20-F 1 h03455e20vf.htm FORM 20-F Form 20-F
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
(Mark One)
     
o   Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
or
     
þ   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2008.
or
     
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______
     
o   Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-
Focus Media Holding Limited
(Exact Name of Registrant as Specified in Its Charter)
Cayman Islands
(Jurisdiction of Incorporation or Organization)
28-30/F, Zhao Feng World Trade Building
369 Jiangsu Road, Shanghai 200050, PRC
(Address of Principal Executive Offices)
Contact Person: Mr. Alex Yang
Acting Chief Financial Officer
Phone: +86 21 3212 4661
Facsimile: +86 21 5240 0228
Address: 28-30/F, Zhaofeng World Trade Building
369 Jiangsu Road, Shanghai 200050, P.R.C.
*(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
 
Ordinary Shares, par value US$0.00005 per share   Nasdaq Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
 
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
(Title of Class)
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
664,692,030 Ordinary Shares
 
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
     Yes þ No o
     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
     Yes o No þ
     Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registration was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP þ
     International Financial Reporting Standards as issued by the International Accounting Standards Board o
     Indicate by check mark which financial statement item the registrant has elected to follow.
     Item 17 o Item 18 þ
     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)
     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
     Yes o No o
 
 


 

FOCUS MEDIA HOLDING LIMITED
FORM 20-F ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2008
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 EX-10.168 Termination and Release Agreement, dated as of December 8, 2008, among Focus Media Holding Limited, CGEN Digital Media Company Limited, Chan Yi Sing, Guanyong Tian and Mei Lijun.
 EX-10.169 Equity Pledge Agreement, dated as of April 28 2007, among Shanghai OOH Advertising Co., Ltd, Liu Yi Nuo and Shanghai Chuanzhi Advertisement Co., Ltd.
 EX-10.170 Shareholders' Voting Rights Proxy Agreement, dated as of April 28, 2007, among Shanghai OOH Advertising Co., Ltd, Liu Yi Nuo and Shanghai Chuanzhi Advertisement Co., Ltd.
 EX-10.171 Equity Pledge Agreement, dated as of April 28 2007, among Shanghai OOH Advertising Co., Ltd, Pan Ze Xin and Shanghai Chuanzhi Advertisement Co., Ltd.
 EX-10.172 Shareholders' Voting Rights Proxy Agreement, dated as of April 28, 2007, among Shanghai OOH Advertising Co., Ltd, Pan Ze Xin and Shanghai Chuanzhi Advertisement Co., Ltd.
 EX-10.173 Equity Pledge Agreement, dated as of April 28 2007, among Shanghai OOH Advertising Co., Ltd, Liu Yi Nuo and Shanghai Ruili Advertisement Co., Ltd.
 EX-10.174 Shareholders' Voting Rights Proxy Agreement, dated as of April 28, 2007, among Shanghai OOH Advertisement Co., Ltd, Liu Yi Nuo and Shanghai Ruili Advertisement Co., Ltd.
 EX-10.175 Equity Pledge Agreement, dated as of April 28, 2007, among Shanghai OOH Advertising Co., Ltd, Ni He Ping and Shanghai Ruili Advertisement Co., Ltd.
 EX-10.176 Shareholders' Voting Rights Proxy Agreement, dated as of April 28, 2007, among Shanghai OOH Advertising Co., Ltd, Ni He Ping and Shanghai Ruili Advertisement Co., Ltd.
 EX-10.177 Equity Pledge Agreement, dated as of April 28 2007, among Shanghai OOH Advertising Co., Ltd, Liu Yi Nuo and Shanghai Xinnuo Advertisement Co., Ltd.
 EX-10.178 Shareholders' Voting Rights Proxy Agreement, dated as of April 28, 2007, among Shanghai OOH Advertising Co., Ltd, Liu Yi Nuo and Shanghai Xinnuo Advertisement Co., Ltd.
 EX-10.179 Equity Pledge Agreement, dated as of April 28 2007, among Shanghai OOH Advertising Co., Ltd, Pan Ze Xin and Shanghai Xinnuo Advertisement Co., Ltd.
 EX-10.180 Shareholders' Voting Rights Proxy Agreement, dated as of April 28, 2007, among Shanghai OOH Advertising Co., Ltd, Pan Ze Xin and Shanghai Xinnuo Advertisement Co., Ltd.
 EX-10.181 Asset Purchase Agreement, dated as of December 22, 2008, between Focus Media Holding Limited and SINA Corporation.
 EX-12.1 Certificate of Chief Executive Officer
 EX-12.2 Certificate of Chief Financial Officer
 EX-13.1 Certification of Periodic Financial Report
 EX-13.2 Certification of Periodic Financial Report
 EX-15.1 Consent of Conyers, Dill & Pearman
 EX-15.2 Consent of Global Law Office
 EX-15.3 Consent of Deloitte Touche Tohmatsu CPA Ltd.
 EX-21.1 List of Subsidiaries

 


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SUPPLEMENTAL INFORMATION
          In this annual report, unless otherwise indicated:
    the terms “we,” “us,” “our company,” “our” and “Focus Media” refer to Focus Media Holding Limited, its predecessor entities and subsidiaries, and, in the context of describing our operations, also include our affiliated Chinese entities;
 
    “shares” and “ordinary shares” refer to our ordinary shares, par value $0.00005, “ADSs” refers to our American depositary shares, each of which represents five ordinary shares, and “ADRs” refers to the American depositary receipts which evidence our ADSs;
 
    “China” and “PRC” refer to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau;
 
    all references to “RMB” are to the legal currency of China and all references to “U.S. dollars,” “US$,” “dollars” and “$” are to the legal currency of the United States. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding;
 
    “Framedia” refers to Infoachieve Limited and its consolidated subsidiaries and affiliates, which we acquired in January 2006;
 
    “Target Media” refers to Target Media Holdings Limited and its consolidated subsidiaries and affiliates, which we acquired in February 2006;
 
    “Focus Media Wireless” refers to Dotad Media Holdings Limited, and its consolidated subsidiary and affiliate, which we acquired in March 2006 and renamed Focus Media Wireless. We terminated our mobile handset advertising business, including Focus Media Wireless, in December 2008;
 
    “Allyes” refers to Allyes Information Technology Company Limited, and its consolidated subsidiaries and affiliates, which we acquired in March 2007 as well as additional smaller Internet advertising companies we acquired and subsequently reorganized to be included within Allyes;
 
    “CGEN” refers to CGEN Digital Media Company Limited, and its consolidated subsidiaries and affiliates, which we acquired in January 2008 and disposed of in December 2008; and
 
    This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2006, 2007 and 2008, and as of December 31, 2007 and 2008.
DISCONTINUED OPERATIONS AND BASIS OF PRESENTATION
          We discontinued the operations of the Focus Media Wireless over 2008 commencing in the first quarter of 2008 and completed in December 2008. Subsequently, on December 22, 2008, we announced the sale to SINA Corporation, or Sina, of substantially all of the assets of our out-of-home digital networks, including our LCD display networks (including our outdoor LED network), poster frame networks and in-store networks (excluding CGEN). As a result of the above transactions, the business operations and related net assets to be sold to Sina, or the assets for sale to Sina, and our mobile handset advertising business have been accounted as discontinued operations in accordance with U.S. GAAP in our audited financial statements.
          We continue to operate the assets for sale to Sina and will continue to operate those assets until the transaction closes. The closing is subject to various customary closing conditions and regulatory approvals. Accordingly, in the descriptions of our business operations in this annual report we continue to describe the assets to be sold to Sina as part of our operations. In Item 5. “Operating and Financial Review and Prospects”, and other items relating to our financial results of operations, the assets to be sold to Sina are discussed as discontinued operations in accordance with U.S. GAAP.

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          On December 9, 2008, we announced the disposal of our CGEN in-store advertising network. CGEN has been recorded as within our continuing operations as we have retained continuing involvement by leasing assets to CGEN after the disposal transaction. We are not receiving, and do not expect to continue to receive, any significant revenues from our continuing involvement in the operation of CGEN.
FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT
MAY NOT BE REALIZED
          This annual report on Form 20-F contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this annual report are forward-looking statements. These forward-looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan”, “believe”, “is/are likely to” or other similar expressions. The forward-looking statements included in this annual report relate to, among others:
    our goals and strategies;
 
    our future business development, financial condition and results of operations;
 
    projected revenues, profits, earnings and other estimated financial information;
 
    our ability to complete the sale of substantially all of the assets of our digital out-of-home advertising networks to SINA Corporation, or Sina, including all required regulatory approvals;
 
    our ability to complete acquisitions we have entered into and costs related to and potential liabilities resulting from completing such acquisitions and integrating the acquired companies into our business;
 
    achieving anticipated or potential synergies with companies we acquire or have acquired;
 
    our plans to expand our advertising network into new cities and regions in China and diversify into new networks and advertising channels such as airports, hospitals and other possible commercial locations;
 
    the growth or acceptance of our in-store network, our outdoor LED network, Framedia’s poster frame network, our movie theater and traditional billboard advertising network and our online advertising services business;
 
    our plan to develop our business into a multi-platform out-of-home advertising network, including through operation of Internet advertising channels such as Allyes and networks such as our movie theater and traditional billboard advertising network;
 
    our plan to identify and create additional advertising channels that target specific consumer demographics, which could allow us to increase our advertising revenue, including Internet advertising channels;
 
    competition in the PRC advertising industry;
 
    the expected growth in the urban population, consumer spending, average income levels and advertising spending levels;
 
    PRC governmental policies and regulations relating to the advertising industry and regulations and policies promulgated by the State Administration of Foreign Exchange;
 
    other risks outlined in our filings with the Securities and Exchange Commission, including our registration statements on Form F-1, as amended, and Form F-3 as amended; and
 
    those other risks identified in “Item 3. Key Information—D. Risk Factors” of this annual report.

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          These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from or worse than our expectations.
          The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

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PART I
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
          Not applicable.
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE
          Not applicable.
ITEM 3.   KEY INFORMATION
A. Selected Financial Data
          The following selected consolidated financial information has been derived from our consolidated financial statements. Our consolidated statements of operations for the years ended December 31, 2006, 2007 and 2008 and our consolidated balance sheets as of December 31, 2006, 2007 and 2008 have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm. The report of Deloitte Touche Tohmatsu CPA Ltd. on those financial statements is included elsewhere in this annual report.
          Our selected consolidated financial information for the years ended December 31, 2004 and 2005 have been derived from Focus Media Advertisement audited consolidated financial statements, which are not included in this annual report.
          Our historical results for any prior period are not necessarily indicative of results to be expected for any future period. The selected consolidated financial information for the periods and as of the dates indicated should be read in conjunction with our financial statements and the accompanying notes and “Item 5. Operating and Financial Review and Prospects”.
          In April 2005, we commenced commercial operations of our in-store network and through our acquisition of Framedia, we commenced operation of our poster frame network on January 1, 2006. In February 2006, we acquired Target Media and in March 2006, we acquired Focus Media Wireless. In March 2007, we acquired Allyes. In January 2008, we acquired CGEN.
                                         
    For the year ended December 31,
    2004   2005   2006   2007   2008
    (in thousands of U.S. dollars)
Selected Consolidated Statements of Operations Data:
                                       
Net revenues:(1)
                                       
Movie Theatre & Outdoor Billboard network
                690       37,305       77,520  
Internet advertising
                      124,939       255,637  
Others
                      819       36,397  
 
                                       
Total net revenues
                690       163,063       369,554  
 
                                       
Cost of revenues:
                                       
Net advertising service cost:
                                       
Movie Theatre & Outdoor Billboard network
                760       28,507       57,276  
Internet advertising
                      93,237       199,189  
Others
                      224       28,581  
 
                                       
Total cost of revenues
                760       121,968       285,046  
Gross profit
                (70 )     41,095       84,508  
Operating expenses:
                                       
General and administrative
    227       429       3,760       16,691       52,102  

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    For the year ended December 31,
    2004   2005   2006   2007   2008
    (in thousands of U.S. dollars)
Selling and marketing
                271       14,052       34,680  
Impairment loss
                            222,536  
Loss on disposal of CGEN
                            190,466  
Other operating income
                      (222 )     (1,027 )
 
                                       
Total operating expenses
    227       429       4,031       30,521       498,757  
 
                                       
Income from operations
                (4,101 )     10,574       (414,249 )
Interest income net
                725       2,734       2,622  
Other income (expenses), net
                      100       (618 )
Income (loss) before income taxes and minority interest
    (227 )     (429 )     (3,376 )     13,408       (412,245 )
Income taxes
                      4,193       3,391  
Minority interest
                      720       (107 )
Net income (loss) from discontinued operations, net of tax
    599       23,977       86,574       135,941       (355,159 )
 
                                       
Net income (loss)
    372       23,548       83,198       144,436       (770,688 )
 
                                       
                                         
    For the year ended December 31,  
    2004     2005     2006     2007     2008  
    (in thousands of U.S. dollars, except share and per share data)  
Earnings per share data:
                                       
Deemed dividend on Series A convertible redeemable preference shares
    (8,308 )                        
Deemed dividend on Series B convertible redeemable preference shares
    (2,191 )                        
Deemed dividend on Series C-1 convertible redeemable preference shares
    (13,356 )                        
Premium of Series B convertible redeemable preference shares
    12,906                          
Income (loss) attributable to holders of ordinary shares
  $ (10,577 )   $ 23,548     $ 83,198     $ 144,436     $ (770,688
 
                             
Income (loss) per share from continuing operations-basic
  $ (0.07 )   $ (0.01 )   $ (0.01 )   $ 0.01     $ (0.65 )
 
                             
Income (loss) per share from continuing operations-diluted
  $ (0.07 )   $ (0.01 )   $ (0.01 )   $ 0.01     $ (0.65 )
 
                             
Income (loss) per share from discontinuing operations-basic
  $     $ 0.10     $ 0.17     $ 0.23     $ (0.55 )
 
                             
Income (loss) per share from discontinuing operations-diluted
  $     $ 0.10     $ 0.17     $ 0.23     $ (0.55 )
 
                             
Income (loss) per share — basic
  $ (0.07 )   $ 0.09     $ 0.16     $ 0.24     $ (1.20
 
                             
Income (loss) per share — diluted
  $ (0.07 )   $ 0.09     $ 0.16     $ 0.24     $ (1.20
 
                             
Shares used in calculating basic income per share
    160,998,600       252,128,545       505,411,079       590,387,396       643,989,522  
 
                             
Shares used in calculating diluted income per share
    160,998,600       252,128,545       505,411,079       608,326,450       643,989,522  
 
                             
                                         
    2004   2005   2006   2007   2008
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 22,669     $ 36,653     $ 164,611     $ 450,416     $ 142,434  
Other current assets(2)
    12,713       104,988       78,712       431,043       665,137  
Non-current assets(3)
    21,033       70,713       862,919       1,258,079       724,723  
Total assets
    56,415       212,354       1,106,242       2,139,538       1,532,294  
Total current liabilities
    8,634       20,694       51,837       276,287       318,864  
Total non-current liabilities
                3,303       6,394       13,540  
Total liabilities
    8,634       20,694       55,140       282,681       332,404  
Minority interest
    81       245       358       1,913       2,106  
Mezzanine equity
    53,273                          
Ordinary shares (142,464,600, 378,306,000, 534,896,873, 640,230,852 and 646,081,710 shares issued and outstanding in 2004, 2005, 2006, 2007 and 2008 respectively)
    7       19       27       32       32  

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    2004   2005   2006   2007   2008
Other shareholders’ equity (deficiency)
    (5,580 )     191,396       1,050,717       1,854,912       1,197,752  
Total shareholders’ equity
  $ (5,573 )   $ 191,415     $ 1,050,744     $ 1,854,944     $ 1,197,784  
                                 
    As of December 31,
    2005   2006   2007   2008
Selected Operating Data:(4)
                               
Number of displays in our commercial location network:
                               
Our direct cities
    45,049       80,263       107,533       122,597  
Our regional distributors(5)
    3,177       5,197       4,765       5,436  
Total
    48,226       85,460       112,298       128,033  
Number of displays in our in-store network(6)
    27,849       38,742       49,452       42,,824  
Number of stores in our in-store network(6)
    4,130       3,898       4,063       3,275  
Number of installed frames in our poster frame network(7)
          99,784       190,468       324,364  
 
(1)   Advertising service revenue is presented net of business tax. Business tax for our Internet advertisings service revenue amounted to $5.0 million and $9.3 million in 2007 and 2008. Business tax for our traditional billboard network was $1.0 million and $2.2 million in 2007 and 2008, respectively. Business tax for our movie theater network was $0.3 million and $0.6 million for 2007 and 2008, respectively. Business tax includes business tax ranging from 3% to 5.55% and cultural industries tax ranging from 0% to 4.0% of our gross advertising service revenue.
 
(2)   Other current assets are equal to total current assets less cash and cash equivalents.
 
(3)   Non-current assets are equal to total assets less total current assets.
 
(4)   Operating data presented includes operating data for discontinued operations except as noted below.
 
(5)   Data that has been provided by our regional distributors is based on the results of surveys we requested them to provide to us and it is possible such data is not entirely accurate or exact.
 
(6)   Operating data for our in-store network does not include data from CGEN’s business and operations.
 
(7)   Number of installed frames includes frames we currently market and frames that have been installed, for instance, in buildings that are still under construction and which we have not yet begun to market. Data includes both traditional poster frames and, for periods starting from June 30, 2007, digital frames.
          In December 2008, we disposed of our in-store advertising operations of CGEN, which resulted in a $190.5 disposal loss. Also in 2008, the disposal of our mobile handset advertising business due to changes in market conditions and the regulatory environment resulted in a loss from disposal of $91.9 million. In December 2008, we entered into a definitive agreement with Sina to sell substantially all of the assets of our digital out-of-home advertising networks, including the LCD display network (including our outdoor LED network), poster frame network and our in-store network (excluding CGEN), to Sina. The transaction is subject to customary closing conditions and certain regulatory approvals. Under the terms of the agreement, upon closing, Sina will issue 47 million newly issued ordinary shares to us as consideration for the acquired assets. We will then distribute the Sina shares to our shareholders shortly after the closing. As a result of the termination of the mobile handset advertising business and the transaction with Sina, these lines of businesses have been accounted as discontinued operations in accordance with US. GAAP in our financial statements.

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Currency Translations and Exchange Rates
          Our operating businesses are currently conducted in China and substantially all of our revenues and expenses are denominated in Renminbi. The People’s Bank of China, or PBOC, sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day. The PBOC also takes into account other factors, such as the general conditions existing in the international foreign exchange markets. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates in the world financial markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. Although PRC governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration for Foreign Exchange and other relevant authorities. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by 2.0% against the U.S. dollar. Since then, the PRC government has made, and may in the future make, further adjustments to the exchange rate system. The PBOC announces the closing price of a foreign currency traded against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against the Renminbi on the following working day.
          For all dates and periods through December 31, 2008, exchange rates of Renminbi into U.S. dollars are based on the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. For January 1, 2009 and all later dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. For your convenience, this annual report contains translations of Renminbi at $1.00 to RMB6.8225, which was the prevailing rate on December 31, 2008. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
          The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.
                                 
    RENMINBI PER U.S. EXCHANGE RATE
    AVERAGE   HIGH   LOW   PERIOD-END
2002
    8.2770       8.2800       8.2669       8.2800  
2003
    8.2770       8.2800       8.2272       8.2769  
2004
    8.2768       8.2774       8.2764       8.2765  
2005
    8.1940       8.2765       8.0702       8.0702  
2006
    7.9723       8.0702       7.8041       7.8087  
2007
    7.6072       7.8127       7.2946       7.2946  
2008
    6.9477       7.2946       6.7800       6.8225  
December
    6.8225       6.8539       6.8842       6.8225  
2009 (through June 19)
    6.8360       6.8322       6.8470       6.8176  
January
    6.8392       6.8360       6.8403       6.8225  
February
    6.8395       6.8363       6.8470       6.8241  
March
    6.8329       6.8360       6.8438       6.8240  
April
    6.8180       6.8304       6.8361       6.8180  
May
    6.8278       6.8235       6.8326       6.8176  
June (through June 19)
    6.8360       6.8336       6.8371       6.8264  

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B. Capitalization and Indebtedness
          Not applicable.
C. Reasons for the Offer and Use of Proceeds
          Not applicable.
D. Risk Factors
          Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, financial condition or results of operations could be seriously harmed.
Risks Relating to Our Business and Industry
We have been named as a defendant in certain purported shareholder class action lawsuits that could have a material adverse impact on our operating results and financial condition.
          We are currently a defendant in ongoing lawsuits as described in Item 8 of this annual report, “Financial Information—Consolidated statements and other financial information—Legal Proceedings.” We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of these lawsuits. An unfavorable outcome from these lawsuits could have a material adverse effect on our consolidated financial position, results of operations, or cash flows in the future. The litigation process may utilize a material portion of our cash resources and divert management’s attention from the day-to-day operations of our company, all of which could harm our business.
Discontinuation of certain of our business units in 2008 and the proposed sale of substantially all of the assets of our out-of-home advertising networks to Sina makes it difficult to evaluate our business as it is currently operated.
          In 2008, we terminated our mobile handset advertising business due to changes in market conditions and the regulatory environment. Furthermore, in December 2008, we entered into a definitive agreement with Sina to sell substantially all of the assets of our digital out-of-home advertising networks, including the LCD display network (including our outdoor LED network), poster frame network and our in-store networks (excluding CGEN), to Sina. As a result of these transactions, these business units have been accounted for as discontinued operations in accordance with US. GAAP in our financial statements. Accordingly, it may be difficult for you to evaluate our business as it is currently accounted for and operated.
We may not be able to complete the sale of substantially all of the assets of our out-of-home advertising networks to Sina due to regulatory or other reasons.
          In December 2008, we entered into a definitive agreement with Sina to sell substantially all of the assets of our digital out-of-home advertising networks, including the LCD display network (including our outdoor LED network), poster frame network and certain in-store networks, to Sina. The transaction is subject to customary closing conditions and certain regulatory approvals. If we are unable to satisfy any of the closing conditions or do not receive any of the relevant regulatory approvals, it is possible that the transaction will not be completed.

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Our transaction with Sina is conditioned upon receiving anti-trust approval from MOFCOM under the Anti-Monopoly Law. At the date of this annual report, we have not received MOFCOM’s approval for our anti-trust application, and we cannot predict the outcome of our anti-trust application.
Some of our business operations have a limited operating history, which may make it difficult for you to evaluate our business and prospects.
          Since January 2007, we added a movie theater and traditional billboard advertising network and an Internet advertising services network to our business. Accordingly, we have a limited operating history for our current operations upon which you can evaluate the viability and sustainability of our business and its acceptance by advertisers and consumers. It is also difficult to evaluate the viability of our Internet advertising services as a business model because we do not have sufficient experience to address the risks frequently encountered by early stage companies using new forms of advertising media and entering new and rapidly evolving markets. These circumstances may make it difficult for you to evaluate our business and prospects.
We derive a substantial majority of our revenues from the provision of advertising services, and advertising is particularly sensitive to changes in economic conditions and advertising trends.
          Demand for advertising time slots and advertising frame space on our networks, and the resulting advertising spending by our clients, is particularly sensitive to changes in general economic conditions and advertising spending typically decreases during periods of economic downturn. Advertisers may reduce the money they spend to advertise on our networks for a number of reasons, including:
    a general decline in economic conditions;
 
    a decline in economic conditions in the particular cities where we conduct business;
 
    a decision to shift advertising expenditures to other available advertising media;
 
    a decline in advertising spending in general; or
 
    a decrease in demand for advertising media in general and for our advertising services in particular would materially and adversely affect our ability to generate revenue from our advertising services, and our financial condition and results of operations.
          In 2008, due to the global economic downturn, growth in consumer spending in China slowed which resulted in a corresponding slowdown in advertising spending growth. If economic conditions worsen or fail to improve, our revenues, net income and results of operations could be materially adversely affected.
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future.
          Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period based on the seasonality of consumer spending and corresponding advertising trends in China. In addition, advertising spending generally tends to decrease during January and February each year due to the Chinese Lunar New Year holiday. We also experience a slight decrease in revenues during the hot summer months of July and August each year, when there is a relative slowdown in overall commercial activity in urban areas in China. As a result, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance. Factors that are likely to cause our operating results to fluctuate, such as the seasonality of advertising spending in China, the effect of the global economic downturn on spending in China, a further deterioration of economic conditions in China and potential changes to the regulation of the advertising industry in China, are discussed elsewhere in this annual report. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating

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expenses for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating results from other quarters.
Our failure to maintain existing relationships or obtain new relationships with businesses that allow us to place our LCD flat-panel displays and advertising poster frames in their buildings and other commercial locations and to lease outdoor traditional and LED digital billboards placed in desirable locations would harm our business and prospects.
          Our ability to generate revenues from advertising sales depends largely upon our ability to provide large networks of LCD flat-panel displays placed in desirable building, commercial and store locations, of advertising poster frames (including digital poster frames) placed in residential complexes, and to secure desirable locations of large outdoor traditional and LED digital billboards, throughout major urban areas in China. We also depend on the ability of our third-party location provider to secure desirable traditional and LED digital billboard locations for our outdoor traditional and LED network. This, in turn, requires that we develop and maintain business relationships with real estate developers, landlords, property managers, hypermarkets, retailers and other businesses and locations in which we rent space for our displays and billboards. Although a majority of our display placement agreements and advertising frame placement agreements have terms ranging from three to five years and two to three years, respectively, and upon expiration give us the right to renew the agreement on terms no less favorable than those offered by competing bidders, we may not be able to maintain our relationships with them on satisfactory terms, or at all. If we fail to maintain our relationships with landlords and property managers, or if a significant number of our existing display or advertising frame placement agreements are terminated or not renewed or if we fail to maintain our relationship with our location provider of traditional and LED billboard space, advertisers may find advertising on our networks unattractive and may not wish to purchase advertising time slots or advertising frame space on our networks, which would cause our revenues to decline and our business and prospects to deteriorate.
          Under some of our display placement agreements in Guangzhou, Shenzhen, Dalian and Chongqing, the property manager has the right to terminate the agreement if landlords or tenants in the building lodge complaints about our flat-panel displays. In addition, some of our display placement agreements in other cities allow the property manager to terminate the agreement if we fail to keep each flat-panel display operational for a minimum amount of time each year. If these tenants complain about our displays, or if the property manager claims we have failed to keep the flat-panel displays operational for the stipulated number of days each year, we may be required to remove our panels from these commercial locations.
          In accordance with PRC real estate laws and regulations, prior consent of landlords and property managers is required for any commercial use of the public areas or facilities of residential properties. With regard to our network of advertising poster frames and some of our flat-panel displays placed in the elevators and public areas of residential complexes, we have entered into frame or display placement agreements with property managers and landlords. For those frame or display placement agreements entered into with property managers, we intend to obtain or urge property managers to obtain consents from landlords. However, if the landlords of a residential complex object to our placing advertising poster frames or flat-panel displays in the elevators and public areas of the complex, we may be required to remove our advertising poster frames or flat-panel displays from the complex and may be subject to fines. We may not be able to successfully expand our out-of-home advertising network into new regions or diversify our network into new advertising networks or media platforms, which could harm or reverse our growth potential and our ability to increase our revenues.
If we are unable to obtain or retain desirable placement locations for our flat-panel displays, advertising poster frames and outdoor traditional and LED billboards on commercially advantageous terms or if the supply of desirable locations diminishes or ceases to expand, we could have difficulty in maintaining or expanding our network, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
          Our location costs, which include lease payments to landlords and property managers under our display placement agreements, maintenance and monitoring fees and other associated costs, comprise a significant portion of our cost of revenues. In 2006, our location costs accounted for 66.2% of our cost of revenues and 24.3% of our total revenues, respectively. For 2007, our location costs accounted for 40.9% of our cost of revenues and 20.0% of our total revenues, respectively. In 2008, our out-of-home advertising network, excluding the traditional billboard network and movie theater advertising network, was accounted for as a discontinued operation due to our entering into an agreement

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with Sina to sell substantially all the assets of this network. Our location costs for discontinued operations in 2008 consisted of 61.0% of our cost of revenues for discontinued operations. In the future, we may need to increase our expenditures on our display and frame placement agreements to obtain new and desirable locations, to renew existing locations, and to secure favorable exclusivity and renewal terms. In addition, lessors of space for our flat-panel displays, advertising poster frames and traditional and LED billboards may charge increasingly higher display location lease fees, or demand other compensation arrangements, such as profit sharing. If we are unable to pass increased location costs on to our advertising clients through rate increases, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
          In addition, in more developed cities, it may be difficult to increase the number of desirable locations in our network because most such locations have already been occupied either by us or by our competitors, or in the case of outdoor traditional and LED billboards, because the placement of outdoor installments may be limited by municipal zoning and planning policies. In recently developing cities, the supply of desirable locations may be small and the pace of economic development and construction levels may not provide a steadily increasing supply of desirable commercial and residential locations. If, as a result of these possibilities, we are unable to increase the placement of our out-of-home television and poster frame advertising networks into commercial and residential locations that advertisers find desirable, we may be unable to expand our client base, sell advertising time slots and poster frame space on our network or increase the rates we charge for time slots and poster frame space, which could decrease the value of our network to advertisers.
If we are unable to attract advertisers to advertise on our networks, we will be unable to maintain or increase our advertising fees and the demand for time on our networks, which could negatively affect our ability to grow revenues.
          The amounts of fees we can charge advertisers for time slots on our out-of-home television networks depend on the size and quality of our out-of-home television networks and the demand by advertisers for advertising time on our out-of-home television networks. Advertisers choose to advertise on our out-of-home television networks in part based on the size of the networks and the desirability of the locations where we have placed our flat-panel displays and where we lease traditional and LED digital billboards as well as the quality of the services we offer. If we fail to maintain or increase the number of locations, displays and billboards in our networks, diversify advertising channels in our networks, or solidify our brand name and reputation as a quality provider of advertising services, advertisers may be unwilling to purchase time on our networks or to pay the levels of advertising fees we require to remain profitable.
          In addition, the fees we can charge advertisers for frame space on our poster frame network depends on the quality of the locations in which we place advertising poster frames, demand by advertisers for frame space and the quality of our service. If we are unable to continue to secure the most desirable residential locations for deployment of our advertising poster frames, we may be unable to attract advertisers to purchase frame space on our poster frame network.
          Our failure to attract advertisers to purchase time slots and frame space on our networks will reduce demand for time slots and frame space on our networks and the number of time slots and amount of frame space we are able to sell, which could necessitate lowering the fees we charge for advertising time on our network and could negatively affect our ability to increase revenues in the future.
Acquisitions we have made, and any future acquisitions may expose us to potential risks and have an adverse effect on our ability to manage our business.
          Our integration of acquired entities into our business may not be successful and may not enable us to expand into new advertising platforms as well as we expect. This would significantly affect the expected benefits of these acquisitions. For example, in 2008, we disposed of CGEN’s in-store advertising operations, and discontinued the operations of Focus Media Wireless, both of which were recent acquisitions. These two transactions resulted in impairments losses to our 2008 results of operations. Moreover, the integration of acquired entities into our operations have required, and will continue to require, significant attention from our management. Future acquisitions will also likely present similar challenges.

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          The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. In addition, we may face challenges trying to integrate new operations, services and personnel with our existing operations. Our recent acquisitions and possible future acquisitions may also expose us to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, our inability to generate sufficient revenue to offset the costs, expenses of acquisitions and potential loss of, or harm to, relationships with employees and advertising clients as a result of our integration of new businesses and new regulations governing cross-border investment by PRC residents. In addition, we cannot assure you that we will be able to realize the benefits we anticipate from acquiring companies, or that we will not incur costs, including those relating to intangibles or goodwill, in excess of our projected costs for these transactions. The occurrence of any of these events could have a material and adverse effect on our ability to manage our business, our financial condition and our results of operations.
There may be unknown risks inherent in the acquisitions we have made.
          Although we have conducted due diligence with respect to the major acquisitions we have undertaken and undertake, we may not be aware of all of the risks associated with the targets of such acquisitions we have made. Any discovery of adverse information concerning any company we have acquired since we acquired such entity could have a material adverse effect on our business, financial condition and results of operations. While we are entitled to seek indemnification in certain circumstances, successfully asserting indemnification or enforcing such indemnification could be costly and time consuming or may not be successful at all.
Our strategic alliances and partnerships may not succeed or yield the benefits we anticipated, which could materially and adversely affect our business and results of operations.
          We have entered into strategic alliances and partnerships with other companies, including Yanhuang Health Media Limited and Dentsu Group, and we may continue to enter into additional alliances and partnerships in the future. However, we cannot assure you that these alliances and partnerships will succeed or result in the benefits we anticipated when we entered into them. For instance, under the terms of our alliance with Yanhuang Health Media, we transferred ownership and operation of the LCD flat-panel displays from the healthcare channel portion of our commercial location network to Yanhuang Health Media. Accordingly, we cannot control Yanhuang Health Media’s management and operation of the healthcare channel or ensure that they will be able to successfully attract advertising customers as we might were we in direct control of that channel. In 2008, we took an investment write-down of approximately US$0.4 million in connection with our investment in Yanhuang Health Media. If the strategic alliances and partnerships we have entered into, or may in the future enter into, do not succeed, our business and results of operations could be materially adversely affected.
Our entry into new types of advertising services through acquisitions may expose us to risks associated with operating in the telecommunications and Internet industries in China which could materially affect our financial condition or results of operation.
          In March 2007, we acquired Allyes, which operates an Internet advertising agency and service technology business. We also made a number of smaller acquisitions in the mobile handset and Internet advertising areas in 2007 and 2008. Our operation of the Internet advertising business subjects us to risks associated with operations in the Internet sector in China. These potential risks include:
    failure to reach traditional advertisers and to take advantage of marketing networks through our existing business;
 
    changes in operating policies or guidelines by mobile telecommunications operators applicable to all wireless value-added service providers using their platforms or which restrict content supplied by others to us;
 
    if regulations change in the future, regulation of the telecommunications sector in China that could impose burdensome approval, licensing, technical or other requirements on value-added service providers such as advertising companies that sell advertising time on mobile telecommunications networks;

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    the performance and reliability of the Internet infrastructure; and
 
    the continued growth of the Internet and e-commerce industries.
          Since March 2008, the Ministry of Information Industry, or MII, the national regulatory authority of the telecom industry has ordered all local telecom regulators and telecom operators at all levels to tighten up regulation of short messaging services, in particular so-called “spam”, or unsolicited, advertisements and messages. It has been reported that several local telecom regulators and operators adopted policies restricting short message advertising activities by limiting the number of such advertisements or disallowing companies from engaging in unsolicited short messaging advertising activities. It has also been reported that the MII, together with other national authorities, is drafting new regulations governing the short messaging business, and that the new regulations are expected to impose strict technical requirements and standards requiring short message advertisements to be sent following the consent of the relevant mobile phone user. As a result of such regulatory changes and other market changes, we terminated our mobile handset advertising business in 2008.
One or more of our regional distributors could engage in activities that are harmful to our reputation in the industry and to our business.
          As of December 31, 2008, we covered approximately 40 out of the approximately 90 cities where we provide our commercial location network through contractual arrangements with regional distributors. Under these arrangements, we provide our business model and operating expertise to local advertising companies in exchange for their acting as regional distributors of our advertising services. We also sell our flat-panel displays to our regional distributors, who are responsible for developing and maintaining an advertising network in office buildings and other commercial locations in the respective cities where they operate. We also grant our regional distributors the right to use our “Focus Media”, “Framedia” and other brand names and logos. However, our contractual arrangements with our regional distributors do not provide us with control or oversight over their everyday business activities, and one or more of our regional distributors may engage in activities that violate PRC laws and regulations governing the advertising industry and advertising content, or other PRC laws and regulations generally. Some of our regional distributors may not possess all the licenses required to operate an advertising business, or may fail to maintain the licenses they currently hold, which could result in local regulators suspending the operations of the network in those cities. In addition, we do not independently review the advertising content that our regional distributors display on the portion of our commercial location network that they operate independently, and our regional distributors may include advertising content on their part of the commercial location network and violate PRC advertising laws or regulations or expose them and us to lawsuits or result in the revocation of their business license. If any of these events occurs, it could harm our reputation in the industry.
We have a material weakness in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
     We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm for a public company must attest to and report on the effectiveness of the company’s internal control over financial reporting. Accordingly, our management assessed our effectiveness of internal control over financial reporting as of December 31, 2008 using the criteria set forth in the report “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (know as COSO).
     Our management has concluded that our internal control over financial reporting was not effective as of December 31, 2008 due to the material weakness we identified. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Largely as a result of a significant number of departures among our executive management and senior financial personnel and competing priorities within the Group, our control procedures to ensure that non-routine transactions and the implications of events subsequent to the balance sheet date (and the information relevant for accounting purposes) known to senior management are communicated timely to those charged with maintaining our books and records did not operate effectively. We have concluded that this deficiency constitutes a material weakness. Since its identification, we have taken, and are continuing to take, the following steps in order to remedy this material weakness: (1) improving internal communications protocols between executive management and accounting and finance personnel and (2) hiring additional accounting and finance personnel to compensate for the aforementioned departures.
     Nevertheless, we cannot assure you that these measures will be effective and that we will be able to resolve the material weakness in internal control over financial reporting in a timely and effective manner or that any significant material weakness in our internal control over financial reporting will not be identified in the future. If, however, we fail to maintain the adequacy of our internal control, we may not be able to conclude that we have effective internal control over financial reporting. Furthermore, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help us to manage the company effectively and prevent fraud. If we are unable to implement solutions to any weaknesses in our existing internal controls and procedures, or if we fail to maintain an effective system of internal controls in the future, we may be unable to accurately report our financial results or prevent fraud and investor confidence and the market price of our ADSs may be adversely impacted.
Failure to manage our growth and operations could strain our management, operational and other resources and we may not be able to achieve anticipated levels of growth in the new networks and media platforms we operate, either of which could materially and adversely affect our business and growth potential.
          To manage our growth and operations, we must develop and improve our existing administrative and operational systems and, our financial and management controls and further expand, train and manage our work force. As we continue this effort, we may incur substantial costs and expend substantial resources in connection with any such expansion or to react to more challenging market conditions, due to, among other things, different technology standards, legal considerations and cultural differences. We may not be able to manage our current or future international operations effectively and efficiently or compete effectively in such markets. We cannot assure you that we will be able to efficiently or effectively manage the growth or changes in our operations, recruit top talent and train our personnel. Any failure to efficiently manage our expansion or changes in operations may materially and adversely affect our business and future growth.
          As we continue to expand into new networks and new media platforms, we expect the percentage of revenues derived from our commercial location network to decline. However, the new advertising networks and media platforms we pursue may not present the same opportunities for growth that we have experienced with our commercial location network and, accordingly, we cannot assure you that the level of growth of our networks will not decline over time.

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Moreover, we expect the level of growth of our commercial location network to decrease as many of the more desirable locations have already been leased by us or our competitors.
If advertisers or the viewing public do not accept, or lose interest in, our out-of-home advertising network, our revenues may be negatively affected and our business may not expand or be successful.
          The market for out-of-home advertising networks in China is relatively new and its potential is uncertain. We compete for advertising spending with many forms of more established advertising media. Our success depends on the acceptance of our out-of-home advertising network by advertisers and their continuing interest in these mediums as components of their advertising strategies. Our success also depends on the viewing public continuing to be receptive towards our advertising network. Advertisers may elect not to use our services if they believe that consumers are not receptive to our networks or that our networks do not provide sufficient value as effective advertising mediums. Likewise, if consumers find some element of our networks, such as the audio feature of our commercial location, in-store, movie theater and outdoor traditional and LED billboard networks, to be disruptive or intrusive, commercial locations, stores and movie theaters may decide not to place our flat-panel displays in their properties or lease us time in movie theaters and advertisers may view our advertising network as a less attractive advertising medium compared to other alternatives. In that event, advertisers may determine to reduce their spending on our advertising network. If a substantial number of advertisers lose interest in advertising on our advertising network for these or other reasons, we will be unable to generate sufficient revenues and cash flow to operate our business, and our advertising service revenue, liquidity and results of operations could be negatively affected.
If the Internet and, in particular, Internet marketing are not broadly adopted in China, our ability to generate revenue and sustain profitability from Allyes could be materially and adversely affected.
          Our future revenues and profits from our online advertising agency business we operate through Allyes are dependent in part upon advertisers in China increasingly accepting the use of the Internet as a marketing channel, which is at an early stage in China. Penetration rates for personal computers, the Internet and broadband in China are all relatively low compared to those in more developed countries. Furthermore, many Chinese Internet users are not accustomed to using the Internet for e-commerce or as a medium for other transactions. Many of our current and potential clients have limited experience with the Internet as a marketing channel, and have not historically devoted a significant portion of their marketing budgets to Internet marketing and promotion. As a result, they may not consider the Internet as effective in promoting their products and services as traditional print and broadcast media.
The growth of our online advertising agency business is substantially dependent on the acceptance of the cost-per-thousand-impressions, or CPM Internet advertising sales model, and certain performance-based Internet advertising sales models, including CPC and CPA models, by industry participants in China.
          The most prevalent Internet advertising sales model in China currently is cost-per-day, whereby Web publishers are paid based on the number of days an Internet ad is on display without regard to the ad’s effectiveness or the number of times the ad is displayed. We believe that the full advantages of Internet marketing in general and our Internet marketing solutions specifically can only be fully realized when more sophisticated Internet advertising sales models such as cost-per-thousand-impressions, or CPM, cost-per-click, or CPC, and cost-per-action, or CPA, are used to purchase ad space. If CPM, CPC and CPA fail to gain acceptance in China, our Internet marketing solutions will be less attractive to industry participants, and the market for those solutions may develop more slowly than we expect or even decline, which would materially and adversely affect our prospects and our business. In addition, if industry participants in China favor other newly-developed Internet advertising sales models incompatible with CPM, CPC or CPA, sales of our Internet marketing solutions may suffer and our revenue and profitability may be materially and adversely affected.
If the delivery of ads or the use of cookies is limited or blocked, our ability to update and expand our user data would be hindered and demand for our Internet marketing solutions could decline.
          Our business may be adversely affected by practices and technologies that impair or undermine the performance of our Internet marketing solutions. For example, Internet users may use software designed to filter or prevent the delivery of Internet ads, including pop-up and pop-under ads; block, disable or remove cookies used by our Internet marketing technologies; or misrepresent measurements of advertising effectiveness. In particular, because we

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rely on cookies to obtain data about Internet users for our database of user information, widespread usage of software in China that disables or removes cookies would limit our ability to update and expand our user information and hinder our ability to provide effective targeted Internet marketing solutions to our clients. We cannot assure you that the proportion of Internet users who employ these or other similar technologies will not increase, thereby diminishing the efficiency of our Internet marketing solutions and causing demand for those solutions to decline.
Our role through Allyes as a supplier of ad space may harm our reputation as an independent purchasing agent and the reputation of our performance-based advertising network as a marketplace for ad space.
          We currently participate in both the purchase and supply of Internet ad space through our online advertising agency business. We also facilitate purchases by our clients of ad space on our performance-based advertising network and may act as sales representative to other Web publishers in the future. In addition, we supply ad space that we purchase from Web publishers on our performance-based advertising network from time to time to advertisers. Our role as a supplier of ad space might harm both our reputation as an independent purchasing agent and the reputation of our performance-based advertising network as a marketplace for ad space. If our reputation as an independent purchasing agent or the reputation of our performance-based advertising network is harmed, our clients may not purchase ad space from us and our business, financial condition and results of operations could be materially and adversely affected.
Our Internet advertising business could be materially and adversely affected if we are unable to introduce new or enhanced Internet marketing services and technologies that meet our clients’ requirements.
          Our future success depends in part upon our ability to enhance and integrate our existing Internet marketing services and technologies that we provide through Allyes and to introduce new, competitively priced services and technologies with features that meet evolving client requirements, all in a timely and cost-effective manner. A number of factors, including the following, could have a negative impact on the success of our services and technologies:
    our failure to anticipate changes in clients’ requirements;
 
    our competitors’ introduction of new services and technologies ahead of our new services and technologies, or their introduction of superior or less expensive services and technologies;
 
    our failure to adapt to Internet advertising technology trends and evolving industry standards; and
 
    delays or difficulties in technology integration, customization or development.
The business and prospects of our online advertising agency business could be harmed if “click-through” fraud is not detected.
          We are exposed to the risk of fraudulent clicks on ads posted on the performance-based advertising network of Allyes by individuals seeking to increase the advertising fees paid to our Web publishers. We may in the future have to refund revenue that our advertisers have paid to us and that was later attributed to click-through fraud. Click-through fraud occurs when an individual clicks on an ad displayed on a website for the sole intent of generating the revenue share payment to the publisher rather than to view the underlying content. From time to time we have experienced fraudulent clicks on the performance-based advertising network of Allyes and we do not allow our advertisers to be charged for such fraudulent clicks. This negatively affects the profitability of our online advertising agency business, and this type of fraudulent act could hurt our brand. If fraudulent clicks are not detected, the affected advertisers may experience a reduced return on their investment in our performance-based advertising network, which could lead the advertisers to become dissatisfied with our online advertising agency business, and in turn lead to loss of advertisers and the related revenue. Furthermore, fraudulent clicks directed at our performance-based advertising network or at other performance-based advertising platforms might encourage the perception among advertisers in China that performance-based sales models like CPC and CPA are not effective, which could slow or even reverse the development of those sales models in China. This could adversely affect our business and our prospects.
System failures could significantly disrupt the operations of our online advertising agency business, which would cause us to lose clients or ad inventory.

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          Our ability to successfully provide clients with Internet marketing services and our performance-based advertising network, and our ability to access user information depends on the continuing and uninterrupted performance of our systems. Sustained or repeated system failures that interrupt our ability to provide services to clients, including failures affecting our ability to deliver ads quickly and accurately and to access our user information base to provide targeted solutions, would reduce significantly the attractiveness of our services to advertisers and Web publishers. Our online advertising agency business could be materially and adversely affected by any damage or failure that impacts data integrity or interrupts or delays our operations. Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious or accidental human acts, and natural disasters. Moreover, despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems in part because we cannot control the maintenance and operation of our third-party data centers. Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future and our ability to provide a record of past transactions. Our data centers and systems incorporate varying degrees of redundancy. All data centers and systems may not automatically switch over to their redundant counterpart. We carry no business insurance policies to compensate us for losses that could occur due to any failures in our systems.
If our Internet marketing technologies contain design or performance defects, our reputation and business may be harmed and we may need to expend significant resources to address liability.
          Technologies as complex as ours may contain design and/or performance defects which are not detectable even after extensive internal testing. Such defects may become apparent only after widespread commercial use. Any design or performance defects in our Internet marketing technologies could have a material and adverse effect on our reputation and business. It is not clear whether China’s existing product liability laws apply to technology products like ours. We cannot assure you that if our Internet marketing technologies are found to have design or performance defects, we will not be liable for product liability claims in China. We do not carry any product liability insurance. Our contracts with our clients currently do not contain provisions to completely limit our exposure to liabilities resulting from product liability claims. Although we have not experienced any product liability claims to date, we cannot assure you that we will not do so in the future.
          Additionally, we rely on our Internet marketing technologies (particularly our ad serving technology) to enhance our Internet marketing services and our performance-based advertising network. Any defect in those technologies could hinder the effectiveness of our Internet marketing services and our performance-based advertising network, which would have a material and adverse effect on our competitiveness, business and future prospects.
We may be liable for content that we serve onto Web publishers’ websites, which could increase our expenses.
          We purchase ad space and then serve our clients’ ads into that ad space. We are liable under PRC law to ensure that the content of the ads that we serve is fair and accurate and is in full compliance with applicable law. Additionally, we may be liable to third-parties for content in our clients’ ads that we serve on Web publishers’ websites or deliver through our performance-based advertising network if those ads contain artwork, text or other content that violates third-parties’ copyrights, trademarks, or other intellectual property rights or if the content is defamatory. We typically indemnify Web publishers against liability arising from the content or nature of ads that we serve on their websites. Any claims or counterclaims against us could harm our reputation, be time-consuming, could result in costly litigation and could divert management’s attention.
The successful operation of our business depends upon the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China.
          Our business depends on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Information Industry of China. In addition, the national networks in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways are the only channels through which a domestic user can connect to the Internet. We cannot assure you that a more sophisticated Internet infrastructure will be developed in China. We or our clients may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not support the demands associated with our growth strategies. For

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example, we intend to expand our sales of rich media technologies, which are bandwidth-intensive. Limited bandwidth in China may hamper the effectiveness of our rich media technologies, which could harm our prospects and business and require us to purchase additional servers in our content distribution network.
We depend on the leadership and services of Jason Nanchun Jiang, who is our founder, chairman, chief executive officer and one of our largest shareholders, and our business and growth prospects may be severely disrupted if we lose his services.
          Our future success is dependent upon the continued service of Jason Nanchun Jiang, our founder, chairman, chief executive officer and one of our largest shareholders. We rely on his industry expertise and experience in our business operations, and in particular, his business vision, management skills, and working relationships with our employees, our other major shareholders, many of our clients and landlords and property managers of the locations in our network. We do not maintain key-man life insurance for Mr. Jiang. If he was unable or unwilling to continue in his present position, or if he joined a competitor or formed a competing company in violation of his employment agreement and noncompetition agreement, we may not be able to replace him easily or at all. As a result, our business and growth prospects may be severely disrupted if we lose his services.
We may need additional capital and we may not be able to obtain it, which could adversely affect our liquidity and financial position.
          We believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs including for working capital and capital expenditures, for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of convertible debt securities or additional equity securities, could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
          Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
    investors’ perception of, and demand for, securities of alternative advertising media companies;
 
    conditions of the U.S. and other capital markets in which we may seek to raise funds;
 
    our future results of operations, financial condition and cash flows;
 
    PRC governmental regulation of foreign investment in advertising services companies in China;
 
    economic, political and other conditions in China; and
 
    PRC governmental policies relating to foreign currency borrowings.
          We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
If we are unable to adapt to changing regulatory requirements or advertising trends and the technology needs of advertisers and consumers, we will not be able to compete effectively and we will be unable to increase or maintain our revenues which may materially and adversely affect our business prospects and revenues.
          The market for out-of-home advertising requires us to continuously identify new advertising trends and the technology needs of advertisers and consumers, which may require us to develop new features and enhancements for our advertising network. The majority of our displays use 17-inch liquid crystal displays screens. We also have a growing number of displays that use larger LCD and plasma screens as well as large size LED digital billboards. We also upgraded portions of our poster frame network with digital poster LCD displays. Allyes provides online advertising

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services to customers. Our movie theater network provides advertising time prior to movie screenings by leasing screen time. In the future, subject to relevant PRC laws and regulations, we may use other technology, such as cable or broadband networking, advanced audio technologies and high-definition panel technology. We may be required to incur development and acquisition costs in order to keep pace with new technology needs but we may not have the financial resources necessary to fund and implement future technological innovations or to replace obsolete technology. Furthermore, we may fail to respond to these changing technology needs. For example, if the use of broadband networking capabilities on our advertising network becomes a commercially viable alternative and meets all applicable PRC legal and regulatory requirements, and we fail to implement such changes on our commercial location network and in-store network or fail to do so in a timely manner, our competitors or future entrants into the market who do take advantage of such initiatives could gain a competitive advantage over us. If we cannot succeed in complying with new regulatory requirements or developing and introducing new features on a timely and cost-effective basis, advertiser demand for our advertising networks may decrease and we may not be able to compete effectively or attract advertising clients, which would have a material and adverse effect on our business prospects and revenues.
We may be subject to, and may expend significant resources in defending against, government actions and civil suits based on the content and services we provide through our digital out-of-home advertising networks mobile handset advertising network or Internet advertising services network.
          PRC advertising laws and regulations require advertisers, advertising operators and advertising distributors, including businesses such as ours, to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator’s license for advertising business operations.
          As an out-of-home advertising service provider, we are obligated under PRC laws and regulations to monitor the advertising content that is shown on our out-of-home advertising networks for compliance with applicable law. In addition, each of our regional distributors is obligated under PRC laws and regulations to monitor the advertising content shown on the portion of our out-of-home television advertising network each of them operates. In general, the advertisements shown on our out-of-home television advertising network and the portion of our advertising network operated by our regional distributors have previously been broadcast over public television networks and have been subjected to internal review and verification of such networks. We and our regional distributors are still separately required to independently review and verify these advertisements for content compliance before displaying the advertisements. In addition, where a special government review is required for specific product advertisements before broadcasting, we and our regional distributors are separately obligated to confirm that such review has been performed and approval has been obtained. We employ, and our regional distributors are required under the terms of our agreements with them to employ, qualified advertising inspectors who are trained to review advertising content for compliance with relevant PRC laws and regulations. In addition, for advertising content related to specific types of products and services, such as alcohol, cosmetics, pharmaceuticals and medical procedures, we and our distributors are required to confirm that the advertisers have obtained requisite government approvals including the advertiser’s operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with the local authorities. We endeavor to comply, and encourage our regional distributors to take measures to comply, with such requirements, including by requesting relevant documents from the advertisers. Starting in January 2006, we began to operate a network of advertising poster frames placed primarily in elevators and public areas of residential complexes. The advertisements shown on our poster frame network are defined as print advertisements under PRC laws and regulations and are also subject to the same legal requirements as advertisements shown on our out-of-home television advertising networks. Outdoor advertisements must be registered with the local branch of the State Administration for Industry and Commerce, or SAIC, before dissemination, and advertising distributors are required to submit a registration application form and the content of the advertisement to the local SAIC and receive an advertising registration certificate from the local SAIC. Our reputation will be tarnished and our results of operations may be adversely affected if advertisements shown on our out-of-home television advertising networks, poster frame network, movie theater or outdoor traditional or LED billboard network are provided to us by our advertising clients in violation of relevant PRC advertising laws and regulations or that the supporting documentation and government approvals provided to us by our advertising clients in connection with such advertising content are not complete or that the advertisements that our regional distributors have procured for broadcasting on our network have not received required approval from the relevant local supervisory bodies or are not content compliant.

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          In addition, we commenced operation of our outdoor LED billboard network in April 2006 and traditional billboard network in January 2007. The placement and installation of traditional and LED billboards are subject to municipal zoning requirements and governmental approvals, including application for an outdoor advertising registration certificate for each traditional or LED billboard subject to a term of use for a period of time, which is typically no more than two years for traditional billboards and no more than four years for LED billboards. If the existing traditional or LED billboards placed by our location provider or us are required to be removed, the attractiveness of this portion of our advertising network will be diminished. Moreover, failure by an owner of traditional or LED billboards to maintain outdoor advertising registration certificates would result in the inability to lease or market such space for the placement of advertisements.
          China has also enacted regulations governing telecommunication service providers and the distribution of news and other information. In the past, the Chinese government has stopped the distribution of information over the Internet and telecommunications networks that it believes to violate Chinese law, including content that is pornographic or obscene, incites violence, endangers national security, is contrary to the national interest or is defamatory. If any of the content that we deliver through our Internet advertising network is found to violate Chinese laws and regulations, we could be subject to fines or suspensions.
          Moreover, civil claims may be filed against us for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of the information displayed on our advertising network. If consumers find the content displayed on our advertising network to be offensive, landlords, property managers, other location providers or telecommunication network operators may seek to hold us responsible for any consumer claims or may terminate their relationships with us.
          In addition, if the security of our content management system is breached through the placement of unauthorized compact flash, or CF’ cards in our flat-panel displays and unauthorized images, text or audio sounds are displayed on our advertising network, viewers or the PRC government may find these images, text or audio sounds to be offensive, which may subject us to civil liability or government censure despite our efforts to ensure the security of our content management system. Any such event may also damage our reputation. If our advertising viewers do not believe our content is reliable or accurate, our business model may become less appealing to viewers in China and our advertising clients may be less willing to place advertisements on our advertising network.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially disrupt our business.
          We cannot be certain that our advertising displays or other aspects of our business do not or will not infringe upon patents, copyrights or other intellectual property rights held by third parties. Although we are not aware of any such claims, we may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, which may materially and adversely disrupt our business.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
          We regard our copyrights, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of the intellectual property used in our business may adversely affect our business and reputation.
          We have historically relied on a combination of trademark and copyright law, trade secret protection and restrictions on disclosure to protect our intellectual property rights. We enter into confidentiality and invention assignment agreements with all our employees. We cannot assure you that these confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our proprietary technology will not otherwise become known to, or be independently developed by, third parties.

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          We are in the process of registering in China many of the trademarks used in our business. We cannot assure you that any of our trademark applications will ultimately proceed to registration or will result in registration with scope adequate for our business. Some of our pending applications or registrations may be successfully challenged or invalidated by others. If our trademark applications are not successful, we may have to use different marks for affected services or technologies, or enter into arrangements with any third parties who may have prior registrations, applications or rights, which might not be available on commercially reasonable terms, if at all.
          In addition, policing unauthorized use of our proprietary technology, trademarks and other intellectual property is difficult and expensive, and litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.
We face significant competition, and if we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.
          We compete with other advertising companies in China. We compete for advertising clients primarily on the basis of network size and coverage, location, price, the range of services that we offer and our brand name. We also face competition from other out-of-home television advertising network operators for access to the most desirable locations in cities in China. Individual buildings, hotels, restaurants and other commercial locations and hypermarket, supermarket and convenience store chains may also decide to independently, or through third-party technology providers, install and operate their own flat-panel television advertising screens. Our in-store network faces competition with similar networks operated by domestic out-of-home advertising companies. Our Internet advertising services compete with those provided by domestic and international advertising agencies, including the WPP Group. We also compete for overall advertising spending with other alternative advertising media companies, such as Internet, wireless communications, street furniture, billboard, frame and public transport advertising companies, and with traditional advertising media, such as newspapers, television, magazines and radio.
          In the future, we may also face competition from new entrants into the out-of-home television advertising sector. Our sector is characterized by relatively low fixed costs and, as is customary in the advertising industry, we do not have exclusive arrangements with our advertising clients. In addition, since December 10, 2005, wholly foreign-owned advertising companies are allowed to operate in China, which may expose us to increased competition from international advertising media companies attracted to opportunities in China.
          Increased competition could reduce our operating margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages, such as significantly greater financial, marketing or other resources, or exclusive arrangements with desirable locations, and others may successfully mimic and adopt our business model. Moreover, increased competition will provide advertisers with a wider range of media and advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins and profits. We cannot assure you that we will be able to successfully compete against new or existing competitors.
We do not maintain any business liability disruption or litigation insurance coverage for our operations, and any business liability, disruption or litigation we experience might result in our incurring substantial costs and the diversion of resources.
          The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business disruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Any business disruption or litigation may result in our incurring substantial costs and the diversion of resources.
We may become a passive foreign investment company, or PFIC, which could result in adverse United States federal income tax consequences to U.S. investors.

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          Based upon the past and projected composition of our income and valuation of our assets, including goodwill, we believe we were not a passive foreign investment company, or PFIC, for 2007, we do not expect to be a PFIC for 2008, and we do not expect to become one in the future, although there can be no assurance in this regard. Furthermore, it is not entirely clear how the contractual arrangements between us and our consolidated VIEs will be treated for purposes of the PFIC rules. If, however, we were a PFIC, such characterization could result in adverse United States federal income tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, our U.S. investors will become subject to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the then market value of our ADSs, which is subject to change. We cannot assure you that we will not be a PFIC for 2008 or any future taxable year. For more information on PFICs, see “Item 10.E Additional Information — Taxation — United States Federal Income Taxation”.
There may be significant United States federal income tax consequences to you if we are able to complete the sale of substantially all of our assets of our out-of-home advertising networks to Sina.
          Under our current structure, we expect that the distribution of Sina shares following the completion of the sale of substantially all of our assets of our out-of-home advertising networks to Sina (the “Sina Sale”) will be taxable as a dividend to United States Holders (as defined under “Additional Information—Taxation—United States Federal Income Taxation”) of our ordinary shares or ADSs. We believe that dividends paid on our ADS, but not our ordinary shares, are currently eligible for reduced rates of taxation.
          In connection with the Sina Sale, we may elect to be treated as a partnership for United States federal income tax purposes. Such an election would generally be treated as if we had liquidated for United States federal income tax purposes and the Sina shares would be treated as having been distributed as part of such deemed liquidation. Accordingly, the distribution of Sina shares would not be taxable as a dividend to United States Holders. Instead, a United States Holder would generally be treated as if such holder had exchanged its ordinary shares or ADSs for the proportionate share of our assets represented by such ordinary share or ADS, including the Sina shares distributed. As result of such deemed exchange, a United States Holder would generally recognize gain or loss equal to the difference, if any, between the fair market value of the property deemed received in the liquidation (including the Sina shares) and such United States Holder’s adjusted tax basis in its ordinary shares or ADSs.
          Following any such election, we expect that United States Holders of our ordinary shares or ADSs will be treated as partners in a partnership for United States federal income tax purpose. The United States federal income tax treatment of partners of a partnership is complex. In general, a partnership is not itself subject to United States federal income tax. Rather, each taxable year the partnership reports to each of its partners such partner’s allocable share of the partnership’s income, gain, loss and deductions for such taxable year. Each partner is required to report and take its allocable share of such items into account when determining its United States federal income tax liability. Prior to the consummation of the Sina Sale, we will provide additional information regarding the United States federal income tax considerations of the Sina Sale and distribution of Sina shares. See “Additional Information—Taxation—United States Federal Income Taxation.
Risks Relating to Regulation of Our Business and to Our Structure
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC governmental restrictions on foreign investment in the advertising industry, we could be subject to severe penalties.
          Substantially all of our operations are or will be conducted through our indirectly wholly-owned operating subsidiaries in China, which we collectively refer to as our PRC operating subsidiaries, and through our contractual arrangements with our consolidated affiliated entities in China. PRC regulations require any foreign entities that invest directly in the advertising services industry to have at least two years of direct operations in the advertising industry outside of China. Since December 10, 2005, foreign investors have been allowed to own directly 100% of PRC

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companies operating an advertising business if the foreign entity has at least three years of direct operations in the advertising business outside of China or less than 100% if the foreign investor has at least two years of direct operations in the advertising industry outside of China. We do not currently directly operate an advertising business outside of China and cannot qualify under PRC regulations any earlier than two or three years after we commence any such operations outside of China or until we acquire a company that has directly operated an advertising business outside of China for the required period of time. Accordingly, our PRC operating subsidiaries which are directly owned by non-PRC subsidiaries of ours, which we collectively refer to as wholly-foreign owned, or WFOE, operating subsidiaries, are currently ineligible to apply for the required licenses for providing advertising services in China. Our non-PRC subsidiaries are ineligible to apply for such required licences too. As such, our advertising businesses are currently primarily provided through contractual arrangements between our WFOE operating subsidiaries and our consolidated affiliated entities in China, which we collectively refer to as our PRC operating affiliates. These PRC operating affiliates include (i) Shanghai Focus Media Advertisement Co., Ltd. and its subsidiaries with regard to our out-of-home television networks, (ii) a group of PRC companies, including Framedia Advertisement, Guangdong Framedia and New Structure Advertisement, with regard to our poster frame network which operate the business of Framedia, and which we refer to as the Framedia operating affiliates, (iii) a group of PRC companies with regard to our online advertising agency business which operate the business of Allyes, and which we refer to as the Allyes operating affiliates, (iv) three PRC companies, including Shanghai Ruili Advertisement Co., Shanghai Xinnuo Advertisement Co. and Shanghai Chuanzhi Advertisement Co., and which we refer to as the Huaguang operating affiliates, and another group of PRC companies, referred to as the Tuojia operating affiliates, that operate our traditional billboard network, and (v) a group of PRC operating affiliates, referred to as Yangshi Sanwei operating affiliates, that operate our movie theatre advertising network. The PRC restriction on foreign investment in advertising industry, however, does not apply to wholly foreign owned subsidiaries established in China, or WFOEs, and WFOEs may establish PRC subsidiaries to operate advertising business directly in China. Accordingly, a portion of the operations of our commercial location network are conducted by our indirect PRC subsidiaries owned by our WFOE operating subsidiaries. Accordingly, our advertising services are currently conducted by (i) our indirect PRC operating subsidiaries and (ii) our PRC operating affiliates. Our PRC operating affiliates, which we control through contractual relationships are owned by either (i) one or more PRC citizens designated by us, (ii) one or more PRC entities owned by our subsidiaries or by our designated appointees or (iii) a combination of PRC citizens and PRC entities owned by our subsidiaries designated by us or our designated appointees. Our PRC operating affiliates, certain of their respective subsidiaries and certain of our indirect PRC operating subsidiaries hold the requisite licenses to provide advertising services in China. Our PRC operating affiliates and their respective subsidiaries directly operate our advertising network. While our indirect PRC operating subsidiaries are eligible for the required licenses for providing advertising services in China and some of our indirect PRC operating subsidiaries have obtained such licences, we have been using and are expected to continue to use PRC operating affiliates and their subsidiaries to operate a significant portion of our advertising business for the foreseeable future. We have entered into contractual arrangements with PRC operating affiliates and their respective subsidiaries, pursuant to which we, through our PRC operating subsidiaries or non-PRC subsidiaries, provide technical support and consulting services to our PRC operating affiliates and their subsidiaries. In addition, we have entered into agreements with our PRC operating affiliates and each of their shareholders which provide us with the substantial ability to control these affiliates and their existing and future subsidiaries.
          Jason Jiang, who is one of the shareholders of a number of the PRC operating affiliates that hold the advertising operating licenses connected with our operating businesses, completed procedures to take on citizenship of another jurisdiction in the second quarter of 2009. Based on enquiries and discussions with the relevant PRC regulatory authorities, we have been informed that Jason Jiang’s change in citizenship does not change the status and nature related to our PRC operating affiliates and we believe such change will not have any material adverse effect on our business operations.
          If we, our existing or future PRC operating subsidiaries and affiliates are found to be in violation of any existing or future PRC laws or regulations or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the State Administration for Industry and Commerce, or SAIC, which regulates advertising companies, would have broad discretion in dealing with such violations, including:
    revoking the business and operating licenses of our PRC subsidiaries and affiliates;
 
    discontinuing or restricting our PRC subsidiaries’ and affiliates’ operations;

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    imposing conditions or requirements with which we or our PRC subsidiaries and affiliates may not be able to comply;
 
    requiring us or our PRC subsidiaries and affiliates to restructure the relevant ownership structure or operations; or
 
    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.
          The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.
We use contractual arrangements with our PRC operating affiliates and their subsidiaries and shareholders for a significant portion of our China operations, which may not be as effective in providing operational control as direct ownership.
          We have in the past used, and will continue in the future to use, contractual arrangements with our PRC operating affiliates and their respective subsidiaries and shareholders to operate a significant portion of our advertising business. For a description of these contractual arrangements, see the sections titled “Organizational Structure” “Business Overview — Recent Developments” in Item 4. “Information on the Company” and “Item 7. — Major Shareholders and Related Party Transactions”. These contractual arrangements may not be as effective in providing us with control over our PRC operating affiliates and their subsidiaries as direct ownership. If we had direct ownership of our PRC operating affiliates and their respective subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of those companies, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legal matter, if our PRC operating affiliates or any of their subsidiaries and shareholders fails to perform its or his respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you to be effective. For example, if any PRC citizen designated by us as the shareholder were to refuse to transfer his equity interest in any of our PRC operating affiliates to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if the PRC shareholder were otherwise to act in bad faith toward us, then we may have to take legal action to compel him to fulfill his contractual obligations. Accordingly, it may be difficult for us to change our corporate structure or to bring claims against our PRC operating affiliates if they do not perform their obligations under its contracts with us or if any of the PRC citizens who hold the equity interest in our PRC operating affiliates do not cooperate with any such actions.
          Many of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our operating entities, and our ability to conduct our business may be negatively affected.
Contractual arrangements we have entered into among our subsidiaries and affiliated entities may be subject to scrutiny by the PRC tax authorities and a finding that we owe additional taxes or are ineligible for our tax exemption, or both, could substantially increase our taxes owed, and reduce our net income and the value of your investment.
          Under PRC law, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. If any of the transactions we have entered into among our subsidiaries and affiliated entities are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective PRC entities and assess late payment interest and penalties. See “Item 5. Operating and Financial Review and Prospects — Taxation” for a discussion of the transactions referred to above. A finding by the PRC tax authorities that any of our PRC operating

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subsidiaries or affiliated entities are ineligible for their tax exemptions, would substantially increase our taxes owed and reduce our net income and the value of your investment. As a result of this risk, you should evaluate our results of operations and financial condition without regard to these tax savings.
          We rely principally on dividends and other distributions on equity paid by our wholly-owned operating subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our operating subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business.
          We are a holding company, and we rely principally on dividends and other distributions on equity paid by our PRC operating subsidiaries for our cash requirements, including the funds necessary to service any debt we may incur. If any of our PRC operating subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements our PRC operating subsidiaries currently have in place with our PRC operating affiliates and their respective subsidiaries in a manner that would materially and adversely affect our PRC operating subsidiaries’ ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by our PRC operating subsidiaries only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, each of our PRC operating subsidiaries is also required to set aside a portion of its net income each year to fund specific reserve funds. These reserves are not distributable as cash dividends. In addition, subject to certain cumulative limits, the statutory general reserve fund requires annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends. As a result of these PRC laws and regulations, our PRC operating subsidiaries and our PRC operating affiliates are restricted in their ability to transfer a portion of their net assets to us whether in the form of dividends, loans or advances. As of December 31, 2008, the amount of these restricted portions was approximately $698.8 million. Any limitation on the ability of our PRC operating subsidiaries to pay dividends to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
Our business operations may be affected by legislative or regulatory changes.
          There are no existing PRC laws or regulations that specifically define or regulate out-of-home television. Changes in laws and regulations or the enactment of new laws and regulations governing placement or content of out-of-home advertising, our business licenses or otherwise affecting our business in China may materially and adversely affect our business prospects and results of operations. An example of regulatory changes that affected our business was the introduction of “anti-spam” rules governing the sending of SMS messages without a user’s consent. These changes in rules governing wireless services contributed to a market environment that eventually contributed to our decision to terminate our mobile handset advertising network in April and December 2008.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiaries and affiliates.
          As an offshore holding company of our PRC operating subsidiaries and affiliates, we may make loans to our PRC subsidiaries and consolidated PRC affiliated entities, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries or consolidated PRC affiliated entities are subject to PRC regulations and approvals. For example:
    loans by us to our foreign invested enterprises to finance their respective activities cannot exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange or its local counterpart; and
 
    loans by us to our PRC operating affiliates or their respective subsidiaries, which are domestic PRC enterprises, must be approved by the relevant government authorities and must also be registered with the PRC State Administration of Foreign Exchange or its local counterpart.
          We may also determine to finance our PRC foreign invested enterprises by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart. Because our

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PRC operating affiliates and their respective subsidiaries are domestic PRC enterprises, we are not likely to finance their activities by means of capital contributions due to regulatory issues relating to foreign investment in domestic PRC enterprises, as well as the licensing and other regulatory issues discussed in “Business Overview — Regulatory Matters” of Item 4. “Information on the Company” of this annual report. We cannot assure you that we can obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our PRC operating affiliates or any of their respective subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations would be negatively affected which would adversely and materially affect our liquidity and our ability to expand our business.
Risks Relating to the People’s Republic of China
          Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
The PRC’s economic, political and social conditions, as well as governmental policies, could affect the financial markets in China and our liquidity and access to capital and our ability to operate our business.
          The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth over the past, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, under current PRC regulations, since December 10, 2005, foreign entities have been allowed to directly own 100% of a PRC advertising business if the foreign entity has at least three years of direct operations of an advertising business outside of China, or to directly own less than 100% of a PRC advertising business if the foreign entity has at least two years of direct operations of an advertising business outside of China. This may encourage foreign advertising companies with more experience, greater technological know-how and more extensive financial resources than we have to compete against us and limit the potential for our growth. Moreover, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
          The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency- denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government implemented a number of measures, such as raising bank reserves against deposit rates to place additional limitations on the ability of commercial banks to make loans and raise interest rates, in order to slow down specific segments of China’s economy which it believed to be overheating. These actions, as well as future actions and policies of the PRC government, could materially affect our liquidity and access to capital and our ability to operate our business.
The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.
          The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 26 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Each of our PRC operating subsidiaries and affiliates is subject to PRC laws and regulations. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have

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significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. For example, these uncertainties may impede our ability to enforce the contracts we have entered into with Focus Media Advertisement and its subsidiaries. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operation. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the advertising industry, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with Focus Media Advertisement and its subsidiaries, and other foreign investors, including you.
If tax benefits currently available to us in PRC were no longer available under the new Enterprise Income Taxes (“EIT”) law which became effective on January 1, 2008, our effective income tax rates for our PRC operations could increase.
          We are incorporated in the Cayman Islands where no income taxes are imposed.
          We generated substantially all our net income from our PRC operations. Our China operations are conducted through various subsidiaries and variable interest entities, or VIEs. Prior to January 1, 2008, pursuant to the PRC Income Tax Laws, our subsidiaries and VIEs were generally subject to EIT at a statutory rate of 33%, which comprised 30% national income tax and 3% local income tax. Some of the Company’s subsidiaries and VIEs were newly incorporated enterprises engaged in advertising industry which were entitled to a two-year tax exemption holiday, commencing from the first operating year. One of our VIEs, Beijing Focus Media Wireless Co., Ltd., was a qualified new technology enterprise and under PRC Income Tax Laws was subject to a preferential tax rate of 15%, plus a three-year tax exemption followed by three years with a 50% reduction in the tax rate, commencing from the first profitable year.
          The newly enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations to the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. Under the EIT Law, China adopted a uniform tax rate of 25% for all enterprises (including domestically-owned enterprises and foreign-invested enterprises) and revoked the previous tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. There is a transition period for enterprises, whether foreign-invested or domestic, which received preferential tax treatments granted by relevant tax authorities prior to January 1, 2008. Enterprises that were subject to an enterprise income tax rate lower than 25% prior to January 1, 2008 may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the new law. Enterprises that were entitled to exemptions or reductions from the standard income tax rate for a fixed term prior to January 1, 2008 may continue to enjoy such treatment until the fixed term expires. Preferential tax treatments may continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises that qualify as “new and high technology enterprises strongly supported by the state” are entitled to a 15% enterprise income tax rate.
          Most of the Company’s subsidiaries and VIEs are expected to transition from 33% to 25% starting from January 1, 2008. Those that currently enjoy a lower tax rate of 15% will gradually transition to the uniform tax rate of 25% from 2008 to 2012 unless the company obtains the “new and high technology enterprise” status under the new tax law.
Dividends we receive from our operating subsidiaries located in the PRC may be subject to PRC withholding tax.
          The newly enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT Law provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC, and the State Council has reduced such rate to 10% through the implementation regulations. We are a Cayman Islands holding company and substantially all of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% income tax if we are considered as a “non-resident enterprise” under the EIT Law. If we are required under the EIT Law to pay income tax for any dividends we

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receive from our subsidiaries, it will materially and adversely affect the amount of dividends, if any, we may pay to our shareholders and ADS holders.
We may be deemed a PRC resident enterprise under the EIT Law and be subject to the PRC taxation on our worldwide income.
          The EIT Law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise. If we are treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations, although dividends distributed from our PRC subsidiaries to us could be exempt from Chinese dividend withholding tax, since such income is exempted under the new EIT Law to a PRC resident recipient.
Dividends payable by us to our foreign investors and gain on the sale of our ADSs or ordinary shares may become subject to taxes under PRC tax laws.
          Under the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises,” or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs may be materially and adversely affected.
Recent PRC regulations relating to offshore investment activities by PRC residents may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders who are PRC residents fail to make any required applications and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
          The PRC National Development and Reform Commission, or NDRC, and SAFE recently promulgated regulations that require PRC residents and PRC corporate entities to register with and obtain approvals from relevant PRC government authorities in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
          Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file with the local branch of SAFE, with respect to that offshore company, any material change involving capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long term equity or debt investment or creation of any security interest over the assets located in China. If any PRC shareholder fails to make the required SAFE registration, the PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

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          We cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any registrations or approvals required under these regulations or other related legislation. Furthermore, as the regulations are relatively new, the PRC government has yet to publish implementing rules, and much uncertainty remains concerning the reconciliation of the new regulations with other approval requirements. It is unclear how these regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. The failure or inability of our PRC resident shareholders to comply with these regulations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our ability to inject additional capital into our PRC subsidiaries and the ability of Focus Media Technology, Focus Media Digital, New Focus Media Advertisement, New Focus Media Agency, Focus Media Defeng Advertisement, Framedia Investment or New Allyes Technology, our PRC subsidiaries, to make distributions or pay dividends, or materially and adversely affect our ownership structure. If any of the foregoing events occur, our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected. See “Exchange Controls” in Item 10. “Additional Information” in this annual report.
The PRC tax authorities may require us to pay additional taxes in connection with our acquisitions of offshore entities that conducted their PRC operations through their affiliates in China.
          Our operations and transactions are subject to review by the PRC tax authorities pursuant to relevant PRC laws and regulations. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, in the case of some of our acquisitions of offshore entities that conducted their PRC operations through their affiliates in China, we cannot assure you that the PRC tax authorities will not require us to pay additional taxes in relation to such acquisitions, in particular where the PRC tax authorities take the view that the previous taxable income of the PRC affiliates of the acquired offshore entities needs to be adjusted and additional taxes be paid. In the event that the sellers failed to pay any taxes required under PRC law in connection with these transactions, the PRC tax authorities might require us to pay the tax, together with late-payment interest and penalties. See “Item 5. Operating and Financial Review and Prospects — Acquisitions”.
A PRC rule on mergers and acquisitions may subject us to sanctions, fines and other penalties and affect our future business growth through acquisition of complementary business.
          On August 8, 2006, six PRC government and regulatory authorities, including the PRC Ministry of Commerce and the Chinese Securities Regulatory Commission, or the CSRC, promulgated a rule entitled “Provisions regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,” or the New M&A Rule, which became effective on September 8, 2006. The New M&A Rule, among other things, requires that an offshore specific purpose vehicle, or SPV, formed for the listing purpose through acquisition of a PRC domestic entity and controlled by PRC residents should obtain approval from the CSRC prior to publicly listing its securities on an overseas stock market. Based on consultation with the International Department of the CSRC regarding its interpretation of the New M&A Rule, our PRC counsel, Global Law Offices, advised us that the CSRC approval was not required for the listing of our ADSs on Nasdaq Global Market and subsequent offerings. However, we cannot assure you that the relevant PRC government agency, including the Ministry of Commerce or other applicable departments of the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that the CSRC’s approval was, or will be, required for future offerings of our ADSs on Nasdaq Global Market, and we may face sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from any offering of our ADSs into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
          The New M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. Complying with the requirements of the New M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit the completion of such transactions, which could affect our ability to expand our business or maintain our market share.

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Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
          Substantially all of our revenues and operating expenses are denominated in Renminbi. The Renminbi is currently convertible under the “current account”, which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans. Currently, each of Focus Media Technology and Framedia Investment may purchase foreign exchange for settlement of “current account transactions”, including payment of dividends to us, without the approval of SAFE. However, we cannot assure you that the relevant PRC governmental authorities will not further limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenues will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the State Administration of Foreign Exchange and other relevant PRC governmental authorities. This could affect the ability of each of Focus Media Technology and Framedia Investment to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.
Fluctuations in exchange rates could result in foreign currency exchange losses.
          Because our earnings and cash and cash equivalent assets are denominated in Renminbi and the net proceeds from this offering will be denominated in U.S. dollars, fluctuations in exchange rates between U.S. dollars and Renminbi will affect the relative purchasing power of these proceeds and our balance sheet and earnings per share in U.S. dollars following this offering. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Since July 2005 the Renminbi is no longer pegged solely to the U.S. dollar. Instead, it is reported to be pegged against a basket of currencies, determined by the People’s Bank of China, against which it can rise or fall by as much as 0.3% each day. This change in policy has resulted in the gradual increase in the value of the Renminbi against the U.S. dollar over time. As of March 31, 2009, the Renminbi had appreciated approximately 17.4% against the U.S. dollar since July 21, 2005. On March 31, 2008, the Renminbi was valued against the U.S. dollar at approximately RMB6.8240 to the U.S. dollar. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future which will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
          Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Any future outbreak of severe acute respiratory syndrome, avian flu or swine flu in China, or similar adverse public health developments, may severely disrupt our business and operations.
          From December 2002 to June 2003, China and other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. Since September 2003, however, a number of isolated new cases of SARS have been reported, most recently in central China in April 2004. During May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS. In addition, many countries, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu. This disease, which is spread through poultry populations, is capable in some circumstances of being transmitted to humans and is often fatal. In April 2009, an outbreak of the H1N1 virus, also commonly referred to as “swine flu”, occurred in Mexico and has spread to other countries. Cases of swine flu have been reported in Hong Kong and mainland China. A new outbreak of SARS or an outbreak of avian or swine flu may result in health or other government authorities requiring the closure of our offices or other businesses, including office buildings, retail stores and other commercial

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venues, which comprise the primary locations where we provide our out-of-home television and poster frame advertising services. Any recurrence of the SARS outbreak, an outbreak of avian or swine flu or a development of a similar health hazard in China, may deter people from congregating in public places, including a range of commercial locations such as office buildings and retail stores. Such occurrences would severely impact the value of our out-of-home television and poster frame advertising networks to advertisers, significantly reduce the advertising time purchased by advertisers and severely disrupt our business and operations.
Risks Relating to Our ADSs and Our Trading Markets
The price of our ADSs has been volatile and may continue to be volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive prices.
          The trading price of our ADSs has been and may continue to be subject to wide fluctuations. Since July 13, 2005, the closing prices of our ADSs on the Nasdaq Global Market has ranged from a low of $4.84 to a high of $65.88 per ADS and the last reported sale price on June 29, 2009 was $7.91. From July 13, 2005 until April 10, 2007, we used an ADS-to-share ratio of 10-to-one. Starting April 11, 2007, we reduced this ratio to five-to-one. All ADS trading prices on the Nasdaq set forth in this annual report, including historical trading and closing prices, have been adjusted to reflect the new ADS-to-share ratio of five-to-one. Our ADS price may fluctuate in response to a number of events and factors. The financial markets in general, and the market prices for many PRC companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies.
          In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific business reasons. Factors such as variations in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our advertising network could cause the market price for our ADSs to change substantially. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade. We cannot give any assurance that these factors will not occur in the future.
We have in the past failed to comply with Nasdaq Listing Rules, including the timely filing of our annual report and maintaining a majority of independent directors on our board of directors.
          Our failure to timely file our 2006 annual report on Form 20-F subjected us to delisting review by the Nasdaq Listing Qualifications Panel. In addition, in the past we previously failed to maintain a majority of independent directors on our board of directors, which put us out of compliance with Nasdaq Listing Rule 5605. See “Management”. On October 4, 2007, we received a letter from Nasdaq Listing Qualifications notifying us that we had regained compliance with all Nasdaq listing qualifications by filing our annual report for 2006.
          Our historical failure to comply with Nasdaq Listing Rules has on one occasion subjected us to delisting review. If for any reason we fail to maintain compliance with Nasdaq Listing Rules in the future, we could be subject to additional delisting procedures and sanctions, which could affect our reputation and the market value of our securities, and could result in shareholder litigation, which may divert the attention of our management and force us to expend resources to defend against such claims. Any litigation may have a material and adverse effect on our business and future results of operations.
A significant percentage of our outstanding ordinary shares is beneficially owned by Jason Nanchun Jiang, our founder, chairman and chief executive officer, and as a result, he may have significantly greater influence on us and our corporate actions by nature of the size of his shareholdings relative to our public shareholders; in addition Charles Chao, one of our directors, is president and chief executive officer of Sina, and his interests as our director may conflict with his interests as an officer of Sina.
          Jason Nanchun Jiang beneficially owns approximately 10.17% of our outstanding ordinary shares. Accordingly, Jason Nanchun Jiang has significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Further, Jason Nanchun Jiang is also one of two shareholders of certain of our affiliated PRC entities with which we have contractual arrangements that are essential to our business. The continuing cooperation of these PRC affiliated entities, and their shareholders, branches and subsidiaries, is important to our business. Without Jason Nanchun Jiang’s consent,

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we could be prevented from entering into transactions or conducting business that could be beneficial to us. Accordingly, Mr. Jiang’s control of Focus Media Advertisement could hinder any change in control of our business, particularly where such change of control would benefit shareholders other than Mr. Jiang. It would be difficult for us to change our corporate structure if any disputes arise between us and Mr. Jiang or if he fails to carry out his contractual and fiduciary obligations to us. Thus, Jason Nanchun Jiang’s interests as an officer and employee may differ from his interests as a shareholder or from the interests of our other shareholders, including you.
          In addition, Charles Chao, who is one of our independent directors, is also president and chief executive officer of SINA Corporation, with which we have entered into an asset purchase agreement to sell a substantial all of the assets of our out-of-home digital networks. Accordingly, his interests as our director and his contractual and fiduciary obligations to us, may conflict with his interest as an executive officer of Sina. While Mr. Chao recused himself from all Focus Media board of director meetings, resolutions and votes relating to our entering into the asset purchase agreement, his interests as our director may differ from his interests as an executive officer of Sina.
Anti-takeover provisions in our charter documents may discourage any hostile acquisition attempt by a third party, which could limit our shareholders’ opportunity to sell their shares at a premium.
          Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.
          For example, our board of directors will have the authority, without further action by our shareholders, to issue preference shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preference shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if the Board of Directors issues preference shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected.
          In addition, some actions require the approval of a supermajority of at least two thirds of our board of directors which, among other things, would allow our non-independent directors to block a variety of actions or transactions, such as a merger, asset sale or other change of control, even if all of our independent directors unanimously voted in favor of such action, further depriving our shareholders of an opportunity to sell their shares at a premium. In addition, our directors serve terms of three years each, which terms are not staggered. The length of these terms could present an additional obstacle against the taking of an action, such as a merger or other change of control, that could be in the interest of our shareholders.
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.
          Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.
          As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
Judgments obtained against us by our shareholders may not be enforceable.

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          We are a Cayman Islands company and substantially all of our assets are located outside of the United States. All of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not resident in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of United States courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, there is uncertainty as to whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement.
          Holders of our ADSs may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.
The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
          Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:
    we have failed to timely provide the depositary with our notice of meeting and related voting materials;
 
    we have instructed the depositary that we do not wish a discretionary proxy to be given;
 
    we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
 
    a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
 
    voting at the meeting is made on a show of hands.
          The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
You may not receive distributions on our ordinary shares or any value for them if it is illegal or impractical to make them available to you.

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          The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your ADSs.
You may be subject to limitations on transfer of your ADSs.
          Your ADSs represented by American Depositary Receipts are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Dividends payable by us to our foreign investors may become subject to withholding taxes under PRC tax laws.
          Under the EIT Law and implementation regulations issued by the State Council, interest and dividends payable to foreign investors which are “derived from sources within the PRC” are subject to income tax at the rate of 10% by way of withholding. Since we are a holding company and substantially all of our income will come from dividends that we receive from our PRC subsidiaries, dividends that we declare from such income may be deemed “derived from sources within the PRC” for purposes of the EIT Law and therefore subject to a 10% withholding tax.
          The EIT Law also provides that dividend income between “qualified resident enterprises” is exempted income, which may imply that dividends we receive from our PRC subsidiaries would be exempt from tax, but we cannot assure you that we will be able to obtain such treatment for dividends paid to us by our PRC subsidiaries. Moreover, if we are deemed to be a PRC resident enterprise under the EIT law, a foreign investor in us may be able to claim the benefits of any income tax treaty between his or her resident country and China. We cannot assure you, however, that treaty benefits will be available to you (for example with respect to the withholding tax rate on dividends) even if we are deemed a PRC resident enterprise.
          If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our foreign shareholders and ADSs holders, the value of your investment in our ADSs may be materially and adversely affected.
Gains on the sales of our shares or ADSs may become subject to PRC income taxes.
          Under the EIT Law and implementation regulations issued by the State Council, our foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax upon any gains they realize from the transfer of their shares or ADSs, if such income is regarded as income from “sources within the PRC.” What will constitute “sources within the PRC” and whether or not there will be any exemption or reduction in taxation for our foreign corporate investors, however, are unclear. If our foreign shareholders and ADSs holders are required to pay PRC income tax on the transfers of their shares or ADSs, the value of your investment in our ADSs may be materially and adversely affected.

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ITEM 4.   INFORMATION ON THE COMPANY
A. History and Development of the Company
          Our legal and commercial name is Focus Media Holding Limited. Our principal executive offices are located at 28-30/F, Zhao Feng World Trade Building, 369 Jiangsu Road, Shanghai 200050 PRC, and our telephone number is 86-21-3212-4661. Our Internet website address is www.focusmedia.cn. Our predecessor company, Shanghai Aiqi Advertisement Co., Ltd., or Aiqi Advertisement, was established by immediate family members of Jason Nanchun Jiang in September 1997 and operated as an advertising agency. In May 2003, Aiqi Advertisement discontinued its advertising agency business, was renamed Shanghai Focus Media Advertisement Co., Ltd., commenced operation of our out-of-home television advertising network in China and reorganized its shareholdings. At the same time, we entered into arrangements with Focus Media Advertisement that resulted in the consolidation of Focus Media Advertisement. Following this reorganization Jason Nanchun Jiang continued to hold a controlling interest in Focus Media Advertisement.
          In conjunction with the change in our business model in May 2003 and to facilitate foreign investment in our company, we established our offshore holding company, Focus Media Holding Limited as a company registered in the British Virgin Islands. On April 1, 2005, we completed the process of changing Focus Media Holding Limited’s corporate domicile to the Cayman Islands and we are now a Cayman Islands company. On July 13, 2005, our ADSs were listed for quotation on the Nasdaq Global Market and on July 19, we and certain of our shareholders completed an initial public offering and sale of 11,615,000 ADSs.
          In January 2006, we acquired Infoachieve Limited which is also referred to as Framedia throughout this annual report, which operates a network of advertising poster frames placed primarily in elevators and public areas of residential complexes in China.
          In January 2006, we and certain of our shareholders completed a public offering and sale of 7,415,389 ADSs.
          In February 2006, we acquired Target Media, which operated an out-of-home advertising network using flat-panel displays placed in elevator lobbies and other public areas in commercial buildings, hospitals, hotels, banks, residential buildings, convenience stores and other locations in cities in China. Since the completion of the acquisition of Target Media, the legal entities of Target Media and its affiliates and subsidiaries have been dissolved and their operations have been integrated with our operations.
          In March 2006, we acquired Dotad Media Holdings, which operates a mobile-phone advertising service in China through China Mobile and China Unicom’s mobile phone networks. Following the acquisition of Dotad Media Holdings, we renamed the acquired company Focus Media Wireless Co., Ltd., which is also referred to as Focus Media Wireless throughout this annual report. In December 2008, we discontinued operations of our mobile handset advertising network, and this business is accounted for as a discontinued operation.
          On June 21, 2006, we and certain of our shareholders completed a public offering and sale of 7,700,000 ADSs.
          In September 2006, we completed the acquisition of 70% of the equity interest in Appreciate Capital Limited, or ACL, a British Virgin Islands company. ACL, through its affiliated PRC entity, leases screen time from movie theaters in cities in China, which it then sells as screen time slots to advertisers.
          In September 2006, certain of our shareholders completed a public offering and sale of 2,459,345 ADSs.
          In September 2006, Jason Nanchun Jiang, our chairman, entered into a variable pre-paid forward contract with Credit Suisse, pursuant to which he pledged and monetized 20 million of our ordinary shares held by him.
          During the fourth quarter of 2006, we completed the acquisition of Fengjing Advertisement. We signed a definitive term sheet to acquire 95% of Fengjing Advertisement Company (“Fengjing”) in July 2006 to further expand our outdoor LED network in Shanghai.

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          In the first quarter of 2007, we acquired Homesky Investment Ltd., a British Virgin Islands company, which operates a traditional billboard network through its PRC affiliates,
          In March 2007, we completed the acquisition of Allyes Information Technology Company Limited, or Allyes, a Cayman Islands company, which operates an Internet advertising marketing agency and technology services company through its PRC affiliated entities.
          In June 2007, we acquired Hua Kuang Advertising Company Limited, a Hong Kong company, and its PRC subsidiary, which operates a traditional billboard network through its PRC affiliates.
          On November 13, 2007, we and certain of our shareholders, primarily consisting of the former shareholders of Framedia, Dotad and Allyes, completed a public offering and sale of 13,720,873 ADSs, representing 68,604,365 ordinary shares.
          On January 2, 2008, we completed the acquisition of CGEN Digital Media Company Limited, or CGEN. In accordance with the share purchase agreement entered into on December 10, 2007, we made a cash payment of US$168.4 million to the former CGEN shareholders and the former CGEN shareholders delivered 100% of the equity interest in CGEN to us. In December 2008, we disposed of CGEN, and no longer receive revenues from this business.
          On March 20, 2008, our executive chairman Jason Jiang purchased 100,000 Focus Media ADSs at an average price of USD 34.19 per ADS in the open market.
          On December 22, 2008, we announced the sale to Sina of substantially all of the assets of our out-of-home digital networks, including our LCD display networks (including our outdoor LED network), poster frame networks and in-store networks (excluding CGEN). These lines of businesses, as well as our mobile handset advertising business, which was discontinued in 2008, have been accounted for as discontinued operations in accordance with U.S. GAAP in our audited financial statements.
          For a description of our principal capital expenditures and divestitures, see “Acquisitions” and “Capital Expenditure” in “Item 5. Operating and Financial Review and Prospects—Acquisitions” and “—B. Liquidity and Capital Resources—Capital Expenditures”.
B. Business Overview
          We are China’s leading multi-platform digital media company, operate the largest out-of-home advertising network in China using audiovisual digital displays, based on the number of locations and number of LCD flat-panel television displays in our network, and also are a leading provider of Internet marketing solutions in China.
          Our Digital Out-of-home Advertising Network which focuses on providing out-of-home advertising through LCD flat-panel televisions displays, traditional and LED billboards, movie screens, and poster and digital frames, includes our commercial location network, in-store network and poster frame network. On December 22, 2008, we entered into an asset purchase agreement with Sina, pursuant to which we agreed to sell substantially all of the assets of our LCD display network, our outdoor LED network, our poster frame network and certain portions of our in-store network. We continue to operate those assets and will continue to operate them until the transaction closes. The transaction remains subject to various customary closing conditions and regulatory approvals. Upon the completion of the asset sale, our commercial location network will consist of our movie theater network and certain traditional billboards. The following is a summary description of the networks comprising our out-of-home advertising network:
    our commercial location network, consisting of:
    our LCD display network —,which refers to our network of flat-panel television displays placed in high-traffic areas of commercial and public buildings marketed to advertisers as a network or as seven separate channels targeting different types of consumers—our premier A and B office building channels, travel, fashion, elite and IT mall channels;

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    our outdoor LED billboard network, which refers to our network of leased 5’ x 5’ LED digital billboards installed on the street-sides in major shopping districts and other locations with heavy pedestrian traffic in Shanghai and Beijing;
 
    our traditional billboard network, which refers to our network of large outdoor poster billboards installed on street-sides in major shopping districts and other locations with heavy pedestrian traffic in Shanghai, Beijing, Guangzhou, Shenzhen and other cities in China; and
 
    our movie theater advertising network, which refers to our right to sell advertising time on movie screens for the three minutes prior to movie screenings at movie theaters in China; and
    our in-store network, which refers to our network of flat-panel television displays placed in specific product areas inside stores with high-traffic concentrations such as selected consumer product sections, the main aisles and check-out lines in large-scale chain retail stores, or hypermarkets, as well as inside selected supermarkets and convenience stores; the CGEN portion of our in-store network substantially ceased operations as of December 2008;
 
    our poster frame network, which refers to our network of traditional and digital advertising poster frames placed mainly in the elevators and public areas of residential complexes which we market under the brand name Framedia; and
          Our Internet Advertising Services Network, which refers to our Internet advertising agency and advertising services technology, including performance-based software suites.
          Since we commenced our current business operations in May 2003, we have experienced significant growth in our network and in our financial results. As of December 31, 2008, we operated our commercial location network directly in over 50 major cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen. As of December 31, 2008, we covered approximately 40 additional cities through contractual arrangements with regional distributors. Between January 1, 2007 and December 31, 2008, the number of displays in our commercial location network increased from 112,298 to 128,033. As of December 31, 2008, our outdoor LED billboard network consisted of approximately 260 leased 5’ x 5’ digital billboards placed along curbsides in high-pedestrian traffic areas in Shanghai and Beijing and one 1,500 square foot digital LED billboard operated on a boat navigating roundtrip along the bund area in Shanghai. In the first quarter of 2009, we suspended operation of a significant portion of our outdoor LED billboard network in Shanghai due to new government regulations governing the use of curbside billboards. For the same reason, we suspended operation of the LED billboard aboard the boat. As of December 31, 2008, we had approximately 540 traditional billboards in prime commercial and shopping areas and along national and provincial highways. In addition, as of the same date, the installed base of our hypermarkets network was 984 stores. Our in-store network also covered 319 supermarkets and 1,972 convenience stores as of December 31, 2008. The number of displays installed in our in-store network was 42,824 as of December 31, 2008. The total number of non-digital frames available for sale on our poster frame network was 324,364 as of December 31, 2008, including digital frames, mainly in Beijing, Shanghai, Guangzhou and Shenzhen.
          The following table sets forth operating data related to our network for the periods indicated:
                                                                 
    For and as of the three months ended
                    September   December                   September   December
    March 31,   June 30,   30,   31,   March 31,   June 30,   30,   31,
    2007   2007   2007   2007   2008   2008   2008   2008
Commercial location network:(1)
                                                               
Number of displays:
                                                               
Our direct cities
    83,256       85,010       90,375       107,533       114,426       117,440       114,300       122,597  
Our regional distributors(2)
    4,010       4,677       5,023       4,765       4,814       5,700       5,831       5,436  
 
                                                               
Total
    87,296       89,687       95,398       112,298       119,240       123,140       120,131       128,033  
 
                                                               
In-store network:(3)
                                                               
Number of displays in our in-store network
    40,736       41,322       43,315       49,452       61,420       58,493       56,614       42,824  
 
                                                               
Number of stores in our in-store network
    3,935       3,995       4,041       4,063       3,874       3,609       3,479       3,275  
 
                                                               

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    For and as of the three months ended
                    September   December                   September   December
    March 31,   June 30,   30,   31,   March 31,   June 30,   30,   31,
    2007   2007   2007   2007   2008   2008   2008   2008
Poster Frame Network:
                                                               
Number of frames installed in our poster frame network (4)
    124,542       161,435       170,605       190,468       246,920       275,985       303,359       324,364  
 
                                                               
 
(1)   Includes operating data for discontinued operations.
 
(2)   Data that has been provided by our regional distributors is based on the results of surveys we requested them to provide to us and it is possible such data is not entirely accurate or exact.
 
(3)   Following our entering into the asset purchase agreement with SINA in December 2008, our in-store network (excluding CGEN) is accounted as a discontinued operation.
 
(4)   Includes both traditional poster frames and, for periods starting from June 30, 2007, digital frames.
Our Network
          Our network includes:
    our digital out-of-home advertising network , including our commercial location network (LCD display, outdoor LED billboard, traditional billboard network and movie theater advertising networks), in-store network and poster frame network; and
 
    our Internet advertising services network.
Digital Out-of-home Advertising Networks
Commercial Location Network
          LCD display network . The majority of displays on our LCD display network are currently placed in heavy-traffic areas of commercial office buildings. The locations in our LCD display network also include shopping malls, banks and hotels as well as more specialized locations such as hospitals, beauty parlors and golf country clubs. We market our LCD display network to advertisers of consumer products and services, such as automobiles, home electronics, mobile communications devices and services, cosmetics, health products and financial services. As of December 31, 2008, our LCD display network, including the portions of our LCD display network operated by our regional distributors, was comprised of 128,033 flat-panel displays placed in over 90 cities throughout China. We operate our LCD display network directly in approximately 50 cities and indirectly through contractual arrangements with regional distributors in approximately 40 additional cities. We have established joint ventures in several cities outside of mainland China, including Hong Kong, Taipei and Singapore through contracts with local operators which operate local commercial location networks and which license our brand name. None of these arrangements outside of China currently constitutes a material part of our business.
          As we expand the number of venues in our LCD display network, we continue to separate certain types of venues into distinct stand-alone channels of this network. As of December 31, 2008, we had established seven such stand-alone channels that are marketed as separate focused channels of our LCD display network: our premier office building A and B, travel, fashion, elite and IT mall channels. Starting in January 2008, operation of our former healthcare channel has been carried out through a strategic investment in Yanhuang Health Media Limited, or Yanhuang Health Media. We transferred ownership of our installed healthcare channel base of approximately 2,461 LCD screens in 31 cities in China to Yanhuang Health Media in exchange for a 20% equity interest in Yanhuang Health Media. In 2008, we took an investment loss of approximately US0.4 million in our investment in Yanhuang Health Media and wrote off our investment in that entity.

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          A majority of the content displayed on our commercial location and in-store networks consists of advertisements which are broadcast repeatedly approximately 60 times throughout a day. Advertisements on our outdoor LED billboard network are broadcast repeatedly approximately 120 times throughout a day.
          We believe that by increasingly offering new advertising channels on our out-of-home television networks, we will be able to offer advertisers more targeted and effective audience reach, thereby enabling us to increase our advertising rates.
          Expanding our network through regional distributors enables us to provide our advertisers with broader nationwide coverage and to test, develop and evaluate these regional advertising markets without our having to incur start-up and ongoing expenses at the early stages of their development. We also seek to acquire our regional distributors when we believe it is more likely for us to benefit economically from the full integration of their operations into our network. We do not have the contractual right to purchase our regional distributors, and any such acquisition must be negotiated with each regional distributor separately.
          Each of our regional distributors operates independently from us and is responsible for independently complying with all relevant PRC laws and regulations including those related to advertising. We periodically monitor our regional distributors to ensure they have obtained all required licenses and are complying with regulations relating to advertising content. See “Item 3D Risk Factors — Risks Relating to Our Business and Industry — One or more of our regional distributors could engage in activities that are harmful to our reputation in the industry and to our business”.
          Upon the completion of our asset sale transaction with Sina, we will no longer operate this portion of our network and it is accounted for as a discontinued operation.
          Outdoor LED billboard network. In April 2006, we commenced operations of an outdoor LED billboard network consisting of 5’ x 5’ LED digital billboards that are installed on the street-sides in major shopping districts and other locations with heavy pedestrian traffic in Shanghai. Full-color audiovisual commercials are displayed on the digital billboards in a repeating six-minute cycle. The commercials displayed on the LED billboards are highly visible even during bright daylight. As of December 31, 2008, the number of the LED billboards in our street-side outdoor LED billboard network in prime commercial and shopping areas reached approximately 260. We market this part of our network under the name “iStreet Network”. In the first quarter of 2009, we suspended operation of a significant portion of our outdoor LED billboard network in Shanghai due to new government regulations governing the use of curbside billboards. For the same reason, we suspended operation of the LED billboard aboard the boat. Upon the completion of our asset sale transaction with Sina, we will no longer operate this portion of our network and it is accounted for as a discontinued operation.
          Traditional billboard network. We operate traditional outdoor poster billboards of approximately 200m2 to 300m2 in size that are in installed on the street-sides in major shopping districts and other locations with heavy pedestrian traffic in Beijing, Shanghai, Guangzhou and most tier 2 cities. We also operate traditional poster billboards of 18 meters by 6 meters by the roadsides of national and provincial highways. As of December 31, 2008, we had approximately 540 traditional poster billboards in prime commercial and shopping areas and along national and provincial highways.
          Movie theater advertising network . We operate our movie theater advertising network by selling leased screen time as time slots to advertisers. We have the right to three minutes of screen time prior to the screening of each movie shown in the theater. As of December 31, 2008, we had rights to lease advertising time on screens in 27,164 movie theaters in cities across China.
In-store Network
          As part of our growth strategy, we commenced operations of our in-store network in April 2005. As of December 31, 2008, we had placed 42,824 flat-panel displays in 984 hypermarkets, 319 supermarkets and 1,972 convenience stores throughout China. We believe the rapid expansion of hypermarkets and other chain retail stores in China provides opportunities and incentives for advertisers to take advantage of in-store television advertising networks

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such as our in-store network. Our in-store network primarily attracts advertisers of food and beverage products, household, kitchen and bathroom products, and household appliances. Upon the completion of our asset sale transaction with Sina, we will no longer operate our in-store network (excluding CGEN) and it is accounted for as a discontinued operation.
          In January 2008, we completed the acquisition of CGEN. In December 2008, we disposed of the CGEN operations. Accordingly, the CGEN portion of our in-store network has ceased operations and we no longer derive material revenues from this operation.
Poster Frame Network
          We own and operate a network of traditional and digital advertising poster frames deployed primarily in the elevators and public areas of residential complexes under the brand name “Framedia”. We place two or three advertising frames in each elevator in which we lease space and sell frame space to advertising clients on a per frame basis for periods of two weeks or longer. As of December 31, 2008, we had installed 324,364 poster frames including 34,195 digital poster frames in cities throughout China. Our digital frames use high-resolution LCD displays with integrated sound, all-angle viewing and remote control technologies. We believe the new media format provides a more effective advertising media to our advertising customers.
          Our poster frame network consists of advertising poster frames placed in elevators and public areas in residential complexes and commercial locations. Our advertising posters include both traditional printed posters as well as digital LCD poster frames with integrated sound, all-angle and remote control technologies. Generally two or three advertising poster frames can be placed in each elevator.
Internet Advertising Services Network
          In March 2007, we completed the acquisition of 100% of the equity interests in Allyes. We made a number of additional smaller Internet advertising companies in 2007 and 2008, and subsequently reorganized all such acquired entities to be included within the operations of Allyes. Allyes is a leading Internet advertising agency and provider of Internet advertising technology in China. Its proprietary software application suite, ‘AdForward’, which covers all aspects of online ad publishing, creative production, tracking, targeting, and performance analysis, is used by independent commercial websites and ad agencies in China. Based on the significant number of Internet advertising campaigns it has executed since its inception in 2000, its widely-used Internet application software and its unique tracking technology, Allyes has accumulated a large database of Internet viewers, segmented based on individual behavior. Allyes initiated the performance-based online advertising model in China. Its advertising network, ‘SmartTrade’, allows advertisers to pay by CPA (cost-per-action), and directly links advertising cost with performance. SmartTrade has integrated advertising resources from over 5,000 popular websites, making it one of the largest performance-based online advertising networks in China.
          Our Internet advertising services network uses proprietary software applications to provide online ad publishing, creative production, tracking, targeting, and performance analysis. We also provide performance-based online advertising services providing advertisers with pay by CPA (cost-per-action), directly link advertising cost with performance. Our Internet advertising services network has integrated advertising resources from over 5,000 popular websites, making it the largest performance-based online advertising network in China.
Advertising Clients, Sales and Marketing
          Our Advertising Clients. The quality and coverage of our network has attracted a broad base of international and domestic advertising clients. Our advertising clients include leading international and domestic brand name advertisers such as Dong Feng Auto (including joint venture brands with Toyota and Peugeot), Loreal China, P&G China, Meng Niu Diary and Chrysler China, which together accounted for approximately 8% of our aggregate revenue for continuing and discontinued operations in 2008.

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          No single advertising client accounted for more than 4% of our revenues in 2008. We believe the appeal and effectiveness of our advertising network is largely evidenced by the number of advertising clients who place multiple advertising campaigns on our network, which is reflected in the percentage increase of advertising fees we receive from clients over time.
          Sales. We employ an experienced advertising sales force in each city in which we operate. We provide in-house education and training to our sales force to ensure they provide our current and prospective clients with comprehensive information about our services, the advantages of using our advertising networks as marketing channels, and relevant information regarding the advertising industry. Our sales team is organized by city, industry and client accounts. We also market our advertising services from time to time by placing advertisements on third-party media, including primarily magazines and Internet websites. We maintain separate sales teams for our poster frame network and our Internet advertising services network. We have begun engaging in limited cross-selling initiatives to enable existing and potential advertising clients to take advantage of our multi-platform advertising network.
          Advertising Contracts. We offer advertisers five-, fifteen- or thirty-second time slots on our out-of-home television advertising networks, including our commercial location, in-store, outdoor LED and movie theater advertising networks. For our commercial location network, our standard advertising package includes a time slot on our entire network or a particular channel in each city in which the advertiser wishes to display the advertisement. For our traditional billboard network, we provide billboard space on a monthly basis. For our movie theater advertising network, time slots are sold on a regional or entire network basis. Our sales are made pursuant to written contracts with commitments ranging from one week to several months. Our advertising rates vary by city and by the number of cities in which the advertisement is placed, as well as by the length of the time slot purchased and the duration of the advertising campaign. We generally require our clients to submit advertising content at least seven days prior to the campaign start date. We also reserve the right to refuse to disseminate advertisements that are not in compliance with content requirements under PRC laws and regulations.
          Advertising contracts for our in-store network, outdoor LED network and movie theater advertising network are substantially similar to those used for our LCD flat-panel display network. Advertising clients generally purchase time slots on our in-store network on a chain-by-chain basis, while time slots on the outdoor LED network cover the entire network and contracts on our movie theater advertising network are done on a regional or entire network basis.
          For our poster frame network, advertising clients purchase frame space on a per-frame basis for terms of one week or more. For our Internet advertising services, we provide Internet advertising solutions for advertisers tailored to their needs.
          Network Monitoring and Media Measurement. We provide a number of services in connection with each client’s advertising campaign following the sales process. Our network operations team monitors the displays in our network on a daily basis. They are also responsible for compiling reports that are supplied under some of our agreements to clients as evidence of the broadcast of their advertisements on our network. The report generally includes a list of buildings where our client’s advertisements were broadcast as well as photographs of representative television displays showing their advertisements being displayed. The advertising campaign reports are provided to our clients for information purposes and do not constitute a customer acceptance provision. The reports we provide to our clients may also contain portions prepared by independent third-party research companies that verify the proper functioning of our flat-panel displays and the proper dissemination of the advertisement, by conducting on-site evaluations and polls to analyze the effectiveness of and public reaction to the advertisement.
          Aside from third-party verification services, we and our regional distributors conduct substantially all client services using our own employees or the employees of the relevant regional distributor. In Beijing and Guangzhou, we contract some of these services to third-party agents. These agents provide us with network development, installation, maintenance, monitoring and reporting services.
          We believe our advertising clients derive substantial value from our ability to provide advertising services targeted at specific segments of consumer markets. Market research is an important part of evaluating the effectiveness and value of our business to advertisers. We conduct market research, consumer surveys, demographic analysis and other advertising industry research for internal use to evaluate new and existing advertising channels. We also purchase or commission studies containing relevant market study data from reputable third-party market research firms, such as

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Nielsen Media Research, CTR Market Research and Sinomonitor. Our acquisition of iResearch Consulting Co., Ltd. in September 2007 has also provided us with enhanced in-house market research capabilities. iResearch is a market research company focusing on the Internet and new media industries in urban areas of China. We typically consult such studies to assist us in evaluating the effectiveness of our network to our advertisers. A number of these studies contain research on the numbers and socio-economic and demographic profiles of the people who visit the locations of our network.
Programming
          Substantially all of the content on our out-of-home television advertising networks consists of audiovisual television advertising provided to us by our advertising clients. We also provide a limited amount of time for landlords and property managers to display location-specific information, building announcements and related promotional material on our network. We do not produce or create any of the advertising content shown on our network, except our own marketing content. All of the advertising content displayed on the portion of the network we operate directly is reviewed by qualified members of our staff to ensure compliance with PRC laws and regulations, while our agreements with our regional distributors require each of them to review the contents shown on the portion of the network they operate for compliance with PRC laws and regulations. See “Item 4.B Information on the Company—Business Overview—Regulatory Matters — Regulation of Advertising Services — Advertising Content”.
          Advertisements on our poster frame network consist of full-color glossy advertising posters designed and provided by our advertising clients.
Pricing
          For information regarding factors affecting our pricing, refer to “Factors that Affect Our Advertising Service Revenue” in Item 5 — Operating and Financial Review and Prospects.
Relationships with Location Providers
          We install our flat-panel displays in selected spaces we lease in office buildings and other commercial locations, hypermarkets, supermarkets and convenience stores. We install our advertising poster frames in elevators and other public areas in residential complexes. Establishing and maintaining long-term relationships with landlords and property managers is a critical aspect of our business. We employ a team of location relationship personnel in each city in which we operate directly who are responsible for identifying desirable locations, negotiating display and frame placement agreements and engaging in ongoing site placement relations.
          In addition to helping us expand our network, our location relationship personnel ensure that the needs and concerns of landlords and property managers are being met and addressed effectively and on a timely basis. These concerns generally include ensuring that the flat-panel displays are properly installed and are in proper working condition. We undertake to landlords and property managers in our network to maintain the proper operation of our flat-panel displays. We generally rely on our own employees to install, maintain, monitor and repair our flat-panel displays and advertising poster frames. Each of our flat-panel displays is inspected at least once daily.
          We enter into display placement agreements with individual landlords, property managers, hotels, shopping malls and chain store companies under which we generally pay a fixed annual rent in exchange for the right to display advertising and commercial media in lobby and elevator areas in the case of our commercial location network and in specific product areas in the major aisles and near check-out counters in hypermarkets, supermarkets and convenience stores in the case of our in-store network. In Beijing and Guangzhou, we contract a portion of the location development, monitoring and maintenance work to local agents. We attempt to maintain terms favorable to our network operations in our display placement agreements, such as long-term leases and exclusivity provisions. We are not reliant on any one landlord or property manager for a material portion of our network coverage. As hypermarkets, supermarkets and convenience stores have control over multiple locations, a smaller number of display placement agreements and contractual arrangements account for a larger percentage of our in-store network coverage.

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          We believe that landlords and property managers generally do not view us as a major source of revenue and are instead primarily attracted to our flat-panel displays as an innovative and visually pleasing medium that complements their public areas and that provides an engaging means of conveying building-related information to their tenants. In connection with certain of our display placement agreements, we agree to provide concessions and services, such as displaying building-related notifications, publicity and other information provided by the landlord or property manager or granting time slots to the landlord or property manager for their own promotional purposes.
          Our display placement agreements have initial terms ranging anywhere from one to ten years. As of December 31, 2008, we had the right under the majority of our display placement agreements to renew the display placement agreements provided that the terms offered by us are no less favorable than those offered by competing bidders. The rental terms and fees under our display placement agreements vary considerably depending on the city, location of the building, size of the building and number of flat-panel displays that may be installed. Under our display placement agreements, we retain ownership of the flat-panel displays.
          We enter into similar frame and billboard placement agreements for the deployment of our advertising poster frames in elevators and public areas of residential complexes and commercial buildings and for traditional outdoor billboards. The majority of our frame placement agreements have terms of two to three years, and contain exclusivity and best offer renewal rights.
Technology and Suppliers
          Out-of-home television advertising is a relatively new advertising medium that owes its development in large part to the emergence of new technologies, such as low-cost, light-weight, flat-panel television displays and compact storage technology. The primary hardware required for the operation of our business consists of components that comprise the flat-panel displays we use in our advertising network. We also develop and install software in our flat-panel displays to assist us with the configuration, editing and operation of our advertising content cycles. Maintaining a steady supply of our proprietary flat-panel displays is important to our operations and the growth of our advertising network.
          We design the distinctive shape of our flat-panel displays, identify suppliers of component parts used in our displays and contract the assembly of our flat-panel displays to third-party contract assemblers. Our contract assemblers are responsible for purchasing the component parts from suppliers we identify each month and assembling the flat-panel displays according to our specifications using components purchased in off-the-shelf form from wholesale distributors. We select component suppliers based on price and quality. As there are many qualified alternative suppliers for our equipment, our obligation to our current contract assemblers is not exclusive. We have never experienced any material delay or interruption in the supply of our flat-panel displays.
          Our services provided through Allyes use proprietary ad serving solutions that assist advertisers, advertising agencies and web publishers in creating and delivering Internet ads, monitoring and analyzing website traffic, tracking the performance of advertising campaigns and implementing direct marketing. Most of the Allyes software applications, from Internet marketing technologies to the applications that operate our servers, are proprietary and were developed in-house by Allyes’ research and development team.
Competition
          We compete with other advertising companies in China including companies that operate out-of-home or telecommunications-based advertising media networks, such as JCDecaux, ClearMedia and SearchMedia. We compete for advertising clients primarily on the basis of network size and coverage, location, price, the range of services that we offer and our brand name. We also compete for overall advertising spending with other alternative advertising media companies, such as Internet, street furniture, billboard, frame and public transport advertising companies, and with traditional advertising media, such as newspapers, television, magazines and radio.

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Facilities
          We currently maintain our headquarters at 28-30/F, Zhao Feng World Trade Building, 369 Jiangsu Road, Shanghai 200050, People’s Republic of China.We also have offices in more than 50 other cities in China.
Regulatory Matters
          We operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority including the State Administration for Industry and Commerce, or SAIC.
          China’s Advertising Law was promulgated in 1994. In addition, the State Council, SAIC and other ministries and agencies have issued regulations that regulate our business, which are discussed below.
Limitations on Foreign Ownership in the Advertising Industry
          The principal regulations governing foreign ownership in the advertising industry in China include:
    The Catalogue for Guiding Foreign Investment in Industry (2007); and
 
    The Administrative Regulations on Foreign-invested Advertising Enterprises (2008).
          These regulations require foreign entities that directly invest in the advertising industry to have at least two years of direct operations in the advertising industry outside of China. Since December 10, 2005, foreign investors have been permitted to own directly a 100% interest in advertising companies in China, but such foreign investors are also required to have at least three years of direct operations in the advertising industry outside of China. PRC laws and regulations do not permit the transfer of any approvals, licenses or permits, including business licenses containing a scope of business that permits engaging in the advertising business. In the event we are able to qualify to acquire the equity interest of our PRC operating affiliates under the rules allowing complete foreign ownership, our PRC operating subsidiaries would continue to exist as the holders of the required advertising licenses consistent with current regulatory requirements.
          Since we have not been involved in advertising outside of China for the required number of years, our WFOE operating subsidiaries, which are directly owned by non-PRC subsidiaries of ours, are currently ineligible to apply for the required advertising services licenses in China. Our non-PRC subsidiaries are ineligible to apply for such required licences too. As such, our advertising business is currently provided primarily through contractual arrangements between our WFOE operating subsidiaries and our consolidated affiliated entities in China, which we collectively refer to as our PRC operating affiliates, including (i) Shanghai Focus Media Advertisement Co., Ltd. and its subsidiaries with regard to our out-of-home television networks, (ii) the Framedia operating affiliates with regard to our poster frame network, (iii) the Allyes operating affiliates with regard to our Internet advertising services, (iv) the Huaguang operating affiliates and the Tuojia operating affiliates with regard to our traditional billboard network, and (v) the Yangshi Sanwei operating affiliates with regard to our movie theatre advertising network. A portion of the operations of our commercial location network are conducted by our indirect PRC subsidiaries owned by our WFOE operating subsidiaries. Accordingly, our advertising services are currently conducted by (i) our indirect PRC operating subsidiaries and (ii) our PRC operating affiliates. Our PRC operating affiliates are owned or controlled by either (i) one or more PRC citizen or citizens designated by us, or (ii) one or more PRC entity or entities owned by our subsidiaries or by our designated appointees, or (iii) a combination of PRC citizens designated by us and entities owned by our subsidiaries or by our designated appointees. Our PRC operating affiliates, certain of their respective subsidiaries and certain of our indirect PRC operating subsidiaries hold the requisite licenses to provide advertising services in China. Our PRC operating subsidiaries and some of our non-PRC subsidiaries have entered into a series of contractual arrangements with our PRC operating affiliates and their respective subsidiaries and shareholders under which:
    we are able to exert effective control over our PRC operating affiliates and their respective subsidiaries;

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    a substantial portion of the economic benefits of our PRC operating affiliates and their respective subsidiaries will be transferred to us; and
 
    we have an exclusive option to purchase all or part of the equity interests in our PRC operating affiliates and all or part of the equity interests in our PRC operating affiliates’ subsidiaries that are owned by our PRC operating affiliates or its nominee holders, as well as all or a part of the assets of our PRC operating affiliates, in each case when and to the extent permitted by PRC law.
          See “Item 4.C Information on the Company—Organizational Structure” and “Item 7.B Major Shareholders and Related Party Transactions—Related Party Transactions”.
          Current PRC regulations, however, do not treat an indirect PRC subsidiary of a foreign entity as a “foreign invested enterprise” where such PRC subsidiary is owned directly by a PRC entity. As such, our indirect PRC operating subsidiaries which are directly owned by our WFOE operating subsidiaries are not subject to the restrictions on foreign investment in advertising industry and are eligible to apply for the required licenses for providing advertising services in China. Several of our indirect PRC operating subsidiaries, including New Focus Media Advertisement, New Focus Media Agency and Focus Media Defeng Advertisement, have obtained such licences and a portion of our commercial location network advertising business is carried out through such indirect PRC operating subsidiaries.
          In the opinion of Global Law Office, our PRC legal counsel,
    the respective ownership structures of our PRC operating subsidiaries and their respective PRC affiliates and subsidiaries are in compliance with existing PRC laws and regulations;
 
    the contractual arrangements among our PRC operating subsidiaries and their respective PRC affiliates, subsidiaries and PRC shareholders of their PRC affiliates, in each case governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and
 
    the PRC business operations of our PRC operating subsidiaries and their respective affiliates and subsidiaries as described in this annual report, are in compliance with existing PRC laws and regulations in all material respects.
          We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the SAIC which regulates advertising companies, will not in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC government determines that the agreements establishing the structure for operating our PRC advertising business do not comply with PRC government restrictions on foreign investment in the advertising industry, we could be subject to severe penalties. See “Item 3.D Key Information—Risk Factors — Risks Relating to Regulation of Our Business and to Our Structure — If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC governmental restrictions on foreign investment in the advertising industry, we could be subject to severe penalties”.
Regulation of Advertising Services
Business License for Advertising Companies
          The principal regulations governing advertising businesses in China include:
    The Advertising Law (1994);
 
    The Advertising Administrative Regulations (1987); and
 
    The Implementing Rules for the Advertising Administrative Regulations (2004).

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          These regulations stipulate that companies that engage in advertising activities must obtain from the SAIC or its local branches a business license which specifically includes operating an advertising business within its business scope. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. We do not expect to encounter any difficulties in maintaining our business licenses. Our PRC operating affiliates, certain of their respective subsidiaries and certain of our indirect PRC operating subsidiaries have obtained, or in the case of some of our new directly-operated cities, are in the process of obtaining such a business license from the local branches of the SAIC as required by the existing PRC regulations. Some of our regional distributors may not possess all the licenses required to operate an advertising business, or may fail to maintain the licenses they currently hold. We periodically monitor our regional distributors to ensure they have obtained all required licenses and are complying with regulations relating to advertising content, although it is possible that one or more of our regional distributors may not be in compliance with all PRC regulations at all times. To our knowledge, all of our regional distributors have received, or are in the process of obtaining, the licenses required to operate an advertising business. If we learn that any of our regional distributors are not in compliance with applicable terms and regulations we notify such regional distributors of the need to complete any necessary procedures and to report any developments to us. If a regional distributor fails to complete the steps necessary to receive the required licenses, we will take steps to terminate the contract with such regional distributor. See “Item 3.D Key Information—Risk Factors — Risks Relating to Our Business and Industry — One or more of our regional distributors could engage in activities that are harmful to our reputation in the industry and to our business”.
Advertising Content
          PRC advertising laws and regulations set forth certain content requirements for advertisements in China, which include prohibitions on, among other things, misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. It is prohibited to disseminate tobacco advertisements via broadcast or print media. It is also prohibited to display tobacco advertisements in any waiting lounge, theater, cinema, conference hall, stadium or other public area. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through radio, film, television, newspaper, magazine, out-of-home and other forms of media, together with any other advertisements which are subject to censorship by administrative authorities according to relevant laws and administrative regulations, must be submitted to the relevant administrative authorities for content approval prior to dissemination. We do not believe that advertisements containing content subject to restriction or censorship comprise a material portion of the advertisements shown on our network.
          Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements they prepare or distribute are true and in full compliance with applicable law. In providing advertising services, advertising operators and advertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of the advertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain commodities which are subject to government censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke violators’ licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertising business.
          We employ qualified advertising inspectors who are trained to review advertising content for compliance with relevant laws and regulations.

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Outdoor Advertising
          The Advertising Law stipulates that the exhibition and display of outdoor advertisements must not:
    utilize traffic safety facilities and traffic signs;
 
    impede the use of public facilities, traffic safety facilities and traffic signs;
 
    obstruct commercial and public activities or create an eyesore in urban areas;
 
    be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; and
 
    be placed in areas prohibited by the local governments from having outdoor advertisements.
          In additional to the Advertising Law, the SAIC promulgated the Outdoor Advertising Registration Administrative Regulations on May 22, 2006, which governs the outdoor advertising industry in China.
          Outdoor advertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required to submit a registration application form and other supporting documents for registration. After review and examination, if an application complies with the requirements, the local SAIC will issue an Outdoor Advertising Registration Certificate for such advertisement. The content of the outdoor advertisement must be submitted for filing with the local SAIC.
          The placement and installation of LED billboards are subject to municipal zoning requirements and governmental approvals, including application for an outdoor advertising registration certificate for each LED billboard, which may be subject to a term of use that is governed by local outdoor advertising regulations and varies accordingly. We use Beijing and Shanghai, which are our major operation locations, as examples. In Beijing, the maximum length of such term of use for a LED billboard is of four years while it is of six years in Shanghai. If the existing LED billboards placed by our LED location provider or us are required to be removed, the attractiveness of this portion of our advertising network will be diminished. Moreover, failure by an owner of LED billboards to maintain outdoor advertising registration certificates would result in the inability to lease or market such space for the placement of advertisements.
Print Advertising
          Following our acquisition of Framedia on January 1, 2006, we also operate a network of advertising poster frames placed primarily in the elevators and public areas of residential complexes. The advertisements shown on our poster frame network are defined as “normal print advertisements” under the Print Advertisements Administrative Regulations promulgated by the SAIC on January 13, 2000, as amended on November 30, 2004, or the Print Advertisements Regulations. Under these regulations, print advertisements must not be placed in areas prohibited by laws or regulations from posting print advertisements.
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
          In January and April 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued two rules that require PRC residents to register with and receive approvals from SAFE in connection with their offshore investment activities. SAFE has announced that the purpose of these regulations is to achieve the proper balance of foreign exchange and the standardization of the cross-border flow of funds.
          On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January and April 2005 mentioned above.
          According to Notice 75:

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    prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;
 
    an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and
 
    an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China.
          Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
          As a Cayman Islands company, and therefore a foreign entity, if Focus Media Holding purchases the assets or equity interest of a PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration procedures described in Notice 75. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us.
          As a result of the lack of implementing rules and other uncertainties relating to the interpretation and implementation of Notice 75, we cannot predict how these regulations will affect our business operations or strategies. For example, our present or future PRC subsidiaries’ ability to conduct foreign exchange activities, such as remittance of dividends and foreign-currency- denominated borrowings, may be subject to compliance with such SAFE registration requirements by relevant PRC residents, over whom we have no control. In addition, we cannot assure you that any such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. We require all the shareholders in Focus Media Holding who are PRC residents to comply with any SAFE registration requirements, but we have no control over either our shareholders or the outcome of such registration procedures. Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.
C. Organizational Structure
          Our predecessor company, Shanghai Aiqi Advertisement Co., Ltd., or Aiqi Advertisement, was established by immediate family members of Jason Nanchun Jiang in September 1997 and operated as an advertising agency. In May 2003, Aiqi Advertisement discontinued its advertising agency business, was renamed Shanghai Focus Media Advertisement Co., Ltd., commenced operation of our out-of-home television advertising network in China and reorganized its shareholdings. At the same time, we entered into arrangements with Focus Media Advertisement that resulted in the consolidation of Focus Media Advertisement. Following this reorganization Jason Nanchun Jiang continued to hold a controlling interest in Focus Media Advertisement.
          In conjunction with the change in our business model in May 2003 and to facilitate foreign investment in our company, we established our offshore holding company, Focus Media Holding Limited as a company registered in the British Virgin Islands in April 2003. In April 2005, we completed the process of changing Focus Media Holding Limited’s corporate domicile to the Cayman Islands and we are now a Cayman Islands company. On July 13, 2005, our ADSs were listed for quotation on the Nasdaq Global Market.

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          In January 2006, we acquired Framedia and E-Times, which operate networks of advertising poster frames placed primarily in elevators and public areas of residential complexes in China. In February 2006, we acquired Target Media. Target Media operated an out-of-home advertising network using flat-panel displays placed in elevator lobbies and other public areas in commercial buildings, hospitals, hotels, banks, residential buildings, convenience stores and other locations in cities in China. Following the acquisition of Target Media, we combined Target Media’s network into our existing commercial location and in-store networks. Other than holding their existing contracts, the former Target Media entities no longer conduct any operations, and the combined network is operated through our existing corporate entities. In March 2006, we acquired Focus Media Wireless, which operates a WAP-based advertising delivery platform on the mobile telecommunications networks of China Mobile and China Unicom. In 2008, we terminated our mobile handset advertising business and it is accounted for as a discontinued operation. In the first quarter of 2007, we acquired Homesky Investment Ltd., which operates a traditional billboard network through its PRC affiliates. In March 2007, we acquired Allyes, which operates an Internet advertising marketing services and technology business. We made a number of additional smaller Internet advertising companies in 2007 and 2008, and subsequently reorganized all such acquired entities to be included within the operations of Allyes. In June 2007, we acquired Hua Kuang Advertising Company Limited and its PRC subsidiary, which operates a traditional billboard network through its PRC affiliates. In January 2008, we acquired CGEN, which operates digital advertising displays in large chain stores in China. On December 9, 2008, we announced the disposition of our CGEN in-store advertising network. Subsequently, on December 22, 2008, we announced the sale to Sina of substantially all of the assets of our out-of-home digital networks, including our LCD display networks (including our outdoor LED network), poster frame networks and in-store networks (excluding CGEN), and these lines of businesses are now accounted as discontinued operations in accordance with U.S. GAAP in our audited financial statements.
Our Corporate Structure and Contractual Arrangements
          Substantially all of our operations are conducted in China as follows:
    with regard to the operation of our commercial location and in-store network, through Focus Media Technology, our indirect wholly-owned subsidiaries in China, Focus Media Digital, a 90%-owned subsidiary of Focus Media Technology, and New Focus Media Advertisement, New Focus Media Agency, Focus Media Defeng Advertisement, all of which are 90%-owned subsidiaries of Focus Media Digital, and through our contractual arrangements with several of our consolidated affiliated entities in China, including Focus Media Advertisement, and its subsidiaries (Focus Media Advertisement owns the remaining 10% equity interest in Focus Media Digital and, through Focus Media Digital, the remaining 10% equity of New Focus Media Advertisement, New Focus Media Agency, Focus Media Defeng Advertisement);
 
    with regard to the operation of our poster frame network, through Framedia Advertisement and New Structure Advertisement, each of which is 90% owned by Focus Media Advertisement and 10% owned by Focus Media Advertising Agency, respectively;
 
    with regard to the operation of the Internet advertising marketing agency business of Allyes, through New Allyes Information Technology Co., Ltd., our indirectly wholly-owned subsidiary in China, and through our contractual arrangements with a group of PRC operating companies, which we refer to as the Allyes operating affiliates, each of which is owned by PRC citizens and entities;
 
    with regard to our outdoor traditional billboard network, through our contractual arrangements with the Huaguang operating affiliates and Tuojia operating affiliates; and
 
    with regard to our movie theater advertising network, through our contractual arrangements with the Yangshi Sanwei operating affiliates.
          Our PRC operating subsidiaries and their respective affiliated entities and shareholders have entered into contractual arrangements substantially similar to those control agreements entered into among Focus Media Technology, Focus Media Digital, New Focus Media Advertisement, New Focus Media Agency, Focus Media Defeng Advertisement, Focus Media Advertisement and its shareholders and subsidiaries. See “Item 7.B Major Shareholders

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and Related Party Transactions—Related Party Transactions — Agreements Among Our Wholly Foreign-Owned Enterprises, PRC Operating Affiliates and Their Respective Shareholders”.
          In 2008, due to reorganizations of our operations, we discontinued our mobile handset advertising operations and the portion of our in-store operations operated by CGEN. In addition, in December 2008, we entered into an asset sale agreement with Sina, pursuant to which we agreed to sell to Sina a substantial portion of the assets of our out-of-home digital networks, including our LCD display networks, outdoor LED networks, poster frame networks and in-store networks (excluding CGEN). We will continue to operate the assets we agreed to sell to Sina until the closing of that transaction, although those operations are accounted for as discontinued operations. Accordingly, to provide a clear picture of our operations before and after these transactions, the following two diagrams set forth our organization structure:
  (i)   as we operated our business prior to the completion of the sale of the assets to be sold to Sina; and
 
  (ii)   as our operations will be conducted after completion of the sale of assets to be sold to Sina.
          Each diagram includes the primary businesses and entities involved in the operation of those the relevant businesses, and excludes dormant entities (such as Focus Media Wireless and CGEN), which aside from holding existing contracts, no longer conduct any operations.

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          Our organizational structure prior to the completion of the sale of assets to Sina:
(FLOW CHART)
 
(1)   Loans used to capitalize our PRC operating companies and to facilitate our control over them.
 
(2)   Agreements that give us effective control over our PRC operating affiliates and their respective subsidiaries.
 
(3)   Agreements that transfer a substantial portion of the economic benefits of our PRC operating affiliates and their respective subsidiaries to us, as described in “Related Party Transactions”.
 
(4)   Each of our PRC operating affiliates is owned by PRC shareholders consisting of either (i) one or more PRC citizen or citizens designated by us, or (ii) one or more PRC entity or entities owned by our subsidiaries or by our designated appointees, or (iii) a combination of PRC citizens designated by us and entities owned by our subsidiaries or by our designated appointees.
 
(5)   The wholly-owned entities relating to our out-of-home television network operations include New Focus Media Technology, Focus Media Technology, Focus Media Digital and New Focus Media Digital. These consist of subsidiaries of Focus Media Advertisement, which holds between 50% and 100% of the subsidiaries, with the remaining minority interest held by Jimmy Wei Yu, Focus Media Advertising Agency or unrelated third parties.
 
(6)   The PRC operating affiliates engaged in the operating of our poster frame network include: New Structure Advertisement and Framedia Advertisement.
 
(7)   The Allyes operating affiliates engaged in the operation of our online advertising agency business consist of a group of different companies under our control.
          Our organizational structure immediately following the completion of the sale of assets to Sina is expected to be as follows:
(CHART)
 
(1)   Agreements that give us effective control over our PRC operating affiliates and their respective subsidiaries.
 
(2)   Allyes PRC operating affiliates are owned by PRC shareholders, which are either (i) one or more PRC citizen or citizens designated by us, or (ii) one or more PRC entity or entities owned by our subsidiaries or by our designated appointees, or (iii) a combination of PRC citizens designated by us and entities owned by our subsidiaries or by our designated appointees.
 
(3)   The Allyes operating affiliates engaged in the operation of our online advertising agency business consist of a group of different companies under our control.
 
(4)   The Huaguang operating affiliates are owned by PRC citizens designated by us.
 
(5)   The Huaguang operating affiliates include Shanghai Ruili Advertisement Co., Shanghai Xinnuo Advertisement Co. and Shanghai Chuanzhi Advertisement Co.
 
(6)   The Tuojia operating affiliates are owned by PRC citizens or entities designated by us.
 
(7)   The Tuojia operating affiliates include Beijing Tuojia Chengyuan Advertisement Co. and Shanghai Qianzhong Advertisement Co., Ltd.
 
(8)   Each of the Yangshi Sanwei operating affiliates is 70% owned by us via a designated PRC entity and 30% owned by one or two unrelated third parties.
 
(9)   The Yangshi Sanwei operating affiliates include Beijing Yangshi Sanwei Advertisement Co. and Shanghai Zhenhao Advertisement Co., Ltd.
          In connection with its entry into the World Trade Organization, China is required to relax restrictions on foreign investment in the advertising, telecommunications and Internet industries in China. Accordingly, PRC regulations stipulate that starting from December 10, 2005, foreign investors are allowed to directly own 100% of PRC

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companies operating an advertising business if the foreign entity has at least three years of direct operations in the advertising business outside of China or to directly own less than 100% if the foreign entity has at least two years of direct operations in the advertising business outside of China. We do not currently directly operate an advertising business outside of China and cannot qualify for direct ownership of a PRC advertising company under PRC regulations any earlier than two or three years, respectively, after we commence any such operations or until we acquire a company which has directly operated an advertising business for the required period of time. We do not currently know how or when we will be able to qualify under these regulations. Even if we do qualify in the future, it may be burdensome or not cost effective for us to meet the required criteria for direct ownership. If and when we qualify for direct ownership, we intend to explore the commercial feasibility of changing our current structure, including possibly direct ownership of our PRC operating affiliates and their respective subsidiaries, taking into consideration relevant cost, market, competitive and other factors. In the event we take such steps, we cannot assure you that we will be able to identify or acquire a qualified foreign company for a possible future restructuring or that any restructuring we may undertake to facilitate direct ownership will be successful.
          Accordingly, since we have not been involved in the direct operation of an advertising business outside of China, our advertising business is currently provided primarily through contractual arrangements with our consolidated affiliated entities in China, including (i) Shanghai Focus Media Advertisement Co., Ltd. and its subsidiaries with regard to our out-of-home television networks, (ii) the Framedia operating affiliates with regard to our poster frame network, (iii) the Allyes operating affiliates with regard to our Internet advertising services, (iv) the Huaguang operating affiliates and the Tuojia operating affiliates with regard to our traditional billboard network, and (v) the Yangshi Sanwei operating affiliates with regard to our movie theatre advertising network, and each of their respective shareholders. A portion of the operations of our commercial location network are conducted by our indirect PRC subsidiaries owned by our WFOE operating subsidiaries. Accordingly, our advertising services are currently conducted by our indirect PRC operating subsidiaries and our PRC operating affiliates which are currently owned or controlled by (i) one or more PRC citizen or citizens designated by us, or (ii) one or more PRC entity or entities owned by our subsidiaries or by our designated appointees, or (iii) a combination of PRC citizens designated by us and entities owned by our subsidiaries or by our designated appointees. Our PRC operating affiliates, certain of their respective subsidiaries and certain of our indirect PRC operating subsidiaries hold the requisite licenses to provide advertising services in China.
          While our indirect PRC operating subsidiaries are eligible for the required licences for providing advertising services in China and some of our indirect PRC operating subsidiaries have obtained such licenses, we use our PRC operating affiliates to operate a significant portion of our advertising business until we acquire them as our wholly-owned subsidiaries. Our PRC operating subsidiaries and some of our non-PRC subsidiaries have entered into contractual arrangements with their respective PRC operating affiliates and shareholders, pursuant to which:
    we are able to exert effective control over our PRC operating affiliates;
 
    a substantial portion of the economic benefits of our PRC operating affiliates will be transferred to us; and
 
    each of our PRC operating subsidiaries or non-PRC subsidiaries or their respective designees has an exclusive option to purchase all or part of the equity interests in our PRC affiliated entities or their respective nominee holders, or, in some cases, all or part of the assets of our PRC affiliated entities, in each case when and to the extent permitted by PRC law.
          Each of our contractual arrangements with our PRC affiliated entities and their respective shareholders and subsidiaries can only be amended with the approval of our audit committee or another independent body of our board of directors. See “Item 7.B Major Shareholders and Related Party Transactions—Related Party Transactions” for further information on our contractual arrangements with these parties.
          In the opinion of Global Law Office, our PRC legal counsel:
    the respective ownership structures of our PRC operating subsidiaries and their respective PRC affiliates and subsidiaries are in compliance with existing PRC laws and regulations;

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    the contractual arrangements among our PRC operating subsidiaries and their respective PRC affiliates, subsidiaries and PRC shareholders of their PRC affiliates, in each case governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and
 
    the PRC business operations of our PRC operating subsidiaries and their respective affiliates and subsidiaries as described in this annual report, are in compliance with existing PRC laws and regulations in all material respects.
          We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the SAIC which regulates advertising companies, will not in the future take a view that is contrary to the above opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC government finds that the agreements that establish the structure for operating our PRC advertising business do not comply with PRC government restrictions on foreign investment in advertising businesses, we could be subject to severe penalties. See “Item 7.B Major Shareholders and Related Party Transactions—Risk Factors — If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC governmental restrictions on foreign investment in the advertising industry, we could be subject to severe penalties”, “— Our business operations may be affected by legislative or regulatory changes” and “— The PRC legal system embodies uncertainties which could limit the legal protections available to you and us”.
          We are increasingly taking steps to exert more direct control over our advertising operations and intend to rely less on contractual arrangements in the future. The steps we may take to achieve a greater degree of direct control over our operations could include (i) continuing to increase the portion of our business operations conducted through our indirect PRC subsidiaries rather than through contractual arrangements with our affiliates, (ii) exercising the call option under the contractual arrangements we and our subsidiaries have entered into with the shareholders of our PRC operating affiliates or (iii) transferring the equity interests held by the citizens who are shareholders of our PRC operating affiliates to (A) a foreign entity that is qualified under PRC regulations for 100% direct ownership an advertising business or (B) one of our indirect PRC subsidiaries.
Subsidiaries of Focus Media Holding Limited
          An exhibit containing a list of our direct subsidiaries has been filed with this annual report.
D. Property, Plants and Equipment
          Please refer to “—B. Business Overview—Facilities” for a discussion of our property, plants and equipment.
ITEM 4A. UNRESOLVED STAFF COMMENTS
          Not applicable.
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
          You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. In addition, our consolidated financial statements and the financial data included in this annual report reflect our recent dispositions and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, see “Item 3.D Key Information — Risk Factors”.
Overview
          Prior to the transactions described below, our out-of-home advertising network consisted of (i) our digital out-of-home advertising network, consisting of our commercial location network (including our LCD flat-panel televisions displays, LED billboards, traditional billboards and movie theater screens), our in-store network, and our poster frame network, (ii) our mobile handset advertising network and (ii) our Internet advertising agency business. In March 2008, we announced the restructuring of our mobile handset advertising business and downsized that portion of our business operations. Subsequently, on December 10, 2008, we announced the termination of the remaining mobile handset advertising network. On December 22, 2008, we announced the sale to Sina of substantially all of the assets of our out-of-home digital advertising networks (the “businesses held for sale”), including our LCD flat-panel display networks, LED billboard network, poster frame network and certain part of our in-store networks (excluding CGEN).

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In accordance with U.S. GAAP, both the businesses held for sale and mobile handset advertising business are accounted for, and are referred to herein as, discontinued operations. As a result, we have modified the reporting segments as they were originally presented in our annual report for the year ended December 31, 2007.
          We did not prepare nor are required to prepare separate financial statements for discontinued operations. To assist readers in evaluating discontinued operations, in particular the assets-held-for sale, we have included certain operation and financial measures of discontinued operations.
          In the following presentation of operating and financial results and prospects, other than for critical accounting policies, which are presented on a whole-company basis, we have divided the analysis into separate discussions for continuing operations and discontinued operations.
Continuing Operations Overview.
          Our continuing operations consist of the following reporting units: (i) our Internet advertising agency business, (ii) our movie theatre and traditional outdoor billboards advertising network and (iii) others (which consists primarily of the CGEN portion of our in-store network, which has substantially ceased operations and is not expected to provide significant revenues in the future). For our continuing operations, we expect our business and operations to be driven by a number of factors and trends including:
    Overall economic growth in China, which affects overall advertising spending in major urban areas in China where consumer spending is concentrated;
 
    Our ability to successfully operate and market our Internet advertising marketing and technology agency.
 
    Our ability to increase sales of advertising space and increase the length of advertising campaigns on our traditional billboard network;
 
    Our ability to increase sales of advertising time slots and extend the duration of our advertising cycle on our movie theater network; and
 
    Our ability to expand our client base through promotion of our services and cross-selling.
          As we continue to expand our business, we expect to face a number of challenges. For our Internet advertising services, we must react to continuing technological innovations, increasing competition in Internet services, and changes in the regulatory environment. For the traditional billboard advertising network, we need to adapt to the operation of a more traditional advertising medium that is competing with numerous other service providers as well as with numerous other advertising media. For the movie theater portion of our advertising network, we face the challenge of continuing to expand our network while attracting interest from advertisers and acceptance from consumers of this relatively new advertising model. In order to continue expanding our network in a manner that is attractive to potential advertising clients, we may continue to enter into new advertising media platforms and to establish additional networks that provide effective channels for advertisers.
          Starting in March 2007, our financial results include those of Allyes, the acquisition of which we completed in March 2007.
Revenues — Continuing Operations
          In 2006, 2007 and 2008, we had net revenues of $0.7 million, $163.1 million and $369.6 million, respectively, for our continuing operations. Our advertising service revenue from continuing operations includes the sale of advertising time slots on our traditional billboard and movie theater network, from Internet advertising services and a small amount of revenue attributable to other advertising related services (primarily CGEN) we provide to our advertising clients. The following table sets forth the segmental revenue of our net revenues from continuing operations for the periods indicated:

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    For the year ended December 31
    2006   2007   2008
            % of net           % of net           % of net
    $   revenue   $   revenue   $   revenue
    (in thousand of U.S. dollars, except percentages)
Net revenue
                                               
Movie theatre and traditional outdoor billboards
    690       100 %     37,305       22.9 %     77,520       21.0 %
Internet advertising network
          0 %     124,939       76.6 %     255,637       69.2 %
Other revenue
          0 %     819       0.5 %     36,397       9.8 %
Total revenue from continuing operations
    690       100 %     163,063       100 %     369,554       100 %
 
(1)   Advertising service revenue is presented net of business tax. Business tax for our Internet advertisings service revenue amounted to $5.0 million and $9.3 million respectively for 2007 and 2008. Business tax for our traditional outdoor billboard and movie theater advertising service revenue amounted to $1.3 million and $2.8 million respectively for 2007 and 2008. Business tax includes business tax ranging from 3% to 5.55% and cultural industries tax of ranging from 0% to 4.0% of our gross advertising service revenue.
          We also break down our total revenues into related-party and unrelated-party sources. The following table presents a more detailed breakdown of our gross revenues and its component parts for our continuing operations:
                         
    For the year ended December 31
    2006   2007   2008
    (in thousands of U.S. dollars except percentages)
Gross Advertising Service Revenue:
                       
Movie Theatre & Traditional outdoor billboard
                       
— Unrelated parties
    697       38,535       78,250  
— Related parties
          23       1,773  
Total Movie Theatre & Traditional outdoor billboards
    697       38,558       80,023  
 
                       
Internet advertising
                       
— Unrelated parties
          128,831       258,977  
— Related parties
          1,140       5,950  
Total internet advertising
          129,971       264,927  
 
                       
Others
                       
— Unrelated parties
          868       40,441  
— Related parties
                 
Total others
          868       40,441  

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    For the year ended December 31
    2006   2007   2008
    (in thousands of U.S. dollars except percentages)
Gross Advertising Services Revenue:
    697       169,397       385,391  
 
                       
Less: Sales taxes:
                       
Movie Theatre & Traditional outdoor billboard
    7       1,253       2,845  
Internet advertising
          5,032       9,290  
Others
          49       3,702  
Total Sales tax
    7       6,334       15,837  
 
                 
Net Advertising Service Revenue
    690       163,063       369,554  
Segmental Advertising Service Revenue — Continuing Operations
          Sources of Revenues. We derive most of our total revenues for continuing operations from the sale of billboard slots on our traditional billboard advertising network, time slots on our movie theater network and providing Internet advertising services to unrelated third parties and to some of our related parties. Our advertising services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated advertising clients on an arm’s-length basis.
          Our advertising service revenue is recorded net of any sales discounts and agency commissions from our standard advertising rate cards that we may provide to our advertising clients. These discounts include volume discounts and other customary incentives offered to our advertising clients, including additional broadcast time for their advertisements if we have unused time slots available in a particular city’s advertising cycle, and represent the difference between our standard rate card and the amount we charge our advertising clients. Our advertising clients include advertisers that directly engage in advertisement placements with us and advertising agencies retained by some advertisers to place advertisements on the advertiser’s behalf. We expect that our advertising service revenue will continue to be the primary source, and constitute the substantial majority of, our revenues for the foreseeable future.
          Our advertising service revenue reflects a deduction for business taxes and related surcharges. Our advertising revenues are subject to a business tax ranging from 3% to 5.55% plus a cultural industries tax ranging from 0% to 4.0% on revenues earned from our advertising services provided in China. We deduct these amounts from our advertising service revenues to arrive at our total revenues attributable to advertising services.
Factors that Affect Our Advertising Service Revenue—Continuing Operations.
Movie Theater & Traditional Outdoor Billboard Networks
          Our advertising revenue derived from our movie theater adverting network is directly affected by the number of movie theaters in which we have leased screen time, our expansion into additional theaters, and the length of the leased screen time, which is currently three minutes per screening per theater prior to movie screenings at movie theaters.
          Our advertising revenue derived from our traditional outdoor billboard networks is directly affected by the number of outdoor billboards which we have leased and our expansion into additional locations.
Internet Advertising Service Revenues
          Our advertising service revenue derived from our Internet advertising services is directly affected by: the number of customers who purchase agency services from us. We agree to provide advertising agency services and technology, and we charge fees based on the size and duration of the advertising campaign and the number of daily impressions or “hits” on the Internet advertisement; and our ability to identify relevant Internet user traffic and deliver effective advertisements for our advertising clients.
          Network Expansion—Continuing Operations. We have focused, and expect to continue to focus, on developing new channels in our advertising networks and entering into new types of advertising media operations to

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continue to grow our revenues and to address these potential capacity constraints on our existing network. These steps have included: (1) adding new media such as traditional billboards and movie theater screens networks and (2) expanding our media platform into new areas such as Internet advertising services and software packages. We expect to continue to explore opportunities to open up additional channels on our existing network and to enter into new advertising media platforms in China.
          Seasonality—Continuing Operations. Our advertising service revenue is subject to key factors that affect the level of advertising spending in China generally. In addition to fluctuations in advertising spending relating to general economic and market conditions, advertising spending is also subject to fluctuations based on the seasonality of consumer spending. In general, a disproportionately larger amount of advertising spending is concentrated on product launches and promotional campaigns prior to the holiday season in December. In addition, advertising spending generally tends to decrease in China during January and February each year due to the Chinese Lunar New Year holiday as office buildings and other commercial venues in China tend to be closed during the holiday. We also experience a slight decrease in revenues during the hot summer months of July and August each year, when there is a relative slowdown in overall commercial activity in urban areas in China. Our past experience, although limited, indicates that our revenues would tend to be lower in the first quarter and higher in the fourth quarter of each year, assuming other factors were to remain constant, such as our advertising rates and the number of available time slots on our network.
          Revenue Recognition—Continuing Operations. For our movie theater and traditional billboard network, we typically sign standard advertising contracts with our advertising clients, which require us to run the advertiser’s advertisements on our network in specified cities for a specified period, typically from four to twelve weeks. We recognize advertising service revenue ratably over the performance period of the advertising contract, so long as collection of our fee remains probable. We do not bill our advertising clients under these contracts until we perform the advertising service by broadcasting the advertisement on our network.
          Internet advertising service revenues primary consist of revenues from advertising and advertising-related services and revenues from sales of Adforward software.
          Advertising revenues, net of agency rebates are recognized ratably over the period in which the advertisement is displayed. Advertising revenues are recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). In accordance with SAB 104, revenues are recognized when all four of the following criteria are met: (i) persuasive evidence of agreement exists; (ii) delivery of service has occurred; (iii) the price is both fixed and determinable; and (iv) collection of the resulting receivable is reasonably assured. The Company sells Adforward subscriptions and perpetual licenses. Revenues are recognized for subscription arrangements ratably over the subscription period for those with fixed fees and as earned (based on actual usage) under our variable fee arrangements. Under perpetual license agreements, revenue recognition is generally commenced when delivery has occurred, software has been installed and training has been provided as the Company does not currently have vendor-specific objective evidence of fair value, or VSOE, for either installation or training services.
          We generally collect our advertising service fees by billing our advertising clients within 60 to 90 days after completion of the advertising contract and book these unbilled or unpaid amounts as accounts receivable until we receive payment or determine the account receivable to be uncollectible.
          Our accounts receivable are general unsecured obligations of our advertising clients and we do not receive interest on unpaid amounts. We make specific reserves for accounts that we consider to be uncollectible. We also provide a general reserve for uncollectible accounts that we reassess on an annual basis. In 2006, 2007 and 2008, we made provision of $0, $201,156 and $7,692,368, respectively for our continuing operations, for accounts receivable that were outstanding for longer than six months. The average number of days outstanding of our accounts receivable for our continuing operations, including from related parties, was 264 and 108 days, respectively, as of December 31, 2007 and 2008.
Other Revenue—Continuing Operations.
     In 2008, we also derived revenue for continuing operations from providing in-store advertising services through CGEN, which we acquired in January 2008. We ceased operation of our in-store advertising services provided

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through CGEN and do not expect to generate significant revenues from this business going forward. In 2008, CGEN generated net revenues of $35.0 million and accounted for and 9.5% of total net revenue of our continuing operations.
Segmental Cost of Revenues—Continuing Operations
          Our cost of revenues for our continuing operations consists of costs directly related to the offering of our advertising services.
          The following table sets forth our cost of revenues for our continuing operations, divided into its major components, by amount and percentage of our net revenues from continuing operations for the periods indicated:
                                                 
    For the year ended December 31
    2006   2007   2008
            % of           % of           % of
            net           net           net
    $   revenue   $   revenue   $   revenue
            (in thousand of U.S. dollars, except percentages)        
Total net revenue from continuing operations
    690       100.0 %     163,063       100.0 %     369,554       100.0 %
Cost of revenue:
                                               
Movie theatre and traditional billboard advertising services
    760       110.1 %     28,507       17.5 %     57,276       15.5 %
Internet advertising network
    0       0 %     93,237       57.2 %     199,189       53.9 %
Others
    0       0 %     224       0.1 %     28,581       7.7 %
Total cost of revenue for continuing operations
    760       110.1 %     121,968       74.8 %     285,046       77.1 %
Gross profit from continuing operations
    (70 )     (10.1 )%     41,095       25.2 %     84,508       22.9 %
Advertising Service Costs—Continuing Operations
          Our cost of revenues for continuing operations related to the offering of our advertising services consists of the costs of purchasing advertising space from web publishers, from movie theater operators and from billboard owners, and other cost items, including salaries for and travel expenses incurred by our network maintenance staff and costs for materials. The primary factor affecting our other costs of revenues is the size of our network maintenance staff.
          Movie theatre advertising networks. The primary costs of revenues associated with our movie theatre advertising networks are advertising time slot leasing costs charged by the movie operators.
          Traditional outdoor billboard. The primary costs of revenue connected with our traditional outdoor billboard network are advertising space leasing costs charged by the billboard owners
          Internet advertising services network. The primary costs of revenues connected with our Internet advertising services network are advertising space leasing costs charged by gateway websites and research and development costs in connection with the development of Internet advertising software packages. We expect these costs to increase as we continue to expand this part of our business as Internet use continues to grow in China.
          Others. Costs of revenues from others in connection with continuing operations are mostly associated with the costs of revenue incurred by the CGEN portion of our in-store network. This line of business has now substantially ceased operations and we do not expect to incur significant costs of revenue from this line of business in the future.
Operating Expenses and Net Income—Continuing Operations
          Our operating expenses for our continuing operations consist of general and administrative, selling and marketing expenses. In 2008, our operating expenses also included a goodwill impairment loss and a loss on disposal relating to CGEN. The following table sets forth our operating expenses for continuing operations divided into their

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major categories by amount and as a percentage of our net revenues from continuing operations for the periods indicated.
                                                 
    For the year ended December 31
    2006   2007   2008
            % of net           % of net           % of net
    $   revenue   $   revenue   $   revenue
            (in thousand of U.S. dollars, except percentages)        
Gross profit for continuing operations
    (70 )     (10.1 )%     41,095       25.2 %     84,508       22.9 %
Operating expenses:
                                               
General and administrative
    3,760       544.9 %     16,691       10.2 %     52,102       14.1 %
Selling and marketing
    271       39.3 %     14,052       8.6 %     34,680       9.4 %
Impairment loss
                            222,536       60.2 %
Loss on disposal of CGEN
                            190,466       51.5 %
Other operating income, net
          0.0 %     (222 )     (0.1 )%     (1,027 )     (0.3 )%
Total operating expenses
    4,031       584.2 %     30,521       18.7 %     498,757       135.0 %
Operating income for continuing operations
    (4,101 )     (594.3 )%     10,574       6.5 %     (414,249 )     (112.1 )%
          General and Administrative. General and administrative expenses primarily consist of salary and benefits for management and finance and administrative staff personnel, share-based compensation expenses,business tax mainly relating to license fees paid by our affiliated PRC companies to their respective overseas holding companies, office rental, maintenance and utilities expenses, depreciation of office equipment, other office expenses and professional services fees. General and administrative expenses accounted for 544.9%, 10.2% and 14.1% of net revenue for continuing operations in 2006, 2007 and 2008, respectively.
          Selling and Marketing. Our selling and marketing expenses primarily consist of salaries and benefits, including share-based compensation expense for our sales staff, marketing and promotional expenses, and other costs related to supporting our sales force. Selling and marketing expenses accounted for 39.3%, 8.6% and 9.4% of net revenues for continuing operations in 2006, 2007 and 2008, respectively.
          Impairment Loss. Under SFAS No. 142 “Goodwill and Other Intangible Assets”, we are required to complete a two-step goodwill impairment test. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. We performed an annual goodwill impairment test for each of our reporting units as of December 31, 2006, 2007 and 2008. As a result, we recorded a goodwill impairment loss of $219.3 million for the year ended December 31, 2008, which was primarily related to our internet advertising business.
          Loss on Disposal of CGEN. Our purchase of CGEN in January 2008 included cash consideration paid of $168.4 million, all of which was paid in 2008 and assumed net liabilities having a fair value of $19.6 million. We also made a loan of $30.0 million to finance CGEN’s working capital subsequent to the closure of the acquisition. Subsequently, on December 10, 2008, we announced the termination of the CGEN acquisition agreement. As a result, we recognized a loss on disposal of CGEN of $190.5 million in 2008. The operations of CGEN has been classified as continuing operations as we had continuing involvement in the operations by lending the new owners of CGEN the use of our equipment.

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     Share-based Compensation. Effective January 1, 2006 the Group adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”), using the modified prospective application transition method, which establishes accounting for share-based awards exchanged for employee services. Accordingly, share-based compensation cost is measured at grant date, based on the fair value of the award, and recognized in expense over the requisite service period.
     As required by SFAS 123-R, management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. The cumulative effect of initially adopting SFAS 123-R was not significant. The Group’s total share-based compensation expense for the years ended December 31, 2006, 2007 and 2008 was $8.4 million, $21.5 million and $42.6 million respectively.
     The following table summarizes the share-based compensation recognized in the consolidated statements of operations:
                         
    For the years ended December 31  
    2006     2007     2008  
    (in thousands of U.S. dollars)  
General and administrative
    2,790       6,544       15,707  
Selling and marketing
                820  
Continuing Operation
    2,790       6,544       16,528  
Discontinued Operation
    5,578       14,911       26,087  
Total
    8,367       21,454       42,615  
          Amortization of Acquired Intangibles. Our amortization of acquired intangibles consists of the amortized portion of intangible assets we acquired through our acquisition of other companies, businesses and assets. The following table summarizes the Amortization of acquired intangibles recognized in the consolidated statements of operations:
                                                 
    For the year ended December 31  
    2006     2007     2008     2006     2007     2008  
    Continuing operations     Discontinued operations  
    (in thousands of U.S. dollars)  
Cost of revenues
    33       8,195       13,947       3,174       7,919       12,493  
Selling and marketing expenses
    15       5,141       9,668       2,552       3,498       4,009  
Total
    49       13,336       23,615       5,725       11,417       16,502  
Discontinued Operations Overview
          We did not prepare nor are required to prepare separate financial statements for discontinued operations. To assist readers to evaluate the discontinued operations, particularly the assets held for sale to Sina, we have included certain operation and financial measures of discontinued operations.
          Our discontinued operations consist of: our LCD flat-panel display network, our poster frame display network, our in-store network (excluding CGEN), and others (which consists primarily of the discontinued mobile handset advertising business).
          We expect our future growth to be driven by a number of factors and trends including:
    Overall economic growth in China, which we expect to contribute to an increase in advertising spending in major urban areas in China where consumer spending is concentrated;
 
    Our ability to increase sales of advertising time slots and extend the duration of our advertising cycle on our commercial location and in-store networks (excluding CGEN);

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    Our ability to expand our client base through promotion of our services and cross-selling; and
 
    Our ability to identify and create new advertising channels by establishing separate advertising networks that enable advertisers to target a diverse range of consumer groups with specific demographic profiles.
          For discontinued operations, our financial results for 2006 also include those of Framedia that we acquired on January 1, 2006, of Target Media that we acquired on February 28, 2006 and, starting in the second quarter of 2006, those of Focus Media Wireless that we acquired in March 2006.
          Because our primary source of revenue is our advertising service revenue, we focus on factors that directly affect our advertising service revenue such as the number of advertising time slots that we have available for sale and the price we charge for our advertising time slots after taking into account any discounts.
          As we continue to expand our network, we expect to face a number of challenges. We have expanded our network rapidly, and we, as well as our competitors, have occupied many of the most desirable locations in China’s major cities. In order to continue expanding our network in a manner that is attractive to potential advertising clients, we may continue to enter into new advertising media platforms and to establish additional stand-alone networks that provide effective channels for advertisers. In addition, we must react to changes in the regulatory environment.
Revenues — Discontinued Operations
For our discontinued operations, we generate revenues primarily from the sale of advertising time slots on our LCD display networks, and, beginning in 2006, from the sale of frame space on our poster frame network and, prior to December 2008, from fees generated by users who access advertising on our mobile handset advertising network. In 2006, 2007 and 2008, we had net revenues of $211.2 million, $343.5 million and $426.6 million, respectively, for our discontinued operations. The following table sets forth our net revenues from discontinued operations for the periods indicated:
                                                 
    For the year ended December 31
    2006   2007   2008
            % of net           % of net           % of net
    $   revenue   $   revenue   $   revenue
    (in thousand of U.S. dollars, except percentages)
Net revenue
                                               
LCD display networks
    131,371       62.2 %     183,376       53.4 %     238,159       55.8 %
In-store network (excluding CGEN)
    26,908       12.7 %     27,444       8.0 %     25,701       6.0 %
Poster frame networks
    40,904       19.4 %     85,472       24.9 %     146,751       34.4 %
Other revenue
    12,032       5.7 %     47,205       13.7 %     15,940       3.8 %
Net revenue from discontinued operations
    211,215       100 %     343,497       100 %     426,551       100 %
 
(1)   Advertising service revenue is presented net of business tax. Business tax on advertising service revenue for our LCD display network amounted to $13.6 million, $18.7 million and $25.2 million in 2006, 2007 and 2008, respectively. Business tax on advertising service revenue for our in-store network (excluding CGEN) amounted to $2.8 million , $2.8 million and $2.6 million in 2006 , 2007 and 2008, respectively. Business tax on advertising service revenue for our poster frame network amounted to $4.0 million , $7.9 million and $13.9 million for 2006, 2007 and 2008 respectively. Business tax includes business tax ranging from 3% to 5.55% and cultural industries tax of ranging from 0% to 4.0% of our gross advertising service revenue.
Revenue — Discontinued Operations
          We derive most of our net revenues for discontinued operations from the sale of time slots on our LCD display network, our poster frame networks and certain in-store networks to unrelated third parties and to some of our related parties. Our advertising service revenue policies for discontinued operations are substantially consistent with those for continuing operations. See “—Advertising Service Revenue—Continuing Operations” above.

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Factors that Affect Our Revenue—Discontinued Operations.
LCD display networks
          Our advertising service revenue derived from our LCD display network is directly affected by the average price we charge for the advertising package provided to our customers, after taking into account any discount offered, as well as by the number of flat-panel displays in our network and the desirability, quality and pedestrian traffic of the locations where we are able to lease space to install our flat-panel displays
In-store Network (excluding CGEN)
          Our advertising service revenue derived from our in-store network (excluding CGEN) is directly affected by the number of flat-panel displays in our network, the number of hypermarkets, supermarkets and convenience stores in the network, and the average price we charge for the advertising package provided to our customers, after taking into account any discount offered.
Poster Frame Network
          Our advertising service revenue derived from our poster frame network is directly affected by: the number of frames in our poster frame network. We sell frame space on our poster frame network on a per frame basis. Increasing the number of residential and other locations on our poster frame network allows us to increase the number of frames on our network, thereby increases the available frame space for sale to advertisers As we upgrade the network to incorporate more digital poster frames, we will also increase the available space as multiple advertisements can be placed on a digital frame on time-shared basis; and the average price we charge for frame space on a per frame basis, after taking into account any discount offered.
          Network Expansion—Discontinued Operations.. Many of the most desirable locations for our commercial location network have been occupied, either by our network as a result of our expansion or by our competitors. As a result, we will need to rely on means other than the rapid increase in the number of locations, flat-panel displays, LED billboards and advertising poster frames in order to continue growing our revenues. These steps have included: (1) expanding our digital out-of-home advertising network through increasing the size and scope of our existing commercial location, in-store network (excluding CGEN) and poster frame network and (2) establishing discrete stand-alone channels on our commercial location network, such as our premier A and B office building, travel, fashion and elite and healthcare channels. We intend to continue expanding our out-of-home advertising network both through increasing the number of locations, displays and advertising poster frames on our commercial location, in-store network (excluding CGEN) and poster frame network.
          Seasonality—Discontinued Operations. Seasonality affects for our discontinued operations are substantially similar to those for our continuing operations. See “—Seasonality—Continuing Operations” above.
          Revenue Recognition—Discontinued Operations. Revenue recognition for our LCD flat-panel display, poster frame and in-store network (excluding CGEN) is substantially consistent with that for our continuing operations. See “—Revenue Recognition—Continuing Operations” above.
          Advertising service fee collection policy for discontinued operations is consistent with that for continuing operations. In 2006, 2007 and 2008, we made provision of $1.8 million, $3.5 million and $8.1 million for accounts receivables for discontinued operations. The average number of days outstanding for our account receivable for our discontinued operations, including from related parties, was 68 and 109 days respectively, as of December 31, 2007 and 2008.
          Other Revenue—Discontinued Operations. In 2007 and 2008, we also derived revenue for the discontinued operations from providing mobile handset advertising services. We terminated the business in 2008 and do not expect to see significant revenue from this business. In 2007 and 2008, mobile handset advertising services had net revenue of $46.1 million and $12.3 million respectively and accounted for 13.4% and 2.9% of net revenue of discontinued operations.

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Cost of Revenues—Discontinued Operations
          Our cost of revenues for our discontinued operations consists of costs directly related to the offering of our advertising services.
          The following table sets forth our cost of revenues for our discontinued operations, divided into its major components, by amount and percentage of our net revenues from discontinued operations for the periods indicated:
                                                 
    For the year ended December 31
    2006   2007   2008
            % of net           % of net           % of net
    $   revenue   $   revenue   $   revenue
            (in thousand of U.S. dollars, except percentages)        
Total net revenue from discontinued operations
    211,215       100 %     343,497       100 %     426,551       100 %
Cost of revenue:
                                               
LCD display networks
    42,076       19.9 %     51,118       14.9 %     61,222       14.4 %
In-store network (excluding CGEN)
    18,107       8.6 %     23,503       6.8 %     30,317       7.1 %
Poster frame networks
    13,622       6.4 %     28,086       8.2 %     59,815       14.1 %
Others
    6,817       3.3 %     23,767       6.9 %     11,057       2.6 %
Total cost of revenue for discontinued operations
    80,620       38.2 %     126,474       36.8 %     162,411       38.1 %
Gross profit from discontinued operations
    130,595       61.8 %     217,023       63.2 %     264,140       61.9 %
          Our cost of revenues for discontinuing operations related to the offering of our advertising services consists of location costs, flat-panel display depreciation costs and other cost items, including salaries for and travel expenses incurred by our network maintenance staff and costs for materials.
          Our location costs for our LCD display network, our in-store network (excluding CGEN) and poster frame network consist of: rental fees and one-time signing payments we pay to landlords, property managers and stores pursuant to the display placement agreements we enter into with them;
          Commissions and public relations expenses we incur in connection with developing and maintaining relationships with landlords and property managers; and maintenance fees for keeping our displays in proper operating condition.
          Generally, we capitalize the cost of our media displays and recognize depreciation costs on a straight-line basis over the term of their useful lives, which we estimate to be five years. The primary factors affecting our depreciation costs are the number of flat-panel displays in our network and the unit cost for those displays, as well as the remaining useful life of the displays.
          Our other cost of revenues consists of salary for and travel expenses incurred by our network maintenance staff and costs for materials and maintenance in connection with the upkeep of our advertising network. The primary factor affecting our other costs of revenues is the size of our network maintenance staff.
          LCD display network. Location costs are the largest component of our cost of revenues for our LCD display network. The primary factors affecting the amount of our location costs include the number of display placement agreements we enter into and the rental fees we pay under those agreements. We expect these costs to decrease as a percentage of our advertising service revenue for our commercial location network in the future, as our advertising service revenue for our commercial location network is expected to increase faster than the additional cost we incur from entering into new display placement agreements and any increases we may experience in renewing existing display placement agreements. However, when our display placement agreements expire, we may be unable to renew these agreements on favorable terms and the rental fee portion of our location costs attributable to these existing locations could increase. As we continue to increase the size of our network and as we update and replace our existing

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displays with new technology, our depreciation costs in connection with our commercial location network are expected to increase.
          In-store network (excluding CGEN). The primary costs of revenues connected with our in-store network (excluding CGEN) are location costs resulting from rental and maintenance fees and depreciation costs for our displays. We expect these costs to continue to increase as we expand our in-store network (excluding CGEN).
          Poster frame network. The primary costs of revenues connected with our poster frame network are location costs resulting from rental fees. Depreciation costs for our frames and other costs for salary and maintenance fees also account for a significant portion of cost of revenues for our poster frame network. We expect these costs to increase in the future as we expand our poster frame network and continuously upgrade our poster frame to digital posters.
Other Costs—Discontinued Operations
          In 2007 and 2008, we also derived revenue for discontinued operations from providing mobile handset advertising services. Other costs are primarily associated to providing mobile handset advertising services. We do not expect to incur significant costs of revenue from mobile handset advertising services in the future.
          General and administrative expenses for the assets held for sale to Sina. . General and administrative expenses for the assets held for sale to Sina consist of substantially the same items as for continuing operations. General and Administrative expenses increased 64.2% to $44.0 million in 2008 from $26.8 million in 2007. The increase is primarily due to an increase in the size of our administrative staff and corresponding increase in expenses for salary and benefits as our operations have grown and to the increase in our share-based compensation expense.
          Selling and Marketing. Our selling and marketing expenses for the assets held for sale to Sina consist of substantially the same items as for continuing operations. Selling and marketing expenses increased substantially to $69.0 million in 2008 from $50.6 million in 2007. The increase was approximately in proportion to the increase in revenue from discontinued operations.
                    Impairment loss. We incurred an impairment loss of $396.8 million for the assets held for sale to Sina in 2008. In conducting our annual impairment test, we undertook a valuation of each reporting unit using the income approach valuation method, which resulted in a goodwill impairment loss of $376.8 million related to our poster frame network. In the fourth quarter, 2008, we determined that a substantial portion of our LCD flat-panel display may not be effectively utilized in the future due to our decision to halt network expansion plans under the unfavorable macro-economic environment and uncertainty with regard to customer demand for our LCD display advertising services. As a result, we recognized a $15.3 million fixed assets impairment loss. In the fourth quarter of 2008, we also took an impairment charge of $4.8 million on intangible assets associated with the Target Media brand due to the management decision to accelerate phasing out of that brand from the operation of our LCD display networks.
                    Loss from termination of mobile handset advertising business. In March 2008, we announced the restructuring the Mobile handset advertising services resulting in a significant reduction of its scale. In December, we announced the disposal of the remaining Mobile handset advertising business. As a result, we recognized a net loss of $91.9 million.
Critical Accounting Policies — Total Company
          We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management’s judgment.

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Revenue Recognition.
          Advertising revenues, net of agency rebates are recognized ratably over the period in which the advertisement is displayed. Advertising revenues are recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). In accordance with SAB 104, revenues are recognized when all four of the following criteria are met: (i) persuasive evidence of agreement exists; (ii) delivery of service has occurred; (iii) the price is both fixed and determinable; and (iv) collection of the resulting receivable is reasonably assured. We sell Adforward subscriptions and perpetual licenses. Revenues are recognized for subscription arrangements ratably over the subscription period for those with fixed fees and as earned (based on actual usage) under our variable fee arrangements. Under perpetual license agreements, revenue recognition is generally commenced when delivery has occurred, software has been installed and training has been provided as we do not currently have vendor-specific objective evidence of fair value, or VSOE, for either installation or training services.
          For our business lines classified within discontinued operations, we typically sign standard advertising contracts with our advertising clients, which require us to run the advertiser’s advertisements on our network in specified cities for a specified period, typically from four to twelve weeks. We recognize advertising service revenue ratably over the performance period of the advertising contract, so long as collection of our fee remains probable. We do not bill our advertising clients under these contracts until we perform the advertising service by broadcasting the advertisement on our network. Revenue collected from our poster frame network is recognized in substantially the same manner as revenues collected under the advertising contracts used for our LCD display networks and in-store networks.
Accounts Receivables
          We generally collect our advertising service fees by billing our advertising clients within 60 to 90 days after completion of the advertising contract and book these unbilled or unpaid amounts as accounts receivable until we receive payment or determine the account receivable to be uncollectible.
          Our accounts receivable are general unsecured obligations of our advertising clients and we do not receive interest on unpaid amounts. We make specific reserves for accounts that we consider to be uncollectible. We also provide a general reserve for uncollectible accounts that we reassess on an annual basis.
Share-based Compensation
          Effective the beginning of 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123-R, “ Share-Based Payment ”, and elected to adopt the modified prospective application method. SFAS No. 123-R requires us to use a fair-value based method to account for share-based compensation. Accordingly, share-based expense is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees’ requisite service period. Our share option plans are described in Note 11 to our consolidated financial statements.
          We estimated the fair value of share options granted using the Black-Scholes-Merton option pricing model, which requires the input of highly subjective assumptions, including the estimated expected life of the share options, estimated forfeitures and the price volatility of the underlying shares. The assumptions used in calculating the fair value of share options represent management’s best estimates, but these estimates involve inherent uncertainties and the applicable of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we estimate our expected forfeiture rate and recognize the expense only for those shares expected to vest. These estimates are based on past employee retention rates and our expectations of future retention rates. We will prospectively revise our estimated forfeiture rates based on actual history. Our compensation expense may change based on changes to our actual forfeitures of these share options.
Income Taxes
          We account for income taxes under the provisions of SFAS No. 109, “ Accounting for Income Taxes ” and effective from January 1, 2007, the Group adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), with the required disclosures as described in Note

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12 to our consolidated financial statements., we record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their recorded amount, an adjustment to our deferred tax assets would increase our income in the period such determination was made. Likewise, if we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to our income in the period such determination is made. We record income tax expense on our taxable income using the balance sheet liability method at the effective rate applicable to each of our affiliated entities in China in our consolidated statements of operations and comprehensive income.
Goodwill and Long-lived Assets Impairment
          We test goodwill for possible impairment on an annual basis as of December 31 of each year and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Circumstances that could trigger an impairment test between annual tests include, but are not limited to:
    a significant adverse change in the business climate or legal factors;
 
    an adverse action or assessment by a regulator;
 
    unanticipated competition;
 
    loss of key personnel;
 
    the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of;
 
    a change in reportable segments; and/or results of testing for recoverability of a significant asset group within a reporting unit.
The timing of an impairment test may result in charges to our statements of operations in our current reporting period that could not have been reasonably foreseen in prior periods. Application of goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and estimating the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value of each reporting unit which could trigger impairment. More conservative assumptions of the anticipated future benefits from these reporting units could result in impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values.
          As of December 31, 2006, 2007 and 2008, we had a goodwill balance of $739.7 million and $943.4 million and $30.7 million respectively, which is not deductible for tax purposes. In the fourth quarter of 2008, we began to face mounting uncertainties about the future demand for our services by our major advertisers. Such uncertainty and worsening macro-economic situation prompted us to undertake an impairment test for each reporting unit using income approach valuation methods, The results of our annual impairment test resulted in a goodwill impairment loss of $218.4 million in 2008 for our Internet advertising service business and $0.9 million for our movie theatre and traditional billboard advertising services business, as the valuations indicated that the fair value of the businesses were less than the carrying value. In December, 2008, we announced termination of CGEN share purchase agreement and disposal of part of CGEN business and associated assets and liabilities. As a result, we recognized loss from disposal of $190.5 million, of which $145.6 million was impairment of goodwill.
          For the discontinued operations, we recorded $376.8 million goodwill impairment loss for our poster frame networks, as the income approach valuation indicated that the fair value of the business was less than the carrying value. On March 2008, as a result of uncertainty in the mobile handset advertising industry in PRC, there was a triggering event which required us to reevaluate the carrying value of the goodwill and assets of the mobile handset advertising

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segment., We undertook a business restructuring in March 2008 to amend their strategic business plans and on December 10, 2008, we announced the complete termination of our mobile handset advertising business. We incurred a $44.1 million goodwill impairment loss within loss from discontinued operations for 2008.
          In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates. We may incur additional goodwill impairment charges in the future although we cannot predict whether this will occur.
          We test long-lived assets for possible impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset group below its carrying amount. Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the undiscounted future cash flows. In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates.
          In the fourth quarter of 2008, we determined that substantial portion of fixed assets for the LCD display networks may not be effectively utilized in the future due to our decision to halt network expansion plan under unfavorable macro economic environment which was manifested by the first sequential decline in revenue for the quarter ended on December 31, 2008 in our history,and uncertainty in regard to customer demands to our LCD display network based advertising services. As a result, we recognized $15.3 million fixed asset impairment expense within loss from discontinued operations.
          In the fourth quarter of 2008, we also took an impairment charge of $4.8 million which is recorded in loss from discontinued operations on intangible assets associated with Target Media brand due to the management decision to accelerate phasing out the brand from the operation of our LCD display networks.
          As a result of the termination of the mobile handset advertising services, we recognized $14.6 million related to impairment of long-lived assets recorded within loss from discontinued operations.
Taxation
Cayman Islands, the British Virgin Islands and Hong Kong.
          Under the current laws of the Cayman Islands and the British Virgin Islands, none of Focus Media Holding Limited, and its subsidiaries incorporated in Cayman Islands or the British Virgin Islands, is subject to tax on its income or capital gains. Focus Media Hong Kong, Allyes (China) Holding Company Limited and Hua Kuang Advertising Company Limited, our wholly owned subsidiaries incorporated in Hong Kong, is subject to profits tax rate of 17.5% on its assessable profits, yet interest derived from deposits placed in Hong Kong with authorized institutions is exempted from the Hong Kong profits tax. In addition, payment of dividends by either company is not subject to withholding tax in those jurisdictions.
Taxable Presence Exposure in the PRC
          The newly enacted Enterprise Income Tax Law and its implementation regulations, as discussed below, provides that enterprises established under the laws of foreign countries or regions whose “de facto management bodies” are located within the PRC are considered PRC resident enterprises and will be subject to the PRC Enterprise Income Tax at the rate of 25% on their worldwide income. Under the Implementation Rules of the PRC Enterprise Income Tax Law, as discussed below, a “de facto management body” is defined as a body that has material and overall management and control over manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Due to the fact that substantially all of our operational management is currently based in the PRC, our Cayman Islands company and BVI company may be deemed as resident enterprises in the PRC. If we are treated as resident enterprises for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% tax rate, which would have an impact on our effective tax rate. Additionally, under such circumstances, dividends distributed from our PRC subsidiaries to our BVI company and ultimately to our Cayman Islands company, could be exempt from Chinese dividend withholding tax, and dividends

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from our Cayman Islands company to ultimate shareholders would be subject to Chinese withholding tax at 10% or a lower treaty rate.
PRC
          Our PRC entities are subject to PRC business tax. We primarily pay 5% business tax on revenues generated from our commercial location, in-store network, poster frame network and internet advertising business, net any deductible advertising cost for business tax purpose. Revenues generated from our mobile handset advertising business generally pays a 3% business tax on the gross revenues.
          In addition to business tax and the 4% cultural industries tax imposed on our advertising business and VAT imposed on our sales of advertising equipment, all of our PRC entities are subject to PRC enterprise income tax on their taxable income, except to the extent some of them enjoy temporary tax exempt status as described in further detail below.
          Prior to January 1, 2008, pursuant to the PRC Income Tax Laws, our subsidiaries and VIEs were generally subject to Enterprise Income Tax (“EIT”) at a statutory rate of 33%, which comprised 30% national income tax and 3% local income tax.
          On January 1, 2008, a new EIT law (“New Law”) in China took effect. The New Law applies a uniform 25% EIT rate to both foreign invested enterprises and domestic enterprises. The New Law provides a five-year transition period from its effective date for those enterprises which were established before the promulgation date of the New Law and which were entitled to a preferential tax treatment under the PRC Income Tax Laws, such as a reduced tax rate or a tax holiday. On December 26, 2007, the State Council issued the Notice of the State Council Concerning Implementation of Transitional Rules for Enterprise Income Tax Incentives (“Circular 39”). Based on Circular 39, certain specifically listed categories of enterprises which enjoyed a preferential tax rate of 15% are eligible for a graduated rate increase to 25% over the 5-year period beginning from January 1, 2008. Specifically, the applicable rates under such an arrangement for such enterprises would be 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011, 2012 and thereafter, respectively. Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises that qualify as “new and high technology enterprises strongly supported by the state” (“HNTE”) under the New Law will be entitled to a 15% preferential EIT rate.
          Most of the our subsidiaries and VIEs transited from 33% to 25%, effective January 1, 2008. Those that currently enjoy a lower tax rate of 15% as high-tech companies under the PRC Income Tax Laws will transition to the uniform tax rate of 25% from 2008 unless they obtain the HNTE status under the New Law. We have thus generally applied the 25% rate in calculating our deferred tax balances.
          Among the subsidiaries and VIEs, Beijing Focus Media Wireless Co., Ltd. and Beijing Kong Zhong Hui Ke Technology Co., Ltd., were granted new technology enterprise status before the end of 2007 and thus enjoyed 0% for 2008 and will enjoy a 50% reduction off the tax rate from 2009 through 2011 based on the transitional rule under the New Law. New Allyes Information Technology (Shanghai) Co., Ltd. is subject to the transitional rule provided under Circular 39, while Allyes Information Technology (Shanghai) Co., Ltd. was granted the HNTE status in 2008 and enjoys a rate of 15% from 2008 through 2010.
          In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined in that statement. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

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          We adopted the provisions of FIN 48 effective January 1, 2007 and estimated the cumulative effect on adoption to be a reduction of consolidated retained earnings as of January 1, 2007 of $3.9 million, including interest and penalties, with a corresponding increase in the liability for uncertain tax positions. We have elected to classify interest and penalties relating to income tax matters within income tax expense. The amount of penalties and interest as of adoption and December 31, 2007 was immaterial. We provided an additional reserve of $4.7 million in connection with tax uncertainties during the year ended December 31, 2007. We decreased our liabilities for unrecognized tax benefits by $3.1 million in connection with effective settlement of prior-year tax uncertainties during the year ended December 31, 2008. We do not anticipate any significant increases or decreases to our liability for unrecognized tax benefits within the next 12 months.
         
    (in thousands of U.S. dollars)  
Balance at January 1, 2008
  $ 8,233  
Settlements
    (3,080 )
Gross increases – interest accrual
    102  
Transfer to liabilitiess held for sale
    (4,724 )
Translation adjustment
    25  
 
     
Balance at December 31, 2008
  $ 556  
 
     
          According to the PRC Tax Administration and Collection Law, the statute of limitations is generally three years if the underpayment of taxes is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of tax liability exceeding RMB100,000 (approx. $14,000 under the current exchange rate) is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is 10 years. There is no statute of limitations in the case of tax evasion. The status of limitations in Hong Kong is six years.
Recently Issued Accounting Standards
     In February 2007, the FASB issued Statement of Financial Accounting Standards No.159, “The Fair Value Option for Financial Assets and Financial Liabilities, an amendment of SFAS No.115” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring different assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal year beginning after November 15, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial position or our results of operations.
     In December 2007, the FASB issued SFAS No. 141, “Business Combinations (Revised 2007)” (“SFAS 141R”). SFAS 141R is relevant to all transactions or events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer to recognize any assets and noncontrolling interest acquired and liabilities assumed to be measured at fair value as of the acquisition date. Liabilities related to contingent consideration are recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of the consideration may be resolved beyond a reasonable doubt. This revised approach replaces SFAS 141’s cost allocation process in which the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their respective fair value. SFAS 141R requires any acquisition-related costs and restructuring costs to be expensed as incurred as opposed to allocating such costs to the assets acquired and liabilities assumed as previously required by SFAS 141. Under SFAS 141R, an acquirer recognizes liabilities for a restructuring plan in purchase accounting only if the requirements of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, are met. SFAS 141R allows for the recognition of pre-acquisition contingencies at fair value only if these contingencies are likely to materialize. If this criterion is not met at the acquisition date, then the acquirer accounts for the non-contractual contingency in accordance with recognition criteria set forth under SFAS 5, “Accounting for Contingencies”, in which case no amount should be recognized in purchase accounting. SFAS 141R is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008.  The adoption of SFAS 141R will change the our accounting treatment for business combination on a prospective basis beginning on January 1, 2009.
     In April 2009 the FASB issued FSP No. 141R-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP 141R-1”). FSP 141R-1 amends the provisions in SFAS 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS 141R will change our accounting treatment for business combination on a prospective basis beginning on January 1, 2009.

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     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). This Statement amends ARB 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity on the financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Furthermore, disclosure of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest is required on the face of the financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. We will incorporate the presentation requirements outlined by SFAS No. 160 on January 1, 2009.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 enhances the required disclosures under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, in order to provide the investing community additional transparency in an entity’s financial statements and to more adequately disclose the impact investments in derivative instruments and use of hedging have on financial position, operating results and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application allowed. We do not expect the adoption of SFAS 161 to have a material impact on our financial position or results of our operations.
     In April, 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). In determining the useful life of acquired intangible assets, FSP 142-3 removes the requirement to consider whether an intangible asset can be renewed without substantial cost of material modifications to the existing terms and conditions and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The adoption of FSP 142-3 will not have a material impact on our consolidated financial position or result of operations.
     In June 2008 the FASB ratified the consensus reached by the Task Force in Emerging Issues Task Force (EITF) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for fiscal years and interim periods beginning after December 15, 2008. EITF 07-5’s “fixed-for-fixed, plus fair value inputs” model is largely consistent with current interpretations of the phrase “indexed to an entity’s own stock.” However, in certain circumstances, EITF 07-5 may result in changes to those accounting conclusions and may have impact on issuers of equity-linked financial instruments (e.g., options or forward contracts) or instruments containing embedded features (e.g., embedded conversion options in a convertible instrument) that have (1) exercise or settlement contingency provisions, (2) a strike price that is subject to adjustment, or (3) a strike price that is denominated in a currency other than the entity’s functional currency. The adoption of EITF 07-5 will not have any impact on our consolidated financial statements.
     In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. As a result of FSP 157-2, we will adopt FAS 157 for our nonfinancial assets and nonfinancial liabilities effective January 1, 2009. We do not expect that the adoption of FAS 157 will have a material impact on our financial position, results of operations or cash flows.
     In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with FAS 157. We do not expect the adoption of FSP 157-3 to have a material impact on our consolidated financial statements or the fair value of our financial assets and liabilities.
     At its November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force on Issue No. 08-06, “Equity Method Investment Accounting Considerations” (“EITF 08-06”). Because of the significant changes to the guidance on subsidiary acquisitions and subsidiary equity transactions and the increased use of fair-value measurements as a result of SFAS 141R and SFAS 160, questions have arisen regarding the application of that accounting guidance to equity-method investments. EITF 08-06 provides guidance for entities that acquire or hold investments accounted for under the equity method. EITF 08-06 is effective for transactions occurring in fiscal years and interim periods beginning on or after December 15, 2008. Early adoption is not permitted. We do not expect that the adoption of EITF 08-06 will have a material impact on the consolidated financial statements.

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     At the November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force on Issue No. 08-07, “Accounting for Defensive Intangible Assets” (“EITF 08-07”). EITF 08-07 requires entities that will acquire a defensive intangible asset after the effective date of SFAS 141R to account for the acquired intangible asset as a separate unit of accounting and to amortize the acquired intangible asset over the period during which the asset would diminish in value. EITF 08-07 is effective for defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008. We will apply the guidance of EITF 08-07 to acquisitions of defensible intangible assets prospectively and do not expect that adoption will have a material impact on the consolidated financial statements.
     On April 9, 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB 157 when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. We do not expect the adoption of FSP 157-4 to have a material impact on our consolidated financial statements or the fair values of our financial assets and liabilities.
     In April 2009, the FASB issued FASB Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). The FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. We do not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on our consolidated financial statements.
          In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, SFAS 165 provides (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009 and shall be applied prospectively. Currently we are still assessing the potential impact, if any, on our consolidated financial statements.
     In June 2009 the FASB issued SFAS No.166, “Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS 166 will be effective for the fiscal year beginning April 1, 2010. We are currently assessing the potential impacts, if any, on our consolidated financial statements.
     In June 2009 the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 eliminates Interpretation 46(R)’s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation 46(R)’s provisions. SFAS 167 will be effective for our fiscal year beginning January 1, 2010. We are currently assessing the potential impacts, if any, on our consolidated financial statements.
Acquisitions
          Since we commenced our current business operations in May 2003, we have acquired numerous companies to expand the coverage of our network in China and to acquire businesses that are complementary to our operations. See “Item 10.C Additional Information — Material Contracts”.
          Some of the businesses we acquired had entities located both in and outside of China. The consideration we paid for these businesses was made in two parts, one part for the entity located in China, and the other part for the entity located outside of China. For consideration paid to acquire entities located in China, we withheld on behalf of sellers who are natural persons 20% of the amount by which the acquisition price exceeded the registered capital of such PRC entity as required under the PRC Individual Income Tax Law and related implementation rules. We were not required to and did not withhold any tax in connection with payments made to acquire the entities located outside of China. See “Item 3.D Key Information — Risk Factors — Risks Relating to the People’s Republic of China — The PRC tax authorities may require us to pay additional taxes in connection with our acquisitions of offshore entities that conducted their PRC operations through their affiliates in China”.
          The financial statements of:
    Allyes Information Technology Company Limited, for the year ended, and as of, December 31, 2006;

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    Target Media Holdings, for the periods ended, and as of, December 31, 2004 and 2005; and
 
    Infoachieve Limited, for the periods ended, and as of, December 31, 2003, 2004 and 2005
 
      are available in our registration statement on Form F-1 (File No. 333-146913) and the financial statements of:
 
    Perfect Media Holding Ltd. for the periods ended, and as of, December 31, 2003 and September 30, 2004;
 
    Focus Media Changsha Holding Ltd., Focus Media Qingdao Holding Ltd. and Focus Media Dalian Holding Ltd. for the period ended, and as of, October 31, 2004; and
 
    Capital Beyond Limited for the periods ended, and as of, December 31, 2004 and March 31, 2005, respectively,
          are available in our registration statement on Form F-1 (File No. 333-134714).
          In 2007, we also made a number of smaller acquisitions, which, due to the smaller size, does not necessitate our providing their financial statements on a stand alone basis. Among these smaller acquisitions, we acquired eight regional distributors in our digital out-of-home network, five local poster frame companies, ten companies in the mobile advertising sector and six Internet advertising companies (excluding Allyes). No one of these acquisitions was material to our business.
          In January 2008, we acquired CGEN Digital Media Company, Limited (CGEN), which was our biggest competitor in in-store advertising segment. Subsequently, on December 10, 2008, we announced the disposition of our in-store advertising business and termination of the CGEN acquisition agreement. The operations of CGEN is classified as a continuing operation primarily because we continue to lend the new owners of CGEN the use of our equipment.
          We acquired six entities in the poster-frame advertising business for cash consideration of approximately $1.2 million as of December 31, 2008. We recognized acquired intangible assets of approximately $7.9 million and goodwill of approximately $0.4 million, which was assigned to the in-elevator poster fame advertising services segment of our network. Part of the purchase consideration is contingent and is based on earnings targets in the three years subsequent to the acquisition, subject further to the attainment of certain operational targets. The purchase price allocation will not be completed until the contingent consideration is known. As such, we have recorded a liability of approximately $7.4 million, which is equal to the excess of the fair value of the assets acquired over cost on the date of acquisition.
          We acquired two entities in the Internet advertising service business for $nil consideration as of December 31, 2008. We recognized acquired intangible assets of approximately $0.7 million. Part of the purchase consideration is contingent and is based on earnings targets in the three years subsequent to the acquisition, subject further to the attainment of certain operational targets. The purchase price allocation will not be completed until the contingent consideration is known. As such, we have recorded a liability of approximately $0.7 million, which is equal to the excess of the fair value of the assets acquired over cost on the date of acquisition.
Results of Operations for Continuing Operations
Year ended December 31, 2008 compared to year ended December 31, 2007
          Net revenues. Our net revenue for continuing operations increased substantially from $163.1 million in 2007 to $369.6 million in 2008 primarily due to (i) revenues from our Internet advertising network due to acquisitions we made in Internet advertising businesses acquired towards the end of 2007 and in 2008 and (ii) revenues from the CGEN in-store networks we acquired in January 2008.
          Internet advertising service business. Internet advertising revenue increased 104% from $124.9 million in 2007 to $255.6 million in 2008, primarily due to revenues derived from entities we acquired in 2007. We commenced our Internet advertising business through the acquisition of Allyes in March 2007. Subsequently, we made eight and two additional acquisitions related to our Internet advertising business in 2007 and 2008, respectively.
          Movie theater and traditional outdoor billboard networks. Movie theater and traditional outdoor billboard revenue more than doubled from $37.3 million in 2007 to $77.5 million in 2008, primarily due to the following two reasons:
  1.   Huaguang and Tuojia, which operate the traditional billboard business were acquired in the first half of 2007. We consolidated their 2007 revenues only after the acquisitions were consummated, while in 2008 we consolidated their full year revenues; and
 
  2.   the significant increase in the number of our movie theater customers from 71 in 2007 to 141 in 2008.
          Others. Other revenue primarily consisted of revenue from the CGEN portion of our in-store network, which we acquired in January 2008. Net revenue from the CGEN portion of our in-store network was $35.0 million in 2008.

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On December 10, 2008, we announced the disposition of the CGEN in-store network business. The operation of the in-store network acquired from CGEN has been substantially ceased and sold to a third-party for operation. We do not expect to derive any significant revenues from this line of business in the future.
          Costs of revenue. Our cost of revenues for continuing operations increased from $122.0 million in 2007 to $285.0 million in 2008.
          Internet advertising service business. The cost of revenue for our Internet advertising business increased 113.6% from $93.2 million in 2007 to $199.2 million in 2008. The increase was mostly attributable to costs associated with the Internet advertising businesses we acquired in 2007 but whose full affect on our costs structure was not fully reflected until the full year 2008 results.
          Movie theater and traditional outdoor billboard network. The cost of revenue for our movie theater and traditional outdoor billboard network increased 101% from $28.5 million in 2007 to $57.3 million in 2008. The increase is primarily attributable to:
  1.   Huaguang and Tuojia, the subsidiaries which operate the traditional billboard business, were acquired in the first half of 2007. We consolidated their respective results of operation only after the acquisitions were consummated, while in 2008 we consolidated their full year revenues;
 
  2.   the increase in the number of billboards leased from 492 in 2007 to 542 in 2008 in response to greater customer demand; and
 
  3.   increased leasing costs associated with time we rent on movie theater screens as a result of an increase in the number of theaters we lease in our network from 10,930 in 2007 to 27,164 in 2008.
          Others. Other costs of revenue was $28.6 million primarily from costs associated with the CGEN in-store networks which we acquired in January 2008, including screen placement, leasing and location costs.
          Gross profit. As a result of foregoing, our gross profit from continuing operations increased 105.6% from 41.1 million in 2007 to $84.5 million in 2008.
                                                 
    For the year ended December 31
    2006   2007   2008
            % of           % of           % of
            net           net           net
    $   revenue   $   revenue   $   revenue
    (in thousand of U.S. dollars, except percentages)
Gross profit from continuing operations
                                               
Movie theatre and traditional billboard advertising services
    (70 )     (10.0 )%     8,798       5.4 %     20,244       5.5 %
Internet advertising network
    0             31,702       19.4 %     56,448       15.3 %
Others
    0             595       0.4 %     7,816       2.1 %
Gross profit from continuing operations
    (70 )     (10.0 )%     41,095       25.2 %     84,508       22.9 %
          The decrease of the gross margin from continuing operations was primarily attributable to the following reasons:
  1.   In January 2008, we acquired CGEN in-store networks. Gross margins from the CGEN in-store network were significantly lower than other lines of businesses because its costs of revenue were driven up by intense competition for advertising locations. In 2008, revenue from CGEN accounted for 9.5% of net revenue for continuing operations.

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  2.   Our Internet advertising network experienced a significant revenue decrease in the fourth quarter of 2008 due to sudden drop in online advertising demand from its key market sectors, such as financial services, real estate and automobiles resulting in lower overall gross margins in 2008.
          As a result of forgoing, the gross margin for our continuing operations decreased from 25.2% in 2007 to 22.9% in 2008.
          Operating expenses. Our operating expenses for continuing operations increased significantly from $30.5 million in 2007 to $498.8 million in 2008. The increase in operating expenses was primarily due to the impairment loss and restructuring loss we recorded in 2008 and, to a lesser extent, to increases in our selling and marketing expenses and in our general and administrative expenses associated with the growth of our business, and in share-based compensation expenses under SFAS 123-R, as well as the amortization of acquisition related intangible assets.
    General and administrative. General and administrative expenses increased substantially from $16.7 million in 2007 to $52.1 million in 2008 mainly due to (i). an increase in the size of our administrative staff and corresponding increases in expenses for salary and benefits, including share-based compensation expenses as our operations have grown organically and through acquisitions; (ii) our having acquired most of the subsidiaries and affiliates involved in conducting our continuing operations through out 2007, and therefore, general and administration expenses for 2007 did not reflect the full year results of those subsidiaries acquired in 2007; and (iii) $3.5 million withholding tax and business tax levied upon royalty fees charged by Focus Media Holding to our PRC affiliates and subsidiaries in 2008, while Focus Media Holding waived the royalty charge in 2007.
 
    Selling and marketing. Selling and marketing expenses increased substantially from $14.1 million in 2007 to $34.7 million in 2008 due to increases in marketing and promotional expenses by our sales force, and in salary and benefits associated with the expansion of our sales force organically and acquisitively as well as share-based compensation expenses and amortization of acquisition related intangible assets
          Impairment loss and Disposal losses. We incurred a $222.5 million impairment loss and a $190.5 million disposal losses in 2008. The impairment expense was primarily for the goodwill impairment for our Internet advertising service business and our traditional billboard and movie theater service business of $218.4 million and $0.9 million, respectively. The disposal losses were attributable to the disposal of CGEN, which we acquired in January 2008 but whose operations we terminated and disposed of in December 2008.
          Other operating income. Other operating income consisted primarily of government subsidies received by our PRC subsidiaries and affiliates in the form of refunds of a portion of the business tax and income tax paid by our PRC

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subsidiaries and affiliates.
          Other expenses. Other expenses increased to $1.7 million in 2008 from $0.2 million in 2007.
          Income tax. Income tax expense was $3.4 million in 2008 as compared to $4.2 million in 2007.
          Net income (loss) from continuing operations. As a result of the foregoing, we incurred a net loss of $415.5 million in 2008 compared to net income of $8.5 million in 2007 for continuing operations.
          Net Income (loss) from discontinued operations. In December, 2008, we announced the disposal of our mobile handset advertising business following a reorganization of the business in March, 2008. In addition, in December, 2008, we also announced our agreement to sell to SINA Corporation substantially all of our assets of our out-of-home digital advertising network, which include our LCD display network, In-elevator poster frame networks and certain part of in-store advertising networks. In accordance with U.S. GAAP, both mobile handset advertising business and the assets held for sale to Sina were accounted as discontinued operations. The discontinued operation incurred a net loss of $355.2 million in 2008 as compared to a net income of $135.9 million in 2007
           Net income (loss). As a result of the foregoing, on a total-company basis, we recorded a net loss of $770.7 million in 2008 compared to net income of $144.4 million in 2007.
Year ended December 31, 2007 compared to year ended December 31, 2006
          Net revenues. Net revenues from continuing operations increased substantially from $0.7 million in 2006 to $163.1 million in 2007 due primarily to our acquisitions of our Internet advertising business through Allyes and our traditional outdoor billboard business in 2007. We commenced providing Internet advertising services and software solutions in March 2007 upon our acquisition of Allyes. Advertising service revenue from our Internet advertising services network totaled $124.9 million in 2007 attributable primarily to sales of our digital marketing services, sales of our performance-based advertising service ‘SmartTrade’ and sales of our Internet advertising software package ‘AdForward’.
          Cost of sales. Cost of sales for continuing operations increased substantially from $0.8 million in 2006 to $122.0 million in 2007 due primarily to costs associated with our Internet advertising business and traditional billboard advertising network which we acquired in 2007 and to the leasing of screen time in connection with our movie theater network. Costs associated with our Internet advertising business consist primarily of advertising space leasing costs charged by gateway websites. We only began incurring costs in connection with our movie theater and traditional billboard network in 2007.
          Gross profit (loss). As a result of the foregoing, our gross profit increased substantially from a loss of $0.1 million in 2006 to $41.1 million in 2007.
          Operating expenses. Our operating expenses increased significantly from $4.0 million in 2006 to $30.5 million in 2007. The increase was primarily attributable to the acquisitions of our Internet advertising business and traditional outdoor billboard business in 2007. The increase in operating expenses was primarily due to increases in our selling and marketing expenses and in our general and administrative expenses associated with the growth of our business, and in share-based compensation expenses under SFAS 123-R, as well as the amortization of acquisition related intangible assets.
    General and Administrative. General and administrative expenses increased substantially from $3.8 million in 2006 to $16.7 million in 2007 mainly due to increases from growth in operations relating to the acquisition of new entities, including Allyes and Traditional Outdoor Billboard business, and increases in the size of our administrative staff and corresponding increases in expenses for salary and benefits as our operations have grown, and increases in share-based compensation expense.

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    Selling and Marketing. Selling and marketing expenses increased substantially from $0.3 million in 2006 to $14.1 million in 2007 due to increases in sales activities relating to operations of new entities, including Allyes and Traditional Outdoor Billboard business, increases in marketing and promotional expenses by our sales force, and in salary and benefits associated with the expansion of our sales force as well as share-based compensation expenses and amortization of acquisition related intangible assets.
          Income (loss) from operations. As a result of forgoing, out income from operations for continuing operations increased from a loss of $4.1 million in 2006 to a profit of $10.6 million in 2007.
          Interest income. Interest income for continuing operations increased substantially to $2.8 million in 2007 from $0.7 million in 2006. The increase was primarily due to (i) the interests from the proceeds we received from our follow-on offering in November 2007; and (ii) interest we received attributable to the cash balances of the companies we acquired in 2007.
          Income tax. We incurred $4.2 million income tax expenses in 2007. We had no income tax expenses in 2006.
          Net income (loss) from continuing operations. As a result of forgoing, our net income from continuing operations was $8.5 million in 2007 as compared to a net loss of $3.4 million in 2006.
          Net income from discontinued operations. We derived net income of $86.6 million and $135.9 million from discontinued operations in 2006 and 2007, respectively.
          Net income. As a result of the foregoing, on a total-company basis, we had net income of $83.2 million and $144.4 million in 2006 and 2007, respectively.
Results of operations for discontinued operations
Year ended December 31, 2008 compared to year ended December 31, 2007
Net revenues. Our net revenue for discontinued operations increased substantially by 24.2% from $343.5 million in 2007 to $426.6 million in 2008.
    LCD flat-panel display network. Advertising service revenue from our LCD flat-panel display network increased 29.8% from $183.4 million in 2007 to $238.1 million in 2008. The increase is attributable to: (i) continued acceptance of our media by an increasing number of advertising clients; (ii) the steady expansion of our media network, including the number of LCD flat-panel displays and LED billboards on our network; and (iii) the sale of tailored advertising packages including through the seven specialized channels on our commercial location network and by targeting advertising campaigns on specific lists of buildings requested by advertising clients which enables us to charge those advertising clients a premium.
 
    Poster frame network. Advertising service revenue from our poster frame network increased 71.7% to $146.8 million in 2008 compared to $85.5 million in 2007. This increase in revenue is primarily attributable to robust sales as the total number of frames installed increased substantially from 190,468 as of December 31, 2007 to 324,364 as of December 31, 2008, including 34,195 digital frames which we introduced in 2008.
 
    In-store network (excluding CGEN). Advertising service revenue from our in-store network (excluding CGEN), decreased 6.0% to $25.7 million in 2008 from $27.4 million in 2007. The decrease was mainly attributable to our failure to consolidate our in-store network sales force with the sales force acquired from CGEN. Such failure caused high turn-over rate among our sales force in 2008
          Cost of revenues. Cost of revenues for discontinued operations increased significantly from $126.5 million in 2007 to $162.4 million in 2008 due to increases in costs of expanding and maintaining our LCD display network, in-store network (excluding CGEN) and poster frame network, offset in part by decreased costs for our mobile handset advertising network as we largely ceased operations of this network in 2008.
    LCD flat-panel display network advertising costs. Cost of revenues associated with our LCD flat-panel display advertising network increased 19.8% to $61.2 million in 2008 from $51.1 million in 2007. This increase was primarily attributable to (i) growth in our advertising service business on our commercial

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      location network between these two periods including substantial increases in our location costs due to a substantial increase in the number of commercial locations where we entered into display placement agreements; (ii) an increase in flat-panel display depreciation costs as a result of an increase in the number of flat-panel displays we own and operate directly to 122,597 as of December 31, 2008 from 107,533 as of December 31, 2007; and (iii) an increase in other direct costs associated with maintaining this portion of our network.
    Poster frame network advertising costs. Our net advertising service cost for our poster frame network increased significantly to $59.8 million in 2008 from $28.1 million in 2007, attributable to increased location costs and depreciation costs relating to the installation and maintenance of poster frames on our network as (i) we significantly increased the number of traditional poster frames on our network and (ii) beginning in June 2007, we began to incur location costs and depreciation cost associated with the purchase and installation of digital poster frames. In 2008, we installed approximately 34,000 digital poster frames as compared to approximately 11,000 such frames installed in 2007.
 
    In-store network (excluding CGEN) advertising costs. We incurred $30.3 million in net advertising service cost for our in-store network (excluding CGEN) in 2008 compared with $23.5 million in 2007. These costs consisted primarily of location costs and depreciation costs relating to the installation and maintenance of our in-store network (excluding CGEN). The increase over these two periods was mostly attributable to a significant increase in location costs, which were driven up by intense competition from CGEN, prior to our acquisition of it in January 2008. Despite our acquisition of CGEN in January 2008, we were not able to significantly reduce location costs in the short-term because our location rental contracts with hyper-markets normally have multiyear durations.
          As a result of the foregoing, gross profit from discontinued operations increased by 21.7% from $217 million in 2007 to $264.1 million in 2008. Gross margin decreased from 63.2% in 2007 to 61.9% in 2008. The gross profit and gross margin for each segment of our discontinued operations for 2007 and 2008 are set forth in the following table:
                                                 
    For the year ended December 31
    2006   2007   2008
    $   Gross margin   $   Gross margin   $   Gross margin
            (in thousand of U.S. dollars, except percentages)        
Gross profit from discontinued operations
                                               
LCD display networks
    89,295       67.9 %     132,258       72.1 %     176,937       74.2 %
In-store network (excluding CGEN)
    8,802       32.7 %     3,941       14.4 %     (4,617 )     (18.0 )%
Poster frame networks
    27,283       66.7 %     57,386       67.1 %     86,936       59.2 %
Others
    5,215       43.3 %     23,438       49.7 %     4,883       30.6 %
Gross profit from discontinued operations
    130,595       61.8 %     217,023       63.2 %     264,140       61.9 %
          Gross margin for our LCD flat-panel display network increased to 74.2% in 2008 from 72.1% in 2007. This is primarily attributable to the lower discount we offered to customers and the higher utilization of our time slots available for sale.
          Gross margin for our poster frame network decreased to 59.2% in 2008 from 67.1% in 2007. The decrease was primarily attributable to lower utilization of frame space and time available for sale caused by the rapid expansion of our network which outpaced demand. Gross margin for our in-store network (excluding CGEN) dropped to negative 18.0% in 2008 from positive 14.4% in 2007. The decrease was attributable to (i) significantly higher location fees paid to store operators due to intense competition with CGEN for advertising locations in stores prior to our acquisition of CGEN in January 2008; and (ii) a decline in revenues in 2008 as compare to 2007 due to unsuccessful efforts to integrate our in-store sales force with the sales force we acquired from CGEN, which resulted in higher costs for the discontinued portion of our in-store network although the CGEN portion is accounted for under continuing operations.

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          In the future, our gross margin may fluctuate depending on the respective financial performance and stage of development of each of our networks as well as the relative contribution to our revenues and costs of each network.
Year ended December 31, 2007 compared to year ended December 31, 2006
      Net revenues. Our net revenue for discontinued operations increased 62.6% from $211.2 million in 2006 to $343.5 million in 2007.
 
    LCD flat-panel display network. Advertising service revenue from our LCD flat-panel display network increased 39.6% from $131.4 million in 2006 to $183.4 million in 2007. The increase in advertising service revenue was attributable to: (i) continued acceptance of our media by an increasing number of advertising clients; (ii) the steady expansion of our media network, including the number of LCD displays and LED billboards on our network; and (iii) the sale of tailored advertising packages including through the six specialized channels on our commercial location network and by targeting advertising campaigns on specific lists of buildings requested by advertising clients which enable us to charge a premium.
 
    Poster frame network. Advertising service revenue from our poster frame network more than doubled to $85.5 million in 2007 compared to $40.9 million in 2006. This increase in revenue was primarily attributable to robust sales as the total number of frames installed more than doubled from 95,878 as of December 31, 2006 to 190,468 as of December 31, 2007, including 10,819 digital frames which we introduced in 2007.
 
    In-store network (excluding CGEN). Advertising service revenue from our in-store network (excluding CGEN), increased 2.0% to $27.4 million in 2007 from $26.9 million in 2006. This increase was attributable to steady sales of advertising services for this portion of our network as it continued to increase in size. Specifically, the number of displays installed in the in-store network (excluding CGEN) amounted to 49,452 as of December 31, 2007, up from 38,742 as of December 31, 2006, offset in part by increased discounts on our rate card that we offered due to relatively strong competition in this area, mainly from CGEN prior to our acquisition of it in January 2008. The number of hypermarkets in our network, from which we derive most of our in-store network revenue, increased from 1,100 as of December 31, 2006 to 1,398 as of December 31, 2007.
 
    Other Revenue. Other revenue was primarily attributable to our Mobile handset advertising network. Revenue from our mobile handset advertising network increased significantly from $10.1 million in 2006 to $46.1 million in 2007 due to the increasing acceptance by advertisers of mobile handset advertising as telecommunications services and mobile handset ownership continues to grow in China.
      Cost of revenues. Our cost of revenues for discontinued operations increased significantly from $80.6 million in 2006 to $126.5 million in 2007 due to increases in costs of expanding and maintaining our LCD flat-panel display, poster frame and in-store advertising networks (excluding CGEN) and our mobile handset advertising network.
 
    Net advertising service cost — LCD flat-panel display network. Our net advertising service cost for our LCD display network increased 21.4% from $42.1 million in 2006 to $51.1 million in 2007. This increase was due to (i) the substantial increase in our advertising service business on our commercial location network between these two periods including substantial increases in our location costs due to a substantial increase in the number of commercial locations where we entered into display placement agreements, including those we operate in our outdoor billboard business; (ii) an increase in flat-panel display depreciation costs as a result of an increase in the number of flat-panel displays we own and operate directly from 80,623 as of December 31, 2006 to 107,533 as of December 31, 2007; (iii) our acquisition of 8 regional distributors during this period, (iv) an increase in other direct costs associated with maintaining the network and (v) payments associated with our lease of curbside LED billboards.
 
    Net advertising service cost — in-store network (excluding CGEN). We incurred $23.5 million in net advertising service cost for our in-store network (excluding CGEN) in 2007 compared to $18.1 million in 2006, consisting of location costs and depreciation costs relating to the installation and maintenance of our in-store network (excluding CGEN).

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    Net advertising service cost — poster frame network. Our net advertising service cost for our poster frame network increased significantly to $28.1 million in 2007 compared to $13.6 million in 2006, attributable to location costs and depreciation costs relating to the installation and maintenance of poster frames on our network as we significantly increased the number of traditional poster frames on our network and, in June 2007, began to incur location costs associated with our digital poster frames.
 
    Other costs of revenue — mobile handset advertising network. Net advertising service cost associated with our mobile handset advertising network increased significantly from $6.8 million in 2006 to $23.8 million in 2007. These costs consisted primarily of message costs charged by mobile operators.
          Gross profit. As a result of the foregoing, our gross profit for discontinued operations increased by 66.2% from $130.6 million in 2006 to $217.0 million in 2007. Our overall gross margin increased during the same period from 61.8% to 63.2%. Our gross margins for each of the businesses in our discontinued operations during these periods are presented in the following table:
                                                 
    For the year ended December 31
    2006   2007   2008
            % of           % of            
            net           net           % of net
    $   revenue   $   revenue   $   revenue
            (in thousand of U.S. dollars, except percentages)        
Gross profit for discontinued operations
                                               
LCD display networks
    89,295       42.3 %     132,258       38.5 %     176,937       41.5 %
In-store network
    8,802       4.2 %     3,942       1.1 %     (4,616 )     (1.1 )%
Poster frame networks
    27,283       12.9 %     57,386       16.7 %     86,936       20.4 %
Others
    5,215       2.4 %     23,438       6.8 %     4,883       1.1 %
Gross profit for discontinued operations
    130,595       61.8 %     217,023       63.2 %     264,140       61.9 %
Liquidity and Capital Resources
Cash Flows and Working Capital
          To date, we have financed our operations primarily through cash generated from operating activities and sales of equity in private and public transactions. As of December 31, 2008, we had approximately $422.9 million in cash and cash equivalents. As we have expanded our network, entered into a large number of display placement agreements, increased our acquisition of regional distributors and related businesses, and made strategic acquisitions, our cash needs for such acquisitions, the purchase of flat-panel displays, payment of our location and maintenance costs and employee costs increased significantly and accounted for the net cash used in investing activities. Our cash and cash equivalents primarily consist of cash on hand, liquid investments with original maturities of three months or less that are deposited with banks and other financial institutions. We generally deposit our excess cash in interest bearing bank accounts. Although we consolidate the results of PRC operating affiliates and their respective subsidiaries described in “Item 4.C Information on the Company—Organizational Structure” in our consolidated financial statements and we can utilize their cash and cash equivalents in our operations through our PRC operating affiliates and their subsidiaries, we do not have direct access to the cash and cash equivalents or future earnings of our PRC operating affiliates and their subsidiaries. However, these cash balances can be utilized by us for our normal operations pursuant to our agreements with PRC operating affiliates and their subsidiaries that provide us with effective control over PRC operating affiliates and their subsidiaries. In addition, we have access to the cash flows of PRC operating affiliates and their subsidiaries through contractual arrangements with our PRC indirect subsidiaries, which provide technical and other services in exchange for fees. See “Item 4.C Information on the Company—Organizational Structure” and “Item 7.B Major Shareholders and Related Party Transactions — Related Party Transactions — Agreements among Us, Our PRC Operating Subsidiaries, Our PRC Operating Affiliates and Their Shareholders and Subsidiaries”.

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          We expect to require cash in order to fund our ongoing business needs, particularly the location costs connected with the placement of our television displays, to fund the ongoing expansion of our network and for payments in connection with our acquisitions. Other possible cash needs may include the upgrading of technology on our network as well as any payment of claims that could be made against us. We have not encountered any difficulties in meeting our current cash needs.
          The following table shows our cash flows with respect to operating activities, investing activities and financing activities in 2006, 2007 and 2008:
                         
    For the year ended December 31,  
    2006     2007     2008  
    (in thousands of U.S. dollars)  
 
                       
Net cash provided by operating activities
  $ 93,354     $ 166,960     $ 168,441  
Net cash used in investing activities
    (121,994 )     (342,881 )     (145,794 )
Net cash provided by (used in) financing activities
    153,521       442,976       (66,616 )
Effect of exchange rate changes
    3,077       18,750       16,468  
 
                 
Net increase (decrease) in cash and cash equivalent
    127,958       285,805       (27,501 )
 
                 
          We had cash provided by operating activities of $168.4 million in 2008, compared to $167.0 million in 2007. Cash provided by operating activities has not increased in proportion to the increase of our revenue due to a significant increase in our account receivable balances and collection period for our account receivables in 2008 compared to 2007. The average number of days outstanding of our accounts receivable for our continuing operations, including from related parties, was 264 and 108 days, respectively, as of December 31, 2007 and 2008. The average number of days outstanding for our account receivable for our discontinued operations, including from related parties, was 107 and 130 days respectively, as of December 31, 2007 and 2008. On a whole-company basis (including continuing and discontinued operations), our account receivables increased to $278.9 million as of December 31, 2008 and the average collection period prolonged to 111 days as compared to 95 days in 2007.
          We had net cash used in investing activities of $145.8 million in 2008, consisting primarily of the following: (1) consideration paid and deposits paid to acquire subsidiaries aggregating $133.3 million, primarily for acquiring CGEN, and for the contingent consideration paid to the companies we acquired prior to 2008; and (2) capital expenditure of $72.9 million in connection with the expansion of our commercial location and poster frame networks;
          We had $66.6 million net cash used by financing activities in 2008, primarily from the application of $47.5 million to execute our share repurchase program and $30.4 million to repay a short-term loan, offset in part by $10.7 million in proceeds from the issuance of shares pursuant to our share option plan.
          We believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs, including for working capital and capital expenditures, for the foreseeable future. These additional cash needs may include costs associated with the expansion of our network, such as (i) the purchase or leasing of traditional billboards in connection with our continuing operations and (ii) the purchase of flat-panel displays and digital poster frames in connection with our discontinued operations and increased location cost. We are also required under PRC law to set aside 10% of our after-tax profits into a general reserve fund. We expect that revenues from operation of our advertising network will be sufficient to cover any such obligations and costs. We may, however, require additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
          From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment.

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Transactions with Related Parties
          Our transactions with related parties have been conducted on arm’s length terms. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” and Note 17 to our audited consolidated financial statements included in this annual report.
Capital Expenditures
          The following table sets forth our historical capital expenditures for the periods indicated. Actual future capital expenditures may differ from the amounts indicated below.
                         
    For the year ended December 31,
    2006   2007   2008
    (in thousands of U.S. dollars)
 
                       
Total capital expenditure
  $ 22,878       59,451       72,876  
          Our capital expenditures were made primarily to acquire flat-panel displays and digital frames for our advertising network. Our capital expenditures are primarily funded by net cash provided from operating activities.
Restricted Net Assets
          Relevant PRC laws and regulations permit payments of dividends by our PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of 10% of after-tax income for our general reserve fund should be set aside prior to payment of dividends. As a result of these PRC laws and regulations, our PRC subsidiaries and our affiliated PRC entities are restricted in their ability to transfer a portion of their net assets to us whether in the form of dividends, loans or advances. As of December 31, 2008, the amount of our restricted net assets was approximately $698.8 million.
A. Research, Development, Patents and Licenses, etc.
Research and Development
          We intend to continue to develop a more advanced model of flat-panel display that uses mobile communications and wireless technology to receive, store, configure and play back advertising content. Whether or not we deploy this newer technology will depend upon cost and network security. We are also developing related software systems that will enable us to configure and run the content on our advertising network in conjunction with mobile communications systems. We also continue to develop proprietary software and systems in connection with the operation of and provision of services through our online advertising services business through Allyes.
Patents and Trademarks
          We believe that the value of our advertising network derives from its effectiveness in reaching a large number of consumers with higher-than-average disposable incomes in urban areas. To a great extent, our business model does not rely on advanced or sophisticated technology or on proprietary trade secrets because our flat-panel displays are assembled with components purchased in off-the-shelf form from wholesale distributors. We endeavor to protect certain of the designs and operating software we use in each generation of our flat-panel displays. We currently hold design patents for our new model of flat-panel display and our software. We have the right to use several trademarks relating to the “Focus Media” brand name in China and in Singapore. We also have the right to use several trademarks relating to the “Framedia” brand name in China. Following our acquisition of Allyes, we also acquired all of its intellectual property including that held by its subsidiaries and affiliates. Upon the completion of our asset sale to SINA Corporation, the intellectual property related to “Focus Media” and “Framedia” will be transferred to SINA Corporation.

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          We do not know if our trademark applications will lead to registered trademarks with the scope of the goods and services we seek, if at all, or whether any trademark we have registered or may receive registration in the future will be challenged or invalidated. See Item 3.D Risk Factor — Risks Relating to Our Business and Industry — Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business. We have also obtained copyright registration for a number of our software. We will continue to assess appropriate occasions for seeking trademark, copyright and other intellectual property protections for those aspects of our business that we believe provide significant competitive advantages.
          The technology developed by Allyes enables us to collect and use data derived from user activity on the Internet. Although we believe that we have the right to use this information and to compile it in our databases, we cannot assure you that any trade secret, copyright or other protection will be available for this information. In addition, our clients and other parties may claim rights to this information.
B. Trend Information
          Please refer to “—Overview” for a discussion of the most significant recent trends in our production, sales, costs and selling prices. In addition, please refer to discussions included in this Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are reasonably likely to have a material effect on our net operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
C. Off-balance Sheet Arrangements
          We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
D. Tabular Disclosure of Contractual Obligations
          The following table sets forth our contractual obligations and commitments with definitive payment terms on a consolidated basis which will require significant cash outlays in the future as of December 31, 2008.
                                                 
    Payments due December 31  
    TOTAL     2009     2010     2011     2012     Thereafter  
    (in thousands of U.S. dollars)  
Display and poster frame placement agreement obligations.
  $ 50,124     $ 34,233     $ 9,044     $ 3,530     $ 1,598     $ 1,719  
Office premise lease obligations
    5,416       2,950       1,588       761       117        
 
                                   
Total contractual obligations
  $ 55,540     $ 37,183     $ 10,632     $ 4,291     $ 1,715     $ 1,719  
 
                                   
          Other than certain leasing arrangements relating to the placement of our flat-panel and office premises, as of December 31, 2008, we did not have any long-term debt obligations, operating lease obligations or purchase obligations.
          A portion of the purchase consideration for certain acquisitions we made, such as Framedia, is contingent and based on earnings targets for two to three years subsequent to the acquisition, subject further to the attainment of certain operational targets. The maximum amount of such contingent payments for continuing and discontinued operations for 2009, 2010, and 2011 is $240 million in aggregate. Other than such contingent earn-out payments and potential liabilities relating to the litigation in which we are involved described under “— Legal Proceedings”, as of December 31, 2008, we had no other indebtedness, material contingent liabilities, or material mortgages or liens. We intend to meet our future funding needs primarily through net cash provided from operating activities and the proceeds of this offering. Our objective is to

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maintain the safety and liquidity of our cash. Therefore we intend to keep our cash and cash equivalents in short-term bank deposits and short-term bonds.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
          The following table sets forth certain information relating to our directors and executive officers. The business address of each of our directors and executive officers is 28-30/F, Zhao Feng World Trade Building, 369 Jiangsu Road, Shanghai 200050, People’s Republic of China.
             
Name   Age   Position
Jason Nanchun Jiang
    36     Chief Executive Officer and Chairman of the Board of Directors
Zhi Tan
    54     Executive Director
Jimmy Wei Yu
    36     Director
Fumin Zhuo(1)
    57     Director
Neil Nanpeng Shen(2)
    41     Director
Charles Chao
    43     Director
Daqing Qi(3)
    46     Director
David Ying Zhang(4)
    35     Director
Ying Wu (5)
    50     Director
Alex Deyi Yang
    33     Acting Chief Financial Officer
David Hailong Zhu
    41     Senior Vice President — Internet Advertising
 
(1)   Independent director, chairman of the compensation committee and member of the audit committee and the nominations committee.
 
(2)   Independent director and chairman of the nominations committee.
 
(3)   Independent director, chairman of the audit committee and member of the compensation committee and nominations committee.
 
(4)   Independent director and member of the compensation committee.
 
(5)   Independent director and member of the audit committee.
          Jason Nanchun Jiang, our founder, has served as the chairman of our board of directors since May 2003 and our chief executive officer from May 2003 to March 2008. Mr. Jiang resumed his position as chief executive officer in January 2009. From 1994 to 2003, Mr. Jiang was the chief executive officer of Everease Advertising Corporation, which is one of the top 50 advertising agencies in China. Starting in 2003, Mr. Jiang was general manager of Aiqi Advertising, an advertising company founded by his immediate family members in 1997 which was renamed Focus Media Advertisement in May 2003 in connection with the establishment of our current business operations. In December 2003, Mr. Jiang was selected by China News Publisher’s Media magazine as one of the “Media People of the Year”. In September 2003, Mr. Jiang was selected by the Television and Newspaper Committees of the China Advertising Commission as one of its “contemporary outstanding advertising media personalities”. Mr. Jiang received a Bachelor of Arts degree in Chinese language and literature from Huadong Normal University in 1995.
          Zhi Tan Aside from currently serving as executive director, has been a director since January 2007. Prior to his appointment, Dr. Tan previously served as chief executive officer, president and senior vice president in charge of the operations of our poster frame network. Dr. Tan was previously the chairman and chief executive officer of Framedia. Dr. Tan has extensive management and operational experience. He served as senior advisor at Tom.com of Hong Kong prior to joining Framedia. From 1999 to 2002, he was the chief executive officer of 8848.net Corporation, which was one of the largest online e-commerce organizations in China. Before joining 8848.net, Dr. Tan was deputy general manager for Microsoft China in 1999. Prior to Microsoft, Dr. Tan was senior vice-president for UTStarcom China from 1995 to 1998. He was directly responsible for all aspects of operations for both Microsoft China and UTStarcom China. Dr. Tan received his PhD in Computer Science from Worcester Polytechnic Institute of Massachusetts in 1987 and a B.S. in Computer Engineering from Jilin Industrial University in China in 1980.

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          Jimmy Wei Yu has served as our director since May 2003. Mr. Yu is the chairman and chief executive officer of United Capital Investment (China) limited, which is one of our principal shareholders and the management company of United China Investment Limited and KTB/UCI China Ventures I Limited and UCI China Venture II Limited. Mr. Yu is also the chairman of Shanghai Multimedia Park Venture Capital, a position he has held since 2003. From 1995 to 1999, Mr. Yu served in various capacities in several telecommunications companies, including as Chief Representative of UTStarcom (Hong Kong) Ltd. He also has been the Chief Representative of Softbank China Venture Capital since its incorporation in 1999.
          Fumin Zhuo has served as our director since December 2004 and has more than 27 years of experience in investment and corporate management. Mr. Zhuo has also served as a general partner in SIG Capital Limited since July 2005. Prior to this, Mr. Zhuo served as chairman and chief executive officer of Vertex China Investment Company (VCI), a company concentrating in investments in the Greater China region, since he joined the fund in July 2002. From 1995 to July 2002, Mr. Zhuo was chief executive officer of Shanghai Industrial Holding Ltd. and chairman of SIIC Medical Science & Technology (Group). Prior to this, starting in 1987, Mr. Zhuo served as chief assistant officer of the Shanghai Economic System Reform Committee. Mr. Zhuo has extensive experience in venture capital fund formation, mergers and acquisitions, and investment management. Mr. Zhuo graduated from Shanghai Jiaotong University’s Electrical Engineering School with a degree in enterprise management and also holds a Master’s degree in economics from Fudan University.
          Neil Nanpeng Shen has served as our director since December 2004. Mr. Shen is the founding managing partner of Sequoia Capital China, or Sequoia China, a China-focused venture capital fund which was established in August 2005. Prior to founding Sequoia China, Mr. Shen was president and chief financial officer of Ctrip.com International Limited, or Ctrip, a Nasdaq-listed on-line travel services company he co-founded and for which he continues to serve as a director. Prior to founding Ctrip, Mr. Shen worked for more than eight years in the investment banking industry in New York and Hong Kong. He was a director at Deutsche Bank Hong Kong where he worked from 1996 to 1999. Prior to 1996, he worked at Chemical Bank, Lehman Brothers and Citibank in various investment banking positions. Mr. Shen is also co-founder and co-chairman of Home Inns & Hotels Management (Hong Kong) Limited. Mr. Shen received his Master’s degree from the School of Management at Yale University and his Bachelor’s degree from Shanghai Jiaotong University.
          Charles Chao was appointed as our director in November 2005 to replace Ted Tak Dee Sun who passed away in September 2005. Mr. Chao is president and chief executive officer of SINA Corporation, an online media company listed on the Nasdaq Global Market. Before he joined SINA Corporation in September 1999, Mr. Chao served as an experienced audit manager with PricewaterhouseCoopers LLP, providing auditing and business consulting services for high tech companies in Silicon Valley, California. Mr. Chao received his master of professional accounting from University of Texas at Austin. He also holds an MA degree in journalism from University of Oklahoma and a BA degree in Journalism from Fudan University in Shanghai, China. Mr. Chao is a certified public accountant and a member of the American Institute of Certified Public Accountants.
          Daqing Qi was appointed as our director on February 28, 2006 upon the closing of our acquisition of Target Media. Professor Qi is professor of accounting and associate dean of the Cheong Kong Graduate School of Business, where he has taught since 2002. From 1996 until 2002, Professor Qi was an associate professor in the School of Accountancy at the Chinese University of Hong Kong. Professor Qi also has extensive experience in providing executive training and consulting services in accounting and corporate finance to government departments and private companies, including the Ministry of Information Industries of the People’s Republic of China, the Shanghai Municipal Government, China Mobile, China Unicom, China Telecom, China Netcom, Nokia and Ericsson. Professor Qi also serves on the board of directors of Sohu.com, a Nasdaq-listed company that provides online services in China. Professor Qi holds a B.S. degree in biophysics and a B.A. degree in journalism from Fudan University, an MBA degree from the University of Hawaii Manoa with a concentration in accounting and finance and a Ph.D. degree in accounting from the Eli Broad Graduate School of Management of Michigan State University.
          David Ying Zhang was appointed as our director on September 28, 2007. Mr. Zhang is the managing director and head of the Beijing office of WI Harper, a private equity investment fund. Mr. Zhang joined WI Harper in late 2001 in the San Francisco office and moved back to China in early 2003. Prior to joining WI Harper, Mr. Zhang was a senior venture associate with ABN AMRO Capital focusing on the life sciences, information technology, and Internet sectors. Before joining ABN AMRO Capital, Mr. Zhang worked at Salomon Smith Barney. At WI Harper, Mr. Zhang has been

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responsible for investments in a number of companies including Pollex, Cardiva, Celestry Designs, Focus Media and iKang Healthcare. Mr. Zhang was born in Shanghai, grew up in the United States and holds a M.S. degree in biotechnology and business from Northwestern University and a B.S. in biology and chemistry from California State University, San Francisco.
          Ying Wu was appointed our director in May 2008. Starting in 2008, has been a partner of CTC Venture Capital, of which he is a founder. Prior to 2008, Mr. Wu was a founder, chief executive officer and president of UTStarcom since 1995 and has many years of experience in managing investments in the media and telecommunications industry.
          Alex Deyi Yang was appointed acting chief financial officer in January 2009. From August 2004 until his appointment as acting chief financial officer, Mr. Yang served as our general counsel. Prior to joining Focus Media in August 2004, Mr. Yang was general counsel of Linktone Ltd., a Nasdaq listed wireless value-added services company, from October 2002 until June 2004. Prior to that, Mr. Yang was an attorney at Commerce & Finance Law Offices in Beijing. Alex graduated from Shanghai International Studies University with a degree in finance and holds an LLM degree from Fudan University.
          David Hailong Zhu has been our Senior Vice President — Internet Advertising since March 2008. From 2001 until 2006, Mr. Zhu was a director and chief executive officer of Allyes, where he was vice president from 2000 until 2001. Prior to joining Allyes, Mr. Zhu worked at FCB Worldwide from 1999 to 2000 as account director. From 1995 to 1997, Mr. Zhu served as account manager at McCann-Erickson. Mr. Zhu worked at DMB&B as accounting executive from 1994 to 1995. Mr. Zhu obtained a bachelor’s degree in English Literature from the University of International Relations in Beijing and an EMBA from the China Europe International Business School.
          We increased our board of directors from five to seven members when we completed our acquisition of Target Media, and further to nine members in 2007.
Duties of Directors
          Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. A company has the right to seek damages if a duty owed by our directors is breached.
          The functions and powers of our board of directors include, among others:
    convening shareholders’ meetings and reporting its work to shareholders at such meetings;
 
    implementing shareholders’ resolutions;
 
    determining our business plans and investment proposals;
 
    formulating our profit distribution plans and loss recovery plans;
 
    determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the issuance of debentures;
 
    formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;
 
    proposing amendments to our amended and restated memorandum and articles of association; and
 
    exercising any other powers conferred by the shareholders’ meetings or under our amended and restated memorandum and articles of association.

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B. Compensation
          In 2008, we paid aggregate cash compensation of approximately $577,000 to our directors and executive officers as a group. In 2006, 2007 and 2008, we granted to selected directors, officers and employees options to acquire an aggregate 14,800,000, 10,892,685 (of which 8,690,085 were cancelled) and 6,050,000 ordinary shares, respectively. We have no service contracts with any of our directors or executive officers that provide benefits to them upon termination. We do not pay or set aside any amounts for pension, retirement or other benefits for our officers and directors.
Share Option Plans
          Our 2003 Employee Share Option Scheme, or our 2003 Option Plan, was adopted by our board of directors at a meeting on June 1, 2003. Our members and board of directors adopted our 2005 Share Option Plan, or our 2005 Option Plan, in May 2005. Our members and board of directors adopted our 2006 Employee Share Option Plan, or our 2006 Option Plan, in October 2006. Our members and board of directors adopted our 2007 Employee Share Option Plan, or our 2007 Option Plan, in December 2007. Our option plans are intended to promote our success and to increase shareholder value by providing an additional means to attract, motivate, retain and reward selected directors, officers, employees and third-party consultants and advisors.
          Originally, under our 2003 Option Plan, not more than 30% of our share capital was reserved for grants of options. Prior to the adoption of our 2005 Option Plan, we issued options equivalent to 10.87% of our issued share capital under our 2003 Option Plan. Under our 2005 Option Plan, the amount of options we may issue has been reduced to an aggregate of 20% of our share capital, including the 10.87% already granted under our 2003 Option Plan. Under our 2006 Share Option Plan, we were authorized to issue up to 3.6% of our share capital outstanding from time to time. In addition, during the three years from the adoption of our 2007 Option Plan, we may issue no more than 5% of our share capital for grants of options.
          Under our 2003 Option Plan:
    In July and August 2004, we granted:
    options to purchase 12,181,600 shares, representing 3.7% of our pre-offering diluted share capital, to certain members of our board of directors and our management group. Each of these options has an exercise price of $0.24 per share. 8,460,800 of these options vest over three years while the remaining 3,720,800 options vest over one year.
 
    options to purchase 8,461,800 shares, representing 2.5% of our pre-offering diluted share capital, to members of our staff. Each of these options has an exercise price of $0.24 per share. 2,159,800 of these options vest over three years while the remaining 6,302,000 options vest over one year.
 
    options to purchase 4,564,800 shares, representing 1.4% of our pre-offering diluted share capital, to third-party consultants and advisors. Each of these options have an exercise price of $0.24 per share. 1,310,400 of these options vest over three years while the remaining 3,254,400 options vest over one year.
          Under our 2005 Option Plan:
    In January 2005, we granted additional options to purchase 1,200,000 of our ordinary shares to some of our directors with an exercise price of $0.58 per share. All of these options vest over three years.
 
    In February 2005, we granted:
    options to purchase 2,000,000 and 2,100,000 of our ordinary shares with an exercise price of $0.58 and $0.75, respectively, to certain of our executive officers and options to purchase 720,000 of our

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      ordinary shares with an exercise price of $0.75 to certain of our employees. All of these options vest over three years.
 
    options to purchase 1,240,000 of our ordinary shares to third-party consultants and advisors with an exercise price of $0.75. All of these options vest over three years.
    In July 2005, we granted:
    options to purchase 11,683,630 of our ordinary shares with an exercise price of $1.70, to certain of our executive officers and employees. All of these options vest over three years.
 
    options to purchase 100,000 of our ordinary shares to a third-party consultant with an exercise price of $1.70. All of these options vest over three years.
    In November 2005, we granted:
    options to purchase 800,000 of our ordinary shares with an exercise price of $2.60, to certain of our executive officers and employees. All of these options vest over three years.
 
    options to purchase 4,000,000 of our ordinary shares with an exercise price of $2.70, to certain of our executive officers and employees. All of these options vest over three years.
    In March 2006, we granted options to purchase 3,000,000 of our ordinary shares with an exercise price of $5.09, to certain of our executive officers, employees and directors. All of these options vest over three years.
          Under our 2006 Option Plan:
    In November 2006, we granted options to purchase 11,800,000 of our ordinary shares to certain of our employees, executive officers and directors. Of these options, 10,300,000 were issued to non-management employees and 1,500,000 were issued to our directors and officers. The issuance to our officers and directors included a grant to Jason Nanchun Jiang of options to purchase 500,000 of our ordinary shares. No other director or officer, upon exercise of all options granted, would beneficially own more than 1% of our outstanding ordinary shares. All of the options granted vest over a three year period, beginning one year from the date of issuance. The exercise price of the options is $5.724 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on November 14, 2016.
 
    In March 2007 and May 2007, we granted options to purchase 1,200,000 and 100,000 of our ordinary shares to certain of our employees. The exercise price of the options is $7.20 and $7.394 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on March 18, 2017 and May 8, 2017, respectively.
 
    In October 2007, we granted options to purchase 9,592,685 of our ordinary shares to certain of our employees, executive officers and directors. Of these options, 6,982,500 were issued to non-management employees and 2,610,185 were issued to our directors and officers. The issuance to our officers and directors included grants to Jason Nanchun Jiang and Zhi Tan of options to purchase 210,185 and 250,000 of our ordinary shares, respectively. No other director or officer, upon exercise of all options granted, would beneficially own more than 1% of our outstanding ordinary shares. All of the options granted vest over a four year period, beginning one year from the date of issuance. The exercise price of the options is $11.422 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on October 3, 2017.
          Under our 2007 Option Plan:

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    In January 2008, we granted options to purchase 4,500,000 of our ordinary shares to certain of our non-management employees. All of the options granted vest over a four year period, beginning one year from the date of issuance. The exercise price of the options is $9.10 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on January 29, 2018.
 
    In March 2008, we granted options to purchase 2,750,000 of our ordinary shares to certain of our executive officers. Of these options, 2,500,000 were issued to Zhi Tan. All of the options granted vest over a four year period, beginning one year from the date of issuance. The exercise price of the options is $8.262 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on March 9, 2018.
 
    In April 2008, we granted options to purchase 6,632,500 of our ordinary shares to non-management employees. All of the options granted vest over a four year period, beginning one year from the date of issuance. The exercise price of the options is $6.42 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on April 10, 2018.
 
    In May 2008, we granted options to purchase 450,000 of our ordinary shares to certain of our independent directors. Of these options, 200,000 were issued to Ying Wu, 150,000 were issued to Daqing Qi and 100,000 were issued to David Zhang. All of the options granted vest over a four year period, beginning one year from the date of issuance. The exercise price of the options is $7.83 per share which was based on the market price of our ADSs at the time the options were granted. The options expire on May 13, 2018.
          In October 2008, we cancelled all options granted during the period from October 3, 2007 to July 25, 2008 and authorized the issue of new options to purchase up to 13,559,325 ordinary shares with a strike price of $2.44 per ordinary share. The option plans are intended to promote the success and to increase shareholder value by providing an additional means to attract, motivate, retain and reward selected directors, officers, employees and third-party consultants and advisors. In 2006, 2007 and 2008, options to purchase 14,800,000, 10,892,685 and 13.559,325 ordinary shares were authorized and granted under the option plans, respectively. Under the terms of each option plan, options are generally granted at prices equal to the fair market value as determined by our board of directors, expire 10 years from the date of grant and generally vest over three years while certain options granted vest over one year. Options generally do not vest unless the grantee remains under our employment or in service with us on the given vesting date. However, in circumstances where there is a death or disability of the grantee, or, for certain option holders, a change in the control of our company, the vesting of options will be accelerated to permit immediate exercise of all options granted to a grantee.
          On September 19, 2008, our Internet advertising services segment (“Allyes”), in contemplation of an initial public offering, adopted the 2008 employee share option plan (the “Allyes 2008 Plan”), which allows Allyes to offer a variety of incentive awards to directors, consultants, advisors or any members of Allyes. Allyes granted 13,320,810 share options to employees on September 19, 2008. Under the terms of the Allyes 2008 Plan,, options are generally granted at exercise prices not less than 100% of the fair market value, as determined by the board of directors, generally expire 10 years from the date of grant and vest over a period of three years.
          Our compensation committee, which administers our option plans, has wide discretion to award options. Subject to the provisions of our option plans and the above allocation targets, our committee that administers our option plans determines who will be granted options, the type and timing of options to be granted, vesting schedules and other terms and conditions of options, including the exercise price. Any of our employees may be granted options. The number of options awarded to a person, if any, is based on the person’s potential ability to contribute to our success, the person’s position with us and other factors chosen by our board of directors.
          Generally, to the extent an outstanding option granted under our option plans has not become vested on the date the grantee’s employment by or service with us terminates, the option will terminate and become unexercisable.
          Our board of directors may amend, alter, suspend, or terminate each of our option plan at any time, provided, however, that in order to increase the limit of 20% of our share capital that may be granted as options, our board of directors must first seek the approval of our shareholders and, if such amendment, alteration, suspension or termination would adversely affect the rights of an optionee under any option granted prior to that date, the approval of such optionee. Without further action by our board of directors, our 2007 Option Plan will terminate in December 2017.
          The table below sets forth the option grants made to our directors and executive officers pursuant to our option plans as of March 31, 2009.

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    Number of            
    ordinary shares            
    to be issued upon            
    exercise of   Exercise per        
    options   ordinary share   Date of grant   Date of expiration
            (in U.S. dollars)        
Jason Nanchun Jiang
    5,882,000     $ 0.24     August 25, 2004   August 24, 2014
 
    3,080,000     $ 2.60     November 2, 2005   November 1, 2015
 
    1,051,100     $ 2.70     November 16, 2005   November 15, 205
 
    710,185     $ 2.44     October 23, 2008   October 22, 2018
Jimmy Wei Yu
    *     $ 0.24     July 5, 2004   July 4, 2014
 
    *     $ 0.24     August 25, 2004   August 24, 2014
 
    *     $ 1.70     July 13, 2005   July 13, 2015
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Fuming Zhuo
    *     $ 0.24     August 10, 2004   August 9, 2014
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Neil Nanpeng Shen
    *     $ 0.58     January 1, 2005   December 31, 2014
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Charles Chao
    *     $ 2.60     November 2, 2005   November 1, 2015
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Daqing Qi
    *     $ 5.09     March 10, 2006   March 9, 2016
 
    *     $ 7.83     May 14, 2008   May 13, 2018
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Zhi Tan
    *     $ 5.72     November 16, 2006   November 15, 2015
 
    *     $ 2.44     October 23, 2008   October 22, 2018
 
    *     $ 2.44     October 23, 2008   October 22, 2018
David Ying Zhang
    *     $ 7.83     May 14, 2008   May 13, 2018
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Ying Wu
    *     $ 7.83     May 14, 2008   May 13, 2018
 
    *     $ 2.44     October 23, 2008   October 22, 2018
Alex Deyi Yang
    *     $ 0.75     February 2, 2005   February 1, 2015
 
    *     $ 2.70     November 2, 2005   November 1, 2015
 
    *     $ 2.44     October 23, 2008   October 22, 2018
David Hailong Zhu
    *     $ 2.44     October 23, 2008   October 22, 2018
 
*   Upon exercise of all options granted, would beneficially own less than 1% of our outstanding ordinary shares, assuming all of our outstanding preference shares are converted into our ordinary shares.
C. Board Practices
          Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by our board of directors, in which case such director holds office until the next following annual meeting of shareholders at which time such director is eligible for reelection. All of our executive officers are appointed by and serve at the discretion of our board of directors. Neither we nor any of our subsidiaries has entered into a contract with any of our directors by which our directors are expected to receive benefits upon termination of their employment.
Board Committees
          Our board of directors has established an audit committee, a compensation committee and a nominations committee.
          Audit Committee. Our audit committee currently consists of Daqing Qi, Ying Wu and Fumin Zhuo. Mr. Qi is the chairman of our audit committee. Our board of directors has determined that all of our audit committee members are “independent directors” within the meaning of Nasdaq Listing Rule 5605(a)(2) and meet the criteria for independence set forth in Section 10A(m)(3) of the U.S. Securities Exchange Act of 1934, or the Exchange Act.
          Our audit committee is responsible for, among other things:

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    recommending to our shareholders, if appropriate, the annual re-appointment of our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
 
    annually reviewing an independent auditors’ report describing the auditing firm’s internal quality-control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditors and our company;
 
    setting clear hiring policies for employees or former employees of the independent auditors;
 
    reviewing with the independent auditors any audit problems or difficulties and management’s response;
 
    reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the U.S. securities laws;
 
    discussing the annual audited financial statements with management and the independent auditors;
 
    discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;
 
    reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments;
 
    reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures on our financial statements;
 
    discussing policies with respect to risk assessment and risk management;
 
    reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
 
    timely reviewing reports from the independent auditors regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other material written communications between the independent auditors and management;
 
    establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
 
    annually reviewing and reassessing the adequacy of our audit committee charter;
 
    such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
 
    meeting separately, periodically, with management, the internal auditors and the independent auditors; and
 
    reporting regularly to the full board of directors.
          Compensation Committee. Our current compensation committee consists of Fumin Zhuo, Daqing Qi and Ying Wu. Mr. Zhuo is the chairman of our compensation committee. Our board of directors has determined that all of our compensation committee members are “independent directors” within the meaning of Nasdaq Listing Rule 5605(a)(2).
          Our compensation committee is responsible for:

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    determining and recommending the compensation of our chief executive officer;
 
    reviewing and making recommendations to our board of directors regarding our compensation policies and forms of compensation provided to our directors and officers;
 
    reviewing and determining bonuses for our officers;
 
    reviewing and determining share-based compensation for our directors and officers;
 
    administering our equity incentive plans in accordance with the terms thereof; and
 
    such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
          Nominations Committee. Our current nominations committee consists of Neil Nanpeng Shen, Daqing Qi and Fumin Zhuo. Mr. Shen is the chairman of our nominations committee. Our board of directors has determined that all of our nominations committee members are “independent directors” within the meaning of Nasdaq Listing Rule 5605(a)(2).
          Our nominations committee is responsible for, among other things, selecting and recommending the appointment of new directors to our board of directors.
D. Employees
          As of December 31, 2008, we had a total of 5,006 full-time employees and no part-time employees. The following table sets out the number of staff by business area as of December 31, 2008:
                 
    Number of    
    employees (1)   Percentage
Sales and marketing
    1,576       31.5 %
Operations
    2,701       54.0 %
Management and administration
    729       14.5 %
 
               
 
               
Total number of employees
    5,006       100 %
 
               
 
(1)   This excludes employees our regional distributors and agents who are not directly under our employ.
          As required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including pension, work-related injury benefits, maternity insurance, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date.
          Generally we enter into a three-year standard employment contract with our officers and managers and a one-year standard employment contract with other employees. According to these contracts, all of our employees are prohibited from engaging in any activities that compete with our business during the period of their employment with us. Furthermore, the employment contracts with officers or managers include a covenant that prohibits officers or managers from engaging in any activities that compete with our business for two years after the period of their employment with us.
E. Share Ownership
          Please see Item 6.B. and Item 7.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
     The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares, as of June 15, 2009:
    each person known to us to own beneficially more than 5% of our ordinary shares and
 
    each of our directors and executive officers who beneficially own our ordinary shares.
     Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. The number of our ordinary shares outstanding used in calculating the percentage for each listed person includes our ordinary shares underlying options held by such person that are exercisable within 60 days of June 15, 2009, but excludes ordinary shares underlying options held by any other person. Percentage of beneficial ownership is based on 654,719,620 ordinary shares outstanding as of June 15, 2009.
                 
    Shares beneficially owned
    Number   Percent
Principal Shareholders
               
Fosun International Limited(1)
    185,509,885       28.33 %
JJ Media Investment Holding Ltd./Jason Nanchun Jiang(2)
    66,586,144       10.17 %
FMR LLC(3)
    40,804,390       6.23 %
TPG-Axon Capital Management, LP(4)
    35,000,000       5.35 %
Sloane Robinson LLP(5)
    34,700,500       5.30 %
T. Rowe Price Associates, Inc.(6)
    34,206,405       5.22 %
 
               
Directors and Executive Officers (7)
               
JJ Media Investment Holding Ltd./ Jason Nanchun Jiang (8)
    66,586,144       10.17 %
Jimmy Wei Yu
    *       *  
Neil Nanpeng Shen
    *       *  
Charles Chao
    *       *  
Fumin Zhuo
    *       *  
Daqing Qi
    *       *  
Zhi Tan
    *       *  
David Ying Zhang
    *       *  
Ying Wu
    *       *  
Alex Deyi Yang
    *       *  
David Hailong Zhu
    *       *  
 
*   Upon exercise of all options currently exercisable or vesting within 60 days of the date of this annual report, would beneficially own less than 1% of our ordinary shares.
 
(1)   Information based on the amended Schedule 13G filed on March 26, 2009 on behalf of Fosun International Limited. The business address of Fosun International Limited is Room 808, ICBC Tower, 3 Garden Road, Central, Hong Kong S.A.R.
 
(2)   Information based on the amended Schedule 13G filed on February 12, 2009 on behalf of Jason Nanchun Jiang. Includes 60,704,144 ordinary shares beneficially owned by JJ Media Investment Holding Ltd., 5,041,600 ordinary shares beneficially owned by Target Sales International Limited and 840,400 ordinary shares beneficially owned by Target Management Group Limited. JJ Media Investment Holding Ltd., Target Sales International Limited and Target Management Group Limited are 100% owned by Jason Nanchun Jiang, our founder and executive chairman. The business address of Jason Nanchun Jiang is c/o Focus Media Holding Limited, 28-30/F, Zhao Feng World Trade Building, 369 Jiangsu Road, Shanghai, China 200050.
 
(3)   Information based on the amended Schedule 13G was filed on January 12, 2009 on behalf of FMR LLC. The business address of FMR LLC is 82 Devonshire Street, Boston, Massachusetts, USA 02109.

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(4)   Information based on the Schedule 13G was filed on February 18, 2009 on behalf of TPG-Axon Capital Management, LP. Includes 11,324,930 ordinary shares held by TPG-Axon Partners, LP and 23,675,070 ordinary shares held by TPG-Axon Partners (Offshore), Ltd. The business address of TPG-Axon Capital Management, LP is 888 Seventh Avenue, 38th Floor, New York, New York, USA 10019.
 
(5)   Information based on the amended Schedule 13G filed on May 15, 2009 on behalf of Sloane Robinson LLC. The business address of Sloane Robinson LLC is 20 Dunstan’s Hill, London EC3R 8ND, United Kingdom.
 
(6)   Information based on the Schedule 13G filed on February 13, 2009 on behalf of T. Rowe Price Associates, Inc. The business address of T. Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore, Maryland, USA 21202.
 
(7)   The address of our current directors and executive officers is c/o Focus Media Holding Limited, 28F, Zhao Feng World Trade Building, 369 Jiangsu Road, Shanghai 200050, China.
 
(8)   See note 2.
     None of our major shareholders have different voting rights from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly.
     We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
     For information regarding our shares held or beneficially owned by persons in the United States, see “Item 9. The Offer and Listing—Market Price Information for Our American Depositary Shares” in this annual report.
B. Related Party Transactions
     Details of advertising service revenue from related parties for the years ended December 31, 2006, 2007 and 2008 are as follows:
                             
        Year ended December 31,  
Name of related parties   Director interested   2006     2007     2008  
        (in U.S. dollars)  
Shanghai Everease Advertising & Communication Ltd. (“Everease”)
  Jason Nanchun Jiang   $ 7,764,977     $ 3,132,954     $ (132,116 )
Multimedia Park Venture Capital
  Jimmy Wei Yu     3,885,546       104        
Shanghai Jobwell Business Consulting Co., Ltd.
  Jimmy Wei Yu     1,382,695              
Shanghai Wealove Wedding Service Co., Ltd.
  Jimmy Wei Yu     1,122,945              
Shanghai Wealove Business Consulting Co., Ltd.
  Jimmy Wei Yu     671,488              
Shanghai Hetong Network Technology Co., Ltd.
  Jimmy Wei Yu     982,527              
Shanghai Shengchu Advertising Agency Co., Ltd.
  Jimmy Wei Yu     3,230,040       44,542        
Beijing Sina Internet Information Services Co., Ltd.
  Charles Cao     190,563       1,095,814       1,637,297  
Beijing Sohu New-age Information Technology Co., Ltd.
  Daqing Qi     119,768       608,150       2,002,839  
Home-Inn Hotel Management (Beijing) Co., Ltd
  Neil Nanpeng Shen     78,742       82,356       256,690  
Ctrip Travel Information Technology (Shanghai) Co., Ltd.
  Neil Nanpeng Shen     178,933             69,863  
51.com
  Neil Nanpeng Shen           19,611       718  
Qihoo.com
  Neil Nanpeng Shen           12,151       48,385  
UUSEE
  Neil Nanpeng Shen           27,789       78,572  
Aikong.com
  Jason Nanchun Jiang                 56,190  
Giant Interactive Group Inc.
  Jason Nanchun Jiang                 4,153,948  
China Vanke Co., Ltd.
  Daqing Qi                 909,775  
Beijing Huayi Brothers
  Jason Nanchun Jiang                 43,561  
Beijing Dentsu Advertising Co., Ltd.
  Dian Zhong                 10,390,101  
Yadu Huang Ke Technology Co., Ltd.
  Fuming Zhuo           243,628       87,638  
 
                     
Total
      $ 19,608,224     $ 5,267,099     $ 19,603,461  
 
                     

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     Details of advertising space leasing costs charged, net of agency rebates received or receivables from gateway websites, of those whom are the related parties, for the years ended December 31, 2006, 2007 and 2008 are as follows:
                             
        Year ended December 31,  
Name of related parties   Director interested   2006     2007     2008  
Beijing Sina Internet Information Services Co., Ltd.
  Charles Cao   $     $ 24,755,004     $ 50,294,367  
Beijing Sohu New-age Information Technology Co., Ltd.
  Daqing Qi           14,596,893       39,061,219  
Ctrip Travel Information Technology (Shanghai) Co., Ltd.
  Neil Nanpeng Shen           130,230       343,546  
51.com
  Neil Nanpeng Shen           204,612       887,603  
Qihoo.com
  Neil Nanpeng Shen           305,413       847,021  
UUSEE
  Neil Nanpeng Shen           15,929       306,899  
E-House(China) Holdings Limited
  Neil Nanpeng Shen           2,008        
 
                     
Total
      $     $ 40,010,089     $ 91,740,655  
 
                     
                                 
            December 31,  
Name of related parties   Note   Director interested   2006     2007     2008  
Shanghai Everease Advertising & Communication Ltd. (“Everease”)
  (a)   Jason Nanchun Jiang   $ 6,331,549     $ 133,543     $ 4,136  
Multimedia Park Venture Capital
  (a)   Jimmy Wei Yu     12,705             232,399  
Shanghai Shengchu Advertising Agency Co., Ltd.
  (a)   Jimmy Wei Yu     403,889              
Beijing Sina Internet Information Services Co., Ltd.
  (a)   Charles Cao           3,385,671       2,183,809  
Beijing Sohu New-age Information Technology Co., Ltd.
  (a)   Daqing Qi           1,198,429       4,905,642  
Ctrip Travel Information Technology (Shanghai) Co., Ltd.
  (a)   Neil Nanpeng Shen           89,946       49,401  
51.com
  (a)   Neil Nanpeng Shen           105,147       215,854  
UUSEE
  (a)   Neil Nanpeng Shen           10,952       18,937  
Home-Inn Hotel Management (Beijing) Co., Ltd.
  (a)   Neil Nanpeng Shen     39,699             23,838  
Yadu Huang Ke Technology Co., Ltd.
  (a)   Fuming Zhuo           150,158       146,033  
Qihoo.com
  (a)   Neil Nanpeng Shen           17,683       53,724  
Giant Interactive Group Inc.
  (a)   Jason Nanchun Jiang                 174,079  
Beijing Dentsu Advertising Co., Ltd.
  (a)   Dian Zhong                 1,716,419  
David Yu
  (b)   David Yu     1,064,947              
 
                         
Total
          $ 7,852,789     $ 5,091,529     $ 9,724,271  
 
                         

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Note (a)   — These amounts represent trade receivables for advertising services provided.
 
Note (b)   — The amount represents a payment due from the ex-shareholder of Target Media for an indemnification of a contingent liability which arose after the acquisition. This amount was paid out in cash in 2007.
     Details of amounts due to related parties as of December 31, 2006, 2007 and 2008 are as follows:
                                 
            December 31,  
Name of related parties   Note   Director interested   2006     2007     2008  
Beijing Sina Internet Information Services Co., Ltd.
  (d)   Charles Cao   $     $ 12,491,999     $ 11,586,228  
Beijing Sohu New-age Information Technology Co., Ltd.
  (d)   Daqing Qi           301,520       3,039,075  
51.com
  (d)   Neil Nanpeng Shen           179,750       554,326  
UUSEE
  (d)   Neil Nanpeng Shen           3,696       151,197  
Home-Inn Hotel Management (Beijing) Co., Ltd.
  (d)   Neil Nanpeng Shen           171        
Tan Zhi
  (c)   Tan Zhi     345,768              
Qihoo.com
  (d)   Neil Nanpeng Shen                 129,427  
Giant Interactive Group Inc.
  (d)   Jason Nanchun Jiang                 146,314  
Ctrip Travel Information Technology (Shanghai) Co., Ltd.
  (d)   Neil Nanpeng Shen                 80,543  
 
                         
Total
          $ 345,768     $ 12,977,136     $ 15,687,110  
 
                         
 
Note (c)   — The amount represents the amount due to the president of Focus Media for operating funds of Framedia. The loan was non-interest bearing and was fully repaid in 2007.
 
Note (d)   — the amounts represent trade payables for advertising services purchased.
Other Related Party Transactions
Shareholders Agreement
     See Item 14.A—Material Modifications to the Rights of Security Holders and Use of Proceeds” for a description of our amended shareholders’ agreement.
Loans to Shareholders of Our PRC Operating Affiliates
     Pursuant to loan agreements entered into by the relevant PRC operating subsidiaries and the shareholders of each of our PRC operating affiliates, respectively, the shareholders obtained a loan of the registered capital of the relevant PRC operating affiliate from the relevant wholly foreign-owned for the sole purpose of establishing or increasing, as the case may be, the registered capital of each such PRC operating affiliate. As of December 31, 2008, the full amounts of the loans to these shareholders remained outstanding. The relevant PRC operating subsidiary granted these loans without interest.
Loan from Relative of Jason Nanchun Jiang
     In March 2006, Weiqiang Jiang, the father of Jason Nanchun Jiang, provided a short-term loan to us of RMB 20.0 million ($2.5 million) to relieve a temporary shortage of Renminbi we were experiencing at that time. The loan is

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unsecured and was provided to us at no interest. As of December 31, 2006, we paid $2.5 million to Everease and they remitted this fund to Weiqiang Jiang on our behalf to repay the loan outstanding.
Transactions with Everease
     Prior to establishing our business, Jason Nanchun Jiang, our founder, chairman and chief executive officer, served as the legal representative and general manager of Everease from 2000 to 2004. From 2004 to March 2005, Ms. Shen Yacheng, the mother of Jason Jiang, served as legal representative of Everease. Everease and our company were considered to be under common control through March 2005 and all transactions we entered into with Everease were treated as related party transactions. Subsequent to Shen Yacheng’s resignation in March 2005, Jason’s father continued to serve as finance manager of Everease (effective from 1994) as a result of which he is able to exert a certain degree of influence over Everease. Therefore, Everease continues to be deemed a related party of Focus Media.
Everease Non-Competition Agreement
     Pursuant to the Everease Non-competition Agreement between Everease and us, dated as of November 2004, Everease, its affiliates, or its directors, officers or employees have agreed not to disclose any confidential information regarding Focus Media to any third-party without our written consent. In addition, for so long as Jason Nanchun Jiang continues to hold any equity interest in our company and for two years thereafter, none of Everease, its affiliates, or its directors, officers or employees may (i) engage in, or lend its name to, any business that competes with our business, (ii) deal in a competitive manner with any of our customers, (iii) solicit any of our directors, officers, employees or agents to become directors, officers, employees or agents of others entities, or (iv) engage in any business conducted under a name that is the same as, or similar to, ours or any trade name used by us where the use of such name is reasonably likely be confused for our name. Everease entered into the non-competition agreement in consideration of its business relationship with us at the time, which relationship was subsequently terminated, and received no cash or other monetary compensation.
Advertising Services Provided by Everease
     In 2006, Everease charged us $47,804 for providing administration services.
Transactions with Entities Affiliated with Jimmy Wei Yu
     For each of the years ended December 31, 2006, 2007 and 2008, office rentals were paid to Multimedia Park Venture Capital approximately amounting to $476,902, $690,018 and $870,718 respectively.
     These advertising services were provided in the ordinary course of business on terms substantially similar to those provided to our unrelated advertising clients on an arm’s-length basis.
Agreements among Us, Our PRC Operating Subsidiaries, Our PRC Operating Affiliates and Their Shareholders and Subsidiaries
     The following is a summary of the material provisions of these agreements. For more complete information you should read these agreements in their entirety. Directions on how to obtain copies of these agreements are provided in this annual report under “Item 10.H Additional Information — Documents on Display” and “Item 19. Exhibits”.
     We have entered into a series of contractual arrangements with our PRC operating affiliates and their respective shareholders and subsidiaries, including contracts relating to the provision of services and certain shareholder rights and corporate governance matters. Each of our contractual arrangements with our PRC operating affiliates and their respective shareholders and subsidiaries may only be amended with the approval of our audit committee or another

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independent body of our board of directors. In connection with our acquisition of Framedia, we entered into a series of contractual arrangements with Focus Media Advertisement’s subsidiaries relating to our poster frame network, Framedia Advertisement, New Structure Advertisement, and Guangdong Framedia, each of which is a subsidiary of Focus Media Advertisement, including contracts relating to the provision of services and certain shareholder rights and corporate governance matters. Each of our contractual arrangements with Framedia Advertisement, Guangdong Framedia, New Structure Advertisement and their shareholders may only be amended in writing by all of its parties unless the provisions being amended only involve certain parties’ interests in which case the amendment shall be made in writing by such parties. Each of Framedia Advertisement, Guangdong Framedia and New Structure Advertisement is 90%-owned by Focus Media Advertisement and 10%-owned by Focus Media Advertising Agency, respectively. With regard to Allyes, which we acquired in March 207, New Allyes Information has entered into a series of contractual arrangements with the Allyes operating affiliates and their shareholders, including contracts relating to the provision of services and certain shareholder rights and corporate governance matters. Each of the contractual arrangements with the Allyes operating affiliates and their shareholders may only be amended with the approval of our audit committee or another independent body of our board of directors. With regard to Huaguang, which we acquired in June 2007, Shanghai OOH Advertisement Co., a subsidiriary of Hua Kuang Advertising Company Ltd, has entered into a series of contractual arrangements with Huaguang operating affiliates and their shareholders, including contracts relating to certain shareholder rights and corporate governance matters.
Transfer of Ownership When Permitted By Law
     Pursuant to call option agreements, including in certain cases subsequent participation letters by new subsidiaries of our PRC operating affiliates, by and among our PRC operating subsidiaries, our PRC operating affiliates, and their respective shareholders and its subsidiaries, the two shareholders of each of our PRC operating affiliates, which shareholders are either (i) two PRC citizens designated by us or (ii) two PRC entities owned by our subsidiaries or by our designated appointees, has granted the relevant PRC operating subsidiary or its designee an exclusive option to purchase all or part of their equity interests in the relevant PRC operating affiliate, and its subsidiaries, or all or part of the assets of the relevant PRC operating affiliate, in each case, at any time determined by the relevant PRC operating subsidiary and to the extent permitted by PRC law. In some cases, pursuant to separate letters of undertaking each such shareholder agrees to pay to the relevant PRC operating subsidiary or us any excess of the purchase price paid for the equity interests in, or assets of, the relevant PRC operating affiliate or its subsidiaries over the respective registered capital of such affiliate or its subsidiaries in the event that the wholly-foreign owned subsidiary or its designee exercises such option.
Voting Arrangements
     Pursuant to voting rights proxy agreements and in certain cases subsequent participation letters by new subsidiaries of the PRC operating affiliates, by and among the PRC operating subsidiaries, the PRC operating affiliates and their subsidiaries, each of the respective shareholders of the PRC operating affiliates has granted a PRC individual designated by the PRC operating subsidiaries the right to appoint all of the directors and senior management of the PRC operating affiliates and those subsidiaries and all of their other voting rights as shareholders of the PRC operating affiliates and their subsidiaries, as the case may be, as provided under the articles of association of each such entity. Under the voting rights proxy agreement, there are no restrictions on the number, to the extent allowed under the respective articles of association of the PRC operating affiliates and their respective subsidiaries, or identity of those persons we can appoint as directors and officers.
Equity Pledge Agreements
     Pursuant to equity pledge agreements and, in certain instances, subsequent participation letters by new subsidiaries of the PRC operating affiliates, by and among the relevant PRC operating subsidiaries, the relevant PRC operating affiliates and their respective subsidiaries, each shareholder of the relevant PRC operating affiliates has pledged his or its equity interest in the relevant PRC operating affiliates and their subsidiaries, as the case may be, to certain of the PRC operating subsidiaries to secure their obligations under the relevant contractual control agreements to which each is a party, including but not limited to, the obligations of the relevant PRC operating affiliates and their respective subsidiaries under certain technical services agreements, trademark licence agreements and exclusive services agreements, as the case may be, and the obligation of each shareholder of the PRC operating affiliates under the respective loan agreements between the relevant shareholder and PRC operating subsidiary, for the sole purpose of

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increasing the registered capital of the PRC operating affiliates, as the case may be and acquiring certain of our regional distributors, respectively. See “— Loans to the Shareholders of the PRC Operating Affiliates”. Under these equity pledge agreements, each shareholder has agreed not to transfer, assign, pledge or otherwise dispose of their interest in the relevant PRC operating affiliate or its subsidiaries, as the case may be, without the prior written consent of the relevant PRC operating subsidiary.
Equity Trust Agreements
     Pursuant to the equity trust agreement by and among Focus Media Advertisement and Focus Media Technology, Focus Media Advertisement holds a 9% equity interest in Focus Media Digital in trust for the benefit of Focus Media Technology. Under the equity trust agreement, Focus Media Technology provides trust funds to Focus Media Advertisement to be used for the purchase of a 9% equity interest in Focus Media Digital and Focus Media Technology agrees to be the beneficiary of any profits or other benefit generated that is attributable to the management, use or disposal of the trust funds. Through these arrangements, we have enabled our indirect subsidiary, Focus Media Technology, to beneficially hold an additional 9% of the interest in Focus Media Digital in addition to the 90% equity interest it holds in its own name.
Cooperation Agreements
     Pursuant to the cooperation agreements by and among New Focus Media Advertisement, Focus Media Advertisement and its subsidiaries, New Focus Media Advertisement entrusted Focus Media Advertisement and its subsidiaries to disseminate advertisements as required by New Focus Media Advertisement in all locations rented by Focus Media Advertisement and its subsidiaries, and to sell advertising time slots for those locations, and each of Focus Media Advertisement and its subsidiaries ensures the allocation of advertising time slots on its respective portion of the advertising network adequate for the dissemination of advertising content as agreed upon between New Focus Media Advertisement and its advertising clients. New Focus Media Advertisement pays a dissemination fee to Focus Media Advertisement and its relevant subsidiaries for dissemination services on a cost-plus basis.
Asset Transfer Agreement
     Pursuant to the asset transfer agreement entered into by and between Focus Media Digital and New Focus Media Advertisement, Focus Media Digital transferred to New Focus Media Advertisement all of its assets relating to its out-of-home LCD television advertising business at fair market value.
Technology Transfer Agreement
     Pursuant to the technology and assets transfer agreement by and between Focus Media Digital and New Focus Media Advertisement, Focus Media Digital transferred to New Focus Media Advertisement all of its technology at a fixed fee.
Exclusive Services Agreement
     Pursuant to the exclusive services agreements by and among New Allyes Information, and certain of its PRC operating affiliates, New Allyes Information has agreed to provide exclusive services in respect of the business operations of Shanghai the relevant PRC operating affiliates and those operating affiliates have agreed to pay a service fee totaling equal to 100% of their tax excluded annual revenues to New Allyes Information.
C. Interests of Experts and Counsel
     Not applicable.

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ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
     Please refer to Item 18 for a list of our annual consolidated financial statements filed as part of this annual report.
Legal Proceedings
     On or about November 27, 2007, Eastriver Partners, Inc. filed a purported class action lawsuit in the United States District Court for the Southern District of New York against us and the underwriters of our follow-on offering of November 2007. On or about December 21, 2007, Scott Bauer filed a purported class action lawsuit in the United States District Court for the Southern District of New York against us, certain of our officers and directors, and the underwriters of our follow-on offering of November 2007. Both complaints allege that our registration statement on Form F-1 on November 1, 2007, as amended, and the related prospectus contained inaccurate statements of material fact. On April 24, 2008, the court consolidated the Eastriver Partners, Inc. and Scott Bauer actions into an action captioned In re Focus Media Holding Limited Litigation and named Iron Workers Local No. 25 Pension Fund as lead plaintiff in the consolidated action. On June 23, 2008, Lead Plaintiff filed a consolidated amended complaint. Specifically, the complaints allege that we failed to disclose reduced gross margins in our Internet advertising business division due to acquisitions we made. The complaint filed by Scott Bauer also alleges that we issued a press release concerning our second quarter 2007 financial results that contained inaccurate statements of material fact. On September 5, 2008, we, certain of our officers and directors, and the underwriters filed a motion to dismiss the consolidated amended complaint. On November 5, 2008, the lead plaintiff filed its opposition to the motion to dismiss. A reply brief was filed on December 5, 2008. The motion to dismiss is pending before the court. We believe we have meritorious defenses to the claims alleged and intend to defend against these lawsuits vigorously. However, there can be no assurance that we will prevail in any such litigation and any adverse outcome of these cases could have a material adverse effect on our business or results of operations.
     On December 10, 2008, Shanghai Focus Media Defeng Advertisement Co., Ltd filed a complaint with Shanghai No. 2 Intermediate People’s Court against Shanghai Darunfa Co. Ltd, requesting (i) termination of an in-store information broadcast system co-operation agreement, dated as of September 3, 2007, and a supplement to the agreement, dated as of May 30, 2008; (ii) return of deposit in the amount of RMB 20 million; (iii) return of rental payment in the amount of RMB 20 million (calculated based upon 50,000 RMB per store for number of 80 stores and for period of 5 months); (iv) liquidated damage in the amount of RMB 48 million; and (v) reimbursement of relevant court and notary fees in connection of the lawsuit. The lawsuit has gone through 2 sessions before court with judgment pending.
     On February 11, 2009, Ying Ping, a PRC citizen, filed an arbitration application in Beijing with China International Economic and Trade Arbitration Commission (“CIETAC”) against us, requesting us, (i) to continue to perform a Share Purchase Agreement, dated as of March 20th 2007, between Ying Ping and us; (ii) to pay an overdue share purchase price in the amount of RMB 106.56 million and accrued interests thereof; and (iii) to bear their legal counsel fee in the amount of RMB 2.3 million and other relevant arbitration costs. The CIETAC accepted Ying Ping’s application for arbitration on February 24, 2009 and no arbitration session has been held yet. We believe we have meritorious defenses to the claims alleged and intend to defend against such claims vigorously. However, there can be no assurance that we will prevail in any such arbitration and any adverse outcome of this case could have a material adverse effect on our business or results of operations.
     Except as disclosed above, we are not currently a party to any material legal proceeding. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business.

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Dividend Policy
     We have not previously declared any dividends. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future.
     Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, shareholders’ interests, contractual restrictions and other factors as our board of directors may deem relevant. In addition, we can pay dividends only out of our profits or other distributable reserves. Any dividend we declare will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, less the fees and expenses payable under the deposit agreement. Other distributions, if any, will be paid by the depositary to holders of our ADSs in any means it deems legal, fair and practical. Any dividend will be distributed by the depositary, in the form of cash or additional ADSs, to the holders of our ADSs. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.
B. Significant Changes
     Since the date of the audited financial statements included as a part of this annual report, the following significant changes have occurred:
    On January 26, 2009, we make certain changes to our management team. Our chairman Jason Jiang resumed his position as chief executive officer to replace Dr. Tan Zhi, who continues to serve as an executive director. We also appointed Alex Deyi Yang, who has been our general counsel since August 2004, as acting chief financial officer to replace Daniel Wu, who resigned to pursue other professional interests. We also appointed Michael Xu as vice president of finance; and
 
    In the first quarter of 2009, we suspended operation of a significant portion of our outdoor LED billboard network in Shanghai due to government regulations governing the use of curbside billboards. For the same reason, we suspended operation of a roving billboard placed on a barge that circulated on the Bund river along a popular boardwalk area in Shanghai.
 
    In 2009, we decided to suspend installation of additional digital frames on our our poster frame network for the foreseeable future.
 
    Jason Jiang, who is one of the shareholders of a number of the PRC operating affiliates that hold the advertising operating licenses connected with our operating businesses, completed procedures to take on citizenship of another jurisdiction in second quarter of 2009. Based on enquiries and discussions with the relevant PRC regulatory authorities, we have been informed that Jason Jiang’s change in citizenship does not change the status and nature related to our PRC operating affiliates and we believe such change will not have any material adverse effect on our business operations.
 
    In 2009, we have renegotiated share purchase agreements with the former shareholders of certain companies that were the subject of our sale to Sina. Under the renegotiated agreements, the earnings multiples used to calculate the total earn-out payment have been reduced, and additional downward adjustments were made based on uncollected account receivable balances.
 
    Allyes reduced the exercise price of 13,320,810 share options from $4.28 to $2.10 per share with no change in other terms and conditions. The modification resulted in an increase in share-based compensation of $3.1 million, which will be recognized over the remaining vesting period of the original awards.
     Please see the section titled “Material Contracts” of Item 10.C. “Additional information”.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Market Price Information for Our American Depositary Shares
     Our ADSs have been listed on the Nasdaq Global Market since July 13, 2005. Our ADSs trade under the symbol “FMCN”. From July 13, 2005 until April 10, 2007, each of our ADSs represented ten of our ordinary shares. Starting April 11, 2007, we reduced this ratio to five-to-one. All ADS trading prices on the Nasdaq Global Market set forth in this annual report, including historical trading and closing prices, have been adjusted to reflect the new ADS-to-

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share ratio of five-to-one. For the period from July 1, 2008 to June 29, 2009 the trading price of our ADSs on the Nasdaq Global Market has ranged from a low of US$4.84 to a high of US$33.82 per ADS. The following table provides the high and low trading prices for our ADSs on the Nasdaq Global Market for each month since July 2008.
                 
    SALE PRICE
    HIGH   LOW
    US$   US$
MONTHLY HIGHS AND LOWS
               
2008 (from July 1)
               
July
    29.91       22.48  
August
    32.79       23.71  
September
    33.82       21.94  
October
    28.79       12.01  
November
    20.69       6.24  
December
    11.67       6.62  
2009
               
January
    10.35       6.73  
February
    8.88       6.80  
March
    7.30       4.84  
April
    7.33       6.20  
May
    8.83       6.30  
June (to June 29)
    9.39       6.52  
     As of April 30, 2009, a total of 117,283,702 ADSs were outstanding. As of April 30, 2009, 586,418,510 shares were registered in the name of a nominee of Citibank, N.A., the depositary under the deposit agreement. We have no further information as to shares held, or beneficially owned, by U.S. persons.
B. Plan of Distribution
     Not applicable.
C. Markets
     Our ADSs, each representing five of our ordinary shares, have been trading on the Nasdaq Global Market since July 13, 2005 under the symbol “FMCN.”
D. Selling Shareholders
     Not applicable.
E. Dilution
     Not applicable.
F. Expenses of the Issue
     Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
     Not applicable.

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B. Memorandum and Articles of Association
     We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our F-1 registration statement (File No. 333-134714), as amended, first filed with the Commission on June 2, 2006.
C. Material Contracts
     We have not entered into any material contracts other than in the ordinary course of business or other than those described below and elsewhere in this annual report.
Allyes
     In March 2007, we completed the acquisition of Allyes Information Technology Company Limited, and its wholly-owned PRC subsidiaries New Allyes Information Technology (Shanghai) Co., Ltd. and Allyes Information Technology (Shanghai) Co., Ltd. and their affiliated PRC operating companies. David Zhu, the founder, former chairman and chief executive officer of Allyes, signed an employment agreement with Focus Media and remains as the chief executive officer of Allyes.
     The following is a brief summary of material provisions of the share purchase agreement. This summary is qualified in its entirety by reference to the actual Allyes Share Purchase Agreement.
     Purchase Price. We agreed to pay the selling shareholders of Allyes $70 million in cash and 19,969,080 Focus Media ordinary shares. In addition, in March, 2008, we made an earn-out payment of 9,662,458 ordinary shares (based upon a fixed price per ordinary share of $7.726) to Allyes in connection with certain earnings targets during the twelve month period from April 1, 2007 to March 31, 2008. None of the ordinary shares received by the Allyes selling shareholders are currently subject to lock-up
     Representations and Warranties. In the share purchase agreement, the Allyes selling shareholders made customary representations and warranties to us, which generally survive for a period of fifteen months following the closing date. However, a number of specified representations and warranties survive for longer periods. We made customary representations and warranties to the Allyes selling shareholders, which survive for a period of one year following the closing date.
     Covenants. The definitive share purchase agreement includes customary covenants relating to, among other things, the conducting of the business in the ordinary course prior to closing, notification of certain matters, confidentiality, non-compete agreements for key employees, treatment of related party accounts and preparation of financial statements.
     Indemnification. The management shareholders have agreed to indemnify us for damages resulting from any breach of any representation or warranty, covenant or other agreement made by the management shareholders in the share purchase agreement, including but not limited to losses arising out of materially inaccurate disclosures made in Allyes’s financial statements; losses arising out of failure to report any material changes in Allyes or its affiliates; losses arising out of failure to adequately disclose terms of any material contracts of Allyes or its affiliates; and losses arising out of any tax or legal liabilities.
     The non-management shareholders have also agreed to indemnify us for damages resulting from any breach of any representation or warranty, covenant or other agreement made by the non-management shareholders in the share purchase agreement.
     The Allyes selling shareholders collectively shall not be liable to indemnify losses greater than the aggregate consideration of the share purchase agreement, and each selling shareholder is only liable up to the product of (x) the amount of his percentage equity interest in the company prior to the closing multiplied by (y) the aggregate consideration of the share purchase agreement. The Allyes selling shareholders are not obligated to indemnify our

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losses until and unless such losses exceed $1 million. If our losses exceed $1 million, the selling shareholders are liable for all amounts including the first $1 million. Management shareholders will be jointly and severally liable. Non-management shareholders will be severally but not jointly liable.
     We have agreed to indemnify the selling shareholders for damages resulting from any breach of any representation or warranty, covenant or other agreement of ours in the share purchase agreement. Our indemnification obligations are capped at the aggregate consideration of the share purchase agreement.
     Amounts of losses are subject to insurance recoveries and other mitigating circumstances. Indemnification payments may be made in-kind with Focus Media ordinary shares received under the share purchase agreement.
     Under the terms of the transaction, we also granted certain registration rights to the former shareholders of Allyes. See “Item 14.A—Material Modifications to the Rights of Security Holders and Use of Proceeds” elsewhere in this annual report.
Control Over Acquired Entities
     We have entered into a series of agreements with the subsidiaries, affiliated entities and nominee shareholders of such affiliated entities of each of Target Media, Framedia, Focus Media Wireless, Huaguang, Allyes and CGEN that provide us with effective control over each of their respective affiliated entities while enabling the their businesses to be consolidated with the respective Cayman holding company of each such business and with us. See “Item 4.C Information on Our Company—Organization Structure— Our Corporate Structure and Contractual Arrangements” and “ Item 7.B Major Shareholders and Related Party Transactions—Related Party Transactions — Agreements Among Us, Our PRC operating subsidiaries, Our PRC Operating Affiliates and Their Shareholders”.
Sale of Assets to SINA Corporation
     On December 22, 2008, we announced that it entered into a definitive agreement with SINA Corporation (“SINA”), under which SINA will acquire substantially all of the assets of our digital out-of-home advertising networks, including LCD display network, poster frame network and in-store network (excluding CGEN). The transaction is intended to combine the new media platform of the two companies in China to provide more effective and integrated marketing solutions to customers. The transaction is subject to customary closing conditions and certain regulatory approvals and, if approved, is expected to be completed by the third quarter of 2009. Based on the December 22, 2008 announcement, SINA will issue 47 million newly issued ordinary shares to Focus as consideration for the acquired assets. Focus will then distribute SINA shares to its shareholders shortly after the closing.

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D. Exchange Controls
     Our operating businesses are currently conducted in China and substantially all of our revenues and expenses are denominated in Renminbi. The People’s Bank of China, or PBOC, sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day. The PBOC also takes into account other factors, such as the general conditions existing in the international foreign exchange markets. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates in the world financial markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. Although PRC governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration for Foreign Exchange and other relevant authorities. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by 2.0% against the U.S. dollar. Since then, the PRC government has made, and may in the future make, further adjustments to the exchange rate system. The PBOC announces the closing price of a foreign currency traded against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against the Renminbi on the following working day.
     In January and April 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued two rules that require PRC residents to register with and receive approvals from SAFE in connection with their offshore investment activities. SAFE has announced that the purpose of these regulations is to achieve the proper balance of foreign exchange and the standardization of the cross-border flow of funds.
     On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January and April 2005 mentioned above.
     According to Notice 75:
    prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;
 
    an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and

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    an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China.
     Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
     As a Cayman Islands company, and therefore a foreign entity, if Focus Media Holding purchases the assets or equity interest of a PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration procedures described in Notice 75. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us.
     As a result of the lack of implementing rules and other uncertainties relating to the interpretation and implementation of Notice 75, we cannot predict how these regulations will affect our business operations or strategies. For example, our present or future PRC subsidiaries’ ability to conduct foreign exchange activities, such as remittance of dividends and foreign-currency- denominated borrowings, may be subject to compliance with such SAFE registration requirements by relevant PRC residents, over whom we have no control. In addition, we cannot assure you that any such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. We require all the shareholders in Focus Media Holding who are PRC residents to comply with any SAFE registration requirements, but we have no control over either our shareholders or the outcome of such registration procedures. Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.
E. Taxation
Cayman Islands Taxation
     The following discussion of the material Cayman Islands federal income tax consequences of an investment in our ADSs is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change, possibly with retroactive effect. This discussion does not deal with all possible tax consequences relating to an investment in our ADSs, such as the tax consequences under state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers, Dill & Pearman, our special Cayman Islands counsel.
     The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of ADS, or ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double taxation treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
     Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Council:
     (1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and

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     (2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on the shares, debentures or other obligations of the Company.
     The undertaking for us is for a period of twenty years from May 3, 2005.
People’s Republic of China Taxation
     The newly enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise.
     Under the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. It is also unclear whether, if we are considered a PRC “resident enterprise,” holders of our ordinary shares or ADSs might be able to claim the benefit of income tax treaties entered into between China and other countries.
United States Federal Income Taxation
     The following discussion describes certain United States federal income tax consequences of the ownership of our ordinary shares and ADSs as of the date hereof. Except where noted, it deals only with ordinary shares and ADSs held as capital assets. This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
    a bank;
 
    a dealer in securities or currencies;
 
    a financial institution;
 
    a regulated investment company;
 
    a real estate investment trust;
 
    an insurance company;
 
    a tax-exempt organization;
 
    a person holding our ordinary shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;
 
    a trader in securities that has elected the mark-to-market method of accounting for your securities;

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    a person liable for alternative minimum tax;
 
    a United States expatriate or a person treated as a resident of more than one country;
 
    a person who owns or is deemed to own 10% or more of our voting stock;
 
    a partnership or other pass through entity for United States federal income tax purposes or a person holding our ordinary shares or ADSs through any such entity; or
 
    a person whose “functional currency” is not the United States dollar.
     Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms. IF YOU ARE CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES OR ADSS, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO YOU IN LIGHT OF YOUR PARTICULAR SITUATION AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
     As used herein, the term “United States Holder” means a beneficial holder of an ordinary share or ADS that is for United States federal income tax purposes:
    an individual citizen or resident of the United States;
 
    a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
 
    an estate the income of which is subject to United States federal income taxation regardless of its source; or
 
    a trust which either (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.
     If a partnership holds our ordinary shares or ADSs, the tax treatment of a partner will depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisors.
ADSs
     If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
     The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the claiming of foreign tax credits for United States Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditabilities of PRC taxes, if any, and the availability of the reduced tax rate for dividends received

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by certain non-corporate holders, each described below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.
Taxation of Dividends
     Subject to the discussion below under “Passive Foreign Investment Companies”, the gross amount of distributions on our ordinary shares or ADSs (including amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. With respect to non-corporate United States investors, certain dividends received in taxable years beginning before January 1, 2011 from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs, which are listed on the Nasdaq Global Market, but not our ordinary shares, are readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our ordinary shares that are represented by ADSs, but not our ordinary shares that are not so represented, currently meet such conditions required for the reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the Unites States. In the event that we are deemed to be a PRC “resident enterprise” under PRC tax law (see discussion under “Taxation—People’s Republic of China Taxation”), we may be eligible for the benefits of the income tax treaty between the Unites States and the PRC, and if we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would be subject to the reduced rates of taxation. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of this legislation to your particular circumstances.
     In the event that we are deemed to be a PRC “resident enterprise” under PRC tax law (see discussion under “Taxation—“People’s Republic of China Taxation”, you may be subject to PRC withholding taxes on dividends paid to you with respect to our ordinary shares or ADSs. In that case, however, you may be able to obtain a reduced rate of PRC withholding taxes under the treaty between the United States and the PRC if certain requirements are met. In addition, subject to certain conditions and limitations, PRC withholding taxes on dividends, if any, may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid to you with respect to our ordinary shares or ADSs will be treated as income form sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. Furthermore, in certain circumstances, if you have held the ordinary shares or ADSs for less than a specified minimum holding period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any PRC withholding taxes imposed on dividends paid on the ordinary shares or ADSs. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
     To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of our ordinary shares or ADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of our ordinary shares or ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).
Passive Foreign Investment Companies

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     We operate an active advertising business in China and based on the past and projected composition of our income and valuation of our assets, including goodwill, we believe we were not a passive foreign investment company for 2008, we do not expect to be a passive foreign investment company (“PFIC”), for 2009, and we do not expect to become one in the future, although there can be no assurance in this regard. Because PFIC status is a factual determination, our United States counsel expresses no opinion with respect to our PFIC status and also expresses no opinion with respect to our expectations contained in this paragraph. Furthermore, it is not entirely clear how the contractual arrangements between us and our consolidated variable interest entities will be treated for purposes of the PFIC rules.
     We will be a PFIC for any taxable year in which:
    at least 75% of our gross income is passive income, or
 
    at least 50% of the value (determined on a quarterly basis) of our assets is attributable to assets that produce or are held for the production of passive income.
     For this purpose, passive income includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.
     The determination of whether we are a PFIC is made annually for each taxable year of our company. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. We could become a PFIC, for example though a decrease in the price of our ADSs (resulting in a decrease in the value of our goodwill, an active asset). If we are a PFIC for any taxable year during which you hold our ordinary shares or ADSs, you will be subject to special tax rules discussed below.
     If we are a PFIC for any taxable year during which you hold our ordinary shares or ADSs, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ordinary shares or ADSs. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ordinary shares or ADSs will be treated as excess distributions. Under these special tax rules:
    the excess distribution or gain will be allocated ratably to each day in your holding period for the ordinary shares or ADSs,
 
    the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
 
    the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
     In addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning before January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will be required to file Internal Revenue Service Form 8621 if you hold our ordinary shares or ADSs in any year in which we are classified as a PFIC.
     If we are a PFIC for any taxable year during which you hold our ordinary shares or ADSs and any of our non-United States subsidiaries is also a PFIC, a United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

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     In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may be available to holders of ADSs because the ADSs are listed on the Nasdaq Global Market, which constitutes a qualified exchange as designated in the Code, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-market election.
     If you make an effective mark-to-market election, you will include in each year as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your ADSs, will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.
     Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.
     Alternatively, you can sometimes avoid the rules described above by electing to treat us as a “qualified electing fund” under section 1295 of the Code. This option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
     You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding our ordinary shares or ADSs if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
     Subject to the discussion above under “Passive Foreign Investment Companies”, for United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of our ordinary shares or ADSs in an amount equal to the difference between the amount realized for the ordinary shares or ADSs and your adjusted tax basis in the ordinary shares or ADSs. Your adjusted tax basis will generally equal the amount you paid for the ordinary shares or ADSs. Any gain or loss you recognize will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss. However, in the event that we are deemed to be a PRC “resident enterprise” under PRC tax law (see discussion under “Taxation—“People’s Republic of China Taxation”), we may be eligible for the benefits of the income tax treaty between the United States and the PRC. Under that treaty, if any PRC tax were to be imposed on any gain from the disposition of our ordinary shares or ADSs, the gain may be treated as PRC-source income. You are urged to consult your tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of ordinary shares or ADSs, including the availability of the foreign tax credit under your particular circumstances.
Information Reporting and Backup Withholding
     Information reporting will apply to dividends in respect of our ordinary shares or ADSs and the proceeds from the sale, exchange or redemption of our ordinary shares or ADSs that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient such as a corporation. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.

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     Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
Tax Considerations of the Sina Sale and Distribution of the Sina Shares
     Under our current structure, we expect that the distribution of Sina shares following the Sina Sale will be taxable as a dividend to you in the manner described above under “—Taxation of Dividends.”
     In connection with the Sina Sale, we may elect to be treated as a partnership for United States federal income tax purposes. Such an election would generally be treated as if we had liquidated for United States federal income tax purposes and the Sina shares would be treated as having been distributed as part of such deemed liquidation. Accordingly, the distribution of Sina shares would not be taxable as a dividend to you. Instead, you would generally be treated as if you had exchanged your ordinary shares or ADSs for the proportionate share of our assets represented by such ordinary share or ADS, including the Sina shares distributed to you. As result of such deemed exchange, you would generally recognize gain or loss in the manner described under "—Taxation of Capital Gains” in amount equal to the difference, if any, between the fair market value of the property deemed received in the liquidation (including the Sina shares)you’re your adjusted tax basis in your ordinary shares or ADSs.
     Following any such election, we expect that United States Holders of our ordinary shares or ADSs will be treated as partners in a partnership for United States federal income tax purposes. The United States federal income tax treatment of partners of a partnership is complex. In general, a partnership is not itself subject to United States federal income tax. Rather, each taxable year the partnership reports to each of its partners such partner’s allocable share of the partnership’s income, gain, loss and deductions for such taxable year. Each partner is required to report and take its allocable share of such items into account when determining its United States federal income tax liability. Prior to the consummation of the Sina Sale, we will provide additional information regarding the United States federal income tax considerations of the Sina Sale and distribution of Sina shares.
     PROSPECTIVE PURCHASERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY ADDITIONAL TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF ORDINARY SHARES OR ADSS, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION, INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.
F. Dividends and Paying Agents
     Not applicable.
G. Statement by Experts
     Not applicable.
H. Documents on Display
     We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.
     We have previously filed with the Commission our registration statements on Form F-1 and F-3ASR and prospectuses and prospectus supplements under the Securities Act of 1933, as amended, with respect to our ADSs.

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     The SEC also maintains a website that contains reports, proxy statements and other information about issuers, such as us, who file electronically with the SEC. The address of that website is http://www.sec.gov. The information on that website is not a part of this annual report.
     We will furnish to Citibank, N.A., as depositary of our ADSs, our annual reports. When the depositary receives these reports, it will upon our request promptly provide them to all holders of record of ADSs. We will also furnish the depositary with all notices of shareholders’ meetings and other reports and communications in English that we make available to our shareholders. The depositary will make these notices, reports and communications available to holders of ADSs and will upon our request mail to all holders of record of ADSs the information contained in any notice of a shareholders’ meeting it receives.
     We are subject to periodic reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders under the federal proxy rules contained in Sections 14(a), (b) and (c) of the Exchange Act, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. The registration statements, reports and other information so filed can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.
I. Subsidiary Information
     Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
     Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in market interests rates. However, our future interest income may fall short of expectations due to changes in market interest rates.
Foreign Currency Risk
     Substantially all our revenues and expenses are denominated in Renminbi. We have not had any material foreign exchange gains or losses. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars relative to the Renminbi because the value of our business is effectively denominated in Renminbi, while the ADSs will be traded in U.S. dollars. Furthermore, a decline in the value of the Renminbi could reduce the U.S. dollar equivalent of the value of the earnings from, and our investments in, our subsidiaries and PRC-incorporated affiliates in China. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our reported financial results in U.S. dollar terms. See “Item 3.B. — Risk Factors — Risks Relating to the People’s Republic of China — Fluctuations in exchange rates could result in foreign currency exchange losses”.
Inflation
     In recent years, China has not experienced significant inflation, and thus inflation has not had a significant effect on our business historically. According to the National Bureau of Statistics of China, the change in the Consumer Price Index in China was 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008, respectively.

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
     Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
     None of these events occurred in any of fiscal 2006, 2007 and 2008.
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. Modifications of Rights
     Upon the closing of our acquisition of Target Media, we amended our shareholder’s agreement to grant the former shareholders of Target Media registration rights with regard to the Focus Media ordinary shares we issued to such former Target Media shareholders. Such shareholders are now entitled to demand registration rights and piggyback registration rights under our amended and restated shareholders agreement. At any time after six months following the closing of our initial public offering,
    any of our shareholders representing a majority of the ordinary shares converted from the Series A convertible redeemable preference shares;
 
    any of our shareholders representing a majority of the ordinary shares converted from the Series B convertible redeemable preference shares;
 
    any of our shareholders representing 20% of the ordinary shares converted from the Series C convertible redeemable preference shares; and
 
    since the closing of our acquisition of Target Media, any of the former Target Media shareholders representing 25% of the ordinary shares issued to them as a group as consideration in connection with our acquisition of Target Media;
may require us to effect the registration, on a form other than Form F-3, of at least 25% of the registrable securities then outstanding. We are not obligated to take any action to effect any such registration on more than two occasions each on behalf of each group of shareholders described above or more than once in any six month period or within six months of any other public offering we conduct in which they had the opportunity to participate without the exclusion of any shares eligible for registration under the shareholders agreement.
     In addition, holders of any of our registrable securities may require us to effect a registration statement on Form F-3 (or any successor form or any comparable form for a registration in a jurisdiction other than the United States) for a public offering of registrable securities so long as the reasonably anticipated aggregate price to the public (net of selling expenses) would be at least $1,000,000 and we are entitled to use Form F-3 (or a comparable form) for such offering. Holders of registrable securities may demand a registration on Form F-3 on unlimited occasions, although we are not obligated to effect more than once in any six month period if within six months of any other public offering we conduct in which they had the opportunity to participate without the exclusion of any shares eligible for registration under the shareholders agreement.
     Upon the closing of our acquisition of Allyes, we granted the former shareholders of Allyes registration rights with regard to the Focus Media ordinary shares we issued to them . Under the terms of our agreement with the former Allyes shareholder:
    prior to September 18, 2009 or prior to the time when the shares proposed to be sold by the former Allyes shareholders may be sold in a 90-day period under Rule 144, any former Allyes shareholders holding

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    3 million of our ordinary shares may request that we effect the registration of the ordinary shares held by them using our existing registration statement on Form F-3ASR, provided that if the offering is part of an underwritten offering, the expected proceeds from such an offering would not be less than US$40 million; we are obligated to effect up to three such registrations; and
 
    certain of the former Allyes shareholders, on a date at least 150 days and no more than 330 days following March 28, 2007, may request that we effect the registration of the ordinary shares held by them using our existing registration statement on Form F-3ASR; we are obligated to effect only one such registration.
     We are not obligated to take any action to effect any such registration more than once in any six month period or within six months of any other public offering we conduct in which they had the opportunity to participate without the exclusion of any shares eligible for registration under the shareholders agreement.
     On April 11, 2007, we effected a change of the ratio of our ADSs to ordinary shares from one (1) ADS representing ten (1) ordinary shares to one (1) ADS representing five (5) ordinary shares.
B. Use of Proceeds
     Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2008, our disclosure controls and procedures were not effective primarily because of the material weakness described below under “Management’s Annual Report on Internal Control over Financial Reporting.”
Management’s Annual Report on Internal Control Over Financial Reporting.
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
     Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, management assessed the effectiveness of the internal control over financial reporting as of December 31, 2008 using criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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     A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Group’s annual or interim financial statements will not be prevented or detected on a timely basis.
     As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our management assessed the effectiveness of internal control over financial reporting as of December 31, 2008 using the criteria set forth in the report “Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (known as COSO). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2008 due to the following material weakness. Largely as a result of a significant number of departures among our executive management and senior financial personnel and competing priorities within our company, our control procedures to ensure that non-routine transactions and the implications of events subsequent to the balance sheet date (and the information relevant for accounting purposes) known to senior management are communicated timely to those charged with maintaining our books and records did not operate effectively. We have concluded that this deficiency constitutes a material weakness. Since its identification, we have taken, and are continuing to take, the following steps in order to remedy this material weakness: (1) improving internal communications protocols between executive management and accounting and finance personnel and (2) hiring additional accounting and finance personnel to compensate for the aforementioned departures.
     The effectiveness of internal control over financial reporting as of December 31, 2008 has been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm, who has also audited our consolidated financial statements for the year ended December 31, 2008.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Focus Media Holding Limited
We have audited Focus Media Holding Limited and subsidiaries (the “Group’s”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Group’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment: The control procedures to ensure that non-routine transactions and the implications of events subsequent to the balance sheet date (and the information relevant for accounting purposes) known to senior management are communicated timely to those charged with maintaining the Group’s books and records did not operate effectively. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2008, of the Group and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Group has not maintained effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2008, of the Group and our report dated June 30, 2009 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Group’s adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”, effective January 1, 2007, and Statement of Financial Accounting Standards No. 123R, “Share-based Payment”, effective January 1, 2006.
/s/ DELOITTE TOUCHE TOHMATSU CPA LTD.
Shanghai, China
June 30, 2009

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ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
     Our Board of Directors has determined that Daqing Qi, who is an independent director, qualifies as an audit committee financial expert as defined in Item 16A of the instruction to Form 20-F.
ITEM 16B. CODE OF ETHICS
     Our board of directors adopted a code of business conduct and ethics on April 16, 2005, which is applicable to our directors, officers and employees. Our code of business conduct and ethics is publicly available on our website at: http://nocache.corporate-ir.net/media_files/irol/19/190067/corp_gov/Conduct_and_Ethics.pdf.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
     The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd., our independent registered public accounting firm, for the years indicated.
                 
    For the year ended December 31,  
    2007     2008  
    (in thousands, US dollar)  
Audit Fees (1)
  $ 1,960     $ 1,950  
Audit-related Fees (2)
          850  
Tax Fees (3)
    394       453  
All Other Fees (4)
           
 
           
Total
  $ 2,354     $ 3,253  
 
           
 
(1)   Audit fees consist of fees associated with the annual audit, the reviews of our quarterly financial statements and statutory audits required internationally. They also include fees billed for those services that are normally provided by the independent accountants in connection with statutory and regulatory filings.
 
(2)   Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements but not described in footnote (1) above. These services include consultations concerning financial accounting and reporting standards and review of capitalization of retained earnings, financial covenants in loan agreements, and our affiliates’ financial information.
 
(3)   Tax fees include fees billed for professional services rendered by Deloitte Touche Tohmatsu CPA Ltd., primarily in connection with our transfer study activities.
 
(4)   All other fees comprise fees for all other services provided by Deloitte Touche Tohmatsu CPA Ltd., other than those services covered in footnotes (1) to (3) above.
     Prior to forming an audit committee, our board of directors is responsible for the oversight of our independent registered public accounting firm. The policy of our board of directors is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu CPA Ltd., including audit services, audit-related services, tax services and other services, as described above.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
     None.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

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                            Maximum Number
                    Total Number of   (or Approximate
                    ADSs Purchased as   Dollar Value) of
                    Part of Publicly   ADSs that May Yet
    Total Number of   Average Price Paid   Announced   Be Purchased
     Period   ADSs Repurchased   per ADS(2)   Program(1)   Under the Program
August 2008
    680,973     $ 29.34       680,973     $ 80,020,285  
September 2008
    405,654     $ 24.63       1,086,627     $ 70,028,740  
October 2008
    501,715     $ 19.91       1,588,342     $ 60,041,501  
November 2008
    800,000     $ 7.32       2,388,342     $ 54,187,501  
 
(1)   We announced a share repurchase program approved by our board of directors on July 16, 2008. Under the terms of the approved program, we may repurchase up to US$100 million worth of our issued and outstanding ADSs. The repurchases have been, and will be, made from time to time on the open market at prevailing market prices or in block trades. The repurchases have been, and will be, made subject to restrictions relating to volume, price and timing. The timing and extent of any repurchases will depend upon market conditions, the trading price of our ADSs and other factors. We expect to implement this share repurchase program over the course of 12 months starting from July 2008, in a manner consistent with market conditions and the interest of the shareholders. Our board of directors will review the share repurchase program periodically, and may authorize adjustment of its terms and size accordingly.
 
(2)   The average price paid per ADS is calculated using the execution price for each repurchase excluding commissions paid to brokers.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
     None.
ITEM 16G.  CORPORATE GOVERNANCE
     None.
PART III
ITEM 17.  FINANCIAL STATEMENTS
     The Registrant has elected to provide the financial statements and related information specified in Item 18.
ITEM 18.  FINANCIAL STATEMENTS
     The following is a list of the audited financial statements and a report of the independent registered public accounting firm included in this annual report beginning on page F-1.
         
    Page
Report of Independent Registered Public Accounting
    F-2  
Consolidated Balance Sheets as of December 31, 2007 and 2008
    F-3  
Consolidated Statements of Operations for each of the years ended December 31, 2006, 2007 and 2008
    F-4  
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2006, 2007 and 2008
    F-5  
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008
    F-6  
Notes to the Consolidated Financial Statements
    F-7  
Additional Information — Financial Statement Schedule 1
    F-47  
ITEM 19.  EXHIBITS

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Exhibit    
Number   Description of Exhibits
3.1*
  Amended and Restated Memorandum and Articles of Association of Focus Media Holding Limited.
 
   
4.1*
  Specimen Ordinary Share Certificate.
 
   
4.2*
  Amended and Restated Shareholders Agreement of Focus Media Holding Limited, dated December 2, 2004, among Focus Media Holding Limited, its subsidiaries, its ordinary shareholders, its preferred shareholders and the investors named therein.
 
   
4.3*
  Deposit Agreement dated July 18, 2005 among the Registrant, Citibank, N.A. and holders of the American Depositary Receipts (incorporated by reference to the registration statement on Form F-6 (File No. 333-126011) filed with the Securities and Exchange Commission with respect to American Depositary Shares representing ordinary shares).
 
   
5.1*
  Form of opinion of Conyers, Dill & Pearman, Cayman Islands special counsel to the registrant, regarding the validity of the ordinary shares being registered.
 
   
5.2*
  Form of opinion of Global Law Office, counsel as to PRC law to the registrant, regarding the validity of (i) the corporate structure of Focus Media Technology (Shanghai) Co., Ltd. and Shanghai Focus Media Advertisement Co., Ltd. and contractual arrangements among Focus Media Technology (Shanghai) Co., Ltd., Shanghai Focus Media Advertisement Co., Ltd. and its subsidiaries, Jason Nanchun Jiang and Jimmy Wei Yu, (ii) the corporate structure of Framedia Investment and Shanghai Framedia Advertisement Development Co., Ltd. and contractual arrangements among Framedia Investment and Shanghai Framedia Advertisement Development Co., Ltd. and its subsidiaries, Jason Nanchun Jiang and Jimmy Wei Yu and (iii) the corporate structure of Shanghai Focus Media Advertisement Co., Ltd., Shanghai Focus Media Advertising Agency Co., Ltd., Beijing Dotad Technology Co., Ltd., Beijing Focus Media Wireless Technology Co., Ltd., Jason Nanchun Jiang and Jimmy Wei Yu.
 
   
8.1*
  Form of opinion of Conyers, Dill & Pearman, special Cayman Islands tax counsel to the registrant, regarding tax matters.
 
   
10.1*
  Rules of the 2003 Employee Share Option Scheme and form of grant letter.
 
   
10.2*
  Technology License and Service Agreement, dated March 28, 2005, by and among Focus Media Digital Information Technology (Shanghai) Co., Ltd., Shanghai Focus Media Advertisements Co., Ltd. and the subsidiaries of Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.3*
  Business Cooperation Agreement, dated March 28, 2005, by and among Shanghai Focus Media Advertisement Co., Ltd., Shanghai Focus Media Advertising Agency Co., Ltd. and the subsidiaries of Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.4*
  Equity Pledge Agreement, dated March 28, 2005, by and among Jason Nanchun Jiang, Jimmy Wei Yu, Shanghai Focus Media Advertisement Co., Ltd., Focus Media Technology (Shanghai) Co., Ltd., Focus Media Digital Information Technology (Shanghai) Co., Ltd. and the subsidiaries of Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.5*
  Call Option Agreement, dated March 28, 2005, among Jason Nanchun Jiang, Jimmy Wei Yu, Shanghai Focus Media Advertisement Co., Ltd. and Focus Media Technology (Shanghai) Co., Ltd.
 
   
10.6*
  Shareholders’ Voting Rights Proxy Agreement, dated March 28, 2005, among Jason Nanchun Jiang, Jimmy Wei Yu, Shanghai Focus Media Advertisement Co., Ltd., Focus Media Technology (Shanghai) Co., Ltd. and the subsidiaries of Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.7*
  Trust Agreement, dated March 28, 2005, by and between Shanghai Focus Media Advertisement Co., Ltd. and Focus Media Technology (Shanghai) Co., Ltd.

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Exhibit    
Number   Description of Exhibits
10.8*
  Trademark License Agreement, dated March 28, 2005, by and among Focus Media Technology (Shanghai) Co., Ltd., Shanghai Focus Media Advertisement Co., Ltd. and its subsidiaries.
 
   
10.9*
  Loan Agreement, dated June 10, 2003, among Focus Media Holding Limited, Jason Nanchun Jiang, Jimmy Wei Yu, Yuanzhe Fu, Yibing Zhou and Yiqing Hou.
 
   
10.10*
  Loan Agreement, dated March 28, 2005, by and between Jason Nanchun Jiang and Focus Media Technology (Shanghai) Co., Ltd.
 
   
10.11*
  Loan Agreement, dated March 28, 2005, by and among Jimmy Wei Yu, Focus Media Technology (Shanghai) Co., Ltd. and Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.12*
  Form of Employment Agreement of Focus Media Technology (Shanghai) Co., Ltd.
 
   
10.13*
  Manager Non-Competition Agreement entered into by Focus Media Holding Limited and Jason Nanchun Jiang on November 29, 2004.
 
   
10.14*
  Technology Transfer Agreement entered into by Jimmy Wei Yu and Focus Media Digital Information (Shanghai) Co., Ltd., dated November 1, 2004.
 
   
10.15*
  Asset and Business Acquisition Agreement between Shanghai Everease Communication Company and Shanghai Focus Media Advertisement Co., Ltd. dated July 1, 2003.
 
   
10.16*
  Everease Non-competition Agreement between Focus Media Holding Limited and Shanghai Everease Communication Company, dated as of November 2004.
 
   
10.17*
  Sales Contract between Shanghai Everease Communication Company and Shanghai Focus Media Advertisement Co., Ltd., dated May 2003.
 
   
10.18*
  Project Cooperation Framework Agreement between Shanghai Everease Communication Company and Beijing Suodi Advertising Co., Ltd., dated February, April and June 2003.
 
   
10.19*
  Transfer Agreement on Project Cooperation Framework Agreement between Shanghai Focus Media Advertisement Co., Ltd. and Beijing Suodi Advertising Co., Ltd., dated August 28, 2003.
 
   
10.20*
  Business Agency Agreement between Shanghai On-Target Advertising Co., Ltd. and Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.21*
  Agreement between Shanghai On-Target Advertising Co., Ltd., Jimmy Wei Yu, Shanghai Focus Media Advertisement Co., Ltd., Union Enterprise Holding Co., Ltd. and Shenlong Lin, dated October 15, 2003.
 
   
10.22*
  Acknowledgement Letter entered into as of March 28, 2005 by and among Shanghai Focus Media Advertisement Co., Ltd., Focus Media Technology (Shanghai) Co., Ltd., Focus Media Digital Information Technology (Shanghai) Co., Ltd. and subsidiaries of Shanghai Focus Media Advertisement Co., Ltd.
 
   
10.23*
  Share Option Plan 2005.
 
   
10.24*
  Acknowledgement Letter for Participation of Equity Pledge Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Fuzhou Fukesi Advertisement Co., Ltd.
 
   
10.25*
  Acknowledgement Letter for Participation of Equity Pledge Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Hefei Fukesi Advertisement Co., Ltd.

119


Table of Contents

     
Exhibit    
Number   Description of Exhibits
10.26*
  Acknowledgement Letter for Participation of Equity Pledge Agreement, dated January 13, 2006, of Shanghai Focus Media Co., Ltd. and Hefei Fukesi Advertisement Co., Ltd.
 
   
10.27*
  Acknowledgement Letter for Participation of Equity Pledge Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Shenyang Focus Media Advertisement Co., Ltd.
 
   
10.28*
  Acknowledgement Letter for Participation of Equity Pledge Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Shenzhen Bianjie Building Advertisement Co., Ltd.
 
   
10.29*
  Acknowledgement Letter for Participation of Equity Pledge Agreement, dated January 13, 2006, of Shanghai Focus Media Co., Ltd. and Shenzhen Bianjie Building Advertisement Co., Ltd.
 
   
10.30*
  Acknowledgement Letter for Participation of Call Option Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Fuzhou Fukesi Advertisement Co., Ltd.
 
   
10.31*
  Acknowledgement Letter for Participation of Call Option Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Hefei Fukesi Advertisement Co., Ltd.
 
   
10.32*
  Acknowledgement Letter for Participation of Call Option Agreement, dated January 13, 2006, of Shanghai Focus Media Co., Ltd. and Hefei Fukesi Advertisement Co., Ltd.
 
   
10.33*
  Acknowledgement Letter for Participation of Call Option Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Shenyang Focus Media Advertisement Co., Ltd.
 
   
10.34*
  Acknowledgement Letter for Participation of Call Option Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Shenzhen Bianjie Building Advertisement Co., Ltd.
 
   
10.35*
  Acknowledgement Letter for Participation of Call Option Agreement, dated January 13, 2006, of Shanghai Focus Media Co., Ltd. and Shenzhen Bianjie Building Advertisement Co., Ltd.
 
   
10.36*
  Acknowledgement Letter for Participation of Shareholders’ Voting Rights Proxy Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Fuzhou Fukesi Advertisement Co., Ltd.
 
   
10.37*
  Acknowledgement Letter for Participation of Shareholders’ Voting Rights Proxy Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Hefei Fukesi Advertisement Co., Ltd.
 
   
10.38*
  Acknowledgement Letter for Participation of Shareholders’ Voting Rights Proxy Agreement, dated January 13, 2006, of Shanghai Focus Media Co., Ltd. and Hefei Fukesi Advertisement Co., Ltd.
 
   
10.39*
  Acknowledgement Letter for Participation of Shareholders’ Voting Rights Proxy Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Shenyang Focus Media Advertisement Co., Ltd.
 
   
10.40*
  Acknowledgement Letter for Participation of Shareholders’ Voting Rights Proxy Agreement, dated January 13, 2006, of Shanghai Focus Media Advertisement Co., Ltd. and Shenzhen Bianjie Building Advertisement Co., Ltd.

120


Table of Contents

     
Exhibit    
Number   Description of Exhibits
10.41*
  Acknowledgement Letter for Participation of Shareholders’ Voting Rights Proxy Agreement, dated January 13, 2006, of Shanghai Focus Media Co., Ltd. and Shenzhen Bianjie Building Advertisement Co., Ltd.
 
   
10.42*
  Equity Pledge Agreement, dated January 13, 2006, by and among Shanghai Focus Media Advertisement Co., Ltd., Shanghai Focus Media Co., Ltd., Shanghai Framedia Investment Consultancy Co., Ltd. and the Local Advertisement Companies named therein.
 
   
10.43*
  Call Option Agreement, dated January 13, 2006