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Linktone Says It Reaches Record Q3 Revenue Levels

Linktone's (LTON) newly announced financial results for the third quarter ended September 30, 2005 show record gross revenues of $20.5 million, up 17% quarter-on-quarter from $17.5 million in the second quarter of 2005 and up 54% year-over-year from $13.3 million in the third quarter of 2004.

Linktone net income for the third quarter was $4.1 million, or $0.15 per fully diluted ADS, compared with $3.7 million, or $0.14 per ADS, for the second quarter of 2005 and $2.8 million, or $0.10 per fully diluted ADS, for the third quarter of 2004. This brings year-to-date net income under U.S. generally accepted accounting principles (GAAP) per fully diluted ADS for the first three quarters of 2005 to $0.40 per fully diluted ADS.

Non-GAAP net income for the third quarter was $4.6 million, or $0.17 per fully diluted ADS. Non-GAAP net income excludes non-cash stock-based compensation expense which is explained in further detail below. This compared with non-GAAP net income of $4.3 million, or $0.15 per fully diluted ADS, in the second quarter of 2005, and $3.6 million, or $0.13 per fully diluted ADS, for the third quarter of 2004. This brings year-to-date Non GAAP net income per fully diluted ADS for the first three quarters of 2005 to $0.46 per fully diluted ADS.

Linktone's third quarter 2005 net income under GAAP included $0.6 million of non-cash stock-based compensation expense. The company anticipates non-cash stock-based compensation expense of the same amount in the fourth quarter of 2005, but believes it may be lower in 2006.

The reconciliation of GAAP measures with non-GAAP measures for net income and net income per fully diluted ADS included in this news release is set forth after the attached financial statements. All diluted per-share computations for the third quarter were based on 27.7 million weighted average ADSs outstanding on a fully diluted basis.

Linktone's third quarter revenue mix continued to show steady diversification across a wide variety of product areas including SMS, MMS, WAP, IVR and RBT.

Linktone estimates that it averaged approximately 8.3 million paying users per month for the third quarter of 2005, up from 7.3 million in the second quarter, with ARPU remaining steady at $0.71 per month for the third quarter of 2005. Linktone attributes the increase to its continued diversification of product offerings and effective cross-selling strategies.

The company's third quarter sales of short messaging services (SMS) were $13.7 million, up from $10.4 million in the prior quarter. This represented 66% of total gross revenues, compared to 59% for the prior quarter. Linktone attributes the increase to sales growth to China Netcom, China Unicom and China Telecom customers. Sales to China Mobile, China Unicom, China Netcom and China Telecom customers for the third quarter of 2005 represented approximately 82%, 9%, and 5% (aggregate of China Netcom and China Telecom) of total sales, respectively.

Linktone's third quarter sales of 2.5G and audio-related services were $6.2 million, or 30% of gross revenues, compared with $6.9 million, or 40%, for the second quarter of 2005.

Audio-related services, including interactive voice response services (IVR) and ring-back services (RBT), generated a total of 21% of gross revenues, a decrease from 27% in the second quarter of 2005.

Multimedia messaging services (MMS), wireless application protocol services (WAP), and Java games remained relatively steady, accounting for 9% of third quarter gross revenues, compared with 13% for the second quarter of 2005.

Linktone's gross margin for the third quarter of 2005 was 61% of net revenues, or gross revenues minus business tax, compared with 66% for the second quarter of 2005 and 68% for the third quarter of 2004. This decrease is within Linktone's historical gross margin range, and was primarily due to the revenue-sharing arrangements with certain content and production partners.

Operating margin was 19% of net revenues, compared with 19% for the second quarter of 2005 and 22% in the third quarter of 2004.

Third quarter operating expenses totaled $8.3 million, compared with $7.8 million for the second quarter of 2005 and $5.8 million for the third quarter of 2004. The sequential increase reflected higher marketing spending in promotion of products.

Selling and marketing expenses were $3.9 million for the third quarter of 2005, compared with $3.4 million for the second quarter of 2005 and $2.5 million for the third quarter of 2004. The company attributes the increase in sales and marketing expenses to the promotion of new products and anticipates modest growth in sales and marketing expenses in the fourth quarter of 2005.

Product development expenses for the third quarter of 2005 were $1.6 million, compared with $1.5 million for the second quarter of 2005 and $0.7 million for the third quarter of 2004. The company continues to invest in product development at an increasing rate, given its strong belief in the importance of improving the quality, uniqueness, user loyalty and diversity of its products.

Non-cash stock-based compensation expense was $0.6 million for the third quarter of 2005, compared with $0.5 million for each of the prior quarter and the third quarter of 2004.

Other general and administrative expenses were $2.1 million, compared with $2.4 million for the prior quarter and $2.1 million for the third quarter of 2004.

At September 30, 2005, Linktone's balance sheet included cash, cash equivalents and short-term investments available for sale totaling approximately $75 million. During the third quarter of 2005, Linktone generated positive cash flow from operations of $0.7 million. At September 30, 2005, days sales outstanding (DSOs), was 94 days, compared with 87 days at June 30, 2005 due to certain delays in account settlements with certain provincial offices of the mobile operators in China.

Linktone shareholders authorized the repurchase of up to $15 million worth of ADSs of the company at the Annual General Meeting held on September 7, 2005. As of November 15, 2005, the company had effected transactions in the open market purchasing approximately $1.0 million worth of ADSs in the open market. The company intends to continue to effect repurchases through open market transactions and stock purchase orders as allowed under the company's insider trading policy.

For the fourth quarter ending December 31, 2005, Linktone expects GAAP net income of approximately $0.15 per fully diluted ADS and non-GAAP net income of approximately $0.17 per fully diluted ADS. For the full fiscal year 2005, Linktone expects GAAP net income of approximately $0.54 per fully diluted ADS and non-GAAP net income of approximately $0.63 per fully diluted ADS.

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