about its users (including user registration information, log-in and log-out time,
IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws
and regulations. The ICPs must regularly update information security and censorship systems for their websites with local public
security authorities, and must also report any public dissemination of prohibited content. If the ICPs violate these measures,
the PRC government may revoke its ICP license and shut down its websites. In addition, the PRC State Secrecy Bureau has issued
provisions authorizing the blocking of access to any website it deems to be leaking national secrets or failing to comply with
the relevant legislation regarding the protection of state secrets.



Internet Privacy



In recent years, PRC government authorities
have legislated on the use of the Internet to protect personal information from unauthorized disclosure. For example, the Internet
Measures prohibits an Internet information services provider from insulting or slandering a third party or infringing upon the
lawful rights and interests of a third party. Pursuant to the BBS Measures, ICPs that provide electronic messaging services
shall not disclose any user’s personal information to any third party without such user’s consent, unless the disclosure
is required by law. ICPs are subject to legal liability if unauthorized disclosure results in damages or losses to users. In addition,
the PRC regulations authorize the relevant telecommunications authorities to demand rectification of unauthorized disclosure by ICPs.



The PRC laws do not prohibit ICPs from
collecting and analyzing person information of their users. The PRC government, however, has the power and authority to order
ICPs to submit personal information of an Internet user if such user posts any prohibited content or engages in illegal activities
on the Internet. However, PRC criminal law prohibits companies and their employees from illegally trading or disclosing customer
data obtained through the course of their business operations.



In addition, the MIIT promulgated the Several
Provisions on Regulating the Market Order of Internet Information Services, which became effective as of March 15, 2012.
This regulation stipulates that ICPs must not, without users’ consent, collect information on users that can be used, alone
or in combination with other information, to identify the user, or User Personal Information, and may not provide any User Personal
Information to third parties without prior user consent. ICPs may only collect User Personal Information necessary to provide
their services and must expressly inform the users of the method, content and purpose of the collection and processing of such
User Personal Information. In addition, an ICP may use User Personal Information only for the stated purposes under the ICPs’
scope of services. ICPs are also required to ensure the proper security of User Personal Information, and take immediate remedial
measures if User Personal Information is suspected to have been disclosed. If the consequences of any such disclosure are expected
to be serious, the ICP must immediately report the incident to the telecommunications regulatory authorities and cooperate with
the authorities in their investigations. Furthermore, on December 28, 2012, the Standing Committee of the National People’s
Congress enacted the Decision to Enhance the Protection of Network Information, or the Information Protection Decision, to further
enhance the protection of users’ personal information in electronic form. The Information Protection Decision provides that
ICPs must expressly inform their users of the purpose, manner and scope of the ICPs’ collection and use of users’
personal information, publish the ICPs’ standards for their collection and use of users’ personal information, and
collect and use users’ personal information only with the consent of the users and only within the scope of such consent.
The Information Protection Decision also mandates that ICPs and their employees must keep strictly confidential users’ personal
information that ICPs collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information
against disclosure, damages and loss.



39







Advertising Business



Foreign Ownership in Advertisement Business:



The principal regulations governing foreign
ownership in advertising businesses in China include:



| | · | The
                                                                                                         Foreign Investment Industrial
                                                                                                         Guidance Catalog;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Administrative Regulations
                                                                                                         on Foreign-invested Advertising
                                                                                                         Enterprises; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Circular Regarding Investment
                                                                                                         in the Advertising Industry
                                                                                                         by Foreign Investors
                                                                                                         through Equity Acquisition.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These regulations
require foreign entities that directly invest in the PRC advertising industry to have at least a two-year track record with a
principal business in the advertising industry outside China. Since December 2005, foreign investors have been permitted
to directly own a 100% interest in advertising companies in China, but such foreign investors are also required to have at least
a three-year track record with a principal business in the advertising industry outside China. PRC laws, rules and regulations
do not permit the transfer of any approvals or licenses, including business licenses containing a scope of business that permits
engagement in the advertising business.



As
a result of the current PRC laws, rules and regulations that impose substantial restrictions on foreign investment in the
Internet and advertising businesses in China, we conduct this portion of our operations through a series of contractual arrangements
among our PRC subsidiaries and our consolidated controlled entities. See “ Item 7. Major Shareholders and Related Party
Transactions3⁄4B. Related Party Transactions3⁄4Contractual Arrangements among Qizhi Software, the VIEs and the Respective Shareholders of the VIEs.”



Competent Authority Governing Advertisement
Business:



SAIC is responsible
for regulating advertising activities in China. The principal regulations governing advertising in China, including online advertising,
include:



| | · | The
                                                                                                         Advertising Law;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Administration of Advertising
                                                                                                         Regulations; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Implementation Rules for
                                                                                                         the Administration of
                                                                                                         Advertising Regulations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These regulations
stipulate that companies that engage in advertising activities in China must obtain from SAIC or its local branches a business
license which specifically includes operating an advertising business within its business scope. Companies conducting advertising
activities without such a license may be subject to penalties, including fines, confiscation of illegal revenues and orders to
cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless
the license is suspended or revoked due to a violation of any relevant law or regulation.



Software Products



According to the PRC
Regulation of Computer Information System Security and the Administrative Measures on Inspection and Sales License of Security
Products for Computer Information System, sale of security products for computer information system, including hardware and software
products, requires approval and a sales license before their distribution. A new sales license is required if an approved security
product has any functional changes.



On March 5, 2009, MIIT issued the
Administrative Measures on Software Products, or the Software Measures, to regulate software products and promote the development
of the PRC software industry. The Software Measures provide for a registration and filing system for software products both made
in China and imported from overseas and require registration of all software products with the competent local government authorities
in charge of software industry administration. Registered software products may enjoy certain preferential treatments granted
by relevant software industry regulations. Software developers or producers may sell or license their registered software products
directly or through distributors. Each registration is valid for five years and renewable upon expiration.



40







Regulation of Electronic Publications and Internet Publishing



The Rules for the Administration of Electronic Publications,
or Electronic Publication Rules, regulate the production, publishing and import of electronic publications in the PRC. In addition,
under the Provisional Measures for Administration of Internet Publication promulgated, Internet publishing is broadly defined
as any act of Internet information providers to select, edit and process content or programs and post such content or programs
on the Internet for users to view, use or download, including books, newspapers, electronic publications and so on. Under relevant
rules and measures issued by the GAPP, providing online download services of software may be deemed as Internet publishing
activities, which require an Internet publishing license.



Games and Virtual Currency



The Provisional Regulations
for the Administration of Online Culture promulgated in 2003 and as amended in 2004 and 2011 applies to entities engaging
in activities related to “online cultural products,” including music and video files, network games, animation
features, audiovisual products, performed plays and artwork converted for dissemination via the Internet. Such entities are required
to apply for an online culture operating permit from the relevant local branches of the Ministry of Culture, or the MOC, for engaging
in any of the following types of activities:



| | · | production,
                                                                                                         duplication, importation,
                                                                                                         wholesale, retail, leasing
                                                                                                         or broadcasting of online
                                                                                                         cultural products;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | dissemination
                                                                                                         of online cultural products
                                                                                                         on the Internet or transmission
                                                                                                         of such products to computers,
                                                                                                         fixed-line or mobile
                                                                                                         phones, radios, television
                                                                                                         sets or gaming consoles
                                                                                                         for the purpose of browsing,
                                                                                                         reading, using or downloading
                                                                                                         such products; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | exhibition,
                                                                                                         competitions or other
                                                                                                         activities involving
                                                                                                         online cultural products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Notice 35 issued
by the State Commission Office for Public Sector Reform on September 7, 2009 interprets the responsibilities of relevant
governmental authorities on the administration and supervision of the animation, online game and culture market. Notice 35 provides
that the GAPP shall be responsible for reviewing a online game before its publication on the Internet and the MOC shall administer
and supervise published online games.



Furthermore, the Provisional
Measures for the Administration of Online Games, or the Online Game Measures, strengthens the MOC’s supervision of the development,
production, online operation and issuance of online games and virtual currency. A company shall obtain the online culture operating
permit in order to conduct online game operation and issuance and transaction of virtual currency. Such permit is valid for three
years and renewable before its expiration. The Online Game Measures sets out detailed restrictions on online game operations,
such as examination and filing of the games’ content, installment of anti-fatigue system and implementation of real-name
registration. In addition, based on the Online Game Measures, the virtual currency issued by a online game operator could be only
used to exchange such operator’s online game products.



On February 15,
2007, the MOC, the People’s Bank of China and other relevant government authorities jointly issued the Notice on Internet
Cafes. The Notice on Internet Cafes authorizes the People’s Bank of China to strengthen the administration of virtual currency
in online games in order to avoid any adverse impact on the economy and financial system. This notice strictly limits the total
amount of virtual currency that a online game operator can issue and an individual game player can purchase. It also distinguishes
virtual transactions from real transactions through electronic commerce and that specifies virtual currency should only be used
to purchase virtual items.



Laws Relating to Intellectual Property



China has adopted
comprehensive legislation governing intellectual property rights, including trademarks, patents and copyrights. China is a signatory
to the main international conventions on intellectual property rights and has been a member of the Agreement on Trade related
Aspects of Intellectual Property Rights since its accession to the WTO in December 2001.



Patent Law



In accordance with
the PRC Patent Law, the State Intellectual Property Office is responsible for administering patents in the PRC. The patent administration
departments of provincial, autonomous region or municipal governments are responsible for administering patents within their respective
jurisdictions.



41







The Chinese patent
system adopts a “first to file” principle, which means that, where more than one person files a patent application
for the same invention, a patent will be granted to the person who filed the application first. To be patentable, invention or
utility models must meet three conditions: novelty, inventiveness and practical applicability. A patent is valid for 20 years
in the case of an invention and 10 years in the case of utility models and designs. A third-party user must obtain consent
or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement upon patent rights.



Trademark Law



In accordance with
the PRC Trademark Law, the Trademark Office of the Administration for Industry and Commerce is responsible for the registration
and administration of trademarks in China. The Administration for Industry and Commerce under the State Council has established
a Trademark Review and Adjudication Board for resolving trademark disputes.



As with patents, China
has adopted a “first-to-file” principle for trademark registration. If two or more applicants apply for registration
of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive preliminary
approval and will be publicly announced. For applications filed on the same day, the trademark that was first used will receive
preliminary approval and will be publicly announced.



Registered trademarks
are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within six
months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of
six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark
shall be deregistered. Renewed registrations are valid for ten years.



Copyright



The Copyright Law
extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition,
there is a voluntary registration system administered by the China Copyright Protection Center.



The Rules of
Protection on Information Network Dissemination Rights address copyright issues relating to the Internet. In addition, on December
17, 2012, the Supreme People's Court promulgated the Provisions on Several Issues Concerning the Application of Law for Trial
of Civil Dispute Cases Involving Infringement of the Right to Network Dissemination of Information, or the Network Dissemination
of Information Provision, which stipulate that the dissemination by network users or network service providers of works, performance
or audio or video recordings without the permission of the holder of the rights to such dissemination will constitute infringement
of such rights, and that network service providers that aid or abet network users’ infringement of the rights of another
to network dissemination of any works or recordings may be liable for such network users’ infringing activities.



Regulation of Foreign Currency Exchange
and Dividend Distributions



Foreign Currency Exchange



The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, as amended in August 2008.
Under the Regulations, RMB are freely convertible for current account items, including the distribution of dividends, interest
payments, trade and service-related foreign exchange transactions. In order to convert RMB for capital account items, such as
direct investments, loans, repatriation of investments and investments in securities outside of China, the prior approval of,
and registration with, SAFE are required.



42







On August 29,
2008, SAFE promulgated Circular 142, which regulates the purposes for which foreign-invested companies may convert foreign
currency into RMB. The notice requires that the registered capital of a foreign-invested company settled in RMB converted from
foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be
used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without
SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such
loans. Violations of Circular 142 can result in severe penalties, including heavy fines. Furthermore, SAFE promulgated
a circular on November 9, 2010, or Circular No. 59, which tightens the regulation over settlement of net proceeds from
overseas offerings like our initial public offering and requires that the settlement of net proceeds must be consistent with the
description in the prospectus for the offering. In addition, to strengthen Circular 142, on November 9, 2011 the SAFE promulgated
the Circular on Further Clarifying and Regulating Relevant Issues Concerning the Administration of Foreign Exchange under Capital
Account, or Circular 45, which prohibits a foreign invested company from converting its registered capital in foreign exchange
currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying inter-company loans,
and repaying bank loans that have been transferred to a third party.



The dividends paid
by a subsidiary to its overseas shareholders are deemed income to the shareholders and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase
or remit foreign currency, subject to a cap approved by SAFE, for settlement of current account transactions without the approval
of SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from,
or registration with, SAFE and other relevant PRC governmental authorities.



Dividend Distribution



The principal regulations
governing distributions of dividends of foreign holding companies include the Foreign-invested Enterprise Law (1986), as amended,
and the Administrative Rules under the Foreign-invested Enterprise Law (2001).



Under these regulations,
foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance
with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to allocate at
least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have
reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.



Circular 75



SAFE issued on October 21,
2005 Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment
Through Offshore Special Purpose Vehicles, or Circular 75, which became effective on November 1, 2005, pursuant to which
(i) a PRC citizen residing in the PRC or non-PRC citizen primarily residing in the PRC due to his or her economic tie to
the PRC, who is referred to as a “PRC resident” in this circular, must register with the local branch of the SAFE
before it establishes or controls an overseas SPV, for the purpose of overseas equity financing; (ii) when a PRC resident
contributes assets of or equity interests in a domestic enterprise into an overseas SPV, or engages in overseas financing after
contributing assets or equity interests into a SPV, such PRC resident must register his or her interest in the SPV and the change
thereof with the local branch of the SAFE; and (iii) when the SPV undergoes a material event outside of China not involving
inbound investments, such as change in share capital, creation of any security interests on its assets or merger and division,
the PRC resident shall, within 30 days from the occurrence of such event, register such change with the local branch of the
SAFE. To further clarify the implementation of Circular 75, the SAFE issued several regulations. These regulations require
PRC residents to register with local branches of SAFE in connection with their direct or indirect offshore investment activities
and PRC subsidiaries are required to coordinate and supervise such filing and registration. These regulations apply to our shareholders
who are PRC residents and may apply to any offshore acquisitions that we make in the future.



Under these foreign
exchange regulations, PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations,
direct or indirect investments in SPVs will be required to register those investments. In addition, any PRC resident who is a
direct or indirect shareholder of an SPV is required to update the previously filed registration with the local branch of SAFE
to reflect any material change. Moreover, the PRC subsidiaries of that SPV are required to urge the PRC resident shareholders
to update their registration with the local branch of SAFE. If any PRC shareholder fails to make the required registration or
update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing their profits and
the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV may also be prohibited
from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration
requirements described above could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign
exchange restrictions. Furthermore, the responsible persons and other persons in such PRC subsidiaries who are held directly liable
for the violations may be subject to administrative sanctions.



43







Failure to comply
with the above SAFE rules may result in restrictions on the foreign exchange activities of the onshore company, including
restricting its PRC subsidiaries’ ability to pay dividends to, or obtain foreign-denominated loans from, the offshore parent,
or prevent the offshore parent from making distributions or paying dividends. PRC residents who control our company from time
to time are required to register with SAFE in connection with their investments in us.



Circular 7



On December 25,
2006, the People’s Bank of China issued the Administrative Measures of Foreign Exchange Matters for Individuals, and SAFE
issued implementation rules on January 5, 2007, both of which became effective on February 1, 2007. Under these
regulations, all foreign exchange matters involved in employee stock ownership plans, stock option plans or related plans in which
onshore individuals participate require the approval of SAFE or its authorized branch. On February 15, 2012, SAFE promulgated
the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership
Plan or Stock Option Plan of Overseas-Listed Company, or Circular 7.



Under Circular 7, PRC residents who
participate in an employee stock option plan in an overseas publicly-listed company are required to register with SAFE or its
local office and complete certain other procedures. A PRC agent, which could be the PRC subsidiary of such overseas publicly-listed
company, is required to retain a financial institution with stock brokerage qualification at the listing place or a qualified
institution to handle matters relating to the exercise or sale of share options. We and our PRC employees, directors and senior
management who receive share options will be subject to these regulations when we are listed in the United States. Our 2006
employee share option scheme, 2006 Employee Share Vesting Scheme and 2011 Share Incentive Plan have been filed with and approved
by SAFE.  However, if we or our PRC optionees fail to comply with these regulations or any of our future share incentive
plans are not filed with or approved by SAFE, we or our PRC optionees may be subject to fines and other legal or administrative
sanctions.



New M&A Regulations and Overseas
Listings



On August 8,
2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission,
the State Administration of Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly issued the New M&A
Rules, which became effective on September 8, 2006. The New M&A Rules require offshore special purpose vehicles
controlled directly or indirectly by PRC companies or individuals and formed for the purpose of listing equity interests in PRC
companies on overseas exchanges to obtain CSRC approval prior to such listing.



On September 21,
2006, the CSRC published procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval
procedures require filing documents with the CSRC and take several months to complete. The application of this new PRC regulation
remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the CSRC approval requirement.



PRC laws and regulations
also require certain merger and acquisition transactions to be subject to merger control review or security review. On February 3,
2011, the General Office of the State Council issued the Notice on Establishing the Security Review System for Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, which sets out the scope, content, work mechanism and procedures of the security
review. The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the aforementioned Notice, further
provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject
to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited
from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases,
loans, control through contractual arrangements or offshore transactions.



Labor Laws



The principal labor laws and regulations
in the PRC include the PRC Labor Law, the PRC Labor Contract Law, the Implementation Rules of the PRC Labor Contract Law, the
PRC Social Insurance Law, the Work-related Injury Insurance Regulations, the Interim Provisions on Registration of Social Insurance
and the Interim Regulations on the Collection and Payment of Social Insurance Fees. Pursuant to the PRC Labor Law and the PRC
Labor Contract Law, employers must enter into written labor contracts with full-time employees in order to establish an employment
relationship.



44







Employers must pay their employees wages
equal to or above local minimum wage standards, establish labor safety and workplace sanitation systems, comply with state labor
rules and standards and provide employees with appropriate training regarding workplace safety. Violations of the PRC Labor
Contract Law and the PRC Labor Law may result in fines or other administrative sanctions or, in the case of serious violations,
criminal liability.



|C. | Organizational Structure
|-- | ------------------------



The following chart illustrates our corporate
structure, including our principal operating subsidiaries, consolidated affiliated entities and our ownership structure as of
the date of this annual report:









The following table sets forth the details
of our subsidiaries as of the date of this annual report:



|Name                                        |  | Country of Incorporation |  | Ownership Interest |    
|------------------------------------------- |  | ------------------------ |  | ------------------ | ---
|Qizhi Software (Beijing) Co., Ltd.          |  | China                    |  |                    | 100
|Tianjin Qisi Technology Co., Ltd.           |  | China                    |  |                    | 100
|Qifei Xiangyi (Beijing) Software Co., Ltd.  |  | China                    |  |                    | 100
|Beijing Qichuang Yousheng Keji Co., Ltd.    |  | China                    |  |                    | 100
|Qiji International Development Limited      |  | Hong Kong                |  |                    | 100
|360 International Development Co. Limited   |  | Hong Kong                |  |                    | 100
|Qifei International Development Co. Limited |  | Hong Kong                |  |                    | 100
|Qihu 360 Software Co. Limited               |  | Hong Kong                |  |                    | 100



|D. | Property, Plant and Equipment
|-- | -----------------------------



Our principal executive offices are located
at Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, China.  In August 2012, we entered into definitive
agreements to purchase these new office premises with an area of approximately 69,205 square meters in Chaoyang District, Beijing,
China for total cash consideration of RMB1.4 billion ($222.2 million). As of the date of this annual report, we have paid approximately
$122.4 million of this consideration. At the end of 2012, approximately 36,483 square meters of these new office premises were
in use. We also lease approximately 10,000 square meters of office space in Beijing and other cities in China.



45







|Item 4A. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



None.



|Item 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- | --------------------------------------------



The following discussion
of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial
statements and their related notes included in this annual report. This report contains forward-looking statements. See “—
F. Safe Harbor.” In evaluating our business, you should carefully consider the information provided under the caption “Item
3. Key Information — D. Risk Factors” in this annual report. We caution you that our businesses and financial performance
are subject to substantial risks and uncertainties.



|A. | Operating Results
|-- | -----------------



Overview



We are a leading Internet
company in China as measured by user base. As of December 2012, we had 456 million monthly active users of our PC-based
products, representing a user penetration rate of 96.5% among all Chinese PC Internet users, according to iResearch.



We are also the No. 1
provider of PC and mobile Internet security products in China as measured by user base. As of December 2012, we had 445 million
monthly active PC Internet security product users, representing a user penetration rate of 94.2% in China, according to iResearch.
Additionally, as of December 2012, we had 207 million users using our key smartphone security product, 360 Mobile Safe. We offer
all of our PC and mobile Internet security products free of charge and generate revenue primarily through offering the following
services:



| | · | Online
                                                                                                         advertising.   We
                                                                                                         offer advertising services
                                                                                                         by providing marketing
                                                                                                         opportunities on 360
                                                                                                         Personal Start-up Page and
                                                                                                         other platform products
                                                                                                         to our advertising customers. We generally offer online
                                                                                                         advertising services
                                                                                                         to our customers on a
                                                                                                         pay-for-performance basis.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We charge customers advertising fees for
                                                        providing links to their websites or online applications on our 360 Personal
                                                        Start-up Page and other platform products. We charge fees to our customers
                                                        on a cost over a time period or cost for performance basis.  Under
                                                        both models, fees are directly or indirectly determined based on the effectiveness
                                                        of our advertising links, which is typically measured by active users,
                                                        clicks, transactions and other actions originated from our 360 Personal
                                                        Start-up Page.  Additionally, under both models, fees are determined
                                                        based on the industry of the customer and the location of the advertising
                                                        link.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our 360 browsers and their default
                                                        home page, 360 Personal Start-up Page, also contain default search
                                                        boxes that direct search traffic to search engines. These search engine
                                                        companies pay us a pre-determined fee for each search referral originated
                                                        from the search boxes in our 360 browsers and 360 Personal Start-up
                                                        Page. Google has historically
                                                        been our primary search referral service customer. Since the launch of 360 Search, revenues from search referral services
                                                        have become insignificant. In October 2012, we and Google
                                                        mutually agreed to terminate the search referral contract entered between
                                                        us, and we have not generated search referral revenues from Google since
                                                        then.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Internet
                                                                                                         value-added services. We offer games
                                                                                                         developed by third parties
                                                                                                         to users and generate
                                                                                                         revenue through sharing
                                                                                                         of in-game item sales
                                                                                                         with game developers.
                                                                                                         We also provide remote
                                                                                                         technical support and
                                                                                                         other Internet value-added
                                                                                                         services to users, although
                                                                                                         our remote technical
                                                                                                         support services have
                                                                                                         been offered for free
                                                                                                         since May 2012 in order to enhance customer experience.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Other
                                                                                                         services.On an ad-hoc
                                                                                                         project basis, we also
                                                                                                         offer IT outsourcing
                                                                                                         and systems integration
                                                                                                         services to enterprise
                                                                                                         customers. This is not
                                                                                                         our core business and
                                                                                                         its contribution to our
                                                                                                         revenues is insignificant.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46







In addition, we have
historically generated revenue through selling anti-virus software developed by third parties. We significantly decreased
our sales of third-party anti-virus software since the fourth quarter of 2009, as we began to offer 360 Anti-Virus to users
free of charge. Revenues from sales of third-party anti-virus software have continued to decrease through 2012, and we do not
expect to generate additional revenue from this business going forward.



We have grown
significantly since we commenced operations in 2005. Monthly active users of our PC-based products increased from 290 million
in December 2010 to 402 million in December 2011 and 456 million in December 2012. Our revenue increased from
$57.7 million in 2010 to $167.9 million in 2011 and $329.0 million in 2012. We first became profitable in 2009. Our
net income increased from $8.5 million in 2010 to $15.6 million in 2011 and $46.7 million in 2012.



The most significant
factors that affect the financial performance and results of operations of our business are:



| | · | User
                                                                                                         base;
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | Pricing
                                                                                                         and revenue sharing;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| | · | Revenue
                                                                                                         mix; and
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | Product
                                                                                                         development.
| | - | -----------------------------------------------------------------------------------------------------------------------------



User base



Our success in generating
revenue, especially from our online advertising and Internet value-added services, largely depends on our ability to maintain
and increase the number of users of our products and services. The size of our user base drives the online traffic or transactions
originated from our platform products for which we get paid by our online advertising customers. The number of users using our
platform products also represents the size of the addressable market for our Internet value-added services and the potential for
generating additional sources of revenues. In order to attract and retain users, we must continue to invest significant resources
to provide comprehensive and effective products and services.



Pricing and revenue sharing



We charge fees to
our customers on a cost over a time period or cost for performance basis.  Under both models, fees are determined based on
the effectiveness of our advertising links, which is typically measured by active users, clicks, transactions and other actions
originated from our 360 Personal Start-up Page.  Additionally, under both models, fees are determined based on the industry
of the customer and the location of the advertising link. We charge search engines a pre-determined fee for each search originated
from our websites and platform products. In both cases, we have been able to increase our fee rates as our advertising platform
becomes more effective as measured by the increase in Internet traffic or transactions that we are able to originate. However,
our ability to increase fee rates is limited by the competitive landscape and subject to acceptance by our customers. As our online
games and software sales business are based on revenue sharing arrangements with third-party developers, our revenue depends in
part on our percentage share of the revenues we generate.



Revenue mix



Our revenues and costs
of revenues are affected by changes in our revenue mix. In 2008 and 2009, we generated a substantial portion of our revenues from
sales of third-party anti-virus software. In the second half of 2009, we started offering 360 Anti-Virus to users free of
charge as we adopted the business model of offering free Internet and mobile security products to build up a large and loyal user
base and generating revenues through providing Internet services, including online advertising and Internet value-added services.
In the fourth quarter of 2009, we significantly decreased sales of third-party anti-virus software and focused on providing online
advertising and Internet value-added services. Revenues from online advertising increased from 67.3% in 2010 to 73.3% in 2011,
but decreased to 67.3% in 2012, and revenues from Internet value-added services increased from 25.7% in 2010 to 26.0% in 2011
and 31.4% in 2012. As we further expand our business, our revenue mix may continue to change, which may affect our results of
operations for future periods.



47







Product development



In order to attract
and retain users, we have invested significant resources in developing security products, cloud-based services, search engine-related
products, mobile Internet products and other Internet products and services so as to develop and strengthen our products and services
and enhance user experience. In 2010, 2011 and 2012, our product development expenses were $24.5 million, $65.0 million and
$156.3 million, respectively, representing 42.5%, 38.7% and 47.5% of our revenues in the corresponding periods. We expect our
product development expenses to continue to increase as we endeavor to develop attractive products and services that enable users
to enjoy a more secure and a higher quality Internet experience.



Overview of Financial Results



We evaluate our business
using a variety of key financial measures.



Revenues



Our revenues increased by 191.1% from $57.7
million in 2010 to $167.9 million in 2011 and by 96.0% from $167.9 million in 2011 to $329.0 million in 2012. The following
table sets forth our revenues by source both in absolute amounts and as percentages of total revenues for the periods indicated:



|                                         |  | Year Ended December 31,              |       
|---------------------------------------- |  | ------------------------------------ | ------
|                                         |  | 2010                                 |       
|                                         |  | ($ in thousands, except percentages) |       
|Revenues:                                |  |                                      |       
|Internet services                        |  |                                      | 53,790
|Online advertising                       |  |                                      | 38,826
|Internet value-added services            |  |                                      | 14,774
|Other services                           |  |                                      | 190   
|Sales of third-party anti-virus software |  |                                      | 3,875 
|                                         |  |                                      | 57,665



Revenues from Internet
Services.  Our revenues from Internet services comprise revenues from online advertising, revenues from Internet
value-added services and revenues from other services.



Online Advertising.



We generate online
advertising revenue primarily through monetization of user traffic on our web properties. We generally offer online advertising
services to our customers on a pay-for-performance basis.



The most significant
factors that directly or indirectly affect our online advertising revenues are:



| | · | the
                                                                                                               number of our users
                                                                                                               and customers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                               number of activities
                                                                                                               initiated on our
                                                                                                               websites and our
                                                                                                               partners’
                                                                                                               websites;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                               rate at which users
                                                                                                               click on sponsored
                                                                                                               links and search
                                                                                                               results;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                               competitiveness
                                                                                                               of bidding for
                                                                                                               sponsored links
                                                                                                               and keywords by
                                                                                                               customers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                               total online marketing
                                                                                                               budgets of our
                                                                                                               customers; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                               total number of
                                                                                                               sponsored links
                                                                                                               and advertisements
                                                                                                               displayed on our
                                                                                                               online properties.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48







In 2012, customers
of our online advertising business primarily consisted of third-party websites that placed links on our platform products (such
as our 360 Personal Start-up Page) and search engines that paid us search referral fees for generating search traffic to them
from our platform products.



A substantial majority
of our online advertising business in 2012 was derived from advertising links on 360 Personal Start-up Page and its subpages.
Pricing for those advertising links was based on several primary factors: pricing model, customer industry and link location.



In 2012, we had two
general pricing models for advertising links: cost over a time period and cost for performance. Under both models, fees are directly
or indirectly determined based on the effectiveness of our advertising links, which is typically measured by active users, clicks,
transactions and other actions originated from our 360 Personal Start-up Page.



Pricing for our advertising
links is also affected by the industry of each customer. For example, links to e-commerce websites can directly lead to sales
of products and revenue to the customer. In contrast, links to video-sharing websites typically increase site traffic and brand
awareness, but do not directly lead to revenue-generating transactions for the customer. As such, the pricing of these links may
differ materially. In addition, the intensity of competition within certain industries affects the prices that customers are willing
to pay for our advertising links and in turn, our pricing power.



The location of the
advertising link is another factor in determining its price. For example, a link on the front page of our 360 Personal Start-up
Page leading directly to a customer’s site may lead to both revenue-generating transactions and additional effects such
as the increase of brand awareness, and therefore have a relatively higher price, while a link on one of our subpages that directs
mainly to specific products carried by a customer may have a relatively lower price. Additionally, a link displayed in a more
prominent position will have a higher price than a link displayed in a less noticeable position on the same page.



The interaction of
these three factors affects the final pricing for each advertising link that we sell. As such, the differences in link pricing
do not directly or linearly correlate with the clicks generated from those links. Links may be sold under different pricing models
to customers in different industries. Even fees for links sold under the same cost over a time period model will still differ
substantially based on the location of the links on our 360 Personal Start-up Page and its subpages and the industry to which
the customers belong.



The increase in the
effectiveness of our advertising links along with the growth of our user base has in turn increased our number of customers and
the revenues we generate from each customer.



For search referral,
we charge a pre-determined fee for each search query that we originate to the third party search engines, up to a pre-determined
limit in certain cases. Our fee may be renegotiated if the number of referred searches exceeds the agreed limit. Our agreements
with the search engines usually have a term of one year and are renewable upon both parties’ written agreement. Google was
historically the biggest contributor to our search referral revenues. In October 2012, we and an affiliate of Google mutually
terminated our search referral agreement due to the launch of our own general search engine. Since the termination of this agreement
revenues from search referrals have become insignificant.



In August 2012, we
launched our general search service, and in the beginning of 2013, we started to offer advertising services on our search engine,
through both internal monetization systems and a newly formed partnership with Google.



49







Internet Value-added
Services.   Our Internet value-added services include offering games developed by third parties, providing remote
technical support and other Internet value-added services to users.



We operate third-party
developed games on our game platform. We provide game players a safe and convenient gaming environment.  Our game portfolio
includes web games, client-based games and mobile games. Users can access and play these games directly through our game platform.
As of December 31, 2012, we offered over 110 games and had over 60 million registered users on our game platform. 
We share revenues from game operations with game developers pursuant to the terms of our cooperation agreements.



A substantial majority
of playing users on our game platform are casual players who play the games on a “free” basis. Typically, only a small
percentage of playing users will purchase in-game virtual items in order to advance to higher stages. We refer to these users
as the “paying users.” As such, total number of paying users is a key driver for our game revenue growth. In December
2012, monthly web game paying users on our game open platform was 238,124, compared with 109,096 in December 2011.



As of the end of 2012,
there were over 110 games on our game platform, compared with 70 at the end of 2011. Each game’s revenue contribution differs
materially. In 2012, the most popular games each generated approximately 2% to 4% of our total revenues, while the least popular
ones each generated less than 0.1% of our total revenue. A significant majority of the games on our game platform has shorter
life cycles than traditional MMORPGs, and as such top games on our game platform tend to change from period to period. The top
ten games contributed approximately 55% of total game revenues in 2012, compared with 58% in 2011. In 2012, the range of the estimated
active lives of web games on our game platform was approximately from 3 months to 28 months. We define a game’s active life
as from the time it is launched to the time its monthly revenue drops to 15% or less of its peak monthly revenue. As we add additional
types of games to our game platform, such as micro-client games and mobile games, such “active lives” of games may
become less relevant to our game operations because different types of games may have drastically different life cycles and monetization
patterns. A longer or shorter “active lives” does not necessarily mean bigger or smaller revenue contribution.



Additionally, we
offered fee-based remote technical support services prior to May 2012. When users encountered security issues, they could
request our staff to provide live technical assistance and remote troubleshooting for a service fee on a per-case basis. We
also provided monthly and annual subscriptions for this service. In order to enhance customer experience, we have
offered remote technical support services for free since May 2012.



We also serve as an
agent for providing online distribution services and payment collection services, such as online lottery distribution, payment
collection for mobile charges, and distribution and payment collection of e-books, on behalf of third parties. We generally charge
commission as a percentage of the gross proceeds or collection amount. We provide payment collection services mainly through third-party
professional payment and settlement institutions.



Other Services



We also generate an
insignificant amount of revenue from other ad-hoc services, such as IT outsourcing and system integration services to enterprise
customers.



Revenues from Sales of Third-party Anti-virus
Software



We have historically generated revenue
through selling anti-virus software developed by third parties. We significantly decreased our sales of third-party anti-virus
software since the fourth quarter of 2009, as we began to offer 360 Anti-Virus to users free of charge. Revenues from sales
of third-party anti-virus software have continued to decrease through 2012, and we do not expect to generate additional revenue
from this business going forward.



50







Cost of Revenues and Operating Expenses



The following table sets forth the cost
of revenues and operating expenses, both in absolute amounts and as percentages of total revenues for the periods indicated:



|                                         |  | Year Ended December 31,              |       
|---------------------------------------- |  | ------------------------------------ | ------
|                                         |  | 2010                                 |       
|                                         |  | ($ in thousands, except percentages) |       
|Revenues:                                |  |                                      | 57,665
|Cost of revenues:                        |  |                                      |       
|Internet services                        |  |                                      | 5,566 
|Sales of third-party anti-virus software |  |                                      | 1,185 
|Total cost of revenues                   |  |                                      | 6,751 
|Operating expenses                       |  |                                      |       
|Selling and marketing                    |  |                                      | 12,603
|General and administrative               |  |                                      | 5,051 
|Product development                      |  |                                      | 24,505
|Impairment loss on intangible
    assets |  |                                      | -     
|Total operating expenses                 |  |                                      | 42,159



Cost of Revenues



Cost of revenues consists of cost of Internet
services and cost of sales of third-party anti-virus software.



Cost of Internet services
primarily consist of business tax, value-added tax and related surcharges, payment collection costs, costs of bandwidth and utilities,
depreciation of equipment and other costs. Our Internet services are subject to PRC business tax, value-added tax and related
surcharges on our revenue. We expect our business tax, value-added tax and related surcharges will continue to increase in line
with increases in our revenues. Payment collection costs in connection with Internet services represent the fees that we pay to
providers of mobile payment and online banking services for processing payments from our users. Other costs incurred in connection
with Internet services primarily comprise salaries and benefits for service operation personnel and authorization fees for the
operation of third-party games.



Cost of sales of third-party
anti-virus software primarily consists of value added tax surcharges, payment collection costs and cost of purchasing third-party
anti-virus software. Payment collection costs in connection with sales of third-party anti-virus software represent the fees that
we pay to providers of mobile payment and online banking services for processing payments from software purchasers. We also incur
costs of purchasing third-party anti-virus software that we resell.



Operating Expenses



Our selling and marketing
expenses primarily consist of salaries and benefits, including share-based compensation expenses, for our sales and marketing
personnel and advertising and promotion expenses. We expect to incur higher selling and marketing expenses as we intensify our
efforts to build our brand and promote our products and services.



Our general and administrative
expenses primarily consist of salaries and benefits, including share-based compensation expenses, for our administrative personnel
and fees that we pay to legal, accounting and other professional service providers. We expect to incur higher general and administrative
expenses as we expand our operations.



Our product development
expenses relate to the research, development and strengthening of our security products, cloud-based services, search engine related
products, mobile Internet products and other Internet products and service. Our product development expenses primarily consist
of salaries and benefits, including share-based compensation expenses, of our product development personnel, costs of bandwidth
and utilities, license and technical service fees, depreciation of equipment and amortization of acquired intangible assets. We
expect product development expenses to continue to increase as we continue to develop and enhance products and develop technologies
related to the Internet, such as browser and mobile Internet technologies.



51







The table below shows
the effect of the share-based compensation expenses on our operating expense line items for the periods indicated:



|                                               |  | Year Ended December 31, |      
|---------------------------------------------- |  | ----------------------- | -----
|                                               |  | 2010                    |      
|                                               |  | ($ in thousands)        |      
|Share-based compensation expenses included in: |  |                         |      
|Cost of revenues                               |  |                         | —    
|Selling and marketing                          |  |                         | 524  
|General and administrative                     |  |                         | 337  
|Product development                            |  |                         | 3,145
|Total                                          |  |                         | 4,006



We expect to continue
to grant share options and nonvested shares under our share incentive plans and incur further share-based compensation expenses
in future periods.



Acquisitions
and Investments



We made a total of
$15.9 million and $24.8 million in investments in small to middle sized Internet companies whose businesses complement our business
in 2011 and 2012, respectively.



Critical Accounting
Policies



The preparation of
our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the
reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities.
We have based our estimates on historical experience and various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates
with our board of directors. Actual results may differ from these estimates under different assumptions or conditions.



An accounting policy
is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the
accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.



We believe that the
following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the
preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies,
judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this annual
report.



Revenue Recognition



We generate revenue
primarily through providing Internet services, consisting primarily of online advertising and Internet value-added services, and
sales of third-party anti-virus software.



We consider revenue
to be realizable and earned when all of the following criteria exist:



| | · | persuasive
                                                                                                         evidence of a sales arrangement
                                                                                                         exists;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | delivery
                                                                                                         has occurred or services
                                                                                                         have been rendered;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                         price is fixed or determinable;
                                                                                                         and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



52







| | · | collectability
                                                                                                         is reasonably assured.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



Internet Services



Internet services
revenue includes online advertising, Internet value-added services and other services.



Online Advertising





We provide links to third-party websites or online applications on its platform products (such as Personal Start-up Page).
We have two general pricing models for advertising links: cost over a time period and cost for performance basis. Under both
models, we charge fees to our customers directly or indirectly determined based on the effectiveness of advertising links,
which is typically measured by active users, clicks, transactions and other actions originated from the 360 Personal Start-up
Page. Additionally, fees are determined based on the industry of the customer and the location of the advertising link. For
advertising contracts that are charged on the cost over a time period basis, we recognize revenue ratably over the period
the advertising is provided. For contracts that are charged on the cost for performance basis, the revenue is estimated by
us based on our internal data, which is confirmed with the respective customers.



We also direct search
traffic to search engines such as Google through our default search boxes on our 360 browsers and their default home page,
360 Personal Start-up Page. We receive a pre-determined fee from search engine companies based on the number of searches originated
from our 360 browsers and 360 Personal Start-up Page, subject to a pre-determined limit. Our fees may be renegotiated
if the number of referred searches exceeds the agreed limit. We estimate the revenue based on our monthly traffic data, which
is subsequently confirmed with our search engine customers.



We occasionally engage
in nonmonetary transactions to allow certain third parties to bundle our security products with their software products, or to
grant third parties the right to provide links to our products on their websites in exchange for more downloads of our products.
We recognize revenues and expenses at fair value from a nonmonetary transaction only if the fair value of the services exchanged
in the transaction is determinable based on the entity’s own historical practice of receiving cash, marketable securities,
or other consideration that is readily convertible to a known amount of cash for similar services from customers unrelated to
the counterparty in the nonmonetary transaction. In 2010, we engaged in certain nonmonetary transactions for which the fair value
was not determinable and therefore no revenues or expenses derived from these nonmonetary transactions were recognized. In 2011,
we engaged in one nonmonetary transaction for which the fair value was determinable. No such transactions were recognized in 2012.



Internet Value-added
Services



Our Internet value-added
services include offering games developed by third parties and providing remote technical support and other Internet value-added
services to our users.



Games. We
provide game services and generate revenue from selling in-game currency online which will later be used by game players to purchase
virtual items in games. Our game portfolio includes web games, client-based games and mobile games. All of the games are developed
by third-party game developers and can be accessed and played by game players directly through our game platform. We primarily
view the game developers to be our customers and consider our responsibility under our agreements with the game developers to
be promotion of the game developers’ games. We collect payments from game players in connection with the sale of in-game
currencies and remit certain agreed-upon percentages of the proceeds to the game developers. Net revenue from the sale of in-game
currencies is deferred until the estimated consumption date, (i.e. the estimated date that virtual items are sold within the game),
which is typically within a short period of time after purchase of the in-game currency. Purchases of in-game currencies are not
refundable after they have been sold unless there is unused in-game currency at the time a game is discontinued. Typically, a
game will only be discontinued when the monthly revenue generated by a game is insignificant. To date, we have never been required
to pay cash refunds to game players or game developers as a result of the discontinuation of a game.



Game revenue recognition
involves certain management judgments, such as determination of who is the principal in providing game services to our users and
estimating the consumption date of in-game currencies. We concluded that game developers are the principals based on the fact
that the games are primarily hosted on the game developers’ servers and such developers are responsible for the maintenance
of the games and determination of the prices of the virtual items used in the games. Therefore, we report such revenue on a net
basis. In addition, we estimate the in-game currency consumption date based on the consumption behavior of the game players for
each reporting period. The amount and timing of our game revenues could be materially different for any period if management made
different judgments or utilized different estimates.



53







Sales of Third-party
Anti-virus Software



We purchase software
from third-party software developers for online resale to users. We recognize revenue when the activation code of the software
is delivered. We evaluate our software sale contracts to determine whether to recognize the revenues on a gross basis or net of
costs of obtaining the associated software. The determination is based upon an assessment as to whether we act as a principal
or agent when providing the sales. Most of the software revenues are accounted for on a gross basis since we act as a principal
in the sales.



Consolidation
of Variable Interest Entities



PRC regulations currently
limit direct foreign ownership of business entities providing Internet services in China, where certain licenses are required
for the provision of such services. To comply with these PRC regulations, we conduct a substantial majority of our business through
our VIEs and their subsidiaries. Qizhi Software, our wholly-owned PRC subsidiary, holds the power to direct the activities of
the VIEs that most significantly affect our economic performance and bears the economic risks and receives the economic benefits
of the VIEs through a series of contractual agreements with the VIEs and/or their nominee shareholders, including:



| | · | business
                                                                                                               operation agreements;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| | · | technology consulting and services agreements;
| | - | ----------------------------------------------

| | · | equity
                                                                                                               disposition agreements;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| | · | loan
                                                                                                               agreements;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| | · | equity
                                                                                                               pledge agreements;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| | · | powers
of attorney; and                                                                                                                 

| | · | spousal consent letters.
| | - | ------------------------



We believe these
contractual agreements are currently legally enforceable under PRC law and regulations. More specifically, we believe the terms of the equity disposition agreement gives us substantive kick-out rights so that we
can have the power to control the VIEs' nominee shareholders and thus the power to direct the activities that most significantly
impact the VIEs' economic performance. Through these contractual agreements,
we believe that the nominee shareholders of the VIEs do not have direct or indirect ability to make decisions regarding the
activities of the VIEs that could have a significant impact on the economic performance of the VIEs because all of the voting
rights of the VIEs’ nominee shareholders have been contractually transferred to Qizhi Software. More specifically, we
believe the terms of the equity disposition agreement gives us substsantive kick-out rights so that we can have the power to
control the VIEs’ nominee shareholders. Therefore, we have effective control over the VIEs. In addition, we believe
that our ability to exercise effective control, together with the technology consulting and services agreements and
the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from the VIEs. Hence,
we believe that the nominee shareholders of the VIEs do not have the rights to receive the expected residual returns of those
VIEs, as such rights have been transferred to Qizhi Software. Therefore, we evaluated the rights we obtained through entering
into these contractual agreements and concluded we have the power to direct the activities that most significantly affect the
VIEs’ economic performance and also have the rights to receive the economic benefits of the VIEs that could be
significant to the VIEs. Accordingly, we are the primary beneficiary of the VIEs and have consolidated the financial results
of the VIEs and their subsidiaries in our consolidated financial statements since the later of the date of acquisition and
incorporation.



We believe that the
possibilities are remote that any oversight or regulatory bodies in China would question the enforceability of Qizhi Software's
contractual arrangements with the VIEs pursuant to the current PRC laws. The shareholders of the VIEs are also our shareholders
and therefore have no current interest in acting contrary to the contractual arrangements. However, uncertainties in the PRC legal
system could limit our ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their
shareholdings in our Company, their interests may diverge from our interests, which may increase the risk that they would act
contrary to the contractual arrangements, such as causing the VIEs to not pay service fees under the contractual arrangements
when required to do so. See “Item 3. Key Information – D. Risk Factors – Risks Related to Our Corporate Structure
– In order to comply with PRC laws and regulations limiting foreign ownership of Internet businesses, we conduct our Internet
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 materially and adversely
affected” and “- Risks Related to Our Corporate Structure – The shareholders of our VIEs may have potential
conflicts of interest with us, which may adversely affect our business.”



54







Goodwill



Goodwill represents
the cost of an acquired business in excess of the fair value of identifiable tangible and intangible net assets purchased. We
generally seek the assistance of independent valuation firm in determining the fair value of the identifiable tangible and intangible
net assets of the acquired business.



There are several
methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically
use the income method. This method starts with a forecast of all of the expected future net cash flows associated with a particular
intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the
risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income
method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the
risks inherent in the future cash flows and the assessment of the asset’s economic life cycle and the competitive trends
impacting the asset, including consideration of any technical, legal, regulatory or economic barriers to entry. Determining the
useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful
lives and certain assets may even be considered to have indefinite useful lives.



Goodwill is tested
for impairment at the reporting unit level on an annual basis (December 31 for the Company) and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
These events or circumstances could include a significant change in the stock prices, business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.



Application of
the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each
reporting unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires
significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for the Company’s business, estimation of the useful life over which cash flows will occur, and
determination of the Company’s weighted average cost of capital. The estimates used to calculate the fair value of a
reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and
assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.



In September 2011,
the Financial Accounting Standards Board, or the FASB, issued an authoritative pronouncement related to testing goodwill for impairment.
The guidance permits us to first assess qualitative factors to determine whether it is “more likely than not” that
the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform
the two-step goodwill impairment test. The Company adopted this pronouncement since 2012. If it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, goodwill is then tested following a two-step process. The first
step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting
unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying
amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying
value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting
for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities
is the implied fair value of goodwill. We have one reporting unit and have determined to perform the annual impairment test
on December 31 of each year. In 2012, we first assessed the qualitative factors to determine whether it is “more likely
than not” that the fair value of the reporting unit is less than its carrying amount and concluded that it was not necessary
for us to proceed to step one of the two-step goodwill impairment test.



As of December 31,
2010, 2011 and 2012, our fair value was substantially in excess of the carrying value of our only reporting. We did not realize
any impairment loss on goodwill during the years ended December 31, 2010, 2011 and 2012.



Intangible Assets
with Indefinite Lives



An intangible asset
that is not subject to amortization is tested for impairment at least annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Such impairment test compares the fair values of assets with their carrying value
amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values
of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant
assumptions are inherent in this process, including estimates of discount rates and market price. Discount rate assumptions are
based on an assessment of the risk inherent in the respective intangible assets. Market prices are based on potential purchase
quotes from third party.



55







Our management performs
impairment assessment on intangible assets with indefinite lives on December 31 of each year or when events or changes in
circumstances indicate that the assets might be impaired. Our management used the discounted cash flow method to estimate the
fair value of intangible assets with indefinite lives. During the years ended December 31, 2010, 2011 and 2012, we recognized
nil, nil and $197,000 of impairment losses, respectively, on our intangible assets with indefinite lives.



Intangible Assets
with Definite Lives



We generally seek
the assistance of an independent valuation firm to determine the fair value of the identifiable tangible and intangible net assets
of an acquired business.



We can use several
methods to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income
method. This method starts with a forecast of the expected future net cash flows. We then discount these cash flows to present
value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.



Estimates and assumptions
used in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected
to measure the risks of future cash flows, the asset’s life cycle and the competitive trends impacting the asset, including
any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires
judgment, as different types of intangible assets have different useful lives.



We amortize intangible assets with determinable
useful lives on a straight-line basis.



We evaluate intangible assets with determinable
useful lives for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
We measure recoverability of long-lived assets to be held and used as part of a cash generating unit by comparing the carrying
amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If we believe the assets are
impaired, the impairment will equal the amount by which the carrying value of the assets exceeds the fair value of the assets.



Estimates of fair value involve a complex
series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. Our judgments in determining
an estimate of fair value can materially impact our results of operations. We base these valuations on information available as
of the impairment review date and on expectations and assumptions that management deems reasonable. Any changes in key assumptions,
including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially
result in impairment charges. During the years ended December 31, 2010, 2011 and 2012, we recognized nil, $87,000 and $1,151,000
of impairment losses, respectively, on our intangible assets with definite lives.



Equity Method Investments



Investee companies over which we have the
ability to exercise significant influence, but do not have a controlling interest, are accounted for using the equity method.
Significant influence is generally considered to exist when we have an ownership interest in the voting stock of the investee
between 20% and 50%, and other factors, such as representation on the investee’s board of directors, voting rights and the
impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.





56







An impairment charge is recorded if
the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. We
estimated the fair value of these investee companies based on discounted cash flow approach which requires significant
judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long
term growth rate of a company’s business, the estimation of the useful life over which cash flows will occur, and the
determination of the weighted average cost of capital. Certain of our equity method investments experience a deteriorating
financial position and performance and we do not expect them to generate any positive future cash flows. Accordingly, we
accrued an impairment charge of nil, $0.2 million and $1.5 million in 2010, 2011 and 2012, respectively, on these equity
method investments based on their fair value which would be minimal.



Cost Method Investments



For investee companies over which we do
not have significant influence and a controlling interest, we carry the investment at cost and recognize as income for any dividend
received from distribution of the investee’s earnings.



We review our cost method
investments for impairment whenever an event or circumstance indicates that an other-than-temporary impairment has occurred.
We consider available quantitative and qualitative evidence in evaluating potential impairment of our cost method
investments. An impairment charge is recorded if the cost of an investment exceeds its fair value and such excess is
determined to be other-than-temporary. The Company estimated the fair value of these investee companies based on discounted
cash flow approach. Factors we consider in making such a determination include general market conditions, the duration and
the extent to which the fair value of an investment is less than its cost, and our intent and ability to hold such
investment. As a result of the assessment process for our cost method investments, we recognized impairment charge of nil,
$0.7 million and $0.8 million in 2010, 2011 and 2012, respectively.



Legal and Other
Contingencies



The outcomes of legal
proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such
as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability
has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is
at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate,
among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of
loss. Changes in these factors could materially impact our financial statements.



Based on the
information currently available, we were unable to make a reasonable estimate of any liability because of the uncertainty
related to the outcome and the amount or range of loss. Accordingly, we did not accrue any provision for these contingencies
as of December 31, 2011 and 2012.



Income Taxes



In preparing our consolidated
financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual
tax exposure and assess temporary differences resulting from different treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which we include in our consolidated balance sheets. We must then assess
the likelihood that we will recover our deferred tax assets from future taxable income. If we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance, we must
include an expense within the tax provision in our statement of operations.



Management must exercise
significant judgment to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. We base the valuation allowance on our estimates of taxable income in each jurisdiction
in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these
estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could
materially impact our financial position and results of operations.



U.S. GAAP requires
that the impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more
likely than not to be sustained upon audit by the relevant tax authority. If we ultimately determine that the payment of these
liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during that period. Conversely, we record
additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment
to be. We did not recognize any significant unrecognized tax benefits during the periods presented in this annual report.



57









Uncertainties exist with respect to the
application of the New EIT Law to our operations, specifically with respect to our tax residency status. The New EIT Law
specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de
facto management bodies” are located within the PRC. The New EIT Law’s implementation rules define the term
“de facto management bodies” as “establishments that carry out substantial and overall management and control
over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”



Because of the uncertainties
resulted from limited PRC tax guidance on the issue, it is uncertain whether our legal entities organized outside of the PRC constitute
residents under the New EIT Law. If one or more of our legal entities organized outside of the PRC were characterized as
PRC tax residents, the impact would adversely affect our results of operations. See “Item 3. Key Information — D.
Risk Factors — Risk Related to Doing Business in China — Dividends we receive from our PRC subsidiaries, dividends
payable by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC
tax laws.”



Share-based
Compensation



Our share-based payment
transactions are measured based on the grant date fair value of the equity instrument we issued and recognized as compensation
expense over the requisite service period, with a corresponding impact reflected in additional paid-in capital.



At the time of the grants, the exercise
prices for options granted under our 2006 Employee Share Option Scheme were determined by CEO with inputs by management based
on various objective and subjective factors, and the exercise prices for options granted under our 2011 Share Incentive Plan were
determined by our compensation committee.



The fair values of our option awards were
estimated on the date of grant using the Black-Scholes and binomial option pricing model using the following assumptions:



|                                                 |  | 2010 |                                                                           |   | 2011 |  |                                                                           | 2012 | 
|------------------------------------------------ |  | ---- | ------------------------------------------------------------------------- | - | ---- |  | ------------------------------------------------------------------------- | ---- | 
|Weighted average risk-free interest rate         |  |      | 3.31%
                                                   - 3.73           | % |      |  | 2.74%
                                                   - 3.88           | %    | 
|Weighted average expected term (number of years) |  |      | 5.15
                                                              - 5.30 |   |      |  | 5.40
                                                              - 6.35 |      | 
|Weighted average expected volatility             |  |      | 62.7%
                                                   - 63.64          | % |      |  | 43.10%
                                                   - 57.70         | %    | 
|Weighted average expected dividend yield         |  |      | —                                                                         |   |      |  | —                                                                         |      | 



58







The risk-free rate
for periods within the expected life of the option is based on the implied yield rates of U.S. dollar denominated bond issued
by the Chinese government as of the valuation dates. The expected life of options represents the period of time the granted options
are expected to be outstanding. As we did not grant options prior to June 2009 and no options have been exercised, no sufficient
historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life is estimated based
on a consideration of factors including contractual term, vesting period and empirical study on early exercise behavior of employee
share options. Our employees who received our stocks options are assumed to exhibit similar behavior. As we expected to grow our
business with internally generated cash, we did not expect to pay dividends in the foreseeable future.



Before April 1, 2011
(the closing date of our initial public offering), the estimated fair value of the ordinary shares underlying our options as of
the respective grant dates was determined based on a retrospective valuation.  When estimating the fair value of the ordinary
shares on the grant dates, our management has considered a number of factors, including the result of a third-party appraisal
and our equity transactions, while taking into account standard valuation methods and the achievement of certain events. 
We also determined of the fair value of our ordinary shares with the assistance of an independent valuation firm. After April
1, 2011, the fair value of our ordinary shares is determined from the closing sales price of our ADSs as quoted on the New York
Stock Exchange.



Because we do not
maintain an internal market for our shares, the expected volatility was based on the historical volatilities of comparable publicly
traded companies engaged in similar lines of business.



Newly Adopted
Accounting Pronouncements



See Note 2 to our
consolidated financial statements included elsewhere in this annual report for recently issued accounting standards that we believe
may have implications on our consolidated financial statements for future periods.



Taxation



Cayman Islands



We are incorporated
in the Cayman Islands.  The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income,
gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely
to be material to us levied by the Government of the Cayman Islands save certain stamp duties which may be applicable, from time
to time, on certain instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not
party to any double tax treaties that are applicable to any payments made to or by us.



Hong Kong



Our wholly-owned subsidiaries
in Hong Kong, 360 International, Qifei International and Qiji International, are subject to the uniform tax rate of 16.5%
in Hong Kong for the year ended December 31, 2012 Under the Hong Kong tax laws, 360 International, Qifei International,
Qiji International and Qihu 360 Software Co. Limited, another Hong Kong subsidiary formed in January 2013, are exempted from the
Hong Kong income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.



PRC



Prior to the effective
date of the New EIT Law on January 1, 2008, domestic enterprises in China were generally subject to an enterprise income
tax at a statutory rate of 33% unless they qualified for certain preferential treatment. Effective as of January 1, 2008,
the New EIT Law applies a uniform enterprise income tax rate of 25% to all domestic enterprises and foreign-invested enterprises
and defines new tax incentives for qualifying entities.



59







Pursuant to
the New EIT Law, enterprises that previously enjoyed preferential treatments of low tax rates will be subject to the
new enterprise income tax rate of 25% after a five-year transitional period. Moreover, tax exemption or reduction with
fixed terms enjoyed by enterprises including us will continue until the expiration of the prescribed period. One of our
operating subsidiaries, Qizhi Software, and our VIEs, Beijing Qihu and Beijing Star World, receive preferential tax treatment
in the PRC as “high and new technology enterprises.” Another one of our operating subsidiaries, Tianjin Qisi,
receives preferential tax treatment in the PRC as a “software enterprise.” As a result, subject to satisfaction
of applicable criteria as confirmed by the competent authorities, Qizhi Software was entitled to an exemption from the 15%
reduced EIT tax rate in 2008 and a 50% reduction in the 15% reduced EIT tax rate in 2009 and 2010.  Qizhi Software
received a renewal of its “high and new technology enterprises” status in October 2011 and was entitled to a
reduced EIT rate of 15% for 2011 and 2012.  Beijing Qihu was entitled to a reduced EIT rate of 15% for 2009, 2010 and 2011.
Beijing Qihu received a renewal of its “high and new technology enterprises” status in July 2012 and was
entitled to a reduced EIT rate of 15% for 2012. Beijing Star World received its “high and new technology
enterprises” status in November 2011 and was entitled to a reduced EIT rate of 15% for 2011 and 2012. Tianjin Qisi
received its “software enterprise” status in March 2011 and was entitled to the preferential tax treatment of
"2-year exemption plus 3-year half rate” starting from 2012, which was its first profit-making year for EIT
purposes.



In addition, the New EIT
Law treats enterprises established outside of China with “de facto management bodies” within the PRC as a PRC resident
enterprise for tax purposes. The implementation rules define the term “de facto management bodies” as establishments
that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting
and properties of an enterprise. The State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination
of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies,
or Circular 82, which sets out certain specific criteria for determining whether the “de facto management body”
of a Chinese-controlled offshore incorporated enterprise is located in China. We do not believe that we should be treated as a
“resident enterprise” for PRC tax purposes. However, if considered a “PRC resident enterprise” for tax
purposes, we would be subject to the PRC enterprise income tax at a rate of 25% on our worldwide income. We will continue to monitor
our tax status. See “ Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China —
We may be subject to PRC taxation on our worldwide income.”



Pursuant to the New EIT
law and its implementation rules, dividends payable to foreign investors are subject to a 10% withholding tax. Pursuant to the
grandfathering arrangement, dividends receivable from our PRC subsidiaries in respect of their undistributed profits prior to
December 31, 2007 are exempt from withholding tax. Under the taxation arrangement between the PRC and Hong Kong, a qualified
Hong Kong tax resident which is the “beneficial owner” and directly holds 25% or more of the equity interest in a
PRC-resident enterprise is entitled to a reduced withholding tax rate of 5%.



Results of Operations



The following table
sets forth a summary of our consolidated results of operations, both in absolute amounts and as percentages of total revenues,
for the periods indicated.



|                                                                          |  | Year Ended December 31,              |       
|------------------------------------------------------------------------- |  | ------------------------------------ | ------
|                                                                          |  | 2010                                 |       
|                                                                          |  | ($ in thousands, except percentages) |       
|                                                                          |  |                                      |       
|Revenues:                                                                 |  |                                      |       
|Internet services                                                         |  |                                      |       
|Online advertising                                                        |  |                                      | 38,826
|Internet value-added
    services                                         |  |                                      | 14,774
|Other
    services                                                        |  |                                      | 190   
|Total                                                                     |  |                                      | 53,790
|Sale
    of third party anti-virus software                               |  |                                      | 3,875 
|Total
    revenues                                                        |  |                                      | 57,665
|                                                                          |  |                                      |       
|Cost of revenues:                                                         |  |                                      |       
|Internet services                                                         |  |                                      | 5,566 
|Sale
    of third party anti-virus software                               |  |                                      | 1,185 
|Total
    cost of revenues                                                |  |                                      | 6,751 
|                                                                          |  |                                      |       
|Subsidy
    income                                                        |  |                                      | 266   
|Operating expenses:                                                       |  |                                      |       
|Selling and marketing                                                     |  |                                      | 12,603
|General and administrative                                                |  |                                      | 5,051 
|Product development                                                       |  |                                      | 24,505
|Impairment
    loss on intangible assets                                  |  |                                      | —     
|Total
    operating expenses                                              |  |                                      | 42,159
|                                                                          |  |                                      |       
|Income from operations                                                    |  |                                      | 9,021 
|Interest income                                                           |  |                                      | 317   
|Other (expense)
    income                                                |  |                                      | (60   
|Exchange gain (loss)                                                      |  |                                      | (267  
|Impairment loss on long-term
    investments                              |  |                                      | —     
|Change in unrealized
    holding loss of trading securities               |  |                                      | —     
|Gain
on disposal of long-term investments and a subsidiary                |  |                                      | —     
|Income before income tax expense
and loss from equity 
method investments |  |                                      | 9,011 
|Income tax expense                                                        |  |                                      | (463  
|Loss
    from equity method investments                                   |  |                                      | (57   
|Net income                                                                |  |                                      | 8,491 
|Add: Net loss attributable to
noncontrolling interest                     |  |                                      | 17    
|Net
     income attributable to Qihoo 360 Technology Co. Ltd.             |  |                                      | 8,508 



60







Year Ended December 31, 2012 Compared to Year Ended
December 31, 2011



Revenues



Revenues increased by 96.0%, from $167.9 million
in 2011 to $329.0 million in 2012, primarily as a result of robust growth in both online advertising and Internet value-added
services, despite a relatively challenging macro-economic environment and intense competition.



Revenues from online advertising
increased by 80.0%, from $123.0 million in 2011 to $221.5 million in 2012. This increase was primarily due to continued
growth momentum in user activities and increased monetization efficiency. Our direct online advertising customers (excluding
search customers) increased from 249 in the fourth quarter of 2011 to 657 in the fourth quarter of 2012.  Direct online
advertising customers (excluding search customers) increased from 350 in 2011 to 860 in 2012, while annual revenue per direct
online advertising customer decreased from $294,000 to $236,000 from 2011 to 2012. The increase in our direct online
advertising customers was mainly due to the release of additional advertising inventory and the introduction of more flexible
performance-based pricing models in mid-2012, and the decrease in the average revenue per direct online advertising customer
was primarily attributable to lower average initial contribution from new customers.



61







Revenues from Internet value-added services
increased by 137.1%, from $43.6 million in 2011 to $103.3 million in 2012. This increase was primarily due to an increase
of paying game users on our game platform.



Cost of Revenues



Our cost of revenues increased by 73%,
from $18.9 million in 2011 to $32.8 million in 2012, primarily due to increases in business tax, value-added tax and related
surcharges and payment collection costs for Internet services in line with revenue growth.



Cost of Internet services increased by
75%, from $18.7 million in 2011 to $32.8 million in 2012, primarily due to primarily due to increases in business tax, value-added
tax and related surcharges and payment collection costs in line with revenue growth.



Operating Expenses



Selling and Marketing
Expenses. Selling and marketing expenses increased by 24.2%, from $46.8 million in 2011 to $58.2 million in 2012. This
increase was primarily due to (i) an increase of $13.2 million in advertising and promotion expenses relating to increased brand
promotion activities and promotion of our security and platform products and (ii) an increase of $6.9 million in salaries and
benefits as a result of increased headcount of sales and marketing personnel, partially offset by a decrease of $10.2 million
in share-based compensation associated with the nonvested shares and share options granted to key sales and marketing employees
and external consultants, which is the result of the one-time post-IPO fair value remeasurement of share options we previously
granted to our external consultants in 2011.



General and Administrative
Expenses. General and administrative expenses increased by 80.1%, from $19.1 million in 2011 to $34.3 million in 2012.
This increase was primarily due to (i) an increase of $7.0 million in salaries and benefits for our general and administrative
personnel as a result of increased headcount, (ii) an increase of $3.8 million in share-based compensation associated with the
vesting of nonvested shares and share options granted to our key employees, (iii) an increase of $2.8 million in professional
fees incurred for legal proceedings and other administrative activities and (iv) an increase of $1.0 million in office expenses
as a result of expanding our operations.



Product Development
Expenses. Product development expenses increased by 140.2%, from $65.0 million in 2011 to $156.3 million in 2012. This
increase was primarily due to (i) an increase of $50.3 million in the salaries and benefits for our product development personnel
as we hired additional employees in 2012 to develop our platforms and products, (ii) an increase of $15.6 million in bandwidth
cost, as we leased additional bandwidth to develop and innovate products and services, (iii) an increase of $11.5 million in depreciation
and amortization expenses from the acquisition of property, equipment and intangible assets for the expansion of our business
to facilitate the development and strengthening of our technologies and products; and (iv) an increase of $9.0 million in share-based
compensation associated with the vesting of nonvested shares and share options granted to our key product development employees.



Income Tax Expense



Income tax expenses
increased from $10.9 million in 2011 to $11.4 million in 2012, primarily due to an increase in taxable income for our subsidiaries
and VIEs from 2011 to 2012, partially offset by certain tax exemptions of our new subsidiaries and VIEs set up in 2012.



Year Ended December 31, 2011 Compared to Year Ended
December 31, 2010



Revenues



Revenues increased by $110.2 million,
or 191.1%, from $57.7 million in 2010 to $167.9 million in 2011, primarily as a result of a substantial increase in
our revenues from Internet services, which was in turn primarily attributable to (i) an increase in our revenues from online
advertising, and (ii) an increase in our revenues from Internet value-added services. This increase was partially offset
by a decrease in revenues from sales of third-party anti-virus software.



62







Revenues from online advertising increased
by $84.2 million, or 216.9%, from $38.8 million in 2010 to $123.0 million in 2011. This increase was primarily due to a substantial
increase in our revenues from third-party websites who placed links on our 360 Personal Start-up Page. The increase in our revenues
from third-party websites was due primarily to our expanded user base, which resulted in higher user traffic and activities and
higher average selling price of our advertising links. This was evidenced by the increase in our online advertising customers
(excluding search customers) from 117 in the fourth quarter of 2010 to 249 in the fourth quarter of 2011, and revenue per customer
from approximately $215,000 to $413,000 during the same period. The increase in our online advertising customers was mainly due
to our effective selling effort, and the increase in the average revenue per customer was primarily attributable to the increase
in traffic to our 360 Personal Start-up Page and its subpages.



Revenues from Internet value-added services
increased by $28.8 million, or 194.9%, from $14.8 million in 2010 to $43.6 million in 2011. This increase was primarily
due to (i) a substantial increase in revenues from games and (ii) an increase in revenues from other Internet value-added
services.



Revenues from sales of third-party anti-virus
software decreased by $3.0 million, or 77.0%, from $3.9 million in 2010 to $0.9 million in 2011, primarily because
the availability of 360 Anti-Virus to users free of charge, leading to a continued decrease in sales of third-party anti-virus
software.



Cost of Revenues



Our cost of revenues increased by $12.1 million,
or 180.2%, from $6.8 million in 2010 to $18.9 million in 2011, primarily due to increases in business tax and surcharges
and payment collection costs for Internet services in line with revenue growth.



Cost of Internet services increased by
$13.1 million, or 235.6%, from $5.6 million in 2010 to $18.7 million in 2011, primarily due to increases in business
tax and surcharges and payment collection costs in line with revenue growth.



Cost of sales of third-party anti-virus
software decreased by $1.0 million, or 79.9%, from $1.2 million in 2010 to $0.2 million in 2011. This decrease
was primarily attributable to decreases in payment collection costs and cost of purchasing third-party anti-virus software as
a result of our decreased sales of third-party anti-virus software. We expect that our cost of sales of third-party anti-virus
software will continue to decrease as our sales of third-party anti-virus software decrease.



Operating Expenses



Selling and Marketing
Expenses.   Selling and marketing expenses increased by $34.2 million, or 271.6%, from $12.6 million in 2010
to $46.8 million in 2011. This increase was primarily due to (i) an increase of $30.9  million in share-based compensation
associated with the post-IPO fair value remeasurement of share options previously granted to our external consultants, as well
as the expenses associated with the nonvested shares and share options granted to our key sales and marketing employees , and
(ii)  an increase of $3.6 million in the salaries and benefits as a result of increased headcount of sales and marketing
personnel .



General and Administrative
Expenses.   General and administrative expenses increased by $14.0 million, or 277.2%, from $5.1 million in
2010 to $19.1 million in 2011. This increase was primarily due to (i) an increase of $4.3  million in professional
fees incurred for legal proceedings and other administrative activities , (ii) an increase of $4.2  million in share-based
compensation associated with the vesting of nonvested shares and share options granted to our key employees, and (iii)  an
increase of $3.2  million in salaries and benefits for our general and administrative personnel as a result of increased
headcount.



Product Development
Expenses.   Product development expenses increased by $40.5 million, or 165.4%, from $24.5 million in 2010
to $65.0 million in 2011. This increase was primarily due to (i) an increase of $18.1  million in the salaries
and benefits for our product development personnel as we hired additional employees in 2011 to develop our platforms and products,
(ii) an increase of $5.5  million in bandwidth cost, as we leased additional bandwidth to develop and innovate products
and services, (iii) an increase of $8.8  million in share-based compensation associated with the vesting of nonvested
shares and share options granted to our key product development employees; (iv) an increase of $2.7 million in license and
technical service fees ; and (v) an increase of $2.5 million in depreciation and amortization expenses from the acquisition
of property, equipment and intangible assets for the expansion of our business to facilitate the development and strengthening
of our technologies and products.



63







Income Tax Expense



Income tax expenses
increased from $463,000 in 2010 to $10.9 million in 2011, primarily due to higher taxable income of our subsidiaries and VIEs
in 2011 than 2010 and the expiration of certain tax exemptions.



|B. | Liquidity and Capital Resources
|-- | -------------------------------



Our principal
sources of liquidity have been cash generated from operating activities and proceeds from our initial public offering and the
concurrent private placement in April 2011. As of December 31, 2012, we had no outstanding debt. Our cash and cash
equivalents primarily consist of cash on hand and term deposits. We believe the cash we received from the initial public
offering and concurrent private placement in April 2011 and the anticipated cash flow from operations will provide us
with sufficient capital to meet our anticipated cash needs for the foreseeable future. If we have additional liquidity needs
in the future, we may obtain additional financing, including credit facility and equity offering or debt financing in capital
markets, to meet such needs.  We are a holding company and conduct our operations primarily through our subsidiaries and
VIEs in China. For the years ended December 31, 2010, 2011 and 2012, our VIEs in China contributed an aggregate of 84.9%,
95.7% and 92.1%, respectively, of our consolidated revenues. Our operations not conducted through contractual arrangements
with our VIEs primarily consist of our advertisement agency services and technology support services. As of December 31, 2011
and 2012, our VIEs accounted for an aggregate of 22.5% and 26.7%, respectively, of our consolidated total assets, and 58.5%
and 34.4%, respectively, of our consolidated total liabilities. The assets not associated with our VIEs primarily consists of
cash and cash equivalent, accounts receivables, property and equipment and land use rights. As of December 31, 2011 and 2012,
$62 million and $142 million, respectively, of these assets were denominated in U.S. dollars and $267 million and $363
million, respectively, of these assets were denominated in RMB. As a result, our ability to pay dividends depends upon
dividends paid by our subsidiaries, which in turn depend upon earnings of our VIEs transferred to our subsidiaries in the
form of payments under the technology consulting and services agreements. As of December 31, 2012, the total amount
of service fees payable to our wholly owned subsidiaries from our VIEs was $2 million. If our subsidiaries or any newly
formed subsidiaries incur debt on their own behalf, the instruments governing their debt may restrict their ability to pay
dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if
any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. As of
December 31, 2012, our PRC subsidiaries and VIEs had aggregate undistributed earnings of approximately
$142.1 million that were available for distribution. These undistributed earnings are considered to be indefinitely
reinvested, and will be subject to PRC dividend withholding taxes upon distribution.



Under PRC law, each
of our PRC subsidiaries must set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until
such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries with foreign investments must also set aside
a portion of its after-tax profits to fund an employee welfare fund at the discretion of the board. Although the statutory reserves
can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of
the respective companies, companies may not distribute the reserve funds as cash dividends except upon a liquidation of these
subsidiaries. In addition, dividend payments from our PRC subsidiaries could be delayed as we may only distribute such dividends
upon completion of annual audits of the subsidiaries.



Furthermore, cash
transfers from our PRC subsidiaries to our subsidiaries outside of China are subject to PRC government control of currency conversion.
Qizhi Software needs to obtain the approval from or registration with the relevant government authorities if it plans to convert
cash denominated in Renminbi into U.S. dollars and remit it to our subsidiaries outside of China. See “Item 3. Key
Information — D. Risk Factors — Risks Related to Doing Business in China—Governmental control of currency conversion
may limit our ability to utilize our revenues effectively and affect the value of your investment.”



64







The following table
sets forth a summary of our cash flows for the periods indicated:



|                                                     |  | Year Ended December 31, |       
|---------------------------------------------------- |  | ----------------------- | ------
|                                                     |  | 2010                    |       
|                                                     |  | ($ in thousands)        |       
|Net cash provided by operating activities            |  |                         | 20,125
|Net cash used in investing activities                |  |                         | (9,053
|Net cash provided by financing activities            |  |                         | 20,253
|Effect of exchange rate on cash and cash equivalents |  |                         | 1,036 
|Net increase in cash and cash equivalents            |  |                         | 32,361
|Cash and cash equivalents at beginning of year       |  |                         | 28,144
|Cash and cash equivalents at end of year             |  |                         | 60,505



Operating Activities



Net cash provided
by operating activities increased to $117.8 million in 2012 from $82.3 million in 2011. Although our growing business generated
substantial net cash inflow as our revenues increased by $161.1 million from $167.9 million in 2011 to $329.0 million in
2012, the cash paid for cost of revenues and operating expenses also increased by $127.0 million from $77.5 million in 2011 to
$204.5 million in 2012.



Net cash provided
by operating activities increased to $82.3 million in 2011 from $20.1 million in 2010. Although our growing business
generated substantial net cash inflow as our revenues increased by $110.2 million from $57.7 million in 2010 to $167.9
million in 2011, the cash paid for cost of revenues and operating expenses also increased by $38.9 million from $38.6 million
in 2010 to $77.5 million in 2011.



Investing Activities



Net cash used in investing
activities amounted to $83.9 million in 2012, primarily due to cash outflows for (i) payment for the purchase of property
and equipment and intangible assets of $73.9 million and (ii) capital contribution of $8.0 million for cost method investments
and $16.2 million for equity method investments, partially offset by cash inflows for disposal certain investments and a subsidiary
of an VIE for $13.8 million.



Net cash used in investing
activities amounted to $34.8 million in 2011, primarily due to the cash outflows for (i) payment for the purchase of
property and equipment and intangible assets of $17.8 million and (ii) capital contribution of $7.6 million for cost method
investments and $6.9 million for equity method investments.



Net cash used in investing
activities amounted to $9.1 million in 2010, primarily due to the cash outflows for (i) payment for the purchase of
property and equipment and intangible assets of $4.0 million in connection with our operation expansion, and (ii) cash
considerations in the amount of $2.6 million paid in the acquisitions made in 2009.



Financing Activities



Net cash provided
by financing activities amounted to $2.0 million in 2012, primarily due to the receipt of proceeds from exercise of
share options by our employees and external consultants.



Net cash provided
by financing activities amounted to $233.3 million in 2011, primarily due to the receipt of proceeds from our initial
public offering and concurrent private placement.



Net cash provided
by financing activities amounted to $20.3 million in 2010, primarily due to our receipt of proceeds from the issuance of
Series C convertible participating redeemable preferred shares.



Capital Expenditures



We incur capital expenditures
primarily for the purchase of servers, network equipment and other computer hardware for our business expansion and the purchase
of new office premises and related facilities. Our capital expenditures were $4.3 million in 2010, $18.7 million in 2011 and $134.2
million in 2012. We expect to incur approximately $130.0 million in capital expenditures for 2013 for the purchase of servers,
network equipment and other computer hardware for our business expansion and the purchase of new office premises and related facilities.
We expect to fund capital expenditures by cash generated from operating and financing activities, including the net proceeds from
our initial public offering and concurrent private placement.



65







|C. | Research and Development, Patents
    and Licenses, etc.
|-- | --------------------------------------------------------



Product Development



In order to attract
and retain users, we have invested significant resources in developing security products, cloud-based services, search engine-related
products, mobile Internet products and other Internet products and services and improve our products and services and enhance
user experience. As of December 31, 2012, our product development team consisted of 2,434 development and technical
staff members, approximately 71.7% of whom held bachelor’s or more advanced degrees.



Our internally developed
technologies include our cloud-based security system, Qihoo search engine technology, cloud storage system, QVM, 360 HIPS
and other technologies. See “— Our Technology.”



Our product development
expenses include costs associated with new product development and enhancement for existing products, such as salaries and benefits,
including share-based compensation expenses, costs of bandwidth and utilities, license and technical service fees, and depreciation
of equipment and amortization of acquired intangible assets. Product development expenses represented 42.5%, 38.7% and 47.5% of
total revenues for the three years ended December 31, 2010, 2011 and 2012, respectively.



Intellectual Property



We rely on a combination
of copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual
property rights and brands. We have registered our “Qihoo” and “Qihu” brands and our “360”
logo with relevant government authorities in China, the United States and Japan and have pending applications for the “Qihoo”
and “Qihu” brands and the “360” logo with relevant government authorities in the European Union.



As of
December 31, 2012, we had 168 registered trademarks in China and 21 registered trademarks outside of China, and
held registered copyrights to 183 software programs covering almost all of our products. As of
December 31, 2012, we had 1,291 pending patent applications and had received 11 authorized patents from various
governmental authorities.



We have registered
the domain name “360.cn” with China Internet Network Information Center. In addition, we have registered 224 domain
names with various domain name registration services as of December 31, 2012.



|D. | Trend Information
|-- | -----------------



Other than as disclosed
elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for 2012 that are
reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources,
or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.



|E. | Off-Balance Sheet Commitments and
    Arrangements
|-- | --------------------------------------------------



We have not entered,
and do not expect to enter, into any off-balance sheet arrangements. We also have not entered into any financial guarantees or
other commitments to guarantee the payment obligations of third parties. In addition, we have not entered into any derivative
contracts indexed to equity interests and classified as shareholders’ equity. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support
to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk
or credit support to it or that engages in leasing, hedging or research and development services with it.



66







|F. | Contractual Obligations
|-- | -----------------------



The following table sets forth our contractual
obligations and commercial commitments as of December 31, 2012:



|                          |  | Payment Due by Period |        
|------------------------- |  | --------------------- | -------
|Contractual Obligations   |  | Total                 |        
|                          |  | ($ in thousands)      |        
|Operating obligations (1) |  |                       | 4,143  
|Capital commitments       |  |                       | 99,793 
|Total                     |  |                       | 103,936










| | (1) | Operating obligations represent future rental commitments related
                                                           to facilities and offices under non-cancelable operating lease agreements
                                                           and fee commitments related to obtaining exclusive rights of operation
                                                           for the games on our platforms.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|G. | Safe Harbor
|-- | -----------



This annual report
on Form 20-F contains forward-looking statements that relate to future events, including our future operating results and
conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations
and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D.
Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.”
These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act
of 1995.



You can identify these
forward-looking statements by terminology such as “will,” “expects,” “believes,” “anticipates,”
“intends,” “estimates” and similar statements. Among other things, the management’s quotations contain
forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on
current expectations, assumptions, estimates and projections about Qihoo 360 and the industry. Potential risks and uncertainties
include, but are not limited to: the Company’s ability to continue to innovate and provide attractive products and services
to attract and retain users; the Company’s ability to keep up with rapid changes in technologies and Internet-enabled devices;
the Company’s ability to leverage its user base to attract customers and users for our revenue-generating services; and
the Company’s dependence on online advertising for a substantial portion of our revenues; and the Company’s ability
to compete effectively; and the Company’s success in defending itself against unsubstantiated reports and allegations by
third parties. This annual report on Form 20-F also contains data related to the Internet industry in China taken from third
party reports. China’s Internet industry may not grow at the rates projected by the market data, or at all. The failure
of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs.
In addition, the rapidly changing nature of the Internet industry subjects any projections or estimates relating to the growth
prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the
market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not
place undue reliance on these forward-looking statements.



All information provided
in this annual report on Form 20-F is as of the date on which the statements are made in this annual report on Form 20-F,
and we undertake no obligation to update any forward-looking statements to reflect subsequent occurring events or circumstances,
or changes in its expectations, except as may be required by law. Although we believe that the expectations expressed in these
forward-looking statements are reasonable, it cannot assure you that its expectations will turn out to be correct, and investors
are cautioned that actual results may differ materially from the anticipated results. You should read this annual report on Form 20-F
completely and with the understanding that our actual future results may be materially different from what we expect. Further
information regarding risks and uncertainties faced by us is included in our filings with the U.S. Securities and Exchange Commission.



67







|Item 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- | ------------------------------------------



|A. | Directors and Senior Management
|-- | -------------------------------



The following table sets forth information
about our directors and executive officers as of the date of this annual report. The business address of all of our directors
and executive officers is Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China.



|Name               |  | Age |  | Position                                         
|------------------ |  | --- |  | -------------------------------------------------
|Hongyi Zhou        |  | 42  |  | Chairman of the board and chief executive officer
|Xiangdong Qi       |  | 48  |  | Director and president                           
|Shu Cao            |  | 37  |  | Director and chief engineer                      
|Neil Nanpeng Shen  |  | 45  |  | Director                                         
|Wenjiang Chen      |  | 43  |  | Director                                         
|Hong Chuan Thor    |  | 41  |  | Director                                         
|Ming Huang         |  | 49  |  | Director                                         
|Shujun Li          |  | 41  |  | Director                                         
|William Mark Evans |  | 55  |  | Director                                         
|Alex Zuoli Xu      |  | 44  |  | Co-chief financial officer                       
|Jue Yao            |  | 39  |  | Co-chief financial officer                       
|Xiaohong Shi       |  | 42  |  | Vice president of technology                     



Hongyi Zhouis a co-founder of our company and has served as our chairman and chief executive officer since August 2006. Mr.
Zhou has over ten years of managerial and operational experience in China’s Internet industry. Prior to founding our company,
Mr. Zhou was a partner at IDG Ventures Capital since September 2005, a global network of venture capital funds, where he
assisted small- to medium-sized software companies in sourcing funding to support their growth. Mr. Zhou was the chief executive
officer of Yahoo! China from January 2004 to August 2005. In 1998, Mr. Zhou founded www.3721.com, a company engaged
in Internet search and online marketing business in China, and served as its chairman and chief executive officer until www.3721.com
was acquired by Yahoo! China in January 2004. Mr. Zhou is an independent director and a member of the compensation committee
of AutoNavi Holdings Limited, a NASDAQ-listed company and a provider of digital map content and navigation and location-based
solutions in China.  Mr. Zhou also serves as a director of a number of privately owned companies based in China. Mr. Zhou
received his bachelor’s degree in computer software in 1992 and his master’s degree in system engineering in 1995
from Xi’an Jiaotong University, China.



Xiangdong Qiis a co-founder of our company and has served as our director and president since our inception. Prior to founding our
company, Mr. Qi served as a vice president of Yahoo! China from January 2004 to August 2005, where he was responsible
for Yahoo! China’s operations and marketing. From August 2003 to January 2004, Mr. Qi was the general manager
of www.3721.com, responsible for its overall operations and strategic planning. Mr. Qi worked at Xinhua News Agency from
1986 to March 2004. Mr. Qi received his bachelor’s degree in wireless communications from Changchun College of Posts
and Telecommunications in China in 1986 and his MBA degree from Beijing University of Science and Technology in China in 2007.



Shu Cao
has been our director since 2006 and served as our chief engineer since October 2005. Prior to joining us, Mr. Cao served
as the chief engineer of Yahoo! China from November 2003 to September 2005 and was responsible for system operation
and maintenance. Mr. Cao has extensive experiences in software engineering, information technology infrastructure and system
operation. Mr. Cao was the co-founder of www.3721.com and served as its head of operations from January 1999 to August 2003.
Mr. Cao received his bachelor’s degree in computer science from Zhejiang University in China in 1998.



Neil
Nanpeng Shen has been our director since 2006. Mr. Shen is the founding managing partner of Sequoia Capital
China. Mr. Shen co-founded Ctrip.com International Ltd., or Ctrip, a NASDAQ-listed company and the largest travel service
provider in China, and served as its chief financial officer from 2000 to October 2005 and as its president from
August 2003 to October 2005. He also co-founded Home Inns and Hotels Management Inc., or Home Inns, a NASDAQ-listed
company and leading economy hotel chain in China. Prior to founding Ctrip and Home Inns, Mr. Shen has over eight years
of experience at major investment banks in New York and Hong Kong. Currently, Mr. Shen is a co-chairman of Home Inns, a
director of Ctrip, a director of E-House (China) Holdings Limited, a NYSE-listed real estate services company in China, chairman of Mecox Lane Limited, a NASDAQ-listed e-commerce company in China, a director of Peak Sport Products Co., Limited,
a Hong Kong Stock Exchange listed sports products company in China and a director of Le Gaga Holdings Limited, a
NASDAQ-listed greenhouse vegetable producer. He is also an independent director of Focus Media Holding Limited, a
NASDAQ-listed media advertising company based in China and a director of a number of privately owned companies based in
China. Mr. Shen received his bachelor’s degree from Shanghai Jiaotong University in China in 1988 and his
master’s degree from the School of Management at Yale University in 1992.



68







Wenjiang Chen has been our
director since September 2011. Ms. Chen has been a partner at CDH Venture since January 2006. From February 2001
to December 2005, she served as an assistant vice president of Walden International Investment Group. From February 2000
to January 2001, Ms. Chen served as an investment manager of China International Capital Corporation Limited. Prior
to that, Ms. Chen was an investment manager of China Light Industry Fund from August 1993 to April 1998. Ms. Chen
obtained a bachelor’s degree in international economics from Renmin University of China in July 1992, and obtained
a master’s degree in business administration from China Europe International Business School in December 1999.



Hong Chuan Thorhas been our director since February 2011. Since 2007, Mr. Thor has served as a managing director of Highland
Capital Partners (Shanghai) Investment Consulting Co., Ltd., a subsidiary of Highland Capital Partners, a venture capital
firm. From 2005 to 2007, Mr. Thor was a venture partner at Highland Capital Partners in the United States. Prior to that
time, Mr. Thor was a partner at JAFCO America Ventures, a venture capital firm in the United States, from 1999 to 2005, and
served as a senior investment professional of JAFCO Co., Ltd, a venture capital firm in Japan, from 1995 to 1999. Mr. Thor is
currently a director of Six Room Holdings, a privately owned Internet services company based in China, and a director of Kascend
Holding Inc., a privately owned mobile services company based in China. Mr. Thor received his bachelor’s degree in
commercial science from Meiji University in Japan.



Ming
Huang has been our director since March 2011. He has been a professor of finance at the Johnson Graduate School
of Management at Cornell University since July 2005 and a professor of finance at China-European International Business
School since July 2010. Professor Huang also served as a professor of finance at Cheung Kong Graduate School of Business in
China from July 2008 to June 2010 and Dean of the School of Finance at Shanghai University of Finance and Economics from
April 2006 to March 2009. Prior to 2005, he was an associate professor of finance at the Graduate School of Business at
Stanford University from September 2002 to June 2005 and an associate dean and visiting professor of finance at Cheung
Kong Graduate School of Business from July 2004 to June 2005. Professor Huang’s academic research primarily
focuses on behavioral finance, credit risk and derivatives. In recent years, his research has focused on Chinese capital
market and public companies. Professor Huang serves as an independent director and a member of the audit committee at Yingli
Green Energy Holding Company Limited, a company listed on the NYSE, since August 2008. Professor Huang also serves as an
independent non-executive director of Fantasia Holdings Group Co., Ltd., a real-estate company listed on the Hong Kong Stock
Exchange. Professor Huang has also served as an independent non-executive director of 360buy Jingdong Mall since January
2013. Professor Huang received his bachelor’s degree in physics from Beijing University, his doctorate degree in
theoretical physics from Cornell University and his doctorate degree in finance from Stanford University.



Shujun Li
has been our director since March 2011. He has been the managing partner of Trustbridge Partners III, L.P., a Cayman Islands
exempted limited partnership since 2008. Mr. Li served as the chief financial officer and several other senior management
roles at Shanda Interactive Entertainment Limited, a NASDAQ-listed company from March 2002 to June 2006. Prior to that,
Mr. Li served as a fund manager responsible for the establishment of Zhongrong Fund Management Company from January 2001
to October 2001 and a senior manager at the international business department of China Southern Securities Co., Ltd.
from August 1997 to December 2000. He received his bachelor’s degree from Hebei Normal University in China in 1994
and his master degree in economics from Nankai University in China in 1998.



William Mark
Evans has been our director since March 2011. Mr. Evans has been a general partner of Balderton Capital, a U.K.
based venture capital firm, since September 2002 and currently serves as a director of Yoox Group S.p.A., an online retail
company listed on the Borsa Italiana, and a number of private companies. From April 2004 to October 2006, Mr. Evans
served as the chairman of the audit committee of the board of directors of Shanda Interactive Entertainment Inc., a company listed
on NASDAQ prior to 2012. Prior to that, Mr. Evans held a variety of senior management positions at Goldman Sachs, including
chairman of Goldman Sachs Asia from 1993 to 1997. Mr. Evans received his bachelor’s degree in economics from Queen’s
University in Canada in 1981 and his MLitt degree in economics from the University of Oxford in 1985.



69







Alex Zuoli Xuhas been our co-chief financial officer since February 2011. Mr. Xu has extensive experiences in investment
research and business management. Prior to joining us, Mr. Xu was a managing director at Cowen & Company, LLC, an
investment banking service provider, where he led the firm’s investment research in China on Chinese companies listed in
the United States. From March 2010 to August 2010, he served as the chief financial officer of Yeecare Holdings, a private
health care product distributor in China, and from May 2008 to March 2010, as the chief strategy officer of China Finance
Online Co., Ltd., a Chinese Nasdaq-listed online financial information/service company. Prior to that, Mr. Xu was a
senior VP at Brean Murray, Carret & Co, a research-driven investment and merchant bank, covering U.S.-listed Chinese
companies. He was part of a top-ranked research team at Banc of America Securities, LLC from 2003 to 2007, and was an equity research
associate at UBS from 2002 to 2003. Mr. Xu received his bachelor’s degree in applied physics from Beijing University
of Posts and Telecommunications in 1990 and an M.B.A. from Cornell University in 2002. Mr. Xu is a CFA charterholder.



Jue Yao
has been our co-chief financial officer since 2012 and vice president of finance since 2008. Ms. Yao served as our financial
director from 2006 to 2008. Prior to joining us in 2006, Ms. Yao held various positions at Sohu.com Inc. from 1999 to 2006,
including financial director, where she was responsible for its strategic planning, budgeting and finance of wireless value-added
and gaming business units. From 1996 to 1999, Ms. Yao was a senior auditor at KPMG. Ms. Yao graduated from University of
International Business and Economics in China with a bachelor’s degree in international accounting in 1996. She is a chartered
accountant in China.



Xiaohong Shihas been our vice president of technology since 2006. From January 2004 to August 2005, Mr. Shi was the
chief technology officer of Yahoo! China, where he was responsible for technology research and development. From 1999 to 2003,
Mr. Shi was the chief technology officer of www.3721.com, a company engaged in Internet search and online marketing business
in China. From November 1998 to August 1999, Mr. Shi was a project manager at Founder Group, a leading Chinese
information technology company. Mr. Shi received his Ph.D. and master’s degrees in computer science from Xi’an
Jiaotong University in 1998 and 1995, respectively.



|B. | Compensation of Directors and Executive Officers
|-- | ------------------------------------------------



Compensation of Directors and Executive
Officers



For the year
ended December 31, 2012, we paid an aggregate of approximately $1.0 million in cash compensation to our directors and
executive officers and granted options to purchase a total of 230,000 ordinary shares to our directors and officers. For the
year ended December 31, 2012, we did not set aside or accrue any amounts to provide pension, retirement or similar
benefits for our executive officers and directors.



Share Option Plans



Our board of directors
and shareholders have adopted three incentive plans, namely, our 2011 share incentive plan, 2006 employee share option scheme
and 2006 share vesting scheme. These incentive plans were adopted to attract and retain the best available personnel for positions
of substantial responsibility, to provide additional incentive directors, officers, advisors and key employees and to promote
the success of our business.



2011 Share Incentive
Plan



The maximum aggregate
number of Class A ordinary shares that may be issued pursuant to all awards under the 2011 share incentive plan, or the 2011
Plan, is 6,272,601 shares plus an annual increase on the first day of each year beginning in 2012 and ending in 2021, equal to
the greater of (i) five percent (5%) of the shares outstanding (on an as converted basis) on the last day of the immediately
preceding fiscal year and (ii) such greater number of shares as determined by our board of directors. The following paragraphs
describe the principal terms of the 2011 Plan.



Types of Awards.    The types of awards we may grant under our 2011 Plan include the options to purchase our ordinary
shares at a specified price and in a specified period determined by our compensation committee. Under the 2011 Plan, we may also
grant awards of our (i) restricted shares, (ii) restricted share units, (iii) dividend equivalents, (iv) deferred
shares, (v) share payments and (vi) share appreciation rights under the terms and conditions determined by our compensation
committee.



Plan Administration.    The compensation committee of our board of directors (or another committee or a subcommittee of our
board of directors assuming the functions of our compensation committee under the 2011 Plan) will administer the 2011 Plan. The
committee will determine the terms and conditions of each grant, including but not limited to, the exercise, grant or purchase
prices, any reload provision, any restrictions or limitations on the awards, vesting schedules, restrictions on the exercisability
of the awards, any acceleration or waivers, and any provision related to non-competition and recapture of gain on the awards.



70







Eligibility.
    We may grant awards to directors, officers, advisors and employees of our company, which include our subsidiaries
and any entity in which we hold actual or de facto control by equity ownership or contractual arrangement.



Award Agreement.    Awards granted under the 2011 Plan will be evidenced by an award agreement that will set forth the
terms and conditions and limitations for each award. Share awards may be evidenced by way of an issuance of certificates or book
entries with appropriate legends. The certificates and book entry procedures may be subject to counsels’ advice, stop-transfer
orders of other conditions or restrictions where the 2011 Plan administrator deems necessary or advisable to comply with the required
laws and regulations.



Vesting.     The
2011 Plan provides that the plan administrator may set the period during which an option or a share appreciation right can be
exercised and may determine that an option or a share appreciation right may not be exercised for a specified period after it
is granted. Such vesting can be based on criteria selected by the administrator. At any time after the grant of an option or a
share appreciation right, the administrator may, in its sole discretion and subject to terms and conditions it determines, accelerate
the period during which an option or a share appreciation right vests. No portion of an option or a share appreciation right unexercisable
at the termination of service of an option or a share appreciation right holder with our company or subsidiaries can become exercisable
afterwards, unless otherwise provided by the administrator.



Exercise Price
and Term of Awards.     The exercise price per share of options granted under the 2011 Plan is determined
by the plan administrator in the award agreement. The price may be fixed or variable related to the fair market value of our ordinary
shares. The term of any option granted should not exceed ten years. However, in the case where our incentive option is granted
to individual who, at the date of grant, owns more than ten percent of the total combined voting power of all classes of our shares,
the price granted shall not be less than 110% of fair market value on the date of grant and the option is exercisable for no more
than five years from the date of grant.



For ordinary share
awards granted under the 2011 Plan, namely (i) restricted shares, (ii) restricted share units, (iii) dividend equivalents,
(iv) deferred shares, and (v) share payments, the consideration shall not be less than the par value of the shares purchased
unless otherwise permitted by applicable laws and regulations. The terms of the share awards are set by the plan administrator
in its sole discretion.



The exercise price
of share appreciation right under the 2011 Plan is determined by the plan administrator and set forth in the award agreement which
may be a fixed or variable price related to the fair market value of the shares. The term of the share appreciation right will
not exceed ten years.



Transfer Restriction.    The awards granted under the 2011 Plan may not be sold, pledged, assigned or transferred in a manner
other than by will or the laws of descent and distribution or, subject to the consent of the plan administrator, as required under
the applicable domestic relations laws.



Amendments or Termination.    The 2011 Plan provides that in the event of any changes affecting our ordinary shares or our share
price, the plan administrator can make proportionate and equitable adjustments to reflect such changes. Upon or in anticipation
of a corporate transaction, including acquisition, disposal of substantially all or all assets, reverse takeover, dissolution,
the plan administrator should in its discretion provide for replacement or assumption of such award. In the event of other changes,
the compensation committee should in its discretion make adjustments in the number and class of shares subject to awards outstanding
on the date of such change to prevent dilution or enlargement of rights. The 2011 Plan will expire and no further awards may be
granted after the tenth anniversary of the plan was adopted.



As of March 31,
2013, we have granted options to purchase a total of 344,000 ordinary shares to our directors and executive officers with
exercise prices from $14.50 to $19.41 per ADS under our 2011 share incentive plan.



71







2006 Employee
Share Option Scheme



In November 2010
and January 2011, our board of directors approved increases of the number of shares under our 2006 employee share option
scheme. The following paragraphs describe the principal terms of our 2006 employee share option scheme.



Types of Awards.    We may grant options to purchase our ordinary shares under our 2006 employee share option scheme.



Plan Administration.    The 2006 employee share option scheme is, upon the approval of the compensation committee established
from time to time under our board of directors, administered by our chief executive officer. Our chief executive officer will
determine the provisions and terms and conditions of each award grant, including, among other things, the number of awards, exercise
price, option vesting schedules, forfeiture provisions and form of payment upon settlement of an award.



Eligibility.
    We may grant awards to our employees, officers, directors of or consultants to our company, which include
our subsidiaries or any entities in which we hold actual or de facto control by equity ownership or contractual arrangement.



Notice of Grant.    A grantee is delivered a written notice in the form our chief executive, subject to the 2006 employee
share option scheme, determines from time to time. The notice specifies the number of options granted as well as other terms and
conditions of the award, including performance criteria on which the grant is made. The grantee may by written notice given to
us renounce his or her rights to the notice of grant, and the grant is deemed not having been made.



Vesting Schedule.    The options granted in each award vests in the grantee as follows: (i) 25% vests twelve months
after the grant is made; (ii) 25% vests 24 months after the grant is made; (iii) 25% vests 36 months after
the grant is made; and (iv) 25% vests 48 months after the grant is made. If the grantee ceases to become eligible for
any reason prior to certain exit events, the option vested but not exercised as well as the options not yet vested will automatically
lapse and expire.



Exercise of Option.    Options are personable to the grantee, who may not transfer, mortgage or create interests (legal or
beneficial) on the option unless having received prior written consent by our chief executive officer. Grantees do not enjoy any
rights, interests or benefits attached to the underlying shares unless the options have vested in and exercised by the grantees.
Unless our chief executive officer agrees and so notifies the grantee separately in writing, grantees may not exercise any vested
options prior to the occurrence of certain material events such as our initial public offering, sale of all or substantially all
of our issued share capital, sale of all or substantially all of its assets and winding up of our company until any of these events
is consummated. Under the 2006 employee share option scheme, the grantees are deemed to have authorized the nominee as designated
by us to act and execute documents to exercise the options. Unless agreed by our chief executive officer in writing, all rights,
including voting rights, attached to the shares allotted under the 2006 employee share option scheme and held by the nominee belong
to and are exercised by the nominee at its sole and absolute discretion. The grantees have the right to all monetary benefits
deriving from the shares when the shares are disposed of.



Exercise Price.    The exercise price is fixed by reference to the date on which the grant is made. Generally, our chief
executive officer may determine the price at either (i) the latest valuation price per share certified by our auditors or
(ii) the latest price per share at which we have issued any shares prior to the date the subject grant is made. We shall
permit payment of the exercise price by an appropriate assignment, transfer, direction or authorization, which is in the form
our chief executive officer may reasonably require, to the extent that the cash proceeds receivable by the grantee from certain
enumerated events, equals to the exercise price payable by the grantee to us.



Amendment and Termination.    Our chief executive officer may at any time terminate our 2006 employee share option scheme. Amendments
to our 2006 employee share option scheme are subject to resolution of our compensation committee. Any amendment of our 2006 employee
share option scheme must not adversely affect awards already granted or agreed to be granted without written consent of a majority
in the number of holders of unexercised options. Unless terminated earlier, the 2006 employee share option scheme will expire
and we may not grant awards after the tenth anniversary of its adoption date on January 25, 2006.



72







As of March 31,
2013, we have granted options to purchase a total of 1,049,000 ordinary shares to our directors and executive officers with
exercise prices of $2.25 to $7.80 per ADS under our 2006 employee share option scheme.



2006 Employee Share Vesting Scheme



In January 2006,
Young Vision, one of our principal shareholders, holders of Series A preferred shares and certain other parties entered into
a share incentive agreement. The share incentive agreement was subsequently amended and restated when we issued our Series B
preferred shares in November 2006 and Series C preferred shares in January 2010. Under the incentive agreement,
Young Vision allocated a total of 21,603,645 ordinary shares of our company to an equity incentive pool designed to award
our employees and consultants according to our 2006 Employee Share Vesting Scheme. 18,086,101 of these 21,603,645 shares
in the equity pool are to vest in grantees on a four-year vesting schedule commencing from November 7, 2006. The remaining
3,517,544 ordinary shares will be granted to employees who join our company as a result of acquisitions or mergers. In February 2011,
Young Vision transferred 11,826,000 and 5,550,654 ordinary shares of our company in the equity pool to Sino Honor Limited
and Strengthen Goal Limited, respectively. Sino Honor Limited, a British Virgin Islands company, is wholly-owned by Shu Cao, our
director and chief engineer. Strengthen Goal Limited, a British Virgin Islands company, is wholly-owned by Xiaohong Shi, our vice
president of technology. Each of Mr. Cao and Mr. Shi disclaims beneficial ownership in the shares held by Sino Honor
Limited and Strengthen Goal Limited, respectively. Grantees are only entitled to rights to monetary benefits by receiving dividends,
if any, on the vested shares. Unless our company agrees in writing, grantees may not dispose of the vested shares prior to the
occurrence of certain material events such as our initial public offering, sale of all or substantially all of our issued share
capital, sale of all or substantially all of our assets and winding up of our company until any of these events is consummated.
Young Vision holds the voting rights for the ordinary shares reserved in this equity incentive pool, including those shares underlying
the options that have been granted and vested. Subject to limited circumstances such as the termination of his employment with
us, Hongyi Zhou, our chairman and chief executive officer, administers this equity incentive pool and has the discretion to change
or impose any restrictions on the manner in which the shares in this equity incentive pool will be granted. Under the 2006 Employee
Share Vesting Scheme, if the grantee’s employment is terminated, we may repurchase all or part of the vested shares at RMB1.0,
depending on the date on which his employment is terminated and the reasons for such termination.



As of March 31,
2013, a total of 3,073,952 shares from this equity incentive pool were granted to our directors and executive officers under
our 2006 employee share vesting scheme.



|C. | Board Practices
|-- | ---------------



Board of Directors



Our board of directors
currently consists of nine directors. A director is not required to hold any shares to qualify for appointment. A director may
vote with respect to any contract, proposed contract or arrangement in which he is materially interested as long as he or she
has made a declaration of the nature of such interest. Our board of directors may exercise all the powers of the company to borrow
money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture
stock or other securities whether outright or as security for any debt, liability or obligation of our company or of any third party.



Committees of the Board of Directors



We have three committees
under the board of directors: an audit committee, a compensation committee and a corporate governance and nominating committee.
We have adopted a charter for each of the three committees.



Audit Committee



Our audit committee
consists of Messrs. Shujun Li and Ming Huang and Ms. Wenjiang Chen. Each of Mr. Li, Mr. Huang and Ms. Wenjiang
Chen is an “independent director” within the meaning of Section 303A of the Corporate Governance Rules of
the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act. Mr. Li is the chair of our audit
committee.



73







The purpose of the
audit committee is to assist our board of directors with its oversight responsibilities regarding: (i) the integrity of our
financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s
qualifications and independence and (iv) the performance of our internal audit function and independent auditor.



The audit committee
is responsible for, among other things:



| | · | appointing
                                                                                                         the independent auditors
                                                                                                         and pre-approving all
                                                                                                         audit and non-audit services
                                                                                                         permitted to be performed
                                                                                                         by the independent auditors;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                                                                                         with the independent
                                                                                                         auditors any audit problems
                                                                                                         or difficulties and management’s
                                                                                                         response;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | discussing
                                                                                                         the annual audited financial
                                                                                                         statements with management
                                                                                                         and the independent auditors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                                                                                         major issues as to the
                                                                                                         adequacy of our internal
                                                                                                         controls and any special
                                                                                                         audit steps adopted in
                                                                                                         light of material control
                                                                                                         deficiencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | meeting
                                                                                                         separately and periodically
                                                                                                         with management and the
                                                                                                         independent auditors.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2012, our audit committee held three
meetings and passed resolutions seven times.



Compensation Committee



Our compensation committee
consists of Messrs. Neil Nanpeng Shen, William Mark Evans and Hong Chuan Thor. Our board of directors has determined that
each of Messrs. Shen, Evans and Hong Chuan Thor is an “independent director” within the meaning of Section 303A
of the Corporate Governance Rules of the New York Stock Exchange. Mr. Shen is the chair of our compensation committee.



Our compensation committee
assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all
forms of compensation to be provided to our directors and executive officers. Members of our compensation committee are not prohibited
from direct involvement in determining their own compensation. Our chief executive officer may not be present at any compensation
committee meeting during which his compensation is deliberated. Our compensation committee is responsible for, among other things:



| | · | approving
                                                                                                         and overseeing the compensation
                                                                                                         package for our executive
                                                                                                         officers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                                                                                         and approving any amendments
                                                                                                         to our compensation plans
                                                                                                         and the compensation
                                                                                                         of our directors; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                                                                                         periodically regarding
                                                                                                         any long-term incentive
                                                                                                         compensation or equity
                                                                                                         plans, programs or similar
                                                                                                         arrangements, annual
                                                                                                         bonuses, employee pension
                                                                                                         and welfare benefit plans.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2012, our compensation committee passed
resolutions ten times.



Corporate Governance and Nominating Committee



Our corporate governance
and nominating committee consists of Messrs. Hong Chuan Thor and Ming Huang and Ms. Wenjiang Chen. Our board of directors
has determined that each member of the corporate governance and nominating committee is an “independent director”
within the meaning of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. Mr. Thor is
the chair of our corporate governance and nominating committee.



Our corporate governance
and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining
the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:



| | · | identifying
                                                                                                         and recommending to the
                                                                                                         board nominees for election
                                                                                                         or re-election to the
                                                                                                         board, or for appointment
                                                                                                         to fill any vacancy;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



74







| | · | reviewing
                                                                                                         annually with the board
                                                                                                         the current composition
                                                                                                         of the board in light
                                                                                                         of the characteristics
                                                                                                         of independence, skills,
                                                                                                         experience and availability
                                                                                                         of service to us;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | advising
                                                                                                         the board periodically
                                                                                                         with respect to significant
                                                                                                         developments in the law
                                                                                                         and practice of corporate
                                                                                                         governance as well as
                                                                                                         our compliance with applicable
                                                                                                         laws and regulations,
                                                                                                         and making recommendations
                                                                                                         to the board on all matters
                                                                                                         of corporate governance
                                                                                                         and on any corrective
                                                                                                         action to be taken; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | monitoring
                                                                                                         compliance with our code
                                                                                                         of business conduct and
                                                                                                         ethics, including reviewing
                                                                                                         the adequacy and effectiveness
                                                                                                         of our procedures to
                                                                                                         ensure proper compliance.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2012, our corporate
governance and nominating committee passed resolutions two times.



Duties of Directors



Under Cayman Islands
law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our directors also have
a duty to exercise the skill they actually possess with the care and diligence that a reasonably prudent person would exercise
in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum
and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.



Employment Agreements



We have entered into
employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed
for a specified time period. We may terminate the employment for cause, at any time, without notice or remuneration, for certain
acts of the employee, including but not limited to a conviction or plea of guilty to a felony, negligence or dishonesty to our
detriment and serious or persistent breach or non-observance of the officer’s duties. Furthermore, we may terminate the
officer without cause, at any time, upon one month written notice or by payment of one month salary in lieu of notice. An executive
officer may terminate his employment at any time with a one-month notice or by payment of one month salary.  In addition,
the executive may resign prior to the expiration of the Agreement if such resignation or an alternative arrangement with respect
to the Employment is approved by the Board.



Each executive officer
has agreed to hold, at all times during the term of his employment agreement, in strict confidence and not to use, except as required
in the performance of his duties in connection with the employment, any confidential information, technical data, trade secrets
and know-how of our company or the confidential information of any third party, including our affiliated entities and our subsidiaries,
received by us. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets
which they conceive, develop or reduce to practice, during the period of his employment with us, and to assign all right, title
and interest in them to us.



We do not have service
contracts with any of our directors that provide for benefits upon termination of employment.



Indemnification
Agreements



We have entered into indemnification agreements
with each of our directors to indemnify them against certain liabilities and expenses arising from their being a director. Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.



|D. | Employees
|-- | ---------



We had 860, 1,725
and 3,168 employees as of December 31, 2010, 2011 and 2012, respectively. As of December 31, 2012, we had 3,168 full-time
employees, including 2,434 in product development, 533 in sales and marketing, and 201 in administration.



75







|E. | Share Ownership
|-- | ---------------



The following table
sets forth information with respect to the beneficial ownership of our shares as of December 31, 2012 by:



| | · | each
                                                                                                         of our directors and
                                                                                                         executive officers; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | each
                                                                                                         person known to us to
                                                                                                         own beneficially more
                                                                                                         than 5% of our shares.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                           |  | Ordinary Shares
    Beneficially Owned (1)(2) |            |  | % | 
|---------------------------------------------------------- |  | --------------------------------------------- | ---------- |  | - | 
|Directors and Executive Officers:                          |  |                                               |            |  |   | 
|Hongyi Zhou (3)                                            |  |                                               | 32,628,158 |  |   | 
|Xiangdong Qi (4)                                           |  |                                               | 17,543,343 |  |   | 
|Shu Cao (5)                                                |  |                                               | 9,049,710  |  |   | 
|Neil Nanpeng Shen (6)                                      |  |                                               | 9,919,461  |  |   | 
|Wenjiang Chen                                              |  |                                               | —          |  |   | 
|Hong Chuan Thor                                            |  |                                               | —          |  |   | 
|Ming Huang                                                 |  |                                               | —          |  |   | 
|Shujun Li                                                  |  |                                               | —          |  |   | 
|William Mark Evans                                         |  |                                               | —          |  |   | 
|Alex Zuoli Xu                                              |  |                                               | *          |  |   | 
|Jue Yao                                                    |  |                                               | *          |  |   | 
|Xiaohong Shi (7)                                           |  |                                               | 2,229,745  |  |   | 
|All directors and executive officers as a group            |  |                                               | 72,299,400 |  |   | 
|                                                           |  |                                               |            |  |   | 
|Principal Shareholders:                                    |  |                                               |            |  |   | 
|Global Village Associates Limited (8)                      |  |                                               | 32,628,158 |  |   | 
|Young Vision Group Limited (9)                             |  |                                               | 15,823,344 |  |   | 
|Sequoia Capital China I, L.P. and its affiliates (10)      |  |                                               | 9,919,461  |  |   | 
|Trustbridge Partners III, L.P. and its affiliates
    (11) |  |                                               | 9,898,167  |  |   | 












| | * | Less than 1% of our outstanding ordinary
                                                         shares.
| | - | ---------------------------------------------------------------------------------------------------------



| | (1) | Beneficial ownership is determined
                                                           in accordance with Rule 13d-3 of the General Rules and Regulations
                                                           under the Exchange Act and includes voting or investment power with
                                                           respect to the securities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The percentage of beneficial ownership
                                                           is calculated by dividing the number of shares beneficially owned by
                                                           such person or group by 184,157,097 ordinary shares, being the number
                                                           of shares outstanding as of December 31, 2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Consists of (i) one Class A ordinary
                                                           share, (ii) 399,999 Class A ordinary shares in the form of ADSs and
                                                           (iii) 32,228,158 Class B ordinary shares held by Global Village.
                                                           Global Village, a British Virgin Islands company, is wholly-owned by
                                                           Fair Point International Limited, or Fair Point. Fair Point, a British
                                                           Virgin Islands company, is wholly-owned by a revocable trust constituted
                                                           under the laws of Singapore with Hongyi Zhou and his wife as the settlers
                                                           and Mr. Zhou as investment manager with sole voting and dispositive
                                                           power and certain family members of Mr. Zhou as the beneficiaries.
                                                           The registered address of Global Village is P.O. Box 957,
                                                           Offshore Incorporations Centre, Road Town, Tortola, British Virgin
                                                           Islands. The registered address of Fair Point is P.O. Box 957,
                                                           Offshore Incorporations Centre, Road Town, Tortola, British Virgin
                                                           Islands.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Consists of (i) 1,719,999 Class A ordinary
                                                           shares beneficially owned by Mr. Qi in the form of ADSs, and (ii) 15,823,344
                                                           Class B ordinary shares held by Young Vision Group Limited, or Young
                                                           Vision, a British Virgin Islands company, which is wholly-owned by
                                                           East Line Holdings Limited East Line, a British Virgin Islands company,
                                                           which is in turn wholly-owned by Mr. Qi. Mr. Qi expressly disclaims
                                                           beneficial ownership in 1,274,039 Class B ordinary shares allocated
                                                           to award the Issuer’s employees and consultants under the Issuer’s
                                                           2006 Employee Share Vesting Scheme. The registered address of Young
                                                           Vision is 2nd Floor, Abbott Building, Road Town, Tortola, British
                                                           Virgin Islands. The registered address of East Line is Abbott Building,
                                                           Road Town, Tortola, British Virgin Islands. The registered address
                                                           of Trade Right is the Bahamas Financial Centre, Shirley and Charlotte
                                                           Streets, P.O. Box N-3023, Nassau, Bahamas.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



76







| | (5) | Consists of (i) 6,362,252 Class A ordinary
                                                           shares in the form of ADSs, (ii) 2,080,362 Class B ordinary shares
                                                           and (iii) 305,594 Class A ordinary shares in the form of ADSs issuable
                                                           upon the exercise of options exercisable within 60 days of the filing,
                                                           all of which are held by Sino Honor Limited, or Sino Honor, a British
                                                           Virgin Islands company wholly-owned by Mr. Cao, and (iv) 301,501 Class
                                                           A ordinary shares in the form of ADSs and (v) one Class B ordinary
                                                           share, all of which are held by Flying Great Limited, or Flying Great,
                                                           a British Virgin Islands company wholly-owned by Mr. Cao. Mr. Cao expressly
                                                           disclaims beneficial ownership in the 6,667,846 Class A and 2,080,362
                                                           Class B ordinary shares held by Sino Honor, which were allocated to
                                                           award the Issuer’s employees and consultants under the Issuer’s
                                                           2006 Employee Share Vesting Scheme. The registered address of Sino
                                                           Honor is P.O. Box 933, 3rd Floor, Omar Hodge Building,
                                                           Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The registered
                                                           address of Flying Great is P.O. Box 933, 3rd Floor,
                                                           Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola, British Virgin
                                                           Islands.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | According to a Schedule 13G/A filed
                                                           by Sequoia Capital China I, L.P. on February 12, 2013 and as of
                                                           December 31, 2012, consists of (i) 7,812,567 Class B
                                                           ordinary shares held by Sequoia Capital China I, L.P., (ii) 897,710
                                                           Class B ordinary shares held by Sequoia Capital China Partners
                                                           Fund I, L.P. and (iii) 1,209,184 Class B ordinary
                                                           shares held by Sequoia Capital China Principals Fund I, L.P. Sequoia
                                                           Capital China I, L.P. Sequoia Capital China Partners Fund I, L.P.
                                                           and Sequoia Capital China Principals Fund I, L.P. are collectively
                                                           referred to as the Sequoia Funds. The Sequoia Funds are managed by
                                                           Sequoia Capital China Advisors Limited, a company incorporated in the
                                                           Cayman Islands. The Sequoia Funds’ general partner is Sequoia
                                                           Capital China Management I, L.P. The general partner of Sequoia Capital
                                                           China Management I, L.P. is SC China Holding Limited, a company
                                                           incorporated in the Cayman Islands. SNP China Enterprises Limited,
                                                           a company incorporated in the British Virgin Islands, is the director
                                                           of and wholly owns SC China Holding Limited. Neil Nanpeng Shen is the
                                                           director of and wholly owns SNP China Enterprises. The principal
                                                           business office of Sequoia Capital China I., L.P. and its affiliates
                                                           is 3000 Sand Hill Road, 4-250, Menlo Park, CA 94025.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Consists of (i) 990,327 Class A ordinary shares in the
                                                           form of ADSs and 333,819 Class B ordinary shares held by Strengthen
                                                           Goal Limited and (ii) 905,598 Class A ordinary shares in
                                                           the form of ADSs and one Class B ordinary share held by Elite
                                                           Wisdom Development Limited. Mr. Shi disclaims beneficial ownership
                                                           in all of the 1,324,146 ordinary shares held by Strengthen Goal Limited.
                                                           Such shares were allocated to award our employees and consultants under
                                                           our 2006 Employee Share Vesting Scheme. Strengthen Goal Limited, a
                                                           British Virgin Islands company, is wholly-owned by Mr. Shi. The
                                                           registered address of Strengthen Goal Limited is P.O. Box 933,
                                                           3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola,
                                                           British Virgin Islands. Elite Wisdom Development Limited, a British
                                                           Virgin Islands company, is wholly-owned by Mr. Shi. The registered
                                                           address of Elite Wisdom Development Limited is P.O. Box 933,
                                                           3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola,
                                                           British Virgin Islands.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Global Village is wholly-owned by Fair Point. Fair Point is wholly-owned
                                                           by a revocable trust constituted under the laws of Singapore with Hongyi
                                                           Zhou and his wife as the settlers and Mr. Zhou as investment manager
                                                           with sole voting and dispositive power and certain family members of
                                                           Mr. Zhou as the beneficiaries. The registered address of Global Village
                                                           is P.O. Box 957, Offshore Incorporations Centre, Road Town,
                                                           Tortola, British Virgin Islands.  The registered address of Fair
                                                           Point is P.O. Box 957, Offshore Incorporations Centre, Road
                                                           Town, Tortola, British Virgin Islands.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Young Vision is wholly-owned by East
                                                           Line. East Line is wholly-owned by Mr. Qi.  The registered address
                                                           of Young Vision is 2nd Floor, Abbott Building, Road Town, Tortola,
                                                           British Virgin Islands. The registered address of East Line is Abbott
                                                           Building, Road Town, Tortola, British Virgin Islands.  Young Vision
                                                           and East Line expressly disclaims beneficial ownership in 1,274,039
                                                           Class B ordinary shares allocated to award our employees and consultants
                                                           under our 2006 Employee Share Vesting Scheme.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



77







| | (10) | According to a Schedule 13G/A filed by Sequoia Capital China I,
                                                            L.P. on February 12, 2013 and as of December 31, 2012, consists
                                                            of (i) 7,812,567 Class B ordinary shares held by Sequoia
                                                            Capital China I, L.P., (ii) 897,710 Class B ordinary
                                                            shares held by Sequoia Capital China Partners Fund I, L.P.
                                                            and (iii) 1,209,184 Class B ordinary shares held by Sequoia
                                                            Capital China Principals Fund I, L.P. Sequoia Capital China I, L.P.
                                                            Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital
                                                            China Principals Fund I, L.P. are collectively referred to as
                                                            the Sequoia Funds. The Sequoia Funds are managed by Sequoia Capital
                                                            China Advisors Limited, a company incorporated in the Cayman Islands.
                                                            The Sequoia Funds’ general partner is Sequoia Capital China
                                                            Management I, L.P. The general partner of Sequoia Capital China Management I, L.P.
                                                            is SC China Holding Limited, a company incorporated in the Cayman
                                                            Islands. SNP China Enterprises Limited, a company incorporated in
                                                            the British Virgin Islands, is the director of and wholly owns SC
                                                            China Holding Limited. Neil Nanpeng Shen is the director of and wholly
                                                            owns SNP China Enterprises. The principal business office of
                                                            Sequoia Capital China I., L.P. and its affiliates is 3000 Sand Hill
                                                            Road, 4-250, Menlo Park, CA 94025.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | According to a Schedule 13G/A filed by TB Partners GP Ltd on February 7,
                                                            2013 and as of December 31, 2012, consists of (i) 7,831,467 class
                                                            A ordinary shares represented by ADSs held directly by Trustbridge
                                                            Partners III, L.P., or TB III, (ii) 1,836,699 class A ordinary
                                                            shares represented by ADSs managed by TB Alternative Assets Ltd.,
                                                            or TB Alternative on behalf of the Trustees of Columbia University
                                                            in the City of New York, and (iii) 230,001 class A ordinary shares
                                                            represented by ADSs managed by TB Alternative on behalf of the Ludwig
                                                            Institute for Cancer Research Ltd. TB III is a Cayman Islands exempted
                                                            limited partnership whose general partner is TB Partners GP3, L.P.
                                                            The general partner of TB Partners GP3, L.P. is TB Partners GP Limited.
                                                            TB Alternative is affiliated with TB Partners GP Limited. Pursuant
                                                            to Section 13(d) of the Exchange Act, each of TB Partners GP
                                                            Limited, TB Partners GP3, L.P., and TB Alternative may be deemed the
                                                            beneficial owner of the class A ordinary shares represented by
                                                            ADSs held by TB III. Pursuant to Rule 13d-4 of the Exchange Act, each
                                                            of TB Partners GP Limited, TB Partners GP3, L.P., and TB Alternative
                                                            disclaims beneficial ownership of the class A ordinary shares
                                                            represented by ADSs held by TB III except to the extent of their pecuniary
                                                            interests therein. Pursuant to Section 13(d) of the Exchange
                                                            Act, each of TB Partners GP Limited, TB Partners GP3, L.P., TB III
                                                            and TB Alternative may be deemed the beneficial owner of the class
                                                            A ordinary shares represented by ADSs managed by TB Alternative on
                                                            behalf of the Trustees of Columbia University in the City of New York
                                                            and the Ludwig Institute for Cancer Research Ltd. Pursuant to Rule
                                                            13d-4 of the Exchange Act, each of TB Partners GP Limited, TB Partners
                                                            GP3, L.P., TB III and TB Alternative disclaims beneficial ownership
                                                            of the class A ordinary shares represented by ADSs held by the
                                                            Trustees of Columbia University in the City of New York except to
                                                            the extent of their pecuniary interests therein. The registered address
                                                            of TB III is Walker House, 87 Mary Street, George Town, Grand
                                                            Cayman KY1-9002, Cayman Islands.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31,
2012, 184,157,097 of our ordinary shares, including 123,472,524 Class A ordinary shares and 60,684,573 Class B ordinary shares,
were issued and outstanding. Based on a review of the register of members maintained by our Cayman Islands registrar, we believe
that 123,472,509 ordinary shares, or approximately 67.0% of our issued and outstanding shares, were held by the record shareholders
in the United States, represented by 82,315,006 ADSs held of record by The Bank of New York Mellon, the depositary of our ADS
program.



Holders of our Class A
ordinary shares are entitled to one vote per share, while holders of our Class B ordinary shares are entitled to five votes
per share. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.



|Item 7. | MAJOR SHAREHOLDERS AND RELATED PARTY
    TRANSACTIONS
|------- | -----------------------------------------------------



|A. | Major Shareholders
|-- | ------------------



Please refer to “Item 6. Directors,
Senior Management and Employees—E. Share Ownership.”



|B. | Related Party Transactions
|-- | --------------------------



Loans from a Related Party



In 2011, our former 53.5%-owned subsidiary,
Shanghai Yiyi Digital Technology Co., Ltd., or Shanghai Yiyi, received loans of RMB6.1 million ($1.0 million) from one of
its non-controlling shareholders.  This non-controlling shareholder also has common shareholders and board directors with
us.  These loans were interest-free loans to finance Shanghai Yiyi’s day-to-day operations.  In January 2012,
we disposed of all of our interests in Shanghai Yiyi to its non-controlling shareholders. As of the date of this annual report,
we had no amounts due under these loans.



78







Purchases of Products and Services



In his personal capacity, Mr. Hongyi
Zhou, our chairman, chief executive officer and principal shareholder, has been an angel investor in the Internet and high-tech
industries in China. From time to time, on an arm’s length basis, we purchase products and services from or enter into revenue
sharing arrangements with companies in which Mr. Zhou is a principal shareholder or a director. None of these transactions
was material.



Investment Advisory Services



In July 2010, we engaged a family member of a shareholder
and executive officer to provide investment advisory services. As remuneration for these services, we granted this advisor options
to purchase 300,000 of our ordinary shares, which were automatically re-designated as Class A ordinary shares upon the completion
of our initial public offering. The fair value of these options as of the grant date was $420,000.



Contractual Arrangements Among Our Subsidiaries, Our VIEs
and the Respective Shareholders of the VIEs



Qizhi Software, our PRC operating subsidiary, is a wholly
foreign-owned enterprise and is subject to PRC legal restrictions on foreign ownership in the telecommunications sector. See
“Item 4. Information on the Company — B. Business Overview — Regulations — Regulations Relating to
Our Business — Telecommunications Regulations.” Accordingly, we conduct our business activities primarily through
two VIEs, namely Beijing Qihu and Beijing Star World. The registered shareholders of Beijing Qihu, Beijing Star World and
other VIEs are our shareholders, directors, officers or key employees, who directly or indirectly hold our shares, including
Mr. Xiangdong Qi, our director and president. We, through Qizhi Software, have entered into contractual arrangements
with Beijing Qihu, Beijing Star World and their respective registered shareholders, which enable us to:



| | · | direct
                                                                                                         the activities that most
                                                                                                         significantly affect
                                                                                                         the economic performance
                                                                                                         of Beijing Qihu, Beijing
                                                                                                         Star World and their
                                                                                                         subsidiaries;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | receive
                                                                                                         substantially all of
                                                                                                         the economic benefits
                                                                                                         from Beijing Qihu and
                                                                                                         Beijing Star World that
                                                                                                         could be significant
                                                                                                         to them and as if we
                                                                                                         were their sole shareholder;
                                                                                                         and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | have
                                                                                                         an exclusive option to
                                                                                                         purchase all of the equity
                                                                                                         interests in Beijing
                                                                                                         Qihu and Beijing Star
                                                                                                         World when and to the
                                                                                                         extent permitted by PRC
                                                                                                         law.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Qizhi Software has also entered into similar contractual arrangements
with eleven other VIEs that do not have significant business operations. Accordingly, we are considered the primary beneficiary
of these VIEs and have consolidated the VIEs’ financial results of operations, assets and liabilities in our consolidated
financial statements.



Equity Disposition Agreements



Qizhi Software entered into equity disposition agreements
with Beijing Qihu, Beijing Star World and their respective registered shareholders, who irrevocably granted Qizhi Software or
its designated person exclusive options to purchase, when and to the extent permitted under PRC law, any part or all of the
equity interests in Beijing Qihu and Beijing Star World. The exercise price for the options to purchase all of the equity
interests in Beijing Qihu and Beijing Star World is the minimum amount of consideration permissible under the then applicable
PRC law. The agreements have an initial term of ten years and are renewable at Qizhi Software’s sole discretion. These
equity disposition agreements provide, among other things, that without Qizhi Software’s prior written consent:



| | · | the
                                                                                                         registered shareholders
                                                                                                         of each VIE may not transfer,
                                                                                                         encumber, grant security
                                                                                                         interest in, or otherwise
                                                                                                         dispose of in any way
                                                                                                         any equity interests
                                                                                                         in their respective VIEs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



79







| | · | Beijing
                                                                                                         Qihu and Beijing Star
                                                                                                         World may not sell, transfer,
                                                                                                         mortgage or otherwise
                                                                                                         dispose of in any way
                                                                                                         their respective assets,
                                                                                                         business or income, nor
                                                                                                         may they create any security
                                                                                                         interest therein (other
                                                                                                         than created in the ordinary
                                                                                                         course of their respective
                                                                                                         business);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | no
                                                                                                         shareholders resolution
                                                                                                         should be passed to increase
                                                                                                         or reduce the registered
                                                                                                         capital of each VIE or
                                                                                                         otherwise alter the capital
                                                                                                         structure of such VIE;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                         articles of association
                                                                                                         of each VIE should not
                                                                                                         be supplemented, altered
                                                                                                         or modified in any way;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Beijing
                                                                                                         Qihu and Beijing Star
                                                                                                         World may not declare
                                                                                                         or pay any dividends
                                                                                                         to their respective registered
                                                                                                         shareholders;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Beijing
                                                                                                         Qihu and Beijing Star
                                                                                                         World may not merge with
                                                                                                         any third parties, or
                                                                                                         purchase or transfer
                                                                                                         any assets or businesses
                                                                                                         from or to any third
                                                                                                         parties;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Beijing
                                                                                                         Qihu and Beijing Star
                                                                                                         World may not engage
                                                                                                         in any transactions that
                                                                                                         may cause substantially
                                                                                                         adverse effects on their
                                                                                                         respective assets, obligations,
                                                                                                         operations, share capital
                                                                                                         and other rights;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Beijing
                                                                                                         Qihu and Beijing Star
                                                                                                         World may not incur any
                                                                                                         indebtedness, except
                                                                                                         where transactions were
                                                                                                         entered into in the ordinary
                                                                                                         course of business; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                         registered shareholders
                                                                                                         of the VIEs will apply
                                                                                                         the proceeds from the
                                                                                                         disposition of the shares
                                                                                                         of their respective VIEs
                                                                                                         to repay the loans extended
                                                                                                         by Qihoo 360 under the
                                                                                                         loan agreements described
                                                                                                         below.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Loan Agreements



Under loan agreements between Qihoo 360 and the registered
shareholders of Beijing Qihu and Beijing Star World, as the case may be, Qihoo 360 extended loans of (i) an aggregate principal
amount of RMB80 million ($12.0 million) to the registered shareholders of Beijing Qihu and (ii) an aggregate principal amount
of RMB10 million ($1.5 million) to the registered shareholders of Beijing Star World. The registered shareholders obtained the
loans to fund the initial registered capital of and contribute additional registered capital to Beijing Qihu and Beijing Star
World, as the case may be. Each loan agreement has a term of ten years and is renewable for another ten-year term upon the parties’
agreement.



Equity Pledge Agreements



Under Qizhi Software’s equity pledge agreements with
Beijing Qihu, Beijing Star World and their respective registered shareholders, the registered shareholders of Beijing Qihu
and Beijing Star World pledged all of their respective equity interests in Beijing Qihu and Beijing Star World to
Qizhi Software to secure the performance of the registered shareholders’, Beijing Qihu’s and Beijing Star
World’s obligations under the business operation agreements and the equity disposition agreements described herein. If
Beijing Qihu or Beijing Star World breaches any of their respective contractual obligations under these agreements seriously,
Qizhi Software, as pledgee, will be entitled to dispose of the pledged equity interests. The registered shareholders of
Beijing Qihu and Beijing Star World agreed not to dispose of or otherwise create any new encumbrance on their respective
equity interests in Beijing Qihu and Beijing Star World or agree to Beijing Qihu and Beijing Star World merging with other
entities or reorganizing in any other form, as the case may be, without Qizhi Software’s prior written consent. Unless
terminated at Qizhi Software’s sole discretion, each equity pledge agreement has a term of ten years and will be
automatically renewed upon the expiration of the ten-year term.



Business Operation Agreements



Under the business
operation agreements among Qizhi Software, Beijing Qihu and Beijing Star World, as the case may be, and the respective
registered shareholders of Beijing Qihu and Beijing Star World, Beijing Qihu and Beijing Star World and their respective
 registered shareholders may not enter into any transaction that could materially affect the assets, liabilities,
interests or operations of Beijing Qihu and Beijing Star World, as the case may be, without Qizhi Software’s prior
written consent. In addition, directors, chairman, general managers, financial controllers or other senior managers of
Beijing Qihu and Beijing Star World, as the case may be, must be Qizhi Software’s nominees appointed by the registered
shareholders of Beijing Qihu and Beijing Star World. Each business operation agreement has a term of ten years and is
renewable at Qizhi Software’s sole discretion.



80







Technology Consulting and Services
Agreements



Under a technology development agreement
dated May 1, 2008 between Qizhi Software and Beijing Qihu, Qizhi Software agreed to provide Beijing Qihu with technology
development and support services related to Beijing Qihu’s advertising business. Beijing Qihu agreed to pay RMB8.5 million
($1.3 million) in 2008 and 30% of Beijing Qihu’s revenues from its advertising business annually from 2009 to 2012 to Qizhi
Software. This agreement has a term of five years. In September 2010, Beijing Qihu and Qizhi Software signed a supplementary
agreement, which amended the percentage of Beijing Qihu’s revenues that Qizhi Software would receive from 30% to 20%, effective
September 1, 2010. On January 1, 2011, Beijing Qihu and Qizhi Software signed a supplementary agreement, which
amended the amount Beijing Qihu would pay to Qizhi Software would based on the monthly statement agreed with both parties. In
2012, pursuant to these agreements, Beijing Qihu agreed to pay RMB269 million ($42.6 million) in technology development and support
service fees related to its advertising business to Qizhi Software.



Under a technology development agreement
dated March 15, 2009 between Qizhi Software and Beijing Qihu, Qizhi Software agreed to provide Beijing Qihu with technology
development and support services related to Beijing Qihu’s online shopping business. Beijing Qihu agreed to pay to Qizhi
Software RMB4.5 million ($0.7 million) within 30 days from the date of the agreement, RMB4.5 million ($0.7 million) within 60
days after the date of the agreement and 35% of the revenues generated from the online shopping business for the period between
June 2009 and December 2012. Unless earlier terminated, this agreement has a term of four years. In June 2010,
Beijing Qihu and Qizhi Software signed a supplementary agreement, which amended the percentage of Beijing Qihu’s revenues
from the online shopping business that Qizhi Software would receive from 35% to 20%, effective June 1, 2010. In addition,
Beijing Qihu and Qizhi Software agreed that no revenue needed to be paid by Beijing Qihu to Qizhi Software in September and
October 2010. On January 1, 2011, Beijing Qihu and Qizhi Software signed a supplementary agreement, which amended
the amount Beijing Qihu would pay to Qizhi Software would based on the monthly statement agreed with both parties. In 2012, pursuant
to these agreements, Beijing Qihu agreed to pay RMB39.9 million ($6.3 million) in technology development and support service fees
related to its online shopping business to Qizhi Software.



Under an exclusive technology consulting
and services agreement dated October 12, 2009 between Qizhi Software and Beijing Star World, Qizhi Software agreed to provide
Beijing Star World with exclusive consulting services relating to Internet information technology and software development technology.
In return for Qizhi Software’s services, Beijing Star World agreed to pay a monthly fee to Qizhi Software based on the number
of page views generated. This agreement has a term of ten years.



Under a technology development and licensing
agreement dated July 1, 2011 between Qizhi Software and Beijing Qihu, Qizhi Software agreed to provide Beijing Qihu with
technology development and support services related to Beijing Qihu’s 360 Safe Brower. Under this agreement, Beijing Qihu
agreed to pay Qizhi Software RMB7.8 million ($1.2 million) within 30 days of the date of the agreement.  In 2012, based on
this agreement, Beijing Qihu agreed to pay RMB169.9 million ($26.9 million) in technology development and support service fees
related to 360 Safe Brower to Qizhi Software.



Under an agreement dated January 1, 2012
between Beijing Qihu and Tianjin Qisi, Beijing Qihu agreed to provide web information issuance services to Tianjin Qisi. In return
for Beijing Qihu’s service, Tianjin Qisi agreed to pay RMB6.0 million ($1.0 million) in 2012 and this agreement had been
fulfilled at the year end of 2012.



Under a technology development agreement
dated April 1, 2012 between Tianjin Qisi and Beijing Qihu, Tianjin Qisi agreed to provide Beijing Qihu with technology development
services related to Beijing Qihu’s web information management platform. Beijing Qihu agreed to pay RMB5 million ($0.8 million)
within 30 days from the date of the agreement and 5% of its revenues generated from the network business to Tianjin Qisi. This
agreement has a term of four years. Afterwards, Tianjin Qisi and Beijing Qihu signed a supplementary agreement, which amended
the amount Beijing Qihu would pay to Tianjin Qisi would based on the monthly statement agreed with both parties.  In 2012,
pursuant to these agreements, Beijing Qihu paid RMB53.0 million ($8.4 million) to Tianjin Qisi.



81







Under a technology development agreement
dated April 1, 2012 between Tianjin Qisi and Beijing Star World, Tianjin Qisi agreed to provide Beijing Star World with technology
development services related to Beijing Star World’s 360 Game Brower. Under this agreement, Beijing Star World agreed to
pay Tianjin Qisi RMB5.0 million ($0.8 million) within 30 days from the date of the agreement and 15% of its revenues generated
from the operation of the 360 Game Brower. This agreement has a term of four years. Afterwards, Tianjin Qisi and Beijing Star
World signed a supplementary agreement, which amended the amount that Beijing Star World would pay to Tianjin Qisi would be based
on the monthly statement agreed with both parties. In 2012, pursuant to these agreements, Beijing Star World paid RMB181.0
million ($28.7 million) to Tianjin Qisi.



Under a cooperation agreement between
Tianjin Qisi and 360 Youjiu, effective from August 20, 2012 to December 31, 2013, Tianjin Qisi agreed to recommend 360 Youjiu’s
software on its network platform. 360 Youjiu agreed to pay a monthly promotion fee to Tianjin Qisi based on the numbers of the
users registered through Tianjin Qisi’s network platform as the price of RMB12 per registered user. In 2012, 360 Youjiu
paid RMB13.8 million ($2.2 million) to Tianjin Qisi.



Under a technology development agreement
dated September 15, 2012 between Beijing Star World and Qifei Xiangyi, Qifei Xiangyi agreed to provide Beijing Star World
with technology development related to Beijing Star World’s game operation management system. Beijing Star World agreed
to pay to Qifei Xiangyi RMB9.0 million ($1.4 million) as the fixed service fees in 2012 and certain percentage of revenues generated
from the game business for the period between October 2012 to September 2017, based on both parties’ negotiation. Unless
earlier terminated, this agreement has a term of five years. On December 1, 2012, Beijing Star World and Qifei Xiangyi signed
a supplementary agreement, which amended the amount Beijing Star World would pay to Qifei Xiangyi would base on the monthly statement
agreed with both parties.  In 2012, pursuant to these agreements, Beijing Star World agreed to pay RMB10.0 million ($1.6
million) to Qifei Xiangyi.



Under a technology development agreement
dated October 8, 2012 between Beijing Qichuang Yousheng Keji Co., Ltd., or Beijing Qichuang, and Beijing Star World, Beijing
Qichuang agreed to provide Beijing Star World with technology development and support services related to the system of user right
management. Beijing Star World agreed to pay RMB450,000 ($71,000) in technology development and support services fees, and this
agreement had been fulfilled at the year end of 2012.



Powers of Attorney



Each registered shareholder of Beijing
Qihu and Beijing Star World has executed a power of attorney to appoint Qizhi Software to be his or her attorneys, and irrevocably
authorize Qizhi Software to vote on his or her behalf on all of the matters concerning Beijing Qihu and Beijing Star World, as
the case may be, that may require shareholders’ approval.



Spousal Consent Letter



The spouse of each married shareholder
of Beijing Qihu and Beijing Star World has signed a spousal consent letter, whereby the spouse agrees that (i) the equity
interests of Beijing Qihu and Beijing Star World owned by such shareholder will be disposed of only in accordance with the applicable
Equity Disposition Agreement, Equity Pledge Agreement, Loan Agreement and other related agreements executed by the shareholder,
(ii) such equity interests do not constitute communal property with such shareholder and (iii) the spouse irrevocably and unconditionally
waives all rights and benefits with respect to such equity interests, including the right to sue in any court and under all applicable
laws.



Concurrent Private Placement



In conjunction with our initial public
offering in April 2011, affiliates of certain of our existing shareholders, or the private placement investors, purchased
an aggregate of 5,172,414 Class A ordinary shares at the initial offering price of $14.50 per ADS. This investment was made
pursuant to an offer exempt from registration with the SEC pursuant to Regulation S and Section 4(2) of the Securities
Act. These private placement investors were TB Alternative Assets Ltd., Highland VII—PRI (2) S.à r.l.,
Highland VIIB—PRI (2) S.à r.l., Highland VIIC—PRI (2) S.à r.l., Highland ENT VII—PRI
(2) S.à r.l., Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital
China Principals Fund I, L.P., and CDH Net Technology Limited. In connection with this investment, we paid a placement fee
equal to 7% of the aggregate purchase price for the investment to UBS AG and Citigroup Global Markets Inc. as the placement
agents and (ii) grant these private placement investors certain registration rights.



82







Employment Agreements



See “Item 6. Directors, Senior Management
and Employees — C. Board Practice — Employment Agreements.”



Share Option Plan



See “ Item 6. Directors, Senior
Management and Employees — B. Compensation of Directors and Executive Officers — Share Option Plans.”



|C. | Interests of Experts and Counsel
|-- | --------------------------------



Not applicable.



|Item 8. | FINANCIAL INFORMATION
|------- | ---------------------



|A. | Consolidated Statements and Other
    Financial Information
|-- | -----------------------------------------------------------



We have appended consolidated
financial statements filed as part of this annual report.



Legal and Administrative Proceedings





In May 2010,
we brought a breach of contract claim against Baidu Shidai Network Technology (Beijing) Co., Ltd., or Baidu Shidai,
in the First Intermediate People’s Court of Beijing, alleging that Baidu Shidai owed us search referral commissions for
the search box placed on our 360 browsers and seeking approximately RMB50.4 million ($7.6 million) in damages,
losses and interest. In September 2010, Baidu Shidai brought a counter-claim against us in the First Intermediate People’s
Court of Beijing, alleging that we charged improper search referral commissions for the search box placed on the 360 browsers
and seeking damages of approximately RMB10.5 million ($1.6 million). In July 2011, we entered into a settlement agreement
with Baidu Shidai, under which Baidu Shidai made back payments of RMB17.5 million ($2.7 million).



83







In October 2010,
Tencent Technology (Shenzhen) Company Ltd. and Shenzhen Tencent Computer Systems Company Limited, or Tencent, brought an unfair
competitive practices claim against us in the Chaoyang District People’s Court of Beijing, alleging that we misled users
with statements that Tencent’s QQ instant messaging program invades users’ privacy and seeking retraction of the statements
and RMB4.0 million in damages. In September 2011, the court ruled that our actions constituted unfair competition and awarded
RMB0.4 million ($63,553) as damages to Tencent. In November 2010, we brought a defamation claim against Tencent in the Xicheng
District People’s Court of Beijing, alleging that Tencent made defamatory statements on its website against us and seeking
retraction of the statements and RMB1.0 in nominal damages. In March 2012, we increased our sought damages to RMB 1.0 million
($0.2 million). This case is currently pending.



In June 2011,
Tencent brought an unfair competitive practices claim against us in the Higher People’s Court of Guangdong province, alleging
that our 360 QQ Bodyguard program interferes with users’ proper usage of Tencent’s QQ instant messaging program and
seeking $19.8 million (RMB125.0 million) in damages, cessation of the unfair competitive practices and public apology. This case
is currently pending.



In November 2011,
we brought a claim for abuse of dominant market position against Tencent in the Higher’s People’s Court of Guangdong
province, alleging that Tencent engaged in monopolistic activities such as restricting users of its QQ instant messaging program
from using our products and bundling its security programs with the QQ instant messaging program and seeking $23.8 million (RMB150.0
million) in damages, cessation of the monopolistic activities and public apology.  This claim was rejected by the court in
the first instance judgment. We subsequently submitted our appeal in April 2013 and this case is currently pending.



In April 2012, two
affiliates of Baidu brought an unfair competitive practices and copyright infringement claim against us in the First Intermediate
People’s Court of Beijing, alleging that 360 Safe Guard modified the results page of Baidu’s search engine, that 360
Browser bundled Baidu personal start-up pages and the unauthorized use of Baidu’s trademark and seeking RMB10 million in
damages. This case is currently pending.



In April 2012, we
brought a claim against Kingsoft and Beike Wangji (Beijing) Security Technology Company Limited, or Beike, for an unfair competitive
advertisement for the incident relating to Apple banning our products from the Apple App Store. In November of 2012, the first
instance judgment was made by Beijing Haidian Court, which ruled in our favor. Kingsoft and Beike appealed in December 2012 and
the court of second instance upheld the judgment of the court of first instance. In May 2012, Kingsoft brought an unfair competition
claim against us for unfair competition, and the court of first instance entered a judgment in our favor in December 2012. Kingsoft
appealed in December 2012 and the court of second instance upheld the judgment of the court of the first instance.



In October 2012, two
affiliates of Baidu brought an unfair competitive practices and copyright infringement claim against us in the First Intermediate
People’s Court of Beijing, alleging that we breached the Robots Exclusion Protocol to access Baidu’s content
without authorization and seeking RMB100.0 million in damages. This case is currently pending.



In February 2013,
we brought a defamation claim against Shanghai Jingwen Culture  Communication Co., Ltd., or Shanghai Jingwen, in the Xuhui
District People’s Court of Shanghai, alleging that Shanghai Jingwen published and distributed a series of false articles
and reports against us on its website and electronic newspapers by maliciously accusing the level of safety and security of our
products. We sought retraction of the defamatory statements, an apology from Shanghai Jingwen and RMB50 million in damages. This
case is currently pending.



Other than the aforementioned,
we are currently not a party to any material legal or administrative proceedings, and we are not aware of threatened material
legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings
arising in the ordinary course of our business.



Based on the information currently available, we were unable to make a reasonable estimate of any liability because of the
uncertainty related to the outcome and the amount or range of loss. Accordingly, we did not accrue any provision for these
contingencies as of December 31, 2011 and 2012.



Dividend Policy



We have never declared
or paid any dividends on our ordinary shares. We do not anticipate paying any dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and expand our business.



Holders of our ADSs
are entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of
our Class A ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars, and the depositary will
distribute them to the holders of ADSs, after deducting its fees and expenses, according to the terms of the deposit agreement.
Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical.



84







|B. | Significant Changes
|-- | -------------------



Except as disclosed
elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this annual report.



|Item 9. | THE OFFER AND LISTING
|------- | ---------------------



|A. | Offering and Listing Details.
|-- | -----------------------------



Our ADSs are listed
on the New York Stock Exchange under the symbol “QIHU.” Every two ADSs represent three of our Class A ordinary
shares. For the period from March 30, 2011 to April 18, 2013, the trading price of our ADSs on the New York Stock Exchange
has ranged from $13.71 to $36.21 per ADS.



The following table
provides the high and low trading prices for our ADSs on the New York Stock Exchange for the periods specified.



|                                         |  | Sales Price ($) |      
|---------------------------------------- |  | --------------- | -----
|                                         |  | High            |      
|Annual High and Low                      |  |                 |      
|2011 (from March 30, 2011)               |  |                 | 36.21
|2012                                     |  |                 | 29.80
|                                         |  |                 |      
|Quarterly High and Low                   |  |                 |      
|First Quarter 2011 (from March 30, 2011) |  |                 | 36.21
|Second Quarter 2011                      |  |                 | 35.72
|Third Quarter 2011                       |  |                 | 26.08
|Fourth Quarter 2011                      |  |                 | 21.49
|First Quarter 2012                       |  |                 | 26.35
|Second Quarter 2012                      |  |                 | 26.18
|Third Quarter 2012                       |  |                 | 25.50
|Fourth Quarter 2012                      |  |                 | 29.80
|First Quarter 2013                       |  |                 | 34.90
|                                         |  |                 |      
|Monthly High and Low                     |  |                 |      
|October 2012                             |  |                 | 23.87
|November 2012                            |  |                 | 25.45
|December 2012                            |  |                 | 29.80
|January 2013                             |  |                 | 34.37
|February 2013                            |  |                 | 33.63
|March 2013                               |  |                 | 34.90
|April 2013 (through April 18, 2013)      |  |                 | 32.20



|B. | Plan of Distribution
|-- | --------------------



Not applicable.



|C. | Markets
|-- | -------



Our ADSs, every two representing three
of our Class A ordinary shares, have been listed on the New York Stock Exchange since March 30, 2011 under the symbol
“QIHU.”



|D. | Selling Shareholders
|-- | --------------------



Not applicable.



|E. | Dilution
|-- | --------



Not applicable.



85







|F. | Expenses of the Issue
|-- | ---------------------



Not applicable.



|Item 10. | ADDITIONAL INFORMATION
|-------- | ----------------------



|A. | Share Capital
|-- | -------------



Not applicable.



|B. | Memorandum and Articles of Association
|-- | --------------------------------------



We incorporate by
reference into this annual report our memorandum and articles of association filed as Exhibit 3.2 to our F-1 registration
statement (File No. 333-172816), as amended, initially filed with the Securities and Exchange Commission on March 14,
2011.



|C. | Material Contracts
|-- | ------------------



We have not entered
into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information
on the Company” or elsewhere in this annual report.



|D. | Exchange Controls
|-- | -----------------



See “Item 4.
Information on the Company — B. Business Overview — Regulation — Foreign Currency Exchange” and “—
Dividend Distribution.”



|E. | Taxation
|-- | --------



Cayman Islands Taxation



The Cayman Islands
currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation
in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government
of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or brought within, the jurisdiction
of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to
or by our company.  There is no exchange control legislation under Cayman Islands law and accordingly there are no exchange
control regulations imposed under Cayman Islands law.



People’s Republic of China Taxation



On March 16,
2007, the National People’s Congress, the PRC legislature, enacted the Enterprise Income Tax Law, which became effective
on January 1, 2008, and on December 6, 2007, the State Council promulgated the Implementation Rules to the Enterprise
Income Tax Law, or the Enterprise Income Tax Law Implementation Rules, which also became effective on January 1, 2008. Under
the Enterprise Income Tax Law and the Enterprise Income Tax Law Implementation Rules, foreign invested enterprises, and domestic
companies are subject to a uniform income tax rate of 25%, unless otherwise specified.



Under the Enterprise
Income Tax Law and the Implementation Rules to the Enterprise Income Tax Law, dividends payable to foreign investors are
subject to the PRC withholding tax at the rate of 10% unless the foreign investor’s jurisdiction of incorporation has a
tax treaty with the PRC that provides for a different withholding arrangement.



86







Under the Enterprise
Income Tax Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies”
located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate
of 25% on their worldwide income. The Enterprise Income Tax Law Implementation Rules define the term “de facto management
body” as the management body that exercises full and substantial control and management over the business, personnel, accounts
and properties of an enterprise. We may be considered a PRC resident enterprise for enterprise income tax purposes, in which case:
(i) we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income; (ii) dividend income
received by us from our PRC subsidiaries would be exempt from the PRC withholding tax since such income is exempted under the
Enterprise Income Tax Law for a PRC resident enterprise recipient; and (iii) dividends paid by us, and gains from the disposition
of our ordinary shares or ADSs, may be subject to PRC withholding taxes.



United States Federal Income Taxation



The following discussion
describes the material U.S. federal income tax consequences to U.S. Holders (as defined below) under current law
of an investment in the ADSs or the Class A ordinary shares to which such ADSs relate. This discussion applies only to U.S.
Holders that hold the ADSs or ordinary shares as capital assets (generally, property held for investment) and that have the U.S.
dollar as their functional currency.



This discussion is
based on the tax laws of the United States as of the date of this annual report, including U.S. Treasury regulations
in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations
thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively
and could affect the tax consequences described below.



The following discussion
neither deals with the tax consequences to any particular investor nor describes all of the tax consequences applicable to persons
in special tax situations such as:



| | · | banks;
| | - | ------



| | · | certain
                                                                                                         financial institutions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| | · | insurance
                                                                                                         companies;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | regulated
                                                                                                         investment companies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| | · | real
                                                                                                         estate investment trusts;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | · | broker-dealers;
| | - | ---------------



| | · | traders
                                                                                                         that elect to use mark-to-market
                                                                                                         method of accounting;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | U.S. expatriates
                                                                                                         or entities covered by
                                                                                                         U.S. anti-inversion tax
                                                                                                         rules;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | tax-exempt
                                                                                                         entities;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | persons
                                                                                                         liable for alternative
                                                                                                         minimum tax;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | persons
                                                                                                         holding an ADS or ordinary
                                                                                                         shares as part of a straddle,
                                                                                                         hedging, conversion or
                                                                                                         integrated transaction;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | persons
                                                                                                         that actually or constructively
                                                                                                         own 10% or more of the
                                                                                                         total combined voting
                                                                                                         power of all classes
                                                                                                         of our voting stock;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | persons
                                                                                                         who acquired ADSs or
                                                                                                         ordinary shares pursuant
                                                                                                         to the exercise of any
                                                                                                         employee share option
                                                                                                         or otherwise as compensation;
                                                                                                         or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | partnerships
                                                                                                         or pass-through entities,
                                                                                                         or persons holding ADSs
                                                                                                         or ordinary shares through
                                                                                                         such entities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, the discussion below does
not describe any tax consequences arising out of the 3.8% Medicare tax on “net investment income.”



87







INVESTORS ARE URGED TO CONSULT THEIR
TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE,
LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.



The discussion below
of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial
owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes:



| | · | an
                                                                                                         individual who is a citizen
                                                                                                         or resident of the United States;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                                                                                         corporation (or other
                                                                                                         entity taxable as a corporation
                                                                                                         for U.S. federal
                                                                                                         income tax purposes)
                                                                                                         created or organized
                                                                                                         in the United States
                                                                                                         or under the laws of
                                                                                                         the United States,
                                                                                                         any State thereof or
                                                                                                         the District of Columbia;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an
                                                                                                         estate, the income of
                                                                                                         which is subject to U.S. federal
                                                                                                         income taxation regardless
                                                                                                         of its source; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                                                                                         trust that (1) is
                                                                                                         subject to the primary
                                                                                                         supervision of a court
                                                                                                         within the United States
                                                                                                         and the control of one
                                                                                                         or more U.S. persons
                                                                                                         for all substantial decisions
                                                                                                         or (2) has a valid
                                                                                                         election in effect under
                                                                                                         applicable U.S. Treasury
                                                                                                         regulations to be treated
                                                                                                         as a U.S. person.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The discussion below
assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement
and any related agreement will be complied with in accordance with their terms. If you own ADSs, you should be treated as the
owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly,
deposits or withdrawals of ordinary shares for ADSs should not be subject to U.S. federal income tax. The U.S. Treasury
has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security
underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying security (for example,
pre-releasing ADSs to persons that do not have the beneficial ownership of the securities underlying the ADSs). Accordingly, the
creditability of any PRC taxes and the availability of the reduced tax rate for dividends received by non-corporate holders (as described
below) could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and our company
if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying ordinary shares.



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



Subject to the PFIC rules discussed
below, the gross amount of any distributions we make to you with respect to the ADSs or ordinary shares (including any amounts
withheld to reflect PRC withholding taxes) generally will be includible in your gross income as dividend income on the date of
receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution
is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles).
Any such dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received
from other U.S. corporations.



To the extent that
the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary
shares, and then, to the extent such excess amount exceeds your tax basis in your ADSs or ordinary shares, as capital gain. We
currently do not, and we do not intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore,
a U.S. Holder should expect that any distribution will generally be reported as a dividend even if that distribution would
otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.



88







With respect to certain
non-corporate U.S. Holders, including individual U.S. Holders, any dividends generally may be taxed at the lower capital
gains rate applicable to “qualified dividend income,” provided that (1) either (a) the ADSs or ordinary
shares, as applicable, are readily tradable on an established securities market in the United States or (b) we are eligible
for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program,
(2) we are neither a PFIC nor treated as such with respect to you (as discussed below) for the taxable year in which
the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. In addition, the
rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to
positions in substantially similar or related property. This disallowance applies even if the minimum holding period under clause (3) has
been met. Under U.S. Internal Revenue Service authority, ADSs will be considered for purposes of clause (1) above
to be readily tradable on an established securities market in the United States if they are listed on the New York Stock
Exchange, as our ADSs are expected to be. However, based on existing guidance, it is not entirely clear whether any dividends
that you receive with respect to the ordinary shares will be taxed as qualified dividend income, because the ordinary shares are
not themselves listed on a U.S. exchange. Furthermore, there can be no assurance that our ADSs will be considered readily
tradable on an established securities market in later years. If we are treated as a “resident enterprise” for PRC
tax purposes under the Enterprise Income Tax Law (see Item 3. Key Information—D. Risk Factors—Risks Related To Doing
Business In China— We may be subject to PRC taxation on our worldwide income.”), we may be eligible for the benefits
of the income tax treaty between the United States and the PRC. If we are eligible for such benefits, dividends we pay on our
ordinary shares, regardless of whether such shares are represented by ADSs, would be subject to the reduced rates of taxation.
You should consult your tax advisors regarding the availability of the lower capital gains rate applicable to qualified dividend
income for any dividends paid with respect to our ADSs or ordinary shares.



Any dividends we pay
generally will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified
dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign
tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable
to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, any dividends distributed
by us with respect to the ADSs or ordinary shares will generally constitute “passive category income” but could, in
the case of certain U.S. Holders, constitute “general category income.”



If PRC withholding
taxes apply to any dividends paid to you with respect to our ADSs or ordinary shares (see “Item 3. Key Information—D.
Risk Factors—Risks Related To Doing Business In China— Dividends we receive from our PRC subsidiaries, dividends payable
by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC tax laws.”),
the amount of the dividends would include the withheld PRC taxes and, subject to certain conditions and limitations (including
a minimum holding period requirement), such PRC withholding taxes generally will be treated as foreign taxes eligible for credit
against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are
complex and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances,
including the effects of any applicable income tax penalties.



Taxation of Disposition of ADSs
or Ordinary Shares



Subject to the PFIC
rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS
or ordinary share equal to the difference between the amount realized for the ADS or ordinary share and your tax basis in the
ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, including
an individual U.S. Holder, that has held the ADS or ordinary share for more than one year, you may be eligible for reduced
tax rates. The deductibility of capital losses is subject to limitations.



Any gain or loss that
you recognize on a disposition of ADSs or ordinary shares will generally be treated as U.S. source income or loss for foreign
tax credit limitation purposes. However, if we are treated as a “resident enterprise” for PRC tax purposes, we may
be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC tax were
to be imposed on any gain from the disposition of the ADSs or ordinary shares (see “Item 3. Key Information—D. Risk
Factors—Risks Related To Doing Business In China— Dividends we receive from our PRC subsidiaries, dividends payable
by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC tax laws.”),
a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect
to treat the gain as PRC source income for foreign tax credit purposes. If we are not eligible for the tax treaty, then you may
not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless
such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign
sources. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances,
including the effects of any applicable income tax treaties.



Passive Foreign Investment Company



Based on the market
price of our ADSs, the current and anticipated value of our assets, including goodwill, and composition of our income and assets,
we do not believe we were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2012. However,
the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that we will not
be a PFIC for any taxable year or that the U.S. Internal Revenue Service will not take a contrary position.



89







A non-U.S. corporation
will be a PFIC for U.S. federal income tax purposes for any taxable year if, applying certain look-through rules, either:



| | · | at
                                                                                                         least 75% of its gross
                                                                                                         income for such year
                                                                                                         is passive income; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | at
                                                                                                         least 50% of the value
                                                                                                         of its assets (based
                                                                                                         on an average of the
                                                                                                         quarterly values of the
                                                                                                         assets) during such year
                                                                                                         is attributable to assets
                                                                                                         that produce passive
                                                                                                         income or are held for
                                                                                                         the production of passive income.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Passive income generally
includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or
business and not derived from a related person).



For this purpose,
we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In applying this rule, while it
is not clear, we believe that the contractual arrangements between us and our affiliated entities should be treated as ownership
of stock.



A separate determination
must be made after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we cannot assure you
that we will not be a PFIC for our current taxable year ending December 31, 2013, or any future taxable year. Because the
value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs or
ordinary shares, fluctuations in the market price of the ADSs or ordinary shares may cause us to become a PFIC. In addition, changes
in the composition of our income or assets may cause us to become a PFIC.



If we are a PFIC for
any taxable year during which you hold ADSs or ordinary shares, we generally will continue to be treated as a PFIC with respect
to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a “deemed
sale” election with respect to the ADSs or ordinary shares. If such election is timely made, you will be deemed to have
sold the ADSs or ordinary shares you hold at their fair market value on the last day of the last taxable year in which were a
PFIC and any gain from such deemed sale would be subject to the consequences described in the following two paragraphs. In addition,
a new holding period would be deemed to begin for the ADSs or ordinary shares for purposes of the PFIC rules. After the deemed
sale election, your ADSs or ordinary shares with respect to which the deemed sale election was made will not be treated as shares
in a PFIC unless we subsequently become a PFIC.



For each taxable year
that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you recognize from a sale or other disposition (including a pledge) of the ADSs
or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a
taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding
taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special
tax rules:



| | · | the
                                                                                                         excess distribution or
                                                                                                         recognized 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 years
                                                                                                         in your holding period
                                                                                                         prior to the first taxable
                                                                                                         year in which we were
                                                                                                         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
                                                                                                         individuals or corporations,
                                                                                                         as applicable, for each
                                                                                                         such year and the interest
                                                                                                         charge generally applicable
                                                                                                         to underpayments of tax
                                                                                                         will be imposed on the
                                                                                                         resulting tax attributable
                                                                                                         to each such year.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, non-corporate
U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us (as described above
under “—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares”) if we are a PFIC in the
taxable year in which such dividends are paid or in the preceding taxable year.



90







The tax liability
for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating
losses for such years, and gains (but not losses) realized on the sale or other disposition of the ADSs or ordinary shares
cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.



If we are treated
as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or
indirect equity investments in other entities that are PFICs, you may be deemed to own shares in such lower-tier PFICs that are
directly or indirectly owned by us in that proportion which the value of the ADSs or ordinary shares you own bears to the value
of all of our ADSs or ordinary shares, and you may be subject to the adverse tax consequences described in the preceding two paragraphs
with respect to the shares of such lower-tier PFICs that you would be deemed to own. You should consult your tax advisors regarding
the application of the PFIC rules to any of our subsidiaries.



A U.S. Holder
of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect
out of the PFIC rules described above regarding excess distributions and recognized gains. If you make a mark-to-market election
for the ADSs or ordinary shares, you will include in income for each year that we are a PFIC an amount equal to the excess, if
any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in
such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary
shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent
of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included
in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary
shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market
loss on the ADSs or ordinary shares, as well as to any loss realized on the actual sale or other disposition of the ADSs or ordinary
shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs
or ordinary shares. Your basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. If
you make a mark-to-market election, any distributions that we make would generally be subject to the tax rules discussed
above under “—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares,” except that the
lower rate applicable to qualified dividend income would not apply.



The mark-to-market
election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange
or other market, as defined in applicable U.S. Treasury regulations. We expect that our ADSs will be listed on the New York
Stock Exchange, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs are listed on New York
Stock Exchange and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election would be available
to you if we were to become a PFIC. It should also be noted that only the ADSs and not our ordinary shares are expected to
be listed on the New York Stock Exchange. Consequently, if you are a holder of ordinary shares that are not represented by
ADSs, it is not entirely clear whether you will be eligible to make a mark-to-market election if we are or become a PFIC. In addition,
because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder
may continue to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are
treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax advisors as to
the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier
PFICs.



Alternatively, if
a non-U.S. corporation is a PFIC, a holder of shares in that corporation may avoid taxation under the PFIC rules described
above regarding excess distributions and recognized gains by making a “qualified electing fund” election to include
in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund election
with respect to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax information, and we currently
do not intend to prepare or provide such information.



Under newly enacted
legislation, unless otherwise provided by the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual
report containing such information as the U.S. Treasury may require. If we are or become a PFIC, you should consult your
tax advisor regarding any reporting requirements that may apply to you.



You should consult
your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares and the elections
discussed above.



91







Information reporting and backup withholding



Any dividend payments with respect to ADSs
or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply,
however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification
or that is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally
must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders should consult their tax
advisors regarding the application of the U.S. information reporting and backup withholding rules.



Backup withholding is not an additional
tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain
a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with
the U.S. Internal Revenue Service and furnishing any required information in a timely manner.



Certain U.S. Holders
who are individuals may be required to report information relating to an interest in our ADSs or ordinary shares, subject to certain
exceptions (including an exception for ADSs or ordinary shares held in accounts maintained by certain financial institutions).
U.S. Holders should consult their tax advisors regarding the effect, if any, of these rules on their ownership and disposition
of the ADSs or ordinary shares.



U.S. Holders should
consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.



|F. | Dividends and Paying Agents
|-- | ---------------------------



Not applicable.



|G. | Statement by Experts
|-- | --------------------



Not applicable.



|H. | Documents on Display
|-- | --------------------



We have previously
filed with the Commission our registration statements on Form F-1 (File Number 333-172816), as amended.



We are subject to
the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file
reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months
after the end of each fiscal year for fiscal years ending on or after December 15, 2011. Copies of reports and other information,
when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained
by the Securities and Exchange Commission at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549, and at the regional
office of the Securities and Exchange Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at
1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements,
and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and
proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.



We will furnish The
Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual
audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings
and other reports and communications that are made generally available to our shareholders. The depositary will make such notices,
reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information
contained in any notice of a shareholders’ meeting received by the depositary from us.



92







In accordance with
the New York Stock Exchange Rules 203.01, we will post this annual report on Form 20-F on our website http://www.360.cn.
In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.



|I. | Subsidiary Information
|-- | ----------------------



For a listing of our
subsidiaries, see “Item 4. Information on the Company — C. Organizational Structure”.



| | Item 11. | QUANTITATIVE
                                                                                                AND QUALITATIVE DISCLOSURES ABOUT
                                                                                                MARKET RISK
| | -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Inflation



Inflation in China
has not materially impacted our results of operations. However, China has recently experienced a significant increase in inflation
levels, which may materially impact our results of operations. According to the National Bureau of Statistics of China, the consumer
price index in China increased by 3.3%, 5.4% and 2.6% year-over-year for the years ended December 31, 2010, 2011 and 2012.



Foreign Exchange Risk



Substantially all
of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash
and cash equivalents denominated in U.S. dollars as a result of our past issuances of preferred shares through private placement
transactions and proceeds from our initial public offering. We do not believe that we currently have any significant direct foreign
exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Although
we believe our exposure to foreign exchange risks is limited, the value of your investment in our ADSs will be affected by the
foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while
the ADSs will be traded in U.S. dollars.



The value of the RMB
against the U.S. dollar and other currencies may fluctuate depending on many factors, including changes in China’s
political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based
on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the
value of the RMB to the U.S. dollar. Under the revised policy, the RMB may fluctuate within a narrow and managed band against
a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the
U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range
against the U.S. dollar.



There remains significant
international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more
significant appreciation of the RMB against foreign currencies. On June 20, 2010, the People’s Bank of China announced
that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Between June
20, 2010 and December 31, 2012, the RMB appreciated by approximately 9.1% against the U.S. dollar.



To the extent that
we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of
the RMB against the U.S. dollar would adversely affect the RMB amount we receive from the conversion. Our U.S. dollar
denominated cash balance was $24.4 million, $55.8 million and $122.6 million as of December 31, 2010, 2011 and 2012,
respectively. A 1.0% increase in the value of the RMB against the U.S. dollar would have decreased this U.S. dollar
denominated cash balance by RMB1.6 million, RMB3.5 million and RMB7.6 million as of December 31, 2010, 2011 and 2012, respectively.



Interest Rate Risk



Our exposure to interest
rate risk primarily relates to the interest income generated by cash in bank deposits. We have not used any derivative financial
instruments to manage our interest risk exposure. Interest earning instruments carry a degree of interest rate risk. We have not
been exposed to material risks due to changes in interest rates. An increase in interest rates, however, may raise the cost of
any debt we incur in the future. In addition, our future interest income may be lower than expected due to changes in market interest rates.



93







A 1.0% decrease in
interest rates would have decreased our interest income for the year ended December 31, 2012 from $6.7 million to $3.5 million.



|Item 12. | DESCRIPTION OF SECURITIES OTHER
    THAN EQUITY SECURITIES
|-------- | ----------------------------------------------------------



|A. | Debt Securities
|-- | ---------------



Not applicable.



|B. | Warrants and Rights
|-- | -------------------



Not applicable.



|C. | Other Securities
|-- | ----------------



Not applicable.



|D. | American Depositary Shares
|-- | --------------------------



According to our Deposit Agreement with
our ADS depositary, The Bank of New York Mellon, the depositary collects its fees for issuance and cancellation of ADSs directly
from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The
depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling
a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction
from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting
for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.



|Persons depositing or withdrawing Class A ordinary
    shares or ADS holders must pay:                                                                                                                              |  | For: |                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)                                                                                                                                                               |  | ·    | Issuance of ADSs, including issuances resulting from a distribution
    of ordinary shares or rights or other property                                                                             
|                                                                                                                                                                                                                    |  | ·    | Cancellation of ADSs for the purpose of withdrawal, including if
    the deposit agreement terminates                                                                                              
|$.05 (or less) per ADS                                                                                                                                                                                              |  | ·    | Any cash distribution to ADS holders                                                                                                                                                               
|A fee equivalent to the fee that would be payable if securities
    distributed to you had been Class A ordinary shares and the Class A ordinary shares had been deposited for issuance
    of ADSs                 |  | ·    | Distribution of securities distributed to holders of deposited
    securities which are distributed by the depositary to ADS holders                                                               
|$.05 (or less) per ADSs per calendar year                                                                                                                                                                           |  | ·    | Depositary services                                                                                                                                                                                
|Registration or transfer fees                                                                                                                                                                                       |  | ·    | Transfer and registration of Class A ordinary shares on our
    ordinary share register to or from the name of the depositary or its agent when you deposit or withdraw Class A ordinary
    shares
|Expenses of the depositary                                                                                                                                                                                          |  | ·    | Cable, telex and facsimile transmissions (when expressly provided
    in the deposit agreement)                                                                                                    
|                                                                                                                                                                                                                    |  | ·    | converting foreign currency to U.S. dollars                                                                                                                                                        
|Taxes and other governmental charges the depositary or the custodian
    have to pay on any ADS or Class A ordinary share underlying an ADS, for example, stock transfer taxes, stamp duty or
    withholding taxes |  | ·    | As necessary                                                                                                                                                                                       
|Any charges incurred by the depositary or its agents for servicing
    the deposited securities                                                                                                                     |  | ·    | As necessary                                                                                                                                                                                       



The fees described above may be amended
from time to time.



94







The depositary has agreed to reimburse
us for expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses
and stock exchange application and listing fees. There are limits on the amount of expenses for which the depositary will reimburse
us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors.
We did not receive any payments or reimbursements from the depositary in 2012.



PART II



| | Item 13. | DEFAULTS,
                                                                                                DIVIDEND ARREARAGES AND DELINQUENCIES
| | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------



None.



Item 14. MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS



See “Item 10. Additional Information”
for a description of the rights of securities holders, which remain unchanged.



Use of Proceeds



The following “Use
of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-172816) for
our initial public offering of 13,927,420 ADSs, representing 20,891,130 Class A ordinary shares, which registration statement
was declared effective by the SEC on March 29, 2011.



For the period from
the effective date of our registration statement to December 31, 2012, we estimate that our expenses incurred and paid to
others in connection with the issuance and distribution of the ADSs totaled $20.4 million, which included $17.6 million for underwriting
discounts and commissions and $2.8 million for other expenses. We received net proceeds of approximately $231.5 million from our
initial public offering.



For the period from
the effective date our registration statement to December 31, 2012, we used, from the proceeds of our initial public offering,
approximately $80.0 million for the enhancement of our R&D capabilities to further develop technologies and the development
of new Internet and mobile security products and services.



| | Item 15. | CONTROLS
                                                                                                AND PROCEDURES
| | -------- | -----------------------------------------------------------------------------------------------------------------------



Disclosure Controls and Procedures



Under the supervision
and with the participation of our management, including our chief executive officer and our chief financial officers, we carried
out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of
the Exchange Act, as of December 31, 2012. Based on that evaluation, our chief executive officer and chief financial officers
concluded that our disclosure controls and procedures as of December 31, 2012 were effective.



Management’s Annual Report on
Internal Control over Financial Reporting



Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements
in accordance with U.S. GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that
our receiptsand expenditures are being made only in accordance with authorizations of our management or our board of directors,
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on our interim or annual consolidated financial statements.



95







Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.



Our management,
including our chief executive officer and chief financial officers, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2012. Based on its assessment, our management concluded that, as of the end of our
most recent fiscal year, the year ended December 31, 2012, our internal control over financial reporting was effective based
on the above criteria.



Our independent registered
public accounting firm, Deloitte Touche Tohmatsu Certified Public Accountants LLP, who audited the financial statements included
in this annual report on Form 20-F, has issued an attestation report on our internal control over financial reporting.



Changes in Internal Controls
Over Financial Reporting



A material weakness
was disclosed in our Form 20-F for 2011 which primarily related to lack of sufficient accounting personnel with appropriate knowledge
of U.S. GAAP.



We have taken the
following remedial measures to address this material weakness:



| | (i) | We have hired three additional accounting
                                                               personnel with solid knowledge of U.S. GAAP and experience in SEC
                                                               reporting, including one who has passed all parts of the U.S. Uniform CPA Examination.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Ourfinance teamattended internal
                                                                                                  workshops and external training
                                                                                                  seminars to stay current with U.S GAAP
                                                                                                  and SEC reporting requirements.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | We have hired additional internal
                                                                 audit personnel with experience working at public companies listed
                                                                 in the U.S.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | In
                                                                                                        July 2012, we recruited
                                                                                                        a new internal audit manager
                                                                                                        with solid experience
                                                                                                        in U.S. GAAP and Sarbanes-Oxley
                                                                                                        compliance.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | In
                                                                                                        December 2012, we recruited
                                                                                                        a new internal audit director,
                                                                                                        with Certified Internal
                                                                                                        Auditor qualification,
                                                                                                        knowledge and professional
                                                                                                        experience in U.S. GAAP
                                                                                                        and internal auditing.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31,
2012, our management concluded that the aforementioned material weakness had been remediated. Except for the remedial measures
described above, there have been no significant changes in our internal control over financial reporting during the year ended
December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of Qihoo 360
Technology Co. Ltd.



We have audited the internal control over
financial reporting of Qihoo 360 Technology Co. Ltd. (the "Company"), and its subsidiaries, its variable interest entities
("VIEs") and VIEs' subsidiaries (collectively, the "Group") as of December 31, 2012, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Group's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group's internal control
over financial reporting based on our audit.



We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A company's internal control over financial
reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers,
or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.





96







Because of the inherent limitations of internal
control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the Group maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial
statement schedule as of and for the year ended December 31, 2012 of the Group and our report dated April 19, 2013 expressed
an unqualified opinion on those consolidated financial statements and financial statement schedule, and included an explanatory
paragraph regarding the Group' s adoption of the authoritative guidance on the presentation of comprehensive income.



/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP



Beijing, the People's Republic of China

April 19, 2013







|Item 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------



Mr. Shujun Li
qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F. All the members of our
audit committee, namely, Messrs. Shujun Li and Ming Huang and Ms. Wenjiang Chen, satisfy the “independence”
requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under
the Exchange Act.





|Item 16B. | CODE OF ETHICS
|--------- | --------------



Our board of directors
has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that
specifically apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer,
vice presidents and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics
as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-172816) filed with the Securities and Exchange
Commission on March 29, 2011 and posted the code on our website http://www.360.cn. We hereby undertake to provide to any
person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s
written request.



97







|Item 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------



At the direction of
the government of the People’s Republic of China in accordance with the Scheme of the Localization Restructuring of Chinese-Foreign
Cooperative Accounting Firms, Deloitte Touche Tohmatsu CPA Limited has restructured to a new partnership and changed its name
to Deloitte Touche Tohmatsu Certified Public Accountants LLP, effective from January 1, 2013. Deloitte Touche Tohmatsu Certified
Public Accountants LLP has succeeded Deloitte Touche Tohmatsu CPA Limited for all purposes and assumed all of the obligations
and rights of Deloitte Touche Tohmatsu CPA Limited with effect from January 1, 2013.



The following table
sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte
Touche Tohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated.



|                       |  | 2011 |         |  | 2012 |  
|---------------------- |  | ---- | ------- |  | ---- | -
|Audit fees (1)         |  | $    | 867,000 |  |      | $
|Audit-related fees (2) |  | $    | 220,000 |  |      | $
|Tax fees (3)           |  | $    | 205,000 |  |      | $












(1)             “Audit
fees” means the aggregate fees billed for each of the fiscal years for professional services rendered by our principal accountant
for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years.



(2)             “Audit-related
fees” means the aggregate fees billed in each of the fiscal years for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit
fees.” the fees disclosed under the category of “Audit-related fees” principally relate to issuing a comfort
letter and, providing listing advice in connection with our public offering in April 2011.



(3)             “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.



The policy of our
audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public Accountants
LLP, including audit services, audit-related services, tax services and other services as described above.



| | Item 16D. | EXEMPTIONS
                                                                                                 FROM THE LISTING STANDARDS FOR
                                                                                                 AUDIT COMMITTEES
| | --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Not applicable.



Item 16E.                         PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED   PURCHASERS



In January 2012,
our board of directors and shareholders approved a share repurchase program, which provided authorization to purchase up to $50
million worth of our outstanding ADSs.  The following table sets forth the number of ADSs we purchased, as well as the aggregate
consideration for the purchase (including transaction fees), through open-market transactions since the inception of the program.
As of March 31, 2013, we have repurchased 14,544 of our Class A ordinary shares under this share repurchase program.



98







|Issuer Purchases of Equity
    Securities
|-----------------------------------------
|Period                                   
|July 2012                                
|August 2012                              



|Item 16F. | CHANGE IN REGISTRANT’S CERTIFYING
    ACCOUNTANT
|--------- | ------------------------------------------------



Not applicable.



|Item 16G. | CORPORATE GOVERNANCE
|--------- | --------------------



We intend to follow
the applicable corporate governance standards under the New York Stock Exchange Listed Company Manual.



NYSE Listed Company
Manual Section 302.00 requires each issuer to hold an annual meeting of shareholders during each fiscal year. However, NYSE
Listed Company Manual permits foreign private issuers like us to follow “home country practice” in certain corporate
governance matters. Our Cayman Islands counsel has provided a letter to the NYSE certifying that under Cayman Islands law, we
are not required to hold annual shareholder meetings every year. We follow home country practice with respect to annual meetings
and did not hold an annual meeting of shareholders in 2012. We may, however, hold annual shareholder meetings in the future if
there are significant issues that require shareholders’ approvals.



Other than the annual
meeting practice described above, there are no significant differences between our corporate governance practices and those followed
by U.S. domestic companies under NYSE Listed Company Manual.



PART III



|Item 17. | FINANCIAL STATEMENTS
|-------- | --------------------



We have elected to provide financial statements
pursuant to Item 18.



|Item 18. | FINANCIAL STATEMENTS
|-------- | --------------------



The consolidated financial statements of
Qihoo 360, its subsidiaries, its VIEs and the VIEs’ subsidiaries are included at the end of this annual report.



|Item 19. | EXHIBITS
|-------- | --------



|1.1 |  | Amended and Restated Memorandum
    and Articles of Association of Qihoo 360 Technology Co. Ltd., as currently in effect (incorporated by reference to Exhibit 3.1
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                  
|2.1 |  | Specimen American Depositary Receipt
    of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (File
    No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                            
|    |  |                                                                                                                                                                                                                                                                                                                  
|2.2 |  | Specimen Certificate for Class A
    ordinary shares of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.2 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                
|    |  |                                                                                                                                                                                                                                                                                                                  
|2.3 |  | Form of Deposit Agreement, among
    Qihoo 360 Technology Co. Ltd., the depositary and holder of the American Depositary Receipts (incorporated by reference to
    Exhibit 4.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission
    on March 14, 2011)



99







|4.1  |  | 2006 Employee Share Option
    Scheme (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-172816), as
    amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.2  |  | 2006 Employee Share Vesting Scheme
    (incorporated by reference to Exhibit 10.2 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.3  |  | Form of Employment Agreement (incorporated
    by reference to Exhibit 10.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.4  |  | Form of Indemnification Agreement
    (incorporated by reference to Exhibit 10.4 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.5  |  | Share Subscription Agreement dated
    December 22, 2009 by and among Qihoo 360 Technology Co. Ltd., Qizhi Software (Beijing) Co., Ltd., Beijing 3G3W
    Science & Technology Co., Ltd., Beijing Qibu Tianxia Technology Co., Ltd., Beijing Qihu Technology
    Company Limited, Qihoo 360 Software (Beijing) Company Limited, Shanghai Qitai Technology Company Limited, Beijing Star
    World Technology Company Limited, Chengdu Qiying Technology Company Limited and the investors named in schedule I thereto
    (incorporated by reference to Exhibit 10.5 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.6  |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P.
    dated April 26, 2010 (incorporated by reference to Exhibit 10.6 from our F-1 registration statement (File No. 333-172816),
    as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.7  |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures
    II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.7 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.8  |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P.
    dated April 26, 2010 (incorporated by reference to Exhibit 10.8 from our F-1 registration statement (File No. 333-172816),
    as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.9  |  | Acknowledgement and Agreement of Ceyuan
    Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.9 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.10 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund
    II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.10 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.11 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors
    Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.11 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.12 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund
    II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.12 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.13 |  | Acknowledgement and Agreement of Ceyuan
    Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.13 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                  



100







|4.14 |  | Joinder Agreement to the
    Share Subscription Agreement, Shareholders’ Agreement, Registration Rights Agreement and Share Incentive Agreement among
    Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and IDG Technology Venture Investment IV, LP
    dated April 26, 2010 (incorporated by reference to Exhibit 10.14 from our F-1 registration statement (File No. 333-172816),
    as amended, initially filed with the Commission on March 14, 2011)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.15 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.15 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.16 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital
    China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.16 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.17 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.17 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.18 |  | Acknowledgement and Agreement of Sequoia
    Capital China Principals Fund I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.18 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.19 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.19 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.20 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital
    China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.20 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.21 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.21 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.22 |  | Acknowledgement and Agreement of Sequoia
    Capital China Partners Fund I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.22 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.23 |  | Google Linking Agreement between Google
    Ireland Limited and Beijing Qihu Technology Company Limited dated December 1, 2008 (incorporated by reference to Exhibit 10.23
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.24 |  | Novation Agreement among Google Ireland
    Limited, Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated May 1, 2009 (incorporated
    by reference to Exhibit 10.24 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.25 |  | Amendment One to Google Linking Agreement
    between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated July 1, 2009 (incorporated by reference
    to Exhibit 10.25 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the
    Commission on March 14, 2011)                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.26 |  | Amendment Two to Google Linking Agreement
    between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated December 1, 2009 (incorporated
    by reference to Exhibit 10.26 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                                                                                                                                                    



101







|4.27 |  | Amendment Three to Google
    Linking Agreement between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated February 1, 2010
    (incorporated by reference to Exhibit 10.27 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                           
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.28 |  | Amendment Four to Google Linking Agreement
    between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated April 1, 2010 (incorporated by
    reference to Exhibit 10.28 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                               
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.29 |  | Google Linking Agreement between Google
    Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated October 1, 2009 (incorporated by reference to
    Exhibit 10.29 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission
    on March 14, 2011)                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.30 |  | Novation Agreement among Google Ireland
    Limited, Qizhi Software (Beijing) Co., Ltd. and Beijing Qihu Technology Company Limited dated September 1,
    2010 (incorporated by reference to Exhibit 10.30 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)            
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.31 |  | Amendment One to Google Linking Agreement
    between Google Ireland Limited and Beijing Qihu Technology Company Limited dated October 1, 2010 (incorporated by reference
    to Exhibit 10.31 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the
    Commission on March 14, 2011)                         
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.32 |  | English translation of Technology Development
    Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated May 1,
    2008 (incorporated by reference to Exhibit 10.32 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)     
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.33 |  | English translation of Technology Development
    Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated October 20,
    2008 (incorporated by reference to Exhibit 10.33 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.34 |  | English translation of Technology Development
    Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated March 15,
    2009 (incorporated by reference to Exhibit 10.34 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)  
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.35 |  | English translation of Loan Agreement
    among Qihoo Technology Company Limited and Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.35
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.36 |  | English translation of Loan Agreement
    among Qihoo Technology Company Limited and Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.36
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.37 |  | English translation of Loan Agreement
    among Qihoo Technology Company Limited and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.37
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                          
|4.38 |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong and Xiaohong Shi dated October 18,
    2010 (incorporated by reference to Exhibit 10.38 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)       



102







|4.39 |  | English translation of
    Equity Disposition Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong, Xiaohong Shi
    and Beijing Qihu Technology Company Limited dated October 18, 2010 (incorporated by reference to Exhibit 10.39 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                        
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.40 |  | English translation of Business Operation
    Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Qihu Technology Company Limited, Xiangdong Qi, Jianming
    Dong and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.40 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.41 |  | English translation of Supplementary
    Agreement to the Technology Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu
    Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated June 1, 2010 (incorporated by reference
    to Exhibit 10.45 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the
    Commission on March 14, 2011)                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.42 |  | English translation of Supplementary
    Agreement to the Technology Development Agreement with respect to the Advertisement Union Agency Management Information System
    between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated September 1, 2010
    (incorporated by reference to Exhibit 10.46 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.43 |  | English translation of Confirmation
    Letter between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated November 1,
    2010 (incorporated by reference to Exhibit 10.47 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.44 |  | English translation of Power of Attorney
    issued by Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.48 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.45 |  | English translation of Power of Attorney
    issued by Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.49 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.46 |  | English translation of Power of Attorney
    issued by Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.50 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



103







|4.47  |  | Supplementary Subscription, Amendment and Adherence
    Agreement relating to Qihoo Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.54 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)   
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.48  |  | Adherence and Amendment to the Shareholders Agreement relating
    to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.55 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)       
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.49  |  | Adherence and Amendment to the Registration Rights Agreement relating
    to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.56 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.50  |  | Adherence and Amendment to the Share Incentive Agreement relating
    to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.57 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)    
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.51  |  | Share Subscription Agreement dated March 14, 2011 (incorporated
    by reference to Exhibit 10.58 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with
    the Commission on March 14, 2011)                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.52  |  | Registration Rights Agreement dated March 14, 2011 (incorporated
    by reference to Exhibit 10.59 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with
    the Commission on March 14, 2011)                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.53  |  | 2011 Share Incentive Plan (incorporated by reference to Exhibit
    10.60 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March
    14, 2011)                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.54* |  | Termination Agreement dated November 2, 2012 between Beijing Qihu
    Technology Co., Ltd. and Google Ireland Limited                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.55* |  | Purchase Agreement for Floors One to Four of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd.                                                                                    
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.56* |  | Purchase Agreement for Floors Five to Nineteen of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qifei Xiangyi (Beijing) Software Co., Ltd.                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.57* |  | Purchase Agreement for Ground Floor of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd.                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.58* |  | Purchase Agreement for Floors Two to Seventeen of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qizhi Software (Beijing) Co., Ltd.                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.59* |  | English translation of Supplementary Agreement to the Technology
    Development Agreement with respect to the Advertisement Union Agency Management Information System between Beijing Qihu Technology
    Company Limited and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011                             
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.60* |  | English translation of Supplementary Agreement to the Technology
    Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu Technology Company Limited
    and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011                                                     
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.61* |  | English translation of Business Operation Agreement among Qizhi
    Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhenyu Xie, Jianming Dong and Zhengyu Chen dated December
    17, 2009                                                                                                     





104









|4.62* |  | English translation of
    Exclusive Technology Consultancy and Service Agreement among Qizhi Software (Beijing) Co., Ltd. and Beijing Star
    World Technology Co., Ltd dated October 12, 2009              
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                               
|4.63* |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012                                                                            
|      |  |                                                                                                                                                                                                               
|4.64* |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012                                                                             
|      |  |                                                                                                                                                                                                               
|4.65* |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012                                                                               
|      |  |                                                                                                                                                                                                               
|4.66* |  | English translation of Equity Disposition
    Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhengyu Xie, Jianming
    Dong and Zhengyu Chen dated April 26, 2012
|      |  |                                                                                                                                                                                                               
|4.67* |  | English translation of Loan Agreement
    among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012                                                                                     
|      |  |                                                                                                                                                                                                               
|4.68* |  | English translation of Loan Agreement
    among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012                                                                                      
|      |  |                                                                                                                                                                                                               
|4.69* |  | English translation of Loan Agreement
    among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012                                                                                        
|      |  |                                                                                                                                                                                                               
|4.70* |  | English translation of Power of Attorney
    issued by Jianming Dong to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009                                                                             
|      |  |                                                                                                                                                                                                               
|4.71* |  | English translation of Power of Attorney
    issued by Zhengyu Chen to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009                                                                              
|      |  |                                                                                                                                                                                                               
|4.72* |  | English translation of Power of Attorney
    issued by Zhenyu Xie to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009                                                                                
|      |  |                                                                                                                                                                                                               
|4.73* |  | English translation of Spousal Consent
    Letter issued by Chunxia He dated October 18, 2010                                                                                                                 
|      |  |                                                                                                                                                                                                               
|4.74* |  | English translation of Spousal Consent
    Letter issued by Xun Guo dated October 18, 2010                                                                                                                    
|      |  |                                                                                                                                                                                                               
|4.75* |  | English translation of Spousal Consent
    Letter issued by Jianxin Gao dated October 18, 2010                                                                                                                
|      |  |                                                                                                                                                                                                               
|4.76* |  | English translation of Spousal Consent
    Letter issued by Chunxia He dated April 26, 2012                                                                                                                   
|      |  |                                                                                                                                                                                                               
|4.77* |  | English translation of Spousal Consent
    Letter issued by Lie Deng dated April 26, 2012                                                                                                                     
|      |  |                                                                                                                                                                                                               
|4.78* |  | English translation of Spousal Consent
    Letter issued by Chunchao Zheng dated April 26, 2012                                                                                                               
|      |  |                                                                                                                                                                                                               





105







|8.1*  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                              
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                             
|11.1  |  | Code of Business Conduct and Ethics
    of Qihoo 360 Technology Company Limited (incorporated by reference to Exhibit 99.1 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
|      |  |                                                                                                                                                                                                                                                             
|12.1* |  | CEO Certification Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                             
|12.2* |  | Co-CFO Certification Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|12.3* |  | Co-CFO Certification Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|13.1* |  | CEO Certification Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                             
|13.2* |  | Co-CFO Certification Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|13.3* |  | Co-CFO Certification Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|15.1* |  | Consent of Deloitte Touche Tohmatsu
    Certified Public Accountants LLP                                                                                                                                                                                    












* Filed with this annual report on Form 20-F.



106







SIGNATURES



The registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.



|                     | Qihoo 360 Technology Co. Ltd.
|-------------------- | -----------------------------
|                     |                              
|                     | By:                          
|                     |                              
|                     |                              
|                     |                              
|Date: April 19, 2013 |                              



107







EXHIBIT INDEX





|1.1 |  | Amended and Restated Memorandum
    and Articles of Association of Qihoo 360 Technology Co. Ltd., as currently in effect (incorporated by reference to Exhibit 3.1
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2.1 |  | Specimen American Depositary Receipt
    of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (File
    No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2.2 |  | Specimen Certificate for Class A
    ordinary shares of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.2 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2.3 |  | Form of Deposit Agreement, among
    Qihoo 360 Technology Co. Ltd., the depositary and holder of the American Depositary Receipts (incorporated by reference to
    Exhibit 4.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission
    on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                     
|4.1 |  | 2006 Employee Share Option
    Scheme (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-172816), as
    amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.2 |  | 2006 Employee Share Vesting Scheme
    (incorporated by reference to Exhibit 10.2 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.3 |  | Form of Employment Agreement (incorporated
    by reference to Exhibit 10.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.4 |  | Form of Indemnification Agreement
    (incorporated by reference to Exhibit 10.4 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.5 |  | Share Subscription Agreement dated
    December 22, 2009 by and among Qihoo 360 Technology Co. Ltd., Qizhi Software (Beijing) Co., Ltd., Beijing 3G3W
    Science & Technology Co., Ltd., Beijing Qibu Tianxia Technology Co., Ltd., Beijing Qihu Technology
    Company Limited, Qihoo 360 Software (Beijing) Company Limited, Shanghai Qitai Technology Company Limited, Beijing Star
    World Technology Company Limited, Chengdu Qiying Technology Company Limited and the investors named in schedule I thereto
    (incorporated by reference to Exhibit 10.5 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.6 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P.
    dated April 26, 2010 (incorporated by reference to Exhibit 10.6 from our F-1 registration statement (File No. 333-172816),
    as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.7 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures
    II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.7 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.8 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P.
    dated April 26, 2010 (incorporated by reference to Exhibit 10.8 from our F-1 registration statement (File No. 333-172816),
    as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.9 |  | Acknowledgement and Agreement of Ceyuan
    Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.9 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                       





108







|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.10 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund
    II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.10 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.11 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors
    Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.11 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.12 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund
    II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.12 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.13 |  | Acknowledgement and Agreement of Ceyuan
    Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.13 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.14 |  | Joinder Agreement to the
    Share Subscription Agreement, Shareholders’ Agreement, Registration Rights Agreement and Share Incentive Agreement among
    Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and IDG Technology Venture Investment IV, LP
    dated April 26, 2010 (incorporated by reference to Exhibit 10.14 from our F-1 registration statement (File No. 333-172816),
    as amended, initially filed with the Commission on March 14, 2011)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.15 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.15 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.16 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital
    China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.16 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.17 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.17 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.18 |  | Acknowledgement and Agreement of Sequoia
    Capital China Principals Fund I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.18 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.19 |  | Joinder Agreement to the Share Subscription
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.19 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.20 |  | Joinder Agreement to the Registration
    Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital
    China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.20 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 





109









|4.21 |  | Joinder Agreement to the Share Incentive
    Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China
    I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.21 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.22 |  | Acknowledgement and Agreement of Sequoia
    Capital China Partners Fund I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.22 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.23 |  | Google Linking Agreement between Google
    Ireland Limited and Beijing Qihu Technology Company Limited dated December 1, 2008 (incorporated by reference to Exhibit 10.23
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.24 |  | Novation Agreement among Google Ireland
    Limited, Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated May 1, 2009 (incorporated
    by reference to Exhibit 10.24 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.25 |  | Amendment One to Google Linking Agreement
    between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated July 1, 2009 (incorporated by reference
    to Exhibit 10.25 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the
    Commission on March 14, 2011)                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.26 |  | Amendment Two to Google Linking Agreement
    between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated December 1, 2009 (incorporated
    by reference to Exhibit 10.26 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.27 |  | Amendment Three to Google
    Linking Agreement between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated February 1, 2010
    (incorporated by reference to Exhibit 10.27 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.28 |  | Amendment Four to Google Linking Agreement
    between Google Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated April 1, 2010 (incorporated by
    reference to Exhibit 10.28 from our F-1 registration statement (File No. 333-172816), as amended, initially filed
    with the Commission on March 14, 2011)                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.29 |  | Google Linking Agreement between Google
    Ireland Limited and Qizhi Software (Beijing) Co., Ltd. dated October 1, 2009 (incorporated by reference to
    Exhibit 10.29 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission
    on March 14, 2011)                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.30 |  | Novation Agreement among Google Ireland
    Limited, Qizhi Software (Beijing) Co., Ltd. and Beijing Qihu Technology Company Limited dated September 1,
    2010 (incorporated by reference to Exhibit 10.30 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.31 |  | Amendment One to Google Linking Agreement
    between Google Ireland Limited and Beijing Qihu Technology Company Limited dated October 1, 2010 (incorporated by reference
    to Exhibit 10.31 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the
    Commission on March 14, 2011)                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.32 |  | English translation of Technology Development
    Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated May 1,
    2008 (incorporated by reference to Exhibit 10.32 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   
|4.33 |  | English translation of Technology Development
    Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated October 20,
    2008 (incorporated by reference to Exhibit 10.33 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                   





110







|4.34 |  | English translation of Technology Development
    Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated March 15,
    2009 (incorporated by reference to Exhibit 10.34 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.35 |  | English translation of Loan Agreement
    among Qihoo Technology Company Limited and Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.35
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.36 |  | English translation of Loan Agreement
    among Qihoo Technology Company Limited and Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.36
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.37 |  | English translation of Loan Agreement
    among Qihoo Technology Company Limited and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.37
    from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.38 |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong and Xiaohong Shi dated October 18,
    2010 (incorporated by reference to Exhibit 10.38 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                          
|4.39 |  | English translation of
    Equity Disposition Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong, Xiaohong Shi
    and Beijing Qihu Technology Company Limited dated October 18, 2010 (incorporated by reference to Exhibit 10.39 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14,
    2011)                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.40 |  | English translation of Business Operation
    Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Qihu Technology Company Limited, Xiangdong Qi, Jianming
    Dong and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.40 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.41 |  | English translation of Supplementary
    Agreement to the Technology Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu
    Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated June 1, 2010 (incorporated by reference
    to Exhibit 10.45 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the
    Commission on March 14, 2011)                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.42 |  | English translation of Supplementary
    Agreement to the Technology Development Agreement with respect to the Advertisement Union Agency Management Information System
    between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated September 1, 2010
    (incorporated by reference to Exhibit 10.46 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.43 |  | English translation of Confirmation
    Letter between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated November 1,
    2010 (incorporated by reference to Exhibit 10.47 from our F-1 registration statement (File No. 333-172816), as amended,
    initially filed with the Commission on March 14, 2011)                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.44 |  | English translation of Power of Attorney
    issued by Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.48 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.45 |  | English translation of Power of Attorney
    issued by Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.49 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.46 |  | English translation of Power of Attorney
    issued by Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.50 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             





111









|4.47  |  | Supplementary Subscription, Amendment and Adherence
    Agreement relating to Qihoo Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.54 from
    our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)   
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.48  |  | Adherence and Amendment to the Shareholders Agreement relating
    to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.55 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)       
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.49  |  | Adherence and Amendment to the Registration Rights Agreement relating
    to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.56 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.50  |  | Adherence and Amendment to the Share Incentive Agreement relating
    to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.57 from our F-1 registration
    statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)    
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.51  |  | Share Subscription Agreement dated March 14, 2011 (incorporated
    by reference to Exhibit 10.58 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with
    the Commission on March 14, 2011)                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.52  |  | Registration Rights Agreement dated March 14, 2011 (incorporated
    by reference to Exhibit 10.59 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with
    the Commission on March 14, 2011)                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.53  |  | 2011 Share Incentive Plan (incorporated by reference to Exhibit
    10.60 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March
    14, 2011)                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.54* |  | Termination Agreement dated November 2, 2012 between Beijing Qihu
    Technology Co., Ltd. and Google Ireland Limited                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.55* |  | Purchase Agreement for Floors One to Four of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd.                                                                                    
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.56* |  | Purchase Agreement for Floors Five to Nineteen of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qifei Xiangyi (Beijing) Software Co., Ltd.                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.57* |  | Purchase Agreement for Ground Floor of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd.                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.58* |  | Purchase Agreement for Floors Two to Seventeen of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qizhi Software (Beijing) Co., Ltd.                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                      
|4.59* |  | English translation of Supplementary Agreement to the Technology
    Development Agreement with respect to the Advertisement Union Agency Management Information System between Beijing Qihu Technology
    Company Limited and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011                             
|      |  |                                                                                                                                                                                                                                                                                                                      





112









|4.60* |  | English translation of Supplementary Agreement to the Technology
    Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu Technology Company Limited
    and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                 
|4.61* |  | English translation of Business Operation Agreement among Qizhi
    Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhenyu Xie, Jianming Dong and Zhengyu Chen dated December
    17, 2009                                                
|      |  |                                                                                                                                                                                                                                                                 
|4.62* |  | English translation of
    Exclusive Technology Consultancy and Service Agreement among Qizhi Software (Beijing) Co., Ltd. and Beijing Star
    World Technology Co., Ltd dated October 12, 2009                                                                
|      |  |                                                                                                                                                                                                                                                                 
|4.63* |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                 
|4.64* |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                 
|4.65* |  | English translation of Equity Pledge
    Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                 
|4.66* |  | English translation of Equity Disposition
    Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhengyu Xie, Jianming
    Dong and Zhengyu Chen dated April 26, 2012                                                  
|      |  |                                                                                                                                                                                                                                                                 
|4.67* |  | English translation of Loan Agreement
    among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                 
|4.68* |  | English translation of Loan Agreement
    among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012                                                                                                                                        
|      |  |                                                                                                                                                                                                                                                                 
|4.69* |  | English translation of Loan Agreement
    among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                 
|4.70* |  | English translation of Power of Attorney
    issued by Jianming Dong to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                 
|4.71* |  | English translation of Power of Attorney
    issued by Zhengyu Chen to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                 
|4.72* |  | English translation of Power of Attorney
    issued by Zhenyu Xie to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                 
|4.73* |  | English translation of Spousal Consent
    Letter issued by Chunxia He dated October 18, 2010                                                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                 
|4.74* |  | English translation of Spousal Consent
    Letter issued by Xun Guo dated October 18, 2010                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                 
|4.75* |  | English translation of Spousal Consent
    Letter issued by Jianxin Gao dated October 18, 2010                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                 





113









|4.76* |  | English translation of Spousal Consent
    Letter issued by Chunxia He dated April 26, 2012                                                                                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                             
|4.77* |  | English translation of Spousal Consent
    Letter issued by Lie Deng dated April 26, 2012                                                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                             
|4.78* |  | English translation of Spousal Consent
    Letter issued by Chunchao Zheng dated April 26, 2012                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                             
|8.1*  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                             
|11.1  |  | Code of Business Conduct and Ethics
    of Qihoo 360 Technology Company Limited (incorporated by reference to Exhibit 99.1 from our F-1 registration statement
    (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
|      |  |                                                                                                                                                                                                                                                             
|12.1* |  | CEO Certification Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                             
|12.2* |  | Co-CFO Certification Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|12.3* |  | Co-CFO Certification Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|13.1* |  | CEO Certification Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                             
|13.2* |  | Co-CFO Certification Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|13.3* |  | Co-CFO Certification Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                             
|15.1* |  | Consent of Deloitte Touche Tohmatsu
    Certified Public Accountants LLP                                                                                                                                                                                    












* Filed with this annual report on Form 20-F.





114









QIHOO 360 TECHNOLOGY CO. LTD.



Consolidated Financial Statements and

Report of Independent Registered Public Accounting Firm

For the years ended December 31, 2010, 2011 and 2012















INDEX TO CONSOLIDATED FINANCIAL STATEMENTS







|CONTENTS                                                     | PAGE(S)
|------------------------------------------------------------ | -------
|                                                             |        
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      | F - 2  
|                                                             |        
|CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2012 | F – 3,4
|                                                             |        
|CONSOLIDATED STATEMENTS OF OPERATIONS                        |        
|FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012         | F – 5  
|                                                             |        
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME              |        
|FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012         | F -6   
|                                                             |        
|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY                 |        
|FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012         | F – 7,8
|                                                             |        
|CONSOLIDATED STATEMENTS OF CASH FLOWS                        |        
|FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012         | F – 9  
|                                                             |        
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS               |        
|FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012         | F – 10 
|                                                             |        
|ADDITIONAL INFORMATION- FINANCIAL STATEMENT SCHEDULE I       | F – 74 







F-1


QIHOO 360 TECHNOLOGY CO. LTD.








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

QIHOO 360 TECHNOLOGY CO. LTD.



We have audited the accompanying consolidated balance sheets
of Qihoo 360 Technology Co. Ltd. (the "Company"), and its subsidiaries, its variable interest entities ("VIEs")
and VIEs' subsidiaries (collectively, the "Group") as of December 31, 2011 and 2012 and the related consolidated statements
of operations, comprehensive income, changes in equity and cash flows for the years ended December 31, 2010, 2011 and 2012, and
related financial statement schedule included in Schedule I. These consolidated financial statements and financial statement schedule
are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.



We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Group as of December 31, 2011 and 2012, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting
principles generally accepted in the United States of America.Also,
in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects, the information set forth therein.



As discussed in Note 2 to the consolidated financial statements,
such statements have been adjusted for the retrospective application of the authoritative guidance regarding the presentation of
comprehensive income, which was adopted by the Group on January 1, 2012.



We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Group's internal control over financial reporting as of December
31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated April 19, 2013 expressed an unqualified opinion on the Group's internal control
over financial reporting.





/s/ Deloitte Touche Tohmatsu Certified Public Accountants
LLP

Beijing, the People's Republic of China

April 19, 2013



F-2


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except for
shares and per share data)





|                                                                                             |  | December 31, |        
|-------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                             |  | 2011         |        
|ASSETS                                                                                       |  |              |        
|Current assets:                                                                              |  |              |        
|Cash and cash equivalents                                                                    |  | $            | 343,731
|Restricted cash                                                                              |  |              | -      
|Trading securities                                                                           |  |              | 231    
|Accounts receivable (net of allowance for doubtful accounts of $68                           |  |              |        
|and $213 as of December 31, 2011 and 2012, respectively)                                     |  |              | 16,741 
|Prepaid expenses and other current assets                                                    |  |              | 12,808 
|Deferred tax assets - current                                                                |  |              | 858    
|                                                                                             |  |              |        
|Total current assets                                                                         |  |              | 374,369
|                                                                                             |  |              |        
|Property and equipment, net                                                                  |  |              | 16,665 
|Land use rights, net                                                                         |  |              | -      
|Acquired intangible assets, net                                                              |  |              | 7,854  
|Goodwill                                                                                     |  |              | 4,580  
|Long-term investments                                                                        |  |              | 15,561 
|Other noncurrent assets                                                                      |  |              | 4,415  
|Deferred tax assets - noncurrent                                                             |  |              | 514    
|                                                                                             |  |              |        
|TOTAL ASSETS                                                                                 |  | $            | 423,958
|                                                                                             |  |              |        
|LIABILITIES                                                                                  |  |              |        
|Current liabilities:                                                                         |  |              |        
|Accounts payable (including accounts payable of the consolidated VIEs without recourse       |  |              |        
|to Qihoo 360 Technology Co. Ltd. of $5,872 and $7,109 as of December 31, 2011                |  |              |        
|and 2012, respectively)                                                                      |  | $            | 5,872  
|Accrued expenses and other current liabilities (including accrued expenses and other current |  |              |        
|liabilities of the consolidated VIEs without recourse to Qihoo 360 Technology Co. Ltd.       |  |              |        
|of $7,984 and $41,488 as of December 31, 2011 and 2012, respectively)                        |  |              | 19,802 
|Deferred revenue-current (including deferred revenue-current of the consolidated VIEs        |  |              |        
|without recourse to Qihoo 360 Technology Co. Ltd. of $9,831 and $17,520                      |  |              |        
|as of December 31, 2011 and 2012, respectively)                                              |  |              | 12,089 
|Amount due to related parties (including amount due to related parties of the consolidated   |  |              |        
|VIEs without recourse to Qihoo 360 Technology Co. Ltd. of $1,025 and $148                    |  |              |        
|as of December 31, 2011 and 2012, respectively)                                              |  |              | 1,025  
|Income tax payable (including income tax payable of the consolidated VIEs                    |  |              |        
|without recourse to Qihoo 360 Technology Co. Ltd. of $3,635 and $2,710                       |  |              |        
|as of December 31, 2011 and 2012, respectively)                                              |  |              | 7,312  
|Current portion of long-term payable (including current portion of long-term payable         |  |              |        
|of the consolidated VIEs without recourse to Qihoo 360 Technology Co. Ltd.                   |  |              |        
|of $460 and nil as of December 31, 2011 and 2012, respectively)                              |  |              | 460    
|                                                                                             |  |              |        
|Total current liabilities                                                                    |  |              | 46,560 
|                                                                                             |  |              |        
|Deferred tax liabilities                                                                     |  |              | 507    
|Deferred revenue-noncurrent (including deferred revenue-noncurrent of the consolidated       |  |              |        
|VIEs without recourse to Qihoo 360 Technology Co. Ltd. of                                    |  |              |        
|$1,589 and $3,242 as of December 31, 2011 and 2012, respectively)                            |  |              | 5,113  
|Other noncurrent liabilities (including other noncurrent liabilities of the consolidated     |  |              |        
|VIEs without recourse to Qihoo 360 Technology Co. Ltd. of                                    |  |              |        
|$286 and nil as of December 31, 2011 and 2012, respectively)                                 |  |              | 286    
|                                                                                             |  |              |        
|TOTAL LIABILITIES                                                                            |  | $            | 52,466 



F-3


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED BALANCE SHEETS - continued

(U.S. dollars in thousands, except for
shares and per share data)



|                                                                                               |  | December 31, |        
|---------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                               |  | 2011         |        
|                                                                                               |  |              |        
|Commitments and contingencies (Note 21)                                                        |  |              |        
|                                                                                               |  |              |        
|EQUITY                                                                                         |  |              |        
|Qihoo 360 Technology Co. Ltd. shareholders' equity                                             |  |              |        
|Class A ordinary shares ($0.001 par value; 378,000,000 and 378,000,000 shares authorized as of |  |              |        
|December 31, 2011 and 2012, respectively; 109,392,815 and 123,472,524 shares issued            |  |              |        
|and outstanding as of December 31, 2011 and 2012, respectively)                                |  |              | 109    
|Class B ordinary shares ($0.001 par value; 122,000,000 and 122,000,000 shares authorized as of |  |              |        
|December 31, 2011 and 2012, respectively; 69,636,436 and 60,684,573 shares issued              |  |              |        
|and outstanding as of December 31, 2011 and 2012, respectively)                                |  |              | 70     
|Additional paid-in capital                                                                     |  |              | 363,021
|Statutory reserves                                                                             |  |              | 5,667  
|Accumulated other comprehensive income                                                         |  |              | 6,263  
|(Accumulated deficit) retained earnings                                                        |  |              | (4,277 
|                                                                                               |  |              |        
|Total Qihoo 360 Technology Co. Ltd. shareholders' equity                                       |  |              | 370,853
|Noncontrolling interest                                                                        |  |              | 639    
|                                                                                               |  |              |        
|TOTAL EQUITY                                                                                   |  |              | 371,492
|                                                                                               |  |              |        
|TOTAL LIABILITIES AND EQUITY                                                                   |  | $            | 423,958



The accompanying notes are integral part
of these consolidated financial statements.



F-4


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except for
shares and per share data)



|                                                                                  |  | For the year ended December 31, |           
|--------------------------------------------------------------------------------- |  | ------------------------------- | ----------
|                                                                                  |  | 2010                            |           
|Revenues:                                                                         |  |                                 |           
|Internet services                                                                 |  | $                               | 53,790    
|Sale of third party anti-virus software                                           |  |                                 | 3,875     
|                                                                                  |  |                                 |           
|Total revenues                                                                    |  |                                 | 57,665    
|                                                                                  |  |                                 |           
|Cost of revenues:                                                                 |  |                                 |           
|Internet services                                                                 |  |                                 | 5,566     
|Sale of third party anti-virus software                                           |  |                                 | 1,185     
|                                                                                  |  |                                 |           
|Total cost of revenues                                                            |  |                                 | 6,751     
|                                                                                  |  |                                 |           
|Subsidy income                                                                    |  |                                 | 266       
|                                                                                  |  |                                 |           
|Operating expenses:                                                               |  |                                 |           
|Selling and marketing                                                             |  |                                 | 12,603    
|General and administrative                                                        |  |                                 | 5,051     
|Product development                                                               |  |                                 | 24,505    
|Impairment loss on intangible assets                                              |  |                                 | -         
|                                                                                  |  |                                 |           
|Total operating expenses                                                          |  |                                 | 42,159    
|                                                                                  |  |                                 |           
|Income from operations                                                            |  |                                 | 9,021     
|                                                                                  |  |                                 |           
|Interest income                                                                   |  |                                 | 317       
|Other (expense) income                                                            |  |                                 | (60       
|Exchange (loss) gain                                                              |  |                                 | (267      
|Impairment loss on long-term investments                                          |  |                                 | -         
|Change in unrealized holding loss of trading securities                           |  |                                 | -         
|Gain on disposal of long-term investments and a subsidiary                        |  |                                 | -         
|                                                                                  |  |                                 |           
|Income before income tax expense and loss from equity method investments          |  |                                 | 9,011     
|Income tax expense                                                                |  |                                 | (463      
|Loss from equity method investments                                               |  |                                 | (57       
|                                                                                  |  |                                 |           
|Net income                                                                        |  |                                 | 8,491     
|Add: Net loss attributable to noncontrolling interest                             |  |                                 | 17        
|                                                                                  |  |                                 |           
|Net income attributable to Qihoo 360 Technology Co. Ltd.                          |  |                                 | 8,508     
|                                                                                  |  |                                 |           
|Accretion of Series A convertible participating redeemable preferred shares       |  |                                 | 815       
|Accretion of Series B convertible participating redeemable preferred shares       |  |                                 | 1,250     
|Accretion of Series C convertible participating redeemable preferred shares       |  |                                 | 978       
|                                                                                  |  |                                 |           
|Net income attributable to ordinary shareholders                                  |  |                                 |           
|of Qihoo 360 Technology Co. Ltd.                                                  |  | $                               | 5,465     
|                                                                                  |  |                                 |           
|Net income per ordinary share-basic                                               |  | $                               | 0.05      
|Net income per ordinary share-diluted                                             |  | $                               | 0.05      
|                                                                                  |  |                                 |           
|Weighted average shares used in calculating net income per ordinary share-basic   |  |                                 | 71,350,571
|Weighted average shares used in calculating net income per ordinary share-diluted |  |                                 | 71,350,571
|                                                                                  |  |                                 |           
|Share based compensation expense included in:                                     |  |                                 |           
|Cost of revenues                                                                  |  | $                               | -         
|Selling and marketing                                                             |  | $                               | 524       
|General and administrative                                                        |  | $                               | 337       
|Product development                                                               |  | $                               | 3,145     



The accompanying notes are integral part
of these consolidated financial statements.



F-5


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

(U.S. dollars in thousands, except for
shares and per share data)



|                                                                     |  | For the year ended December 31, |      
|-------------------------------------------------------------------- |  | ------------------------------- | -----
|                                                                     |  | 2010                            |      
|                                                                     |  |                                 |      
|Net income                                                           |  | $                               | 8,491
|                                                                     |  |                                 |      
|Other comprehensive income, net of tax:                              |  |                                 |      
|Foreign currency translation adjustments                             |  |                                 | 1,330
|                                                                     |  |                                 |      
|Other comprehensive income                                           |  |                                 | 1,330
|                                                                     |  |                                 |      
|Comprehensive income                                                 |  |                                 | 9,821
|                                                                     |  |                                 |      
|Add: Comprehensive loss  attributable to noncontrolling
    interest |  |                                 | 12   
|                                                                     |  |                                 |      
|Comprehensive income attributable to Qihoo 360 Technology Co. Ltd    |  | $                               | 9,833





The accompanying notes are integral part
of these consolidated financial statements.



F-6


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



|                                                                                                                      |  | Ordinary
    shares |            |  | Shares
    to be issued |   |    | Additional
    
paid-in |  |  | Statutory  |   |  | Accumulated

    other
 comprehensive |        |   | (Accumulated
    deficit) 
retained |   |         | Total 
    Qihoo 360
    Technology 
Co. Ltd. shareholders' |  |   | Noncotrolling |  |  | Total 
(deficit) |      
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ---------- |  | ----------------------- | - | -- | ----------------------- |  |  | ---------- | - |  | ------------------------------------- | ------ | - | ----------------------------------- | - | ------- | ----------------------------------------------------------- |  | - | ------------- |  |  | ---------------- | -----
|                                                                                                                      |  | Shares              |            |  | Amount                  |   |    | Shares                  |  |  | Amount     |   |  | capital                               |        |   | reserves                            |   |         | income                                                      |  |   | earnings      |  |  | equity           |      
|Balance
    as of January 1, 2010                                                                                     |  |                     | 65,339,960 |  |                         | $ | 65 |                         |  |  | 2,703,236  |   |  | $                                     | 3,558  |   |                                     | $ | 5,011   |                                                             |  | $ | 84            |  |  | $                | 1,692
|Issuance
    of ordinary shares in connection with business acquisitions
    and share-based compensation arrangement |  |                     | 5,642,720  |  |                         |   | 6  |                         |  |  | (2,125,176 | ) |  |                                       | (3,183 | ) |                                     |   | 3,177   |                                                             |  |   | -             |  |  |                  | -    
|Issuance
    of ordinary shares in connection with exercise of
    share options                                      |  |                     | 578,060    |  |                         |   | 1  |                         |  |  | (578,060   | ) |  |                                       | (375   | ) |                                     |   | 374     |                                                             |  |   | -             |  |  |                  | -    
|Share-based
    compensation                                                                                          |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | 4,006   |                                                             |  |   | -             |  |  |                  | -    
|Accretion
    of Series A convertible participating redeemable preferred shares                                       |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Accretion
    of Series B convertible participating redeemable preferred shares                                       |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Accretion
    of Series C convertible participating redeemable preferred shares                                       |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Provision
    for statutory reserves                                                                                  |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | 80            |  |  |                  | -    
|Noncontrolling
    interest for establishments of subsidiaries                                                        |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Net
    income                                                                                                        |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Foreign
    currency translation adjustments                                                                          |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | 1,325
|Balance
    as of December 31, 2010                                                                                   |  |                     | 71,560,740 |  |                         |   | 72 |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | 12,568  |                                                             |  |   | 164           |  |  |                  | 3,017
|Accretion
    of Series A convertible participating redeemable preferred shares                                       |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Accretion
    of Series B convertible participating redeemable preferred shares                                       |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Accretion
    of Series C convertible participating redeemable preferred shares                                       |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|                                                                                                                      |  |                     |            |  |                         |   |    |                         |  |  |            |   |  |                                       |        |   |                                     |   |         |                                                             |  |   |               |  |  |                  |      
|Issuance
    of ordinary shares in connection with share-based compensation
    arrangements                          |  |                     | 3,059,779  |  |                         |   | 3  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Share-based
    compensation                                                                                          |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | 47,989  |                                                             |  |   | -             |  |  |                  | -    
|Issuance
    of ordinary shares in connection with exercise of options                                                |  |                     | 31,172     |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | 48      |                                                             |  |   | -             |  |  |                  | -    
|                                                                                                                      |  |                     |            |  |                         |   |    |                         |  |  |            |   |  |                                       |        |   |                                     |   |         |                                                             |  |   |               |  |  |                  |      
|Issuance
    of ordinary shares upon initial public offering ("IPO"), net
    of offering costs of $2,763             |  |                     | 26,063,544 |  |                         |   | 26 |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | 231,523 |                                                             |  |   | -             |  |  |                  | -    
|Conversion
    of participating redeemable preferred shares to ordinary shares                                        |  |                     | 78,314,016 |  |                         |   | 78 |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | 70,893  |                                                             |  |   | -             |  |  |                  | -    
|Provision
    for statutory reserves                                                                                  |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | 5,503         |  |  |                  | -    
|Noncontrolling
    interest for establishment of a subsidiary                                                         |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Disposal
    of noncontrolling interest in a subsidiary                                                               |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Net
    income                                                                                                        |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Foreign
    currency translation adjustments                                                                          |  |                     | -          |  |                         |   | -  |                         |  |  | -          |   |  |                                       | -      |   |                                     |   | -       |                                                             |  |   | -             |  |  |                  | 3,246





F-7


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY - continued

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



|                                                                                             |  | Ordinary
    shares |             |  | Shares
    to be issued |   |     | Additional
    
paid-in |  |  | Statutory |  |  | Accumulated

    other
 comprehensive |   |  | (Accumulated
    deficit) 
retained |   |         | Total 
    Qihoo 360
    Technology 
Co. Ltd. shareholders' |  |   | Noncotrolling |  |  | Total 
(deficit) |      
|-------------------------------------------------------------------------------------------- |  | ------------------- | ----------- |  | ----------------------- | - | --- | ----------------------- |  |  | --------- |  |  | ------------------------------------- | - |  | ----------------------------------- | - | ------- | ----------------------------------------------------------- |  | - | ------------- |  |  | ---------------- | -----
|                                                                                             |  | Shares              |             |  | Amount                  |   |     | Shares                  |  |  | Amount    |  |  | capital                               |   |  | reserves                            |   |         | income                                                      |  |   | earnings      |  |  | equity           |      
|Balance as of December 31, 2011                                                              |  |                     | 179,029,251 |  |                         | $ | 179 |                         |  |  | -         |  |  | $                                     | - |  |                                     | $ | 363,021 |                                                             |  | $ | 5,667         |  |  | $                | 6,263
|Issuance
    of ordinary shares     in connection with share-based compensation arrangements |  |                     | 3,512,394   |  |                         |   | 3   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Share-based compensation                                                                     |  |                     |             |  |                         |   |     |                         |  |  |           |  |  |                                       |   |  |                                     |   | 50,605  |                                                             |  |   | -             |  |  |                  | -    
|Issuance of ordinary shares
    in connection with exercise of options                       |  |                     | 1,615,452   |  |                         |   | 2   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | 6,963   |                                                             |  |   | -             |  |  |                  | -    
|Provision for statutory
    reserves                                                         |  |                     | -           |  |                         |   | -   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | -       |                                                             |  |   | 10,408        |  |  |                  | -    
|Noncontrolling interest
    for establishments of subsidiaries                               |  |                     | -           |  |                         |   | -   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Disposal of noncontrolling
    interest in subsidiaries                                      |  |                     | -           |  |                         |   | -   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | 73      |                                                             |  |   | -             |  |  |                  | -    
|Net income                                                                                   |  |                     | -           |  |                         |   | -   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | -       |                                                             |  |   | -             |  |  |                  | -    
|Foreign currency translation
    adjustments                                                 |  |                     | -           |  |                         |   | -   |                         |  |  | -         |  |  |                                       | - |  |                                     |   | -       |                                                             |  |   | -             |  |  |                  | 2,851
|                                                                                             |  |                     |             |  |                         |   |     |                         |  |  |           |  |  |                                       |   |  |                                     |   |         |                                                             |  |   |               |  |  |                  |      
|Balance as of December 31, 2012                                                              |  |                     | 184,157,097 |  |                         | $ | 184 |                         |  |  | -         |  |  | $                                     | - |  |                                     | $ | 420,662 |                                                             |  | $ | 16,075        |  |  | $                | 9,114



The accompanying notes are integral part
of these consolidated financial statements.



F-8


QIHOO 360 TECHNOLOGY CO. LTD.




CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands, except for
shares and per share data)



|                                                                                  |  | For the year ended
    December 31, |       
|--------------------------------------------------------------------------------- |  | ----------------------------------- | ------
|                                                                                  |  | 2010                                |       
|Cash flows from operating activities:                                             |  |                                     |       
|Net income                                                                        |  |                                     | 8,491 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                     |       
|Share-based compensation                                                          |  |                                     | 4,006 
|Depreciation and amortization                                                     |  |                                     | 1,344 
|Amortization of land use rights                                                   |  |                                     | -     
|Gain on disposal of property and equipment                                        |  |                                     | -     
|Gain on disposal of a subsidiary                                                  |  |                                     | -     
|Gain on disposal of long-term investments                                         |  |                                     | -     
|(Reversal) provision of allowance for doubtful accounts                           |  |                                     | (32   
|Loss from impairment of intangible assets                                         |  |                                     | -     
|Loss on equity method investments                                                 |  |                                     | 57    
|Unrealized holding loss on trading securities                                     |  |                                     | -     
|Loss from impairment of long-term investments                                     |  |                                     | -     
|Changes in operating assets and liabilities:                                      |  |                                     |       
|Accounts receivable                                                               |  |                                     | 1,100 
|Prepaid expenses and other current assets                                         |  |                                     | (1,144
|Payment for land use rights                                                       |  |                                     | -     
|Deferred taxes                                                                    |  |                                     | 60    
|Other noncurrent assets                                                           |  |                                     | (195  
|Accounts payable                                                                  |  |                                     | 670   
|Accrued expenses and other current liabilities                                    |  |                                     | 2,858 
|Deferred revenue                                                                  |  |                                     | 2,824 
|Amount due to related parties                                                     |  |                                     | -     
|Income tax payable                                                                |  |                                     | 86    
|                                                                                  |  |                                     |       
|Net cash provided by operating activities                                         |  |                                     | 20,125
|                                                                                  |  |                                     |       
|Cash flows from investing activities:                                             |  |                                     |       
|Restricted cash                                                                   |  |                                     | -     
|Purchase of property and equipment                                                |  |                                     | (2,826
|Purchase of intangible assets                                                     |  |                                     | (1,203
|Net cash (paid for) acquired from business acquisition                            |  |                                     | (2,619
|Purchase of other assets                                                          |  |                                     | (1,039
|Purchase of trading securities                                                    |  |                                     | -     
|Capital contribution for cost method investments                                  |  |                                     | (146  
|Capital contribution for equity method investments                                |  |                                     | (1,220
|Cash collected
    from disposal of long-term investments and a subsidiary        |  |                                     | -     
|Proceeds from disposal of property and equipment                                  |  |                                     | -     
|Dividends received from a cost method investee                                    |  |                                     | -     
|                                                                                  |  |                                     |       
|Net cash used in investing activities                                             |  |                                     | (9,053
|                                                                                  |  |                                     |       
|Cash flows from financing activities:                                             |  |                                     |       
|Proceeds from issuance of Series C convertible participating                      |  |                                     |       
|redeemable preferred shares                                                       |  |                                     | 20,000
|Payment of issuance costs of Series C convertible participating                   |  |                                     |       
|redeemable preferred shares                                                       |  |                                     | (78   
|Proceeds from exercise of share options                                           |  |                                     | 375   
|Proceeds from issuance of ordinary shares upon IPO                                |  |                                     | -     
|Payment of IPO costs                                                              |  |                                     | (44   
|Capital contribution from noncontrolling interest shareholders                    |  |                                     | -     
|Payment for share repurchase                                                      |  |                                     | -     
|                                                                                  |  |                                     |       
|Net cash provided by financing activities                                         |  |                                     | 20,253
|                                                                                  |  |                                    
|Effect of exchange rate on cash and cash equivalents                              |  |                                     | 1,036 
|Net increase in cash and cash equivalents                                         |  |                                     | 32,361
|Cash and cash equivalents at beginning of year                                    |  |                                     | 28,144
|                                                                                  |  |                                    
|Cash and cash equivalents at end of year                                          |  |                                     | 60,505
|                                                                                  |  |                                     |       
|Supplemental disclosure of cash flow information:                                 |  |                                     |       
|Income tax paid                                                                   |  |                                     | 317   
|                                                                                  |  |                                     |       
|Supplemental schedule of non-cash activities:                                     |  |                                     |       
|Conversion of participating redeemable preferred shares to ordinary shares        |  |                                     | -     
|Payable for purchasing land use rights, plant, property and equipment             |  |                                     |       
|and intangible assets                                                             |  |                                     | 271   
|Accrued and deferred IPO costs                                                    |  |                                     | 515   
|Nonmonetary transaction (Note 8(v))                                               |  |                                     | -     



The accompanying notes are integral part
of these consolidated financial statements.



F-9


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES
| | -- | -------------------------------------



Qihoo 360 Technology Co. Ltd. (the "Company"
or "Qihoo 360", formerly known as Qihoo Technology Company Limited), incorporated in the Cayman Islands in June 2005,
with its consolidated subsidiaries, variable interest entities ("VIEs") and VIEs' subsidiaries (collectively referred
to the "Group") is primarily involved in the operations of internet services in the People's Republic of China (the "PRC").
Prior to April 2012, the Group also involved in sales of third party anti-virus software in the PRC and such operation was diminished
after the expiry of the agreement with the third-party developer in April 2012.



As of December 31, 2012, details of the Company's
subsidiaries, its VIEs and VIEs' subsidiaries are as follows:







|                                                                    |  | Place of       |  | Later of           |  | Percentage of |      
|------------------------------------------------------------------- |  | -------------- |  | ------------------ |  | ------------- | -----
|                                                                    |  | establishment/ |  | acquisition/       |  | economic      |      
|                                                                    |  | incorporation  |  | incorporation      |  | ownership     |      
|                                                                    |  |                |  |                    |  |               |      
|Subsidiaries                                                        |  |                |  |                    |  |               |      
|Qizhi Software (Beijing) Co., Ltd. ("Qizhi Software")               |  | PRC            |  | December 28, 2005  |  |               | 100  
|Tianjin Qisi Technology Co., Ltd. ("Tianjin Qisi")                  |  | PRC            |  | September 15, 2011 |  |               | 100  
|Beijing Qichuang Yousheng Keji Co., Ltd (“QCYS”)                    |  | PRC            |  | July 24, 2012      |  |               | 100  
|Qifei Xiangyi (Beijing) Software Co., Ltd (“QFXY)                   |  | PRC            |  | August 17, 2012    |  |               | 100  
|Qiji International Development Limited ("Qiji International")       |  | HK             |  | November 1, 2010   |  |               | 100  
|Qifei International Development Co. Limited ("Qifei International") |  | HK             |  | November 2, 2010   |  |               | 100  
|360 International Development Co. Limited ("360 International")     |  | HK             |  | November 2, 2010   |  |               | 100  
|                                                                    |  |                |  |                    |  |               |      
|VIEs                                                                |  |                |  |                    |  |               |      
|Beijing 3G3W Science & Technology Co., Ltd. ("3G")                  |  | PRC            |  | December 28, 2005  |  |               | 100  
|Beijing Qibu Tianxia Technology Co., Ltd. ("QBTX")                  |  | PRC            |  | November 28, 2006  |  |               | 100  
|Beijing Qihu Technology Co., Ltd. ("Beijing Qihu")                  |  | PRC            |  | August 13, 2007    |  |               | 100  
|Qihoo 360 Software (Beijing) Co., Ltd. ("QH360")                    |  | PRC            |  | May 4, 2009        |  |               | 100  
|Shanghai Qitai Network Technology Co., Ltd. ("Shanghai Qitai")      |  | PRC            |  | September 2, 2009  |  |               | 100  
|Beijing Star World Technology Co., Ltd. ("Beijing Star
    World")  |  | PRC            |  | October 12, 2009   |  |               | 100  
|Chengdu Qiying Technology Co., Ltd. ("CDQY")                        |  | PRC            |  | December 17, 2009  |  |               | 100  
|Qihoo Ceteng Technology Co., Ltd. ("Ceteng ")                       |  | PRC            |  | April 28, 2011     |  |               | 100  
|Shanghai JN Technology Co., Ltd. ("Shanghai JN ")                   |  | PRC            |  | August 5, 2011     |  |               | 100  
|Shanghai Yizhitang Information Service Co., Ltd. ("YZT")            |  | PRC            |  | December 1, 2011   |  |               | 100  
|360 Youjiu (Beijing) Technology Co., Ltd. (“360 Youjiu”)            |  | PRC            |  | March 12, 2012     |  |               | 77.78
|Shanghai Qihu Technology Co., Ltd. (“Shanghai QH”)                  |  | PRC            |  | April 26, 2012     |  |               | 100  
|Sanya Qijun Technology Co., Ltd. (“SYQJ”)                           |  | PRC            |  | September 25, 2012 |  |               | 100  
|                                                                    |  |                |  |                    |  |               |      
|VIEs' Subsidiaries                                                  |  |                |  |                    |  |               |      
|Beijing Yuan Tu Technology Co., Ltd. ("Yuan Tu")                    |  | PRC            |  | December 28, 2010  |  |               | 70   
|Shanghai Juliu Software Technology Co., Ltd. (“SHJL”)               |  | PRC            |  | July 11, 2012      |  |               | 60   
|Beijing Jueying Telecommunication Technology Co., Ltd. (“BJJY”)     |  | PRC            |  | August 31, 2012    |  |               | 100  
|Beijing Qifutong Technology Co., Ltd. (“QFT”)                       |  | PRC            |  | October 25, 2012   |  |               | 100  
|Beijing Chuxun Technology Co., Ltd. (“BJCX”)                        |  | PRC            |  | December 17, 2012  |  |               | 70   
|Beijing Wanbokesi Information Technology Co., Ltd. (“WBKS”)         |  | PRC            |  | December 24, 2012  |  |               | 100  





History of the Group and corporate reorganization



Qizhi Software, a wholly foreign owned subsidiary
in PRC, entered into a series of contractual arrangements with 3G, QBTX, Beijing Qihu, QH360, Shanghai Qitai, Beijing Star
    World, CDQY, Ceteng,
Shanghai JN, YZT, 360 Youjiu, Shanghai QH and SYQJ (collectively the "VIEs") in January 2006, November 2006, August 2007,
May 2009, September 2009, October 2009, December 2009, April 2011, and August 2011, November 2012, February 2012, May 2012 and
September 2012, respectively. (See below for a description of the VIE arrangements under which the Company, or its subsidiaries,
is the primary beneficiary of its consolidated VIEs and their subsidiaries).





F-10


QIHOO 360 TECHNOLOGY CO. LTD.




The VIE arrangements



PRC regulations currently limit direct foreign ownership
of business entities providing internet services in the PRC where certain licenses are required for the provision of such services.
To comply with these PRC regulations, the Company conducts substantially the majority of its business through the VIEs and their
subsidiaries. To provide the Company the expected residual returns of the VIEs and their subsidiaries, Qizhi Software has entered
into the following contractual arrangements with the VIEs and their shareholders that enable the Company to (1) have power to direct
the activities that most significantly affect the economic performance of the VIEs, and (2) receive the economic benefits of the
VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has
consolidated the VIEs' financial results of operations, assets and liabilities in the Company's consolidated financial statements.
In making the conclusion that the Company is the primary beneficiary of the VIEs, the Company believes the Company's rights under
the terms of the equity disposition agreements provide it with a substantive kick out right. More specifically, the Company believes
the terms of the equity disposition agreements are valid, binding and enforceable under PRC laws and regulations currently in effect.
A simple majority vote of the Company's board of directors is required to pass a resolution to exercise the Company's rights under
the exclusive option agreement, for which the consent from the shareholders of the VIEs is not required. The Company's rights under
the equity disposition agreements give the Company the power to control the shareholders of the VIEs and thus the power to direct
the activities that most significantly impact the VIEs' economic performance. In addition, the Company's rights under the powers
of attorney also reinforce the Company's abilities to direct the activities that most significantly impact the VIEs' economic performance.
The Company also believes that this ability to exercise control ensures that the VIEs will continue to execute and renew service
agreements and pay service fees to the Company. By charging service fees in whatever amounts the Company deems fit, and by ensuring
that service agreements are executed and renewed indefinitely, the Company has the rights to receive substantially all of the economic
benefits from the VIEs.



The series of contractual arrangements are summarized
as follows:



F-11


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
| | -- | -------------------------------------------------



The VIE arrangements - continued



Business Operation Agreements



Under the Business Operation Agreements, the registered
shareholders of VIEs and the VIEs may not enter into any transaction that could materially affect the assets, liabilities, interests
or operations of the VIEs, without Qizhi Software's prior written consent. In addition, directors, general managers, financial
controllers or other senior managers of VIEs must be Qizhi Software's nominees appointed by the registered shareholders of the
VIEs. Each business operation agreement has a term of ten years and is renewable at Qizhi Software's sole discretion.



Technology Consulting and Services Agreements



Under the Technology Consulting and Services
Agreements, Qizhi Software agreed to provide the VIEs with technology support and consulting services. VIEs agreed to pay certain
percentage of its revenue as service fees to Qizhi Software. The service fees are subject to adjustment by Qizhi Software. The
agreements have a term of three to ten years unless terminated upon both parties’ agreement. The agreement may be renewed
upon Qizhi Software’s approval and the renewed term will be based on agreement of both parties.



Equity Disposition Agreements



The agreements granted Qizhi Software or its designated
person exclusive options to purchase, when and to the extent permitted under PRC law, any part or all of the equity interests in
the VIEs. The exercise price for the options to purchase all of the equity interests is the minimum amount of consideration permissible
under the then applicable PRC law. The agreements have an initial term of ten years and are renewable at Qizhi Software's sole
discretion. Under the equity disposition agreements, the registered shareholders of the VIEs may sell the pledged shares to the
Company at a nominal price to pay off the loans. The Company absorbs losses of the VIEs, and is exposed to the risk of losses from
the operation of the VIEs.



Loan Agreements



Under Loan Agreements between the Company and the
registered shareholders of VIEs, the Company extended loans to the registered shareholders of VIEs for contributing registered
capital to the VIEs in order to hold 100% of the equity interest in the VIEs. Each loan agreement has a term of ten years and is
renewable upon both parties' agreement.



F-12


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
| | -- | -------------------------------------------------



The VIE arrangements - continued



Equity Pledge Agreements



Under Qizhi Software's Equity Pledge Agreements with
the VIEs and their respective registered shareholders, the registered shareholders of the VIEs pledged all of their respective
equity interests in favor of Qizhi Software to secure VIEs' obligations under the Equity Disposition Agreements and Business Operation
Agreements described above. If any of the VIEs breaches any of their respective contractual obligations under these agreements
seriously, Qizhi Software, as pledgee, will be entitled to dispose the pledged equity interests. The registered shareholders of
VIEs agreed not to dispose of, or otherwise create any new encumbrance on their respective equity interests in the VIEs, and not
to approve the VIEs to merge with other entities or reorganize in any other forms, without Qizhi Software's prior written consent.
Unless terminated at Qizhi Software's sole discretion, each equity pledge agreement has a term of ten years and is renewable at
Qizhi Software's sole discretion, similar to the term of Equity Disposition Agreements and Business Operation Agreements.





Power of Attorney



Each registered shareholder of VIEs, has executed
a power of attorney appointing Qizhi Software to be his or her attorneys, and irrevocably authorizing Qizhi Software to vote on
his or her behalf on all of the matters concerning the VIEs, that may require shareholders' approval. The term of power of attorney
is ten years. The Power of Attorney can be renewed at Qizhi Software’s sole discretion.



Spousal Consent



Under the
Spousal Consent letters, the spouse of each married registered shareholder of VIEs has signed a spousal consent letter, whereby
the spouse agrees that (i) the equity interests of the VIEs owned by such shareholder will be disposed of only in accordance with
the applicable Equity Disposition Agreement, Equity Pledge Agreement, Loan Agreement and other related agreements executed by the
shareholder, (ii) such equity interests do not constitute communal property with such shareholder and (iii) the spouse irrevocably
and unconditionally waives all rights and benefits with respect to such equity interests, including the right to sue in any court
and under all applicable laws.



As a result of the contractual arrangements described
above, Qizhi Software has the power to direct the activities of the VIEs that most significantly affect the entity's economic performance,
bears the economic risks and receives the economic benefits of the VIEs, and is the primary beneficiary of the VIEs. Therefore,
the Company has consolidated the financial results of the VIEs and their subsidiaries in its consolidated financial statements
since the later of the date of acquisition and incorporation.



F-13


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
| | -- | -------------------------------------------------



The VIE arrangements - continued



Risks in relation to the VIE structure



The Company believes that Qizhi Software's contractual
arrangements with the VIEs are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal
system could limit the Company's ability to enforce the contractual arrangements. If the legal structure and contractual arrangements
were found to be in violation of PRC laws and regulations, the PRC government could:

| | § | revoke the Group's business and operating licenses
| | - | --------------------------------------------------

| | § | require the Group to discontinue or restrict the Group's operations
| | - | -------------------------------------------------------------------

| | § | restrict the Group's right to collect revenues,
| | - | -----------------------------------------------

| | § | block the Group's websites,
| | - | ---------------------------

| | § | require the Group to restructure the Group's operations,
| | - | --------------------------------------------------------

| | § | impose additional conditions or requirements with which the Group may not be able to comply
| | - | -------------------------------------------------------------------------------------------

| | § | impose restrictions on the Group's business operations or on the Group's customers or take other regulatory or enforcement
actions against the Group that could be harmful to the Group's business.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company's ability to conduct its business may
be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, the Company may
not be able to consolidate the VIEs in its consolidated financial statements as it may lose the ability to exert effective control
over the VIEs and their shareholders, and it may lose the ability to receive economic benefits from the VIEs.



The shareholders of the VIEs are directors or officers of the Company. Most of them are also shareholders of the Company. Therefore they have no current interest in seeking
to act contrary to the contractual arrangements. The interests of the VIEs' shareholders may differ from the interests of the Company
as a whole. The Company cannot assure that when conflicts of interest arise, the shareholders will act in the best interests of
the Company or that conflicts of interests will be resolved in the Company's favor. Currently, the Company does not have existing
arrangements to address potential conflicts of interest the shareholders of the VIEs may encounter in their capacity as the beneficial
owners and directors or officers of the VIEs, on the one hand, and as beneficial
owners and directors or officers of the Company, on the other hand. The Company believes the shareholders of the VIEs will not
act contrary to any of the contractual arrangements and the equity disposition agreements provide the Company with a mechanism
to remove the shareholders as the beneficial shareholders of the VIEs should they act to the detriment of the Company. The Company
relies on the VIEs' shareholders, as directors and officers of the Company, to fulfill their fiduciary duties and abide by laws
of the PRC and Cayman Islands and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest
or disputes between the Company and the VIEs' shareholders, the Company would have to rely on legal proceedings, which could result
in disruption of its business, and there is substantial uncertainty as to the outcome of any such legal proceedings.





F-14


QIHOO 360 TECHNOLOGY CO. LTD.




To further protect the investors' interest from any
risk that the shareholders of the VIEs may act contrary to the contractual arrangements, the Company, through Qizhi Software, entered
into irrevocable powers of attorney with the registered shareholders of the VIEs. Through these powers of attorney, the shareholders
of the VIEs entrusted Qizhi Software as its proxy to exercise its rights as the shareholders of the VIEs with respect to an aggregate
of 100% of the equity interests in the VIEs. The term of power of attorney is ten years. The power of attorney can be renewed at
Qizhi Software’s sole discretion.



The following consolidated financial statement balances
and amounts of the Group's VIEs and their subsidiaries were included in the accompanying consolidated financial statements as of
and for the years ended:





|                                          |  |   |                         |   | December 31, |  
|----------------------------------------- |  | - | ----------------------- | - | ------------ | -
|                                          |  |   |                         |   | 2011         |  
|                                          |  |   |                         |   |              |  
|Total current assets                      |  |   |                         |   |              | $
|Total noncurrent assets                   |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|Total assets                              |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|Total current liabilities                 |  |   |                         |   |              |  
|Total noncurrent liabilities              |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|Total liabilities                         |  |   |                         |   |              | $
|                                          |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|                                          |  |   | Year ended December 31, |  
|                                          |  |   | 2010                    |   |              |  
|                                          |  |   |                         |   |              |  
|Revenues                                  |  | $ | 48,967                  |   |              | $
|Net income                                |  | $ | 15,220                  |   |              | $
|                                          |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|                                          |  |   |                         |   |              |  
|                                          |  |   | Year ended December 31, |  
|                                          |  |   | 2010                    |   |              |  
|                                          |  |   |                         |   |              |  
|Net cash provided by operating activities |  | $ | 9,975                   |   |              | $
|Net cash used in investing activities     |  |   | (5,477                  | ) |              |  
|Net cash provided by financing activities |  |   | -                       |   |              |  
|                                          |  |   |                         |   |              |  
|                                          |  | $ | 4,498                   |   |              | $











The VIEs contributed an aggregate of 84.9%, 95.7%
and 92.1% of the consolidated revenues for the year ended December 31, 2010, 2011 and 2012, respectively. The Group's operations
not conducted through contractual arrangements with the VIEs primarily consist of its advertisement agency service and technology
support service. As of the years ended December 31, 2011 and 2012, the VIEs accounted for an aggregate of 22.5% and 26.7%, respectively,
of the consolidated total assets, and 58.5% and 34.4%, respectively, of the consolidated total liabilities. The assets not associated
with the VIEs primarily consist of cash and cash equivalent, account receivables, property and equipment, and land use rights.
There are no consolidated VIEs' assets that are collateral for the VIEs' obligations and can only be used to settle the VIEs' obligations.
There are no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or
any of its consolidated subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit
variable interests that require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs
ever need financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions,
provide financial support to its VIEs through loans to the shareholder of the VIEs or entrustment loans to the VIEs.



Relevant PRC laws and regulations restrict the VIEs
from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the
Company in the form of loans and advances or cash dividends. Please refer to Note 25 for disclosure of restricted net assets.



F-15


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



Basis of presentation



The consolidated financial statements of the Group
have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").



Basis of consolidation



The consolidated financial statements of the Group
include the financial statements of the Company, its wholly owned subsidiaries and VIEs and their subsidiaries. All inter-company
transactions and balances have been eliminated upon consolidation.



Use of estimates



The preparation of the consolidated financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the reported amounts of revenues and expenses in the consolidated financial statements and accompanying notes.
Significant accounting estimates reflected in the Group's consolidated financial statements include allowance for doubtful accounts,
valuations of acquired intangible assets, share-based compensation, valuation allowances for deferred tax assets, impairment of
long-term investments, impairment of long-lived assets, useful lives of definite-lived intangible assets and other long-lived assets
as well as goodwill impairment assessment.



Fair value measurements



Authoritative literature provides a fair value hierarchy,
which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy
within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the
fair value measurement as follows:



| | · | Level 1-inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
| | - | ----------------------------------------------------------------------------------------------------------

| | · | Level 2-inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable
in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Level 3-inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants
would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include
option pricing models, discounted cash flow models, and similar techniques.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



TheGroup measures certain assets, including the long-term investments and intangible assets, at fair value on a nonrecurring
basis when they are deemed to be impaired. The fair values of these investments and intangible assets are determined based on valuation
techniques using the best information available, and may include management judgments, future performance projections, etc. An
impairment charge to the long-term investments is recorded when the cost of the investment exceeds its fair value and this condition
is determined to be other-than-temporary, and impairment charge to the intangible assets is recorded when their carrying amounts
may not be recoverable.

F-16


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Cash and cash equivalents



Cash and cash equivalents consist of cash on hand
and term deposits, which are unrestricted as to withdrawal or use.



Trading securities



The securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading securities. Unrealized holding gains and losses for
trading securities are included in the consolidated statements of operations.



Accounts receivable and allowance for doubtful
accounts



Accounts receivable represents those receivables derived
in the ordinary course of business. Allowance for doubtful accounts reflect the Group's best estimate of probable losses inherent
in the accounts receivable balances. The Group regularly review allowances by considering factors such as historical experience,
credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer's ability
to pay.



Property and equipment, net



Property and equipment is carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated
useful lives:





|Computer equipment and application software   | 3 years                                  
|--------------------------------------------- | -----------------------------------------
|Building                                      | 44 - 60 years                            
|Office building related facility and machines | 10 – 15 years                            
|Furniture and vehicles                        | 3 - 5 years                              
|Leasehold improvements                        | lesser of the lease term or the estimated
|                                              | useful life of the assets                





F-17


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Land use rights, net



All land in the PRC is owned by the PRC government,
which, according to the relevant PRC law,may grant the right to use the land for a specified
period of time. Payment for acquiring land use rights are stated at cost less accumulated amortization and any recognized impairment
loss. Amortization is provided on a straight-line basis over the term of the land use rights.



Acquired intangible assets, net



Acquired intangible assets are estimated by management
based on the fair value of assets acquired. Identifiable intangible assets are carried at cost less accumulated amortization. Amortization
of definite-lived intangible assets is computed using the straight-line method over the following estimated useful lives, which
are as follows:





|Domain names                | 3 - 10 years
|--------------------------- | ------------
|Source code                 | 5 - 8 years 
|Technology                  | 3 - 10 years
|Non-compete agreement       | 1 - 5 years 
|Trade mark                  | 3 years     
|License of service provider | 8 years     





As of December 31, 2011 and 2012, the carrying values
of these intangible assets with definite useful lives are $5,497 and $11,140, respectively.



If an intangible asset is determined to have an indefinite
life, it should not be amortized until its useful life is determined to be no longer indefinite. Certain domain names, trademarks
and business license resulting from the acquisitions of business are determined to have indefinite lives. As of December 31, 2011
and 2012, the carrying values of these intangible assets with indefinite lives are $2,357 and $1,170, respectively.



Impairment of long-lived assets



The Group evaluates the recoverability of long-lived
assets, including identifiable intangible assets with determinable useful lives, whenever events or changes in circumstances indicate
that a long-lived asset's carrying amount may not be recoverable. The Group measures the carrying amount of long-lived asset against
the estimated undiscounted future cash flows associated with it. Impairment exists when the sum of the expected future net cash
flows is less than the carrying value of the asset being evaluated. Impairment loss is calculated as the amount by which the carrying
value of the asset exceeds its fair value. Fair value is estimated based on various valuation techniques, including the discounted
value of estimated future cash flows. The evaluation of asset impairment requires the Group to make assumptions about future cash
flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ
from assumed and estimated amounts. During the years ended December 31, 2010, 2011 and 2012, the Group recognized nil, $87 and
$1,151, respectively, of impairment losses on identifiable intangible assets with determinable useful lives. The related intangible
assets are impaired in full when impairment indicators are noted.







F-18


QIHOO 360 TECHNOLOGY CO. LTD.




Goodwill



Goodwill represents the excess of the purchase price
over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment
annually or more frequently if events or changes in circumstances indicate that it might be impaired.



Goodwill is tested for impairment at the reporting
unit level on an annual basis (December 31 for

the Group) and between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These
events or circumstances could include a significant change in the stock prices, business climate, legal factors, operating performance
indicators, competition, or sale or disposition of a significant portion of a reporting unit.



Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment
of goodwill to reporting units, and determination of the fair value of each reporting unit. The estimation of fair value of each
reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash
flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Group’s business, estimation
of the useful life over which cash flows will occur, and determination of the Group’s weighted average cost of capital. The
estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions.
Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for
the reporting unit.



In September 2011, the FASB issued an authoritative
pronouncement related to testing goodwill for impairment. The guidance permits the Group to first assess qualitative factors to
determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount
as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Group adopted this pronouncement
since 2012. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, goodwill is
then tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying amount,
including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired
and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares
the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill
is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined
in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to the assets and liabilities is the implied fair value of goodwill.



An impairment loss is recognized for any excess in
the carrying value of goodwill over the implied fair value of goodwill. The Group recognized no impairment loss on goodwill for
any of the periods presented.



F-19


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Impairment of indefinite-lived intangible assets



An intangible asset that is not subject to amortization
is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might
be impaired. Such impairment test is to compare the fair values of assets with their carrying value amounts and an impairment loss
is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible assets not subject
to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent
in this process, including estimates of discount rates or market price. Discount rate assumptions are based on an assessment of
the risk inherent in the respective intangible assets. Market prices are based on potential purchase quote from third party, if
any. During the years ended December 31, 2010, 2011 and 2012, the Group recognized nil, nil and $197, respectively, of impairment
losses on its indefinite-lived intangible assets.



F-20


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Equity Method Investments



Investee companies over which the Group has the ability
to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant
influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between
20% and 50%, and other factors, such as representation on the investee’s board of directors, voting rights and the impact
of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.



An impairment charge is recorded if the carrying
amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. The Group
estimated the fair value of these investee companies based on discounted cash flow approach which requires significant
judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long
term growth rate of a company’s business, the estimation of the useful life over which cash flows will occur, and the
determination of the weighted average cost of capital. Certain of the equity method investments experience a deteriorating
financial position and performance and the Group does not expect them to generate any positive future cash flows.
Accordingly, the Group accrued an impairment charge of nil, $236 and $1,541 in 2010,
2011 and 2012, respectively,  on these equity method investments based on their fair value which would be minimal.



Cost Method Investments



For investee companies over which the Group does not
have significant influence and a controlling interest, the Group carries the investment at cost and recognize as income for any
dividend received from distribution of the investee’s earnings.



The Group reviews its cost method investments
for impairment whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. The Group
considers available quantitative and qualitative evidence in evaluating potential impairment of its cost method investments.
An impairment charge is recorded if the cost of an investment exceeds its fair value and such excess is determined to be
other-than-temporary. The Group estimated the fair value of these investee companies based on discounted cash flow approach.
Factors the Group considers in making such a determination include general market conditions, the duration and the extent to
which the fair value of an investment is less than its cost, and the Group's intent and ability to hold such investment. As a
result of the assessment process for its cost method investments, the Group recognized impairment charge of nil, $666 and
$761 in 2010, 2011 and 2012, respectively.



Revenue recognition



The Group generates its revenue through internet services
and sales of third party anti-virus software. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.



F-21


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Revenue recognition - continued



Internet services revenue



Internet services revenue includes online advertising,
internet value-added services and other services.



| | (1) | Online advertising
| | --- | ------------------



The Group provides links to third-party websites or
online applications on its platform products (such as Personal Start-up Page). The Group has two general pricing models for advertising
links: cost over a time period and cost for performance basis. Under both models, the Group charges fees to its customers directly
or indirectly determined based on the effectiveness of advertising links, which is typically measured by active users, clicks,
transactions and other actions originated from the 360 Personal Start-up Page. Additionally, fees are determined based on the industry
of the customer and the location of the advertising link. For advertising contracts that are charged on the cost over a time period,
the Group recognizes revenue ratably over the period the advertising is provided. For contracts that are charged on the cost for
performance, the revenue is estimated by the Group based on its internal data, which is confirmed with the respective customers.



The Group also directs search traffic to search engines
such as Google through its default search boxes on the Group's 360 Browsers and its default home page, 360 Personal Start-up Page.
The Group receives a pre-determined fee from search engine companies based on the number of searches originated from the search
boxes in 360 Browsers and 360 Personal Start-up Page, subject to a pre-determined limit, from search engine companies. The revenue
is estimated by the Group based on its traffic data, which is confirmed subsequently with the search engine companies. Since the
Group launched its own search engine in August 2012, revenue from search referral service has become insignificant.



The Group occasionally engages in nonmonetary transactions
to allow certain third parties to bundle the Group's security products with third parties' software products, or to grant the third
parties the right to provide links to the Group's free security products on the third parties' websites in exchange for more downloads
of its security products. The Group recognizes revenues and expenses at fair value from a nonmonetary transaction only if the fair
value of the services exchanged in the transaction is determinable based on the entity's own historical practice of receiving cash,
trading securities, or other consideration that is readily convertible to a known amount of cash for similar services from customers
unrelated to the counterparty in the nonmonetary transaction. In 2011, the Group engaged in one nonmonetary transaction for which
the fair value was determinable (see details in Note 8(v)). Other than this transaction, for the years ended December 31, 2010,
2011 and 2012, the Group engaged in nonmonetary transactions for which the fair value was not determinable and therefore no revenues
or expenses derived from these nonmonetary transactions were recognized.



F-22


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Revenue recognition - continued



Internet services revenue - continued



| | (2) | Internet value-added services
| | --- | -----------------------------



The Group's internet value-added services include offering
games developed by third parties, offering remote technical support to paying users, and providing other internet value-added services
on the Group's platforms.



Games - The Group provides game services and generates
revenue from selling in-game currency, which will be later used by game players to purchase in-game virtual items. The Group’s
game portfolio includes web games, client-based games and mobile games. All of the games are developed by third-party game developers
and can be accessed and played by game players directly through the Group’s game platform. The Group primarily views the
game developers to be its customers and considers its responsibility under its agreements with the game developers to be promotion
of the game developers' games. The Group generally collects payments from game players in connection with the sale of in-game currencies
and remits certain agreed-upon percentages of the proceeds to the game developers and records revenue net of remittances. Revenue
from the sale of in-game currency is primarily recorded net of remittances to game developers and deferred until the estimated
consumption date, (i.e., the estimated date in-game currencies are consumed within the game), which is typically within a short
period of time after purchase of the in-game currency. Purchases of in-game currency are not refundable after they have been sold
unless there is unused in-game currency at the time a game is discontinued. Typically, a game will only be discontinued when the
monthly revenue generated by a game is insignificant. To date, the Group has never been required to pay cash refunds to game players
or game developers as a result of the discontinuation of a game.



Remote technical support - The Group provides live technical
assistance on a broad range of computer issues relating to security and performance optimization through remote access to users'
computers. The Group generally charges fees on a per case basis for this service and also provides monthly and annual subscriptions.
For services charged on a per case basis, the Group recognizes revenue when the service is provided. For monthly and annual subscriptions,
the Group recognizes revenue ratably over the life of the subscription. In May 2012, the Group offers remote technical support
services for free and refunds prepaid fees to users.



Other internet value-added services – The Group
acts as an agent for providing online distribution services and payment collection services on behalf of third-parties, such as
online distribution of lottery, collection payment for mobile charges, e-books and etc. The Group provides payment collection services
mainly through third-party professional payment and settlement institutions. The Group generally charges commission as a percentage
of the gross proceeds or collection amount, and the revenue is estimated by the Group based on its internal system, which is confirmed
with the respective cooperators.





F-23


QIHOO 360 TECHNOLOGY CO. LTD.




Sales of third party anti-virus software



The Group purchases software, such as anti-virus software,
from third-party software developers for online distribution to users. The Group recognizes revenue when the activation code of
the software is delivered. The Group evaluates its software sales contracts to determine whether to recognize revenues on a gross
basis or net of costs of obtaining the associated software. The determination is based upon an assessment as to whether the Group
acts as a principal or agent when providing the sales. In April 2012, after an agreement with a third-party developer was expired,
the Group's sales of third party anti-virus software has been insignificant.



F-24


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Deferred revenue



Deferred revenue primarily includes cash received
in advance from customers or end users and unrecognized license fee related to a license granted under a nonmonetary transaction
as described in Note 8(v), and deferred subsidy income. The unused cash balances remaining in customers or users' accounts are recorded
as a liability. Deferred revenues related to prepayments from third party customers or end users will be recognized as revenue
when all of the revenue recognition criteria are met, and deferred revenue related to license fee will be recognized as revenue
based on the contract term.



Costs of revenues



Cost of revenues primarily consists of business tax,
value added tax ("VAT") and related surcharges, payment collection costs, salaries and benefits, bandwidth costs, depreciation
of equipment and revenue sharing to third party partners.



Business tax and related surcharges by various Chinese
local tax authorities are incurred at rates ranging from 3.39% to 8.70% on revenue generated from providing services.



In July 2012, the Ministry of Finance and the
State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in lieu of business tax in certain
areas and industries in the PRC. Such VAT pilot program was to be phased in Beijing and Tianjin in September and December 2012,
respectively. Starting from September 1, 2012, certain subsidiaries and VIEs of the Group became subject to VAT and related surcharges
by various Chinese local tax authorities at rates ranging from 3.36% to 6.78% on revenue generated from providing services which
were previously subject to business tax.



Business tax and VAT included
in revenues and cost of revenues for the years ended December 31, 2010, 2011 and 2012 were $2,938, $9,078 and $18,434, respectively.



Product development expenses



The product development expenses primarily consist
of the research and development expenses and expenses incurred for strengthening the existing products. Product development primarily
focused on the development and enhancement of security products, cloud-based services, search engine related products, mobile internet
products and other internet products and services.



Product development expenses include personnel-related
expenses, bandwidth, license and technical service fees, depreciation of property and equipment and amortization of acquired intangible
assets. The Group expenses product development costs as incurred.





Advertising costs



Advertising costs are expensed as incurred. The Group
incurred advertising costs of $9,114, $7,843 and $21,082 for the years ended December 31, 2010, 2011 and 2012, respectively, which
were recorded as a component of selling and marketing expenses in the accompanying consolidated statements of operations.



F-25


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Operating leases



Leases where the rewards and risks of ownership of
assets primarily remain with the lessor are accounted for as operating leases. Payments made under operating leases are charged
to the consolidated statements of operations on a straight-line basis over the lease periods.



Subsidy income



Government subsidy is recorded as a liability in deferred
revenue when received, and recognized as subsidy income when the project is inspected and confirmed by the government, or it is
not subject to future return or reimbursement. The Group recognized subsidy income of $266, $151 and $2,570 for the years ended
December 31, 2010, 2011 and 2012, respectively.



Income taxes



The Group follows the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial
reporting and tax basis of assets and liabilities using enacted tax rates that will be in effect for the period in which the differences
are expected to reverse. The Group records a valuation allowance against the amount of deferred tax assets that it determines is
not more-likely-than-not of being realized. The effect on deferred taxes of a change in tax rates is recognized in the consolidated
statements of operations in the period that includes the enactment date.



The impact of an uncertain income tax position on
the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant
tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.



Net income per share



Basic net income per share is computed by dividing
net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year
excluding any outstanding ordinary shares that are contingently refundable subject to the satisfaction of both the service and
performance condition on the nonvested shares. Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares.



The Company computes earnings per Class A and Class
B ordinary shares using the two-class method. The unvested portions of nonvested shares are participating securities as all outstanding
nonvested shares are entitled to nonforfeitable dividends that participate in undistributed earnings with ordinary shares. Since
the nonvested shares are considered participating securities, the nonvested shares issued by the Company are required to apply
the two-class method when computing basic earnings per share.



The Group has share options and nonvested shares which
could potentially dilute basic earnings per share in the future. To calculate the number of shares for diluted net income per share,
the effect of the share options is computed using the treasury stock method.



F-26


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Foreign currency translation



The functional and reporting currency of the Company
is the United States dollar ("U.S. dollar"). The financial records of the Company's subsidiaries, VIEs and VIEs' subsidiaries
located in the PRC are maintained in its local currency, the Renminbi ("RMB") which is the functional currency of these
entities. The financial records of the Company's subsidiaries located in Hong Kong are maintained in U.S. dollar which is the functional
currency of these entities.



Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet
date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the
applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the consolidated
statements of operations.



The Group's entities with functional currency of RMB
translate their operating results and financial position into the U.S. dollar, the Company's reporting currency. Assets and liabilities
are translated using the exchange rates in effect on the balance sheet date. Equity amounts are translated at historical exchange
rates, and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are
reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the consolidated
statements of changes in equity and comprehensive income.



Comprehensive income



Comprehensive income of the Group includes the cumulative
foreign currency translation adjustments and net income for the year. The consolidated financial statements have been adjusted
for the retrospective application of the authoritative guidance regarding presentation of comprehensive income, which was adopted
by the Group on January 1, 2012.



Share-based compensation



Share-based compensation with employees is measured
based on the grant date fair value of the equity instrument. The Group recognizes the compensation costs net of an estimated forfeiture
rate using the straight-line method, over the requisite service period of the award, which is generally the vesting period of the
award. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ,
or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up
adjustment in the period of change and will also impact the amount of share-based compensation expense to be recognized in future
periods.



Share awards issued to nonemployees are measured at
fair value at the earlier of the commitment date or the date the services is completed and recognized over the period the service
is provided or as goods is received.



The Group uses the Black-Scholes or Binomial-Model
option pricing model to measure the value of options granted to employees and nonemployees at each grant date or measurement date.



F-27


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Risks and uncertainties



The Group participates in a dynamic industry with
rapid changes in regulations, technology trends, customer demand and competition and believes that changes in any of the following
areas could have a material adverse effect on the Group's future financial position, results of operations, or cash flows: advances
and trends in new technologies and industry standards; changes in certain strategic relationships or customer relationships; regulatory
or other PRC related factors; risks associated with the Group's ability to attract and retain certain necessary employees to support
its growth; risks associated with the Group's ability to keep and increase the user base; risks associated with the Group's growth
strategies and general risks associated with the internet security industry, and risks surrounding pending litigations.



Concentration of credit risk



Financial instruments that potentially expose the
Group to concentrations of credit risk consist primarily of cash and accounts receivable. The Group places its cash with financial
institutions with high-credit ratings and quality. The Group conducts credit evaluations of customers and generally does not require
collateral or other security from their customers. The Group maintains reserves for potential credit losses.



Details of the customers that account for 10% or more
of total revenues are as follow:





|         |  | For the year ended December 31, |   
|-------- |  | ------------------------------- | --
|         |  | 2010                            |   
|         |  |                                 |   
|Customer |  |                                 |   
|A        |  |                                 | 21
|B        |  |                                 | 6 





Details of the customers accounting for 10% or more
of accounts receivable are as follows:





|         |  | December 31, |   
|-------- |  | ------------ | --
|         |  | 2011         |   
|         |  |              |   
|Customer |  |              |   
|A        |  |              | 10
|B        |  |              | 24
|C        |  |              | 8 



F-28


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Newly adopted accounting pronouncements



In May 2011, the FASB issued an authoritative pronouncement
on fair value measurement. The guidance is the result of joint efforts by the FASB and IASB to develop a single, converged fair
value framework. The guidance is largely consistent with existing fair value measurement principles in U.S. GAAP. The guidance
expands the existing disclosure requirements for fair value measurements and makes other amendments, mainly including:



| | · | Highest-and-best-use and valuation-premiseconcepts for nonfinancial
assets- the guidance indicates that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value
of nonfinancial assets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit
risk - the guidance permits an exception to fair value measurement principles for financial assets and financial liabilities (and
derivatives) with offsetting positions in market risks or counterparty credit risk when several criteria are met. When the criteria
are met, an entity can measure the fair value of the net risk position.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Premiums or discounts in fair value measure - the guidance states that "premiums or discounts that reflect size as a characteristic
of the reporting entity's holding (specifically, a blockage factor that adjusts the quoted price of an asset or a liability because
the market's normal daily trading volume is not sufficient to absorb the quantity held by the entity) rather than as a characteristic
of the asset or liability (for example, a control premium when measuring the fair value of a controlling interest) are not permitted
in a fair value measurement."
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Fair value of an instrument classified in a reporting entity's shareholders' equity - the guidance prescribes a model for measuring
the fair value of an instrument classified in shareholders' equity; this model is consistent with the guidance on measuring the
fair value of liabilities.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Disclosures about fair value measurements - the guidance expands disclosure requirements, particularly for Level 3 inputs.
Required disclosures include:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | For fair value measurements categorized in level 3 of the fair value hierarchy: (1) a quantitative disclosure of the unobservable
inputs and assumptions used in the
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

measurement, (2) a description of the valuation process
in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value
measurements, from period to period), and (3) a narrative description of the sensitivity of the fair value to changes in unobservable
inputs and interrelationships between those inputs.



| | o | The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but
whose fair value must be disclosed.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------





F-29


QIHOO 360 TECHNOLOGY CO. LTD.






NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Newly adopted accounting pronouncements



The guidance is to be applied prospective and effective
for interim and annual periods beginning after December 15, 2011, for public entities. Early application by public entities is
not permitted. The adoption of this guidance did not have a significant effect on the Group’s consolidated financial statements.



In June 2011, the FASB issued an authoritative pronouncement
to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of
other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
In both choices, an entity is required to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance
eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders'
equity. These amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The guidance should be applied retrospectively. For public entities, the amendments
are effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted.
The Company has adopted this guidance on January 1, 2012 and has separately presented the consolidated statements of comprehensive
income since that date.



In September 2011, the FASB has issued an authoritative
pronouncement related to testing goodwill for impairment. The guidance is intended to simplify how entities, both public and nonpublic,
test goodwill for impairment. The pronouncement permits an entity to first assess qualitative factors to determine whether it is
''more likely than not'' that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the two-step goodwill impairment test. The guidance is effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance
did not have a significant effect on the Group’s consolidated financial statements.



In December 2011, the FASB issued a further authoritative
pronouncement, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated
Other Comprehensive Income. Under the amendments, entities are required to present reclassification adjustments and the effect
of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net
income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive
income. In addition, the amendments require that reclassification adjustments be presented in interim financial periods. The amendments
supersede changes to those paragraphs that pertain to how, when, and where reclassification adjustments are presented. The amendments
in this Update are effective for public entities for fiscal years beginning after December 15, 2011. The adoption of this guidance
did not have a significant effect on the Group’s consolidated financial statements.



F-30


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | ------------------------------------------------------



Recently issued accounting standards not yet adopted



In December 2011, the FASB issued an authoritative
pronouncement on disclosures about offsetting assets and liabilities. Under this pronouncement, entities are required to disclose
both gross information and net information about both instruments and transactions eligible for offset in the statement of financial
position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include
derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities
lending arrangements. An entity is required to apply the amendments for annual reporting periods beginning on or after January
1, 2013. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
The Group is in the process of evaluating the effect of adoption of this pronouncement.



In July 2012, the FASB has issued an authoritative
pronouncement related to testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the pronouncement,
entities testing indefinite-lived intangible assets for impairment would have the option of performing a qualitative assessment
before calculating the fair value of the asset. If an entity determines, on the basis of qualitative factors, that the indefinite-lived
intangible asset is not more likely than not impaired, a quantitative fair value calculation would not be needed. The amendments
are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Group
will adopt this pronouncement on January 1, 2013 which will not have a significant impact on its financial condition or results
of operations.



In February 2013, the FASB has issued an authoritative
pronouncement related to reporting of amounts reclassified out of accumulated other comprehensive income, to improve the transparency
of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net
income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into
net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income
in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial
statements under U.S. GAAP.



The new amendments will require an organization to:

| | · | Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of
net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified
is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required
under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case
when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet
account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-31


QIHOO 360 TECHNOLOGY CO. LTD.




The amendments apply to all public and private companies
that report items of other comprehensive income. The amendments are effective for reporting periods beginning after December 15,
2012. The Group will adopt this pronouncement on January 1, 2013 which will not have a significant impact on its financial condition
or results of operations.



In March 2013, the FASB has issued an authoritative
pronouncement related to parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries
or groups of assets within a foreign entity or of an investment in a foreign entity. When a reporting entity (parent) ceases to
have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than
a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required
to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should
be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign
entity in which the subsidiary or group of assets had resided.



For an equity method investment that is a foreign
entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be
released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an
equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into
net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains
the equity method investment.



Additionally, the amendments in this pronouncement
clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial
interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that result in an acquirer obtaining
control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to
as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence
of those events. The amendments in this pronouncement are effective prospectively for fiscal years (and interim reporting periods
within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring
after the effective date. Prior periods should not be adjusted. The Group will adopt this pronouncement on January 1, 2014 which
will not have a significant impact on its financial condition or results of operations.



| | 3. | ACQUISITIONS
| | -- | ------------



| | (1) | Acquisition of internet service business
| | --- | ----------------------------------------



On August 26, 2010, the Group made
an investment of $772, representing 35% ownership, to form a new internet service company, Investee D, with an independent third
party. The investment was accounted for as equity method investment since the Group has significant influence over the new company.On June 1, 2011, the Group acquired the remaining 65% equity interest from the third-party shareholders for a cash consideration
of $618. The acquisition provided synergies with the existing business. At the acquisition date, the fair value of the 35% equity
investment was valued at $1,056 by the management with the assistance of an independent valuation firm. The difference of $342
between the fair value of the 35% equity interest and its book value was recorded as loss from equity method investments. The $618
cash consideration was paid during 2011.





F-32


QIHOO 360 TECHNOLOGY CO. LTD.




The acquisition was recorded using
the acquisition method of accounting and, accordingly, the acquired assets and liabilities were recorded at their fair market value
at the date of acquisition. The total purchase price of $618 was allocated as follows:





|                                                      |  | US$ |       
|----------------------------------------------------- |  | --- | ------
|                                                      |  |     |       
|Cash                                                  |  | $   | 615   
|Other current assets                                  |  |     | 13    
|Property and equipment                                |  |     | 28    
|Intangible assets                                     |  |     |       
|Domain name                                           |  |     | 408   
|Technology                                            |  |     | 293   
|Goodwill                                              |  |     | 338   
|Other current liabilities                             |  |     | (21   
|Fair value of 35% equity interests owned by the Group |  |     | (1,056
|Total                                                 |  | $   | 618   









| | (2) | Acquisition of internet service business -continued
| | --- | ---------------------------------------------------



On June 24, 2011, the Group acquired
an anti-virus business from the third-party shareholders for a cash consideration of $491, which was paid during 2011. The acquisition
provided synergies with the existing business.



The acquisition was recorded using
the acquisition method of accounting and, accordingly, the acquired assets and liabilities were recorded at their fair market value
at the date of acquisition. The total purchase price of $491 was allocated as follows:





|                      |  | US$ |    
|--------------------- |  | --- | ---
|                      |  |     |    
|Intangible assets     |  |     |    
|Technology            |  | $   | 304
|Non-compete agreement |  |     | 67 
|Goodwill              |  |     | 120
|Total                 |  | $   | 491



The intangible assets valuations for the acquisitions
described above were based on valuation analysis prepared by the management with the assistance of an independent third party valuation
firm. The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost
approaches. The Group has incorporated certain assumptions which include projected cash flows and replacement costs.



The goodwill is mainly attributable
to intangible assets that cannot be recognized separately as identifiable assets under US GAAP and comprise (a) the assembled work
force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.



The following pro forma information
summarizes the effect of the two acquisitions described above, as if these acquisitions had occurred as of January 1, 2010. This
pro forma information is presented for information purposes only. It is based on historical information and does not purport to
represent the actual results that may have occurred had the Group consummated the acquisitions on January 1, 2010, nor is it necessarily
indicative of future results of operations of the consolidated enterprises:





F-33


QIHOO 360 TECHNOLOGY CO. LTD.






|                                              |  | Year ended December 31, |       
|--------------------------------------------- |  | ----------------------- | ------
|                                              |  | 2010                    |       
|                                              |  | (Unaudited)             |       
|                                              |  |                         |       
|Pro forma revenue                             |  | $                       | 57,838
|Pro forma net income                          |  | $                       | 8,400 
|Pro forma earnings per ordinary share-basic   |  | $                       | 0.05  
|Pro forma earnings per ordinary share-diluted |  | $                       | 0.05  





Since the acquired businesses have
been fully integrated into the Group's current business after the acquisitions, it is impracticable to disclose separately their
standalone revenue and earnings after the acquisition.



| | (3) | Acquisition of software development business
| | --- | --------------------------------------------



During 2012, the Group acquired
the 65% remaining equity interest in one of its equity method investees with cash consideration of $312. The acquisition provided
synergies with the existing business. $185 cash consideration was paid during 2012 and the remaining will be paid in 2013. As of
acquisition date, $443 cash was acquired from this acquisition.



| | 4. | DISPOSAL OF A SUBSIDIARY
| | -- | ------------------------



In January 10, 2012, the Group sold its entire
53.5% equity interest of Shanghai Yiyi Digital Technology Co., Ltd. ("Shanghai Yiyi") to Shanghai Yiyi’s
noncontrolling interest shareholders for a cash consideration of $4,207. The Group recognized a gain from the disposal with
an amount of $3,566.



| | 5. | RESTRICTED CASH
| | -- | ---------------



Restricted cash consists of the following:



(i) $1,605 reserved in an escrow account for registration
of a new VIE’s wholly owned subsidiary. The deposited balance is included in the Group’s bank balance until the registration
of the new company is completed. In March 2013, the new company completed legal process of registration and the restriction was
removed.



(ii)$300 reserved
in an escrow account to guarantee the application for operation right from an international internet organization.The deposit can be withdrawn if the application for the right of operation fails, or after the authorized operation period
expires.



F-34


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 6. | ACCOUNTS RECEIVABLE
| | -- | -------------------



Accounts receivable consists of the following:





|                                |  | December 31, |       
|------------------------------- |  | ------------ | ------
|                                |  | 2011         |       
|                                |  |              |       
|Accounts receivable             |  | $            | 16,809
|Allowance for doubtful accounts |  |              | (68   
|Accounts receivable, net        |  | $            | 16,741





Movement of allowance for doubtful accounts is as
follows:





|                                 |  | 2010 |     |   | 2011 |   |    | 2012 | 
|-------------------------------- |  | ---- | --- | - | ---- | - | -- | ---- | 
|                                 |  |      |     |   |      |   |    |      | 
|Balance at beginning of year     |  | $    | 51  |   |      | $ | 14 |      | 
|(Reversal of) charge to expenses |  |      | (32 | ) |      |   | 51 |      | 
|Write offs during the year       |  |      | (4  | ) |      |   | -  |      | 
|Exchange rate differences        |  |      | (1  | ) |      |   | 3  |      | 
|Balance at end of year           |  | $    | 14  |   |      | $ | 68 |      | 





F-35


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 7. | PREPAID EXPENSES AND OTHER CURRENT ASSETS
| | -- | -----------------------------------------





|                                                          |  | December 31, |       
|--------------------------------------------------------- |  | ------------ | ------
|                                                          |  | 2011         |       
|                                                          |  |              |       
|Prepaid rental                                            |  | $            | 907   
|Rental and other deposits                                 |  |              | 458   
|Prepaid license and technical service fee                 |  |              | 1,424 
|Prepaid principal for investments (i)                     |  |              | 1,168 
|VAT Input for purchasing fixed assets                     |  |              | -     
|Prepayment to service providers (ii)                      |  |              | 1,257 
|Bridge loans (iii)                                        |  |              | 1,209 
|Guarantee loan to employees related to                    |  |              |       
|exercise of share options (iv)                            |  |              | 894   
|Receivable of exercise cost of share options (v)          |  |              | 30    
|Interest receivable                                       |  |              | 955   
|Prepayment for technology purchase and research           |  |              |       
|project to a third party individual                       |  |              | 715   
|Advance to suppler for purchase of property and equipment |  |              | 463   
|Loan to employees (vi)                                    |  |              | 137   
|Reimbursements receivable from ADS                        |  |              |       
|depositary service(vii)                                   |  |              | -     
|Others                                                    |  |              | 3,191 
|Total                                                     |  | $            | 12,808





| | (i) | The Group made several payments to establish new companies with other independent third parties. The prepayments will be recorded
as long-term investments when the investees are legally established.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Amount represents the advance payments made on behalf of the end users to the service providers in relation to other Internet
value-added services, which will be collected from the end users subsequently within a short period.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | The Group provided unsecured interest-free bridge loans to certain investees and potential investees in accordance with the
investment agreements signed between the parties.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Amount represents interest-free loans to employees to settle the individual income tax associated with the options granted
by the Company. Such loan is secured by share options held by the employees, and will be repaid to the Company when the options
are exercised and related ordinary shares are sold.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | The Group's employees exercised their stock options for the purchase of the Company's shares through a trading institution.
The balance of $4,907 represents the exercise cost to be received by the Group from the trading institution. The balance was received
in January 2013.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | The loans were interest-free with repayment period from six months to one year. Such loans are
guaranteed by options and nonvested shares that the Company granted to those employees.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | The Bank of New York Mellon provides ADS depository services to the Company and reimburses partial
service fees to the Company according to the service agreement. The balance represents the receivable from the bank.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-36


QIHOO 360 TECHNOLOGY CO. LTD.






| | 8. | LONG-TERM INVESTMENTS
| | -- | ---------------------





|                                                    |  | December 31, |       
|--------------------------------------------------- |  | ------------ | ------
|                                                    |  | 2011         |       
|                                                    |  |              |       
|Cost method investments:                            |  |              |       
|An internet service company, Investee E (i)         |  | $            | 5,500 
|An internet service company, Investee F (ii)        |  |              | -     
|An internet service company, Investee G (ii)        |  |              | -     
|An internet service company, Investee H (iii)       |  |              | 929   
|Others (viii)                                       |  |              | 2,424 
|Less: impairment loss on long-term investments (iv) |  |              | (666  
|Cost method investments, net                        |  | $            | 8,187 
|Equity method investments:                          |  |              |       
|An internet security company, Investee I (v)        |  |              | 1,958 
|A web game company, Investee J (vi)                 |  |              | 1,547 
|An internet security company, Investee K (vii)      |  |              | -     
|Others (viii)                                       |  |              | 4,105 
|Less: impairment loss on long-term investments (iv) |  |              | (236  
|Equity method investments, net                      |  |              | 7,374 
|Total                                               |  | $            | 15,561





F-37


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 8. | LONG-TERM INVESTMENTS - continued
| | -- | ---------------------------------



| | (i) | In October 2011, the Group entered into a share purchase agreement with Investee E to purchase its 18% ordinary shares
                                                               for an aggregate purchase price of $5,500. The Group used the cost method of accounting to record its investment since the
                                                               Group does not have the ability to exercise significant influence over the operating and financing activities. In May 2012,
                                                               the Group received cash dividend of $313 which was attributable to the period before the investment and was treated as a
                                                               reduction of the investment cost. During 2012, the Group sold part of its equity share for an aggregate price of $4,020 and
                                                               recognized a gain of $2,024. As of December 31, 2012, the Group held 8.04% equity interest in investee E. The management of
                                                               the Group determined that there was no impairment on such investment during the year ended December 31, 2011 and 2012.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | In August 2012, the Group invested in Investee F and Investee G to purchase their 3.33% and 10% preferred shares for purchase
price of $1,500 and $1,575, respectively. The Group used the cost method of accounting to record these investments since the Group
does not have the ability to exercise significant influence over the operating and financing activities. The management of the
Group determined that there was no impairment on such investment during the year ended December 31, 2012.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | In August 2011, the Group entered into an agreement to purchase 1.7% share limited partnership interest in the Investee H
                                                                 and admission as a Limited Partner for an aggregate amount of capital commitment of $3,000. The payments shall be executed in
                                                                 persuade of the capital call made by the General Partner. As of December 2012, the Group has paid $1,379. Investee H is an
                                                                 entrepreneurial incubator which focuses on IT start-ups. The Group used the cost method of accounting to record its
                                                                 investment since the Group does not have the ability to exercise significant influence over the operating and financing
                                                                 activities. The management of the Group determined that there was no impairment on such investment during the year ended
                                                                 December 31, 2011 and 2012.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-38


QIHOO 360 TECHNOLOGY CO. LTD.






NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 8. | LONG-TERM INVESTMENTS - continued
| | -- | ---------------------------------



| | (iv) | An impairment charge is recorded if the carrying amount of the equity method investment exceeds its fair value and this condition
is determined to be other-than-temporary. The Group estimated the fair value of these investee companies based on discounted cash
flow approach which requires significant judgments, including the estimation of future cash flows, which is dependent on internal
forecasts, the estimation of long term growth rate of a company’s business, the estimation of the useful life over which
cash flows will occur, and the determination of the weighted average cost of capital. Certain of the equity method investments
experience a deteriorating financial position and performance and the Group does not expect them to generate any positive future
cash flows. Accordingly, the Group accrued an impairment charge of nil, $236 and $1,541 in 2010, 2011 and 2012 on these equity
method investments based on their fair value which would be minimal.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Group reviews its cost method investments for impairment
whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. The Group considers available
quantitative and qualitative evidence in evaluating potential impairment of its cost method investments. An impairment charge is
recorded if the cost of an investment exceeds its fair value and such excess is determined to be other-than-temporary. The Group
estimated the fair value of these investee companies based on discounted cash flow approach. Factors the Group considers in making
such a determination include general market conditions, the duration and the extent to which the fair value of an investment is
less than its cost, and the Group's intent and ability to hold such investment. As a result of the assessment process for its cost
method investments, the Group recognized impairment charge of nil, $666 and $761 million in 2010, 2011 and 2012, respectively for
certain cost method investments as their financial positions and performance of these investee companies are deteriorating and
the Group does not expect them to generate any positive future cash flows. Accordingly, the Group estimated the fair values of
these investee companies would be minimal.



| | (v) | In November 2011, the Group entered into a nonmonetary transaction with the Investee I. The Group provides the license for
using the Group's certain technology licenses to Investee I in exchange for its 30% equity interest in the form of preferred shares.
The Group also needs to provide continuous technical support to the investee for ten years. Because the fair value of the licenses
is more readily determinable, the Group recorded the transaction based on the fair value of the license which was valued with the
assistance of a third-party valuation firm. The fair value was determined as $3,000. The transaction was accounted for as an equity
method investment since the Group has the ability to exercise significant influence over the operating and financing activities
of Investee I. The partial gain of the nonmonetary transaction was recorded as deferred revenue and is amortized ratably over the
ten year contract period. In June 2012, the Group made an additional investment in Investee I for an aggregate price of $2,140
in cash to avoiding dilution in its series B financing. The Group recognized $142 and $2,337 share of loss in 2011 and 2012, respectively.
The management of the Group determined that there was no impairment on such investment during the years ended December 31, 2011
and 2012.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-39


QIHOO 360 TECHNOLOGY CO. LTD.






| | (vi) | In December 2011, the Group made an investment of $1,572, representing 25% ownership, to form a new web game company, Investee
J, with independent third parties. The investment was accounted for as an equity method investment since the Group has the ability
to exercise significant influence over the operating and financing activities of Investee J. The Group recognized $25 and $247
share of loss in 2011 and 2012, respectively. The management of the Group determined that there was no impairment on such investment
during the years ended December 31, 2011 and 2012.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | In April 2012, the Group entered into a share purchase agreement with Investee K to purchase its 20% ordinary shares for an
aggregate purchase price of $2,006. The investment was accounted for as an equity method investment since the Group has the ability
to exercise significant influence over the operating and financing activities of Investee K. The Group recognized $115 share of
loss since the date of the investment. The management of the Group determined that there was no impairment on such investment during
the year ended December 31, 2012.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-40


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 8. | LONG-TERM INVESTMENTS - continued
| | -- | ---------------------------------



| | (viii) | As of December 31, 2011, the Group had 18 investments mainly in internet technology industry with equity interest from 1.5%
to 40%. In 2012, the Group made 37 new investments other than the above 7 investments with initial considerations less than $1,000,
which are specialized in mobile internet business, game development and security business with the equity interest ranging from
5% to 40%. The Group used cost method of accounting to account for the investments with equity interest below 20% when the Group
does not have the ability to exercise significant influence, and used the equity method of accounting to account for the investments
with equity interest between 20% and 50% when the Group has the ability to exercise significant influence but does not have controlling
interest over the investments. During 2012, the Group sold two equity method investments and certain of its equity interests in
two cost method investments and recognized a total gain of $4,766. No such transaction occurred in 2010 and 2011.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | 9. | PROPERTY AND EQUIPMENT, NET
| | -- | ---------------------------





|                                                  |  | December 31, |       
|------------------------------------------------- |  | ------------ | ------
|                                                  |  | 2011         |       
|                                                  |  |              |       
|Computer equipment and application software       |  | $            | 22,105
|Building (i)                                      |  |              | 671   
|Office building related facility and machines (i) |  |              | -     
|Furniture and vehicles                            |  |              | 507   
|Leasehold improvements                            |  |              | 1,336 
|                                                  |  |              | 24,619
|Less: Accumulated depreciation and amortization   |  |              | 7,954 
|Property and equipment, net                       |  | $            | 16,665





| | (i) | In August 2012, the Group entered into a series of definitive agreements to purchase two parcels of office buildings and the
associated land use rights with an area of approximately 69,205 square meters in Chaoyang District, Beijing, China for a total
cash consideration of $222 million. As of December 31, 2012, the Group completed the acquisition of one parcel of the building
and capitalized the related building cost of $43,927 and the cost for the facilities of the building of $13,212. As of December
31, 2012, the other parcel of the building is still under construction. 
Depreciation and amortization expenses for the
years ended December 31, 2010, 2011 and 2012 were $781, $3,393 and $14,768, respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







F-41


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 10. | LAND USE RIGHTS, NET
| | --- | --------------------





|                                                |  | December 31, |  
|----------------------------------------------- |  | ------------ | -
|                                                |  | 2011         |  
|                                                |  |              |  
|Land use rights                                 |  | $            | -
|                                                |  |              |  
|Less: accumulated depreciation and amortization |  |              | -
|Land use rights, net                            |  | $            | -





In
December 2012, the Group acquired land use rights associated with the newly acquired office building inChaoyang District,
Beijing, China (see Note 9 for detail). The certificate will expire as of December 8, 2056. The Group
amortizes the cost of acquired land use rights on a straight-line basis over the remaining 44 years of useful life. Amortization
expenses for land use rights totaled $140 for the year ended December 31, 2012.The Group is in the process of obtaining
the certificate of the land use rights.

Future amortization expense
is $1,677 per year for each of the next five years through December 31, 2017 and after.



| | 11. | ACQUIRED INTANGIBLE ASSETS, NET
| | --- | -------------------------------



The gross carrying amount, accumulated amortization
and net carrying amount of the acquired intangible assets are as follows:





|                                 |  | December 31, |       
|-------------------------------- |  | ------------ | ------
|                                 |  | 2011         |       
|                                 |  |              |       
|Indefinite-lived:                |  |              |       
|Domain names                     |  | $            | 757   
|Trademarks                       |  |              | 1,274 
|License of service provider      |  |              | 604   
|Definite-lived:                  |  |              |       
|Domain names                     |  |              | 836   
|Source code                      |  |              | 1,752 
|Technology                       |  |              | 4,579 
|Non-compete agreement            |  |              | 121   
|License of service provider      |  |              | -     
|Trademarks                       |  |              | -     
|Total acquired intangible assets |  |              | 9,923 
|Less: Accumulated amortization   |  |              |       
|Domain names                     |  |              | (64   
|Source code                      |  |              | (572  
|Technology                       |  |              | (1,009
|Non-compete agreement            |  |              | (59   
|Trademarks                       |  |              | -     
|Accumulated amortization         |  |              | (1,704
|Less: Impairment loss            |  |              |       
|Domain names                     |  |              | (278  
|Source code                      |  |              | (87   
|Trademarks                       |  |              | -     
|Technology                       |  |              | -     
|Accumulated impairment loss      |  |              | (365  
|Acquired intangible assets, net  |  | $            | 7,854 







F-42


QIHOO 360 TECHNOLOGY CO. LTD.






NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





Amortization expenses for the years ended December
31, 2010, 2011 and 2012 were $563, $834 and $1,689, respectively. Amortization expenses for the years ending December 31, 2013,
2014, 2015, 2016 and 2017 and after are expected to be $3,333, $2,927, $2,275, $816 and $1,789, respectively.



On December 31 of each year, the Group evaluated the
remaining useful life of the intangible assets with indefinite lives to determine whether events and circumstances continue to
support an indefinite useful life. At December 31, 2012, the Group determined that a license of service provider which was estimated
to have indefinite live should have a life of eight years. The Group then estimated the fair value of this intangible asset at
the time of change in useful live using discounted cash flow valuation methodology and determined that the asset was not impaired.
After the change of the useful life, this intangible asset began to be amortized prospectively over its estimated remaining useful
life.



The Group performs an impairment assessment on intangible
assets with indefinite lives on December 31 of each year by comparing the fair value with its carrying value. The fair value of
intangible assets with indefinite lives was estimated based on the discounted value of estimated future cash flows. Based on the
assessment, the Group determined the excess in the carrying value of indefinite-lived intangible asset over its fair value and
recognized an impairment loss of nil, nil and $197 for the years ended December 31, 2010, 2011 and 2012, respectively.



Intangible assets with determinable useful lives are
evaluated for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
The Group measures recoverability of these assets to be held and used as part of a cash generating unit by comparing the carrying
amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If the assets are determined
as impaired, the impairment will equal the amount by which the carrying value of the assets exceeds the fair value of the assets.

As a result of the impairment analysis, the Group
recognized an impairment loss of nil, $87 and $1,151 for the year ended December 31, 2010, 2011 and 2012, respectively for intangible
assets with determinable useful lives.





F-43


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 12. | GOODWILL
| | --- | --------





|                                              |  |      |       |  |      |  
|--------------------------------------------- |  | ---- | ----- |  | ---- | -
|                                              |  | 2011 |       |  | 2012 |  
|                                              |  |      |       |  |      |  
|Beginning balance                             |  | $    | 3,918 |  |      | $
|Goodwill acquired in acquisitions of business |  |      | 458   |  |      |  
|Exchange rate differences                     |  |      | 204   |  |      |  
|Ending balance                                |  |      | 4,580 |  |      |  





The Group performs its annual impairment test for
Goodwill on December 31 of each year. Based on the results of the impairment test, there was no impairment of goodwill during the
years ended December 31, 2010, 2011 and 2012, respectively.





| | 13. | ACCRUED EXPENSES AND OTHER CURRENT LIBILITIES
| | --- | ---------------------------------------------





|                                                           |  | December 31, |       
|---------------------------------------------------------- |  | ------------ | ------
|                                                           |  | 2011         |       
|                                                           |  |              |       
|Payroll related payable                                    |  |              | 5,481 
|Amount due to employees (i)                                |  |              | 4,605 
|Accrued marketing promotion expenses                       |  |              | 1,658 
|Accrued bandwidth                                          |  |              | 1,378 
|Accrued professional service fee                           |  |              | 1,346 
|Payable for purchasing land use rights and plant, property |  |              |       
|and equipment and intangible assets                        |  |              | 915   
|Accrued agent rebates and profit sharing cost              |  |              | 844   
|Accrued license and technical service fee                  |  |              | 750   
|Consideration payable for investments                      |  |              |       
|and acquisitions                                           |  |              | 498   
|Other tax payable                                          |  |              | 233   
|Deposits from E-commerce customers                         |  |              | 1,083 
|Other current liabilities                                  |  |              | 1,011 
|Total                                                      |  | $            | 19,802





| | (i) | Amount represents cash received by the Group from the trading institution for selling ordinary shares on behalf of the employees,
which will be paid to the employee subsequently.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-44


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 14. | DEFERRED REVENUE
| | --- | ----------------





|                                    |  |              |        |  |      |  
|----------------------------------- |  | ------------ | ------ |  | ---- | -
|                                    |  | December 31, |       
|                                    |  | 2011         |        |  | 2012 |  
|                                    |  |              |        |  |      |  
|Deferred revenue - current:         |  |              |        |  |      |  
|Deferred revenue from customers (i) |  | $            | 8,356  |  |      | $
|Deferred revenue for system         |  |              |        |  |      |  
|development services (ii)           |  |              | 3,006  |  |      |  
|Deferred subsidy income (iii)       |  |              | 517    |  |      |  
|Deferred license fee (iv)           |  |              | 210    |  |      |  
|Deferred reimbursement of ADS       |  |              |        |  |      |  
|depositary service (v)              |  |              | -      |  |      |  
|Total deferred revenue - current    |  | $            | 12,089 |  |      | $
|Deferred revenue - noncurrent       |  |              |        |  |      |  
|Deferred license fee (iv)           |  | $            | 1,853  |  |      | $
|Deferred revenue for system         |  |              |        |  |      |  
|development services (ii)           |  |              | -      |  |      |  
|Deferred subsidy income (iii)       |  |              | 1,589  |  |      |  
|Deferred reimbursement of ADS       |  |              |        |  |      |  
|depositary service (v)              |  |              | 1,671  |  |      |  
|Total deferred revenue - noncurrent |  | $            | 5,113  |  |      | $





F-45


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 14. | DEFERRED REVENUE - continued
| | --- | ----------------------------



| | (i) | Deferred revenue from customers mainly represents payments received from (1) advertising customers before the services were
provided by the Group; and (2) game players before the in-game currency were consumed.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Deferred revenue for system development services represents payments received from third party customers in relation to the
service to be provided by the Group which is subject to the customers' inspection and acceptance.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | The Group received prepayments from the local government for web-security related research and development projects. The amount
was deferred since the projects are subject to final inspection upon the completion.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Deferred license fee was related to the nonmonetary transaction as described in Note 8(v).
| | ---- | ------------------------------------------------------------------------------------------



| | (v) | Deferred reimbursement of ADS depositary service represents the cash received from the
Bank of New York Mellon as reimbursement of its ADS depositary service, which will be recognized ratably over the ADS contract
term.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | 15. | INCOME TAXES
| | --- | ------------



Cayman



The Company is a tax-exempted company incorporated
in the Cayman Islands.



Hong Kong



Qifei International, 360 International and Qiji International,
incorporated in 2010, are subject to the unified tax rate of 16.5% in Hong Kong for the year ended December 31, 2011 and 2012.
Under the Hong Kong tax laws, Qifei International, 360 International and Qiji International are exempted from income tax on its
foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.



F-46


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 15. | INCOME TAXES - continued
| | --- | ------------------------



PRC



The Group's PRC entities are subject to Enterprise
Income Tax ("EIT") on the taxable income in accordance with the relevant PRC income tax laws.



The Enterprise Income Tax Law ("the New EIT Law")
became effective on January 1, 2008. The New EIT Law applies a uniform 25% enterprise income tax rate to both foreign invested
enterprises and domestic enterprises except for certain entities that enjoy preferential tax rates, which are lower than the statutory
rates, as described below.



Under the New EIT Law and its implementing rules,
an enterprise which qualifies as a "high and new technology enterprise" ("HNTE") is entitled to a tax rate
of 15%.



On April 21, 2010, the State Administration of Taxation
issued Circular 157 Further Clarification on Implementation of Preferential EIT Rate during Transition Periods ("Circular
157"). Circular 157 seeks to provide additional guidance on the interaction of certain preferential tax rates under the transitional
rules of the New EIT Law. Prior to Circular 157, Qizhi Software interpreted the law to mean that if an HNTE entity was in a tax
holiday period, including "2-year exemption plus 3-year half rate", "5-year exemption plus 5-year half rate"
and other tax exemptions and reductions, where it was entitled to a 50% reduction in the tax rate and was also entitled to a 15%
rate of tax due to HNTE status under the New EIT Law, then it was entitled to pay tax at the rate of 7.5%. Circular 157 appears
to have the effect that such an entity is entitled to pay tax at either the lower of 15% or 50% of the standard PRC tax rate (i.e.
currently 25%). Circular 157 is unclear as to whether its effect is retrospective but the Group's understanding is that the State
Administration of Taxation has taken the position that the Circular applies only to tax years commencing from January 1, 2010.
However, Qizhi Software confirmed with the relevant local tax district that entities that qualify for "3-year exemption plus
3-year half rate" tax holiday as HNTEs and which is registered in Experimental Area for Developing New-Technology Industries
of Beijing, notwithstanding Circular 157, can still be subject to 7.5% EIT for the year ended December 31, 2010. As a consequence,
Qizhi Software was entitled to a tax rate of 7.5% in 2010. Qizhi Software received a renewal of its HNTE status in October 2011
and was entitled to a reduced EIT rate of 15% for 2011 and 2012.





F-47


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 15. | INCOME TAXES - continued
| | --- | ------------------------



PRC - continued



Beijing Qihu was recognized as a HNTE by relevant
PRC government authorities and entitled to PRC Enterprise Income Tax of 15% tax rate for the years ended December 31, 2010 and
2011, respectively. In July 2012, Beijing Qihu received a renewal of its HNTE status and is still entitled to 15% tax rate for
the years ended December 31, 2012.



Shanghai Qitai is approved by the local tax authority
to file its income tax by adopting the "deemed-profit method". Under this method, Shanghai Qitai filed its income tax
by calculating as 2.5% of the gross revenues.



3G, QBTX, QH360, Yuan Tu and CDQY are subject to the
unified tax rate of 25% for the years ended December 31, 2010, 2011 and 2012, respectively.



Beijing Star World is recognized as a HNTE by
relevant PRC government authorities starting on November 21, 2011, and is subject to tax rate of 25% for the years ended
December 31, 2010 and 15% for the years ended December 31, 2011 and 2012, respectively.



Shanghai JN and YZT are all subject to the unified
tax rate of 25% for the year ended December 31, 2011 and 2012.



Tianjin Qisi is recognized as Software Enterprise
by relevant PRC government authorities in March 2011 and entitled to the preferential tax treatment of "2-year exemption plus
3-year half rate" commencing from its first profit-making year for EIT purposes. For the year ended December 31, 2012, Tianjin
Qisi starts to enjoy the first year tax exemption.



Ceteng, which was incorporated in 2011, is recognized
as Software Enterprises by relevant PRC government authorities on December 19, 2011 and entitled to the preferential tax treatment
of "2-year exemption plus 3-year half rate" commencing from its first profit-making year for EIT purposes. Until the
year ended December 31, 2012, Ceteng is still as accumulated loss for EIT.



QFXY, which was incorporated in 2012, is recognized
as Software Enterprises by relevant PRC government authorities in November 2012 and entitled to the preferential tax treatment
of "2-year exemption plus 3-year half rate" commencing from its first profit-making year for EIT purposes. QFXY is subject
to the unified tax rate of 25% for the year ended December 31, 2012.



QCYS, SYQJ, QFT, SHJL, 360 Youjiu, BJCX, Shanghai
QH, and WBKS, which were incorporated or acquired in 2012, are all subject to the unified tax rate of 25% for the year ended December
31, 2012.



BJJY was acquired in 2012 and is recognized as Software
Enterprise by relevant PRC government authorities in 2011 and entitled to the preferential tax treatment of "2-year exemption
plus 3-year half rate" commencing from its first profit-making year for EIT purposes. BJJY was entitled to a tax rate of 50%
of the applicable rate for 2012 which was 12.5%.





F-48


QIHOO 360 TECHNOLOGY CO. LTD.




Uncertainties exist with respect to how the current
income tax law in the PRC applies to the Group's overall operations, and more specifically, with regard to tax residency status.
The New EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for
Chinese Income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the
New EIT Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and
control over the manufacturing and business operations, personnel, accounting, properties, etc., occurs within the PRC. Despite
the present uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe that the legal entities
organized outside of the PRC within the Group should be treated as residents for EIT law purposes. If the PRC tax authorities subsequently
determine that the Company, its subsidiaries, VIEs and VIEs' subsidiaries registered outside the PRC should be deemed a resident
enterprise, the Company and its subsidiaries, VIEs and VIEs' subsidiaries registered outside the PRC will be subject to the PRC
income tax at a rate of 25%.



F-49


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 15. | INCOME TAXES - continued
| | --- | ------------------------



PRC - continued



If the Company were to be non-resident for PRC tax
purpose, dividends paid to it out of profits earned after January 1, 2008 would be subject to a withholding tax. In the case of
dividends paid by PRC subsidiaries, the withholding tax would be 10%. Distributions made out of pre January 1, 2008 retained earnings
will not be subject to the withholding tax. The Company's PRC entities historically have not declared or paid any dividends.



Aggregate undistributed earnings of the Company's
subsidiaries, VIEs and VIEs' subsidiaries located in the PRC that are available for distribution to the Company of approximately
$142,121 at December 31, 2012 are considered to be indefinitely reinvested, and accordingly, no provision has been made for the
Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company. The Chinese tax
authorities have also clarified that distributions made out of pre January 1, 2008 retained earnings will not be subject to the
withholding tax.



Detailed information about income tax of the Group's
subsidiaries and VIEs is as below:



The current and deferred portion of income tax expense
included in the consolidated statements of operations is as follows:





|                                      |  | For the year ended December 31, |    
|------------------------------------- |  | ------------------------------- | ---
|                                      |  | 2010                            |    
|                                      |  |                                 |    
|Current income tax expense            |  | $                               | 403
|Deferred income tax expense (benefit) |  |                                 | 60 
|Total income tax expense              |  | $                               | 463







F-50


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 15. | INCOME TAXES - continued
| | --- | ------------------------



PRC - continued



The principal components of the deferred tax assets
and liabilities are as follows:





|                                             |  | December 31, |       
|-------------------------------------------- |  | ------------ | ------
|                                             |  | 2011         |       
|                                             |  |              |       
|Current deferred tax assets:                 |  |              |       
|Accrued payroll                              |  | $            | 797   
|Provision of allowance for doubtful accounts |  |              | 15    
|Deferred revenue-current                     |  |              | -     
|Other assets                                 |  |              | 52    
|Less: Valuation allowance                    |  |              | (6    
|Current deferred tax assets, net             |  |              | 858   
|Noncurrent deferred tax assets:              |  |              |       
|Deferred revenue-noncurrent                  |  |              | 457   
|Acquired intangible assets                   |  |              | 57    
|Advertising and promotion expenses           |  |              | 23    
|Subsidy income                               |  |              | -     
|Net operating loss carry forwards            |  |              | 1,137 
|Less: Valuation allowance                    |  |              | (1,160
|Noncurrent deferred tax assets, net          |  |              | 514   
|Noncurrent deferred tax liabilities:         |  |              |       
|Acquired intangible assets                   |  |              | 507   
|Subsidy income                               |  |              | -     
|Noncurrent deferred tax liabilities          |  | $            | 507   





The Company operates through its subsidiaries and
VIEs and the valuation allowance is considered on each individual subsidiary and VIE basis. The subsidiaries and VIEs registered
in the PRC have total net operating loss carry forwards of $5,546 as of December 31, 2012 which will expire on various dates between
December 31, 2013 and December 31, 2017.



F-51


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 15. | INCOME TAXES - continued
| | --- | ------------------------



PRC - continued



Reconciliation between the income tax expense computed
by applying the PRC tax rate to income before income tax and the actual provision for income tax is as follows:





|                                                    |  | For the year ended December 31, |       
|--------------------------------------------------- |  | ------------------------------- | ------
|                                                    |  | 2010                            |       
|                                                    |  |                                 |       
|Income before income tax expense                    |  | $                               | 9,011 
|PRC statutory income tax rate                       |  |                                 | 25    
|Income tax expense at the statutory income tax rate |  |                                 | 2,253 
|Permanent differences                               |  |                                 | 75    
|Effect of different income tax calculation          |  |                                 |       
|method required by tax bureau                       |  |                                 | (2,416
|Effect of different income tax rates                |  |                                 |       
|in other jurisdictions                              |  |                                 | 1,093 
|Effect of income tax holiday                        |  |                                 |       
|and preferential tax rates                          |  |                                 | (717  
|Changes in valuation allowance                      |  |                                 | 175   
|Income tax expense                                  |  | $                               | 463   





Certain consolidated entities of the Group enjoy tax
holidays granted by the local tax authorities. Without the tax holidays, the Group's income tax expense would have increased by
$717, $7,036 and $17,844 for the years ended December 31, 2010, 2011 and 2012, respectively. The impact of the tax holidays on
basic net income per ordinary share was an increase of $0.01, $0.05 and $0.10 for the years ended December 31, 2010, 2011 and 2012,
respectively.



F-52


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 16. | ORDINARY SHARES
| | --- | ---------------



The Company's Memorandum and Articles of Association,
as amended, authorizes the Company to issue 156,631,180 for 2010, 500,000,000 for 2011 and 2012, respectively ordinary shares with
a par value of $0.001 each.



On January 17, 2006, the Company issued a total of
100 ordinary shares, par value $1.00 each, including 55 shares to Young Vision and 45 shares to Global Village. In January 2006,
the Company subdivided the ordinary shares at a 1 to 1,000 ratio. Also on the same day, the Company issued a total of 65,239,960
ordinary shares to the shareholders at par value $0.001 each. As a result, Young Vision held 35,936,978 ordinary shares, 18,086,101
of which was designated as the equity pool (see Note 17), par value $0.001 each, and Global Village held 29,402,982 ordinary shares
par value $0.001 each.



In January 2010, the Company also issued to Global
Village 2,125,176 ordinary shares in connection with its acquisition of The World Browser in September 2009. The shares were recorded
as shares to be issued in equity on the consolidated balance sheet as of December 31, 2009.



In addition, in January 2010, in connections with
certain acquisitions and share-based compensation arrangement in 2009, the Company issued 3,517,544 ordinary shares to Young Vision
that would eventually issue the shares to key employees if certain employment criteria are met.



In April 2010, the Company issued 578,060 ordinary
shares in connection with the exercise of options which were granted and vested in 2006.



On April 4, 2011, the Company completed its IPO and
a concurrent private placement upon which the Company's ordinary shares were divided into Class A ordinary shares and Class B ordinary
shares. The Company newly issued 26,063,544 Class A ordinary shares, consisting of (i) 20,891,130 Class A ordinary shares offered
through IPO, and (ii) 5,172,414 Class A ordinary shares issued in connection with the concurrent private placement. All of the
Company's Series A, Series B and Series C shares were automatically converted into 27,024,089 Class A and 51,289,927 Class B ordinary
shares.



In September and December 2011, the Company issued
2,152,693 and 907,086 ordinary shares for future delivery to the employees and nonemployees upon exercise of share options or grant
of nonvested shares, respectively.



In March, September and December 2012, the Company
issued 563,715, 2,160,951 and 2,403,180 ordinary shares for future delivery to the employees and nonemployees upon exercise of
share options or grant of nonvested shares, respectively.



As of December 31, 2012, there are 123,472,524 Class
A ordinary shares and 60,684,573 Class B ordinary shares outstanding, par value $0.001 per share.



F-53


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 17. | CONVERTIBLE PARTICIPATING REDEEMABLE PREFERRED SHARES
| | --- | -----------------------------------------------------



In January and May of 2006, the Company issued a total
of 31,003,440 shares of Series A shares at Series A subscription price of $0.4999 per share for cash proceeds of $15,500. In May
2006, the Company granted a total of 1,600,320 warrants to certain Series A shareholders to purchase additional Series A shares
which were exercisable into Series A shares at the Series A subscription price for $800. All of the warrants were exercised in
August 2006.



In November 2006, the Company issued 37,878,789 shares
of Series B shares to Series B shareholders at Series B subscription price of $0.66 per share for cash proceeds of $25,000.



In January 2010, the Company issued a total of 7,831,467
shares of Series C shares at Series C subscription price of $2.5538 per share for cash proceeds of $20,000.



In April 2010, one of the shareholders of Series A
shares transferred at Series C subscription price of $2.5538 per share to three investors a total of 1,691,610 Series A shares,
156,631 of which was transferred to a shareholder of both Series A shares and Series B shares. The shareholder was granted all
the rights of the Series C shares for the 156,631 Series A shares.



On April 4, 2011, Series A, Series B and Series C
shares had been automatically converted into 27,024,089 Class A and 51,289,927 Class B ordinary shares after the closing of IPO.



The main terms of Series A, Series B and Series C
shares are summarized as follows:



Rank



The series C shares shall, with respect to (i) the
payment of the liquidation payment in the event of a liquidation or a sale transaction, (ii) the payment of the dividends and (iii)
all other rights and preferences, rank senior to (a) the series B shares, the series A shares and the ordinary shares; while series
B shares with respect to these events rank senior to the series A shares and the ordinary shares; and the series A shares respect
to these events rank senior to the ordinary shares.



Redemption



At any time commencing on the earlier of (a) such
time as the Company's CEO is enjoined or prevented from serving as the CEO of the Company and (b) the sixth anniversary of the
Series B Subscription Date, (i) if holders of at least 66 2/3% of the Series B shares approve redemption, any holder of Series
B share shall be entitled to require the Company and (ii) if holders of at least 75% of the Series A shares approve redemption,
any holder of Series A shares shall be entitled to require the Company, in each case by a six-month prior notice in writing to
the Company to redeem, out of legally available funds, for all, but not less than all, of the Series B shares or Series A shares
held by such holder, as applicable; provided the Group remain solvent and have sufficient cash for working capital required for
at least one year, by reference to the annual budget approved by the Board. This redemption right set forth herein shall terminate
upon closing of a qualified initial public offering ("Qualified IPO").



F-54


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 17. | CONVERTIBLE PARTICIPATING REDEEMABLE PREFERRED SHARES - continued
| | --- | -----------------------------------------------------------------



Redemption - continued



At any time commencing on the fifth anniversary of
the series C subscription date, if holders of at least 66 2/3% of the series C shares approve redemption, any holder of series
C shares shall be entitled to require the Company, by serving a Redemption Notice on the Company, to redeem, out of legally available
funds, for all, but not less than all, of the series C shares held by such holder, provided, that the Group Companies remain solvent
and have sufficient cash for working capital required for at least one year by reference to the annual budget approved by the Board
of Directors.



Qualified IPO means firm commitment underwritten public
offering either with total offering proceeds to the Company of at least $80,000 before deduction of the underwriting commissions
and expenses or with the approval of holders of 66 2/3% or more of the then issued and outstanding preferred shares of the Company.



Redemption Payments equal to the (i) aggregate of
series C subscription price, series B subscription price or series A shares subscription price, (as adjusted for share dividends,
combinations or splits or reclassification with respect to such share) plus (ii) all accumulated but unpaid dividends on the Series
C shares, the Series B shares or Series A shares, as applicable, at a rate of 5% for each year the Series C shares, Series B shares
or Series A shares, as applicable, remain outstanding (pro rata for a partial year).



During the years ended December 31, 2010 and 2011,
the Company recorded $815 and $203 as accretion of Series A shares, $1,250 and $313 as accretion of Series B shares, $978 and $255
as accretion of Series C shares in the consolidated statements of operations, respectively.



Conversion



Optional conversion-Any holder of Series A shares,
Series B shares and Series C shares shall have the right, at its option, at any time and from time to time, to convert, any or
all of such holder's Series A shares, Series B shares or Series C shares, as applicable, into such number of fully paid ordinary
shares as is determined by dividing (i) the Series A subscription price by the then effective conversion price for the Series A
shares, or (ii) the Series B subscription price by the then effective conversion price for the Series B shares, or (ii) the Series
C subscription price by the then effective conversion price for the Series C shares, as applicable. The conversion price for Series
A shares, Series B shares and Series C shares shall initially be equal to the Series A subscription price, the Series B subscription
price and the Series C subscription price respectively, subject to adjustment for share dividend, share split or share combination,
and other anti-dilution feature.



F-55


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 17. | CONVERTIBLE PARTICIPATING REDEEMABLE PREFERRED SHARES - continued
| | --- | -----------------------------------------------------------------



Conversion - continued



Automatic conversion-Immediately upon closing of a
Qualified IPO or approval of the holder of at least 75% of the Series A shares, each outstanding share of Series A shares shall
be automatically converted, into the number of fully paid and ordinary shares in accordance with the then effective applicable
conversion price.



Immediately upon closing of a Qualified IPO, each
outstanding share of Series B shares shall be automatically converted, into the number of fully paid and ordinary shares in accordance
with the then effective applicable conversion price.



Immediately upon closing of a Qualified IPO or approval
of the holder of at least 75% of the Series C preferred shares, each outstanding share of Series C shares shall be automatically
converted, into the number of fully paid ordinary shares in accordance with the then effective applicable conversion price.



Dividends



For dividend other than in ordinary shares, dividend
shall be ratably paid to holders of Series C shares, Series B shares, Series A shares and Ordinary shares based on an as-if converted
basis.



For dividend in ordinary shares, holders of Series
C shares, Series B shares or Series A shares shall not participate in the distribution of dividend in Ordinary Shares, but shall
be entitled to adjustment to the conversion price then in effect.



Voting rights



The Board of Directors shall comprise a maximum of
six directors, two of which shall represent Series A preferred shareholders, one of which shall represent Series B preferred shareholders.
Series A, Series B and Series C shares shall be entitled to three, two and one non-voting observers to the Board of Directors,
respectively. Holders of ordinary shares, voting as a single class, shall be entitled to elect a maximum of three directors.



Liquidation preference



Upon liquidation, out of legally available assets
for shareholders, holders of Series C shares shall be paid an amount equal to Series C subscription price plus unpaid dividends
if any first. Then Series B shareholders shall be paid an amount equal to Series B subscription price plus unpaid dividends if
any. Then Series A shareholders shall be paid an amount equal to Series A subscription price plus unpaid dividends if any. Any
remaining assets shall be distributed ratably among Series C shareholders, Series B shareholders, Series A shareholders and ordinary
shareholders on an as-if converted basis. The Company has not declared any dividends for Series A shares, Series B shares, or Series
C shares.



F-56


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 18. | NET INCOME PER SHARE
| | --- | --------------------



The following table sets forth the computation of
basic and diluted net (loss) income per share for the periods indicated:





|                                                                       |  | 2010 |            |  | 2011 |  |             | 2012 | 
|---------------------------------------------------------------------- |  | ---- | ---------- |  | ---- |  | ----------- | ---- | 
|                                                                       |  |      |            |  |      |  |             |      | 
|Net income attributable to Qihoo 360 Technology Co. Ltd                |  |      | 8,508      |  |      |  | 15,603      |      | 
|Accretion of Series A shares                                           |  |      | 815        |  |      |  | 203         |      | 
|Accretion of Series B shares                                           |  |      | 1,250      |  |      |  | 313         |      | 
|Accretion of Series C shares                                           |  |      | 978        |  |      |  | 255         |      | 
|Undistributed earnings allocated to Series A shares(i)                 |  |      | 1,040      |  |      |  | -           |      | 
|Undistributed earnings allocated to Series B shares(i)                 |  |      | 906        |  |      |  | -           |      | 
|Undistributed earnings allocated to Series C shares(i)                 |  |      | -          |  |      |  | -           |      | 
|Undistributed earnings allocated to participating unvested shares(i)   |  |      | 778        |  |      |  | 1,124       |      | 
|Net income attributable to Class A and Class B ordinary shareholders   |  |      |            |  |      |  |             |      | 
|for computing basic net income per ordinary share                      |  |      | 2,741      |  |      |  | 13,708      |      | 
|Net income attributable to nonvested shareholders for computing        |  |      |            |  |      |  |             |      | 
|basic net income per participating unvested shares(i)                  |  |      | 778        |  |      |  | 1,124       |      | 
|Accretion of Series A shares                                           |  |      | 815        |  |      |  | 203         |      | 
|Undistributed earnings allocated to Series A shares(i)                 |  |      | 1,040      |  |      |  | -           |      | 
|Net income attributable to Series A shareholders for computing basic   |  |      |            |  |      |  |             |      | 
|net income per Series A share                                          |  |      | 1,855      |  |      |  | 203         |      | 
|Accretion of Series B shares                                           |  |      | 1,250      |  |      |  | 313         |      | 
|Undistributed earnings allocated to Series B shares(i)                 |  |      | 906        |  |      |  | -           |      | 
|Net income attributable to Series B shareholders for computing basic   |  |      |            |  |      |  |             |      | 
|net income per Series B share                                          |  |      | 2,156      |  |      |  | 313         |      | 
|Accretion of Series C shares                                           |  |      | 978        |  |      |  | 255         |      | 
|Undistributed earnings allocated to Series C shares(i)                 |  |      | -          |  |      |  | -           |      | 
|Net income attributable to Series C shareholders for computing basic   |  |      |            |  |      |  |             |      | 
|net income per Series C share                                          |  |      | 978        |  |      |  | 255         |      | 
|Weighted average ordinary shares outstanding used in computing basic   |  |      |            |  |      |  |             |      | 
|net income per Class A and Class B ordinary share                      |  |      | 55,568,041 |  |      |  | 137,775,752 |      | 
|Weighted average shares used in calculating net income per             |  |      |            |  |      |  |             |      | 
|participating unvested share-basic                                     |  |      | 15,782,530 |  |      |  | 11,292,535  |      | 
|Weighted average shares outstanding used in computing basic            |  |      |            |  |      |  |             |      | 
|net income per Series A share                                          |  |      | 32,603,760 |  |      |  | 8,356,247   |      | 
|Weighted average shares outstanding used in computing basic            |  |      |            |  |      |  |             |      | 
|net income per Series B share                                          |  |      | 37,878,789 |  |      |  | 9,755,085   |      | 
|Weighted average shares outstanding used in computing basic            |  |      |            |  |      |  |             |      | 
|net income per Series C share                                          |  |      | 7,659,818  |  |      |  | 2,057,209   |      | 
|Weighted average ordinary shares outstanding used in computing diluted |  |      |            |  |      |  |             |      | 
|net income per Class A and Class B ordinary share(ii)                  |  |      | 71,350,571 |  |      |  | 172,992,515 |      | 
|Net income per Class A and Class B ordinary share-basic                |  |      | 0.05       |  |      |  | 0.10        |      | 
|Net income per participating unvested share-basic                      |  |      | 0.05       |  |      |  | 0.10        |      | 
|Net income per Series A share-basic                                    |  |      | 0.06       |  |      |  | 0.02        |      | 
|Net income per Series B share-basic                                    |  |      | 0.06       |  |      |  | 0.03        |      | 
|Net income per Series C share-basic                                    |  |      | 0.13       |  |      |  | 0.12        |      | 
|Net income per Class A and Class B ordinary share-diluted              |  |      | 0.05       |  |      |  | 0.09        |      | 





F-57


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 18. | NET INCOME PER SHARE - continued
| | --- | --------------------------------



| | (i) | The net income attributable to Qihoo 360 Technology Co. Ltd. was allocated among Class A and Class B ordinary shares, preferred
shares and certain nonvested shares (see Note 17) pro rata on the basis of their right to participate in dividends.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The calculation of the weighted average number of Class A and Class B ordinary shares for the purpose of diluted net income
per share has considered the effect of certain potentially dilutive securities. For the year ended December 31, 2011, the incremental
weighted average number of 19,578,504 and 4,345,724 ordinary shares from the assumed conversion of Series A, B and C preferred
shares, and the exercise of share options using the treasure stock method, respectively, has been included in the dilutive securities.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the year 2010, 32,603,760, 37,878,789 and 7,831,467
ordinary shares resulting from the assumed conversion of Series A shares, Series B shares and Series C shares were excluded as
their effect was anti-dilutive. The effect of the share options were also excluded as the performance condition for the share options
has not been met.



For the year 2011 and 2012, 2,552,844 and 4,990,513
share options were excluded as their effect was anti-dilutive, respectively.



| | 19. | SHARE-BASED COMPENSATION
| | --- | ------------------------



Share options



On January 25, 2006, the Company adopted the 2006
Employee Share Option Plan (the "2006 Plan") for the granting of share options to employees and nonemployees to reward
them for services to the Company and to provide incentives for future service. The share options expire ten years from the date
of grant.



On April 1, 2011, the Company adopted the 2011 Employee
Share Option Plan (the "2011 Plan") for the granting of share options to employees and nonemployees to reward them for
services to the Company and to provide incentives for future service. The share options expire ten years from the date of grant.

F-58


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Share options - continued



Option to employees and directors



On January 1, 2010 and July 1, 2010, the Company granted
110,000 and 939,000 share options to employees at an exercise price of $2.2 and $2.8 per share, respectively.



On January 1, 2011, February 14, 2011, March 3, 2011,
July 1, 2011 and October 1, 2011, the Company granted 3,726,200, 700,000, 684,500, 2,689,200 and 375,000 share options to employees
at an exercise price of $5.2, $5.2, $6.0, $12.94 and $10.89 per share, respectively.



On July 1, 2011, the Company granted 40,000 share
options to two directors at an exercise price of $9.67 per share.



On January 20, 2012, February 10, 2012, April 15,
2012, July 15, 2012 and October 15, 2012, the Company granted 1,834,500, 935,000, 171,500, 417,500 and 761,500 share options to
employees at an exercise price of $10.67, $11.35, $14.52, $10.95 and $14.67 per share, respectively.



Option to nonemployees



On July 1, 2010, the Company granted 4,100,000 share
options to nonemployees for consulting and investment advisory services of four years at an exercise price of $2.8 per share.



On January 1 and March 3, 2011, the Company granted
60,000 and 20,000 share options to nonemployees for consulting and investment advisory services of three or four years at an exercise
price of $5.2 and $6.0 per share, respectively.



On March 1, 2012, July 15, 2012, July 15, 2012 and
October 15, 2012, the Company granted 33,000, 10,000, 40,000 and 10,000 share options to nonemployees for consulting and investment
advisory services of four years at an exercise price of $14.09, $10.95, $10.67 and $14.67 per share, respectively.



Option exercise



The option shall be exercisable by giving notice in
writing to the Company stating that the option is exercised and the number of shares in respect of which it is exercised. Any such
notice must be accompanied by a remittance for the full amount of the exercise price for the shares in respect of which the notice
is given.



Vesting of options



The option will vest when the service conditions are
met. In addition, according with the 2006 Plan, one of the exit events, described in "Termination of Option" below, shall
happen.



In accordance with the vesting schedules set out in
the 2006 Plan, 1/4 of the options granted will be vested on each anniversary from the date of grant subject to the occurrence of
one of the exit events. Under the 2011 Plan, the Plan administrator (compensation committee) has the authority to determine the
schedule for vesting.



F-59


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Share options - continued



Termination of option



Both under the 2006 and the 2011 Plan, the option
may not be exercised until vested. Once vested, the option may be exercised in whole or any part, at any time. However, an option
will be forfeited, if the grantee ceases to be an employee.



Furthermore, in accordance with the 2006 Plan, an
option will be forfeited, if the grantee ceases to be an employee prior to an exit, then (i) the portion of the option which has
been otherwise vested and not exercised, and (ii) the portion of the options which has not been vested, will automatically lapse
and expire.



Exit means (i) a listing, (ii) a sale of all or substantially
all of the issued share capital of the Company, (iii) a sale by the Company of all or substantially all of its assets, (iv) the
passing of an effective resolution or the making of an order of a competent court for the winding up of the Company.



Based on the terms above, the options will not actually
vest until one of the exit events happens and the service conditions are met.



The fair value of the options granted is estimated
on the date of grant using the Black-Scholes or Binomial-Model option-pricing model with the following assumptions used.





|                                                  |  | Year ended December 31, |                
|------------------------------------------------- |  | ----------------------- | ---------------
|                                                  |  | 2011                    |                
|                                                  |  |                         |                
|Risk-free interest rate                           |  |                         | 2.74% - 3.88%  
|Expected life (years)                             |  |                         | 5.40 - 6.35    
|Volatility                                        |  |                         | 43.10% - 57.70%
|Dividend yield                                    |  |                         | -              
|Fair value of underlying ordinary shares          |  |                         |                
|at the grant date                                 |  |                         | 5.01 - 14.09   
|Fair value of the share options at the grant date |  |                         | 2.64 - 8.15    





F-60


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Share options - continued



Termination of option - continued



| | (1) | Volatility
| | --- | ----------



The volatility of the underlying ordinary shares during
the life of the options was estimated based on the historical share price volatility of comparable companies over a period comparable
to the expected term of the options.



| | (2) | Risk-free interest rate
| | --- | -----------------------



Risk-free interest rate was estimated based on the yield
to maturity of China international government bonds with a maturity period close to the expected term of the options.



| | (3) | Expected term
| | --- | -------------



For the options granted to employees, as the Group did
not have sufficient historical share option exercise experience, it estimated the expected term average based on a consideration
of factors including contractual term and vesting period.



| | (4) | Dividend yield
| | --- | --------------



The dividend yield was estimated by the Group based
on its expected dividend policy over the expected term of the options.



| | (5) | Exercise price
| | --- | --------------



Before closing of IPO, the exercise price of the options
was determined by the Company's Chief Executive Officer. After closing of IPO, the exercise price shall be determined by the Compensation
Committee which may be a fixed or variable price related to the closing sales price of the shares as quoted on the principal exchange
or system.



| | (6) | Fair value of underlying ordinary shares
| | --- | ----------------------------------------



Before closing of IPO, the estimated fair value of the
ordinary shares underlying the options as of the respective grant dates was determined based on a retrospective valuation. When
estimating the fair value of the ordinary shares on the grant dates, management has considered a number of factors, including the
result of a third-party appraisal and equity transactions of the Group, while taking into account the standard valuation methods
and the achievement of certain events. The determination of fair value of the ordinary shares was also with the assistance of an
independent valuation firm. After closing of IPO, the fair value of the ordinary shares is determined as the closing sales price
of the shares as quoted on the principal exchange or system.



F-61


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Share options - continued



Termination of option - continued



The following table summarizes information regarding
the share options granted:







|                  |  |                 |            |  | Fair value per    |   |       |                |  |   | Intrinsic value   | 
|----------------- |  | --------------- | ---------- |  | ----------------- | - | ----- | -------------- |  | - | ----------------- | 
|                  |  |                 |            |  | ordinary share    |   |       | Exercise price |  |   | per option        | 
|Grant date        |  | Options granted |            |  | at the grant date |   |       | per option     |  |   | at the grant date | 
|                  |  |                 |            |  |                   |   |       |                |  |   |                   | 
|January 1, 2010   |  |                 | 110,000    |  |                   | $ | 1.80  |                |  | $ | 2.20              | 
|July 1, 2010      |  |                 | 5,039,000  |  |                   | $ | 2.58  |                |  | $ | 2.80              | 
|January 1, 2011   |  |                 | 3,786,200  |  |                   | $ | 5.01  |                |  | $ | 5.20              | 
|February 14, 2011 |  |                 | 700,000    |  |                   | $ | 6.60  |                |  | $ | 5.20              | 
|March 3, 2011     |  |                 | 704,500    |  |                   | $ | 7.21  |                |  | $ | 6.00              | 
|July 1, 2011      |  |                 | 2,689,200  |  |                   | $ | 14.09 |                |  | $ | 12.94             | 
|July 1, 2011      |  |                 | 40,000     |  |                   | $ | 14.09 |                |  | $ | 9.67              | 
|October 1, 2011   |  |                 | 375,000    |  |                   | $ | 10.89 |                |  | $ | 10.89             | 
|January 20, 2012  |  |                 | 1,834,500  |  |                   | $ | 11.67 |                |  | $ | 10.67             | 
|February 10, 2012 |  |                 | 935,000    |  |                   | $ | 11.17 |                |  | $ | 11.35             | 
|March 1, 2012     |  |                 | 33,000     |  |                   | $ | 14.00 |                |  | $ | 14.09             | 
|April 15, 2012    |  |                 | 171,500    |  |                   | $ | 14.52 |                |  | $ | 14.52             | 
|July 15, 2012     |  |                 | 427,500    |  |                   | $ | 10.95 |                |  | $ | 10.95             | 
|July 15, 2012     |  |                 | 40,000     |  |                   | $ | 10.95 |                |  | $ | 10.67             | 
|October 15,2012   |  |                 | 771,500    |  |                   | $ | 14.73 |                |  | $ | 14.67             | 
|Total             |  |                 | 17,656,900 |  |                   |   |       |                |  |   |                   | 







|                                               |  |                   |            |   | Weighted average |  
|---------------------------------------------- |  | ----------------- | ---------- | - | ---------------- | -
|                                               |  |                   |            |   | exercise price   |  
|                                               |  | Number of options |            |   | per option       |  
|                                               |  |                   |            |   |                  |  
|Outstanding at January 1, 2010                 |  |                   | 896,050    |   |                  | $
|Granted                                        |  |                   | 5,149,000  |   |                  |  
|Exercised                                      |  |                   | -          |   |                  |  
|Forfeited                                      |  |                   | (131,100   | ) |                  |  
|Outstanding at December 31, 2010               |  |                   | 5,913,950  |   |                  |  
|Granted                                        |  |                   | 8,294,900  |   |                  |  
|Exercised                                      |  |                   | (31,172    | ) |                  |  
|Expired                                        |  |                   | (3,499     | ) |                  |  
|Forfeited                                      |  |                   | (487,600   | ) |                  |  
|Outstanding at December 31, 2011               |  |                   | 13,686,579 |   |                  |  
|Granted                                        |  |                   | 4,213,000  |   |                  |  
|Exercised                                      |  |                   | (1,615,452 | ) |                  |  
|Expired                                        |  |                   | -          |   |                  |  
|Forfeited                                      |  |                   | (1,136,113 | ) |                  |  
|Outstanding at December 31, 2012               |  |                   | 15,148,014 |   |                  |  
|Vested and exercisable at December 31, 2012    |  |                   | 4,808,547  |   |                  | $
|Vested and expect to vest at December 31, 2012 |  |                   | 16,798,137 |   |                  | $





F-62


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Share options - continued



Termination of option - continued



The following table summarizes information with respect
to share options outstanding as of December 31, 2012:





|                  |  | Options
    outstanding |            |  | Options
    exercisable |          
|----------------- |  | ----------------------- | ---------- |  | ----------------------- | ---------
|                  |  |                         |            |  | Weighted                |          
|                  |  |                         |            |  | average                 |          
|                  |  |                         |            |  | remaining               |          
|                  |  | Number                  |            |  | contractual             |          
|                  |  | outstanding             |            |  | term                    |          
|                  |  |                         |            |  |                         |          
|June 30, 2009     |  |                         | 552,206    |  |                         | 6.5 years
|January 1, 2010   |  |                         | 53,353     |  |                         | 7.0 years
|July 1, 2010      |  |                         | 4,215,907  |  |                         | 7.5 years
|January 1, 2011   |  |                         | 3,171,603  |  |                         | 8.0 years
|February 14, 2011 |  |                         | 628,000    |  |                         | 8.1 years
|March 3, 2011     |  |                         | 456,460    |  |                         | 8.2 years
|July 1, 2011      |  |                         | 2,103,578  |  |                         | 8.5 years
|July 1, 2011      |  |                         | 40,000     |  |                         | 8.5 years
|October 1, 2011   |  |                         | 242,907    |  |                         | 8.7 years
|January 20,2012   |  |                         | 1,407,500  |  |                         | 9.0 years
|February 10, 2012 |  |                         | 910,000    |  |                         | 9.1 years
|March 1, 2012     |  |                         | 33,000     |  |                         | 9.2 years
|April 15, 2012    |  |                         | 148,000    |  |                         | 9.3 years
|July 15, 2012     |  |                         | 389,000    |  |                         | 9.5 years
|July 15, 2012     |  |                         | 40,000     |  |                         | 9.5 years
|October 15, 2012  |  |                         | 756,500    |  |                         | 9.8 years
|Total             |  |                         | 15,148,014 |  |                         |          



Under the 2006 Plan, the options would not vest until
both the service and performance condition, i.e., one of the exit events happens. Therefore, the Group did not record any compensation
expenses in the consolidated statements of operation for share options granted to employees prior to the completion of IPO which
is one of the exit events. Upon the completion of IPO in 2011, there were 229,988 share options became vested in accordance with
the vesting term under 2006 Plan, and accordingly, $21,229 share based compensation expense were recorded in connection with the
vesting of such share options and the remeasurement of share options granted to the nonemployees that the measurement date is not
fixed. The Group recognized nil, $34,504 and $26,997 share-based compensation expense for the years ended December 31, 2010, 2011
and 2012, respectively.



As of December 31, 2012, there was $47,378 unrecognized
share-based compensation expense relating to share options. The expense is expected to be recognized over a weighted-average remaining
vesting period of 2.01 years.



F-63


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Nonvested shares



On January 19, 2006, the Company's shareholder, Young
Vision, the Series A shareholder and certain other parties entered into the Share Incentive Agreement, pursuant to which, Young
Vision allocated a total of 18,086,101 ordinary shares of the Company to an equity incentive pool designed to award employees and
consultants of the Group in accordance with the Employee Share Vesting Scheme (the "2006 Share Plan"), of which 9,951,000
shares were granted before January 1, 2008. In addition, in January 2010, the Company issued 3,517,544 nonvested shares in connection
with certain 2009 acquisitions.



In February 2011, Young Vision transferred 11,826,000
and 5,550,654 ordinary shares in the equity incentive pool to Sino Honor Limited and Strengthen Goal Limited, respectively.



The nonvested shares granted or vested in accordance
with the 2006 Share Plan will, be held by Young Vision and all rights (including without limitation, the voting rights and the
right to receive the share certificates) attached to such shares will be exercised by Young Vision at its sole and absolute discretion,
except that the grantee shall have the right to all the monetary benefits deriving from the shares vested when the shares are disposed
of in accordance with the 2006 Share Plan. Since the unvested nonvested shares are entitled to the same rights (including nonforfeitable
dividend rights) and obligations as ordinary shares, these shares are considered participating securities.



The nonvested shares granted under the 2006 Share
Plan shall vest (i) 15 per cent of the aggregate number of shares 12 months after the start of vesting period; (ii) 20 per cent
of the aggregate number of shares 24 months after the start of vesting period; (iii) 30 per cent of the aggregate number of shares
so granted 36 months after the start of vesting period; and (iv) 35 per cent of the aggregate number of Shares 48 months after
the start of vesting period.



However, all nonvested shares to any grantee shall
also be subject to the Company's rights to repurchase at an aggregate repurchase price of RMB1.00, if the grantee terminated his/her
employment with the Group: (a) in all, on or before the second anniversary of the start of vesting period; (b) 50% of otherwise
vested nonvested shares, after the second anniversary but before the fourth anniversary of the start of vesting period; or (c)
no shares, after the fourth anniversary of the start of vesting period.



The nonvested shares granted under the 2011 Plan shall
vest based on service, or any other criteria selected by the Compensation Committee. If the grantee terminated his/her service
("Termination of Service") with the Group, the Group shall have the right to repurchase the unvested nonvested shares.



Termination of Service means (i) As to a consultant,
the time when she/he is terminated for any reason, (ii) As to a non-employee director, the time when non-employee director ceases
to be a director for any reason, (iii) As to an employee, the time when the employee-employer relationship is terminated for any
reason. However, all terminations shall exclude simultaneously commences or remains in employment or service with the Company,
any subsidiaries or VIEs and VIEs' subsidiaries in others way.



F-64


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Nonvested shares - continued



The following table summarizes information regarding
the nonvested shares granted:





|                                               |  |                  |            |   | Weighted average     |  
|---------------------------------------------- |  | ---------------- | ---------- | - | -------------------- | -
|                                               |  |                  |            |   | fair value per       |  
|                                               |  | Number of        |            |   | nonvested share      |  
|                                               |  | nonvested shares |            |   | at the grant date(i) |  
|                                               |  |                  |            |   |                      |  
|Outstanding at January 1, 2010                 |  |                  | 11,058,219 |   |                      |  
|Granted                                        |  |                  | 1,670,000  |   |                      | $
|Vested                                         |  |                  | (1,379,985 | ) |                      |  
|Forfeited                                      |  |                  | (214,640   | ) |                      |  
|Outstanding at December 31, 2010               |  |                  | 11,133,594 |   |                      |  
|Granted                                        |  |                  | 3,255,976  |   |                      | $
|Vested                                         |  |                  | (5,824,709 | ) |                      |  
|Forfeited                                      |  |                  | (380,610   | ) |                      |  
|Outstanding at December 31, 2011               |  |                  | 8,184,251  |   |                      |  
|Granted                                        |  |                  | 4,845,877  |   |                      | $
|Vested                                         |  |                  | (3,136,471 | ) |                      |  
|Forfeited                                      |  |                  | (1,121,419 | ) |                      |  
|Outstanding at December 31, 2012               |  |                  | 8,772,238  |   |                      |  
|Vested and to be transferred to grantees at    |  |                  |            |   |                      |  
|December 31, 2012                              |  |                  | 15,378,240 |   |                      |  
|Vested and expect to vest at December 31, 2012 |  |                  | 24,150,478 |   |                      |  





| | (i) | The fair value of the underlying ordinary shares is the same as the fair value of the nonvested shares when calculating the
weighted average fair value per nonvested share at the grant date.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Before closing of IPO, the fair value of the nonvested
shares was determined at the grant dates by the Group with the assistance of an independent valuation firm. After closing of IPO,
the fair value of the nonvested shares was determined by the closing sales price of the shares as quoted on the principal exchange
or system. The Group recognized $4,006, $13,485 and $23,608 share based compensation expense for the years ended December 31, 2010,
2011 and 2012, respectively.



F-65


QIHOO 360 TECHNOLOGY CO. LTD.




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 19. | SHARE-BASED COMPENSATION - continued
| | --- | ------------------------------------



Nonvested shares - continued



Included in the total number of nonvested shares granted
during the year ended December 31, 2010, 20,000 shares were granted to hire certain key technical persons.



As of December 31, 2012, total unrecognized compensation
expense relating to the nonvested shares was $38,798. The expense is expected to be recognized over a weighted average period of
2.75 years using the graded vesting attribution method.





| | 20. | RELATED PARTY BALANCES AND TRANSACTIONS
| | --- | ---------------------------------------



The Group's related parties and the relationship with
the Group are as follows:





|Name of the related party | Relationship with the Group        
|------------------------- | -----------------------------------
|                          |                                    
|Related party M           | Noncontrolling interest shareholder
|                          | of one of the Group's subsidiaries 
|Related party N           | The Group’s cost method investee   
|Related party P           | Noncontrolling interest shareholder
|                          | of one of the Group's subsidiaries 







F-66


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 20. | RELATED PARTY BALANCES AND TRANSACTIONS - continued
| | --- | ---------------------------------------------------



Details of related party balances and main transactions
as of December 31, 2010, 2011 and 2012 are as follows:



| | (1) | Amount due to related parties
| | --- | -----------------------------



|                       |  | December
    31, |    
|---------------------- |  | ---------------- | ---
|                       |  | 2011             |    
|                       |  |                  |    
|Related party M (i)    |  | $                | 969
|Related party N (ii).  |  | $                | 56 
|Related party P (iii). |  | $                | -  





| | (i) | It represents interest-free loan borrowed by Shanghai Yiyi from related party M for daily operating.
| | --- | ----------------------------------------------------------------------------------------------------



| | (ii) | It represents the unpaid promotion expense.
| | ---- | -------------------------------------------



| | (iii) | It represents the pre-operating expenses paid by related party P on behalf of 360 Youjiu, which has been settled in February
2013.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------





| | (2) | Share options granted
| | --- | ---------------------



On July 1, 2010, the Company granted 300,000 share options
to an individual consultant, who is an immediate family of a shareholder, for investment advisory services. The fair value of the
share options as of the grant date was $420.



| | (3) | Main transactions with related parties
| | --- | --------------------------------------



|                                                 |  |  |                 |  |  | For the year ended December 31, |     
|------------------------------------------------ |  |  | --------------- |  |  | ------------------------------- | ----
|Nature                                           |  |  | Company Name    |  |  |                                 | 2010
|                                                 |  |  |                 |  |  |                                 |     
|Marketing promotion received from                |  |  | Related party N |  |  | $                               | -   
|Disposal equity interest of Shanghai yiyi to (i) |  |  | Related party M |  |  | $                               | -   



| | (i) | On January 10, 2012, the Group entered into a termination agreement with related party M.  Pursuant to the termination
agreement, the Group agreed to dispose its 53.5% equity interest of Shanghai Yiyi to related party M.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-67


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 21. | COMMITMENTS AND CONTINGENCIES
| | --- | -----------------------------



| | (1) | Capital commitments
| | --- | -------------------



The Group’s capital commitments relate primarily
to commitments on building and land use rights for the new office in Chaoyang District, Beijing, China. Total capital commitments
contracted but not yet reflected in the consolidated financial statements amounted to $100 million as of December 31, 2012.
The Group will fulfill $16 million and $84 million of these capital commitments in
2013 and 2014, respectively.



| | (2) | Operating commitments
| | --- | ---------------------



The Group has future rental commitments related to
facilities and offices under non-cancelable operating lease agreements and fees commitment related to obtain exclusive rights of
operate games on the Group’s platform.



Future minimum payments under those commitments as of
December 31, 2012 were as follows:



|2013 |  |  | $ | 2,694 | 
|---- |  |  | - | ----- | 
|2014 |  |  |   | 808   | 
|2015 |  |  |   | 565   | 
|2016 |  |  |   | 76    | 
|2017 |  |  |   | -     | 
|     |  |  | $ | 4,143 | 



Rental expenses under operating leases for 2010,
2011 and 2012 were $1,390, $4,261 and $5,967, respectively.



| | (3) | Contingencies
| | --- | -------------





In October 2010, Tencent Technology (Shenzhen)
Company Ltd. and Shenzhen Tencent Computer Systems Company Limited, or Tencent, brought an unfair competitive practices claim against
the Group in the Chaoyang District People’s Court of Beijing, alleging that the Group misled users with statements that Tencent’s
QQ instant messaging program invades users’ privacy and seeking retraction of the statements and RMB4.0 million in damages.
In September 2011, the court ruled that the Group's actions constituted unfair competition and awarded RMB0.4 million ($63,553)
as damages to Tencent. In November 2010, the Group brought a defamation claim against Tencent in the Xicheng District People’s
Court of Beijing, alleging that Tencent made defamatory statements on its website against the Group and seeking retraction of the
statements and RMB1.0 in nominal damages. In March 2012, the Group increased its sought damages to RMB 1.0 million ($0.2 million).
This case is currently pending.



In June 2011, Tencent brought an unfair competitive
practices claim against the Group in the Higher People’s Court of Guangdong province, alleging that the Group's 360 QQ Bodyguard
program interferes with users’ proper usage of Tencent’s QQ instant messaging program and seeking $19.8 million (RMB125.0
million) in damages, cessation of the unfair competitive practices and public apology. This case is currently pending.





F-68


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)



In November 2011, the Group brought a claim for abuse
of dominant market position against Tencent in the Higher’s People’s Court of Guangdong province, alleging that Tencent
engaged in monopolistic activities such as restricting users of its QQ instant messaging program from using the Group's products
and bundling its security programs with the QQ instant messaging program and seeking $23.8 million (RMB150.0 million) in damages,
cessation of the monopolistic activities and public apology. This claim was rejected by the court in the first instance judgment.
The Group subsequently submitted its appeal in April 2013 and this case is currently pending.



In April 2012, two affiliates of Baidu brought an unfair
competitive practices and copyright infringement claim against the Group in the First Intermediate People’s Court of Beijing,
alleging that 360 Safe Guard modified the results page of Baidu’s search engine that 360 Browser bundled Baidu personal start-up
pages and the unauthorized use of Baidu’s trademark and seeking RMB10 million in damages. This case is currently pending.



In April 2012, the Group brought a claim against
Kingsoft and Beike Wangji (Beijing) Security Technology Company Limited, or Beike, for an unfair competitive advertisement
for the incident relating to Apple banning the Group's products from the Apple App Store. In November of 2012, the first
instance judgment was made by Beijing Haidian Court, which ruled in the Group's favor. Kingsoft and Beike appealed in
December 2012 and the court of second instance upheld the judgment of the court of first instance. In May 2012, Kingsoft
brought an unfair competition claim against the Group for unfair competition, and the court of first instance entered a
judgment in the Group's favor in December 2012. Kingsoft appealed in December 2012 and the court of second instance upheld
the judgment of the court of first instance.



In October 2012, two affiliates of Baidu brought an
unfair competitive practices and copyright infringement claim against the Group in the First Intermediate People’s Court
of Beijing, alleging that the Group breached the Robots Exclusion Protocol to access Baidu’s content without authorization
and seeking RMB100.0 million in damages. This case is currently pending.



In February 2013, the Group brought a defamation claim
against Shanghai Jingwen Culture Communication Co., Ltd., or Shanghai Jingwen, in the Xuhui District People’s Court of Shanghai,
alleging that Shanghai Jingwen published and distributed a series of false articles and reports against the Group on its website
and electronic newspapers by maliciously accusing the level of safety and security of its products. The Group sought retraction
of the defamatory statements, an apology from Shanghai Jingwen and RMB50 million in damages. This case is currently pending.



Other than the aforementioned lawsuits, the Group is
also a party to several legal proceedings or claims in China that the Group believes are immaterial.



Based on information currently available, the Group
believes that it does not have sufficient evidence to anticipate the outcome of the lawsuits and also the possible contingency
losses. Therefore, no accrual for contingency loss was recognized in the consolidated financial statements as of December 31, 2011
and 2012.

F-69


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





| | 22. | FAIR VALUE MEASUREMENTS
| | --- | -----------------------



Measured on recurring basis



The Group measured its financial assets and liabilities
including cash equivalents and trading securities at fair value on a recurring basis as of December 31, 2011 and 2012.



Cash equivalents included term deposits that can
be withdrawn at any time and are stated at fair value. Trading securities included corporate equity securities that are traded
publicly in the open market. The Group classified such financial assets as investments with Level 1 of the fair value hierarchy
because they are valued based on the quoted market price in an active market.



The Group did not have Level 2 investments as of
December 31, 2011 and 2012.

F-70


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





22.	FAIR VALUE MEASUREMENTS - continued



Measured on recurring basis - continued



The following table shows the fair value of the Group's
financial assets and liabilities measured at recurring basis as of December 31, 2012 and 2011:







|                               |  |                                                                              |                                                                                                                                                                                    |  |  |                                                                              |                                                   |  |  |   |                                              |  |  |   |                |  |  |   |                                                                                                                                                                                    |  |  |   |                                                   |  |  |   |                                              |  |  |   |                | 
|------------------------------ |  | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------- | ------------------------------------------------- |  |  | - | -------------------------------------------- |  |  | - | -------------- |  |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | ------------------------------------------------- |  |  | - | -------------------------------------------- |  |  | - | -------------- | 
|                               |  | As of December 31, 2011

Fair Value Measurements at the Reporting Date Using |                                                                                                                                                                                    |  |  | As of December 31, 2012

Fair Value Measurements at the Reporting Date Using
|                               |  |                                                                              | Quoted
                                                                                                           prices in

active markets

for identical

instruments

(level 1) |  |  |                                                                              | Significant

other

observable

inputs

(level 2) |  |  |   | Significant

unobservable

inputs

(level 3) |  |  |   | Total

balance |  |  |   | Quoted
                                                                                                           prices in

active markets

for identical

instruments

(level 1) |  |  |   | Significant

other

observable

inputs

(level 2) |  |  |   | Significant

unobservable

inputs

(level 3) |  |  |   | Total

balance | 
|Cash equivalents-term deposits |  | $                                                                            | 256,555                                                                                                                                                                            |  |  | $                                                                            | -                                                 |  |  | $ | -                                            |  |  | $ | 256,555        |  |  | $ | 153,805                                                                                                                                                                            |  |  | $ | -                                                 |  |  | $ | -                                            |  |  | $ | 153,805        | 
|Trading securities             |  | $                                                                            | 231                                                                                                                                                                                |  |  | $                                                                            | -                                                 |  |  | $ | -                                            |  |  | $ | 231            |  |  | $ | 179                                                                                                                                                                                |  |  | $ | -                                                 |  |  | $ | -                                            |  |  | $ | 179            | 
|Total                          |  | $                                                                            | 256,786                                                                                                                                                                            |  |  | $                                                                            | -                                                 |  |  | $ | -                                            |  |  | $ | 256,786        |  |  | $ | 153,984                                                                                                                                                                            |  |  | $ | -                                                 |  |  | $ | -                                            |  |  | $ | 153,984        | 



Measured on nonrecurring basis



The Group measured the fair value of the purchased
intangible assets using the "cost," "income approach-excess earnings" and "with & without" valuation
method.



Long-term investments, goodwill and other intangible
assets are measured at fair value on a nonrecurring basis and they are recorded at fair value only when impairment is recognized.



The Group measured the fair value of long term
investments and acquired intangible assets using income approach-discounted cash flow method based on which to recognize the
impairment loss in 2012. These assets are considered as Level 3 assets because the Group used unobservable inputs to
determine their fair values (see note 8(iv) for long term investments and note 11 for acquired intangible assets).







F-71


QIHOO 360 TECHNOLOGY CO. LTD.


| |  | 
| |  | 



23.	SEGMENT AND GEOGRAPHIC INFORMATION



The Group's chief operating decision maker has been
identified as the Chief Executive Officer ("CEO"), who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Group. The Group has one operating segment. The Group's revenue and net income are substantially
derived from internet service which mainly includes online advertising and internet value-added services. The table below is only
presented at the revenue level with no allocations of direct or indirect costs. The Group operates in the PRC and majority of the
Group's long-lived assets are located and services are provided in the PRC.



Components of revenues are presented in the following
table:



|                                             |  | For the year ended December 31, |       
|-------------------------------------------- |  | ------------------------------- | ------
|                                             |  | 2010                            |       
|                                             |  |                                 |       
|Internet
    services                        |  |                                 |       
|Online
    advertising                       |  | $                               | 38,826
|Internet
    value-added services            |  |                                 | 14,774
|Other
    services                           |  |                                 | 190   
|Sales
    of third party anti-virus software |  |                                 | 3,875 
|Total                                        |  | $                               | 57,665







| | 24. | MAINLAND CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION
| | --- | ---------------------------------------------------------



Full time employees of the Group in the mainland China
participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations
require the Group to accrue for these benefits based on certain percentages of the employees' salaries. The total provisions for
such employee benefits were $2,904, $7,017 and $18,125 for the years ended December 31, 2010, 2011 and 2012, respectively.



PRC legal restrictions permit payments of dividends
by the Group's PRC entities only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to
payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises and PRC Foreign Investment Enterprises, the
PRC entities must make appropriations from after-tax profit to non-distributable statutory reserve funds as determined by the Board
of Directors of the Group. These reserve funds include the (1) general reserve, (2) enterprise expansion fund and (3) staff bonus
and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriations of not less than
10% of after-tax profit (as determined under accounting principles and financial regulations applicable to PRC enterprises at each
year-end); the other two funds are at the Group's discretion. These reserve funds can only be used for specific purposes and are
not distributable as cash dividends. The Group has made appropriation to these statutory reserve funds of $80, $5,503 and $ 10,408
for the years ended December 31, 2010, 2011 and 2012, respectively.

F-72


QIHOO 360 TECHNOLOGY CO. LTD.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- continued

FOR THE YEARS ENDED DECEMBER 31, 2010,
2011 AND 2012

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)





25.	RESTRICTED NET ASSETS



Relevant PRC statutory laws and regulations permit
the payment of dividends by the Group's PRC subsidiaries, VIEs and VIEs' subsidiaries only out of their retained earnings, if any,
as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual
appropriations of 10% of after-tax income be set aside as a reserve prior to the payment of dividends. As a result of these PRC
laws and regulations, the Group's PRC subsidiaries, VIEs and VIEs' subsidiaries are restricted in their ability to transfer a portion
of their net assets to the Company either in the form of dividends, loans or advances. The balance of restricted net assets was
$105,051 and $156,762, of which $50,236 and $68,067 was attributed to the paid in capital and statutory reserves of the VIEs and
VIEs' subsidiaries and $54,815, and $88,695 was attributed to the paid in capital and statutory reserves of the Company's PRC subsidiaries,
as of December 31, 2011 and 2012, respectively. The PRC subsidiaries’ accumulated profits may be distributed as dividends
to the Company without the consent of a third party. The VIEs' revenues and accumulated profits may be transferred to Qizhi Software
through contractual arrangements without the consent of a third party.



26.	SUBSEQUENT EVENTS



The Group evaluated all events subsequent to the balance
sheet date of April 19, 2013 through the date the consolidated financial statements were issued.





F-73


QIHOO 360 TECHNOLOGY CO. LTD.






ADDITIONAL INFORMATION – FINANCAL STATEMENT
SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY

BALANCE SHEETS

(U.S. dollars in thousands, except for
shares and per share data)







|                                                                                               |  | December 31, |        
|---------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                               |  |              | 2011   
|ASSETS                                                                                         |  |              |        
|Current assets:                                                                                |  |              |        
|Cash and cash equivalents                                                                      |  | $            | 241,842
|Restricted cash                                                                                |  |              | -      
|Trading securities                                                                             |  |              | 231    
|Prepaid expenses and other current assets                                                      |  |              | 1,092  
|Amounts due from subsidiaries and VIEs                                                         |  |              | 7,988  
|Deferred tax assets - current                                                                  |  |              | -      
|                                                                                               |  |              |        
|Total current assets                                                                           |  |              | 251,153
|                                                                                               |  |              |        
|Acquired intangible assets, net                                                                |  |              | 1,505  
|Investments in subsidiaries and VIEs                                                           |  |              | 120,617
|Cost method investment                                                                         |  |              | 929    
|Deferred tax assets - noncurrent                                                               |  |              | 457    
|                                                                                               |  |              |        
|TOTAL ASSETS                                                                                   |  | $            | 374,661
|                                                                                               |  |              |        
|LIABILITIES                                                                                    |  |              |        
|Current liabilities:                                                                           |  |              |        
|                                                                                               |  |              |        
|Accrued expenses and other current                                                             |  |              | 821    
|Deferred revenue-current                                                                       |  |              | -      
|Amounts due to subsidiaries and VIEs                                                           |  |              | 1,316  
|                                                                                               |  |              |        
|                                                                                               |  |              |        
|Total current liabilities                                                                      |  |              | 2,137  
|                                                                                               |  |              |        
|Deferred revenue-noncurrent                                                                    |  |              | 1,671  
|                                                                                               |  |              |        
|TOTAL LIABILITIES                                                                              |  | $            | 3,808  
|                                                                                               |  |              |        
|EQUITY                                                                                         |  |              |        
|Qihoo 360 Technology Co. Ltd. shareholders' equity                                             |  |              |        
|Class A ordinary shares ($0.001 par value; 378,000,000 and 378,000,000 shares authorized as of |  |              |        
|December 31, 2011 and 2012, respectively; 109,392,815 and 123,472,524 shares issued            |  |              |        
|and outstanding as of December 31, 2011 and 2012, respectively)                                |  |              | 109    
|Class B ordinary shares ($0.001 par value; 122,000,000 and 122,000,000 shares authorized as of |  |              |        
|December 31, 2011 and 2012, respectively; 69,636,436 and 60,684,573 shares issued              |  |              |        
|and outstanding as of December 31, 2011 and 2012, respectively)                                |  |              | 70     
|Additional paid-in capital                                                                     |  |              | 363,021
|Accumulated other comprehensive income                                                         |  |              | 6,263  
|Retained earnings                                                                              |  |              | 1,390  
|                                                                                               |  |              |        
|Total shareholders' equity                                                                     |  |              | 370,853
|                                                                                               |  |              |        
|TOTAL EQUITY                                                                                   |  |              | 370,853
|                                                                                               |  |              |        
|TOTAL LIABILITIES AND EQUITY                                                                   |  | $            | 374,661







F-74


QIHOO 360 TECHNOLOGY CO. LTD.




ADDITIONAL INFORMATION – FINANCIAL STATEMENT SCHEDULE
I

CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY

STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except for
shares and per share data)



|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                  |  | For the year ended December 31, |       
|                                                                                  |  |                                 | 2010   |   |  |   | 2011    |   |  |   | 2012    |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Cost of revenues                                                                  |  |                                 | -      |   |  |   | 16      |   |  |   | 4       |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Operating expenses:                                                               |  |                                 |        |   |  |   |         |   |  |   |         |  
|Selling and marketing                                                             |  |                                 | 524    |   |  |   | 31,473  |   |  |   | 21,289  |  
|General and administrative                                                        |  |                                 | 359    |   |  |   | 6,788   |   |  |   | 10,815  |  
|Product development                                                               |  |                                 | 3,394  |   |  |   | 12,283  |   |  |   | 21,782  |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Total operating expenses                                                          |  |                                 | 4,277  |   |  |   | 50,544  |   |  |   | 53,886  |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Loss from operations                                                              |  |                                 | (4,277 | ) |  |   | (50,560 | ) |  |   | (53,890 | )
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Interest income                                                                   |  |                                 | 72     |   |  |   | 1,662   |   |  |   | 4,702   |  
|Other income                                                                      |  |                                 | -      |   |  |   | -       |   |  |   | 1,277   |  
|Exchange (loss) gain                                                              |  |                                 | (148   | ) |  |   | 6,514   |   |  |   | 412     |  
|Impairment loss on long-term investments                                          |  |                                 | -      |   |  |   | (666    | ) |  |   | -       |  
|Change in unrealized holding loss of trading securities                           |  |                                 | -      |   |  |   | (220    | ) |  |   | (52     | )
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Loss before income tax expense and earnings from subsidiary and VIEs              |  |                                 | (4,353 | ) |  |   | (43,270 | ) |  |   | (47,551 | )
|Income in earnings of subsidiaries and VIEs                                       |  |                                 | 12,861 |   |  |   | 58,873  |   |  |   | 94,639  |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Income before income tax expense                                                  |  |                                 | 8,508  |   |  |   | 15,603  |   |  |   | 47,088  |  
|Income tax expense                                                                |  |                                 | -      |   |  |   | -       |   |  |   | (342    | )
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Net income attributable to Qihoo 360 Technology Co. Ltd.                          |  |                                 | 8,508  |   |  |   | 15,603  |   |  |   | 46,746  |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Accretion of Series A convertible participating redeemable preferred shares       |  |                                 | 815    |   |  |   | 203     |   |  |   | -       |  
|Accretion of Series B convertible participating redeemable preferred shares       |  |                                 | 1,250  |   |  |   | 313     |   |  |   | -       |  
|Accretion of Series C convertible participating redeemable preferred shares       |  |                                 | 978    |   |  |   | 255     |   |  |   | -       |  
|                                                                                  |  |                                 |        |   |  |   |         |   |  |   |         |  
|Net income attributable to ordinary shareholders of Qihoo 360 Technology Co. Ltd. |  | $                               | 5,465  |   |  | $ | 14,832  |   |  | $ | 46,746  |  







F-75


QIHOO 360 TECHNOLOGY CO. LTD.




ADDITIONAL INFORMATION – FINANCIAL
STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY

STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands, except for
shares and per share data)







|                                                                        |  | For the year ended December 31, |      
|----------------------------------------------------------------------- |  | ------------------------------- | -----
|                                                                        |  |                                 | 2010 
|                                                                        |  |                                 |      
|Net income                                                              |  | $                               | 8,508
|                                                                        |  |                                 |      
|Other comprehensive income, net of tax:                                 |  |                                 |      
|Foreign currency translation adjustments                                |  |                                 | 1,325
|                                                                        |  |                                 |      
|Other comprehensive income                                              |  |                                 | 1,325
|                                                                        |  |                                 |      
|Comprehensive income                                                    |  |                                 | 9,833
|                                                                        |  |                                 |      
|Add: Comprehensive loss attributable to
    noncontrolling     interest |  |                                 | -    
|                                                                        |  |                                 |      
|Comprehensive income attributable to Qihoo 360 Technology Co. Ltd.      |  | $                               | 9,833







F-76


QIHOO 360 TECHNOLOGY CO. LTD.




ADDITIONAL INFORMATION – FINANCIAL
STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY

STATEMENTS OF CHANGES IN EQUITY

(U.S. dollars in thousands, except share
data and per share data, or otherwise noted)







|                                                                                                                  |  |  |                 |  |  |   |                     |  |  |  |            |   |  |   |               |   |  |   |            |  |  |   |               |  |  |   |              |   |  |   | Total      |  
|----------------------------------------------------------------------------------------------------------------- |  |  | --------------- |  |  | - | ------------------- |  |  |  | ---------- | - |  | - | ------------- | - |  | - | ---------- |  |  | - | ------------- |  |  | - | ------------ | - |  | - | ---------- | -
|                                                                                                                  |  |  |                 |  |  |   |                     |  |  |  |            |   |  |   |               |   |  |   |            |  |  |   |               |  |  |   |              |   |  |   | Qihoo 360  |  
|                                                                                                                  |  |  |                 |  |  |   |                     |  |  |  |            |   |  |   |               |   |  |   |            |  |  |   | Accumulated   |  |  |   | (Accumulated |   |  |   | Technology |  
|                                                                                                                  |  |  |                 |  |  |   |                     |  |  |  |            |   |  |   |               |   |  |   | Additional |  |  |   | other         |  |  |   | deficit)     |   |  |   | Co. Ltd.   |  
|                                                                                                                  |  |  | Ordinary shares |  |  |   | Shares to be issued |  |  |  | paid-in    |   |  |   | comprehensive |   |  |   | retained   |  |  |   | shareholders' | 
|                                                                                                                  |  |  | Shares          |  |  |   | Amount              |  |  |  | Shares     |   |  |   | Amount        |   |  |   | capital    |  |  |   | income        |  |  |   | earnings     |   |  |   | equity     |  
|                                                                                                                  |  |  |                 |  |  |   |                     |  |  |  |            |   |  |   |               |   |  |   |            |  |  |   |               |  |  |   |              |   |  |   |            |  
|Balance as of January 1, 2010                                                                                     |  |  | 65,339,960      |  |  | $ | 65                  |  |  |  | 2,703,236  |   |  | $ | 3,558         |   |  | $ | 5,011      |  |  | $ | 1,692         |  |  | $ | (18,907      | ) |  | $ | (8,581     | )
|Issuance of ordinary shares in connection with
    business acquisitions and share-based compensation arrangement |  |  | 5,642,720       |  |  |   | 6                   |  |  |  | (2,125,176 | ) |  |   | (3,183        | ) |  |   | 3,177      |  |  |   | -             |  |  |   |              |   |  |   | -          |  
|Issuance of ordinary shares in connection with exercise of share
    options                                      |  |  | 578,060         |  |  |   | 1                   |  |  |  | (578,060   | ) |  |   | (375          | ) |  |   | 374        |  |  |   | -             |  |  |   |              |   |  |   | -          |  
|Share-based compensation                                                                                          |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | 4,006      |  |  |   | -             |  |  |   |              |   |  |   | 4,006      |  
|Accretion of Series A convertible participating redeemable preferred shares                                       |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | (815         | ) |  |   | (815       | )
|Accretion of Series B convertible participating redeemable preferred shares                                       |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | (1,250       | ) |  |   | (1,250     | )
|Accretion of Series C convertible participating redeemable preferred shares                                       |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | (978         | ) |  |   | (978       | )
|Net income                                                                                                        |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | 8,508        |   |  |   | 8,508      |  
|Foreign currency translation adjustments                                                                          |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | 1,325         |  |  |   | -            |   |  |   | 1,325      |  
|Balance as of December 31, 2010                                                                                   |  |  | 71,560,740      |  |  |   | 72                  |  |  |  | -          |   |  |   | -             |   |  |   | 12,568     |  |  |   | 3,017         |  |  |   | (13,442      | ) |  |   | 2,215      |  
|Accretion of Series A convertible participating redeemable preferred shares                                       |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | (203         | ) |  |   | (203       | )
|Accretion of Series B convertible participating redeemable preferred shares                                       |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | (313         | ) |  |   | (313       | )
|Accretion of Series C convertible participating redeemable preferred shares                                       |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | (255         | ) |  |   | (255       | )
|Issuance of ordinary shares in connection
    with share-based compensation arrangements                          |  |  | 3,059,779       |  |  |   | 3                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | -            |   |  |   | 3          |  
|Share-based compensation                                                                                          |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | 47,989     |  |  |   | -             |  |  |   | -            |   |  |   | 47,989     |  
|Issuance of ordinary shares in connection with exercise of options                                                |  |  | 31,172          |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | 48         |  |  |   | -             |  |  |   | -            |   |  |   | 48         |  
|Issuance of ordinary shares upon initial public offering
    ("IPO"), net of offering costs of $2,342             |  |  | 26,063,544      |  |  |   | 26                  |  |  |  | -          |   |  |   | -             |   |  |   | 231,523    |  |  |   | -             |  |  |   | -            |   |  |   | 231,549    |  
|Conversion of participating redeemable preferred shares to ordinary shares                                        |  |  | 78,314,016      |  |  |   | 78                  |  |  |  | -          |   |  |   | -             |   |  |   | 70,893     |  |  |   | -             |  |  |   | -            |   |  |   | 70,971     |  
|Net income                                                                                                        |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | -             |  |  |   | 15,603       |   |  |   | 15,603     |  
|Foreign currency translation adjustments                                                                          |  |  | -               |  |  |   | -                   |  |  |  | -          |   |  |   | -             |   |  |   | -          |  |  |   | 3,246         |  |  |   |              |   |  |   | 3,246      |  







F-77


QIHOO 360 TECHNOLOGY CO. LTD.






ADDITIONAL INFORMATION – FINANCIAL STATEMENT SCHEDULE
I – continued

CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY

STATEMENTS OF CHANGES IN EQUITY

(U.S. dollars in
thousands, except share data and per share data, or otherwise noted)







|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   |            | 
|------------------------------------------------------------------ |  |  | --------------- |  |  | - | ------------------- |  |  |  | ------- |  |  | - | ------------- |  |  | - | ---------- |  |  | - | ------------- |  |  | - | ------------ |  |  | - | ---------- | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   | Total      | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   | Qihoo 360  | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   | Accumulated   |  |  |   | (Accumulated |  |  |   | Technology | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   | Additional |  |  |   | other         |  |  |   | deficit)     |  |  |   | Co. Ltd.   | 
|                                                                   |  |  | Ordinary shares |  |  |   | Shares to be issued |  |  |  | paid-in |  |  |   | comprehensive |  |  |   | retained   |  |  |   | shareholders' | 
|                                                                   |  |  | Shares          |  |  |   | Amount              |  |  |  | Shares  |  |  |   | Amount        |  |  |   | capital    |  |  |   | income        |  |  |   | earnings     |  |  |   | equity     | 
|Balance as of December 31, 2011                                    |  |  | 179,029,251     |  |  | $ | 179                 |  |  |  | -       |  |  | $ | -             |  |  | $ | 363,021    |  |  | $ | 6,263         |  |  | $ | 1,390        |  |  | $ | 370,853    | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   |            | 
|Issuance of ordinary shares in connection with share-based         |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   |            | 
|compensation arrangements                                          |  |  | 3,512,394       |  |  |   | 3                   |  |  |  | -       |  |  |   | -             |  |  |   | -          |  |  |   | -             |  |  |   | -            |  |  |   | 3          | 
|Share-based compensation                                           |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   | 50,605     |  |  |   | -             |  |  |   | -            |  |  |   | 50,605     | 
|Issuance of ordinary shares in connection with exercise of options |  |  | 1,615,452       |  |  |   | 2                   |  |  |  | -       |  |  |   | -             |  |  |   | 6,963      |  |  |   | -             |  |  |   | -            |  |  |   | 6,965      | 
|Disposal of noncontrolling interest in subsidiaries                |  |  | -               |  |  |   | -                   |  |  |  | -       |  |  |   | -             |  |  |   | 73         |  |  |   | -             |  |  |   | -            |  |  |   | 73         | 
|Net income                                                         |  |  | -               |  |  |   | -                   |  |  |  | -       |  |  |   | -             |  |  |   | -          |  |  |   | -             |  |  |   | 46,746       |  |  |   | 46,746     | 
|Foreign currency translation adjustments                           |  |  | -               |  |  |   | -                   |  |  |  | -       |  |  |   | -             |  |  |   | -          |  |  |   | 2,851         |  |  |   | -            |  |  |   | 2,851      | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   |            | 
|Balance as of December 31, 2012                                    |  |  | 184,157,097     |  |  | $ | 184                 |  |  |  | -       |  |  | $ | -             |  |  | $ | 420,662    |  |  | $ | 9,114         |  |  | $ | 48,136       |  |  | $ | 478,096    | 
|                                                                   |  |  |                 |  |  |   |                     |  |  |  |         |  |  |   |               |  |  |   |            |  |  |   |               |  |  |   |              |  |  |   |            | 







F-78


QIHOO 360 TECHNOLOGY CO. LTD.






ADDITIONAL INFORMATION – FINANCIAL
STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY

STATEMENTS OF CASH FLOW

(U.S. dollars in thousands, except for
shares and per share data)





|                                                                                  |  | For the year ended December 31, |        
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                                  |  | 2010                            |        
|Cash flows from operating activities:                                             |  |                                 |        
|Net income                                                                        |  |                                 | 8,508  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |        
|Share-based compensation                                                          |  |                                 | 4,006  
|Gain from investments in subsidiaries and VIEs                                    |  |                                 | (12,861
|Depreciation and amortization                                                     |  |                                 | 149    
|Unrealized holding loss on trading securities                                     |  |                                 | -      
|Loss from impairment of long-term investments                                     |  |                                 | -      
|Prepaid expenses and other current assets                                         |  |                                 | (599   
|Deferred taxes                                                                    |  |                                 | -      
|Accrued expenses and other current liabilities                                    |  |                                 | 269    
|Deferred revenue                                                                  |  |                                 | -      
|Amount due from/to subsidiaries and VIEs                                          |  |                                 | (19    
|                                                                                  |  |                                 |        
|Net cash (used in) provided by operating activities                               |  |                                 | (547   
|                                                                                  |  |                                 |        
|Cash flows from investing activities:                                             |  |                                 |        
|Restricted cash                                                                   |  |                                 | -      
|Purchase of intangible assets                                                     |  |                                 | (1,096 
|Net cash paid for business acquisition                                            |  |                                 | (2,260 
|Purchase of trading securities                                                    |  |                                 | -      
|Capital contribution for cost method investments                                  |  |                                 | -      
|Investment in subsidiaries                                                        |  |                                 | -      
|                                                                                  |  |                                 |        
|Net cash used in investing activities                                             |  |                                 | (3,356 
|                                                                                  |  |                                 |        
|Cash flows from financing activities:                                             |  |                                 |        
|Proceeds from issuance of Series C convertible participating                      |  |                                 |        
|redeemable preferred shares                                                       |  |                                 | 20,000 
|Payment of issuance costs of Series C convertible participating                   |  |                                 |        
|redeemable preferred shares                                                       |  |                                 | (78    
|Proceeds from exercise of share options                                           |  |                                 | 375    
|Proceeds from issuance of ordinary shares upon IPO                                |  |                                 | -      
|Payment of IPO costs                                                              |  |                                 | -      
|Payment for share repurchase                                                      |  |                                 | -      
|                                                                                  |  |                                 |        
|Net cash provided by financing activities                                         |  |                                 | 20,297 
|                                                                                  |  |                                 |        
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | 16,394 
|Cash and cash equivalents at beginning of year                                    |  |                                 | 9,553  
|                                                                                  |  |                                 |        
|Cash and cash equivalents at end of year                                          |  |                                 | 25,947 





F-79


QIHOO 360 TECHNOLOGY CO. LTD.






ADDITIONAL INFORMATION – FINANCIAL
STATEMENTS SCHEDULE I

FINANCIAL INFORMATION OF PARENT COMPANY

NOTES OF THE CONDENSED FINANCIAL STATEMENT





1. BASIS FOR PREPARATION



The condensed financial information of the Company has been
prepared using the same accounting policies as set out in the Group’s consolidated financial statements except that the Company
has used the equity method to account for investments in its subsidiaries and VIEs.





2. INVESTMENTS IN SUBSIDIARIES AND VIEs



The Company and its subsidiaries and VIEs were included in the
consolidated financial statements where the inter-company transactions and balances were eliminated upon consolidation. For purpose
of the Company’s stand-alone financial statements, its investments in subsidiaries and VIEs were reported using the equity
method of accounting. The Company’s share of income and losses from its subsidiaries and VIEs were reported as equity in
earnings of subsidiaries and VIEs in the accompanying parent company financial statements.









F-80