##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q

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

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)



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 April 30, 2003
|----------------------------- |  | -----------------------------
|                             
|Common stock, $.001 par value |  | 35,137,559                   
|                             



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##### Table of Contents



SOHU.COM INC



Table of Contents



|       
|-------
|PART I 
|       
|Item 1 
|       
|       
|       
|       
|       
|       
|       
|       
|       
|       
|       
|Item 2 
|       
|Item 3 
|       
|Item 4 
|       
|PART II
|       
|Item 1 
|       
|Item 2 
|       
|Item 3 
|       
|Item 4 
|       
|Item 5 
|       
|Item 6 
|       
|       
|       
|       



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Condensed Consolidated Financial Statements



SOHU.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)



|                                                                                                                                                                                                            |  | March 31, 2003 |         |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                                                                                                                      |  |                |         |   |                   |  
|Current assets:                                                                                                                                                                                             |  |                |         |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                   |  | $              | 23,215  |   |                   | $
|Accounts receivable, net                                                                                                                                                                                    |  |                | 2,832   |   |                   |  
|Accounts receivable from related parties                                                                                                                                                                    |  |                | 4,884   |   |                   |  
|Prepaid and other current assets                                                                                                                                                                            |  |                | 2,428   |   |                   |  
|Current portion of long-term investments in marketable debt securities                                                                                                                                      |  |                | 4,549   |   |                   |  
|                                                                                                                                                                                                            |  |                |         |   |                   |  
|Total current assets                                                                                                                                                                                        |  |                | 37,908  |   |                   |  
|Long-term investments in marketable debt securities                                                                                                                                                         |  |                | 19,678  |   |                   |  
|Fixed assets, net                                                                                                                                                                                           |  |                | 5,897   |   |                   |  
|Long-term loans to related parties                                                                                                                                                                          |  |                | 4,741   |   |                   |  
|Other assets, net                                                                                                                                                                                           |  |                | 907     |   |                   |  
|                                                                                                                                                                                                            |  |                |         |   |                   |  
|                                                                                                                                                                                                            |  | $              | 69,131  |   |                   | $
|                                                                                                                                                                                                            |  |                |         |   |                   |  
|                                                                                                                                                                                                           
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                        |  |                |         |   |                   |  
|Current liabilities:                                                                                                                                                                                        |  |                |         |   |                   |  
|Accounts payable                                                                                                                                                                                            |  | $              | 853     |   |                   |  
|Payable to related parties                                                                                                                                                                                  |  |                | 1,563   |   |                   |  
|Accrued liabilities and deferred revenues                                                                                                                                                                   |  |                | 6,693   |   |                   |  
|                                                                                                                                                                                                            |  |                |         |   |                   |  
|Total current liabilities                                                                                                                                                                                   |  |                | 9,109   |   |                   |  
|                                                                                                                                                                                                           
|Commitments and contingencies (Note 5)                                                                                                                                                                      |  |                |         |   |                   |  
|                                                                                                                                                                                                           
|Shareholders equity:                                                                                                                                                                                       |  |                |         |   |                   |  
|Common Stock: $0.001 par value per share (75,400 authorized at March 31, 2003 and
December 31, 2002, 34,878 and 34,611 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively) |  |                | 35      |   |                   |  
|Treasury Stock                                                                                                                                                                                              |  |                | (2,003  | ) |                   |  
|Additional paid-in capital                                                                                                                                                                                  |  |                | 130,065 |   |                   |  
|Deferred compensation                                                                                                                                                                                       |  |                | (31     | ) |                   |  
|Accumulated other comprehensive income                                                                                                                                                                      |  |                | 552     |   |                   |  
|Accumulated deficit                                                                                                                                                                                         |  |                | (68,596 | ) |                   |  
|                                                                                                                                                                                                            |  |                |         |   |                   |  
|Total shareholders equity                                                                                                                                                                                  |  |                | 60,022  |   |                   |  
|                                                                                                                                                                                                            |  |                |         |   |                   |  
|                                                                                                                                                                                                            |  | $              | 69,131  |   |                   | $
|                                                                                                                                                                                                            |  |                |         |   |                   |  



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



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##### Table of Contents

SOHU.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands except per share data)



|                                                                                                                                       |  | Three Months Ended |       
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                                                       |  | Mar. 31, 2003      |       
|Revenues:                                                                                                                              |  |                    |       
|Advertising                                                                                                                            |  | $                  | 4,476 
|Non-advertising (including $8,554 and $889 from related parties for the three months
ended March 31, 2003 and 2002, respectively)      |  |                    | 9,935 
|                                                                                                                                       |  |                    |       
|Total revenues                                                                                                                         |  |                    | 14,411
|                                                                                                                                      
|Cost of revenues:                                                                                                                      |  |                    |       
|Advertising (including $36 related party services for each of the three months ended
March 31, 2003 and 2002)                          |  |                    | 1,602 
|Non-advertising (including $2,646 and $366 of related party services for the three
months ended March 31, 2003 and 2002, respectively) |  |                    | 3,654 
|                                                                                                                                       |  |                    |       
|Total cost of revenues                                                                                                                 |  |                    | 5,256 
|                                                                                                                                      
|Gross profit                                                                                                                           |  |                    | 9,155 
|                                                                                                                                      
|Operating expenses:                                                                                                                    |  |                    |       
|Product development                                                                                                                    |  |                    | 1,742 
|Sales and marketing                                                                                                                    |  |                    | 1,992 
|General and administrative                                                                                                             |  |                    | 1,076 
|                                                                                                                                       |  |                    |       
|Total operating expenses                                                                                                               |  |                    | 4,810 
|                                                                                                                                       |  |                    |       
|                                                                                                                                      
|Operating profit/(loss)                                                                                                                |  |                    | 4,345 
|                                                                                                                                      
|Other income/(expense)                                                                                                                 |  |                    | (81   
|Interest income                                                                                                                        |  |                    | 327   
|                                                                                                                                       |  |                    |       
|Net income/(loss)                                                                                                                      |  | $                  | 4,591 
|                                                                                                                                       |  |                    |       
|                                                                                                                                      
|Basic net income/(loss) per share                                                                                                      |  | $                  | 0.13  
|                                                                                                                                       |  |                    |       
|Shares used in computing basic net income/(loss) per share                                                                             |  |                    | 34,756
|                                                                                                                                       |  |                    |       
|Diluted net income/(loss) per share                                                                                                    |  | $                  | 0.12  
|                                                                                                                                       |  |                    |       
|Shares used in computing diluted net income/(loss) per share                                                                           |  |                    | 39,186
|                                                                                                                                       |  |                    |       



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



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##### Table of Contents

SOHU.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



|                                                                                         |  | Three Months Ended |       
|---------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                         |  | March 31, 2003     |       
|Cash flows from operating activities:                                                    |  |                    |       
|Net income/(loss)                                                                        |  | $                  | 4,591 
|Adjustments to reconcile net income/(loss) to net cash provided by operating
activities: |  |                    |       
|Depreciation and amortization                                                            |  |                    | 1,227 
|Provision for allowance for doubtful accounts                                            |  |                    | (26   
|Provision for valuation allowance for long-term loans to related
parties                 |  |                    | 86    
|Loss on disposal of fixed assets                                                         |  |                    | 2     
|Stock-based compensation expense                                                         |  |                    | (18   
|Changes in assets and liabilities:                                                       |  |                    |       
|Accounts receivable                                                                      |  |                    | (813  
|Accounts receivable from related parties                                                 |  |                    | (2,922
|Prepaid and other current assets                                                         |  |                    | (431  
|Accounts payable                                                                         |  |                    | (95   
|Payable to related parties                                                               |  |                    | 108   
|Accrued liabilities and deferred revenues                                                |  |                    | 2,274 
|                                                                                         |  |                    |       
|Net cash provided by operating activities                                                |  |                    | 3,983 
|Cash flows from investing activities:                                                    |  |                    |       
|Long term investments in marketable debt securities                                      |  |                    | 1,061 
|Long-term loans to related parties                                                       |  |                    |      
|Acquisition of fixed assets                                                              |  |                    | (759  
|Acquisition of other assets                                                              |  |                    | (213  
|                                                                                         |  |                    |       
|Net cash provided by/(used in) investing activities                                      |  |                    | 89    
|Cash flows from financing activities:                                                    |  |                    |       
|Issuance of Common Stock pursuant to Stock Incentive Plan                                |  |                    | 214   
|                                                                                         |  |                    |       
|Net cash provided by financing activities                                                |  |                    | 214   
|Net increase/(decrease) in cash and cash equivalents                                     |  |                    | 4,286 
|Cash and cash equivalents at beginning of period                                         |  |                    | 18,929
|                                                                                         |  |                    |       
|Cash and cash equivalents at end of period                                               |  | $                  | 23,215
|                                                                                         |  |                    |       



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



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##### Table of Contents

SOHU.COM INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(Unaudited, in thousands)



|                                                          |  | Common Stock  |  |        |    |                | Additional Paid-in Capita |        |   |                       |   |         | Accumulated Other Comprehensive Income |                     |   |     |   |  | Total Shareholders Equity |    
|--------------------------------------------------------- |  | ------------- |  | ------ | -- | -------------- | ------------------------- | ------ | - | --------------------- | - | ------- | -------------------------------------- | ------------------- | - | --- | - |  | -------------------------- | ---
|                                                          |  | Shares Issued |  | Amount |    | Treasury Stock |                           |        |   | Deferred Compensation |   |         |                                        | Accumulated Deficit |   |    
|Balance, December 31, 2002                                |  | 34,611        |  | $      | 35 |                | $                         | (2,003 | ) |                       | $ | 129,881 |                                        |                     | $ | (42 | ) |  | $                          | 547
|Net income                                                |  |              |  |        |   |                |                           |       |   |                       |   |        |                                        |                     |   |    |   |  |                            |   
|Unrealized gains on marketable debt securities            |  |              |  |        |   |                |                           |       |   |                       |   |        |                                        |                     |   |    |   |  |                            | 6  
|Foreign currency translation adjustment                   |  |              |  |        |   |                |                           |       |   |                       |   |        |                                        |                     |   |    |   |  |                            | (1 
|                                                          |  |               |  |        |    |                |                           |        |   |                       |   |         |                                        |                     |   |     |   |  |                            |    
|Comprehensive income                                      |  |               |  |        |    |                |                           |        |   |                       |   |         |                                        |                     |   |     |   |  |                            |    
|Compensatory stock options                                |  |              |  |        |   |                |                           |       |   |                       |   | (30     | )                                      |                     |   | 11  |   |  |                            |   
|Issuance of common stock pursuant to stock incentive plan |  | 267           |  |        |   |                |                           |       |   |                       |   | 214     |                                        |                     |   |    |   |  |                            |   
|                                                          |  |               |  |        |    |                |                           |        |   |                       |   |         |                                        |                     |   |     |   |  |                            |    
|Balance, March 31, 2003                                   |  | 34,878        |  | $      | 35 |                | $                         | (2,003 | ) |                       | $ | 130,065 |                                        |                     | $ | (31 | ) |  | $                          | 552
|                                                          |  |               |  |        |    |                |                           |        |   |                       |   |         |                                        |                     |   |     |   |  |                            |    



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



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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 corporation. The Company does not have any substantive operations of its own and
substantially all of its primary business operations are conducted through its wholly owned subsidiaries, Sohu ITC Information Technology (Beijing) Co., Ltd., Sohu.com (Hong Kong) Limited, and ChinaRen, Inc., and Beijing Sohu Online Network
Information Services, Ltd. (Beijing Sohu), a related company.



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 months ended March 31, 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. 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 or assets to its non-advertising segments as management does not use this
information to measure the performance of the operating segments. The Company doesnt allocate any Web site operation cost to non-advertising cost of revenues.



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Summarized information by segment for the three months ended March 31, 2003 and 2002 is as follows (in
thousands):



|                                          |  | Three Months Ended
|----------------------------------------- |  | ------------------
|                                          |  | March 31, 2003    
|Revenues:                                 |  |                   
|Advertising                               |  | 4,476             
|Non-advertising:                          |  |                   
|E-subscription                            |  | 8,678             
|E-commerce                                |  | 1,175             
|Other                                     |  | 82                
|                                          |  |                   
|Subtotal non-advertising revenues         |  | 9,935             
|                                          |  |                   
|Total revenues                            |  | 14,411            
|                                          |  |                   
|Cost of revenues:                         |  |                   
|Advertising                               |  | 1,602             
|Non-advertising:                          |  |                   
|E-subscription                            |  | 2,646             
|E-commerce                                |  | 1,008             
|Other                                     |  |                  
|                                          |  |                   
|Subtotal non-advertising cost of revenues |  | 3,654             
|                                          |  |                   
|Total cost of revenues                    |  | 5,256             
|                                          |  |                   
|Gross profit                              |  | 9,155             
|                                          |  |                   



3. NET INCOME (LOSS)
PER SHARE



Basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted
average number of common and, if dilutive, common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common stock issuable upon the exercise of stock options and warrants (using the treasury stock
method).



4. 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, financial services 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, subject to the restrictions set forth in the Sarbanes-Oxley Act of 2002 with respect to loans to executive officers and directors.



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 are included in long term loans to related parties, 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 law, to purchase the entire ownership in Beijing Sohu from the two Beijing Sohu shareholders for $242,000. These loans are included in long-term loans to related parties. As of March 31, 2003, the Company had
recorded a valuation allowance of $56,000 against long-term loans to related parties for cumulative losses incurred by Beijing Sohu.



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Pursuant to the agreements
with Beijing Sohu and the shareholders of Beijing Sohu, certain operations related to the Companys online content were transferred to Beijing Sohu in order to allow Beijing Sohu to develop and provide content to the Company for a monthly
service fee, which will be subject to periodic adjustment as agreed between the parties. The Company paid $36,000 in such service fees for each of the three months ended March 31, 2003 and 2002. Because of PRC regulations which prohibit foreign
companies from operating in the telecommunications industry, Beijing Sohu contracted with network operators for e-subscription revenues of $8,488,000 and $889,000 during the three months ended March 31, 2003 and 2002, respectively. At March 31,
2003, accounts receivable from related parties included receivables from Beijing Sohu of $4,818,000 primarily related to subscription revenues ultimately due from third party network operators. Beijing Sohu generated e-commerce sales of $1,175,000
and $300,000, respectively, during the three months ended March 31, 2003 and 2002.



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 Beijing Century High-Tech Investment Co., Ltd. (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. These loans are included in long-term loans to related parties. As of
March 31, 2003, the Company had 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. These loans are included in long term loans to related parties. As of March 31, 2003, the Company had recorded a valuation allowance of
$3,000 against long-term loans to related parties for losses incurred by Hengda.



Because of PRC regulations which prohibit foreign companies from operating in certain industries, Hengda contracted with a network operator for e-subscription revenues of $66,000 for Internet access services during the three months
ended March 31, 2003. At March 31, 2003, accounts receivable from related parties included receivables from Hengda of $66,000 primarily related to subscription revenues ultimately due from a third party network operator. There were no revenues
recorded during the three months ended March 31, 2002 because this business started in the first quarter of 2003.



The Century Loan Agreement and Hengda 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 or Hengda to the Company, (ii) the shares of High Century or Hengda 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 and Hengda. Charles Zhang and Li Wei have pledged all of their shares in High Century and Hengda 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, and January 2003, in the case of Hengda, or at such time as Dr. Charles Zhang or Li Wei, 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 and Hengda.



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 of Sohu-Guolian. Sohu-Guolian will provide technical services to the PRC online securities trading and financial services industries. As of March 31, 2003, the Company had recorded a valuation allowance of $275,000 against long-term loans to
related parties for losses incurred by Sohu-Guolian.



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##### Table of Contents



As of March 31, 2003, payable
to related parties included $435,000 and $1,128,000 payable to High Century and Hengda, respectively, as High Century and Hengda had transferred their unused cash to the Company. The Company may be required to repay these funds at any time.



PRC regulations currently restrict the Company from holding
direct equity interests in Beijing Sohu, High Century and Hengda; therefore, the financial statements of these entities are not consolidated with those of the Company. As the shareholders of these entities are also officers and shareholders of the
Company, these entities are related parties and, thus, transactions with these entities are disclosed in accordance with SFAS 57, Related Party Disclosures. The Company expects that it will continue to be involved in and provide
financial support to these entities.



5. 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
Peoples Republic of China. Though the Peoples Republic of China 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 regarding in what specific segments of these industries foreign owned entities, like the Company, may
operate. The Companys legal structure and scope of operations in China could be subjected to restrictions which could result in severe limits to the Companys ability to conduct business in the Peoples Republic of China.



6. RECENT ACCOUNTING PRONOUNCEMENTS



In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). This Issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement
consideration should be allocated to the identified separate accounting units. EITF No. 00-21 is effective for fiscal periods beginning after June 15, 2003. The Company has not completed its assessment as to whether EITF No. 00-21 will have a
significant impact on its financial statements.



In January 2003,
the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 50 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, FIN 46 must be adopted for the
first interim or annual period beginning after June 15, 2003. The Company does not believe that this announcement will have a significant impact on its financial statements.



7. RECLASSIFICATIONS



Certain amounts from prior periods have been reclassified to conform with current period presentation.



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 ITC Information Technology (Beijing) Co., Ltd. (or
Beijing ITC), 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 Sohu-Guolian Information Technology Co., Ltd. (or Sohu-Guolian), 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



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##### Table of Contents

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.



OVERVIEW



Sohu, having introduced the first Chinese language online directory, is one
of the leading Internet portals in China in terms of brand recognition. We are a Delaware corporation.



On October 18, 2000, Sohu acquired ChinaRen for total consideration of $33 million, comprising 4,401,500 shares of Sohu common stock with an aggregate market value of approximately $31.6 million, stock
options granted to ChinaRen employees to purchase 221,002 shares of Sohu common stock valued at $0.5 million and other acquisition costs aggregating $0.9 million. Revenues and expenses from ChinaRens operations after the acquisition date have
been included in Sohus consolidated financial statements.



We have incurred significant net losses since inception, except for each of the three quarters ended March 31, 2003. As of March 31, 2003, we had an accumulated deficit of $68.6 million. These losses have been 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.



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, provision for long-term loans to related parties, 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.



We generate advertising revenue from standard, sponsorship and retail contracts, most of which are one year or less in
duration. Pursuant to standard advertising contracts, we provide placements on a number of different Web site channels and formats, including but not limited to banners, links, logos, buttons, content integration and email marketing. Revenue is
normally recognized ratably over the period in which the advertising is displayed, when collectibility is reasonably assured. In estimating the fair value of individual services provided, we make estimates based on the value of services provided to
our customers using prices contained in our standard rate card and actual average sell rates. Different sell rates can exist between contracts depending on the size, the respective advertiser and the location of the advertisements. 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 Web site, 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.



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E-subscription revenues are
included within non-advertising revenues and are derived principally from providing value added short messaging 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 Sohu 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 Sohu each operator remits the e-subscription fees, net of its service
fees, for the month to Beijing Sohu, which then transfers the funds to Sohu. 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, ranges from 15% 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. At the end of each reporting period, where an operator has not provided Beijing Sohu 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 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 from third parties and related
parties. 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 non-related party accounts receivable balance was $2.8 million net of allowance for doubtful accounts of $646,000 as of March 31, 2003. Our accounts receivable from related parties was $4.9 million and there was no allowance for doubtful
accounts as of March 31, 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.



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Our management must make
estimates of the valuation of long-term loans to related parties which were made to facilitate our participation in telecommunications, internet content, financial services and certain other businesses in China where foreign ownership is either
prohibited or restricted (the PRC Companies). To the extent losses are incurred by the PRC companies, Sohu accrues for such losses by recording a valuation allowance against long-term loans to related parties. As of March 31, 2003, Sohu
had recorded $338,000 of such valuation allowance for losses incurred by the PRC Companies. If the regulatory environment was to change or business conditions were to deteriorate, additional allowances might be required.



As of March 31, 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, which are currently not
contemplated in our current estimates, that would allow us to realize more of our deferred tax assets than the presently recorded net amount, an adjustment to the deferred tax asset would increase income when those events occurred.



RESULTS OF OPERATIONS



FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002



REVENUES



Total revenues increased by $9.9 million to $14.4 million for the three months ended March 31, 2003 as compared to the three
months ended March 31, 2002. For the three months ended March 31, 2003, advertising revenues constituted $4.5 million or 31% of total revenues and non-advertising revenues were $9.9 million or 69% of total revenues. For the three months ended March
31, 2002, advertising revenues constituted $2.5 million or 55% of total revenues and non-advertising revenues were $2 million or 45% of total revenues.



Advertising Revenues



Advertising revenues increased by $2 million to $4.5 million for the three months ended March 31, 2003, as compared to the three months ended March 31,
2002. The increase was primarily due to higher advertising rates, the increasing number of advertisers purchasing space on our online media properties as well as larger and longer-term purchases by certain advertisers. Sales to Sohus five
largest advertisers were 13% of total advertising revenues for the three months ended March 31, 2003, as compared to 21% of total advertising revenues for the three months ended March 31, 2002.



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 and to a lesser extent from e-commerce services.



Non-advertising revenues increased by $7.9 million to $9.9 million for the three months ended March 31, 2003, as compared to the three months ended March
31, 2002. Non-advertising revenues were derived from e-subscription fees of $8.7 million, e-commerce services of $1.2 million, and e-technology services of $82,000.



Most of the growth in non-advertising revenues was attributable to increases in e-subscriptions revenue. E-subscription
revenues are derived principally from providing value added short messaging 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-subscriptions fees increased by $7.8 million to $8.7 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. The increase was due to product
development and consumer acceptance of short messaging services most of which were recently introduced.



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 fulfillment 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, cosmetics, 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 who are individuals in Beijing, Shanghai and Guangzhou. Fulfillment is provided by delivery companies or through postal services.
Substantially all sales are done on a cash on delivery basis. E-commerce revenue increased by $147,000 to $1.2 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002, as a result of more people
purchasing through our Web site.



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COSTS AND EXPENSES



Cost of Revenues



Total cost of revenues increased by $2.3 to $5.3 million for the three months
ended March 31, 2003, as compared to the three months ended March 31, 2002. For the three months ended March 31, 2003, advertising cost of revenues constituted $1.6 million or 30% of total cost of revenues and non-advertising cost of revenues were
$3.7 million or 70% of total cost of revenues. For the three months ended March 31, 2002, advertising cost of revenues constituted $1.5 million or 50% of total cost of revenues and non-advertising cost of revenues was $1.4 million or 50% of total
cost of revenues.



Advertising Cost of Revenues



Advertising cost of revenues increased by $139,000 to $1.6
million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002 due to higher spending on headcount and content as we expanded our channel offerings.



Non-advertising Cost of Revenues



Non-advertising cost of revenues increased by $2.2 million to $3.7 million
for the three months ended March 31, 2003. For the three months ended March 31, 2003, non-advertising cost of revenues included $2.6 million in e-subscription cost of revenues consisting of subscription collection and short message transmission
charges paid to third party network operators and $1 million in e-commerce cost of revenue consisting of the purchase price of consumer products sold by Sohu and inbound and outbound shipping charges. E-commerce and subscription cost of revenues do
not include allocations for Web site operating costs. Substantially all non-advertising cost of revenues are variable costs and the increase is consistent with the increases in revenue.



Product Development Expenses



Product development expenses increased by $567,000 to $1.7 million for the three months ended March 31, 2003, as compared to
the three months ended March 31, 2002. The increase was primarily attributable to increased headcount and licensing spending associated with our Sohu browser and online games development.



Sales and Marketing Expenses



Sales and marketing expenses decreased by $23,000 to $2 million for the three months ended March 31, 2003 as compared to the
three months ended March 31, 2002. Overall spending was largely unchanged.



General and Administrative Expenses



General and administrative expenses increased by $109,000 to $1.1 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. The increase was primarily due to an increase in professional
fees.



Operating Profit/(Loss)



As a result of the foregoing, we had an operating profit of 4.3 million for
the three months ended March 31, 2003 as compared to an operating loss of $2.5 million for the three months ended March 31, 2002.



Other Expense



For the three months ended March 31, 2003, other expense was $81,000 and included a $86,000 valuation allowance for long-term loans to related parties for
investments in Sohu-Guolian and $5,000 gain on disposal of fixed assets. There was no significant other expense recorded for the three months ended March 31, 2002.



Interest Income



Interest income for the three months ended March 31, 2003 was $327,000, approximately the same as for the three months ended March 31, 2002, as our cash
balances and average rates of return were similar and we invested in longer term marketable securities which partly protected us from falling interest rates.



Net Income/(Loss)



As a result of the foregoing, we had net income of $4.6 million for the three months ended March 31, 2003, as compared to a net loss of $2.2 million for
the three months ended March 31, 2002. We did not record any income tax expense as we have approximately $17 million in net operating losses which can be used to reduce taxes payable. As a Delaware company, after the utilization of remaining loss
carryforwards we will be subject to tax at a maximum rate of 34 percent.



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LIQUIDITY AND CAPITAL
RESOURCES



We have financed our operations principally
through private sales of preferred stock and our initial public offering completed in July 2000. From inception through March 31, 2003, we have raised net proceeds of $39.2 million through the sale of preferred stock in private placements and $52.4
million from the sale of common stock in our initial public offering. We invest our excess cash in marketable debt securities of high quality investment grade. As of March 31, 2003, we had cash, cash equivalents, and investments in marketable debt
securities totaling approximately $47.4 million.



Net cash
provided by operating activities was approximately $4 million for the three months ended March 31, 2003, primarily due to net income of $4.6 million and depreciation and amortization of $1.2 million, offset by an increase in working capital of $1.9
million. Net cash provided by operating activities was $129,000 for the three months ended March 31, 2002, primarily due to our net loss of $2.2 million, depreciation and amortization of $1.2 million, and a decrease in working capital of $1 million.



There was no significant net cash provided by the investing
activities for the three months ended March 31, 2003. During the three months ended March 31, 2003, $1 million of marketable debt securities matured and approximately offset the payment for acquisition of fixed assets and other assets. Net cash used
in investing activities was $7.8 million for the three months ended March 31, 2002, primarily due to long-term investments in marketable debt securities of $5 million, the purchase of fixed assets for $1 million and long-term loans to related
parties of $1.9 million for financing an investment in High Century and Hengda.



There was no significant net cash provided by financing activities for each of the three months ended March 31, 2003 and 2002.



Our principal commitments consist of obligations under various operating leases for office facilities. We expect that capital expenditures in 2003 will
primarily consist of purchases of additional servers, computer software, workstations and technological improvements to network infrastructure.



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. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may
decide to pursue. If these sources are insufficient to satisfy cash requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in
additional dilution to stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms
acceptable to us, if at all.



Chinese regulations limit our
ability to convert renminbi into foreign currency for capital items. While operations in China are currently a net user of cash, the ability to use future cash generated in China for expenditures outside of China may be restricted. 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 Sohu.com



Cases of Severe Acute Respiratory Syndrome, or SARS, may have an adverse
effect on our business operations and financial results.



Recently there have been a number of SARS cases in China, where we derive all of our revenues, and specifically in Beijing where most of our employees are based. Possible risks associated with SARS include a reduction in advertising
revenue because advertisers may cancel existing contracts or defer future advertising expenditures, a reduction of non-advertising revenue because consumers use of our e-subscriptions and e-commerce services is restricted, and severe
disruption of our business operations if our suppliers or we are required to temporarily close our offices pursuant to health or other government regulations. With the health of our employees being the highest priority we have taken precautionary
protection measures which include but are not limited to restricting travel and having most of our Beijing head office employees work from their homes. The situation with SARS could deteriorate or improve in a very short time.



If we are unable to obtain adequate Director and Officer liability
insurance against third party claims at economical rates, we could be exposed to increased risk of loss in the event of a claim.



Pursuant to a policy expiring in July 2003, we have $15 million in Director and Officer liability insurance coverage. As our market capitalization has
recently increased significantly, this amount of insurance coverage may not be sufficient. Furthermore, because of market factors associated with the Sarbanes-Oxley Act of 2002 and the litigation environment in the United States, our premiums could
increase significantly and we may not be able to obtain sufficient coverage at economical rates.



Except for each of the three quarters ended March 31, 2003, we have incurred net losses since inception and losses could continue in the future.



Except for each of the three quarters ended March 31, 2003, we have incurred
significant net losses since our inception in August 1996. In addition, we had an accumulated deficit of approximately $68.6 million at March 31, 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. 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, short messaging and subscription 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 business solely in the PRC through our wholly owned subsidiary, Beijing ITC. Beijing ITC is a wholly foreign owned enterprise, or
WFOE, under PRC law. We are a Delaware corporation and a foreign person 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, online stock trading and internet access, we have established Beijing Sohu, High



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Century and Hengda which are companies incorporated in the PRC and owned by Charles Zhang, our chief
executive officer, and certain other employees of Sohu. As of March 31, 2003, Sohu had invested $5.1 million in Beijing Sohu, High Century and Hengda through loans to related parties. 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 of $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 will provide technical services to the PRC online securities trading and financial services industries. We do not have any direct ownership interest in Beijing Sohu, High Century, Hengda or
Sohu-Guolian.



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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, Beijing Sohus, Hengdas, High Centurys or
Sohu-Guolian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, Beijing Sohus, Hengdas, High Centurys and Sohu-Guolians current or proposed businesses and
operations. In addition, these new laws and regulations may be retroactively applied to us, Beijing ITC, High Century, Hengda, Beijing Sohu, or Sohu-Guolian.



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If we, Beijing ITC, High
Century, Beijing Sohu, Hengda, or Sohu-Guolian 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;
| | - |  | --------------



| | · |  | confiscating our, Beijing ITCs, High Centurys, Hengdas, Beijing Sohus or Sohu-Guolians income;
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| | · |  | revoking our, Beijing ITCs, High Centurys, Hengdas, Beijing Sohus or Sohu-Guolians business license;
| | - |  | ---------------------------------------------------------------------------------------------------------



| | · |  | shutting down our, Beijing ITCs, or Beijing Sohus servers and/or blocking our Web sites;
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| | · |  | requiring us, Beijing ITC, High Century, Hengda, Sohu-Guolian or Beijing Sohu to restructure its ownership structure or operations; and
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| | · |  | requiring us, Beijing ITC, High Century, Hengda, Beijing Sohu or Sohu-Guolian to discontinue any portion or all of its Internet business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



We may be unable to collect long term loans to related parties or exercise
management influence associated with Beijing Sohu, High Century, Sohu-Guolian or Hengda.



At March 31, 2003 Sohu had provided long term loans of $5.1 million to Dr. Charles Zhang, Sohus Chief Executive Officer and a major Sohu stockholder, 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, and Hengda, which is owned 80% by High Century and 20% by an employee. Beijing Sohu, High Century
and Hengda are used to facilitate our participation in telecommunications, Internet content, financial services and certain other businesses in China where foreign ownership is either prohibited or restricted. We expect that we will continue to be
involved in and provide additional financial support under similar arrangements in the future, subject to the restrictions set forth in the Sarbanes-Oxley Act of 2002 with respect to loans to directors and executive officers.



The agreements contain provisions that, subject to PRC law, (i) the loans can
only be repaid to Sohu by transferring the shares of High Century, Hengda or Beijing Sohu to Sohu, (ii) the shares of High Century, Hengda or Beijing Sohu cannot be transferred without the approval of Sohu, and (iii) Sohu has the right to appoint
all directors and senior management personnel of High Century, Hengda and Beijing Sohu. Dr. Charles Zhang and the other employee borrowers have pledged all of their shares in High Century, Hengda 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, and after January 2003, in the case of Hengda, 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-Guolian and Beijing Sohu.



Our ability to
ultimately collect these loans will depend on the profitability of Beijing Sohu, Hengda, Sohu-Guolian and High Century, which is uncertain. As of March 31, 2003, the Company had recorded $338,000 of valuation allowance for losses incurred by Beijing
Sohu, High Century, Hengda, and Sohu-Guolian. 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-Guolian and Beijing Sohu.



As of March
31, 2003, payable to related parties of $1.6 million represents funds initially used to capitalize High Century and Hengda which are currently not being used in the operations of High Century and Hengda and have been transferred to Sohu. Under PRC
regulations, we could be required to repay these balances to High Century and Hengda at any time or High Century and Hengda could be penalized for this action. We do not intend to repay the balances at this time.





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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, a PRC company 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 acquire appropriate government approvals to conduct our content-related operations. In addition, we have transferred our content-related assets and operations to Beijing Sohu. 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;
| | - |  | -----------------------------------------------------------------------------------------------------------



| | · |  | whether the PRC government may impose additional regulatory requirements with which we or Beijing Sohu may not be in compliance; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| | · |  | whether the PRC government will permit Beijing Sohu to acquire future licenses necessary in order to conduct operations in the PRC.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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 and
Beijing Sohu will be able to obtain all of the licenses we or Beijing Sohu 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 or Beijing Sohu or our service providers or otherwise harm our business.



We depend upon contractual arrangements with Beijing Sohu, Hengda, Sohu-Guolian and High Century 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 business 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, Sohu-Guolian and High Century 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 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, Sohu-Guolian and High Century 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.



Charles Zhang, our chief executive officer, Beijing Sohu, Hengda, Sohu-Guolian and High Century. 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.



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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 depend on online advertising for a significant portion of our revenues.



We derive a significant portion of our revenues from the sale of advertising on our Web sites. For the three months ended
March 31, 2003 and 2002, advertising revenues represented approximately 31% and 55%, respectively, of our total 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;
| | - |  | -----------------------------------------------



| | · |  | 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.



We rely on e-subscription services for a significant portion of our
revenues.



We derive a significant portion of our revenues
from e-subscription services on our Web sites. For the three months ended March 31, 2003 and 2002, e-subscription revenues represented approximately 60% and 20%, respectively, of our total revenues. We expect our reliance on e-subscription revenues
to increase. Our business plan is dependent upon further increases in revenues from e-subscription services and the expansion of our subscriber base.



E-subscription revenue is derived principally from providing value added short messaging 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. Pursuant to contractual arrangements between Beijing Sohu and a number of mobile network
operators in 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 the e-subscription fees, and are based on contracted rates. Generally, (i) within 15 to 90 days after the end of each month, Beijing Sohu 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, each operator remits the e-subscription fees, net of its service fees, for the
month to Beijing Sohu which then transfers the funds to Sohu.



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



| | · |  | we provide short messaging 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, ranges from 15% 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. Changes in failure rates may result in a 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 is currently under
negotiation and the existing CMCC contract expires in September 2003. 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 is unwilling to cooperate with us, we would not be able to find substitute partners.
| | - |  | ------------------------------------------------------------------------------------------------------



| | · |  | 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 US$.60 to US$4.0. Over the past six months, the largest contributor to our e-subscriptions growth and total e-subscriptions revenue has been from our online dating and friends matching service which we refer to as
Jiqinggongshe or GGMM. 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | 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 for non-compliance with
their regulations. 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 used by a user for more than three months.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | 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 rely on e-commerce services for a significant portion of our revenues.



We derive a significant portion of our revenues from e-commerce sales from our Web sites. For the three months ended March 31, 2003 and 2002, e-commerce revenues represented approximately 8% and 23%,
respectively, of our total revenues.



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.
| | - |  | ---------------------------------------------------------------------------------------------------



In 2002, through High Century, we invested $3.1 million in Sohu-Guolian, a
joint venture which provides services to the online trading and financial services industries.



The success of this investment depends, among other things, on the following factors:



| | · |  | conditions and trading volumes in the China securities market which currently can be considered weak;
| | - |  | -----------------------------------------------------------------------------------------------------



| | · |  | the acceptability and development of online stock trading in China which is unknown at this time;
| | - |  | -------------------------------------------------------------------------------------------------



| | · |  | expansion, which is dependent on the development of Chinas banking system (which currently does not allow for nation wide remote account opening);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | cooperation from Guolian Securities Co., Ltd., our joint venture partner, who we rely on to provide technical expertise, licensing and other resources to allow
Sohu-Guolian to provide services; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | future legislation to allow Sohu-Guolian to obtain its own online securities trading license (currently regulations do not exist which would allow Sohu-Guolian to
obtain its own online trading license).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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There is no assurance that Sohu-Guolian will be successful, and, in addition, we believe that it is
unlikely that Sohu-Guolian will be profitable in 2003 or 2004.



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,
many of which are beyond our control. 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. 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, short messaging 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 short messaging and e-commerce customers, we may need to increase substantially our expenditures for creating and maintaining brand loyalty. If our revenues do not increase proportionately, our results of operations and liquidity
will suffer.



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 short messaging 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 currently expect that we will need capital to fund additions to our portal and computer infrastructure, including any acquisitions of complementary assets, technologies or businesses we may pursue, as well as the expansion of our sales
and marketing activities.



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.



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Substantially all of our subscription revenue is generated through short messaging services where we
depend on mobile network operators for message delivery and payment collection. If we were unable to continue this arrangement, our short messaging 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 and chief executive officer 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 stockholders, 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 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, short messaging 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.
| | - |  | ---------------------------------------------------------------------------------------------------



Our advertising pricing model, which is based on charging a fixed fee to
display advertisements for a specified time period, may not be profitable.



There are currently no industry standard pricing models used to sell advertising on the Internet. This makes it difficult to project our future advertising rates and revenues. The models we adopt may prove not to be profitable. A
significant portion of our advertising revenues in 2003 and 2002 were derived from charging a fixed fee to display an advertisement over a given time period.



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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 will rely on dividends and other distributions on equity paid by our wholly-owned operating subsidiaries to fund any cash requirements we may have.



We are a holding company with no operating assets other than the shares of
Beijing ITC, our wholly-owned subsidiary in the PRC that owns and conducts our Internet business. We will rely on dividends and other distributions on equity paid by Beijing ITC for our cash requirements in excess of any cash raised from investors
and retained by us. If Beijing ITC incurs debt on its own behalf in the future, the instruments governing the debt may restrict Beijing ITCs ability to pay dividends or make other distributions to us. In addition, PRC legal restrictions permit
payment of dividends by Beijing ITC only out of its net income, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, Beijing ITC is also required to set aside a portion of its net income each year to fund
certain reserve funds. These reserves are not distributable as cash dividends.



Beijing ITC has incurred significant net losses since its inception. Therefore, we have not received any dividends or other distributions from Beijing ITC in the past and do not expect any dividends 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.



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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, and may
in the future be, subject to legal proceedings and claims from time to time 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, 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.



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.
| | - |  | ------------------------------------------



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, subscription, short messaging
and e-commerce services for a significant portion of our future revenues, but the Internet has not been proven as a widely accepted medium for advertising, subscription, short messaging or e-commerce services.



We expect to derive a significant portion of our revenue for the foreseeable
future from online advertising, subscription, short messaging and e-commerce services. If the Internet is not accepted as a medium for advertising, subscription, short messaging or e-commerce services, our ability to generate revenues will be
adversely affected.



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.



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Many of our current and
potential advertising and e-commerce customers have only limited experience using the Internet for advertising or commerce 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 online advertising and
e-commerce markets are new and rapidly evolving, particularly in China. As a result, many of our current and potential advertising and e-commerce customers have limited experience using the Internet for advertising or commerce purposes and
historically have not devoted a significant portion of their advertising and sales budgets to Internet-based advertising and e-commerce. Moreover, customers 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 or sell their products on our portal if they do not perceive our online advertising and e-commerce 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.



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, short messaging 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.
| | - |  | ----------------------



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.



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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.



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.



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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 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.



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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.



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 precedental 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 foreign investors. 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.



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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, substantially all 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 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 the
Market for Our Common Stock



The market price of our
common stock has been and will likely continue to be volatile.



The market price of our common stock has been volatile, and is likely to continue to be so. 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, particularly Internet companies. As a result, investors in our shares may experience a decrease in the value of their shares regardless of our operating performance or
prospects.



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



There were approximately 34,878,143 shares of our common stock outstanding as of March 31, 2003, as well as options to purchase an additional 6,241,770 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.



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



Our chief executive officer beneficially owns approximately 25% 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 and 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 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 months ended March 31,
2003 was not material.



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INVESTMENT RISK



|a) |  | Investments in Beijing Sohu, High Century, Hengda 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, financial services 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, subject to the restrictions set forth in the Sarbanes-Oxley Act of 2002 with respect to loans to directors and executive officers.



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 are included in long term loans to related parties, 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. As of March 31, 2003, we had recorded a valuation
allowance of $56,000 against long-term loans to related parties for losses incurred by Beijing Sohu.



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. These loans are included in long term loans to related parties. As of March 31, 2002, we had recorded a valuation allowance of $4,000 against long-term loans to related parties for
losses incurred by High Century.



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. These loans are included in long term loans to related parties. As of March 31, 2003, we had recorded a valuation allowance of $3,000
against long-term loans to related parties for losses incurred by Hengda.



The loan agreements under which funds are provided to invest in High Century and Hengda 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 or Hengda to
us, (ii) the shares of High Century or Hengda cannot be transferred without the approval of Sohu, and (iii) we have the right to appoint all directors and senior management personnel of High Century and Hengda. Charles Zhang and Li Wei have pledged
all of their shares in High Century and Hengda 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, and January 2003, in the case of Hengda, or at such time as Dr. Charles
Zhang or Li Wei, 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 and Hengda.



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 will provide technical services to the PRC online securities trading and financial services industries. As of March 31, 2003, we had
recorded a valuation allowance of $275,000 against long-term loans to related parties for losses incurred by Sohu-Guolian.



As of March 31, 2003, payable to related parties included $435,000 and $1,128,000 payable to High Century and Hengda, respectively, as High Century and
Hengda had transferred their unused cash to Sohu. Sohu may be required to repay these funds at any time.



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|(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 March 31, 2003, unrealized gains of $546,000
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-14(c) and 15-d-14(c)) as of a date, or the
Evaluation Date, within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to Sohu
would be made known to them by others within the company. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date.



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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 March 31, 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.



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.
|--- |  | --------------------



None.



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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.



|                   
|-------------------
|                   
|Dated: May 12, 2003
|                   
|                   
|                   
|                   



CERTIFICATIONS



I, Dr. Charles Zhang,
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Sohu.com Inc.;
|-- |  | --------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 12, 2003



/s/ Dr. Charles Zhang

President, Chief Executive Officer and Chairman

of the Board of Directors



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I, Derek Palaschuk, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Sohu.com Inc.;
|-- |  | --------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 12, 2003



/s/ Derek Palaschuk

Chief Financial Officer & Senior Vice President



37



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##### Table of Contents

Sohu.com Inc.

Quarterly Report on Form 10-Q For Quarter Ended March 31, 2003



EXHIBITS INDEX



|10.1  |  | Employment Agreement, effective as of January 1, 2003, by and between Sohu.com Inc. and Victor
Koo                    
|----- |  | ----------------------------------------------------------------------------------------------------------------------
|10.2* |  | Employment Agreement, effective as of January 1, 2003, by and between Sohu.com Inc. and Charles
Zhang                 
|10.3* |  | Employment Agreement, effective as of January 1, 2003, by and between Sohu.com Inc. and Derek
Palaschuk               
|99.1  |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|99.2  |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002



|* |  | Incorporated herein by reference to the registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------



38