Sohu.com (SOHU)

Business Results

As Sohu previously reported, Sohu discontinued its own e-commerce platform of physical consumer goods on June 20, 2006. While processing the disposal of its e-commerce business, Sohu is reporting the related business activities as discontinued operations. Sohu’s income statement separates out discontinued operations for both current and prior periods in order to focus on continuing operations and provide a consistent basis for comparing financial performance over time.

Total revenues for third quarter ended September 30, 2006 totaled US$35.4 million, compared to revenues of US$34.1 million for second quarter ended June 30, 2006, and US$27.4 million for third quarter ended September 30, 2005. Gross margin was 65% in the third quarter of 2006, compared to 64% in the previous quarter and 67% in the same period of 2005. Non-GAAP gross margin of 66% in third quarter of 2006 remained at similar levels compared with 65% in the previous quarter and 67% in the same period of 2005. Net income for the third quarter was US$6.6 million or US$0.17 per fully diluted share. Non-GAAP net income for third quarter of 2006 was US$8.5 million or US$0.22 per fully diluted share. This compares to non-GAAP net income of US$8.4 million or US$0.22 per fully diluted share for the previous quarter and US$8.0 million or US$0.21 per fully diluted share for third quarter of 2005.

Sohu’s advertising revenues for third quarter of 2006 totaled US$23.9 million, a 27% year-on-year and 5% quarter-on-quarter growth. Advertising revenues, consisting of US$21.0 million in brand advertising and US$2.9 million in sponsored search, accounted for 67% of total revenues in third quarter of 2006. Brand advertising revenues for third quarter of 2006 were US$21.0 million, an increase of 35% year-on-year and 9% quarter-on-quarter. Sponsored search revenues for third quarter of 2006 were US$2.9 million, down 10 % year-on-year and 19% quarter-on quarter, mainly due to further enhancement of Sohu’s anti-fraudulent click mechanism and a decrease in revenues from fixed-fee paid listing. For the first nine months of 2006, brand advertising revenues and sponsored search revenues grew 37% and 9% year-on-year, respectively. Advertising gross margin was 69%, compared to 70% in the previous quarter and 74% in the third quarter of 2005. Advertising non-GAAP gross margin was 71%, unchanged from the previous quarter and a decline from 74% in third quarter of 2005. This year-on-year non-GAAP gross margin decline was primarily due to an increase in exclusive content expenses and bandwidth costs.

For third quarter of 2006, Sohu’s non-advertising revenues, which are derived mainly from wireless value-added services and online games, increased by 34% year-on-year and 2% quarter-on-quarter to US$11.5 million, representing 33% of total revenues. The strong year-on-year improvement was a result of the recovery in wireless revenues. Wireless revenues for third quarter of 2006 totaled US$8.8 million, a modest decline of 2% from the previous quarter despite new policy changes by the mobile network operators and up 31% over the same period last year. Non-advertising gross margin was 56%, compared to 53% in the previous quarter and 54% in third quarter of last year. Non-advertising non-GAAP gross margin was 57% compared to 53% in the previous quarter and 54% in third quarter of 2005. This gross margin improvement was primarily due to the increased mix of higher margin revenues and an increase in gross margin of certain SMS products.

For the third quarter, Sohu’s operating expenses was US$16.9 million. Non-GAAP operating expenses totaled US$15.4 million, an increase of 7% from the previous quarter and 39% year-on-year. The year-on-year increase was primarily due to our increased re-investment in research and development, increased marketing expenses on branding, and increased headcount and salaries.

As of September 30, 2006, Sohu’s cash, cash equivalents and investments in marketable debt securities balance was US$120.0 million, compared to US$132.9 million as of June 30, 2006 and US$133.1 million as of December 31, 2005.

Carol Yu, CFO of Sohu.com, commented, “Year-to-date, we have been very pleased with the progress of our core advertising business, which has been and will continue to be our main point of focus. We were able to achieve a record high quarter of brand advertising revenues and manage our costs to maintain a stable level of non-GAAP gross margin of 73%. Our non-advertising non-GAAP gross margin of 57% also showed significant sequential improvement from 53% in the second quarter despite our experiencing a modest revenue decline in our wireless revenues. We have been able to minimize the overall impact of the new policy changes on our wireless business in large part due to our ongoing vigilance and careful management of this segment while successfully identifying new revenue sources. In addition, we have been able to further expand our businesses with a stable and healthy non-GAAP net margin of 24%.”

Business Results

As Sohu previously reported, Sohu discontinued its own e-commerce platform of physical consumer goods on June 20, 2006. While processing the disposal of its e-commerce business, Sohu is reporting the related business activities as discontinued operations. Sohu’s income statement separates out discontinued operations for both current and prior periods in order to focus on continuing operations and provide a consistent basis for comparing financial performance over time.

Total revenues for second quarter ended June 30, 2006 totaled US$34.1 million, compared to revenues of US$30.4 million for first quarter ended March 31, 2006, and US$25.0 million for second quarter ended June 30, 2005. Gross margin for the second quarter of 2006 was 64%. Non-GAAP gross margin of 65% in second quarter of 2006 was down slightly from 68% in the previous quarter and 69% in the same period of 2005. Including discontinued operations, net income for the second quarter of 2006 was US$7.2 million or US$0.19 per fully diluted share. Non-GAAP net income for second quarter of 2006 was US$8.4 million or US$0.22 per fully diluted share. This compares to non-GAAP net income of US$7.8 million or US$0.20 per fully diluted share for the previous quarter and US$7.1 million or US$0.18 per fully diluted share for second quarter of 2005.

Sohu’s advertising revenues for second quarter of 2006 totaled US$22.8 million, a 35% year-on-year and 13% quarter-on-quarter improvement. For the first half of 2006, advertising revenues grew by 35% year-on-year. Advertising revenues, consisting of US$19.3 million in brand advertising and US$3.5 million in sponsored search, accounted for 67% of total revenues in second quarter of 2006. For the first half of 2006, brand advertising revenues and sponsored search revenues grew by 38% and 20% year-on-year, respectively. Advertising non-GAAP gross margin was 71%, a decline from 75% in the previous quarter and 76% in second quarter of 2005. This gross margin decline was primarily due to an increase in exclusive content expenses and bandwidth costs.

For second quarter of 2006, Sohu’s non-advertising revenues, which are derived mainly from wireless value-added services and online games, increased by 39% year-on-year and 9% quarter-on-quarter to US$11.2 million, representing 33% of total revenues. The strong year-on-year improvement was a result of the continued recovery in wireless revenues. Wireless revenues for second quarter of 2006 totaled US$9.0 million, an increase of 12% over the previous quarter and 41% over the same period last year. Non-advertising non-GAAP gross margin was 53% compared to 55% in the previous quarter and 56% in second quarter of 2005. This gross margin decline was primarily due to the reduced price ceiling set by one of the mobile network operators on SMS fees and increased wireless content expenses.

For the second quarter, Sohu’s non-GAAP operating expenses totaled US$14.4 million, increasing 12% from the previous quarter and increasing 37% year-on-year. The year-on-year increase was primarily because of the increase of marketing expenses, increase in headcount and salaries.

For the second quarter, Sohu’s other income included a gain of US$0.8 million arising from our early redemption of convertible notes with face value of US$15.0 million at a discount.

As of June 30, 2006, Sohu’s cash, cash equivalents and investments in marketable debt securities balance was US$132.9 million, compared to US$133.1 million as of December 31, 2005, even after an early redemption of US$15 million convertible notes during the second quarter.

Carol Yu, CFO of Sohu.com, commented, “Once again, the financial results we achieved in the second quarter of 2006 exceeded our prior guidance with the strength coming from our core advertising business supplemented by a rebounding wireless segment. Although we do expect to experience some bumps in the road over the next few quarters on the wireless side due to certain previously announced operator policy changes, we are well-positioned to minimize the overall impact given our focus on Sohu’s main business - advertising. During the second quarter, we took steps to further streamline our business lines and have discontinued our e-commerce platform so that we are fully focused on advertising, which is the area where we have a clear competitive advantage and solid visibility. Online advertising will continue to be the primary driver behind our long term growth.”

Business Results

Revenues for first quarter ended March 31, 2006 totaled US$31.3 million, compared to revenues of US$30.5 million for fourth quarter ended December 31, 2005, and US$23.7 million for first quarter ended March 31, 2005. Gross margin for the first quarter of 2006 was 65%. Non-GAAP gross margin of 66% in first quarter of 2006 was unchanged from the previous quarter and down slightly from 68% in the same period of 2005. Net income for the first quarter of 2006 was US$6.0 million or US$0.16 per fully diluted share. Non-GAAP net income for first quarter of 2006 was US$7.8 million or US$0.20 per fully diluted share. This compares to net income of US$8.9 million or US$0.23 per fully diluted share for the previous quarter and US$5.7 million or US$0.15 per fully diluted share for first quarter of 2005.

Sohu’s advertising revenues for first quarter of 2006 totaled US$20.1 million, a 35% year-on-year improvement and 1% quarter-on-quarter decline. Advertising revenues, consisting of US$16.7 million in brand advertising and US$3.4 million in sponsored search, accounted for 64% of total revenues in first quarter of 2006. Advertising non-GAAP gross margin was 75%, an increase from 74% in the previous quarter but slightly lower than 78% in first quarter of 2005.

For first quarter of 2006, Sohu’s non-advertising revenues, which are derived mainly from wireless value-added services, online games and e-commerce, increased by 25% year-on-year and 9% quarter-on-quarter to US$11.1 million, representing 36% of total revenues. The strong year-on-year improvement was a result of the continued recovery in wireless revenues, which increased 10% over the previous quarter and 34% over the same period last year. Non-advertising non-GAAP gross margin was 51% compared to 50% in the previous quarter and 52% in first quarter of 2005.

For the first quarter, Sohu’s non-GAAP operating expenses totaled US$13.0 million, declining 9% from the previous quarter and increasing 20% year-on-year. The quarter-on-quarter decrease was primarily due to a decline in sales commission whiles the year-on-year increase primarily related to costs associated with Sohu’s exclusive Olympics sponsorship role and personnel costs.

As of March 31, 2006, Sohu’s cash, cash equivalents and investments in marketable debt securities balance was US$137.5 million, compared to US$133.1 million and US$128.7 million as of December 31, 2005 and March 31, 2005, respectively.

Carol Yu, CFO of Sohu.com, commented, “We are extremely pleased with the financial results we achieved in the first quarter of 2006. Despite it being a seasonally weak quarter, our total revenues reached a historical record and exceeded our guidance, with brand advertising revenues growing 38% year-over-year and sponsored search revenues growing 26% year-over-year. Our focus on our core advertising business remains unchanged and we have also seen our wireless revenues rebound more significantly in the first quarter. Through continued investments in new products, content and branding for Sohu and Sogou, we are committed to utilizing all of our resources to the best of our ability in order to fully capture China’s massive online advertising market opportunity and grow shareholder value.”

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Business Results

Revenues for fourth quarter ended December 31, 2005 totaled US$30.5 million, compared to revenues of US$28.3 million for third quarter ended September 30, 2005, and US$24.1 million for fourth quarter ended December 31, 2004. Gross margin of 66% in fourth quarter of 2005 was up slightly from 65% in the previous quarter and down slightly from 68% in the same period of 2004. Net income for fourth quarter of 2005 was US$8.9 million or US$0.23 per fully diluted share. This compares to net income of US$8.0 million or US$0.21 per fully diluted share for the previous quarter and US$6.5 million or US$0.17 per fully diluted share for fourth quarter of 2004.

Revenues for fiscal year 2005 totaled US$108.3 million, a 5% year-on-year increase from fiscal year 2004. Gross margin was 66% in fiscal 2005, down slightly from 67% in fiscal 2004. U.S. GAAP net income in fiscal 2005 was US$29.8 million or US$0.77 per fully diluted share compared to net income of US$35.6 million or US$0.89 per fully diluted share in fiscal 2004.

Sohu’s advertising revenues for fourth quarter of 2005 totaled US$20.3 million, a 28% year-on-year improvement and 8% increase quarter-on-quarter. Advertising revenues, consisting of US$16.9 million in brand advertising and US$3.4 million in sponsored search, accounted for 67% of total revenues in fourth quarter of 2005. Advertising gross margin was 74%, relatively stable from the previous quarter but lower than 81% in fourth quarter of 2004.

In fiscal 2005, Sohu’s advertising revenues totaled US$70.9 million, up 27% from US$55.7 million in fiscal 2004.

For fourth quarter of 2005, Sohu’s non-advertising revenues, which are derived mainly from wireless value-added services, online games and e-commerce, increased by 24% year-on-year and 7% quarter-on-quarter to US$10.2 million, representing 33% of total revenues. The strong year-on-year improvement was a result of the continued recovery in wireless revenues after bottoming out in the fourth quarter 2004. Wireless revenues posted its fourth consecutive quarter of sequential growth, increasing 7% over third quarter and 55% over the same period last year. Non-advertising gross margin improved to 50% compared to 47% in previous quarter and 42% in fourth quarter of 2004.

In fiscal 2005, Sohu’s non-advertising revenues totaled US$37.5 million, down 21% from US$47.5 million in fiscal 2004 reflecting the shift in the revenue mix to favor the core advertising business.

For the fourth quarter, Sohu’s operating expenses totaled US$14.2 million, increasing 25% from previous quarter and 37% year-on-year. The increase in expenses quarter-on-quarter primarily relates to costs associated with Sohu’s exclusive Olympics sponsorship role and additional sales commissions payable to our sales team totaling US$1.4 million pertaining to higher collections as well as a change in the timing of when the commission is accrued.

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For the fourth quarter of 2005, Sohu’s other income totaled US$2.4 million. This included a gain of US$1.2 million arising from our repurchase of convertible notes with face value of US$15.22 million at a discount. In addition, due to an exemption regarding payment of certain taxes and receipts of tax refunds by our China subsidiaries, we have also recorded approximately US$1.2 million gain of other income.

As of December 31, 2005, Sohu’s cash, cash equivalents and investments in marketable debt securities balance was US$134.1 million, compared to US$132.5 million and US$141.3 million as of September 30, 2005 and December 31, 2004, respectively. During the year, the Company completed a US$13.8 million stock repurchase program and the aforementioned repurchase of convertible notes.

Carol Yu, CFO of Sohu.com commented, “Although this is typically a slower season for advertising, we were still able to post another solid quarter of results. Our focus on growing our user base and maintaining our leadership position in online advertising in China continues to work well. We have taken full advantage of the rapid growth in online advertising in China which we believe is still in an early growth stage and have taken the necessary steps to ensure Sohu’s Internet properties are well-positioned to benefit as more advertisers begin to value the importance of brand and search advertising in China as an effective tool to reach consumers.”

Business Results

Revenues for third quarter ended September 30, 2005 totaled US$28.3 million, compared to revenues of US$25.9 million for second quarter ended June 30, 2005, and US$25.9 million for third quarter ended September 30, 2004. Gross margin of 65% in third quarter of 2005 was down slightly from 67% in previous quarter and 68% in same period of 2004. Net income for third quarter of 2005 was US$8.0 million or US$0.21 per fully diluted share. This compares to net income of US$7.1 million or US$0.18 per fully diluted share for previous quarter and US$8.3 million or US$0.21 per fully diluted share for third quarter of 2004.

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Sohu’s advertising revenues for third quarter of 2005 totaled US$18.8 million, a 21% year-on-year improvement and 11% increase quarter-on-quarter. Advertising revenues, consisting of US$15.6 million in brand advertising and US$3.2 million in sponsored search, accounted for 66% of total revenues in third quarter of 2005. Advertising gross margin was 74%, compared to 76% in previous quarter and 79% in third quarter of 2004.

For third quarter of 2005, Sohu’s non-advertising revenues, which are derived from wireless value-added services, online games and e-commerce, decreased by 9% year-on-year but improved 6% quarter-on-quarter to US$9.5 million, representing 34% of total revenues. The year-on-year decline was a result of reduction in wireless revenues of 17%. However, wireless revenues posted its third consecutive quarter of sequential growth, increasing 6% over second quarter, reflecting a continued recovery in Sohu’s wireless business. Non-advertising gross margin was 47% compared to 51% in previous quarter and 52% in third quarter of 2004, primarily due to additional charges from a mobile operator.

For third quarter of 2005, Sohu’s operating expenses totaled US$11.4 million, increasing a 6% from previous quarter and 18% year-on-year. Operating profit margin of 25% was slightly down from 26% in previous quarter and down from 31% in third quarter last year. Year-on-year increase in operating expenses represents Sohu’s continued investment in long-term growth opportunities, mainly in research and development.

As of September 30, 2005, Sohu’s cash, cash equivalents and investments in marketable debt securities balance was US$132.5 million.

“We are extremely pleased to see Sohu once again meet its operational and strategic objectives and continue to look for new and innovative ways to leverage the strong Sohu brand. We are now well-positioned to benefit from the large and rapidly growing advertising market in China and believe our non-advertising revenues are also on an upward growth trend,” stated Carol Yu, Sohu’s Chief Financial Officer.

Business Results

Revenues for the second quarter ended June 30, 2005 totaled US$25.9 million, compared to revenues of US$23.7 million for the first quarter ended March 31, 2005, and US$27.3 million for the second quarter ended June 30, 2004. Gross margin of 67% in Q2 2005 was down slightly from 68% in the previous quarter and slightly up from 66% in Q2 2004. Net income for the second quarter of 2005 was US$7.1 million or US$0.18 per fully diluted share. This compares to net income of US$5.7 million or US$0.15 per fully diluted share for the first quarter of 2005 and US$9.9 million or US$0.25 per fully diluted share for the second quarter of 2004.

SOHU’s advertising revenues for the second quarter of 2005 totaled US$17.0 million, a 27% year-on-year improvement and 14% increase quarter-on-quarter. Advertising revenues, consisting of US$13.9 million in brand advertising and US$3.1 million in sponsored search, accounted for 66% of total revenues in the second quarter of 2005. Advertising gross margin was 75%, compared to 76% in Q1 2005 and 75% in Q2 2004.

For the second quarter of 2005 SOHU’s non-advertising revenues, which are derived from wireless value-added services, online games and e-commerce, decreased by 36% year-on-year but stayed unchanged quarter-on-quarter at US$8.9 million, representing 34% of total revenues. The year-on-year decline was caused primarily by a reduction in wireless revenue of 44% year-on-year. Wireless

revenue posted its second consecutive quarter of sequential growth, however, increasing 7% over the first quarter, reflecting a continuing recovery in SOHU’s wireless business. Online games revenue was unchanged compared to the first quarter. A decline in e-commerce revenue due to a change in the company’s e-commerce business model offset the growth in wireless revenue, resulting in overall flat quarter-on-quarter non-advertising revenue. Non-advertising gross margin was 53% compared to 55% in Q1 2005 and 58% in Q2 2004, mostly due to Unicom’s increasing its percentage share of SMS revenue and charging additional service fees for its marketing services.

For the second quarter of 2005, SOHU’s operating expenses totaled US$10.7 million, largely unchanged quarter-on-quarter, but an increase of 27% year-on-year. Operating profit margin of 26% was up from 23% in Q1 2005 and down from 35% in the second quarter last year. The year-on-year increase in operating expenses is mostly due to SOHU’s investment in long-term growth opportunities, the rise in sales and marketing spending, and the consolidation of operating expenses from the wireless services provider Goodfeel that SOHU acquired in May 31 2004 and the mapping services provider Go2Map that SOHU acquired in May 31 2005.

In July 2005, SOHU launched the beta version of a casual game platform with nine internally developed casual games. The company intends to build a substantial user base before considering ways to monetize this casual games platform.

“We are pleased to see SOHU’s improved operational results as we continue to invest in our in-house research and development program and look into strategic opportunities to leverage the Company’s organic growth and drive long-term shareholder value based on sustainable growth in China’s Internet opportunity,” Carol Yu, SOHU’s Chief Financial Officer, said.

At June 30, 2005, SOHU’s cash, cash equivalents and investments in marketable debt securities balance was US$124.8 million.

Business Results

Revenues for the first quarter ended March 31, 2005 totaled US$23.73 million, compared to revenues of US$24.07 million for the fourth quarter ended December 31, 2004, and US$25.94 million for the first quarter ended March 31, 2004. Gross margin of 68% in Q1

2005 was unchanged from the previous quarter and slightly up from 67% in Q1 2004. Net income for the first quarter of 2005 was US$5.71 million or US$0.15 per fully diluted share. This compares to net income of US$6.50 million or US$0.17 per fully diluted share for the fourth quarter of 2004 and US$10.93 million or US$0.27 per fully diluted share for the first quarter of 2004.

SOHU’s advertising revenue for the first quarter of 2005 totaled US$14.86 million, a 35% year-on-year improvement and 6% decline quarter-on-quarter. Advertising revenue, consisting of US$12.13 million in brand advertising and US$2.73 million in sponsored search, accounted for 63% of total revenues in the first quarter of 2005. Advertising gross margin was 76%, compared to 80% in Q4 2004 and 75% in Q1 2004.

For the first quarter of 2005 SOHU’s non-advertising revenue, which are derived from wireless value-added services, online games and e-commerce, decreased by 41% year-on-year but increased 8% quarter-on-quarter to US$8.87 million, representing 37% of total revenues. The year-on-year decline was predominantly caused by the loss in wireless revenue, which went down by 51% year-on-year, while the quarterly sequential increase was similarly due to the resumption of growth in wireless revenue. Non-advertising gross margin was 55% compared to 45% in Q4 2004 and 61% in Q1 2004.

The martial arts fighting game Blade Online, in commercial operation since October 17, 2004, generated revenue in line with company expectations. Together with Knight Online, SOHU’s first online game, the two multi-player online role-playing games represented 6% of overall revenues in the first quarter.

For the first quarter of 2005, SOHU’s operating expenses totaled US$10.74 million, an increase of 4% quarter-on-quarter and 59% year-on-year. Operating profit margin of 23% was down from 25% in Q4 2004 and 41% in the same period last year. The year-on-year increase in operating expenses is mostly due to investment in long-term growth opportunities, the rise in sales and marketing spending, and the consolidation of operating expenses from the wireless services provider Goodfeel that SOHU acquired in mid-2004.

In February 2005 SOHU repurchased 885,605 shares of common stock, thereby completing a ten months old stock repurchase program with an accumulated stock buy-back of 6% of the total shares outstanding.

In April 2005, SOHU signed a definitive agreement to acquire Go2Map, one of the leading online mapping service providers in China. The acquisition will enable SOHU to apply Go2Map’s rich technological expertise in professional location-based information to SOHU’s search engine capabilities as well as online website content.

“We believe both the stock repurchase program and the acquisition of Go2Map have been attractive investments for the company. We will continue to look into strategic opportunities to leverage the Company’s organic growth and drive long-term shareholder value,” Carol Yu, SOHU’s Chief Financial Officer, said.

At March 31, 2005, SOHU’s cash and marketable debt securities balance was US$128.7 million.

Business Results

Revenues for the fourth quarter ended December 31, 2004 totaled US$24.1 million, compared to revenues of US$24.6 million for the fourth quarter ended December 31, 2003. Gross margin was 68% in Q4 2004 compared to 72% in Q4 2003. US GAAP net income for the fourth quarter of 2004 was US$6.5 million or US$0.17 per fully diluted share. This compares to US GAAP net income of US$11.6 million or US$0.28 per fully diluted share for the fourth quarter of 2003.

Revenues for fiscal 2004 were US$103.2 million compared to revenues of US$80.4 million in fiscal 2003. Gross margin was 67% in fiscal 2004 compared to 69% in fiscal 2003. US GAAP net income in fiscal 2004 was US$35.6 million or US$0.89 per fully diluted share compared to net income of US$26.4 million or US$0.66 per fully diluted share in fiscal 2003.

SOHU’s advertising revenue for the fourth quarter of 2004 totaled US$15.9 million, a 68% year-on-year improvement and 3% quarter-on-quarter. Advertising revenue, consisting of US$13.2 million in brand advertising and US$2.7 million in sponsored search, accounted for 66% of total revenues in Q4 2004. Advertising gross margin was 80%, compared to 77% in the same period last year.

In fiscal 2004, SOHU’s advertising revenue totaled US$55.7 million, up 89% from US$29.5 million in fiscal 2003, as a result of combined organic growth and acquisition amidst widespread acceptance of the Internet as a key platform for corporate advertisers to reach an online population of 94 million users.

For the fourth quarter of 2004 SOHU’s non-advertising revenue, which are derived from wireless value-added services, online games and e-commerce, decreased by 46% year-on-year and 22% quarter-on-quarter to US$8.2 million, representing 34% of total revenues. The decline was predominantly caused by the loss in wireless revenue, which went down by 64% year-on-year and 43% quarter-on-quarter. Non-advertising gross margin was 45% compared to 69% in the same quarter one year ago largely because of the decline in relatively high-margin wireless product sales.

The martial arts fighting game Blade Online, in commercial operation since October 17, 2004, generated revenue in line with company expectations. Together with Knight Online, SOHU’s first online game, the two multi-player online role-playing games represented 5% of overall revenues in the fourth quarter.

In fiscal 2004, SOHU’s non-advertising revenues totaled US$47.5 million, down 7% from US$50.9 million in fiscal 2003, reflecting how changes in operating environment for wireless value-added services that resulted in a sharp decline in wireless business in the second half of 2004 were partially offset by the relatively strong levels of wireless revenues in the first half of 2004.

For the fourth quarter of 2004, SOHU’s operating expenses totaled US$10.4 million, an increase of 56% year-on-year. Operating profit margin of 25% was down from 45% in the same period last year.

In fiscal 2004, SOHU’s operating expenses were US$35.2 million, an increase of 52% over operating expenses of US$23.2 million in fiscal 2003. The year-on-year increase in operating expenses is mostly due to investment in long-term growth opportunities, the rise in sales and marketing spending, and the consolidation of operating expenses from three companies acquired by SOHU since late 2003.

“SOHU is a healthy, diversified company with long-term growth prospects, even though we have managed through five quarters of highly volatile wireless business. To demonstrate management’s unwavering confidence, the company bought back more shares during the fourth quarter. As a result, the total stock buy-back in 2004 amounted to almost 4% of total shares outstanding,” Carol Yu, SOHU’s Chief Financial Officer, said.

At December 31, 2004, SOHU’s cash and marketable debt securities balance was US$141.3 million.