Sohu.com (SOHU)

Non-advertising Cost of Revenues

Non-advertising cost of revenues were $5.3 million and $9.9 million for the three and six months ended June 30, 2006, respectively, as compared to $3.5 million and $6.5 million for the corresponding three and six month periods in 2005.

Wireless. Wireless cost of revenues increased by $1.6 million to $4.5 million for the three months ended June 30, 2006, and increased by $3.1 million to $8.3 million for the six months ended June 30, 2006, as compared to the corresponding three and six month periods in 2005. Wireless cost of revenues mainly consists of collection and wireless transmission charges paid to mobile network operators, expenses related to complaints based on allegations for the breach of certain provisions of agreements with mobile network operations, fees or royalties paid to third party content providers for services and content associated with our wireless services, relevant depreciation of servers and computer equipment and bandwidth leasing costs. Our wireless gross margins were 50% and 51% for the three and six months ended June 30, 2006, respectively, as compared to 55% and 58% for the corresponding periods in 2005. Wireless gross margin for the six months ended June 30, 2006

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decreased compared to the corresponding period in 2005 primarily because of the reduced price ceiling set by a mobile network operator on SMS fees and increased wireless content expenses.

Others. Cost of revenues for other services, was $826,000 and $1.6 million for the three and six months ended June 30, 2006, respectively, as compared to $675,000 and $1.3 million for the corresponding three and six month periods in 2005. Cost of revenues for other services mainly consists of payments to game developers. Following the acquisition of Go2Map, cost of other revenues also includes personnel and other expenses in connection with sale of software business and provision of ASP services. For the three and six months ended June 30, 2006, the cost of sales of software and provision of ASP services was $105,000 and $176,000, respectively, as compared to $44,000 for the period from May 31, 2005, the acquisition date of Go2Map, to June 30, 2005.

Non-advertising Cost of Revenues

Non-advertising cost of revenues increased by $1.2 million to $5.4 million for the three months ended March 31, 2006 as compared to $4.2 million for the three months ended March 31, 2005.

Wireless. Wireless cost of revenues increased by $1.5 million to $3.8 million for the three months ended March 31, 2006, as compared to $2.3 million for the three months ended March 31, 2005. Wireless cost of revenues mainly consists of collection and wireless transmission charges paid to mobile network operators, expenses related to complaints based on allegations for the breach of certain provisions of agreements with mobile network operations, fees or royalties paid to third party content providers for services and content associated with our wireless services, relevant depreciation of servers and computer equipment and bandwidth leasing costs. The collection and transmission charges vary between mobile network operators and include a gateway fee of $0.002 to $0.031 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 15% to 60% of total fees collected by mobile network operators from mobile phone users and paid to us in

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the first quarter of 2006. Our wireless gross margins were 52% and 61% for the three months ended March 31, 2006 and 2005, respectively. Wireless gross margin decreased primarily because one of the major mobile network operators has increased the service fees we pay for using their infrastructure from 10% to 20% of SMS revenue, starting from April 1, 2005. In addition, we increased our re-investment in content.

E-commerce. E-commerce cost of revenues was $0.8 million for the three months ended March 31, 2006, as compared to $1.2 million for the three months ended March 31, 2005. E-commerce cost of revenues mainly consists of the purchase price of consumer products sold and inbound and outbound shipping charges. Our e-commerce gross margins were 1% and 2% for the three months ended March 31, 2006 and 2005, respectively.

Others. Cost of revenues for other services, was $792,000 and $673,000 for the three months ended March 31, 2006 and 2005, respectively, mainly consisting of payments to game developers. Following the acquisition of Go2Map, cost of other revenues also includes personnel and other expenses in connection with sale of software business and provision of ASP services. For the three months ended March 31, 2006, the cost of sales of software and provision of ASP services was $71,000.

Non-advertising Cost of Revenues

Non-advertising cost of revenues increased by $3.9 million to $21.9 million for the year ended December 31, 2004 as compared to $18.0 million for the year ended December 31, 2003.

Wireless. Wireless cost of revenues increased by $0.7 million to $13.8 million for the year ended December 31, 2004, as compared to $13.1 million for the year ended December 31, 2003. Wireless cost of revenues consists mainly of collection and wireless transmission charges paid to third party network operators, expenses related to notices of penalties and complaints from CMCC subsidiaries based on allegations of the breach of certain provisions of agreements with the mobile network operators, fees or royalties paid to third party content providers for services and content associated with our wireless services, relevant depreciation of servers and computer equipment and bandwidth leasing costs. The collection and transmission charges vary between third party operators and include a gateway fee of $0.006 to $0.0151 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 10% to 30% of total fees collected by the third party operators from mobile phone users and paid to us. Content costs were immaterial as compared to collection and transmission charges. Our wireless gross margins were 62% and 70% for the years ended December 31, 2004 and 2003, respectively. Wireless gross margin decreased primarily because revenues from high gross margin products decreased.

E-commerce. E-commerce cost of revenues was $6.1 million for the year ended December 31, 2004, as compared to $3.4 million for the year ended December 31, 2003. E-commerce cost of revenues consists mainly of the purchase price of consumer products sold and inbound and outbound shipping charges. The change in e-commerce cost of revenues from the comparative period in 2003 was attributable to the change in sales volume. Our e-commerce gross margin was 1% for the year ended December 31, 2004, as compared to 9% for the year ended December 31, 2003. For the year ended December 31, 2004, approximately 3 percentage points of the reduction in gross margin were attributable to our providing free delivery for orders greater than $6 and approximately 5 percentage points of the reduction were attributable to our lowering sales prices of our products.

Others. Cost of revenues for other services, consisting mainly of fees paid to third parties for design services and related overhead, was $2.1 million and $1.5 million for the years ended December 31, 2004 and 2003, respectively.

Non-advertising Cost of Revenues

Non-advertising cost of revenues were $5.0 million and $13.6 million for the three and nine months ended September 30, 2005, respectively, as compared to $5.1 million and $17.2 million for the corresponding three and nine month periods in 2004.

Wireless. Wireless cost of revenues increased by $0.2 million to $3.4 million for the three months ended September 30, 2005, while decreased by $3.2 million to $8.5 million for the nine months ended September 30, 2005, as compared to the

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corresponding three and nine month periods in 2004. Wireless cost of revenues consists mainly of collection and wireless transmission charges paid to mobile network operators, expenses related to notices of penalties and complaints based on allegations of the breach of certain provisions of agreements with mobile network operators, fees or royalties paid to third party content providers for services and content associated with our wireless services, relevant depreciation and bandwidth cost. The collection and transmission charges vary between mobile network operators and include a gateway fee of $0.0025 to $0.03 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 15% to 60% of total fees collected by mobile network operators from mobile phone users and paid to us. Content costs are insignificant as compared to collection and transmission charges. Our wireless gross margin was 50% and 55% for the three and nine months ended September 30, 2005, respectively, as compared to 61% and 63% for the corresponding periods in 2004. Wireless gross margin decreased primarily due to penalties of $241,000 paid to China Unicom Corporation Limited (or Unicom). In addition, there is an increase in Unicom’s share of our SMS revenue that Unicom retains as a service fee from 10% to 20% to its favor, effective April 1, 2005. Furthermore, effective June 1, 2005, Unicom began charging additional services fees for its marketing services. We expect wireless gross margins to be flat or increase slightly in the coming quarters.

E-commerce. E-commerce cost of revenues was $1.0 million and $3.1 million for the three and nine months ended September 30, 2005, respectively, as compared to $1.5 million and $4.1 million for the corresponding three and nine month periods in 2004. E-commerce cost of revenues consists mainly of the purchase price of consumer products sold and inbound and outbound shipping charges.

Our cost of revenues for e-commerce decreased because of our implementation of the n2N business model for certain products beginning in May 2005. Under the n2N business model, we act as an agent instead of the primary obligor and record revenue on a net basis. Accordingly, under n2N business model, both revenue and cost of revenues declined, but gross margin increased compared with that under B2C business model. During the three months ended September 30, 2005, management made the decision to terminate the B2C business model for majority of the products. As a result, it was determined that the carrying cost of certain inventories and related cost will not be recoverable and a provision of $151,000 was recorded. As we will implement the n2N business model for majority of the products by the end of 2005, we expect cost of revenues for e-commerce to decrease further and gross profit to increase.

Others. Cost of revenues for other services, consisting mainly of payments to game developers, was $626,000 and $2.0 million for the three and nine months ended September 30, 2005, respectively, as compared to $446,000 and $1.4 million for the corresponding three and nine month periods in 2004. Following the acquisition of Go2Map, cost of other revenues also includes personnel and other expenses in connection with software customization and provision of ASP services. For the three and nine months ended September 30, 2005, the cost of sales of software and provision of ASP services was $109,000 and $152,000, respectively.

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Non-advertising Cost of Revenues

Non-advertising cost of revenues were $4.2 million and $8.2 million for the three and six months ended June 30, 2005, respectively, as compared to $5.9 million and $11.7 million for the corresponding three and six month periods in 2004.

Wireless. Wireless cost of revenues decreased by $1.4 million to $2.8 million for the three months ended June 30, 2005, and decreased by $3.3 million to $5.0 million for the six months ended June 30, 2005, as compared to the corresponding three and six month periods in 2004. Wireless cost of revenues consists mainly of collection and wireless transmission charges paid to mobile network operators, expenses related to notices of penalties and complaints from CMCC subsidiaries based on allegations of the breach of certain provisions of agreements with the mobile network operators, and fees or royalties paid to third party content providers for services and content associated with our wireless services. The collection and transmission charges vary between mobile network operators and include a gateway fee of $0.0024 to $0.01 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 15% to 50% of total fees collected by mobile network operators from mobile phone users and paid to us. Content costs are insignificant as compared to collection and transmission charges. Wireless cost of revenues does not include allocations for website operating costs. Our wireless gross margin was 56% and 60% for the three and six months ended June 30, 2005, respectively, as compared to 63% and 65% for the corresponding periods in 2004. Wireless gross margin decreased primarily due to Unicom’s increasing, effective April 1, 2005, from 10% to 20% the share of our SMS revenue that it retains as a service fee, and, effective June 1, 2005 charging additional services fees for its marketing services. Accordingly, we expect wireless gross margins to decrease slightly in the coming quarters.

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E-commerce. E-commerce cost of revenues was $0.8 million and $2.0 million for the three and six months ended June 30, 2005, respectively, as compared to $1.3 million and $2.6 million for the corresponding three and six month periods in 2004. E-commerce cost of revenues consists mainly of the purchase price of consumer products sold and inbound and outbound shipping charges. E-commerce cost of revenues does not include allocations for website operating costs. Our e-commerce gross margin was 7% and 4% for the three and six months ended June 30, 2005, respectively, as compared to 2% in each of the corresponding three and six month periods in 2004. The increase in gross margin resulted from our implementation of the n2N business model for certain products from May 2005. For the n2N business model, where Sohu acts as an agent instead of the primary obligor, we record revenue on a net basis.

Others. Cost of revenues for other services, consisting mainly of payments to game developers, was $594,000 and $1.2 million for the three and six months ended June 30, 2005, respectively, as compared to $386,000 and $754,000 for the corresponding three and six month periods in 2004. Following the acquisition of Go2Map, cost of other revenues also includes the cost of sales of software and the provision of ASP services.

Non-advertising Cost of Revenues

Non-advertising cost of revenues were $4.0 million and $5.8 million for the three months ended March 31, 2005 and 2004, respectively.

Wireless. Wireless cost of revenues decreased by $2.0 to $2.2 million for the three months ended March 31, 2005, as compared to $4.2 million for the three months ended March 31, 2004. Wireless cost of revenues consists mainly of collection and wireless transmission charges paid to third party network operators, expenses related to notices of penalties and complaints from CMCC subsidiaries based on allegations of the breach of certain provisions of agreements with the mobile network operators, and fees or royalties paid to third party content providers for services and content associated with our wireless services. The collection and transmission charges vary between third party operators and include a gateway fee of $0.004 to $0.010 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 10% to 35% of total fees collected by the third party operators from mobile phone users and paid to us. Content costs are immaterial as compared to collection and transmission charges. Wireless cost of revenues does not include allocations for website operating costs. Our wireless gross margins were 63% and 66% for the three months ended March 31, 2005 and 2004, respectively. Wireless gross margin decreased primarily because revenues from high gross margin products decreased. We expect wireless gross margins to decrease in the coming quarters mainly because one of the major operators has increased the service fees we pay for using its infrastructure from 10% of revenue to 20% for SMS, starting from April 1, 2005.

E-commerce. E-commerce cost of revenues was $1.2 million for the three months ended March 31, 2005, as compared to $1.3 million for the three months ended March 31, 2004. E-commerce cost of revenues consists mainly of the purchase price of consumer products sold and inbound and outbound shipping charges. E-commerce cost of revenues does not include allocations for website operating costs. Our e-commerce gross margin was 3% for the three months ended March 31, 2005, which remained stable compared with the gross margin for the three months ended March 31, 2004.

Others. Cost of revenues for other services, consisting mainly of payments to game developers, was $572,000 and $368,000 for the three months ended March 31, 2005 and 2004, respectively.

Non-advertising cost of revenues

Non-advertising cost of revenues was $17.7 million and $7.5 million for the years ended December 31, 2003 and 2002, respectively. The increases were consistent with revenue growth. Prior to our adoption of FIN 46 on July 1, 2003, which resulted in the consolidation of our variable interest entities, substantially all non-advertising cost of revenues was from related parties.

Wireless. Our wireless gross margin for the year ended December 31, 2003 was 70% as compared to 63% for the year ended December 31, 2002. Wireless cost of revenues was $13.0 million and $3.7 million for the years ended December 31, 2003 and 2002, respectively, which consists mainly of subscription collection and wireless transmission charges paid to third party network operators. The fees varied between third party operators and included a gateway fee of $0.006 to $0.012 per message, depending on the volume of the monthly total wireless messages, and a collection fee of 12% to 15%, based on the total fees collected by the third party operators from mobile phone users and paid to us. As the operator fees were charged on a per message basis and as a percentage of revenue, the increase in wireless cost of revenues is consistent with our increase in wireless revenues. Content costs are also included in wireless cost of revenues but are immaterial as compared to collection and transmission charges. Wireless cost of revenues does not include allocations for Website operating costs. Subsequent to the adoption of FIN 46, wireless cost of revenues also includes the business tax paid when VIEs remit to our subsidiaries wireless fees which have been collected by the VIEs. The increase in gross margins was mainly due to a higher mix of monthly subscriptions, which have higher gross margins. There were no significant changes in third party network operator fees in 2003.

E-commerce. Our e-commerce gross margin for the year ended December 31, 2003 was 10% as compared to 16% for the year ended December 31, 2002. Our 2003 gross margin decreased from 2002 due to market price competition and the fact that we started providing free shipping in 2003, which increased our e-commerce cost of revenues. For the years ended December 31, 2003 and 2002, our e-commerce cost of revenues was $3.4 million and $3.5 million, respectively, consisting of the purchase price of consumer products, and inbound and outbound shipping charges. E-commerce cost of revenues did not include allocations for Website operating costs.

Others. Cost of revenues for other services, consisting of employee compensation costs and related overhead, fees paid to third party for design services and, where applicable, the cost of hardware and software, was $1.3 million and $280,000 for the years ended December 31, 2003 and 2002, respectively.

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