Baidu.com,Inc. 2007 Annual Report Confidence and focus, vision for the future Dear Shareholder, We are proud to report another great year at Baidu.com. Now in our eighth year, and our third year as a NASDAQ-listed company, we remain dedicated to our strategy of providing the best way for people to find information by offering a large variety of search products. In our first year as a listed company, we focused on improving search technologies, business and market share. In our second year, while retaining this focus on search, we took steps towards defining our long-term investment strategy for growth. 2007 was another year of growth, innovation and continuous investment at Baidu. By finding innovative ways to improve our product offerings, services, geographical reach, we have expanded our market dominance and have continued to produce steady strong financial results. We've accomplished all this while continuing to make long-term investments that pave the way for Baidu's future. We are particularly proud to be the first Chinese company to join the NASDAQ-100 Index. The NASDAQ-100 Index, launched in January 1985, is one of the most widely followed benchmarks in the world, and it is a great honor for us to be recognized as a part of that index so early in our tenure as a U.S. listed company. 欲穷千里目，更上一层楼 To see great distances, one must climb to great heights Zhihuan Wang(688-742), Dang Dynasty BUSINESS DEVELOPMENT Our tremendous results in 2007 were driven by development. During 2007, we developed innovative healthy growth in the number of active online advertising services by bundling traditional search, marketing customers as well as steady increases in banner ads, contextual ads, behaviorally targeted ads revenue per online marketing customer. In 2007, and Brand-Link, our new brand advertising service. we had over 214,000 active online marketing Bundled solutions encourage large advertisers customers, approximately 50% more than we had in to buy more advertising. While SME customer 2006. And revenue per online marketing customer base is growing at a fast and healthy pace, larger grew to RMB 8,100 in 2007, up approximately 40% customers have begun to realize the importance year-over-year. According to iResearch, Baidu's web of integrating search with other online and offline search traffic share rose to nearly 72% in the fourth marketing efforts. By the end of 2007, growth rate quarter, up from nearly 65% in the first quarter of in advertising spending by large advertisers started 2007. Additionally, according to a fourth quarter to pick up momentum, and we have seen increases 2007 study by comScore, Baidu has become the in the number of large advertisers from the financial world's third most popular search engine in the services, IT, electronics and automobile industries world. and are pleased with the success of these innovative new advertising solutions. We are able to leverage our strong user base and product lines to drive additional business PRODUCTS & TECHONLOGY DIRECT AND DISTRIBUTION SALES MODEL Nothing is more important to us than our deep connection with Chinese internet users, and we are Developing the best sales team in China has always proud to be the search engine of choice in China. In been an important part of our strategy. We promoted 2007, we launched several new products including Mr. Hailong Xiang to the position of vice president the Finance Channel, the Olympic Channel, and the of sales in 2007. Mr. Xiang has successfully headed Game Channel. These new products compliment our our direct sales team in both Shanghai and Beijing, already popular portfolio of community products such and we are expanding our direct sales and customer as Baidu Postbar, Baidu Space, Baidu Encyclopedia service in Guangdong province, another high growth and Baidu Knows, which now is the largest online region. Q&A service in the world. We continued to see the benefit of our focus on We also developed new products for our customers customer service. Our efforts help our customers in 2007. In September 2007, we launched Baidu become more knowledgeable about the efficacy TV, a new form of streamed video "TV Commercial" of their online marketing spending. Our efforts style advertising shown on the websites of Baidu in customer care also help us monitor business Union members. In December, we announced the development through information sharing, which launch of yet another new advertising product prompts greater spending by our customers because "Brand-Link", which generates a wide range of the products we offer more accurately meet their brand-specific content when Internet users search needs. Customers are pleased with our online for the brand names that subscribe to the product. marketing platform and we are confident that A Baidu search for a brand name of a subscriber more and more Chinese businesses will begin to to Brand-Link will generate a wide range of brand- understand the power of paid search and choose related content, including news reports, promotional Baidu as their destination for their online advertising announcements, product information and marketing spending. campaigns. A number of leading brand names are using this new service. We expect this product will enhance branding capability for our online marketing customers. While maintaining the leadership in search technology, we continue to making effort in algorithm refinement. We are constantly improving our paid search platform and search relevance, and continue to strike a balance between natural search and paid search that improves the user experience. STRATEGIC PARTNERSHIPS In 2007, we continued to build strategic partnerships. page if they attempt to visit an incorrect or Partnerships enhance the user experience, drawing nonexistent URL. This arrangement is not only greater traffic to our site while also positioning Baidu another effective means to increase user traffic to to explore new areas of growth. Baidu, it also improves the efficiency of information searches for Internet users. We expanded our existing online entertainment platform through collaborations with international Another development in our ongoing effort to form record companies in 2007 and are proud to pioneer strategic partnerships that bring value to Baidu is advertising supported digital music in China. At a recently initiated revenue sharing model formed the start of 2007, Baidu announced a partnership between Baidu and a number of online gaming with EMI Music, the world's largest independent operators in China, including Shanda, a NASDAQ- music company, to launch an advertising-supported listed Internet gaming company. According to the online music streaming service in China. This was arrangement, online gamers will be able to access a landmark revenue-sharing arrangement. Under their game accounts from Baidu's online game this arrangement, we make EMI's Chinese songs platform, youxi.baidu.com, which redirects traffic to available for streaming at no charge to our users. the gaming operators. This allows online gamers, a While our users listen to the music for free, they will large segment of China's Internet users, convenient be exposed to Internet advertising and EMI Music access to all of their gaming accounts on partner and Baidu will share the revenue generated by that gaming sites and also drives gaming traffic to Baidu's advertising, a pioneering approach to monetizing gaming partners. and promoting digital music. We also formed a partnership with Rock Music Group in the third We will continue to look for strategic partnerships quarter of 2007, to build an online music streaming with strong synergies. service. Our music partnerships are an integral and exciting part of developing our entertainment and music offerings at Baidu and we are confident in the long-term potential of these models. Our recent partnership with China Netcom (CNC) is an exciting development in our effort to expand Baidu Union. CNC is a 2008 Beijing Olympic Games sponsor and has an extensive and diversified user base. According to this agreement, CNC subscribers will automatically be redirected to a Baidu search EXPANDING FOR THE FUTURE After a year of preparation, Baidu Japan was our plans to develop a consumer-to-consumer (C2C) launched officially in January 2008. We are e-commerce platform. We plan to leverage our high committed to and excited about our expansion user traffic and large online communities to build a into Japan, and our product teams are actively C2C service. Search engines already play a critical working to develop the Baidu Japan site. The role in the Chinese e-commerce market. According upcoming years will be productive years in Japan to a June 2007 iResearch report, 49% of China's as we rely on our localized teams to have more current C2C users conducted searches before visiting knowledge of the Japanese market. Leveraging the e-commerce sites. While still in the development superior technical capabilities of our China based stage, we believe Baidu is well positioned to enter engineers, we are tailoring products and services the e-commerce arena in the near future. This is an to meet the demands of the Japan market. We are exciting development for Baidu and we are pleased confident that with our proven strength in Chinese with the progress to date. Again, our knowledge of language search and our focus on delivering the our customers’ and users’ needs has placed us in a best tools to find information online, we will be prime position to enter new areas of business and able to provide Japanese users with a higher enhance user experience. quality alternative to existing search engines. Beyond regional expansion, we are also breaking into new business arenas. In 2007, we announced TALENT Everyone at Baidu was shocked and saddened by the Mobile Business North Asia as vice president of passing of our chief financial officer, Shawn Wang Asia Pacific and general manager of New Wireless at the end of 2007.