Santa Claus gave coals to Linktone (LTON) today as the company announced that it has received a notice of sanctions from China Mobile.

The notice states that Linktone violated China Mobile rules regarding billing practices in connection with its wireless access protocol (WAP) services. This violation arose from the company's inadvertent billing in November 2004 of approximately 27,000 WAP customers CNY6.00 (USD 0.72) each for a service that should have been free.

"The inadvertent billing was an unfortunate error. We corrected the root cause of the error and proactively alerted China Mobile as soon as we discovered it internally," said Raymond Yang, chief executive officer of Linktone. "We are cooperating closely with China Mobile, and we are taking all steps necessary to minimize the impact of the sanctions on our business. To date, Linktone's WAP services have contributed a small percentage of our revenues, and this was expected to continue. As for our other service platforms, we plan to develop and promote the existing products in our broad service portfolio. We believe that our continued commitment to the Chinese wireless market and the recent steps we have taken to tighten internal controls over billing practices will enable us to resume our historically sound relationship with China Mobile and the business expansion associated with it."

The company discovered the incorrect billing within a week of its occurrence. Thereafter, Linktone immediately contacted China Mobile and worked closely with the operator to address the problem. Following this cooperation, China Mobile decided to impose sanctions and penalties on Linktone services delivered through the mobile operator's central headquarters and provincial subsidiaries. Specifically, China Mobile will withhold Linktone's WAP revenues between January 1, 2005 and June 30, 2005.

For the third quarter ended September 30, 2004, WAP services contributed 1.8% of Linktone's total gross revenues.

In addition to the WAP penalty, China Mobile will suspend approval of any new product applications and joint marketing activities for Linktone wireless service platforms — including short messaging services (SMS), multimedia messaging services (MMS), WAP, JAVA, interactive voice response (IVR), and ring-back — between January 1, 2005 and June 30, 2005 at the central and provincial levels. China Mobile also suspended one of Linktone's IVR services for one month on the basis that it contained inappropriate content. To date, this particular service has not contributed a material amount of revenue.

Linktone will be able to continue offering its existing wireless value- added services through China Mobile's central headquarters and provincial subsidiaries, including current SMS, MMS, WAP, JAVA, IVR, and ring-back product lines. Linktone anticipates that its business with the other mobile and telecom operators — China Unicom, China Netcom and China Telecom — will be unaffected by the sanctions from China Mobile.

Linktone had not previously received a notice of sanctions from China Mobile. The China Mobile sanctions announced today are similar in nature to those applied to several other Chinese wireless value-added service providers over the course of 2004. As a result of the China Mobile sanctions, the company currently expects no impact on fourth-quarter 2004 gross revenues and moderate impact on 2005 gross revenues. Linktone plans to provide its business outlook for the first quarter of 2005 with the reporting of its fourth-quarter 2004 results in February 2005.

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