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.

BUSINESS DEVELOPMENT
Our tremendous results in 2007 were driven by healthy growth in the number of active online marketing customers as well as steady increases in revenue per online marketing customer. In 2007, we had over 214,000 act ive onl ine market ing customers, approximately 50% more than we had in 2006. And revenue per online marketing customer grew to RMB 8,100 in 2007, up approximately 40% year-over-year.

According to iResearch, Baidu's web search traffic share rose to nearly 72% in the fourth quarter, up from nearly 65% in the first quarter of 2007. Additionally, according to a fourth quarter 2007 study by comScore, Baidu has become the world's third most popular search engine in the world.

We are able to leverage our st rong user base and product lines to drive additional business development. During 2007, we developed innovative advertising services by bundling traditional search, banner ads, contextual ads, behaviorally targeted ads and Brand-Link, our new brand advertising service.

Bundled solutions encourage large advertisers to buy more adver t ising. Whi le SME customer base is growing at a fast and healthy pace, larger customers have begun to realize the importance of integrating search with other online and offline marketing efforts. By the end of 2007, growth rate in advertising spending by large advertisers started to pick up momentum, and we have seen increases in the number of large advertisers from the financial services, IT, electronics and automobile industries and are pleased with the success of these innovative new advertising solutions.

PRODUCTS & TECHONLOGY
Nothing is more important to us than our deep connection with Chinese internet users, and we are proud to be the search engine of choice in China. In 2007, we launched several new products including the Finance Channel, the Olympic Channel, and the Game Channel. These new products compliment our already popular portfolio of community products such as Baidu Postbar, Baidu Space, Baidu Encyclopedia and Baidu Knows, which now is the largest online Q&A service in the world.

We also developed new products for our customers in 2007. In September 2007, we launched Baidu TV, a new form of streamed video "TV Commercial" style advertising shown on the websites of Baidu Union members. In December, we announced the launch of yet another new advertising product "Brand-Link", which generates a wide range of brand-specific content when Internet users search for the brand names that subscribe to the product.

A Baidu search for a brand name of a subscriber to Brand-Link will generate a wide range of brandrelated content, including news reports, promotional announcements, product information and marketing 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 cont inue 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.

DIRECT AND DISTRIBUTION SALES MODEL
Developing the best sales team in China has always been an important part of our strategy. We promoted Mr. Hailong Xiang to the position of vice president of sales in 2007. Mr. Xiang has successfully headed our direct sales team in both Shanghai and Beijing, and we are expanding our direct sales and customer service in Guangdong province, another high growth region.

We continued to see the benefit of our focus on customer service. Our efforts help our customers become more knowledgeable about the efficacy of their online marketing spending. Our efforts in customer care also help us monitor business development through information sharing, which prompts greater spending by our customers because the products we offer more accurately meet their needs. Customers are pleased with our online marketing platform and we are confident that more and more Chinese businesses will begin to understand the power of paid search and choose Baidu as their destination for their online advertising spending.

STRATEGIC PARTNERSHIPS
In 2007, we continued to build strategic partnerships. Partnerships enhance the user experience, drawing greater traffic to our site while also positioning Baidu to explore new areas of growth.

We expanded our existing online entertainment platform through collaborations with international record companies in 2007 and are proud to pioneer advertising supported digital music in China. At the start of 2007, Baidu announced a partnership with EMI Music, the world's largest independent music company, to launch an advertising-supported online music streaming service in China. This was a landmark revenue-sharing arrangement. Under this arrangement, we make EMI's Chinese songs available for streaming at no charge to our users.

While our users listen to the music for free, they will be exposed to Internet advertising and EMI Music and Baidu will share the revenue generated by that advertising, a pioneering approach to monetizing and promoting digital music. We also formed a partnership with Rock Music Group in the third quarter of 2007, to build an online music streaming 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 page i f they at tempt to visi t an incor rect or nonexistent URL. This arrangement is not only another effective means to increase user traffic to Baidu, it also improves the efficiency of information searches for Internet users.

Another development in our ongoing effort to form strategic partnerships that bring value to Baidu is a recently initiated revenue sharing model formed between Baidu and a number of online gaming operators in China, including Shanda, a NASDAQ listed Internet gaming company. According to the arrangement, online gamers will be able to access their game accounts from Baidu's online game platform, youxi.baidu.com, which redirects traffic to the gaming operators. This allows online gamers, a large segment of China's Internet users, convenient access to all of their gaming accounts on partner gaming sites and also drives gaming traffic to Baidu's gaming partners.

We will continue to look for strategic partnerships with strong synergies.

EXPANDING FOR THE FUTURE
After a year of preparation, Baidu Japan was launched of f icial ly in January 2008. We are committed to and excited about our expansion into Japan, and our product teams are actively working to develop the Baidu Japan site. The upcoming years will be productive years in Japan as we rely on our localized teams to have more knowledge of the Japanese market. Leveraging the superior technical capabilities of our China based engineers, we are tailoring products and services to meet the demands of the Japan market. We are confident that with our proven strength in Chinese language search and our focus on delivering the best tools to find information online, we will be able to provide Japanese users with a higher quality alternative to existing search engines.

Beyond regional expansion, we are also breaking into new business arenas. In 2007, we announced our plans to develop a consumer-to-consumer (C2C) e-commerce platform. We plan to leverage our high user traffic and large online communities to build a C2C service. Search engines already play a critical role in the Chinese e-commerce market. According to a June 2007 iResearch report, 49% of China's current C2C users conducted searches before visiting e-commerce sites. While still in the development stage, we believe Baidu is well positioned to enter the e-commerce arena in the near future.

This is an exciting development for Baidu and we are pleased with the progress to date. Again, our knowledge of our customers’ and users’ needs has placed us in a prime position to enter new areas of business and enhance user experience.

TALENT
Everyone at Baidu was shocked and saddened by the passing of our chief financial officer, Shawn Wang at the end of 2007. Shawn had been with us since before the IPO and was an important and muchloved presence who had tremendous impact on Baidu. Shawn is deeply missed and left a big space to be filled.

In March 2008, we announced the appointment of Jennifer Li to the position of chief financial officer. Jennifer is an experienced finance leader who brings more than 13 years of treasury, corporate finance and financial analysis experience. Jennifer joined Baidu from GMAC where she served as Controller of GMAC's North American operations. Prior to that, Jennifer was chief financial officer of General Motors China where she was responsible for GM's wholly owned and joint venture businesses in China. In her first few months on the job, we have started to leverage Jennifer's vast financial and international experience. She brings a new perspective to our finance function and continues to strengthen Baidu's international standard of competence.

In April 2008, we welcomed Peng Ye to the post of chief operating officer. Peng joined Baidu from Apple China, where he served as country general manager. In that role, Peng oversaw all business operations for Apple China. Prior to Apple, Peng worked for SatCom AG as managing director and for Motorola Mobile Business North Asia as vice president of Asia Pacific and general manager of New Wireless Carrier Operations. Peng also served Nortel China and Nortel Europe for seven years in several senior management and product development positions.

Making sure we have the best people is central to Baidu's ability to stay on top in the Chinese market. In 2007, we added approximately 2,300 people to our sales and marketing team, most of whom are in Beijing, Shanghai and Guangdong province because these areas contribute a significant portion to our total revenue. We believe adding more experienced direct sales people and customer service staff will enhance customer experience and improve per customer spending through professional training and customer care program.

In addition, we also added around 400 people to our R&D team. We are recruiting the most talented and innovative minds around. Baidu continues to be an attractive destination for rising talent. We develop our talent base through numerous internal and external training programs.

FINANCIAL HIGHLIGHTS
As with years past, our financial performance reflects the successes we've been able to consistently report to our shareholders. Total revenues in 2007 were RMB1.7 billion ($239.1 million)1, representing a 108.2% increase over 2006. Operating profit in 2007 was RMB547.2 million ($75.0 million), a 108.1% increase over 2006.

Operating profit excluding share-based compensation expenses (non-GAAP)2 in 2007 was RMB587.0 million ($80.5 million), representing an 88.7% increase from 2006. Net income in 2007 was RMB629.0 million ($86.2 million), representing a 108.4% increase from 2006. Basic and diluted EPS for 2007 amounted to RMB18.57 ($2.55) and RMB18.11 ($2.48), respectively.

OUTLOOK
China's Internet population continues to grow rapidly, and it has surpassed the US to become the world's largest Internet market as measured by number of users in March 2008, according to BDA. The Chinese market has a lot of potential for further development. We remain committed to delivering the best user search experience in Chinese language search and creating exceptional value for our shareholders.

2007 was a year of continuous growth, innovation and long term investment for future growth. I firmly believe that our focus on these principles in 2007 enabled Baidu to become a stronger and more valuable company. We are looking forward to a very bright 2008.

On behalf of everyone at Baidu, I am grateful to you, our shareholders, who have made such growth possible and who drive our future. With your continued support, we look forward to further improving our company in every way and paving the way for the future of Chinese Internet search.

Sincerely,
Robin Li
Chairman and CEO
Baidu.com, Inc.

Download Baidu.com, 2007 Annual Report

PDF format, 881KB, 231Pages.

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About Baidu.com:

Baidu.com, Inc. (Baidu) is a Chinese-language Internet search provider. The Company conducts its operations principally through Baidu Online Network Technology (Beijing) Co., Ltd. (Baidu Online), its wholly owned subsidiary in Beijing, the People’s Republic of China. In addition, it conducts part of its operations through Baidu Netcom Science Technology Co., Ltd. (Baidu Netcom), which holds the licenses and approvals necessary to operate Baidu’s Websites and provide online advertising services.

In November 2007, Baidu established Baidu (Hong Kong) Limited (Baidu Hong Kong), a wholly owned subsidiary in Hong Kong, which became the sole shareholder of Baidu (China) Co., Ltd. (Baidu China) and Baidu.com Times Technology (Beijing) Co., Ltd. (Baidu Times).

In February 2008, it assisted in establishing Beijing BaiduPay Science and Technology Co., Ltd. (BaiduPay), jointly owned by Baidu Netcom. BaiduPay will operate an online payment platform.

Robin  Li
Chief Executive Officer
Chairman

Robin Li has served as our chairman of the board since our inception in January 2000 and as our chief executive officer since January 2004. Prior to founding Baidu, Robin Li had accumulated extensive knowledge and practical application experience in search engine technology. Mr Li worked as a staff engineer for Infoseek, a pioneer in the Internet search engine industry, from July 1997 to December 1999 and he was a senior consultant for IDD Information Services from May 1994 to June 1997.

Robin Li received a Master of Science Degree in Computer Science from The State University of New York at Buffalo and a Bachelor of Science Degree in Information Management from Peking University.

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