Dear Baidu Shareholders, As I write my second letter to you all, I cannot help but feel proud of the efforts and accomplishments of everyone here at Baidu. Now in our seventh year, our mission remains the same as when we started — to provide the best way for people to find information. This mission has guided us through our daily business decisions and helped us extend our leadership position so that we find ourselves here today, leading the pack and looking towards even more successes in the future.

Last year was about growth and investment. Our revenues reached record highs. Our net income surpassed expectations. Our product line saw innovative improvements and expansions. And perhaps most significantly, the Chinese people once again chose us as the search engine they depend on most. We have achieved leadership in this market not only due to our superior search technology, but also because of our commitment to listening to user needs and creating the innovative products that meet them.

Chinese online users voted Baidu the number one search engine in China for the second year running1 and their loyalty drove our market share to over 60% of the Chinese online search market2 and it is exciting to note that our market share is still growing. For this, we have our dedicated employees and you, our shareholders, to thank.

Last year was also about investment. As we solidified our leadership in 2006, we took the opportunity to push forward with investments in a number of important strategic initiatives.

We improved our monetization model by introducing dynamic bidding and improving the relevancy of online searches, and we switched to direct sales in Beijing to enhance customer service and to ensure long-term financial rewards. While both of these initiatives required a short period adjustment for our online marketing customers, we have no doubt that they will contribute to the continued growth of our business over the long term.

Towards the end of 2006, we also announced our plan to expand into the Japanese online search market. I am confident that we will establish a quality alternative in Japan soon and we look forward to growth in the long term.

We believe that success in Internet search and online marketing in China requires focus, particularly on technological leadership, local insight and effective execution. At Baidu, in order to maintain this focus we have made it a priority to attract and retain highly qualified R&D personnel, encourage a culture of listening to our customers, and dedicate resources to developing an experienced management team. The rewards we’re reaping today are a result of the work we’ve poured into making the above visions become realities, to the point where Baidu is setting the benchmark in all of these areas.

Of course, one of the most exciting aspects of developing a web business in China is the enormous potential of the market. By the end of 2006, we had 137 million Internet users here, only representing around 10 percent of the total population. Every day, more Chinese people sign online for the first time, and when they do Baidu is there to help them navigate the Internet. This influx of new users will also drive growth in China’s paid search market as will the growth in advertisers. In the fourth quarter of 2006 we served over 108,000 online marketing customers, which represent less than 1% of China’s 20 million plus small and medium enterprises.

In addition, with the growth in credit card use and the strengthening of the online payment infrastructure in China, we believe e-commerce transactions will increase dramatically and the market for online search advertising will grow in tandem. Looking ahead, I cannot begin to express how excited we are when we consider the opportunities the world’s second largest pool of Internet users and the enterprising Chinese market has to offer.

In the remaining part of this letter I want to describe Baidu’s 2006 progress in greater detail and also take a brief look at the year’s financials.

FINANCIAL HIGHLIGHTS

With the solid foundation gained from our initial public offering in August 2005 and consistently strong financial results, we have continued our commitment to making longterm investments in innovation, IT infrastructure, distribution networks and human resources. These investments have helped to fuel our growth and provided exceptional value for our shareholders.

Our financial growth was exceptional in 2006, with full year 2006 total revenue reaching RMB838 million, growing 162 percent over 2005, and full year net income increasing over 530 percent year-over-year to RMB302 million.

PRODUCT & TECHONLOGY

At the core of our success is our drive to connect with Chinese online users, developing the products and services that will best serve their needs and improve user experience. In 2006, aside from refining our traditional web search, we also launched a host of new products that cater to the unique requirements of China’s online communities. Some of these products and services are Baidu Government Search, University Search, Baidu Index, Youth Search, Baidu Greetings, Baidu Map, Baidu Currency, Ancient Literature Search, Postal Code Search, Baidu Blog Search and Baidu Favorites. All of these products and services allow users to find what they need faster and more effectively.

We are committed to ensuring that these new products reflect the needs of our users and enhance user experience. As such, we have established numerous channels that allow us to collect user feedback and improve our offerings. We are also modifying our most popular offerings so they can be accessed by mobile phones, WAP devices and other non-traditional means. These features will allow busy people to keep themselves plugged into Baidu’s network while they are on the go.

Online community building and leveraging the collective wisdom of users is another area that we are excited to be entering. In 2006 we launched knowledge-based search products, including Baidu Knows, Baidu Post Bar and Baidu Encyclopedia, all of which have been strong traffic drivers. By the end of 2006, our Baidu Knows platform hosted well over 14 million answered questions, becoming the most popular knowledge search site in China.

Tapping into the increasingly popular Internet “blogosphere,” in July of 2006 we introduced Baidu Space, which allows users to create personal homepages with blogs and photo albums and engage in social networking functions while integrating the functionality of other Baidu search products. This service, which helps users stay connected while searching online, saw over 100,000 users register within the first day of its launch.

SALES & DISTRIBUTION

While we enhanced the online search experience for our users, we also took concrete steps to ensure that our online marketing customers receive the dedicated service they deserve. We achieved this primarily through expansion and improvement of our dual pronged sales network, which leverages direct sales forces in major cities and third-party distributors in other less developed locations.

In Beijing, where the number of Internet users topped 30 percent of the population for the first time, we successfully transitioned to a direct sales force, ramping up our drive to hire and train new direct sales staff across the board. We are confident that our customers will appreciate direct access to our in-house sales and service team and we expect that this will be reflected in our future results.

Improving customer service quality is one of our central strategies for both building and educating our customer base and increasing average spending per customer. Through 2006, we continued to improve the ability of our distributors to serve our customers. Our open communication channels and quick response times ensure that all our customers receive a high level of service. This commitment to service helped us to increase the number of active online marketing customers served in the fourth quarter of 2006 to over 108,000 from around 63,000 in the fourth quarter of 2005.

IMPROVING OUR MONETIZATION

During 2006 we undertook two important initiatives to refine our P4P online marketing platform and improve our monetization algorithms. First, in June, we removed the original minimum bid price for keywords and adopted a dynamic bidding mechanism. By letting an algorithm determine the starting bid, our new pricing system better reflects the true value of different keywords.

Following that, in September we introduced an intelligent ranking system that aims to provide better user experience and increased customer ROI by incorporating the ‘quality’ of a keyword into the ranking algorithm for sponsored listings. We are confident that as users see greater relevance in their search results and our online marketing customers receive higher quality hits, these changes will produce strong revenue growth over the long term. Over the course of 2006 our revenue per online customer climbed to RMB2,500 from RMB1,773 in the fourth quarter of 2005.

While the market gradually matures, we will continue to refine our P4P system in order to deliver the highest return on investment for our customers.

STRATEGIC PARTNERSHIPS

2006 was also a year for building strategic partnerships with other global content and technology leaders. As the leader in China’s online search market, Baidu is clearly the partner of choice and we believe that these relationships will prove to provide even better and more extensive resources for our users, while allowing Baidu to explore new areas for growth.

One significant development was the launch of an initiative with Nokia to bring Baidu’s most popular search services to China’s mobile users. We also began partnerships with global industry leaders including Intel, IBM and Hewlett Packard to explore innovative ways that search can be integrated into other traditional and non-traditional devices.

We expanded our digital entertainment offerings through collaborations with EMI to launch an advertising-supported online music streaming service and MTV Networks to stream and download digital video music and entertainment content. We also formed a strategic alliance with Microsoft to display Baidu’s sponsored listings on various Microsoft properties. These landmark initiatives are already expanding the wealth of available content for our users and helping to extend Baidu’s reach on the Internet.

These partnerships with international content providers are testimony to Baidu’s leadership in the Chinese online search industry and we are confident that we will help drive value for our partners. We will continue to explore strategic partnerships that enhance our core user experience and provide new opportunities to generate revenue.

EXPANDING INTO JAPAN

2007 also brings an exciting new addition to our business development strategy as we endeavor to take Baidu’s experience and expertise in search to Japan. We are committed to investing the resources necessary to develop a quality search offering for Japanese users.

We believe there is significant opportunity to develop search services that better address the needs of Japanese users. We are also 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 quality alternative to existing search engines.

FOSTERING TALENT

People have always been at the heart of a successful technology company and Baidu is no exception. We are dedicated to building our world-class R&D team by hiring and developing the best available talent. During 2006, we launched a series of events to attract top graduates, including the National Campus Relationship Building Project and the 2006 Baidu Star Programming Contest. We also became the first Chinese Internet company to be granted qualification to host a post-doctorate research station. We believe the young talent emerging from China’s universities today has the potential to innovate in ways we have yet to imagine, and we will continue to reach out to this group of people to build our team.

We also have a host of training programs, incentives and opportunities for our employees to grow within our company. In fact, three of the newest members of our senior management team were promoted from internal positions. We pride ourselves on creating a great place to work and grow, and we will continue to build Baidu as a platform to develop the next generation of IT leaders.

SUPPORTING OUR COMMUNITY

Along with developing our business, Baidu is also committed to contributing to society and we are constantly looking for ways to give back to our community. In 2006, we actively participated in a number of initiatives that supported worthy causes such as environmental protection, education and healthcare. In one case, our participation included a donation of over RMB1million towards the ecological development of Hebei province.

In addition, Baidu collaborated with the national Hope Project that assists disadvantaged children return to school; supported the Pink Ribbon Breast Cancer Awareness campaign; jointly established an Aids education program in rural China; donated books to under-privileged primary schools in Gansu province; and sponsored Bicycle Riding Week in Beijing among other projects. As we grow and prosper, Baidu will stay engaged in making valuable contributions to the healthy development of our society.

2007 OUTLOOK

Since our successful listing on NASDAQ in 2005, we have been dedicated to delivering the best user search experience in Chinese language search and creating exceptional value for our shareholders. However, we refuse to let our past accomplishments stand alone and define who we are. We will continue to carefully study consumer trends to determine emerging needs, and will develop the services that will keep us at the forefront of online search innovation.

On behalf of everyone at Baidu, I am grateful to all who have helped us get where we are today. With your continued support, we look forward to leading the way in Chinese Internet search for many years to come.

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

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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