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ChinaNet Online Holdings Reports Third Quarter 2010 Earnings; Adjusted Net Income Grew 100% To $3.9 Million With Adjusted Diluted EPS Of $0.19

Cost of sales for the three months ended September 30, 2010 was approximately $3.1 million, down 22.8% due to a significant reduction in purchased television advertisement time from TV networks and local stations.

Gross profit for the third quarter of 2010 was $5.8 million, representing gross margin of 65.0%, compared to $4.1 million in gross profit and a gross margin of 50.4% in the third quarter of 2009. The meaningful year-over-year increase in gross margins was due largely to the Company's deliberate strategy to focus predominantly in its core internet service and advertising business, 28.com, which generate margins of 70%-80% compared to 5%-10% for its TV advertising business. Gross margins in internet advertising and TV were 76.9% and 9.4% during the third quarter of 2010, compared to 73.8% and 18.6% in the corresponding period last year, respectively.

Operating expenses for the three months ended September 30, 2010 were approximately $1.9 million, up 41.6% from the year ago period. Selling expenses for the period were $0.9 million, up 36.4% from $0.6 million from the third quarter of 2009 as the Company invested in new branding initiatives to drive new customer additions. Research and development expenses grew by 107.5% year-over to $0.3 million. ChinaNet accelerated spending to upgrade its advertising and internet management software platform. General and administrative expenses were $0.8 million and $0.3 million in the third quarter 2010 and 2009, respectively. Approximately $0.5 million of the increase was due to public company expenses.

Operating income for the third quarter of 2010 totaled $3.8 million, a 41% increase from the $2.7 million reported for the third quarter of 2009. Operating margins improved 940 basis points year-over-year to 42.7% during the third quarter; update accordingly.

GAAP net income for the third quarter was $3.8 million, an increase of 498.3% compared to $0.6 million reported in the same period of the prior year, while adjusted net income was $3.9 million and $1.9 million in each corresponding period. Adjusted diluted net income per share was $0.19 in the third quarter of 2010 compared to $0.11 in the same period in 2009, based on 20.9 million and 17.6 million outstanding shares, respectively.

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