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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549

FORM 10-Q



x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

OR

 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE
TRANSITION PERIOD FROM  TO



COMMISSION FILE NUMBER 0-30961



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Sohu.com Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|Delaware                                                      |  | 98-0204667                            
|------------------------------------------------------------- |  | --------------------------------------
|(STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYERIDENTIFICATION NUMBER)



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Suite 1519, Tower 2

Bright China Chang An Building

7 Jianguomen Nei Avenue

Beijing 100005

Peoples Republic of China

86-10-6510-2160



(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,

OF REGISTRANTS PRINCIPAL EXECUTIVE OFFICES)



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.    Yes x     No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).     Yes ̈No x



The number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:



|Class                         |  | Outstanding at October 31, 2003
|----------------------------- |  | -------------------------------
|Common stock, $.001 par value |  | 35,994,859                     



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SOHU.COM INC

Table of Contents



|PART I  |  | FINANCIAL INFORMATION                                                                                                       |  | PAGE
|------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                            
|Item 1  |  | Condensed Consolidated Financial Statements (unaudited)                                                                     |  | 3   
|        |  |                                                                                                                            
|        |  | Condensed Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002                            |  | 3   
|        |  |                                                                                                                            
|        |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) |  | 4   
|        |  |                                                                                                                            
|        |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)           |  | 5   
|        |  |                                                                                                                            
|        |  | Condensed Consolidated Statement of Shareholders Equity for the Nine Months Ended September 30, 2003 (unaudited)           |  | 6   
|        |  |                                                                                                                            
|        |  | Notes to Condensed Consolidated Financial Statements                                                                        |  | 7   
|        |  |                                                                                                                            
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 12  
|        |  |                                                                                                                            
|Item 3  |  | Quantitative and Qualitative Disclosure About Market Risk                                                                   |  | 37  
|        |  |                                                                                                                            
|Item 4  |  | Controls and Procedures                                                                                                     |  | 39  
|        |  |                                                                                                                            
|PART II |  | OTHER INFORMATION                                                                                                           |  |     
|        |  |                                                                                                                            
|Item 1  |  | Legal Proceedings                                                                                                           |  | 39  
|        |  |                                                                                                                            
|Item 2  |  | Changes in Securities and Use of Proceeds                                                                                   |  | 39  
|        |  |                                                                                                                            
|Item 3  |  | Defaults Upon Senior Securities                                                                                             |  | 40  
|        |  |                                                                                                                            
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                                                         |  | 40  
|        |  |                                                                                                                            
|Item 5  |  | Other Information                                                                                                           |  | 40  
|        |  |                                                                                                                            
|Item 6  |  | Exhibits and Reports on Form 8-K                                                                                            |  | 40  
|        |  |                                                                                                                            
|        |  | SIGNATURES                                                                                                                  |  | 41  
|        |  |                                                                                                                            
|        |  | Exhibit Index                                                                                                               |  | 42  



2



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PART IFINANCIAL INFORMATION



Item 1.
Condensed Consolidated Financial Statements



SOHU.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)



|                                                                                                                                                          |  | September30, 2003 |         |   | December31, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | -
|ASSETS                                                                                                                                                    |  |                   |         |   |                  |  
|Current assets:                                                                                                                                           |  |                   |         |   |                  |  
|Cash and cash equivalents                                                                                                                                 |  | $                 | 117,255 |   |                  | $
|Accounts receivable, net                                                                                                                                  |  |                   | 11,814  |   |                  |  
|Accounts receivable from related parties                                                                                                                  |  |                   |        |   |                  |  
|Prepaid and other current assets                                                                                                                          |  |                   | 2,945   |   |                  |  
|Assets held for disposal                                                                                                                                  |  |                   | 2,331   |   |                  |  
|Current portion of long-term investments in marketable debt securities                                                                                    |  |                   | 14,898  |   |                  |  
|                                                                                                                                                          |  |                   |         |   |                  |  
|Total current assets                                                                                                                                      |  |                   | 149,243 |   |                  |  
|Long-term investments in marketable debt securities                                                                                                       |  |                   | 29,402  |   |                  |  
|Fixed assets, net                                                                                                                                         |  |                   | 5,574   |   |                  |  
|Long-term loans to related parties                                                                                                                        |  |                   |        |   |                  |  
|Other assets, net                                                                                                                                         |  |                   | 3,560   |   |                  |  
|                                                                                                                                                          |  |                   |         |   |                  |  
|                                                                                                                                                          |  | $                 | 187,779 |   |                  | $
|                                                                                                                                                          |  |                   |         |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                      |  |                   |         |   |                  |  
|Current liabilities:                                                                                                                                      |  |                   |         |   |                  |  
|Accounts payable                                                                                                                                          |  | $                 | 855     |   |                  |  
|Payable to related parties                                                                                                                                |  |                   |        |   |                  |  
|Accrued liabilities and deferred revenues                                                                                                                 |  |                   | 19,012  |   |                  |  
|                                                                                                                                                          |  |                   |         |   |                  |  
|Total current liabilities                                                                                                                                 |  |                   | 19,867  |   |                  |  
|Zero coupon convertible senior notes                                                                                                                      |  |                   | 90,000  |   |                  |  
|                                                                                                                                                          |  |                   |         |   |                  |  
|Total liabilities                                                                                                                                         |  |                   | 109,867 |   |                  |  
|Commitments and contingencies (Note 10)                                                                                                                   |  |                   |         |   |                  |  
|Shareholders equity:                                                                                                                                     |  |                   |         |   |                  |  
|Common Stock: $0.001 par value per share (75,400 authorized, 35,982 and 34,611 shares issued and outstanding at September 30, 2003
and December 31, 2002) |  |                   | 36      |   |                  |  
|Treasury Stock                                                                                                                                            |  |                   | (2,003  | ) |                  |  
|Additional paid-in capital                                                                                                                                |  |                   | 137,852 |   |                  |  
|Deferred compensation                                                                                                                                     |  |                   | (20     | ) |                  |  
|Accumulated other comprehensive income                                                                                                                    |  |                   | 446     |   |                  |  
|Accumulated deficit                                                                                                                                       |  |                   | (58,399 | ) |                  |  
|                                                                                                                                                          |  |                   |         |   |                  |  
|Total shareholders equity                                                                                                                                |  |                   | 77,912  |   |                  |  
|                                                                                                                                                          |  |                   |         |   |                  |  
|                                                                                                                                                          |  | $                 | 187,779 |   |                  | $
|                                                                                                                                                          |  |                   |         |   |                  |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



3



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SOHU.COM INC.

C
ONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands except per share data)



|                                                                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                                               |  | 2003                            |        |   | 2002                           |  
|Revenues:                                                                                      |  | $                               | 8,748  |   |                                | $
|Advertising                                                                                    |  |                                 |        |   |                                |  
|Non-advertising (including $0, $2,472, $19,879, and $5,231 from related parties, respectively) |  |                                 | 13,332 |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|Total revenues                                                                                 |  |                                 | 22,080 |   |                                |  
|                                                                                               |  |                                 |        |  
|Cost of revenues:                                                                              |  |                                 |        |   |                                |  
|Advertising (including $0, $36, $72, and $108 related party services, respectively)            |  |                                 | 1,973  |   |                                |  
|Non-advertising (including $0, $873, $6,194, and $2,194 related party services, respectively)  |  |                                 | 4,928  |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|Total cost of revenues                                                                         |  |                                 | 6,901  |   |                                |  
|                                                                                               |  |                                 |        |  
|Gross profit                                                                                   |  |                                 | 15,179 |   |                                |  
|                                                                                               |  |                                 |        |  
|Operating expenses:                                                                            |  |                                 |        |   |                                |  
|Product development                                                                            |  |                                 | 1,968  |   |                                |  
|Sales and marketing                                                                            |  |                                 | 2,839  |   |                                |  
|General and administrative                                                                     |  |                                 | 1,181  |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|Total operating expenses                                                                       |  |                                 | 5,988  |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|                                                                                               |  |                                 |        |  
|Operating profit/(loss)                                                                        |  |                                 | 9,191  |   |                                |  
|                                                                                               |  |                                 |        |  
|Other expense                                                                                  |  |                                 | (552   | ) |                                |  
|Interest income                                                                                |  |                                 | 532    |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|Net income/(loss) before taxes                                                                 |  |                                 | 9,171  |   |                                |  
|Income tax expense                                                                             |  |                                 | 6,500  |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|Net income/(loss)                                                                              |  |                                 | 2,671  |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|                                                                                               |  |                                 |        |  
|Basic net income/(loss) per share                                                              |  | $                               | 0.07   |   |                                | $
|                                                                                               |  |                                 |        |   |                                |  
|                                                                                               |  |                                 |        |  
|Shares used in computing basic net income/(loss) per share                                     |  |                                 | 35,824 |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  
|                                                                                               |  |                                 |        |  
|Diluted net income/(loss) per share                                                            |  | $                               | 0.07   |   |                                | $
|                                                                                               |  |                                 |        |   |                                |  
|                                                                                               |  |                                 |        |  
|Shares used in computing diluted net income/(loss) per share                                   |  |                                 | 41,643 |   |                                |  
|                                                                                               |  |                                 |        |   |                                |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



4



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SOHU.COM INC.

C
ONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)





|                                                                                     |  | Nine Months Ended September 30, |        
|------------------------------------------------------------------------------------ |  | ------------------------------- | -------
|                                                                                     |  | 2003                            |        
|Cash flows from operating activities:                                                |  |                                 |        
|Net income (loss)                                                                    |  | $                               | 14,788 
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                 |        
|Tax benefits from stock options                                                      |  |                                 | 6,500  
|Depreciation and amortization of other assets                                        |  |                                 | 3,638  
|Provision for valuation allowance for long-term loans to related parties             |  |                                 | 209    
|Provision for assets held for disposal                                               |  |                                 | 345    
|Loss on disposal of fixed assets                                                     |  |                                 | 31     
|Provision for allowance for doubtful accounts                                        |  |                                 | (3     
|Stock-based compensation expense                                                     |  |                                 | (2     
|                                                                                     |  |                                
|Changes in assets and liabilities:                                                   |  |                                 |        
|Accounts receivable                                                                  |  |                                 | (3,376 
|Accounts receivable from related parties                                             |  |                                 | (6,006 
|Prepaid and other current assets                                                     |  |                                 | (1,118 
|Accounts payable                                                                     |  |                                 | 95     
|Payable to related parties                                                           |  |                                 |       
|Accrued liabilities and deferred revenues                                            |  |                                 | 14,204 
|                                                                                     |  |                                 |        
|Net cash provided by operating activities                                            |  |                                 | 29,305 
|                                                                                     |  |                                
|Cash flows from investing activities:                                                |  |                                 |        
|Long-term investments in marketable debt securities                                  |  |                                 | (19,108
|Loans to related parties                                                             |  |                                 |       
|Cash included in variable interest entities                                          |  |                                 | 2,642  
|Acquisition of fixed assets                                                          |  |                                 | (2,288 
|Acquisition of other assets                                                          |  |                                 | (1,416 
|                                                                                     |  |                                 |        
|Net cash used in investing activities                                                |  |                                 | (20,170
|                                                                                     |  |                                
|Cash flows from financing activities:                                                |  |                                 |       
|Issuance of common stock pursuant to Stock Incentive Plan                            |  |                                 | 1,441  
|Zero coupon convertible senior notes                                                 |  |                                 | 87,750 
|                                                                                     |  |                                 |        
|Net cash provided by financing activities                                            |  |                                 | 89,191 
|                                                                                     |  |                                
|Net increase (decrease) in cash and cash equivalents                                 |  |                                 | 98,326 
|                                                                                     |  |                                
|Cash and cash equivalents at beginning of period                                     |  |                                 | 18,929 
|                                                                                     |  |                                 |        
|Cash and cash equivalents at end of period                                           |  |                                 | 117,255
|                                                                                     |  |                                 |        



The accompanying notes
are an integral part of these condensed consolidated financial statements.



5



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SOHU.COM INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(Unaudited, in thousands)



|                                                          |  | Common Stock |  |        |    |               |   |        |                          |  |   |                      |   |  |                                            |     |   |                    |   |    
|--------------------------------------------------------- |  | ------------ |  | ------ | -- | ------------- | - | ------ | ------------------------ |  | - | -------------------- | - |  | ------------------------------------------ | --- | - | ------------------ | - | ---
|                                                          |  | SharesIssued |  | Amount |    | TreasuryStock |   |        | AdditionalPaid-inCapital |  |   | DeferredCompensation |   |  | AccumulatedOtherComprehensiveIncome/(Loss) |     |   | AccumulatedDeficit |   |    
|Balance, December 31, 2002                                |  | 34,611       |  | $      | 35 |               | $ | (2,003 | )                        |  | $ | 129,881              |   |  | $                                          | (42 | ) |                    | $ | 547
|Net income                                                |  |             |  |        |   |               |   |       |                          |  |   |                     |   |  |                                            |    |   |                    |   |    
|Unrealized gains on marketable debt securities            |  |             |  |        |   |               |   |       |                          |  |   |                     |   |  |                                            |    |   |                    |   | (90
|Foreign currency translation adjustment                   |  |             |  |        |   |               |   |       |                          |  |   |                     |   |  |                                            |    |   |                    |   | (11
|Comprehensive income                                      |  |             |  |        |   |               |   |       |                          |  |   |                     |   |  |                                            |    |   |                    |   |   
|Compensatory stock options                                |  |             |  |        |   |               |   |       |                          |  |   | (25                  | ) |  |                                            | 22  |   |                    |   |   
|Issuance of common stock pursuant to stock incentive plan |  | 1,371        |  |        | 1  |               |   |       |                          |  |   | 1,496                |   |  |                                            |    |   |                    |   |   
|Tax benefits from stock options                           |  |             |  |        |   |               |   |       |                          |  |   | 6,500                |   |  |                                            |    |   |                    |   |   
|                                                          |  |              |  |        |    |               |   |        |                          |  |   |                      |   |  |                                            |     |   |                    |   |    
|Balance, September 30, 2003                               |  | 35,982       |  | $      | 36 |               | $ | (2,003 | )                        |  | $ | 137,852              |   |  | $                                          | (20 | ) |                    | $ | 446
|                                                          |  |              |  |        |    |               |   |        |                          |  |   |                      |   |  |                                            |     |   |                    |   |    



The accompanying notes
are an integral part of these condensed consolidated financial statements



6



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SOHU.COM INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. THE COMPANY AND BASIS OF PRESENTATION



Sohu.com Inc. (Sohu or the Company) is a Delaware company. The
Company does not have any substantive operations of its own and substantially all of its primary business operations are conducted through its intermediate holding company, Sohu.com Limited, its indirect wholly owned subsidiaries, Sohu ITC
Information Technology (Beijing) Co., Ltd. (Beijing ITC) and Beijing Sohu New Era Information Technology Co., Ltd. (Sohu Era), and its variable interest entities, Beijing Sohu Internet Information Service Co., Ltd.
(Sohu Internet) and Beijing Sohu Online Network Information Services, Ltd. (Beijing Sohu). Sohu.com Limited was established in May 2003. Sohu Era and Sohu Internet were established in July 2003.



The accompanying unaudited consolidated interim financial statements reflect all normal
recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. Results for the three and nine months ended September 30, 2003 are not necessarily indicative of the
results expected for the full fiscal year or for any future period.



These
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete financial statements.



2. ADVERTISING REVENUE RECOGNITION



Advertising revenues are derived principally from standard, sponsorship and retail contracts, most of which are one year or less in duration. Such contracts establish the
fixed price and advertising services to be provided. Pursuant to advertising contracts, the Company provides advertisement placements on various Web site channels and in different formats, including but not limited to banners, links, logos, buttons,
content integration and email marketing. Revenue is recognized ratably over the period the advertising is provided and, as such, the Company considers the services to have been delivered. Based upon the Companys credit assessments of its
customers prior to entering into contracts, the Company determines if collectibility is reasonably assured. In situations where collectibility is not deemed to be reasonably assured, the Company recognizes revenue upon payment from the customer.



As of July 1, 2003, the Company adopted EITF 00-21, Revenue Arrangements with
Multiple Deliverables (EITF 00-21), and recognized revenue for the contracted amount ratably over the contract period. Prior to the adoption of EITF 00-21, the Company recognized revenue for individual services ratably over the period
the individual advertisement was displayed. In estimating the contract value to be allocated to the individual services, the Company used prices contained in its standard rate cards and the average sell rates. The adoption of EITF 00-21 did not have
a material impact on the Companys revenue.



3. CONCENTRATIONS



Substantially all of the Companys e-subscription revenue for all
periods presented is derived from providing value added mobile-related messaging services. The Company relies on two third party network operators and their subsidiaries for the billing of and collection from mobile phone users. If the annual
contracts with these operators were not renewed or were terminated, the Companys e-subscription business could be adversely affected.



4. ACCOUNTS RECEIVABLE, NET



The Company makes estimates of the uncollectability of accounts receivable based on historical bad debts, customer credit-worthiness, current economic trends and changes
in customer payment terms. A provision is made against accounts receivable to the extent they are considered uncollectible.



The following summarizes the activity in the allowance for doubtful accounts receivable for the nine months ended September 30, 2003 and 2002 (in
thousands):



|                               |  | Nine monthsEndedSeptember 30, |     
|------------------------------ |  | ----------------------------- | ----
|                               |  | 2003                          |     
|Balance at beginning of period |  | $                             | 924 
|Additional provision           |  |                               | 383 
|Write-offs                     |  |                               | (464
|Cash collected                 |  |                               | (386
|                               |  |                               |     
|Balance at end of period       |  | $                             | 457 
|                               |  |                               |     



7



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5.    SEGMENT INFORMATION



Based on the criteria established by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the
Company operates in three principal business segments. The Company does not allocate any operating costs, including Web site operating costs, or assets to its two principal non-advertising segments as management does not use this information to
measure the performance of the operating segments.



Summarized information by
segment for the three and nine months ended September 30, 2003 and 2002 is as follows (in thousands):



|                                          |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|----------------------------------------- |  | ------------------------------- | ------ | ------------------------------
|                                          |  | 2003                            |        | 2002                          
|Revenues:                                 |  |                                 |        |                               
|Advertising                               |  | $                               | 8,748  |                               
|Non-advertising:                          |  |                                 |        |                               
|E-subscription                            |  |                                 | 12,640 |                               
|E-commerce                                |  |                                 | 692    |                               
|Other                                     |  |                                 |       |                               
|                                          |  |                                 |        |                               
|Subtotal non-advertising revenues         |  |                                 | 13,332 |                               
|                                          |  |                                 |        |                               
|Total revenues                            |  |                                 | 22,080 |                               
|                                          |  |                                 |        |                               
|Cost of revenues:                         |  |                                 |        |                               
|Advertising                               |  |                                 | 1,973  |                               
|Non-advertising:                          |  |                                 |        |                               
|E-subscription                            |  |                                 | 4,299  |                               
|E-commerce                                |  |                                 | 629    |                               
|Other                                     |  |                                 |       |                               
|                                          |  |                                 |        |                               
|Subtotal non-advertising cost of revenues |  |                                 | 4,928  |                               
|                                          |  |                                 |        |                               
|Total cost of revenues                    |  |                                 | 6,901  |                               
|                                          |  |                                 |        |                               
|Gross profit                              |  | $                               | 15,179 |                               
|                                          |  |                                 |        |                               



6.    NET
INCOME (LOSS) PER SHARE



Basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and, if dilutive, potential common shares outstanding during the period.
Potential common shares consist of shares issuable upon the exercise of stock options (using the treasury stock method) and zero coupon convertible senior notes.



8



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The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per
share data):



|                                                   |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30, |  
|-------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | -
|                                                   |  | 2003                            |        | 2002                           |  
|Numerator:                                         |  |                                 |        |                                |  
|Net income (loss)                                  |  | $                               | 2,671  |                                | $
|Effect of dilutive securities:                     |  |                                 |        |                                |  
|Zero coupon convertible senior notes               |  |                                 | 166    |                                |  
|                                                   |  |                                 |        |                                |  
|Net income (loss) adjusted for dilutive securities |  | $                               | 2,837  |                                | $
|                                                   |  |                                 |        |                                |  
|Denominator:                                       |  |                                 |        |                                |  
|Weighted average basic common shares outstanding   |  |                                 | 35,824 |                                |  
|Effect of dilutive securities:                     |  |                                 |        |                                |  
|Stock options                                      |  |                                 | 4,180  |                                |  
|Zero coupon convertible senior notes               |  |                                 | 1,639  |                                |  
|                                                   |  |                                 |        |                                |  
|Weighted average diluted common shares outstanding |  |                                 | 41,643 |                                |  
|                                                   |  |                                 |        |                                |  
|Basic net income (loss) per share                  |  | $                               | 0.07   |                                | $
|                                                   |  |                                 |        |                                |  
|Diluted net income (loss) per share                |  | $                               | 0.07   |                                | $
|                                                   |  |                                 |        |                                |  



For the nine months ended September
30, 2002, potential common shares related to shares issuable upon the exercise of stock options of 4.4 million were not included in the computation because the effect of inclusion would be anti-dilutive.



7.    ZERO COUPON CONVERTIBLE SENIOR NOTES



The Company completed a private placement on July 14, 2003 of $90 million principal amount
of zero coupon convertible senior notes due July 2023, which resulted in net proceeds to the Company of approximately $87,350,000 after deduction of the initial purchasers discount and our offering expenses. The notes do not pay any interest,
have a zero yield to maturity, and are convertible into the Companys common stock at a conversion price of $44.76 per share, subject to adjustment for dividends, distributions, and upon the occurrence of certain other events. Each $1,000
principal of the notes is initially convertible into 22.3414 shares of common stock of the Company. Each holder of the notes will have the right, at the holders option, to require the Company to repurchase all or any portion of the principal
amount of the holders notes on July 14 in 2007, 2013 and 2018 at a price equal to 100% of the outstanding principal amount. The Company may also redeem all or a portion of the notes for cash at any time on or after July 14, 2008 at 100% of the
principal amount of the notes if the closing price of its common stock for each of the 30 consecutive trading days prior to such time was at least 130% of the conversion price or at such time at least 90% of the initial aggregate principal amount of
the notes have been converted, repurchased or redeemed. In addition, upon a change of control event, each holder of the notes has the right to require the Company to repurchase some or all of its notes at a repurchase price equal to 100% of the
principal amount of the notes plus accrued and unpaid interest. The notes are effectively subordinated to the Companys trade debt. The Company has filed a registration statement with the Securities and Exchange Commission to register for
resale the notes and the common stock issuable upon conversion of the notes. However, until the registration statement becomes effective, the notes may be offered and sold only in transactions that are exempt from registration under the U.S.
Securities Act of 1933 and the securities laws of any other applicable jurisdiction.



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8.    VARIABLE INTEREST ENTITIES AND RELATED PARTY TRANSACTIONS



|a) | Variable Interest Entities
|-- | --------------------------



Effective July 1, 2003, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Pursuant
to FIN 46, Beijing Sohu, Beijing Century High-Tech Investment Co., Ltd. (High Century), Beijing Hengda Yitong Internet Technology Development Co., Ltd. (Hengda), and Sohu Internet are variable interest entities
(VIEs) and the Company is the primary beneficiary. Accordingly, effective July 1, 2003, the VIEs have been consolidated in the Companys financial statements. The Company has not restated earlier periods for the adoption of FIN 46.
Thus, prior to July 1, 2003, these entities were not consolidated in the Companys financial statements and transactions with and balances related to the VIEs have been disclosed as related parties. The Company records a valuation allowance
against the long-term loans to the extent there are losses in these entities. As a result, the long-term loans to related party balance equals the net assets of the related VIE. Thus, the adoption of FIN 46 did not have an impact on the net income
or net assets of the Company. The following table provides information about VIEs (in thousands):



|Name of VIE   |  | Business Purpose          |  | Total assets atSeptember 30,2003 |       | Total revenue for thethree months endedSeptember 30, 2003 |   | Net income/(loss)for the threemonths endedSeptember 30,2003 | 
|------------- |  | ------------------------- |  | -------------------------------- | ----- | --------------------------------------------------------- | - | ----------------------------------------------------------- | 
|Beijing Sohu  |  | Internet Content Provider |  | $                                | 1,046 |                                                           | $ | 8,095                                                       | 
|Hengda        |  | Internet Service Provider |  |                                  | 1,208 |                                                           |   | 335                                                         | 
|Sohu Internet |  | Internet Content Provider |  |                                  | 605   |                                                           |   | 4,290                                                       | 
|High Century  |  | Investment holding        |  |                                  | 4,587 |                                                           |   |                                                            | 



|b) | Related Party Transactions
|-- | --------------------------



The Company has entered into the following arrangements with Dr. Charles Zhang, the Companys Chief Executive Officer and a major Sohu shareholder, and certain employees of the Company to satisfy Peoples
Republic of China (PRC) regulations which prohibit or restrict foreign companies from owning or operating telecommunications, internet content and certain other businesses in China. The Company expects that it will continue to be
involved in and provide additional financial support under similar arrangements in the future.



Under Section 402 of the Sarbanes-Oxley Act of 2002, issuers subject to the act are prohibited from making personal loans to their directors and executive officers. Under Section 402, issuers are permitted to maintain
the loans they made to directors and executive officers prior to the effective date of the Sarbanes-Oxley Act. They are not permitted, however, to renew or materially modify such loans. The Company believes that there is a strong argument that the
loans to Dr. Zhang described below are not personal loans, in view of the Companys underlying business purpose for making the loans and the lack of a personal benefit to Dr. Zhang from the loans. In the absence of judicial
interpretation, an SEC rule, or an SEC staff interpretation confirming the Companys conclusion, however, the Company intends to treat these loans as if they were personal loans under Section 402 of the Sarbanes-Oxley Act.
Accordingly, the Company expects that if it enters into arrangements similar to those described below in the future, any loans made under such arrangements will be made to individuals who are not directors or executive officers of the Company. In
addition, should the existing loans to Dr. Zhang, or to the entities in which he is the primary shareholder, need to be renewed or materially modified, such as if the Company needs to advance additional funds to any of these entities, the Company
expects that the entities, the ownership of the entities and/or the loans to the entities will be restructured so that the Company could not be deemed to be making a loan to Dr. Zhang. The prohibitions set forth in Section 402 have not had any
adverse effect on the Companys operations to date, and the Company does not expect them to have any adverse effect in the future.



In June 2000, the Company extended loans in the amount of $193,000 to Dr. Charles Zhang and $49,000 to He Jinmei, another employee of the Company, to finance their
investments in Beijing Sohu, a company incorporated in the PRC. The shareholders of Beijing Sohu have pledged their shares in Beijing Sohu as collateral for the loan. These loans bear no interest and are due in full on the earlier of demand, in 2010
or at such time as Dr. Charles Zhang or He Jinmei, as the case may be, is not an employee of the Company. A subsidiary of the Company has entered into an option agreement giving it the right, at any time, subject to PRC



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law, to purchase the entire ownership in Beijing Sohu from the two Beijing Sohu shareholders for $242,000. Prior to the
adoption of FIN 46 on July 1, 2003, these loans were included in long-term loans to related parties and the Company recorded a valuation allowance of $56,000 against long-term loans to related parties for losses incurred by Beijing Sohu.



In November 2001, the Company entered into a Loan and Share Pledge Agreement (the
Century Loan Agreement) with Dr. Charles Zhang, and Li Wei, another employee of the Company, for the purpose of funding an equity investment of $4,595,000 by these two individuals in High Century, a company incorporated in the PRC which
engages in investment holding in the PRC on behalf of the Company. Pursuant to the Century Loan Agreement, the Company has extended total loans amounting to $4,595,000 of which $3,676,000 and $919,000 were loaned to Charles Zhang and Li Wei,
respectively. Prior to the adoption of FIN 46 on July 1, 2003, these loans were included in long-term loans to related parties and the Company recorded a valuation allowance of $4,000 against long-term loans to related parties for losses incurred by
High Century.



In January 2002, the Company entered into a Loan and Share
Pledge Agreement (the Hengda Loan Agreement) with Li Wei for the purpose of funding an equity investment of $242,000 by Li Wei in Beijing Hengda Yitong Internet Technology Development Co., Ltd. (Hengda), a company
incorporated in the PRC which engages in Internet access services in the PRC on behalf of the Company. The $242,000 investment represents a 20% interest in Hengda, with High Century holding the remaining 80% interest. Prior to the adoption of FIN 46
on July 1, 2003, these loans were included in long-term loans to related parties and the Company recorded a valuation allowance of $3,000 against long-term loans to related parties for losses incurred by Hengda.



In June 2003, the Company entered into a Loan and Share Pledge Agreement (the Internet
Loan Agreement) with He Jinmei for the purpose of funding an equity investment of $121,000 by He Jinmei in Sohu Internet, a company incorporated in the PRC which engages in Internet information services in the PRC on behalf of the Company. The
$121,000 investment represents a 20% interest in Sohu Internet, with High Century holding the remaining 80% interest.



The Century Loan Agreement, Hengda Loan Agreement and Internet Loan Agreement, which are subject to PRC law, include provisions that (i) the loans can only be repaid to
the Company by transferring the shares of High Century, Hengda or Sohu Internet to the Company, (ii) the shares of High Century, Hengda or Sohu Internet cannot be transferred without the approval of the Company, and (iii) the Company has the right
to appoint all directors and senior management personnel of High Century, Hengda and Sohu Internet. Charles Zhang, Li Wei and He Jinmei have pledged all of their shares in High Century, Hengda and Sohu Internet as collateral for the loans and the
loans bear no interest and are due on demand after November 2003, in the case of High Century, after January 2003, in the case of Hengda, and after June 2004, in the case of Sohu Internet, or at such time as Dr. Charles Zhang, Li Wei or He Jinmei,
as the case may be, is not an employee of the Company. The Company does not intend to request repayment of the loans as long as PRC regulations prohibit the Company from directly investing in businesses being undertaken by High Century, Hengda and
Sohu Internet.



In April 2002, High Century invested $3,080,000 in Sohu-Guolian
Information Technology Co., Ltd. (Sohu-Guolian), a company incorporated in the PRC, for a 51% equity interest in and joint control over Sohu-Guolian. As of June 30, 2003, the Company had recorded a valuation allowance of $398,000 against
long-term loans to related parties for losses incurred by Sohu-Guolian. In September 2003, Sohu-Guolian commenced liquidation procedures. During the three months ended September 30, 2003, the Company made a provision of $345,000 against the
investment in Sohu-Guolian. At September 30, 2003, the investment in Sohu-Guolian was included as assets held for disposal.



Beijing Sohu contracted with network operators for e-subscription revenues of $7,403,000 and $26,858,000 during the three and nine months ended September 30, 2003,
respectively, as compared to $2,472,000 and $5,231,000 in the corresponding three and nine month periods in 2002. Beijing Sohu also generated e-commerce sales of $692,000 and $2,851,000 during the three and nine months ended September 30, 2003,
respectively, as compared to $1,204,000 and $3,032,000 in the corresponding three and nine month periods in 2002. Sohu Internet contracted with network operators for e-subscription revenues of $4,290,000 for each of the three and nine months ended
September 30, 2003. There were no revenues recorded during the three and nine months ended September 30, 2002 because Sohu Internet was formed in the third quarter of 2003. Hengda contracted with a network operator for e-subscription revenues of
$335,000 and $670,000 for Internet access services during the three and nine months ended September 30, 2003, respectively. There were no revenues recorded during the three and nine months ended September 30, 2002 because Hengdas operations
started in the first quarter of 2003. For the three months ended September 30,2003, these revenues were consolidated under FIN 46. For the six months ended June 30, 2003, these revenues were included as related party revenues.



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Approximately 60% of the Companys e-commerce cash on delivery services in Beijing are being provided by Beijing
Qingfan Delivery Co., Ltd. (Qingfan), a company owned by Zhang Tao, the brother of Dr. Charles Zhang, Sohus Chief Executive Officer, President and Chairman, and a major Sohu stockholder. Total delivery fees paid by the Company to
Qingfan were approximately $20,000 and $88,000 for the three and nine months ended September 30, 2003, as compared to $20,000 for each of the three and nine months ended September 30, 2002.



9. INCOME TAXES



The Company is subject to taxes in the United States, the Peoples Republic of China, and Hong Kong. The Companys subsidiaries in
China are governed by the Income Tax Law of the Peoples Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the PRC Income Tax Law). Pursuant to the PRC Income Tax Law,
wholly-owned foreign enterprises are subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax), or 15% for certain technology enterprises, on PRC taxable income. Furthermore, new technology enterprises are exempted
from Chinese state corporate income tax for three years, beginning with their first year of operations, and are entitled to a 50% tax reduction at the rate of 7.5% for the subsequent three years and 15% thereafter. Commencing in the third quarter of
2003, the Companys China based subsidiaries Sohu Era, Sohu Software and its VIE Sohu Internet are entitled to these tax benefits available to new technology enterprises.



During the three months ended September 30, 2003 the Company recorded U.S. federal income tax expense of $6,500,000 associated with a tax
restructuring and other taxable income. During the same period, the Company was entitled to a tax deduction related to employees exercising their stock options and accordingly, did not fully utilize existing U.S. federal net operating losses carried
forward. The benefit of the stock option deduction has been recorded in additional paid in capital.



10. COMMITMENTS AND CONTINGENCIES



The
Chinese market in which the Company operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the ability of the Company to operate an Internet business, and to conduct advertising, e-commerce and
subscription services in the PRC. Though the PRC has, since 1978, implemented a wide range of market-oriented economic reforms, continued reforms and progress towards a full market-oriented economy are uncertain. In addition, the telecommunication,
information, and media industries remain highly regulated. Restrictions are currently in place or are unclear with respect to which specific segments of these industries foreign owned entities, like the Company, may operate. The Companys legal
structure and scope of operations in the PRC could be subjected to restrictions which could result in severe limits to the Companys ability to conduct business in the PRC.



ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



As used in this report, references to us, we, our, our company, Sohu and Sohu.com are to
Sohu.com Inc., and, except where the context requires otherwise, our subsidiaries ChinaRen Inc. (or ChinaRen), Sohu.com (Hong Kong) Limited (or Sohu Hong Kong), Sohu.com Limited, Sohu ITC Information Technology (Beijing) Co., Ltd. (or Beijing ITC),
Beijing Sohu New Era Information Technology Co., Ltd. (Sohu Era), and Beijing Sohu Interactive Software Co., Ltd. (Sohu Software), and our affiliates Beijing Sohu Online Network Information Services, Ltd. (or Beijing Sohu), Beijing Century High Tech
Investment Co., Ltd. (or High Century), Beijing Hengda Yitong Internet Technology Development Co., Ltd. (or Hengda), and Beijing Sohu Internet Service Co. Ltd. (or Sohu Internet) and these references should be interpreted accordingly. Unless
otherwise specified, references to China or PRC refer to the Peoples Republic of China and do not include the Hong Kong Special Administrative Region, the Macau Special Administrative Region or Taiwan. This report
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or
future strategies that are signified by the words expect, anticipate, intend, believe, or similar language. All forward-looking statements included in this document are based on information available
to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth below under the caption Risk Factors. Readers are cautioned not to place undue reliance on these
forward-looking statements.



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OVERVIEW



We are a leading Internet portal in China in terms of brand recognition, page views and registered users. Our portal consists of sophisticated Chinese language Web
navigational and search capabilities, 17 main content channels, Web-based communications and community services and a platform for e-subscriptions (consisting mainly of mobile telephone-related messaging services, or wireless services) and
e-commerce. Each of our interest-specific main channels contains multi-level sub-channels that cover a comprehensive range of topics, including news, business, entertainment, sports and career. We also offer free Web-based e-mail. We offer a
universal registration system, whereby a user that has registered for our e-mail service is automatically registered for our chat, bulletin board, instant messaging and other services. Our portal attracts consumers and merchants alike because it is
designed to meet the specific needs and interests of Internet users in China. Key features include proprietary Web navigational and search capabilities that reflect the unique cultural characteristics and thinking and viewing habits of PRC Internet
users. ChinaRen is an online portal located in China that targets mainland Chinese Internet users with its strong community products.



We derive revenues primarily through the sale of advertising, e-subscriptions (consisting mainly of wireless services) and e-commerce.



We were organized in 1996 as Internet Technologies China Incorporated, and launched our
original Web site, itc.com.cn, in January 1997. In February 1998, we re-launched our Web site under Sohu.com. In September 1999, we renamed our company Sohu.com Inc. Substantially all of our operations are conducted through our indirect wholly owned
PRC subsidiary Sohu ITC Information Technology (Beijing) Co., Ltd.



Effective
on July 18, 2003, as part of a tax restructuring intended to reduce the rate of income taxes we pay in the PRC, we transferred various assets, including our domain names (including www.sohu.com and www.chinaren.com), our trademarks, all of the
issued and outstanding shares of Beijing ITC and Sohu Hong Kong, and the rights under loans payable to Sohu.com Inc. by Beijing Sohu, High Century, Hengda, and Sohu Internet, to Sohu.com Limited, a Cayman Islands corporation which is a newly formed
wholly-owned subsidiary of Sohu.com Inc. In July 2003, Sohu Era and Sohu Software were incorporated in the PRC and during the three months ended September 30, 2003 were approved as new technology enterprises, which are subject to lower tax rates in
China than companies which do not have new technology enterprise status. During the three months ended September 30, 2003, we incurred a non-cash tax charge of $6,500,000 as a result of this restructuring.



Also effective July 18, 2003, the audit committee of our Board of Directors pre-approved the
provision by our auditor, PricewaterhouseCoopers, of tax advice and services to Sohu, including the filing of our 2002 and 2003 tax returns.



As of September 30, 2003, we had an accumulated deficit of $58.4 million as a result of significant net losses from our inception through the quarter ended June 30, 2002.
These losses were funded with proceeds of preferred stock private placements and our initial public offering completed in July 2000. We may incur substantial net losses in the future due to the relative high risk associated with our revenue and the
high level of planned operating and capital expenditures, including sales and marketing costs, personnel hires, and product development. We anticipate funding such losses, if any, with the remaining proceeds from our initial public offering, the
proceeds of the private placement of zero coupon convertible senior notes we completed in July 2003, and our cash, cash equivalents, and investments.



CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES



Sohus discussion and analysis of its financial condition and results of operations are based upon Sohus consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Sohu to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Sohu evaluates its estimates based on historical experience and on various other assumptions that are believed 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. Actual results may differ from these estimates under different assumptions or conditions.
Sohu believes accounting for advertising revenue, accounting for e-subscriptions revenues, gross versus net basis of revenue recognition, allowance for doubtful accounts, and valuation allowance against deferred tax assets represent critical
accounting policies which reflect more significant judgments and estimates used in the preparation of our consolidated financial statements.



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We generate advertising revenue from standard, sponsorship and retail contracts, most of which are one year or less in
duration. Such contracts establish the fixed price and advertising services to be provided. Pursuant to advertising contracts, we provide advertisement placements on various Web site channels and in different formats, including but not limited to
banners, links, logos, buttons, content integration and email marketing. Revenue is recognized ratably over the period the advertising is provided and, as such, we consider the services to have been delivered. Based upon our credit assessments of
our customers prior to entering into contracts, we determine if collectibility is reasonably assured. In situations where collectibility is not deemed to be reasonably assured, we recognize revenue upon payment from the customers.



As of July 1, 2003, we adopted EITF 00-21, Revenue Arrangements with Multiple Deliverables
(EITF 00-21), and recognized revenue for the contracted amount ratably over the contract period. Prior to the adoption of EITF 00-21, we recognized revenue for individual services ratably over the period the individual advertisement was
displayed. In estimating the contract value to be allocated to the individual services, we used prices contained in our standard rate cards and the average sell rates. The adoption of EITF 00-21 did not have a material impact on our revenue.



Sponsorship contracts may include services similar to those in our standard
advertising contracts, are generally for larger dollar amounts and for a longer period of time, may allow advertisers to sponsor a particular area on our Website, may include brand affiliation services and/or a larger volume of services, and may
require some exclusivity or premier placements. Sponsorship advertisement revenues are normally recognized on a straight line basis over the contract period and when collection of the resulting receivable is reasonably assured provided we are
meeting our obligations under the contract. Pursuant to retail advertising contracts, which are normally for lower dollar amounts and are with small and medium size enterprises, we provide services which include listings in our search directory or
our classified advertisements section, normally for a fixed annual fee, and priority placements on search results for a fixed fee or variable pricing based on bidding by different competitors. For retail advertising contracts, revenue is recognized
as the service is provided, which is normally on a straight line basis over the term of the contract, and collection of the resulting receivable is reasonably assured. Material differences could result in the amount and timing of our revenue for any
period if management made different judgments or utilized different estimates.



E-subscription revenues are included within non-advertising revenues and are derived principally from providing value added wireless services such as alumni club, dating and friends matching, e-mail, ringtone and logo downloads and various
other related products to mobile phone users. E-subscription fees are charged on a monthly or per message basis. E-subscription revenues are recognized in the month in which the service is performed, provided no significant Sohu obligations remain.
We rely on a number of mobile network operators in China to bill mobile phone users for e-subscription fees. In order to meet ownership requirements under PRC law which restrict or prohibit us from being an Internet content provider or directly
providing telecommunications services such as e-subscriptions, we rely on Beijing Sohu to contract with the mobile operators. Generally, (i) within 15 to 90 days after the end of each month, Beijing SohuorSohu Internet receives a statement from
each of the operators confirming the amount of e-subscription charges billed to that operators mobile phone users and (ii) within 30 to 120 days after delivering a monthly statement to Beijing Sohuor Sohu Internet each operator remits the
e-subscription fees, net of its service fees, for the month to Beijing Sohu or Sohu Internet, which then transfers the funds to our subsidiaries Beijing ITC or Sohu Era. In order to recognize revenue and get paid for services provided, we rely on
billing confirmations from the mobile network operators as to the actual amount of services they have billed to their mobile customers. We do not collect e-subscription fees from an operator in certain circumstances due to technical issues with the
operators network. This is referred to as the failure rate, which can vary from operator to operator. An operators failure rate can vary from month to month, and in the past has ranged from 5% to 80% with recent average
failure rates of around 25%, and may change at any time without notice. If an operator encounters technical problems, increases in the failure rate for that operator could occur. CMCC Beijing is currently in the process of establishing a new billing
platform and may require us to switch to this platform in the future. The new platform may result in higher failure rates. At the end of each reporting period, where an operator has not provided Beijing Sohu or Sohu Internet with the monthly
statement for any month confirming the amount of e-subscription charges billed to that operators mobile phone users for the month, Sohu, using information generated from its own internal system and historical data, makes estimates of the
failure rate and collectable e-subscription fees and accrues revenue accordingly. Material differences could result in the amount and timing of our revenue for any period because of differences between the actual failure rate per an operators
statement and our internal records.



Our management must determine whether to
record revenue for our e-subscriptions and e-commerce business lines using the gross or net method of reporting. Determining whether revenue should be reported gross or net is based on an assessment of various factors, principally whether Sohu is
acting as the principal in offering services to the customer or whether Sohu is acting as an agent in the transaction. To the extent Sohu is acting as



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a principal in a transaction Sohu reports as revenue the payments received on a gross basis and reports as costs of revenue the amounts attributable to goods
and services provided by third party operators and other vendors. To the extent Sohu is acting as an agent in a transaction Sohu reports as revenue the payments received less commissions and other payments to third parties, i.e., on a net basis. The
determination of whether Sohu is serving as principal or agent in a transaction is judgmental in nature and based on an evaluation of the terms of an arrangement.



Based on our assessment, our e-subscriptions revenues are recorded on a gross basis. The majority of our e-commerce revenues are recorded on
a gross basis but, depending on the terms of particular contracts with our suppliers, the net basis is also used. To the extent revenues are recorded gross, any commissions or other payments to third parties are recorded as expenses so that the net
amount (gross revenues, less expenses) flows through operating income. Accordingly, the impact on operating income is the same, whether Sohu records the revenue on a gross or net basis.



Our management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes accounts
receivable, historical bad debts, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balance was $11.8 million
net of allowance for doubtful accounts of $457,000 as of September 30, 2003. If the financial condition of Sohus customers or telecom operators were to deteriorate, resulting in their inability to make payments, additional allowance might be
required.



As of September 30, 2003, due to our history of cumulative losses,
we have recorded a full valuation allowance against our gross deferred tax assets in order to reduce our deferred tax assets to the amount that is more likely than not to be realized. If events were to occur in the future that would allow us to
realize more of our deferred tax assets than the presently recorded net amount, an adjustment would be made to the deferred tax assets that would increase income for the period when those events occurred.



RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002



REVENUES



Total net revenues were $22.1
million and $55.8 million for the three and nine months ended September 30, 2003, respectively, as compared to $7.5 million and $18.2 million for the corresponding three and nine month periods in 2002. For the three months ended September 30, 2003
and 2002, advertising revenues constituted $8.7 million and $3.6 million, or 40% and 49% of total revenues, respectively, and non-advertising revenues were $13.3 million and $3.8 million, or 60% and 51% of total revenues, respectively. For the nine
months ended September 30, 2003 and 2002, advertising revenues constituted $20.0 million and $9.5 million, or 36% and 53% of total revenues, respectively, and non-advertising revenues were $35.8 million and $8.6 million, or 64% and 47% of total
revenues, respectively.



Advertising Revenues



Advertising revenues increased by $5.1 million to $8.7 million for the three months ended
September 30, 2003 and increased by $10.5 million to $20.0 million for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. As online advertising is relatively new and developing in China
there are a number of factors which have contributed to our growth. Part of the increase was due to the development and growth from our paid listing business (we receive fees for listing companies in our search directory), where paid listing
revenues increased by $755,000 to $1.5 million for the three months ended September 30, 2003 and increased by $2.2 million to $3.8 million for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in
2002. Because of the evolving and dynamic nature of our business, including the advertising patterns of our customers, it is not possible for us to quantify the amount of increases attributable to other factors, which include higher advertising
rates of approximately 40%, the increasing number of advertisers purchasing space on our online media properties and larger and longer-term purchases by certain advertisers. Sales to Sohus five largest advertisers were 11% of total advertising
revenues for each of the three and nine months ended September 30, 2003, respectively, as compared to 13% and 11% of total advertising revenues for the corresponding three and nine month periods in 2002. As of September 30, 2003 and 2002, we
recorded $4.0 million and $1.3 million of deferred revenues, respectively.



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Non-advertising Revenues

Non-advertising revenues, which have been the fastest growing part of our business, are derived principally from monetizing our users (i.e. consumers) via e-subscription services.



Non-advertising revenues increased by $9.5 million to $13.3 million for the three months
ended September 30, 2003 and increased by $27.2 million to $35.8 million for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. Non-advertising revenues for the three months ended
September 30, 2003 were derived from e-subscription fees of $12.6 million and e-commerce services of $692,000. Prior to our adoption of FIN 46 on July 1, 2003, which resulted in the consolidation of our variable interest entities, substantially all
of our non-advertising revenue was from related parties.



Most of the growth in
non-advertising revenues was attributable to increases in e-subscriptions revenue. E-subscription fees increased by $10.1 million to $12.6 million for the three months ended September 30, 2003 and increased by $27.5 million to $32.9 million for the
nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. For the three months and nine months ended September 30, 2003 approximately 93% and 95% of e-subscription revenues, respectively, were
derived from providing value added wireless services, such as alumni club, dating and friends matching, e-mail, ringtone and logo downloads and various other related products, to mobile phone users. Wireless-related e-subscription fees are charged
on a monthly or per message basis. Currently, approximately 80% of our wireless revenue is from consumers who subscribe for monthly services, for which we charge a monthly fee ranging from approximately $0.60 to $4.00.



Our wireless services were introduced in China in late 2000 and our growth in this area over
the past two years has been mainly attributable to a combination of a number of factors, such as increases in the number of Chinese mobile phone users who have been subscribing for our wireless services and our introduction of new products to the
market. The unique characteristics of the China mobile phone and internet users are important factors for the growth of this business. Product development is especially important because these services have only recently become available in China
and some of the services we offer are unique to China. Presently we provide over 500 different monthly subscription wireless services and over 150 services which are charged on a per message basis. We regularly introduce new products and adaptations
to our existing products. Depending on the product, subscribers may use the product for as short as one month or may use it on an ongoing basis. As described below, there are certain products and marketing methods which have contributed to our
growth. Price increases have not been a factor in our wireless growth, because we have many different products and pricing is normally set when the product is launched and remains unchanged during the life of the product. Approximately 25% of our
growth was attributable to improvements in the wireless billing and transmission platform, as our approximate billing failure rate during the nine months ended September 30, 2003 was 25%, as compared to 40% for the nine months ended September 30,
2003.



During the past nine months the largest contributor to our wireless
related e-subscriptions growth has been our online dating and friends matching service, which we refer to as Jiqinggongshe or GGMM, and accounted for approximately 25 percent of our wireless revenue. We developed this product
in the fourth quarter of 2002, and it accounted for approximately 12% of our revenue in the fourth quarter of 2002. Most of our GGMM subscribers were acquired through website union, where we used third party websites to market our products. At the
instruction of the mobile operators, we stopped using website union in July 2003. We also used website union for marketing numerous other products, which, excluding GGMM, accounted for approximately 15 percent of our total revenue for the nine
months ended September 30, 2003. As a result of our inability to use website union to promote our products or acquire subscribers, we experienced substantially lower growth in e-subscriptions revenue for the three months ended September 30, 2003 as
compared to the three months ended June 30, 2003, March 31, 2003 and December 31, 2002. Because our use of website union is restricted, we expect our subscriber base for products previously promoted through website union to continue to decline. Our
future growth in e-subscriptions revenue could be materially less than historical growth.



The future growth and sustainability of our e-subscription revenues is dependent upon user acceptance of our existing and new services, especially services, such as GGMM, which are paid by way of monthly
subscriptions. Because these services are new and untested, we do not have a clear understanding of consumer behavior, making it difficult to predict future growth or usage.



E-commerce revenues are earned from direct sales of consumer products through Sohus Web site. In 2001, we established store.sohu.com
where we undertake fulfilment e-commerce activities and conduct e-commerce transactions. Our e-commerce products consist of over 4,000 consumer products such as books, health care products, videos, music and computer equipment. We purchase products
from suppliers, stock the goods in our warehouse and, upon receiving the orders from our Web site, arrange for delivery to our customers, most of



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whom are individuals in Beijing, Shanghai and Guangzhou. Fulfilment is provided by delivery companies or through postal
services. Substantially all sales are done on a cash on delivery basis. E-commerce revenue decreased by $515,000 to $692,000 for the three months ended September 30, 2003 and decreased by $184,000 to $2.9 million for the nine months ended September
30, 2003, as compared to the corresponding three and nine month periods in 2002, because we discontinued sales of cosmetics in the third quarter ended September 30, 2003.



COSTS AND EXPENSES



Cost of Revenues

Total cost of revenues increased by $3.6 million to
$6.9 million for the three months ended September 30, 2003 and increased by $9.1 million to $18.4 million for the nine months ended September 30, 2003, as compared to the three and nine month periods in 2002. For the three months ended September 30,
2003 and 2002, advertising cost of revenues constituted $2.0 million and 1.5 million, or 29% and 44% of total cost of revenues, respectively, and non-advertising cost of revenues was $4.9 million and $1.9 million, or 71% and 56% of total cost of
revenues, respectively. For the nine months ended September 30, 2003 and 2002, advertising cost of revenues constituted $5.3 million and $4.4 million, or 29% and 47% of total cost of revenues, respectively, and non-advertising cost of revenues was
$13.1 million and $4.9 million, or 71% and 53% of total cost of revenues, respectively.



Advertising Cost of Revenues

Advertising cost of revenues include personnel costs and personnel overhead, content purchases, depreciation
and bandwidth, which are fairly fixed in nature and accordingly do not tend to increase or decrease proportionately with revenue.



Our advertising gross margin for the three months ended September 30, 2003 was 77% as compared to 60% for the three months ended September 30, 2002. Our advertising gross
margin for the nine months ended September 30, 2003 was 73% as compared to 54% for the nine months ended September 30, 2002. Our gross margins improved because most of the costs of advertising are fairly fixed and have not increased at the same rate
as revenue growth.



Advertising cost of revenues increased by $501,000 to $2.0
million for the three months ended September 30, 2003 and increased by $895,000 to $5.3 million for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. The increase for the three months
ended September 30, 2003 was primarily due to higher spending on headcount of $300,000 and an increase in spending for content of $214,000 as we expanded our channel offerings, offset by reductions of $13,000 in various other categories. The
increase for the nine months ended September 30, 2003 was primarily due to higher spending on headcount of $615,000 and an increase in content payments of $369,000, offset by a reductions of $89,000 in certain other categories such as bandwidth.



Non-advertising Cost of Revenues

Non-advertising cost of revenues increased by $3.1 million to $4.9 million for the three months ended September 30, 2003 and increased by $8.2 million to $13.1 million
for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. Prior to our adoption of FIN 46 on July 1, 2003, which resulted in the consolidation of our variable interest entities,
substantially all non-advertising cost of revenues was from related parties.



Our e-subscriptions gross margin for the three months ended September 30, 2003 was 66%, approximately the same as for the three months ended September 30, 2002. Our e-subscriptions gross margin for the nine months ended September 30, 2003
was 68% as compared to 61% for the nine months ended September 30, 2002. For the three and nine months ended September 30, 2003, non-advertising cost of revenues included $4.3 million and $10.6 million, respectively, in e-subscription cost of
revenues, which consists mainly of subscription collection and wireless transmission charges paid to third party network operators. E-subscription cost of revenues does not include allocations for Web site operating costs. The fees vary between
third party operators and include a gateway fee of $0.006 to $0.012 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 12% to 15%, based on the total fees collected by the third party operators from
mobile phone users and paid to us. As the operator fees are charged on a per message basis and as a percentage of revenue, the increase in e-subscriptions cost of revenue is consistent with our increase in wireless revenues. There have been no
significant changes in the third party network operator fees over the past two years.



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Our e-commerce gross margin for the three months ended September 30, 2003 was 9% as compared to 19% for the three months
ended September 30, 2002. Our e-commerce gross margin for the nine months ended September 30, 2003 was 11% as compared to 16% for the nine months ended September 30, 2002. Our gross margins were reduced due to market price competition and the fact
that we started providing free shipping in 2003, which increased our non-advertising cost of revenues. For the three and nine months ended September 30, 2003, non-advertising cost of revenues included $629,000 and $2.5 million, respectively, in
e-commerce cost of revenues consisting of the purchase price of consumer products sold by Sohu and inbound and outbound shipping charges. E-commerce cost of revenues do not include allocations for Web site operating costs. The change in e-commerce
cost of revenues from the comparative period in 2003 is attributable to the reduction in sales volume.



Product Development Expenses

Product development expenses increased by $494,000 to $1.9 million for the three months
ended September 30, 2003 and increased by $1.7 million to $5.6 million for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. The increase for the three months ended September 30, 2003
was primarily attributable to increased headcount spending of $455,000 and $39,000 for various other categories. The increase for the nine months ended September 30, 2003 was primarily due to increased headcount of $1.4 million, online games
development of $100,000 and $195,000 for various other categories.



Sales
and Marketing Expenses

Sales and marketing expenses increased by $977,000 to $2.8 million for the three months ended September 30, 2003 and increased
by $1.6 million to $7.4 million for the nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. The increase for the three months ended September 30, 2003 was primarily due to increased marketing
spending of $381,000, increased personnel expenses of $361,000 and $235,000 for various other categories. The increase for the nine months ended September 30, 2003 was primarily due to increased personnel expense of $1.0 million, advertising and
promotion expense of $1.2 million and $274,000 for various other categories, offset by the decreased provision for bad debts of $858,000 associated with the implementation of tighter credit policies.



General and Administrative Expenses

General and administrative expenses increased by $226,000 to $1.2 million for the three months ended September 30, 2003 and increased by $669,000 to $3.6 million for the
nine months ended September 30, 2003, as compared to the corresponding three and nine month periods in 2002. The increase for the three months ended September 30, 2003 was primarily due to increased professional fees of $169,000 and $57,000 for
various other categories. The increase for the nine months ended September 30, 2003 was primarily due to increased professional fees of $658,000 and $11,000 for various other categories.



Operating Profit (Loss)

As a result of
the foregoing, we had operating profit of $9.2 million and $20.8 million for the three and nine months ended September 30, 2003 as compared to operating loss of $126,000 and $3.8 million for the corresponding three and nine month periods in 2002.



Interest Income

Interest income increased by $227,000 to $532,000 for the three months ended September 30, 2003 and increased by $268,000 to $1.2 million for the nine months ended
September 30, 2003, as compared to the corresponding three and nine month periods in 2002. The increases were mainly due to our increased cash balance and investments as a result of our private placement of zero coupon convertible senior notes in
July 2003 and an increase in our profits from quarter to quarter.



Income
Tax Expense



Income tax expense was $6.5 million for the three and nine
months ended September 30, 2003 and $0 for the corresponding periods in 2002. The increase in income tax expense was due to income tax expense associated with a tax restructuring undertaken during the three months ended September 30, 2003 and other
taxable income. We were not profitable in the previous year and, accordingly, had no taxable income. As of September 30, 2002 we had provided a full valuation allowance for our deferred tax assets.



Effective for the fourth quarter of 2003, most of our income is earned in China by Sohu Era,
Sohu Internet and Sohu Software which, as new technology enterprises, are subject to taxation at 0 percent for each of three years ended December 31, 2005, 7.5 percent for each of three years ended December 31, 2008 and 15 percent thereafter. If
Sohu Era, Sohu Internet and Sohu Software do not continue to meet the definition of a new technology enterprise or there are changes in the taxation policies of the PRC government, their income would be subject to taxation at the rate of 33 percent.



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Income earned in the United States where Sohu.com Inc. is incorporated is subject to taxation at 34%. Going forward we
anticipate the only significant income earned in the United States and subject to United States taxation to be interest income. If dividends are paid by our China or other non-U.S. subsidiaries to Sohu.com Inc., the dividends would be taxed at the
Sohu.coms rate of taxation which is 34 percent. At this time, we do not intend for the China or other non-U.S. subsidiaries to pay dividends to Sohu.com.



In the fourth quarter of 2003, we expect our effective tax rate to be between 0 and 10 percent. For 2004 and 2005, we do not anticipate having our Chinese subsidiaries
pay dividends to Sohu and, if most of our operating subsidiaries continue to meet the definition of new technology enterprises, our effective tax rate on a group basis should be less than 3 percent. However if we undertake new businesses in China
which do not meet the requirements of a new technology enterprise, we would be subject to taxation on this income at 33 percent.



Accordingly, our future effective tax rate could vary between 0 percent and 34 percent due to a variety of factors, including, but not limited to, the relevant income
contribution by Chinese entities taxed at 0 to 33 percent and U.S. operations taxed at 34 percent, the ability of our operating subsidiaries to meet the requirements of a new technology enterprises which are taxed at a maximum of 15 percent (which
is less than the normal China corporate tax rate of 33 percent), dividends paid by the subsidiaries in China or intermediate holding companies to Sohu.com which would be taxed in the United States at 34 percent, the ability of Sohu.com to use its
net operating losses, changes in statutory tax rates, the amount of tax exempt interest income generated during the year, the ability to utilize foreign tax credits and non-deductible items relating to acquisitions, or other non-recurring charges.
We will continue to monitor the effective tax rate on a quarterly basis.



Net Income (Loss)

As a result of the foregoing, we had net income of $2.7 million and $14.8 million for the three and nine months ended
September 30, 2003, as compared to net income of $112,000 and net loss of $3.0 million for the corresponding three and nine month periods in 2002.



LIQUIDITY AND CAPITAL RESOURCES



We have financed our operations principally through sales of equity securities and convertible notes, and revenues from operations. As of September 30, 2003, we had cash,
cash equivalents, and investments in marketable debt securities totalling approximately $161.6 million as compared to $44.2 million as of December 31, 2002.



We completed a private placement on July 14, 2003 of $90 million principal amount of zero coupon convertible senior notes due July 2023, which resulted in net proceeds to
Sohu of approximately $87,350,000 after deduction of the initial purchasers discount and our offering expenses. The notes do not pay any interest, have a zero yield to maturity, and are convertible into Sohus common stock at a conversion
price of $44.76 per share, subject to adjustment. Each $1,000 principal of the notes is initially convertible into 22.3414 shares of Sohus common stock. Each holder of the notes will have the right, at the holders option, to require Sohu
to repurchase all or any portion of the principal amount of the holders notes on July 14 in 2007, 2013 and 2018 at a price equal to 100% of the outstanding principal amount. Sohu may also redeem all or a portion of the notes for cash at any
time on or after July 14, 2008 at 100% of the principal amount of the notes if the closing price of Sohus common stock for each of the 30 consecutive trading days prior to such time was at least 130% of the conversion price or at such time at
least 90% of the initial aggregate principal amount of the notes have been converted, repurchased or redeemed. In addition, upon a change of control event, each holder of the notes may require Sohu to repurchase some or all of its notes at a
repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. We have filed a registration statement with the Securities and Exchange Commission to register for resale the notes and the common stock issuable
upon conversion of the notes. However, until the registration statement becomes effective, the notes may be offered and sold only in transactions that are exempt from registration under the U.S. Securities Act of 1933 and the securities laws of any
other applicable jurisdiction.



Pursuant to an agreement with a bank, we were
extended a commercial line of credit of $15 million with our investments in marketable debt securities as collateral, to meet any of our short-term contingent cash needs. We have no amount outstanding under the credit facility as of September 30,
2003. We are not subject to any financial covenants under the credit facility.



Net cash provided by operating activities was $29.3 million for the nine months ended September 30, 2003, primarily due to our net income of $14.8 million for the period, tax benefits from stock options of $6.5 million, depreciation and
amortization of $3.6 million, provision for loans to related parties and assets held for disposal of $554,000, and $3.9 million of a decrease in working capital. Net cash provided by operating activities was



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$1.8 million for the nine months ended September 30, 2002, primarily due to our net loss of $3.0 million for the period,
adjusted for depreciation and amortization of $3.7 million, provision for allowance for doubtful accounts of $798,000 and changes in working capital.



Net cash used in investing activities was $20.2 million for the nine months ended September 30, 2003, primarily due to long term investments in marketable debt securities
of $19.1 million, purchase of fixed assets of $2.3 million and addition of other assets of $1.4 million, partially offset by $2.6 million in cash included in variable interest entities. Net cash used in investing activities was $8.3 million for the
nine months ended September 30, 2002, and primarily due to investments of $2.8 million in marketable debt securities, purchase of fixed assets of $2.1 million and loans to related parties of $3.3 million for financing investments in High Century and
Hengda.



Net cash provided by financing activities was $89.2 million for the
nine months ended September 30, 2003, due to net proceeds of $87.8 million from the private placement of our zero coupon convertible senior notes and proceeds of $1.4 million from issuance of common stock pursuant to our stock incentive plan. There
was no significant net cash provided by financing activities for the nine months ended September 30, 2002.



We believe that current cash and cash equivalents will be sufficient to meet the requirements of working capital (net cash used in operating activities), commitments and capital expenditures cash needs for at least
the next twelve months. At this time, we do not expect to require additional cash resources. However, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions
we may decide to pursue.



Chinese regulations limit our ability to convert
renminbi into foreign currency for capital items and may restrict our ability to use cash generated in China for expenditures outside of China. The laws of the PRC do allow the payment of dividends from China based operating subsidiaries. We have
not paid dividends in the past from China to our holding companies outside of China. If the renminbi were to decline in value, our revenues in US dollar terms would be reduced.



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RISK FACTORS



Risks Related to Our Business



Except for each of the five quarters ended September 30, 2003, we have incurred net losses since inception and losses could continue in the future.



Except for each of the five quarters ended September
30, 2003, we have incurred significant net losses since our inception in August 1996. In addition, we had an accumulated deficit of approximately $58.4 million at September 30, 2003. We may incur substantial net losses in the future due to the
relative high risk associated with our revenue and the high level of planned operating and capital expenditures, including sales and marketing costs, personnel hires, and product development. Although we have recorded a net income for each of the
five consecutive quarters ended September 30, 2003, we may not sustain profitability.



We have a limited operating history, which may make it difficult for investors to evaluate our business.



We began offering products and services under the www.Sohu.com Web site in February 1998. Accordingly, we have a limited operating history upon which
investors can evaluate our business. In addition, our senior management and employees have worked together at our company for only a relatively short period of time. As an early stage company in the new and rapidly evolving PRC Internet market, we
face numerous risks and uncertainties. Some of these risks relate to our ability to:



| |  | increase our online advertising revenues and successfully build our e-commerce and e-subscription services (including wireless services) businesses, given the early stage of
development of the PRC Internet industry;
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| |  | continue to attract a larger audience to our portal by expanding the type and technical sophistication of the content and services we offer; and
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| |  | maintain our current, and develop new, strategic relationships to increase our revenue streams as well as product and service offerings.
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PRC Internet laws and regulations are unclear and will likely change in the near
future. If we are found to be in violation of current or future PRC laws or regulations, we could be subject to severe penalties.



We conduct our Internet operations solely in the PRC through our indirect wholly owned subsidiaries, Beijing ITC and Sohu Era and variable interest
entities Sohu Internet and Beijing Sohu. Beijing ITC and Sohu Era are wholly foreign owned enterprises, or WFOEs, under PRC law. We are a Delaware corporation, Sohu Hong Kong, our indirect wholly owned subsidiary and the parent company of Beijing
ITC and Sohu Era, is a Hong Kong corporation, and Sohu and Sohu Hong Kong are foreign persons under PRC law. Accordingly, our Internet business is 100% foreign-owned. In order to meet ownership requirements under PRC law which restrict or prohibit
Sohu from operating in certain industries such as Internet content provider and Internet access, we have established Beijing Sohu, High Century, Hengda and Sohu Internet which are companies incorporated in the PRC and owned by Dr. Charles Zhang, our
president and chief executive officer and a major Sohu shareholder, and certain other employees of Sohu. As of September 30, 2003, Sohu had invested $5.2 million in Beijing Sohu, High Century, Hengda and Sohu Internet through loans to officers and
employees. In 2000, we extended loans of $242,000 to Dr. Charles Zhang and a Sohu employee to set up Beijing Sohu. Pursuant to a restructuring in May 2000, we transferred certain of our assets and operations to Beijing Sohu, a PRC company that is
80% owned by Dr. Charles Zhang. In 2001 and 2002, we made loans totaling $4.6 million to Dr. Charles Zhang and an employee of the company to establish High Century for the purposes of undertaking additional investments in the PRC where foreign
ownership is prohibited or restricted. In 2002, we loaned $242,000 to an employee of the company for the purpose of funding an investment in Hengda, a company incorporated in the PRC which engages in Internet access services in the PRC on behalf of
Sohu. The $242,000 investment represents a 20% interest in Hengda, with High Century holding the remaining 80% interest. In March 2002, High Century entered into a joint venture agreement with Guolian Securities Co., Ltd., pursuant to which High
Century has invested $3.1 million in Sohu-Guolian in return for a 51% equity interest in and joint control of Sohu-Guolian. Sohu-Guolian was established to provide technical services to the PRC online securities trading and financial services
industries. In September 2003, Sohu-Guolian commenced liquidation proceedings. In June 2003, we loaned $121,000 to an employee of the company for the purpose of funding an investment in Sohu Internet, a company incorporated in the PRC which engages
in Internet information services in the PRC on behalf of Sohu. The $121,000 investment represents a 20% interest in Sohu Internet with High Century holding the remaining 80% interest. We do not have any direct ownership interest in Beijing Sohu,
High Century, Hengda or Sohu Internet.



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The PRC has recently begun to regulate its Internet sector by making pronouncements or enacting
regulations regarding the legality of foreign investment in the PRC Internet sector and the existence and enforcement of content restrictions on the Internet. We believe that our current ownership structure complies with all existing PRC laws, rules
and regulations. There are, however, substantial uncertainties regarding the interpretation of current PRC Internet laws and regulations. In addition, new PRC Internet laws and regulations were recently adopted. Accordingly, it is possible that the
PRC government will ultimately take a view contrary to ours.



Issues, risks and
uncertainties relating to PRC government regulation of the PRC Internet sector include the following:



| |  | The PRC recently enacted regulations applying to Internet-related services and telecom-related activities. While many aspects of these regulations remain unclear, they purport to
limit and require licensing of various aspects of the provision of Internet information services. If these regulations are interpreted to be inconsistent with our restructuring, our business will be severely impaired.
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| |  | Under the agreement reached in November 1999 between the PRC and the United States concerning the United States support of Chinas entry into the World Trade
Organization, or WTO, foreign investment in PRC Internet services will be liberalized to allow for 30% foreign ownership in key telecommunication services, including PRC Internet ventures, for the first year after Chinas entry into the WTO,
49% in the second year and 50% thereafter. China officially entered the WTO on December 11, 2001. However, the implementation of Chinas WTO accession agreements is still subject to various conditions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Ministry of Information Industry, or MII, has also stated that the activities of Internet content providers are subject to regulation by various PRC government authorities,
depending on the specific activities conducted by the Internet content provider. Various government authorities have stated publicly that they are in the process of preparing new laws and regulations that will govern these activities. The areas of
regulation currently include online advertising, online news reporting, online publishing, online securities trading and the provision of industry-specific (e.g., drug-related) information over the Internet. Other aspects of our online operations
may be subject to regulation in the future.
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The
interpretation and application of existing PRC laws and regulations, the stated positions of the MII and the possible new laws or regulations have created substantial uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, PRC Internet companies, including us.



Accordingly, it is possible that the relevant PRC authorities could, at any time, assert that any portion or all of our, Beijing ITCs, Sohu Eras, Beijing Sohus, Hengdas, High Centurys or
Sohu Internets existing or future ownership structure and businesses violate existing or future PRC laws, regulations or policies. It is also possible that the new laws or regulations governing the PRC Internet sector that have been adopted or
may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our, Beijing ITCs, Sohu Eras, Beijing Sohus, Hengdas, High Centurys and Sohu Internets current or proposed
businesses and operations. In addition, these new laws and regulations may be retroactively applied to us, Beijing ITC, Sohu Era, High Century, Hengda, Beijing Sohu or Sohu Internet.



If we, Beijing ITC, Sohu Era, High Century, Beijing Sohu, Hengda or Sohu Internet were found to be in violation of any
existing or future PRC laws or regulations, the relevant PRC authorities would have broad discretion in dealing with such violation, including, without limitation, the following:



| |  | levying fines;
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| |  | confiscating our, Beijing ITCs, Sohu Eras, High Centurys, Hengdas, Beijing Sohus or Sohu Internets income;
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| |  | revoking our, Beijing ITCs, Sohu Eras, High Centurys, Hengdas, Beijing Sohus or Sohu Internets business license;
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| |  | shutting down our, Beijing ITCs, Sohu Eras, Beijing Sohus or Sohu Internets servers and/or blocking our Web sites;
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| |  | requiring us, Beijing ITC, Sohu Era, High Century, Hengda, Beijing Sohu or Sohu Internet to restructure its ownership structure or operations; and
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| |  | requiring us, Beijing ITC, Sohu Era, High Century, Hengda, Beijing Sohu or Sohu Internet to discontinue any portion or all of its Internet business.
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We may be unable to collect long-term loans to officers and employees or exercise
management influence associated with Beijing Sohu, High Century, Hengda or Sohu Internet.



At September 30, 2003 Sohu had provided long-term loans of $5.2 million to Dr. Charles Zhang, Sohus president and chief executive officer and a
major Sohu shareholder, and certain of our employees. The long-term loans are used to finance investments in Beijing Sohu and High Century, which are owned 80% by Dr. Charles Zhang and 20% by certain of our employees, Hengda, which is owned 80% by
High Century and 20% by an employee, and Sohu Internet, which is owned 80% by High Century and 20% by an employee. Beijing Sohu, High Century, Hengda and Sohu Internet are used to facilitate our participation in telecommunications, Internet content
and certain other businesses in China where foreign ownership is either prohibited or restricted.



The agreements contain provisions that, subject to PRC law, (i) the loans can only be repaid to us by transferring the shares of High Century, Hengda,
Sohu Internet or Beijing Sohu to us, (ii) the shares of High Century, Hengda, Sohu Internet or Beijing Sohu cannot be transferred without our approval, and (iii) we have the right to appoint all directors and senior management personnel of High
Century, Hengda, Sohu Internet and Beijing Sohu. Dr. Charles Zhang and the other employee borrowers have pledged all of their shares in High Century, Hengda, Sohu Internet and Beijing Sohu as collateral for the loans and the loans bear no interest
and are due on demand after November 2003, in the case of High Century, the earlier of a demand or 2010, in the case of Beijing Sohu, after January 2003, in the case of Hengda, and after June 2004, in the case of Sohu Internet, or, in any case, at
such time as Dr. Charles Zhang or the other employee borrowers, as the case may be, is not an employee of Sohu. Sohu does not intend to request repayment of the loans as long as PRC regulations prohibit it from directly investing in businesses being
undertaken by High Century, Hengda, Sohu Internet and Beijing Sohu.



Because these loans can only be repaid by the borrowers transferring the shares of the various entities, our ability to ultimately realize the effective return of the amounts advanced under these loans will depend on the profitability
of Beijing Sohu, Hengda, Sohu Internet and High Century, which is uncertain. Furthermore, because of uncertainty associated with PRC law, ultimate enforcement of the loan agreements is uncertain. Accordingly, we may never be able to collect these
loans or exercise influence over High Century, Hengda Sohu Internet and Beijing Sohu.



We have attempted to comply with restrictions on foreign investment in the PRC Internet sector imposed by the PRC government by transferring our content-related assets and operations to, and entering into agreements with, Beijing Sohu
and Sohu Internet, PRC companies owned by our President and Chief Executive Officer. If the PRC government finds that these agreements do not comply with the relevant foreign investment restrictions, our business in the PRC will be adversely
affected.



Because the PRC government restricts
foreign investment in Internet-related businesses, we have restructured our Internet operations by having Beijing Sohu and Sohu Internet acquire appropriate government approvals to conduct our content-related operations. In addition, we have
transferred our content-related assets and operations to Beijing Sohu and Sohu Internet. The legal uncertainties associated with PRC government regulations and our restructuring may be summarized as follows:



| |  | whether the PRC government may view our restructuring as being in compliance with its laws and regulations;
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| |  | whether the PRC government may impose additional regulatory requirements with which we, Beijing Sohu or Sohu Internet may not be in compliance; and
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| |  | whether the PRC government will permit Beijing Sohu or Sohu Internet to acquire future licenses necessary in order to conduct operations in the PRC.
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We cannot be sure that our restructured operations and activities will be viewed by PRC regulatory
authorities as in compliance with applicable PRC laws and regulations. Our business will be adversely affected if our business license is revoked as a result of non-compliance. In addition, we cannot be sure that we, Beijing Sohu and Sohu Internet
will be able to obtain all of the licenses we, Beijing Sohu or Sohu Internet may need in the future. Future changes in PRC government policies affecting the provision of information services, including the provision of online services and Internet
access, may impose additional regulatory requirements on us, Beijing Sohu or Sohu Internet or our service providers or otherwise harm our business.



We depend upon contractual arrangements with Beijing Sohu, Hengda, High Century and Sohu Internet for the success of our business and these arrangements may not be
as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce.



Because we conduct our Internet operations only in the PRC, and because we are restricted or prohibited by the PRC government from owning Internet
content, financial services or telecommunication operations in the PRC, we are dependent on Beijing Sohu, Hengda, High Century and Sohu Internet in which we have no direct ownership interest, to provide those services through contractual agreements
between the parties. These arrangements may not be as effective in providing control over our Internet content, financial services or telecommunications operations as direct ownership of these businesses. For example, Beijing Sohu and Sohu Internet
could fail to take actions required for our business, such as entering into content development contracts with potential content suppliers or failing to maintain the necessary permit for the content servers. If Beijing Sohu, Hengda, High Century and
Sohu Internet fail to perform its obligations under these agreements, we may have to rely on legal remedies under PRC law, which we cannot assure you would be effective or sufficient.



Dr. Charles Zhang, our president and chief executive officer and a major shareholder of our company, is also the majority
shareholder of Beijing Sohu, Hengda, High Century and Sohu Internet. As a result, our contractual relationships with those companies could be viewed as entrenching his management position or transferring certain value to him, especially if any
conflict arises with him.



Even if we are in compliance with PRC
governmental regulations relating to licensing and foreign investment prohibitions, the PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate.



The PRC has enacted regulations governing Internet access and the
distribution of news and other information. In the past, the PRC government has stopped the distribution of information over the Internet that it believes to violate PRC law, including content that is obscene, incites violence, endangers national
security, is contrary to the national interest or is defamatory. In addition, we may not publish certain news items, such as news relating to national security, without permission from the PRC government. Furthermore, the Ministry of Public Security
has the authority to cause any local Internet service provider to block any Web site maintained outside the PRC at its sole discretion. Even if we comply with PRC governmental regulations relating to licensing and foreign investment prohibitions, if
the PRC government were to take any action to limit or prohibit the distribution of information through our network or to limit or regulate any current or future content or services available to users on our network, our business would be harmed.



We are also subject to potential liability for content on our
Web sites that is deemed inappropriate and for any unlawful actions of our subscribers and other users of our systems under regulations promulgated by the MII.



Furthermore, we are required to delete content that clearly violates the laws of the PRC and report content that we suspect may violate PRC law. It is
difficult to determine the type of content that may result in liability for us, and if we are wrong, we may be prevented from operating our Web sites.



We rely on e-subscription services for a significant portion of our revenues. If our contracts with mobile network operators were to be terminated, altered or not
renewed, or if such operators did not provide continuous or adequate service, our revenues could be reduced significantly.



We derive a significant portion of our revenues from e-subscription services on our Web sites. For the three and nine months ended September 30, 2003,
e-subscription revenues represented approximately 57% and 59%, respectively, of our total revenues, as compared to 34% and 29% for the corresponding three and nine month periods in 2002. For the three and nine months ended September 30, 2003,
wireless services accounted for 93% and 95%, respectively, of our total e-subscription revenues, We expect our reliance on the portion of wireless e-subscription revenues to increase. Our business plan is dependent upon further increases in revenues
from wireless services and the expansion of our subscriber base.



E-subscription revenue in 2003 is derived principally from providing value added wireless services such as alumni club, dating and friends matching, e-mail, ringtone and logo downloads and various other related products to mobile phone
users. Wireless fees are charged on a monthly or per message basis. Pursuant to contractual arrangements between Beijing Sohu or Sohu Internet and a number of mobile network operators in



24



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China which are subsidiaries of China Mobile Communication Corporation, or CMCC, and China Unicom Co., Ltd, or Unicom,
Sohu relies on the operators for both billing of, and collection from, mobile phone users of e-subscription fees. The service fees range from approximately 10% to 50% of our e-subscription revenues, and are based on contracted rates that are subject
to review and renewal on an annual basis. Generally, (i) within 15 to 90 days after the end of each month, Beijing Sohu or Sohu Internet receives a statement from CMCC and Unicom confirming the amount of e-subscription charges billed to that
operators mobile phone users and (ii) within 30 to 120 days after delivering a monthly statement to Beijing Sohu or Sohu Internet, each operator remits the e-subscription fees, net of its service fees, for the month to Beijing Sohu or Sohu
Internet which then transfers the funds to Beijing ITC or Sohu Era, in order to allow the revenues to be included within our consolidated accounts.



With respect to our wireless services, we depend on the cooperation of CMCC and Unicom. We rely on CMCC and Unicom in the following ways:



| | · | we provide wireless services through CMCCs and Unicoms network and gateway;
| | - | -----------------------------------------------------------------------------



| | · | we utilize and rely on CMCC and Unicoms billing systems to charge our subscribers through the subscribers mobile phone bill;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | we rely on their collection proxy services to collect payments from subscribers; and
| | - | ------------------------------------------------------------------------------------



| | · | we rely on their infrastructure to further develop our subscription services.
| | - | -----------------------------------------------------------------------------



We face significant risks in the area of e-subscription services, such as the following, which could adversely affect our e-subscription services
and revenues:



| | · | E-subscription services are provided through our Web site and recorded in our internal systems. However, in order to recognize revenue and get paid for services provided, we rely on
billing confirmations from CMCC and Unicom as to the actual amount of services they have billed to their mobile customers. We do not collect e-subscription fees from an operator in certain circumstances due to technical issues with the
operators network. We refer to these failures as an operators failure rate, which can vary from operator to operator. An operators failure rate can vary from month to month, ranging from 5% to 80% and may change at any
time without notice. If an operator encounters technical problems, increases in the failure rate for that operator could occur. CMCC Beijing and other operators are currently in the process of establishing a new billing platform and may require us
to switch to this platform in the future. The new platform may result in higher failure rates. Changes in failure rates may result in significant reductions or fluctuations in our e-subscription revenues.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The service fees we pay for using an operators infrastructure are set based on the negotiation of annual contracts. Our contract with Unicom expires in March 2004. Our
contracts with CMCC expire at various times from November 2003 to May 2004. Our negotiating power is limited and if an operator increases its service fees, or does not comply with the terms of our contract, our revenue, gross margin and
profitability could be materially reduced.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We rely on the operators to pay us the e-subscriptions fees which they have billed to their mobile customers. If an operator refuses to pay us or limits the amount of
e-subscriptions fees which can be billed in a month, our revenues could be adversely affected.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An operator could launch competing services at any time.
| | - | --------------------------------------------------------



| | · | The refusal of an operator to allow us to supply certain services or its refusal to allow us to charge our desired prices for our services could disrupt our e-subscription services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | If CMCC or Unicom were unwilling to cooperate with us, we would not be able to find substitute partners.
| | - | --------------------------------------------------------------------------------------------------------



| | · | Pursuant to the regulations of CMCC and Unicom, Sohu has the right to charge consumers who have registered to be billed on a monthly basis even if they do not use our services in
any month or on a regular basis. If CMCC and Unicom were to disallow us from billing consumers who do not actively use our services, our e-subscriptions revenue, generally, and our GGMM revenue, specifically, would be materially impacted.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | Our consumers may not understand our services or the fees they are being charged, may not be satisfied with our services and/or may not use our services on a regular basis, each of
which could result in decreases or fluctuations in our revenue.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Also, consumers may cancel their services at any time without notice, which could result in significant reductions and fluctuations in our revenue.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | · | CMCC or Unicom may change their operating regulations at any time, which could result in our being fined or having our services discontinued without notice. Changes in these
operating regulations could also have a material impact on our revenue. For example, in April 2003, CMCC announced or clarified regulations which prohibit utilizing its billing gateway for services which are not directly related to the mobile phone
and prohibit billing for services which have not been used by a subscriber for more than three months. These two regulation changes did not have a material impact on our revenues but are examples of how policies could change as the industry is in an
early stage of development. In July 2003, CMCC disallowed us from using third party Web sites which do not have Internet content provider licenses, or website union, to promote our e-subscriptions products. Over 50% of our e-subscriptions growth
during the nine months ended June 30, 2003 was derived from products acquired through website union. Approximately 25% of our total wireless revenues for the three and nine months ended September 30, 2003 were from our online dating and friends
matching service Jiqinggongshe or GGMM product, and 20% of our wireless revenues for the same periods were from other products, whose subscribers were acquired through website union. As a result of our inability to use
website union to promote our products or acquire subscribers, we experienced substantially lower growth in e-subscriptions revenue for the three months ended September 30, 2003 as compared to the three months ended June 30, 2003, March 31, 2003 and
December 31, 2002. Because our use of website union is restricted, we expect our subscriber base for products previously promoted through website union to continue to decline.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Currently over eighty percent of our e-subscriptions revenue is from consumers who subscribe for individual services for which we charge a monthly fee ranging from approximately
$0.60 to $4.00. Over the past nine months, the largest contributor to our e-subscriptions growth and total e-subscriptions revenue has been our GGMM online dating and friends matching service, that accounts for approximately 25 percent of wireless
revenue during the past nine months. Future growth and sustainability of our e-subscription revenues is dependent upon user acceptance of our existing and new services, especially services such as GGMM which are paid by way of monthly subscriptions.
Because these services are new and untested, we do not have a clear understanding of consumer behavior, making it difficult to predict future growth or usage.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We face intense competition from a number of companies who may launch competing or better products than us at any time. In addition, there are limited barriers to entry in this
area.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We also face the risk that changes in
government policy could restrict or curtail the services which we provide.



We depend on online advertising for a significant portion of our revenues. There are a number of risks in this area, any of which could adversely affect our advertising revenues.



We derive a significant portion of our revenues from the sale of advertising
on our Web sites. For the three and nine months ended September 30, 2003, advertising revenues represented approximately 40% and 36%, respectively, of our total revenues, as compared to 49% and 53% for the corresponding three and nine month periods
in 2002. For each of the three and nine months ended September 30, 2003, our five largest advertisers accounted for approximately 11% of our total advertising revenues. In fiscal 2002, our five largest advertisers accounted for approximately 14% of
total advertising revenues.



The online advertising market in
China is new and relatively small. Our ability to generate and maintain significant online advertising revenues in China will depend, among other things, on:



| | · | the development of a large base of users possessing demographic characteristics attractive to advertisers;
| | - | ----------------------------------------------------------------------------------------------------------



| | · | downward pressure on online advertising prices;
| | - | -----------------------------------------------



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| |  | acceptance by advertisers that online advertising is effective;
| | - | ---------------------------------------------------------------



| |  | the development of independent and reliable means of verifying traffic; and
| | - | ---------------------------------------------------------------------------



| |  | the effectiveness of our advertising delivery, tracking and reporting systems.
| | - | ------------------------------------------------------------------------------



The development of Web software that blocks Internet advertisements before they appear on a users screen may hinder the growth of online
advertising. The expansion of ad blocking on the Internet may decrease our revenues because when an ad is blocked, it is not downloaded from our ad server. As a result, such advertisements will not be tracked as a delivered advertisement. In
addition, advertisers may choose not to advertise on the Internet or on our portal because of the use by third parties of Internet advertisement blocking software.



Accordingly, we may not be successful in generating significant future online advertising revenues.



Our e-commerce services may face certain business and regulatory risks, any of which
could adversely affect our e-commence revenues.



For
the three and nine months ended September 30, 2003, e-commerce revenues represented approximately 3% and 5%, respectively, of our total revenues, as compared to 16% and 17% for the corresponding three and nine month periods in 2002.



Substantially all e-commerce revenues are earned from the sale of consumer
products. Our business plan is dependent upon further increases in revenues from e-commerce.



We face the following risks with respect to our e-commerce business line:



| |  | the online shopping market is small and unproven in China and, therefore, we may not be able to sustain revenue growth or maintain existing revenue levels;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we may not be able to maintain our existing gross margins because of competitors such as Joyo, Bertelsmann Online and Dang Dang;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | credit cards are not widely used in China and, therefore, we rely on cash on delivery for collecting payments whereby we have a collection risk from the companies providing delivery
service; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | future government regulations could restrict us from further expanding or continuing this business.
| | - | ---------------------------------------------------------------------------------------------------



Our operating results are likely to fluctuate significantly and may differ from market expectations.



Our annual and quarterly operating results have varied significantly in the
past, and may vary significantly in the future due to a number of factors such as our reliance on mobile operators for our e-subscriptions revenue, the fact that the Chinese internet industry is in an early stage of development and we are unsure if
it will continue to grow or at what rate it will grow, and the fact that we are subject to government regulations that may change at any time or without notice which could impact our business. As a result, we believe that year-to-year and
quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. In addition, we have experienced very high growth rates in the past twelve months and there may be expectations that these growth rates will
continue. It is likely that in some future quarter, our operating results may be below the expectations of public market analysts and investors. In this event, the trading price of our common stock may fall.



We will not be able to attract visitors, advertisers, paying subscribers, wireless and
e-commerce customers if we do not maintain and develop the Sohu brand.



Maintaining and further developing our brand is critical to our ability to expand our user base and our revenues. We believe that the importance of brand recognition will increase as the number of Internet users in
China grows. In order to attract and retain Internet users, advertisers, subscribers, and wireless and e-commerce customers, we may need to substantially increase our expenditures for creating and maintaining brand loyalty. If our revenues do not
increase proportionately, our results of operations and liquidity will suffer.



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Our success in promoting and enhancing our brand, as well as our ability to remain competitive, will also
depend on our success in offering high quality content, features and functionality. If we fail to promote our brand successfully or if visitors to our portal or advertisers do not perceive our content and services to be of high quality, we may not
be able to continue growing our business and attracting visitors, advertisers, and wireless and e-commerce customers.



We may need additional capital and we may not be able to obtain it.



Our capital requirements are difficult to plan in our rapidly changing industry. We may need additional capital for such
initiatives as the launch of new products or the acquisition of complementary assets, technologies or businesses we may pursue.



Our ability to obtain additional financing in the future is subject to a variety of uncertainties, including:



| |  | investors perceptions of and appetite for Internet-related securities;
| | - | -----------------------------------------------------------------------



| |  | conditions in the U.S. and other capital markets in which we may seek to raise financing;
| | - | -----------------------------------------------------------------------------------------



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



| |  | the amount of capital that other PRC entities may seek to raise in foreign capital markets;
| | - | -------------------------------------------------------------------------------------------



| |  | PRC governmental regulation of foreign investment in Internet companies;
| | - | ------------------------------------------------------------------------



| |  | economic, political and other conditions in the PRC;
| | - | ----------------------------------------------------



| |  | PRC governmental policies relating to foreign currency borrowings; and
| | - | ----------------------------------------------------------------------



| |  | any new laws and regulations that may require various PRC government approvals for securities offerings by companies engaged in the Internet sector in the PRC.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



Our inability to raise additional funds on
favorable terms, or at all, could force us to scale back our planned expenditures, which could adversely affect our growth prospects.



If we fail to establish and maintain relationships with content and technology providers and mobile network operators, we may not be able to attract and retain
users.



We rely on a number of third party
relationships to attract traffic and provide content in order to make our portal more attractive to users and advertisers. Some content providers have increased the fees they charge us for their content. This trend could increase our operating
expenses and could adversely affect our ability to obtain content at an economically acceptable cost. Most of our arrangements with content providers are short-term and may be terminated at the convenience of the other party. In addition, much of
the third party content provided to our portal is also available from other sources or may be provided to other Internet companies. If other Internet companies present the same or similar content in a superior manner, it would adversely affect our
visitor traffic.



Substantially all of our e-subscription
revenue is generated through wireless services where we depend on mobile network operators for message delivery and payment collection. If we were unable to continue this arrangement, our wireless services would be severely disrupted.



Our business also depends significantly on relationships with leading
technology and infrastructure providers and the licenses that the technology providers have granted to us. Our competitors may seek to establish the same relationships as we have, which may adversely affect us. We may not be able to maintain these
relationships or replace them on commercially attractive terms.



We
depend on key personnel and our business may be severely disrupted if we lose the services of our key executives and employees.



Our future success is heavily dependent upon the continued service of our key executives, particularly Dr. Charles Zhang, who is the founder, president,
chief executive officer and a major shareholder of our company and the founder and president of Beijing Sohu, High Century, and Hengda. We rely on his expertise in our business operations and on his personal relationships with some of our principal
shareholders, the relevant regulatory authorities, our customers and suppliers, Beijing Sohu, High Century, and Hengda. If one or more of our key executives and employees are unable or unwilling to continue in their present positions, we may not be



28



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able to easily replace them and our business may be severely disrupted. In addition, if any of these key executives or employees joins a competitor or forms
a competing company, we may lose customers and suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into an employment agreement and a confidentiality, non-competition and
non-solicitation agreement with us. However, the degree of protection afforded to an employer pursuant to confidentiality and non-competition undertakings governed by PRC law may be more limited when compared to the degree of protection afforded
under the laws of other jurisdictions. We do not maintain key-man life insurance for any of our key executives.



We also rely on a number of key technology staff for the operation of Sohu. Given the competitive nature of the industry, the risk of key technology staff
leaving Sohu is high and could have a disruptive impact on our operations.



Rapid growth and a rapidly changing operating environment strain our limited resources.



We have limited operational, administrative and financial resources, which may be inadequate to sustain the growth we want to achieve. As our audience and
their Internet use increase, as the demands of our audience and the needs of our customers change and as the volume of online advertising, wireless and e-commerce activities increases, we will need to increase our investment in our network
infrastructure, facilities and other areas of operations. If we are unable to manage our growth and expansion effectively, the quality of our services could deteriorate and our business may suffer. Our future success will depend on, among other
things, our ability to:



| |  | adapt our services and maintain and improve the quality of our services;
| | - | ------------------------------------------------------------------------



| |  | protect our Web site from hackers and unauthorized access;
| | - | ----------------------------------------------------------



| |  | continue training, motivating and retaining our existing employees and attract and integrate new employees; and
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | develop and improve our operational, financial, accounting and other internal systems and controls.
| | - | ---------------------------------------------------------------------------------------------------



We may not be able to track the delivery of advertisements through our portal, which may make us less attractive to potential
advertisers.



It is important to advertisers that we
accurately measure the demographics of our user base and the delivery of advertisements through our portal. Companies may choose not to advertise on our portal or may pay less for advertising if they do not perceive our portal to be reliable. We
depend on third parties to provide us with some of these measurement services. If they are unable to provide these services in the future, we would need to perform these services ourselves or obtain these services from other providers. This could
cause us to incur additional costs or cause interruptions or slowdowns in our business during the time we are replacing these services. We are currently implementing additional systems designed to collect information on our users. We may not be able
to implement these systems successfully.



Our strategy of acquiring
complementary assets, technologies and businesses may fail and may result in equity or earnings dilution.



As a component of our growth strategy, we have acquired and intend to actively identify and acquire assets, technologies and businesses that are
complementary to our existing portal business. Our acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, significant amortization expenses related to goodwill and other intangible
assets and exposure to undisclosed or potential liabilities of acquired companies. Moreover, the resources expended in identifying and consummating acquisitions may be significant. Furthermore, any acquisitions we decide to pursue may be subject to
the approval of the relevant PRC governmental authorities, as well as any applicable PRC rules and regulations.



We may rely on dividends and other distributions on equity paid by Sohu.com Limited, our wholly-owned subsidiary, to fund any cash requirements we may have. We may
not be able to obtain cash from distributions to the extent such distributions are restricted by PRC law or future debt covenants.



We are a holding company with no operating assets other than investments in Chinese operating entities including Beijing ITC, Sohu Era, and Sohu Software through an
intermediate holding company, Sohu.com Limited, our wholly-owned subsidiary in the Cayman Islands, and our variable interest entities, Beijing Sohu, High Century, Hengda and Sohu Internet. We may rely on dividends and other distributions on equity
paid by Sohu.com Limited for our cash requirements in excess of any cash raised from investors and retained by us. If Beijing ITC, Sohu Era, and Sohu Software incur debt on their own behalf in the future, the instruments



29



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governing the debt may restrict Beijing ITCs, Sohu Eras and Sohu Softwares ability to pay dividends or make other distributions to us. In
addition, PRC legal restrictions permit payment of dividends by Beijing ITC, Sohu Era, and Sohu Software only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, Beijing ITC, Sohu
Era and Sohu Software are also required to set aside 10% of their net income each year to fund certain reserve funds until these reserves equal 50% of the amount of paid-in capital. These reserves are not distributable as cash dividends. We do not
expect any dividends or other distributions on equity from Sohu.com Limited in the foreseeable future.



We may not have exclusive rights over the mark Sohu.com in certain areas.



We have applied for registration of the Sohu.com mark in Hong Kong and Taiwan, and plan to apply for registration in Malaysia and Singapore.
Completion of these applications is subject to prior rights in the relevant jurisdictions. Any rejection of those applications may adversely affect our legal rights over the mark Sohu.com in those countries and regions.



Unauthorized use of our intellectual property by third parties, and the expenses
incurred in protecting our intellectual property rights, may adversely affect our business.



We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and reputation. We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to
protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still evolving. In particular, the laws of the PRC and certain other countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of
the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Future litigation could
result in substantial costs and diversion of resources.



We may be
subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, materially disrupt our business.



We cannot be certain that our products and services do not or will not
infringe valid patents, copyrights or other intellectual property rights held by third parties. We have in the past been, are currently, and may in the future be, subject to claims and legal proceedings relating to the intellectual property of
others in the ordinary course of our business. In particular, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, may be ordered to pay a fine and we may incur
licensing fees or be forced to develop alternatives. We may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial
monetary liability or may materially disrupt the conduct of our business by restricting or prohibiting our use of the intellectual property in question.



We may be subject to, and may expend significant resources in defending against, claims based on the content and services we provide over our portal.



As our services may be used to download and distribute
information to others, there is a risk that claims may be made against us for defamation, negligence, copyright or trademark infringement or other claims based on the nature and content of such information. Furthermore, we could be subject to claims
for the online activities of our visitors and incur significant costs in their defense. In the past, claims based on the nature and content of information that was posted online by visitors have been made in the United States against companies that
provide online services. We do not carry any liability insurance against such risks.



We could be exposed to liability for the selection of listings that may be accessible through our portal or through content and materials that our visitors may post in classifieds, message boards, chat rooms or other
interactive services. If any information provided through our services contains errors, third parties may make claims against us for losses incurred in reliance on the information. We also offer Web-based e-mail and subscription services, which
expose us to potential liabilities or claims resulting from:



| |  | unsolicited e-mail;
| | - | -------------------



| |  | lost or misdirected messages;
| | - | -----------------------------



| |  | illegal or fraudulent use of e-mail; or
| | - | ---------------------------------------



| |  | interruptions or delays in e-mail service.
| | - | ------------------------------------------



30



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Investigating and defending any such claims may be expensive, even if they do not result in liability.



Risks Related to Our Markets



We will rely on online advertising sales for a significant portion of our future
revenues, but the online advertising market is new and rapidly evolving, particularly in China, and the Internet has not been proven as a widely accepted medium for advertising.



We expect to derive a significant portion of our revenue for the foreseeable future from online advertising. If the Internet
is not accepted as a medium for advertising, our ability to generate revenues will be adversely affected.



The online advertising market is new and rapidly evolving, particularly in China. As a result, many of our current and potential advertising clients have
limited experience using the Internet for advertising purposes and historically have not devoted a significant portion of their advertising budget to Internet-based advertising. Moreover, advertising clients that have invested substantial resources
in other methods of conducting business may be reluctant to adopt a new strategy that may limit or compete with their existing efforts. In addition, companies may choose not to advertise on our portal if they do not perceive our online advertising
platform to be effective or our audience demographics to be desirable. The failure to successfully address these risks or execute our business strategy would significantly reduce our profitability.



The acceptance of the Internet as a medium for advertising depends on the
development of a measurement standard. No standards have been widely accepted for the measurement of the effectiveness of online advertising. Industry-wide standards may not develop sufficiently to support the Internet as an effective advertising
medium. If these standards do not develop, advertisers may choose not to advertise on the Internet in general or through our portals or search engines.



Many of our current and potential e-subscription customers have only limited experience using the Internet for subscription purposes, and may not be willing to
fully embrace the products and services we offer, which would adversely affect our future revenues and business expansion.



The e-subscription market is also new and rapidly evolving in China. Many of our current and potential e-subscription customers have limited experience
using the Internet for subscription services. Our e-subscription revenue growth depends upon user acceptance of our existing and new services, especially services that are paid by way of monthly subscriptions such as our wireless dating, email,
news, sports and jokes content, alumni club and other products where users can receive services on a daily basis. Because these services are new and untested, we do not have a clear understanding of consumer behavior, making it difficult to predict
future growth or usage. Customers may not be willing to fully embrace the products and services we offer, which would adversely affect our future revenues and business expansion.



We face intense competition which could reduce our market share and adversely affect our financial performance.



The PRC Internet market is characterized by an increasing number of entrants
because, among other reasons, the barriers to entry are relatively low. The market for Internet services and products, particularly Internet search and retrieval services, wireless and e-commerce services and online advertising, is intensely
competitive. In addition, the Internet industry is relatively new and constantly evolving and, as a result, our competitors may better position themselves to compete in this market as it matures.



There are many companies that provide or may provide Web sites and online
destinations targeted at Internet users in China. Some of our major competitors in China are major United States Internet companies, such as Yahoo! Inc and Nasdaq listed companies Sina Corporation and Netease. In addition, we may face competition
from existing or new domestic PRC Internet companies that are either affiliated with large corporations such as Legend Computer, America Online and Softbank Corporation, or controlled or sponsored by PRC government entities. These competitors may
have certain advantages over us, including:



| |  | substantially greater financial and technical resources;
| | - | --------------------------------------------------------



| |  | more extensive and well developed marketing and sales networks;
| | - | ---------------------------------------------------------------



| |  | better access to original content;
| | - | ----------------------------------



| |  | greater global brand recognition among consumers; and
| | - | -----------------------------------------------------



| |  | larger customer bases.
| | - | ----------------------



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With these advantages, our competitors may be better able to:



| |  | develop, market and sell their products and services;
| | - | -----------------------------------------------------



| |  | adapt more quickly to new and changing technologies; and
| | - | --------------------------------------------------------



| |  | more easily obtain new customers.
| | - | ---------------------------------



We may not be able to compete successfully against our current or future competitors.



The telecommunications infrastructure in China, which is not as well developed as in the United States, may limit our growth.



The telecommunications infrastructure in China is not
well developed. Our growth will depend on the PRC government and state-owned enterprises establishing and maintaining a reliable Internet and telecommunications infrastructure to reach a broader base of Internet users in China. The Internet
infrastructure, standards, protocols and complementary products, services and facilities necessary to support the demands associated with continued growth may not be developed on a timely basis or at all by the PRC government and state-owned
enterprises.



We depend on ChinaNet, China Netcom, China Telecom and the
Beijing Telecom Administration for telecommunications services, and any interruption in these services may result in severe disruptions to our business.



Although private Internet service providers exist in China, almost all access to the Internet is maintained through
ChinaNet, currently owned by China Netcom and China Telecom, under the administrative control and regulatory supervision of the MII. In addition, local networks connect to the Internet through a government-owned international gateway. This
international gateway is the only channel through which a domestic Chinese user can connect to the international Internet network. We rely on this infrastructure and China Netcom and China Telecom to provide data communications capacity primarily
through local telecommunications lines. Although the government has announced aggressive plans to develop the national information infrastructure, this infrastructure may not be developed and the Internet infrastructure in China may not be able to
support the continued growth of Internet usage. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure.



We may not be able to lease additional bandwidth from the Beijing Telecom
Administration on acceptable terms, on a timely basis or at all. In addition, we will have no means of getting access to alternative networks and services on a timely basis, if at all, in the event of any disruption or failure of the network.



The high cost of Internet access may limit the growth of the Internet in
China and impede our growth.



Access to the Internet
in China remains relatively expensive, and may make it less likely for users to access and transact business over the Internet. Unfavorable rate developments could further decrease our visitor traffic and our ability to derive revenues from
transactions over the Internet.



The acceptance of the Internet as a
commerce platform in China depends on the resolution of problems relating to fulfillment and electronic payment.



Our future growth of revenues depends in part on the anticipated expansion of e-commerce activities in China. As China currently does not have a reliable
nationwide product distribution network, the fulfillment of goods purchased over the Internet will continue to be a factor constraining the growth of e-commerce. An additional barrier to the development of e-commerce in China is the lack of reliable
payment systems. In particular, the use of credit cards or other viable means of electronic payment in sales transactions is not as well developed in China as in some other countries, such as the United States. Various government entities and
businesses are working to resolve these fulfillment and payment problems, but these problems are expected to continue to hinder the acceptance and growth of the Internet as a commerce platform in China, which could in turn hinder our growth.



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Risks Related to the Internet and Our Technology Infrastructure



To the extent we are unable to scale our systems to meet the increasing PRC Internet
population, we will be unable to expand our user base and increase our attractiveness to advertisers and merchants.



As Web page volume and traffic increase in China, we may not be able to scale our systems proportionately. To the extent we do not successfully address
our capacity constraints, our operations may be severely disrupted, and we may not be able to expand our user base and increase our attractiveness to advertisers and merchants.



Unexpected network interruptions caused by system failures may result in reduced visitor traffic, reduced revenue and harm to our
reputation.



Our portal operations are dependent upon
Web browsers, Internet service providers, content providers and other Web site operators in China, which have experienced significant system failures and system outages in the past. Our users have in the past experienced difficulties due to system
failures unrelated to our systems and services. Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, as a result of increased traffic or otherwise, could
reduce our user satisfaction, future traffic and our attractiveness to users and advertisers.



Our operations are vulnerable to natural disasters and other events, as we only have limited backup systems and do not maintain any backup servers outside of China.



We have limited backup systems and have experienced system failures and
electrical outages from time to time in the past, which have disrupted our operations. All of our servers and routers are currently hosted in a single location within the premises of Beijing Telecom Administration. We do not maintain any back up
servers outside Beijing. We do not have a disaster recovery plan in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins and similar events. If any of the foregoing occurs, we may
experience a complete system shutdown. We do not carry any business interruption insurance. To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more
copies of our Web sites to mirror our online resources. Although we carry property insurance with low coverage limits, our coverage may not be adequate to compensate us for all losses, particularly with respect to loss of business and reputation,
that may occur.



Concerns about security of e-commerce transactions and
confidentiality of information on the Internet may increase our costs, reduce the use of our portal and impede our growth.



A significant barrier to e-commerce and confidential communications over the Internet has been the need for security. Internet usage could decline if any
well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. If unauthorized persons are able to penetrate our network security,
they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems.



Our network operations may be vulnerable to hacking, viruses and other disruptions,
which may make our products and services less attractive and reliable.



Internet usage could decline if any well-publicized compromise of security occurs. Hacking involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or
loss or corruption of data, software, hardware or other computer equipment. Hackers, if successful, could misappropriate proprietary information or cause disruptions in our service. We may be required to expend capital and other resources to protect
our Web site against hackers. We cannot assure you that any measures we may take will be effective. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability, as
well as materially damage our reputation and decrease our user traffic.



Political, Economic and Regulatory Risks



Regulation and
censorship of information distribution in China may adversely affect our business.



China has enacted regulations governing Internet access and the distribution of news and other information. Furthermore, the Propaganda Department of the Chinese Communist Party has been given the responsibility to
censor news published in China to ensure, supervise and control a particular political ideology. In addition, the MII has published implementing regulations that subject online information providers to potential liability for content included on
their portals and the actions of subscribers and others using their systems, including liability for violation of PRC laws prohibiting the distribution of content deemed to be



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socially destabilizing. Because many PRC laws, regulations and legal requirements with regard to the Internet are
relatively new and untested, their interpretation and enforcement may involve significant uncertainty. In addition, the PRC legal system is a civil law system in which decided legal cases have limited binding force as legal precedents. As a result,
in many cases it is difficult to determine the type of content that may result in liability for a Web site operator.



Periodically, the Ministry of Public Security has stopped the distribution over the Internet of information which it believes to be socially
destabilizing. The Ministry of Public Security has the authority to cause any local Internet service provider to block any Web site maintained outside China at its sole discretion. If the PRC government were to take action to limit or eliminate the
distribution of information through our portal or to limit or regulate current or future applications available to users of our portal, our business would be affected.



The State Secrecy Bureau, which is directly responsible for the protection of state secrets of all PRC government and
Chinese Communist Party organizations, is authorized to block any Web site it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the distribution of online information. Under
the applicable regulations, we may be held liable for any content transmitted on our portal. Furthermore, where the transmitted content clearly violates the laws of the PRC, we will be required to delete it. Moreover, where the transmitted content
is considered suspicious, we are required to report such content. We must also undergo computer security inspections, and if we fail to implement the relevant safeguards against security breaches, we may be shut down. In addition, under recently
adopted regulations, Internet companies which provide bulletin board systems, chat rooms or similar services, such as our company, must apply for the approval of the State Secrecy Bureau. As the implementing rules of these new regulations have not
been issued, however, we do not know how or when we will be expected to comply, or how our business will be affected by the application of these regulations.



Political and economic policies of the PRC government could affect our business.



All of our business, assets and operations are located in China and all of our revenues are derived from our operations in
China. Accordingly, our business could be adversely affected by changes in political, economic or social conditions in China, adjustments in PRC government policies or changes in laws and regulations.



The economy of China differs from the economies of most countries belonging
to the Organization for Economic Cooperation and Development in a number of respects, including:



| |  | structure;
| | - | ----------



| |  | level of government involvement;
| | - | --------------------------------



| |  | level of development;
| | - | ---------------------



| |  | level of capital reinvestment;
| | - | ------------------------------



| |  | growth rate;
| | - | ------------



| |  | control of foreign exchange; and
| | - | --------------------------------



| |  | methods of allocating resources.
| | - | --------------------------------



Since 1949, China has been primarily a planned economy subject to a system of macroeconomic management. Although the Chinese government still owns a
significant portion of the productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms. We cannot predict what effects the economic
reform and macroeconomic measures adopted by the Chinese government may have on our business or results of operations.



If tax benefits available to certain of our subsidiaries and variable interest entities located in China are reduced or repealed, our business could suffer.



Our China-based subsidiaries Sohu Era and Sohu
Software and our variable interest entity Sohu Internet enjoy tax benefits which are available to new technology enterprises incorporated in Beijing Zhongguancun Science Park. Subject to the approval of the relevant authorities, the
effective income tax rate for new technology enterprises registered and operating in Beijing Zhongguancun Science Park is 15%, while



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the local income tax will be exempted as long as the enterprise holds the new technology enterprise status. New
technology enterprises are exempted from Chinese state corporate income tax for three years, beginning with their first year of operations, and are entitled to a 50% tax reduction at the rate of 7.5% for the subsequent three years. Sohu Era, Sohu
Software and Sohu Internet were incorporated in 2003 and, providing there is no change in their status as a new technology enterprise or a change in the relevant regulations, will be subject to an effective tax rate of 0% in 2003, 2004 and 2005,
7.5% in 2006, 2007 and 2008 and 15% thereafter. At this time we expect most all of our sales and our income to be earned from our Zhongguancun-based subsidiaries and our Zhongguancun-based variable interest entity. If there were changes to the tax
regulations in China or our subsidiaries and Sohu Internet did not meet the requirements of a new technology enterprise, we could be subject to enterprise income tax in China at rates up to 33% which could cause a significant reduction in our
after-tax income.



The PRC legal system embodies uncertainties
which could limit the legal protections available to us and you.



The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to
promulgate a comprehensive system of laws and regulations governing economic matters in general. Our PRC operating subsidiary, Beijing ITC, is a wholly-foreign owned enterprise, or a WFOE, which is an enterprise incorporated in mainland China and
wholly-owned by our indirect subsidiary, Sohu Hong Kong. Beijing ITC is subject to laws and regulations applicable to foreign investment in mainland China. However, these laws, regulations and legal requirements are relatively recent, and their
interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, we cannot predict the effect of future developments in the PRC legal
system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.



Restrictions on currency exchange may limit our ability to utilize our revenues
effectively.



Substantially all of our revenues and
operating expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the current account, which includes dividends, trade and service related foreign exchange transactions, but not under the capital
account, which includes foreign direct investment.



Currently, Beijing ITC may purchase foreign exchange for settlement of current account transactions, including payment of dividends, without the approval of the State Administration for Foreign Exchange, or SAFE. Beijing ITC may
also retain foreign exchange in its current account (subject to a ceiling approved by the SAFE) to satisfy foreign exchange liabilities or to pay dividends. However, the relevant PRC governmental authorities may limit or eliminate our ability to
purchase and retain foreign currencies in the future.



Since a
significant amount of our future revenues will be in the form of Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside China, if
any, or expenditures denominated in foreign currencies.



Foreign exchange transactions under the capital account are still subject to limitations and require approvals from the SAFE. This could affect Beijing ITCs ability to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.



We may
suffer currency exchange losses if the Renminbi depreciates relative to the U.S. Dollar.



Our reporting currency is the U.S. Dollar. However, substantially all of revenues are denominated in Renminbi. Our revenues as expressed in our U.S.
Dollar financial statements will decline in value if the Renminbi depreciates relative to the U.S. Dollar. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may
not be able to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into U.S. Dollars.



It may be difficult to enforce any civil judgments against us or our board of directors
or officers, because most of our assets are located outside of the United States.



Although we are incorporated in the State of Delaware, a significant portion of our assets are located in the PRC. As a result, it may be difficult for investors to enforce outside the United States in any actions
brought against us in the United States, including actions predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States. In addition, certain of our
directors and officers (principally in the PRC) and all or a substantial portion of their assets may be



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located outside the United States. As a result, it may not be possible for investors to effect service of process within
the United States upon those directors and officers, or to enforce against them or us judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States
or of the securities laws of any state of the United States. We have been advised by our PRC counsel that, in their opinion, there is doubt as to the enforceability in the PRC, in original actions or in actions for enforcement of judgments of United
States courts, of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any state of the United States.



Risks Related to Our Common Stock



The market price of our common stock has been and will likely continue to be volatile. The price of our common stock may fluctuate significantly, which may make it
difficult for stockholders to sell shares of our common stock when desired or at attractive prices.



The market price of our common stock has been volatile and is likely to continue to be so. The initial public offering price of our common stock in July
2000 was $13.00 per share. The trading price of our common stock subsequently dropped to a low of $0.52 per share on April 9, 2001. During the last two quarters of 2002, the trading price of our common stock ranged from a low of $1.20 per share to a
high of $6.94 per share, and during the first half of 2003 and the fourth quarter through November 11, 2003, the trading price of our common stock ranged from a low of $6.10 per share to a high of $43.40 per share. On November 11, 2003, the closing
price of our common stock was $31.50 per share.



In addition,
the Nasdaq Stock Markets National Market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies, and particularly Internet-related companies.



The price for our common stock may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions. Additionally, volatility or a lack of
positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options or other stock awards.



The sale or availability for sale of substantial amounts of our common stock could adversely affect its market price.



There were approximately 35,994,859 shares of our
common stock outstanding as of October 31, 2003, as well as options to purchase an additional 4,738,847 shares of our common stock. Of the outstanding shares, 25,424,216 were issued prior to the initial public offering of our common stock. These
shares are either freely tradable without restriction under Rule 144(k) under the Securities Act or are tradable subject to the notice, volume and manner of sale restrictions of Rule 144 under the Securities Act.



Sohu issued 4,600,000 shares of common stock in connection with the initial
public offering. All of these shares are freely tradable without restriction unless they are held by our affiliates as that term is defined in Rule 144 under the Securities Act.



On October 18, 2000, we issued an aggregate of 4,401,500 shares of our common
stock to the former stockholders of ChinaRen in connection with our acquisition of that company. All of these shares are currently freely tradable without restriction.



We issued $90 million of zero coupon convertible senior notes due July 2023 which we may not be able to repay in cash
and could result in dilution of our earnings per share.



In July 2003, we issued $90 million aggregate principal amount of zero coupon convertible senior notes due July 2003. The notes are convertible into our common stock at a conversion price of $44.76 per share,



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subject to adjustment upon the occurrence of specified events, which would result in the issuance of an aggregate of approximately two million shares.
Therefore, each $1,000 principal amount of the notes will initially be convertible into 22.3414 shares of our common stock. Each holder of the notes will have the right, at the holders option, to require Sohu to repurchase all or any portion
of the principal amount of the holders notes on July 14 in 2007, 2013 and 2018 at a price equal to 100% of the outstanding principal amount. We may also be required to repurchase all of the notes following a fundamental change of Sohu, such as
a change of control, prior to maturity. We may not have enough cash on hand or have the ability to access cash to pay the notes if presented for redemption on a fundamental change, on a redemption date referred to above or at maturity. In addition,
the redemption or purchase of our notes with shares of our common stock or the conversion of the notes into our common stock could result in dilution of our earnings per share.



We are controlled by a small group of our existing stockholders, whose interests may differ from other stockholders.



Our president and chief executive officer, Dr.
Charles Zhang, beneficially owns approximately 24% of the outstanding shares of our common stock and is our largest stockholder. Our second largest stockholder, together with our chief executive officer, our other executive officers and members of
our Board of Directors, beneficially own approximately 50% of the outstanding shares of our common stock. Accordingly these stockholders acting together will have significant influence in determining the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They will also have significant influence in
preventing or causing a change in control. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of these stockholders may differ from the
interests of the other stockholders.



Holders of a majority of
the outstanding shares of our common stock are parties to an agreement under which they have agreed to vote together in favor of a nominee of one of our stockholders to our board of directors. As a result of their voting power, they will have the
ability to cause that nominee to be elected.



Anti-takeover provisions of
the Delaware General Corporation Law, our certificate of incorporation and Sohus Stockholder Rights Plan could delay or deter a change in control.



Some provisions of our certificate of incorporation and bylaws, as well as various provisions of the Delaware General
Corporation Law, may make it more difficult to acquire our company or effect a change in control of our company, even if an acquisition or change in control would be in the interest of our stockholders or if an acquisition or change in control would
provide our stockholders with a premium for their shares over then current market prices. For example, our certificate of incorporation provides for the division of the board of directors into two classes with staggered two-year terms and provides
that stockholders have no right to take action by written consent and may not call special meetings of stockholders, each of which may make it more difficult for a third party to gain control of our board in connection with, or obtain any necessary
stockholder approval for, a proposed acquisition or change in control.



In addition, we have adopted a stockholder rights plan under the terms of which, in general, if a person or group acquires more than 20% of the outstanding shares of common stock, all other Sohu stockholders would have the right to purchase
securities from Sohu at a substantial discount to those securities fair market value, thus causing substantial dilution to the holdings of the person or group which acquires more than 20%. The stockholder rights plan may inhibit a change in
control and, therefore, could adversely affect the stockholders ability to realize a premium over the then-prevailing market price for the common stock in connection with such a transaction.



The power of our Board of Directors to designate and issue shares of preferred stock
could have an adverse effect on holders of our common stock.



Our certificate of incorporation authorizes our board of directors to designate and issue one or more series of preferred stock, having rights and preferences as the board may determine, and any such designations and issuances could have an
adverse effect on the rights of holders of common stock.



ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



FOREIGN CURRENCY EXCHANGE RATE RISK



The majority of our
revenues, expenses and liabilities are denominated in Chinese renminbi. Thus, revenues and operating results may be impacted by exchange rate fluctuations in the renminbi when financial results are



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translated in U.S. dollars on consolidation. Currency fluctuations and restrictions on currency exchange may adversely affect our business, including
limiting the ability to convert Chinese renminbi into foreign currencies

and, if the renminbi were to decline in value, reducing revenue in U.S. dollar
terms. We have not tried to reduce exposure to exchange rate fluctuations by using hedging transactions but may choose to do so in the future. We may not be able to do this successfully. Accordingly, we may experience economic losses and negative
impacts on earnings and equity as a result of foreign exchange rate fluctuations. The effect of foreign exchange rate fluctuations on us in the three and nine months ended September 30, 2003 was not material.



INVESTMENT RISK



a) Investments in Beijing Sohu, High Century, Hengda, Sohu Internet and Sohu-Guolian



We have entered into the following arrangements with Dr. Charles Zhang, our Chief Executive
Officer and a major Sohu shareholder, and certain of our employees to satisfy PRC regulations which prohibit or restrict foreign companies from owning or operating telecommunications, internet content and certain other businesses in China. We expect
that we will continue to be involved in and provide additional financial support under similar arrangements in the future.



Under Section 402 of the Sarbanes-Oxley Act of 2002, issuers subject to the act are prohibited from making personal loans to their directors and executive officers. Under
Section 402, issuers are permitted to maintain the loans they made to directors and executive officers prior to the effective date of the Sarbanes-Oxley Act. They are not permitted, however, to renew or materially modify such loans. We believe that
there is a strong argument that the loans to Dr. Zhang described below are not personal loans, in view of our underlying business purpose for making the loans and the lack of a personal benefit to Dr. Zhang from the loans. In the absence
of judicial interpretation, an SEC rule, or an SEC staff interpretation confirming our conclusion, however, we intend to treat these loans as if they were personal loans under Section 402 of the Sarbanes-Oxley Act. Accordingly, we expect
that if we enter into arrangements similar to those described below in the future, any loans made under such arrangements will be made to individuals who are not our directors or executive officers. In addition, should the existing loans to Dr.
Zhang, or to the entities in which he is the primary shareholder, need to be renewed or materially modified, such as if we need to advance additional funds to any of these entities, we expect that the entities, the ownership of the entities and/or
the loans to the entities will be restructured so that we could not be deemed to be making a loan to Dr. Zhang. The prohibitions set forth in Section 402 have not had any adverse effect on our operations to date, and we do not expect them to have
any adverse effect in the future.



In June 2000, we extended loans in the
amount of $193,000 to Dr. Charles Zhang and $49,000 to He Jinmei, another employee of Sohu, to finance their investments in Beijing Sohu, a company incorporated in the PRC. The shareholders of Beijing Sohu have pledged their shares in Beijing Sohu
as collateral for the loan. These loans bear no interest and are due in full on the earlier of demand, in 2010 or at such time as Dr. Charles Zhang or He Jinmei, as the case may be, is not an employee of Sohu. A subsidiary of Sohu has entered
into an option agreement giving it the right, at any time, subject to PRC law, to purchase the entire ownership in Beijing Sohu from the two Beijing Sohu shareholders for $242,000.



In November 2001, we entered into a loan and share pledge agreement with Dr. Charles Zhang, and Li Wei, another employee of Sohu, for the
purpose of funding an equity investment of $4,595,000 by these two individuals in High Century, a company incorporated in the PRC which engages in investment holding in the PRC on behalf of Sohu. Pursuant to the loan agreement, we have extended
total loans amounting to $4,595,000 of which $3,676,000 and $919,000 were loaned to Charles Zhang and Li Wei, respectively.



In January 2002, we entered into a loan and share pledge agreement with Li Wei for the purpose of funding an equity investment of $242,000 by Li Wei in Hengda, a company
incorporated in the PRC which engages in Internet access services in the PRC on behalf of Sohu. The $242,000 investment represents a 20% interest in Hengda, with High Century holding the remaining 80% interest.



In June 2003, we entered into a loan and share pledge agreement with He Jinmei for the
purpose of funding an equity investment of $121,000 by He Jinmei in Sohu Internet, a company incorporated in the PRC which engages in Internet information services in the PRC on behalf of Sohu. The $121,000 investment represents a 20% interest in
Sohu Internet, with High Century holding the remaining 80% interest.



The loan
agreements under which funds are provided to invest in High Century, Hengda and Sohu Internet are subject to PRC law and include provisions that (i) the loans can only be repaid to us by transferring the shares of High Century, Hengda or Sohu
Internet to us, (ii) the shares of High Century, Hengda or Sohu Internet cannot



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be transferred without the approval of Sohu, and (iii) we have the right to appoint all directors and senior management
personnel of High Century, Hengda and Sohu Internet. Charles Zhang, Li Wei and He Jinmei have pledged all of their shares in High Century, Hengda and Sohu Internet as collateral for the loans and the loans bear no interest and are due on demand
after November 2003, in the case of High Century, after January 2003, in the case of Hengda, and after June 2004, in the case of Sohu Internet, or at such time as Dr. Charles Zhang, Li Wei or He Jinmei, as the case may be, is not an employee of
Sohu. We do not intend to request repayment of the loans as long as PRC regulations prohibit us from directly investing in businesses being undertaken by High Century, Hengda and Sohu Internet.



In April 2002, High Century invested $3,080,000 in Sohu-Guolian, a company incorporated in
the PRC, for a 51% equity interest in and joint control of Sohu-Guolian. Sohu-Guolian provides technical services to the PRC online securities trading and financial services industries. In September 2003, Sohu-Guolian commenced liquidation
procedures. During the three months ended September 30, 2003, Sohu made a provision of $345,000 against the investment in Sohu-Guolian.



Each of Beijing Sohu, High Century, Hengda, and Sohu Internet is a VIE, as defined under FIN 46, Consolidation of Variable Interest Entities, with Sohu as
the primary beneficiary and consolidated in Sohus financial statements. Sohu adopted the provisions of FIN 46 for Beijing Sohu, High Century and Hengda as of July 1, 2003 and for Sohu Internet upon its formation.



(b) Investment in marketable debt securities



Sohu invests in marketable debt securities to preserve principal while at the same time
maximizing yields without significantly increasing risk. These marketable debt securities are classified as available-for-sale because we may dispose of the securities prior to maturity and they are thus reported at the market value as of the end of
the period. As of September 30, 2003, unrealized gains of $451,000 were recorded as accumulated other comprehensive income in shareholders equity.



ITEM 4.
CONTROLS AND PROCEDURES



Our chief executive
officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this quarterly report (the Evaluation Date), have concluded that as of the Evaluation Date our disclosure controls and procedures were effective and designed to ensure that material information relating to Sohu would be made known to
them by others within the company. During the period covered by this quarterly report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.



PART II OTHER INFORMATION



ITEM 1.
 LEGAL PROCEEDINGS



There are no material legal
proceedings pending or, to our knowledge, threatened against us. From time to time we become subject to legal proceedings and claims in the ordinary course of our business. Such legal proceedings or claims, even if not meritorious, could result in
the expenditure of significant financial and management resources.



ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS



On July
17, 2000, we completed an underwritten initial public offering of our common stock pursuant to a Registration Statement on Form S-1 (SEC file No. 333-96137), which became effective on July 10, 2000. Public trading of the common stock offered in the
initial public offering commenced on July 12, 2000. We sold an aggregate of 4,600,000 shares of common stock in the offering at a price to the public of $13 per share, resulting in gross proceeds of $59.8 million. Our net proceeds, after deduction
of the underwriting discount of $4.2 million and other offering expenses of $3.2 million, were approximately $52.4 million. All shares sold in the offering were sold by us.



During the three months ended September 30, 2003, we did not use any proceeds from the offering. The remaining net proceeds from the
offering have been invested in cash, cash equivalents, and marketable debt securities. The use of the proceeds from the offering does not represent a material change in the use of proceeds described in the prospectus contained in the Registration
Statement on Form S-1 described above.



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We completed a private placement on July 14, 2003 of $90 million principal amount of zero coupon convertible senior notes
due July 2023, which offering resulted in net proceeds to Sohu of approximately $87,350,000 after deduction of the initial purchasers (Merrill Lynch, Pierce, Fenner & Smith Incorporated) discount and our offering expenses. The notes
do not pay any interest, have a zero yield to maturity, and are convertible into Sohus common stock at a conversion price of $44.76 per share, subject to adjustment. Each $1,000 principal amount is initially convertible into 22.3414 shares of
Sohus common stock. Each holder of the notes will have the right, at the holders option, to require Sohu to repurchase all or any portion of the principal amount of the holders notes on July 14 in 2007, 2013 and 2018 at a price
equal to 100% of the outstanding principal amount. Sohu may also redeem all or a portion of the notes for cash at any time on or after July 14, 2008 at 100% of the principal amount of the notes if the closing price of its common stock for each of
the 30 consecutive trading days prior to such time was at least 130% of the conversion price or at such time at least 90% of the initial aggregate principal amount of the notes have been converted, repurchased or redeemed. In addition, upon a change
of control event, each holder of the notes may require Sohu to repurchase some or all of its notes at a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. We have filed a registration statement with
the Securities and Exchange Commission to register for resale the notes and the common stock issuable upon conversion of the notes. However, until the registration statement becomes effective, the notes may be offered and sold only in transactions
that are exempt from registration under the U.S. Securities Act of 1933 and the securities laws of any other jurisdiction.



ITEM 3.
DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



ITEM 5.
OTHER INFORMATION



None.



ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



Please see the Exhibit Index attached hereto.



(b) Reports on Form 8-K.



On July 10, 2003, Sohu filed a Current Report on Form 8-K in connection with its proposed offering and pricing in a private placement of its
zero coupon convertible senior notes and its announcement of the highlights of its earnings results for the quarter ended June 30, 2003. On the same day, Sohu filed another Current Report on Form 8-K to update its Risk Factors.



On July 14, 2003, Sohu filed a Current Report on Form 8-K in connection with its announcement
of the issuance of an additional $20 million principal amount of zero coupon convertible senior notes.



On July 16, 2003, Sohu filed a Current Report on Form 8-K in connection with its completion of the private placement of $90 million aggregate principal amount of zero coupon convertible senior notes.



On July 23, 2003, Sohu filed a Current Report on Form 8-K to update its Risk Factors.



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



SOHU.COM INC.



Dated: November 14, 2003



By:

/s/    DEREK PALASCHUKChief Financial Officer & Senior Vice President (Principal Financial Officer)




41



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Sohu.com Inc.

Quarterly Report on Form 10-Q For Quarter Ended September 30, 2003



EXHI
BITS INDEX



|     | 
|---- | 
|10.1 | 
|     | 
|10.2 | 
|     | 
|10.3 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 



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