Good day, everyone, and welcome to the Sohu third quarter 2006 earnings release conference call. Today’s conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ingrid Shea, Investor Relations. Please go ahead.

Thank you, Operator. Thank you for joining Sohu.com to discuss our 2006 third quarter results. On the call today are Dr. Charles Zhang, Chairman of the Board and CEO, and Ms. Carol Yu, Chief Financial Officer. Before the management presentations, I would like to read you the Safe Harbor statement in connection with today’s conference call. Except for the historical information contained here-in, the matters discussed in this conference call are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, Sohu's historical and possible future losses, limited operating history, uncertain regulatory landscape in the People's Republic of China, fluctuations in quarterly operating results, and the company's reliance on online advertising sales, mobile phone related wireless revenue, and online games for its revenues. Further information regarding these and other risks is included in Sohu's annual report on Form 10-K and other filings with the Securities and Exchange Commission. Thank you for your patience. Now, let me turn the call over to Dr. Charles Zhang, Chairman and CEO. Charles.

Hello, everyone, and welcome to Sohu’s 2006 third quarter financial results call. I am pleased to report a strong quarter of financial performance, backed by a record quarter of brand advertising revenues. As we enter the final months of 2006, I am more than happy with what we have accomplished, and even more excited about what the future will bring, especially as the much-anticipated Beijing Olympics draws closer. To appeal to the increasingly sophisticated Chinese user base and China’s growing online advertising market, we continue to deliver premium, differentiated and exclusive content. This strategy has been working well in expanding our core advertising business. Now, I would like to discuss highlights for the third quarter. We achieved yet another record total revenues of $35.4 million for the third quarter of 2006, growing 4% sequentially and 29% year-on-year, exceeding company guidance. Let me discuss the progress of our many business lines. First, advertising. Overall, we experienced a good quarter in advertising, driven by our record-high brand advertising revenues. Advertising revenues for the third quarter were $23.9 million, up 5% quarter-on-quarter and 27% year-on-year, meeting our guidance. Brand advertising revenues were $21 million, representing a sequential increase of 9% and a year on year increase of 35%, exceeding company guidance. For the first nine months of 2006, brand advertising revenue grew by 37% year on year. Sponsored search accounted for $2.9 million, representing a sequential decline of 19%, and year on year decline of 10%. For the first nine months of 2006, sponsored search revenue grew by 9% year on year. In brand advertising, revenues continued to be driven by heavy spending sectors, such as automobile, real estate, and information technology. The sectors that experienced the fastest growth for the quarter were e-commerce and online games. During the quarter, we took significant…

Thank you, Charles. I would like to take this opportunity to discuss some key financials for the third quarter 2006. We are pleased to report strong record revenues of $35.4 million for the third quarter, which exceeded our guidance. With advertising revenues of $23.9 million, we experienced a sequential increase of 5% and a year on year increase of 27%. For the third quarter, wireless revenues were $8.8 million, down 2% quarter on quarter and up 31% year on year. Let me give you a breakdown of wireless revenues for the third quarter: Given the widely expected negative impact of new policy changes by mobile network operators, we view the marginal sequential decline in the third quarter as a positive. We have continued to limit our investment in this segment, and have also been prudently identifying additional revenue sources. During the quarter, we generated $0.5 million from the SMS voting platform we provided for My Show, a television music program through a partnership with Sprite, Shanghai Media Group, and Universal Music Group. Our other revenues mainly included online game revenues, which grew 4% sequentially and 55% year on year to $2.2 million. Starting 2006, share-based compensation expenses were charged to cost of revenues and operating expenses due to the adoption of FAS-123R. Total share-based compensation expenses for the third quarter 2006 was $1.9 million. As we believe excluding the share-based compensation expense from our non-GAAP financial measure of net income makes a more meaningful comparison of Sohu operation results, and improves users’ understanding of Sohu's performance, we use non-GAAP measures to explain the gross margin, cost and expense items. So we will now turn to our gross margins. Overall gross margin for the third quarter was 66%, remained at similar levels compared with 65% in the previous quarter and 67%…

(Operator Instructions) Our first question comes from Safa Rashtchy, Piper Jaffray.

Good morning, Charles and Carol, and congratulations on a great quarter. A couple of quick questions. You mentioned I believe the two categories, or two areas that advertisers that were strong, e-commerce and games. Could you give us a little bit more color as to what was driving that strength, whether it was new product launches, or new advertisers? Also, how is the strength in other sectors? What should we expect would be driving growth in the coming quarters? Maybe you could give us some sort of a piece of qualitative weight of those two sectors --

Sorry, Safa, the line does not come out very clear. Could you just repeat your question?

I will try. I am in a land line, but I will try to speak louder. I was asking about the strength in different sectors of the advertising. You mentioned e-commerce and games were strong. Could you tell us what drove that strength? Were there any new product launches? Also, how was the strength in the other sectors?

Real estate is a little bit fast. Real estate, automobiles, and IT continue to be our three major streams of advertising revenues. E-commerce and online games, because there are many online game launches and there are many new sites for e-commerce that are also being launched. In general, the Internet sector is very bullish in China. They need to do advertising on our platform, so I think that drives it. Up and coming, like what Charles has mentioned, we will launch the Olympic channel on November 7th. That is a core part of our Olympic strategy, and the fact that CISports, we will co-operate and co-manage those sets of websites. We believe that all these new assets of inventories will contribute to continued strength in our advertising business. Also, the two new channels that Charles has mentioned, S and V, the two video channels, which we are very, very excited about. We believe that would lend on the success of our World Cup videos. Advertisers are very pleased with the results that they saw on the World Cup video clips, and I think that will continue to be a very exciting part of our business.

That is a perfect segue for my follow-up, if I may. The video and sports related sites, as well as your blogging and social networking as you group them, web 2.0 initiative, which you said have had good success, are they bringing any new type of advertisers? I am especially thinking of any consumer packaged good companies, which may be more interested in those types of sites. Are you seeing any interest from new advertisers because of those channels?

Yes, especially the V, the entertainment channel, is getting good feedback and response from consumer goods companies, because the entertainment channel is reaching a wider, younger user base.

Yes, we are seeing interest from advertisers who were not as keen as they were before, so they are more keen today, for a wider population of advertisers.

Our next question comes from Catherine Leung, Citigroup.

I just have a question on the wireless segment. It was much better than we expected, and I was wondering if you could help us understand better whether this was because the policies themselves did not have as great an impact as expected, or was it due to some proactive measures that Sohu has been taking? Thank you.

I think, as I said, it is due to our vigilance in managing our business, and also identifying some new opportunities. So it is really, without any additional marketing or spending whatever, by fine-tuning, manage the team well, and minimize the loss due to the policy change, and also identify new opportunities, like the My Show, the TV show. So there is some kind of creativity.

Catherine, it is all our execution.

Thank you.

Our next question comes from Richard Ji, Morgan Stanley.

I have a couple of questions. First, regarding your brand advertising, could you comment on the advertising pricing trend, especially given that you most likely will increase advertising price at the beginning of next year? That is my first question.

It is going upwards.

Okay. When are you going to give us more concrete color?

But Richard, I think more importantly, other than the pricing trend itself, it is the creation of additional inventories, like what I have just mentioned. We are now able to offer our advertisers a much broader range of products and inventories, otherwise unavailable before or by our competitors. I think that will be a more important revenue growth driver. For example, these new inventories, nothing to be compared like to like, and we do expect, for example, as we approach 2008, the Olympic channel’s pricing, as you can imagine, will just -- I mean, there is only one way. The trend is up. While we still maintain our previous practice of raising prices 20%, 25% on a year on year basis on our hard resources, I think these additional inventories, both the fact that these inventories are available and second, and more importantly, is that these inventories will be very, very attractive to a much broader range of advertisers.

That is very good. The second question is, by our observation, I noticed an interesting development in your company, and that is you are among the first few search company that took serious measure to attack the fraudulent click problem, which I think is a prevailing issue in the industry. Could you just help us understand a little better what measures you have taken, and what do you think of the trend going forward, especially for your new SoGou search engine?

We rewrote the software that is managing our, you know, the search business, and basically --

For example, if the same IP comes out with more than X number of clicks, it would be disregarded, so this is the mechanism behind, but technologically, I cannot explain how we wrote those programs, but this is the mechanism behind as to how we excluded or strengthened the measures on fraudulent clicks, and we believe that we have the responsibility to make sure the industry is growing on a very healthy basis.

Our next question comes from Dick Wei, JP Morgan.

Good to see another very nice brand advertising growth for the quarter. My main question is on the Olympic side. I was talking with a media, ad agency the past two weeks. They are already talking about adjusting their budget for Olympic advertising, probably going to start in the second-half of ’07. I guess for the World Cup, you guys probably did not really realize the full potential. How has the Olympic sales effort been going? Has there been having any -- probably not during the Olympic weeks, but probably the three months before, or six months before the Olympics actually take place, do you have any rate cards or any sales to the Olympics channel already? Some comments on that would be great.

Before Carol gives a more detailed explanation, I want to re-emphasize the one that I just said, about the privilege. Because of the geographical restriction, a non-top advertisers, non-top partner of the Olympics, basically local advertisers, we can advertise with their Olympic logo on a billboard or on any non-Internet properties, but once they advertise on the Internet properties, then immediately, people anywhere in the world can see. It has this problem, basically the boundary-less nature of the Internet. That is why it was restricted. But because Sohu, as a sponsor of the Olympic website, and also through technological matters, we are able to resolve that problem by the IT identification, so the Olympic Committee awarded our rights to allow the local sponsors of the Olympics to advertise on the Sohu Olympic channel and the website. This provides a very unique opportunity and a privilege for those many, many local advertisers who are starting to accelerate their Olympic advertising in 2007, to have their Olympic logo to appear on the Internet and the Sohu properties are the only place they are allowed to, so this is a very important opportunity that probably is not fully comprehended by the industry yet.

Dick, you really are ahead of time, really forward-looking because we are now very busy talking about budget allocations from advertisers for 2007 and you start asking me about questions about 2008, so maybe -- let me just give you some color as to what makes us very excited about 2007 first. In 2007, there are a few key events which we believe will help drive the ad budgets, add traffic and everything. The first event is the torch relay, the members participating in the torch relay. The torch relay itself will only start in 2008, but next year, sponsors and partners will all get their respective holders, for example, Sohu and other sponsors and partners will get their respective holders for such members, participants in the torch relay. All of these companies will be very busy using different methods to help promote their images and branding by selecting these participants, including Sohu. We already have been approached by many of these sponsors who are looking forward to working with Sohu on the Internet to pick up these torch relay participants, which would be a very, very high profile event next year. This is the first item. The second item is all the stadiums will be ready, obviously, before the games and a lot of them will be ready next year. In order to make sure that all these stadiums function properly, there will be a series of test games. It is called [Market] Beijing, is a total of 40-something. The first two have already been done in 2006, during September and October, and it has drawn a lot of local interest and international interest as well. There will be another 40-something of these test games next year. CISports is responsible to host the official website for all of these 40-something test games, and we believe that will be a very good platform for both sponsors and non-sponsors of the Olympic Games to take part in these very exciting sports events. Just to give you two examples as to what makes us very bullish as to our overall Olympic Strategy.

Carol, if I may have a follow-up question on that, have you been showing those Olympic specific related channels already? I understand that the Olympics outlook is really good. You guys are really well-positioned, but I just want to make sure that the sales efforts is actually going on.

The sales efforts -- actually, like what I said, our sales team is very busy getting budget allocations from advertisers over the next couple of months. They started this lately, so we do expect to be able to give more color on our next two calls.

Our next question comes from Ming Zhao, Susquehanna Financial Group.

Thank you. Good morning, Charles and Carol. First question is, can you explain what is the increase in the fixed asset line?

Those are mainly servers for getting ready for the SoGou 3.0.

My second question is on the search. You guys talked about monetization for ’07, and now you mentioned the anti-fraudulent clicks, is that suggesting you are going to change the business model from paid directory listing to a pay-for-performance dominated model next year?

We will continue to offer both models, and we will probably switch the emphasis more to what is pay-for-performance, yes.

Final question is you mentioned there is some softness in the real estate advertisers. On a sequential basis, has that revenue portion declined quarter over quarter?

Q3 is slightly lower than Q2, but Q4 is mainly flat.

Our next question comes from William Bean, Deutsche Bank.

Could you just talk a little bit about the advertising on the real estate side, just give us an update on what happened there and whether things are back to normal?

Like what we explained to the group of investors that you brought to Beijing, new policies came out, developers put some of their promotional campaigns on hold. Once the detailed rules are out, the developers come back and do their promotional campaigns again, so there is a slight drop during Q3, but it came back to more normal towards the end of Q3.

Great, and can you give us a sense of the timeline in terms of starting to monetize SoGou, and what sort of pattern we should expect, or what you are expecting in terms of how you see the revenue ramping up? Is it going to be more gradual, or do you think you see an early spike?

I think traffic first. We are looking at launching SoGou Version 3.0, which we believe, in terms of a search quality database size and relevancy, accuracy, response time, everything, will surpass any competitor and become the leading search engine in terms of quality. Only through this way that SoGou is not only better a little bit but better by a lot, that SoGou can have a traffic -- I think a -- not gradual, but almost like a dramatic increase, if we have the proper, right marketing efforts with it. We first hope that the traffic will dramatically grow in the first-half of 2007, and then the monetization follows. Now it is still that we have the case where we are really growing traffic by launching the best, the far best search engine, because it takes time for search engine technology to accumulate and to mature. I think the reason we adapt the SoGou 2.5 as version 2.5 because we believed in the beginning of the year, we think that SoGou 2.5 is a version that will transition into a more final 3.0 version, we believe with much broader and different architecture to lay the foundation for our future platform for a long time to come, so we are really excited about this version 3.0. I think monetization will follow, maybe once we achieve the high traffic growth and the sizable market share in the first half of 2007.

Great, and just one last quick thing. Could you just give us the number of blog users and page views in the quarter?

No, we are not giving out those numbers right now.

The page views grew 160% compared with -- in the third quarter, and now into, starting the fourth quarter, the first month in the fourth quarter, page views and registered users continued to grow, especially benefiting from this newly launched version, the Sohu Blog Plus. So the page views continues to grow and the registered users continue to grow.

Our next question comes from Lu Sun, Lehman Brothers.

A question on search sponsored traffic. You mentioned that the page views remain relatively flat. I understand you are trying whatever you can to improve on the technology side, but other than that, we noticed that your blog traffic is tracking up very nicely and you have this radio content and other stuff, web 2.0 initiatives. Is there any way that you can leverage the traffic growth on your other channels to search, or whatever campaign you can do to boost the usage on search sites?

Definitely. Search engines -- our SoGou search engine is not only a standalone product itself, but it is the engine to drive many applications through the Sohu matrix. The blog search and the future video search and now, we are streamlining the Sohu portal to give users a more relevant reading experience by utilizing the search technology. Even the existing product, you can look at Sohu blogs, the text is actually, behind the text, it is our search engine technology. The Sohu matrix, by utilizing the search technology, it does drive traffic to SoGou, so the SoGou traffic growth is -- internally driven traffic is growing steadily. It is due to some counter effects that the overall traffic remained flat, because of some of our -- we stopped some toolbar-related spamming of pop-up windows, because it is cost -- a lot of the virus killing software regards the SoGou toolbar as a virus. That is something that is, you know, the counter effects to cancel the traffic growth. We believe that SoGou traffic is now becoming more healthier and more quality traffic.

About that toolbar thing, do you think that can be resolved in the near-term, or do you have any good idea how to boost the external growth?

I think the toolbar is the important strategy, but at one time, the toolbar is not properly used. Now, I think it is already -- it dropped back. I think it has stabilized, a stabilized level. With the toolbar to be more, a really good functionality, like providing people, for people to really enjoy using the toolbar. I think it has already stabilized and I think it will gradually grow back, because there are so many toolbars by so many other companies, and toolbar really now is a very bad name. But in the long run, people will realize that the SoGou toolbar is a toolbar that can really help users have direct access to the various quality content and activities on the Sohu matrix, together with our team input measure, I think it will bring a lot of good will name to SoGou related desktop software.

Another question, if I may, on the games side. They are like 5% Q-to-Q growth -- what was the main driver of all this growth, and what is your expectation for your new game, [inaudible]?

[inaudible] will launch, it is still in closed beta. The commercial launch is next year. Q-to-Q growth is just we do more promotional activities. It is nothing very, very important.

Due to time constraints, we will take our final question from Steve Weinstein, Pacific Crest.

Thank you very much. I was just hoping to get a little better understanding of what is happening in the search business. You called out two factors that influenced the growth in the quarter, one was attacking click fraud, and then one was removing some of the fixed fee type of listings. I am wondering if you could quantify for us or give us proportionately the impact that had on the business? Then, on the fixed fee component of it, I assume the goal is to transition that into a cost-per-click type of model. I am wondering how that transition works from a modeling perspective, like how long you think it takes to get to basically revenue-neutral as you make that transition.

I believe that we would expect to see revenue impact from those pay-per-click models, would come in probably the second-half of next year, because as we have always been telling the street, that we are still in a product development phase. Now, with SoGou 3.0, we are eventually pretty happy with the product, and we are now ready to move into the product marketing phase, which we expect to do in the next two, three quarters, and then we will start aggressive monetization the second-half of next year, or more meaningful monetization. With that, then we can move over to the pay-per-click model more credibly. On the fraudulent click side, it probably hits us for about $2,000, $3,000 for now, per quarter.

I’m sorry, could you say that one more time?

I think the decline for the SoGou search business is that most of our paid for listing services has been related to [SoGu] search, the old search, and also with our alliance network of website. What is really the driving engine for growth is really to have good listing, pay-per-click search on SoGou search traffic. So it is only when we have a really sizable webpage search from SoGou search, and also effective monetization of SoGou traffic, we will start to see a gradual growth pattern similar to competitors in the U.S. in China. Before we make this transition, it is a transition not only from a paid listing to a bid listing, but also from the SoGou search and alliance network links to SoGou traffic, because a [SoGu] search, it is really, the traffic is facing off. We are not developing. We are not leading traffic, and to guide people who do use the [SoGu] search, it is the old search engine. It is really the transition, transitioning in two areas.

At this time, I would like to turn the conference back over to Ingrid Shay for any additional or closing remarks.

We would like to thank everyone for participating in today’s call. Please feel free to contact us with any additional questions that you may have. Thank you.

Once again, ladies and gentlemen, that does conclude today’s conference. You may now disconnect.