424B4 1 h00274b4e424b4.htm FOCUS MEDIA HOLDING LIMITED FOCUS MEDIA HOLDING LIMITED
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Filed Pursuant to Rule 424B4
Registration No. 333-131065
Registration No. 333-131312
(FOCUS MEDIA LOGO)
Focus Media Holding Limited
6,787,829 American Depositary Shares
Representing
67,878,290 Ordinary Shares
 
       Focus Media Holding Limited, or Focus Media, is offering 1,500,000 American depositary shares, or ADSs, and the selling shareholders identified in this prospectus are offering an additional 5,287,829 ADSs. Each ADS represents ten ordinary shares, par value $0.00005 per share of Focus Media. The ADSs are evidenced by American depositary receipts, or ADRs. We will not receive any proceeds from the ADSs sold by the selling shareholders.
       Our ADSs are quoted on the Nasdaq National Market under the symbol “FMCN.” On January 26, 2006, the last sale price for our ADSs as reported on the Nasdaq National Market was US$44.10 per ADS.
       See “Risk Factors” beginning on page 17 to read about risks you should consider before buying the ADSs.
 
       Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
    Per ADS   Total
         
Public offering price
  $ 43.50     $ 295,270,561.50  
Underwriting discount
  $ 1.89     $ 12,810,822.46  
Proceeds, before expenses, to Focus Media
  $ 41.61     $ 62,419,016.24  
Proceeds, before expenses, to the selling shareholders
  $ 41.61     $ 220,040,722.80  
       To the extent the underwriters sell more than 6,787,829 ADSs, the underwriters have an option to purchase up to an additional 627,560 ADSs from the selling shareholders at the public offering price less the underwriting discount.
 
       The underwriters expect to deliver the ADSs evidenced by the ADRs against payment in U.S. dollars in New York, New York on January 31, 2006.
Global Coordinator
Goldman Sachs (Asia) L.L.C.
Joint Bookrunners
Goldman Sachs (Asia) L.L.C. Credit Suisse
Co-Lead Managers
Citigroup Morgan Stanley
Co-Manager
Piper Jaffray
 
Prospectus dated January 27, 2006.


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PROSPECTUS SUMMARY
       The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors”, before deciding whether to buy our ADSs.
Our Business
       We believe we operate the largest out-of-home advertising network in China using audiovisual television displays, based on the number of locations and number of flat-panel television displays in our network. It is our goal to create the largest multi-platform out-of-home advertising network in China, reaching urban consumers at strategic locations over a number of media formats, including audiovisual television displays in buildings and stores, advertising poster frames and, in the future, other new and innovative media. To date, our out-of-home advertising network consists of the following:
  •  our commercial location network, which refers to our network of flat-panel television displays placed in high-traffic areas of commercial office buildings, such as in lobbies and near elevators, as well as in beauty parlors, karaoke parlors, golf country clubs, auto shops, banks, pharmacies, hotels, airports, airport shuttle buses and in-air flights;
 
  •  our in-store network, which refers to our network of flat-panel television displays placed in specific product areas such as the personal care and food and beverage sections and other store locations with high-traffic concentration such as the main aisles and check-out lines in large-scale chain retail stores, which are referred to in China as hypermarkets, as well as inside selected supermarkets and convenience stores; and
 
  •  our poster frame network, which refers to our network of advertising poster frames placed mainly in the elevators and public areas of residential complexes which we acquired through our acquisition of Framedia. According to an independent survey conducted by Sinomonitor International Media Research, or Sinomonitor, Framedia’s frames were installed in 99.0%, 90.7%, 92.7% and 85.3% of a total of 2,789 residential buildings with advertising poster frames surveyed in Beijing, Shanghai, Guangzhou and Shenzhen.
       We derive revenue principally by selling advertising time slots on our commercial location and in-store networks, and from January 2006, by selling frame space on our poster frame network. Substantially all of the content displayed on our commercial location and in-store networks consists of advertisements which are broadcast repeatedly approximately 60 or 80 times per day in twelve or nine-minute cycles, depending on the city in which the cycle is operated. Our poster frame network consists of advertising poster frames placed in elevators and public areas in residential complexes and commercial locations. For advertising poster frames placed in elevators, generally two, three or four advertising poster frames can be placed in each elevator.
       Our flat-panel displays are primarily placed in venues that have a high concentration of consumers with higher-than-average disposable incomes or that have a high concentration of consumers who are likely to be interested in particular types of products and services. Accordingly, our network provides a targeted and cost-effective way for advertising clients to reach segmented consumer groups with attractive demographic characteristics. Due to the captive and low distraction nature of the locations where we place our displays, we believe our commercial location network produces higher consumer recall rates of advertisements than traditional television advertisements.
       As of September 30, 2005, more than 1,200 advertisers purchased advertising time slots on our out-of-home television advertising networks, including over 70 advertisers who purchased time slots on our in-store network, and for the nine months ended September 30, 2005, we acquired over 700 new advertising clients. Some of our largest advertising clients in terms of revenue include

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leading international brand name advertisers such as NEC, Nokia, Samsung, Toyota and Volkswagen, and leading domestic brand name advertisers such as China Merchants Bank, China Mobile, China Unicom and Dongfeng Motor Corporation, which together accounted for approximately 20% of our revenue in 2004. In addition, over 600 advertisers have bought frame space from Framedia since 1999, including leading international and domestic companies, such as Audi, Lenovo, Microsoft, Motorola, Omega, Samsung and Sony.
       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 September 30, 2005, we operated our commercial location network directly in a total of 23 cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen, which we refer to as our Tier I cities, and 19 other directly operated cities. As of September 30, 2005, we covered an additional 31 cities through contractual arrangements with regional distributors that, together with the other 19 directly operated cities, we refer to as our Tier II cities. Between January 1, 2004 and September 30, 2005, the number of commercial locations in which we operate directly increased from 754 to 18,538, and the number of displays in those locations increased from 827 to 34,079. As of September 30, 2005, our commercial location network operated by our regional distributors consisted of approximately 3,273 flat-panel displays in approximately 2,656 locations in the 31 cities. We commenced commercial operations of our in-store network in April 2005. As of September 30, 2005, our in-store network consisted of 20,061 flat-panel displays placed in 2,702 store locations in our directly operated cities, including 553 hypermarkets and 1,272 supermarkets and 877 convenience stores. As of September 30, 2005, Framedia owned and operated over 77,000 advertising poster frames in its network in six cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen.
       For the nine months ended September 30, 2005, we recorded total revenues of $43.6 million, income from operations of $13.9 million and net income of $14.1 million as compared to total revenues, income from operations and net income of $17.4 million, $7.7 million and $1.7 million for the nine months ended September 30, 2004. In 2004, we recorded total revenues of $29.2 million, income from operations of $13.0 million and net income of $372,752 as compared to total revenues of $3.8 million, income from operations of $525,110 and net income of $25,483 in 2003. Our net income of $372,752 in 2004 reflects a one-time non-cash charge of $11.7 million for a change in fair value of derivative liability associated with our Series B convertible redeemable preference shares. We have not incurred, and we will not incur, any such charges from January 1, 2005 as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004.
Our Strategies, Risks and Uncertainties
       In order to enhance our position in the out-of-home advertising industry in China, we intend to expand our networks, promote our brand name, create increasingly segmented network channels, pursue complimentary advertising media platforms and explore new digital media opportunities. Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including the following:
  •  potential liabilities connected with our proposed acquisition of Target Media, including liabilities and risks that could result from commercially sensitive documents that were not disclosed to us and will not be disclosed to us prior to the completion of the acquisition;
 
  •  our ability to successfully integrate Framedia and its poster frame network and Target Media and its flat-panel television display network into our existing business;
 
  •  our limited operating history for our current operations and the short history of the out-of-home television advertising sector that make it difficult for you to evaluate the viability and prospects of our business;

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  •  competition from present and future competitors in China’s growing advertising market, particularly large multi-national advertisers that may now more readily compete in China;
 
  •  our limited ability to control and oversee the everyday business activities or regulatory compliance of our regional distributors; and
 
  •  the possibility that the PRC government could determine that our operating structure does not comply with PRC government restrictions on foreign investment in the advertising industry, which could potentially subject us to severe penalties.
       See “Risk Factors” and other information included in this prospectus for a discussion of these and other risks.
Our Corporate History and Structure
       We were incorporated on April 11, 2003 as an international business company formed under the laws of the British Virgin Islands, and changed our corporate domicile to the Cayman Islands on April 1, 2005. Our ADSs representing our ordinary shares have been quoted on the Nasdaq National Market Inc. since our initial public offering on July 13, 2005. Due to PRC government restrictions that apply to foreign investment in China’s advertising industry, our advertising business is currently conducted through contractual arrangements among us, our subsidiaries and our consolidated affiliated entities in China, principally Shanghai Focus Media Advertisement Co., Ltd, or Focus Media Advertisement, and its subsidiaries. Focus Media Advertisement, several of its subsidiaries and Shanghai New Focus Media Advertisement Co., Ltd., or New Focus Media Advertisement, our new indirect subsidiary, hold the requisite licenses to provide advertising services in China. These contractual arrangements enable us to:
  •  exercise effective control over Focus Media Advertisement and its subsidiaries;
 
  •  receive a substantial portion of the economic benefits from Focus Media Advertisement and its subsidiaries; and
 
  •  have an exclusive option to purchase all or part of the equity interests in Focus Media Advertisement and all or part of the equity interests in Focus Media Advertisement’s subsidiaries that are owned by Focus Media Advertisement or its nominee holders, as well as all or part of the assets of Focus Media Advertisement, in each case when and to the extent permitted by PRC law.
       See “Our Corporate Structure” and “Related Party Transactions” for further information on our contractual arrangements with these parties.
Recent Developments
       Initial Public Offering. On July 18, 2005, we completed our initial public offering, which involved the sale by us and some of our shareholders of 10,100,000 of our ADSs, representing 101,000,000 of our ordinary shares at an initial public offering price of $17.00 per ADS. On August 9, 2005, we and some of our shareholders sold an additional 1,515,000 ADSs representing 15,150,000 ordinary shares at the initial public offering price pursuant to the underwriters’ exercise of their over-allotment option.
       Recent Acquisitions. On August 15, 2005, we acquired Shenzhen Bianjie Commercial Location Advertising Company, or Bianjie, a local audiovisual advertising network operator in Shenzhen. Under the terms of the transaction, we acquired a 100% equity stake in the company and Bianjie also transferred all of its display placement agreements to us for a purchase price of RMB 3,800,000 ($456,485).

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       On November 20, 2005, we acquired our former regional distributor, Shenyang Focus Media Advertising Company, or Shenyang FM. At the time of the acquisition, Shenyang FM had a network of flat-panel displays deployed in approximately 150 office buildings, hotels and other commercial locations. Under the terms of the transaction, we acquired a 70% equity stake in Shenyang FM for a purchase price of RMB 4,000,000 ($494,515). Key management of Shenyang FM retained the remaining 30% share in the company and continue to run the day-to-day operations.
       On January 1, 2006, we acquired Infoachieve Limited, or Infoachieve, its subsidiary Shanghai Framedia Investment Consulting Co., Ltd., and its affiliated PRC entities including Shanghai Framedia Advertising Development Co., Ltd., Guangdong Shiji Shenghuo Advertisements Co., Ltd. and Shanghai New Structure Advertisement Co., Ltd. Under the terms of the transaction we acquired a 100% equity stake in Infoachieve from Total Team Investments Limited, the BVI entity through which Infoachieve’s shareholders held their respective interests in Infoachieve, for $39.6 million in cash and 22,157,003 of our ordinary shares, subject to an earnout payment and other adjustments. We refer to Infoachieve and its combined consolidated entities collectively as Framedia in this prospectus. Framedia owns and operates an out-of-home poster frame advertising network placed in residential complexes in China. Framedia installs and deploys advertising poster frames mainly inside elevators and public areas of residential complexes in major cities in China and sells advertising frame space to advertising clients. Details of Framedia’s corporate structure, business operations and our acquisition of Framedia are set forth in “Our Corporate Structure”, “Business — Our Advertising Network”, “Recent Developments — Our Recent Acquisition of Framedia” and “Related Party Transactions”.
       Focus Media entered into a share purchase agreement, which took effect on January 1, 2006, with Shenzhen E-Times Advertising Co., Ltd., or E-Times, and Skyvantage Group Limited, or Skyvantage, and the shareholders of E-Times and Skyvantage which operate a local out-of-home poster frame advertising network placed in commercial and residential buildings. Under the terms of the transaction, Focus Media will acquire 100% of the equity of Skyvantage and E-Times will transfer all of its poster frame assets and frame placement contracts to Focus Media for a purchase price of $5,000,000. We expect to complete our acquisition of E-Times and Skyvantage in the first quarter of 2006.
       On January 7, 2006, we entered into a definitive share purchase agreement to acquire the business of Target Media Holdings Limited, or Target Media Holdings, its subsidiary Target Media Multi-Media Technology (Shanghai) Co., Ltd., or Target Multi-Media, and its affiliated PRC entity Shanghai Target Media Co., Ltd., or Shanghai Target Media, by purchasing 100% of the equity interests of Target Media Holdings from its shareholders for $94 million in cash and 77 million of our ordinary shares, subject to a working capital adjustment. We refer to Target Media Holdings and its consolidated entities collectively as Target Media in this prospectus. We expect to complete our acquisition of Target Media in the first quarter of 2006. Target Media owns and operates a network of flat-panel displays placed in commercial buildings, hotels, banks, residential buildings, convenience stores and other locations similar to our commercial location network. Based on data provided to us by Target Media, we believe that, as of September 30, 2005, Target Media’s flat-panel display network consisted of approximately 25,100 flat-panel displays placed in approximately 16,650 locations in 43 cities in China, and that for the nine months ended September 30, 2005, Target Media recorded revenues of RMB 174.8 million ($21.6 million) and net income of RMB 32.6 million ($4.0 million). Information, including business, operations, financial condition and results of operations, relating to Target Media included in this prospectus has been provided to us by Target Media’s management and has not been prepared by us. Additionally, due to the commercially sensitive nature of our transaction with Target Media, we and our advisors have not had an opportunity to independently verify all of the information relating to Target Media included in this prospectus. See “Risk Factors — Risks Relating to our Recent Acquisitions”. Additional details of Target Media’s business, operations and our acquisition of Target Media are set forth in “Recent Developments — Our Proposed Acquisition of Target Media”.

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Selected Estimated Fourth Quarter 2005 Results
       The following is an estimate of our preliminary unaudited financial results for the three months ended December 31, 2005. Neither the review of our financial statements for the three months ended December 31, 2005 nor the audit as of and for the year ended December 31, 2005 has been completed, and therefore these results may be subject to adjustment. We expect:
  •  total revenues for the three months ended December 31, 2005 to be in the range from $22.0 million to $23.0 million, compared to total revenues of $11.8 million for the same period in 2004; and
 
  •  net income for the three months ended December 31, 2005 to be in the range from $8.7 million to $9.1 million, compared to a loss of $1.3 million for the same period in 2004.
       During the fourth quarter, we expect to experience seasonally greater demand for our commercial location network. These estimates also do not include results from our poster frame network, which was acquired in January 2006, nor do they reflect the effect of our future results if we complete our proposed acquisition of Target Media.
       Given the preliminary nature of our estimates, our actual total revenues and net income may be materially different from our current expectations. For additional information regarding the various risks and uncertainties inherent in such estimates, see “Forward-Looking Statements”.
Our Offices
       Our principal executive offices are located at 28-30/F, Zhao Feng World Trade Building, 369 Jiangsu Road, Shanghai 200050, China, and our telephone number is (86-21) 3212-4661. Our website address is http://www.focusmedia.cn. The information on our website does not form part of this prospectus.
Conventions That Apply To This Prospectus
       This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in New York, New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of September 30, 2005, which was RMB 8.0920 to $1.00. We make no representation that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. On January 26, 2006, the noon buying rate was RMB 8.0620 to $1.00.
       Unless we indicate otherwise, all information in this prospectus reflects the following:
  •  no exercise by the underwriters of their option to purchase up to 627,560 additional ADSs representing 6,275,600 ordinary shares;
 
  •  all share splits, so that share number, per share price and par value data is presented as if the share splits had occurred from our inception; and
 
  •  none of our outstanding options as of December 31, 2005 have been exercised.

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The Offering
       The following assumes that the underwriters do not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.
Offering price $43.50 per ADS
 
ADSs offered by Focus Media 1,500,000 ADSs
 
ADSs offered by the selling shareholders 5,287,829 ADSs
 
ADSs outstanding after this
offering
18,402,829 ADSs
 
Ordinary shares outstanding after this offering 415,463,003 ordinary shares
 
ADS to ordinary share ratio 1:10
 
Nasdaq National Market symbol “FMCN”
 
The ADSs Each ADS represents ten ordinary shares, par value $0.00005 per share. The ADSs will be evidenced by American depositary receipts, or ADRs. The depositary will be the holder of the ordinary shares underlying your ADSs and you will have rights as provided in the deposit agreement. Although we do not expect to pay dividends in the foreseeable future, in the event we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after converting the funds received into U.S. dollars and deducting its fees and expenses. You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you fees for exchanges. We may amend or terminate the deposit agreement without your consent, and if you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. You should carefully read the section in this prospectus entitled “Description of American Depositary Shares” to better understand the terms of our ADSs. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
 
Lock-up Agreements We, the selling shareholders and our directors and executive officers have agreed with the underwriters that we will not, without the prior consent of Goldman Sachs (Asia) L.L.C. and Credit Suisse Securities (USA) LLC, for a period of 90 days following the date of this prospectus: (1) offer, sell, contract to sell, pledge, grant any option to purchase, make any share sale or otherwise dispose of any of the ADSs or our ordinary shares or any securities that are convertible into or exercisable or exchangeable for the ADSs or our ordinary shares; or (2) enter into any swap or other agreement that transfers to any other entity, in whole or in part, any of the economic consequences of ownership of our ADSs or ordinary shares. The restrictions above do not apply to the

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ADSs to be sold in this offering and the ordinary shares underlying such ADSs. See “Shares Eligible for Future Sale”.
 
Depositary Citibank, N.A.
 
Option to purchase additional
ADSs
The selling shareholders have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional 627,560 ADSs.
 
Timing and settlement for ADSs The ADSs are expected to be delivered against payment on January 31, 2006. The ADRs evidencing the ADSs will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York, New York. In general, beneficial interests in the ADSs will be shown on, and transfers of these beneficial interests will be effected only through, records maintained by DTC and its direct and indirect participants.
 
Use of proceeds Our net proceeds from this offering are expected to be approximately $60.6 million. We anticipate using approximately $40.0 million of the net proceeds of this offering to fund a portion of the cash consideration in connection with the acquisitions we made prior to the date of this offering. We may use any remaining amounts for our future strategic acquisitions, expansion of our advertising network and general corporate purposes. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before deciding to invest in our ADSs.

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
       The following summary consolidated financial information has been derived from our consolidated financial statements. Our consolidated financial statements are prepared by including the financial statements of Focus Media Advertisement, formerly Aiqi Advertising, through May 2003 and our consolidated financial statements, which include the consolidation of Focus Media Advertisement and Shanghai Perfect Media as variable interest entities, thereafter, and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our statements of operations for 2002, 2003 and 2004 and our balance sheets as of December 31, 2002, 2003 and 2004 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 prospectus. Our statement of operations for each of the nine months ended September 30, 2004 and 2005 and balance sheet data as of September 30, 2004 and 2005 has been derived from our unaudited consolidated financial data which has been included elsewhere in this prospectus.
       Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period. The summary consolidated financial information for the periods and as of the dates indicated should be read in conjunction with those statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
       Prior to May 2003, we were an advertising agency, the operations and services of which differ markedly from our current business. As an advertising agency, we assisted media companies in selling their advertising time or space to companies seeking to advertise in exchange for a commission. In May 2003, we ceased acting as an advertising agency and commenced our current business as an operator of an out-of-home advertising network, consisting first of our commercial location network. 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.

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        For the nine months
    For the year ended December 31,   ended September 30,
         
    2002   2003   2004   2004   2005
                     
    (in thousands of U.S. dollars, except share data)
Consolidated Statements of Operations Data:
                                       
Revenues:
                                       
 
Advertising services revenue(1)
  $ 24     $ 3,369     $ 26,321     $ 15,238     $ 42,852  
 
Advertising equipment revenue
          389       2,889       2,206       772  
                               
   
Total revenues
    24       3,758       29,210       17,444       43,624  
                               
Cost of revenues:
                                       
 
Net advertising service cost
          1,566       6,823       4,080       16,479  
 
Net advertising equipment cost
          275       1,934       1,694       544  
                               
   
Total cost of revenues
          1,841       8,757       5,774       17,023  
                               
Gross profit
    24       1,917       20,453       11,670       26,601  
Total operating expenses
    24       1,392       7,500       3,937       12,713  
                               
Income from operations
          525       12,953       7,733       13,888  
Interest income
          1       10       5       822  
Other income (expense) — net
          (9 )     (4 )     (3 )     10  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                (11,692 )     (3,166 )      
                               
Income before income taxes and minority interest
          517       1,267       4,569       14,720  
Total income taxes
          482       908       2,830       491  
                               
Minority interest
          8       13       (41 )     (107 )
Equity loss of affiliates
          (18 )                  
                               
Net income
          25       372       1,698       14,122  
Earnings per share data:
                                       
Deemed dividend on Series A convertible redeemable preference shares(2)
                (8,308 )     (8,308 )      
Deemed dividend on Series B convertible redeemable preference shares(2)
                (2,191 )     (2,191 )      
Deemed dividend on Series C-1 convertible redeemable preference shares(2)
                (13,356 )                
Premium of Series B convertible redeemable preference shares
                12,906              
Income (loss) attributable to holders of ordinary shares
  $     $ 25     $ (10,577 )   $ (8,801 )   $ 14,122  
                               
Income (loss) per share — basic
  $     $ 0.00     $ (0.07 )   $ (0.06 )   $ 0.07  
                               
Income (loss) per share — diluted
  $     $ 0.00     $ (0.07 )   $ (0.06 )   $ 0.06  
Shares used in calculating basic income per ADR
          144,657,600       160,998,600       138,027,670       210,377,820  
Shares used in calculating diluted income per ADR
          144,657,600       160,998,600       138,027,670       238,206,610  
                                 
        As of
    As of December 31,   September 30,
         
    2002   2003   2004   2005
                 
    (in thousands of U.S. dollars)
Consolidated Balance Sheet Data:
                               
Cash and cash equivalents
  $ 15     $ 716     $ 22,669       83,974  
Other current assets(4)
    106       1,902       12,713       60,589  
Non-current assets(5)
    8       2,688       21,033       57,174  
Total assets
    129       5,306       56,415       201,737  
Total current liabilities
    7       4,119       8,634       19,666  
Minority interest
          4       81       193  
Mezzanine equity
                53,273        
Total shareholders’ equity (deficiency)
  $ 122     $ 1,183     $ (5,573 )   $ 181,878  

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    As of   As of
    December 31,   September 30,
         
    2003   2004   2005
             
Selected Operating Data:
                       
Number of displays in our commercial location network:
                       
 
Our direct cities
    827       12,786       34,079  
 
Our regional distributors(6)
    201       2,629       3,273  
   
Total
    1,028       15,415       37,352  
Number of displays in our in-store network(7)
                20,061  
Number of stores in our in-store network
                2,702  
                                 
    For the three months ended
     
    December 31,   September 30,
         
    2003   2004   2004   2005
                 
Commercial Location Network:
                               
Number of time slots available for sale(8)
    1,299       5,170       3,542       8,348  
Number of time slots sold(9)
    292       2,209       1,280       4,240  
Utilization rate for commercial location network(10)
    22.5 %     42.7 %     36.1 %     50.8 %
Average quarterly advertising service revenue per time slot sold (US$)
  $ 8,177     $ 5,018     $ 5,506     $ 4,077  
 
(1)  Advertising service revenue is presented net of business tax, which amounted to $1,405, $311,770, $2,788,233, $1,559,989 and $4,346,367 in 2002, 2003 and 2004 and for the nine months ended September 30, 2004 and 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0% of our gross advertising service revenue.
 
(2)  We are no longer required to record deemed dividends prospectively following conversion at the closing of our initial public offering of our Series A, Series B, Series C-1 and Series C-2 convertible redeemable preference shares into ordinary shares.
 
(3)  Each ADS represents ten of our ordinary shares.
 
(4)  Other current assets is equal to total current assets less cash and cash equivalents.
 
(5)  Non-current assets is equal to total assets less total current assets.
 
(6)  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.
 
(7)  We commenced operation of our in-store network in April 2005.
 
(8)  Includes the time slots for our directly operated cities and the time slots we are entitled to sell on the portion of our network operated by our regional distributors. Number of time slots available refers to the number of 30-second equivalent time slots available on our network during the period presented and is calculated by taking the total advertising time available on our network during the period presented, calculated in aggregate seconds, which we then divide by 30 to determine the number of 30-second equivalent time slots available. The number of advertising time slots available for sale is determined by the number of cities in which we directly operate, the two-ninths portion of time slots on our regional distributors’ networks which we have the right to sell and the length of the advertising cycle, which is currently twelve minutes in all of our directly operated cities.
 
(9)  Number of time slots sold refers to the number of 30-second equivalent time slots sold during the period presented and is calculated by taking the total advertising time we sold during the period presented, calculated in aggregate seconds, which we then divide by 30 to determine the number of 30-second equivalent time slots sold.
(10)  Utilization rate refers to total time slots sold as a percentage of total time slots available during the relevant period.

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Consolidated Pro Forma Financial Data of
Focus Media, Framedia, Target Media Holdings and Other Acquired Entities
       The following unaudited pro forma condensed consolidated financial information is derived from the historical financial statements of Focus Media Holding Limited, appearing elsewhere in this prospectus, after giving effects to the pro forma adjustments described in the notes to such pro forma financial statements. Financial information with respect to the acquisitions are derived from the historical financial statements of Perfect Media Holding Limited, or Perfect Media, Focus Media Changsha Holding Limited or Focus Media Changsha, Focus Media Qingdao Holding Limited, or Focus Media Qingdao, Focus Media Dalian Holding Limited, or Focus Media Dalian, Capital Beyond Limited, or Capital Beyond, Infoachieve Limited, or Framedia, and Target Media Holdings Limited or Target Media, appearing elsewhere in this prospectus.
       The preparation of the unaudited pro forma condensed consolidated balance sheet and statements of operations appearing below is based on financial statements prepared in accordance with U.S. GAAP. These principles require the use of estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. The objective of the unaudited pro forma condensed consolidated balance sheet and statements of operations is to provide information on the impact of the acquisitions of Perfect Media, Focus Media Changsha, Focus Media Qingdao, Focus Media Dalian, Capital Beyond, Framedia and Target Media. We refer to these businesses collectively as the acquired businesses.
       The unaudited pro forma condensed consolidated balance sheet as of September 30, 2005 assumes that the acquisition of Framedia and Target Media occurred on September 30, 2005 and reflects the historical consolidated balance sheet of Focus Media Holding Limited giving pro forma effect to the acquisitions of the acquired businesses using the purchase method of accounting.
       The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2004 presents adjustments as if the acquisitions of the acquired businesses had been consummated on January 1, 2004. The unaudited pro forma condensed consolidated statement of operations for the nine months ended September 30, 2005 presents adjustments as if the acquisitions of Capital Beyond, Framedia and Target Media had been consummated on January 1, 2005.
       The following unaudited pro forma condensed consolidated balance sheet and statements of operations should be read in conjunction with the historical consolidated financial statements, unaudited pro forma condensed consolidated balance sheet and statements of operations and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
       While the unaudited pro forma condensed consolidated financial information is helpful in showing the financial characteristics of the consolidated companies, it is not intended to show how the consolidated companies would have actually performed if the events described above had in fact occurred on the dates assumed or to project the results of operations or financial position for any future date or period. We have included in the unaudited pro forma condensed consolidated statement of operations all the adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the operating results in the historical periods. However, because such adjustments are based on estimates such as the preliminary purchase price allocation and the estimated amortization period for the acquired intangible assets for Framedia and Target Media, the actual consolidated balance sheet and results of operations may differ significantly from the pro forma amounts reflected below.
       Information, including business, operations, financial condition and results of operations relating to Target Media included in this prospectus has been provided to us by Target Media’s management and has not been prepared by us. Additionally, due to the commercially sensitive nature of our transaction with Target Media, we and our advisors have not had an opportunity to independently verify all the information relating to Target Media included in this prospectus. See “Risk Factors — Risks Relating to our Recent Acquisitions”.

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    Focus Media                    
    Holding   Framedia   Target Media            
    September 30,   September 30,   September 30,   Pro forma        
    2005(1)   2005   2005(2)   Adjustments   Notes   Pro forma
                         
    (in thousands of U.S. dollars)
Unaudited Pro Forma Condensed Consolidated Balance Sheet
                                               
Current assets:
                                               
 
Cash and cash equivalents
  $ 83,974     $ 1,460     $ 11,171     $ (24,600 )     (4)(5)(9)     $ 72,005  
 
Time deposits
                1,517                     1,517  
 
Investment in available-for-sale securities
    34,951                                 34,951  
 
Accounts receivable, net
    20,307       3,161       12,814                     36,282  
 
Inventory
    371       9                           380  
 
Prepaid expenses and other current assets
    3,716       1,185       5,863                     10,764  
 
Deferred tax assets-current
                14       (14 )     (12)        
 
Amounts due from related parties
    1,244             2,682                     3,926  
                                     
 
Total current assets
    144,563       5,815       34,061       (24,614 )             159,825  
Rental deposits
    9,294             249                     9,543  
Property and equipment, net
    32,910       878       18,830                     52,618  
Acquired intangible assets, net
    1,232       780       146       59,812       (4)(5)       61,970  
Goodwill
    12,823       12,704             290,153       (4)(5)       315,680  
Deferred tax assets
    915                                 915  
                                     
   
Total assets
  $ 201,737     $ 20,177     $ 53,286       325,352             $ 600,551  
                                     
 
Liabilities and shareholders’ equity
Current liabilities:
                                               
 
Short-term bank loan
  $ 3,089     $     $                   $ 3,089  
 
Accounts and bills payable
    4,787       703       8,182                     13,672  
 
Accrued expenses and other current liabilities
    9,598       5,958       4,361       49,000       (5)       68,917  
 
Amounts due to related parties
          1,738       4                     1,742  
 
Short-term loans from shareholders
          3,049                           3,049  
 
Income taxes payable
    2,192             55                     2,247  
                                     
 
Total current liabilities
    19,666       11,448       12,602       49,000               92,716  
                                     
Minority interest
    193                                 193  
 
Mezzanine equity
                                               
Series A-1 convertible redeemable preference shares
          1,484             (1,484 )     (8)        
Series A-2 convertible redeemable preference shares
          814             (814 )     (8)        
Series A convertible redeemable preferred shares
                18,537       (18,537 )     (8)        
Series B convertible redeemable preferred shares
                15,365       (15,365 )     (8)        
 
Shareholders equity
                                               
Ordinary shares
    19       12       11       (18 )     (4)(5)(8)(9)       24  
Additional paid-in capital
    178,027       25,079       7,244       292,817       (4)(5)(8)(9)       503,167  
Deferred share based compensation
    (814 )                               (814 )
Statutory reserves
                619                     619  
Retained earnings (accumulated deficit)
    3,572       (18,567 )     (1,092 )     19,659       (4)(5)       3,572  
Accumulated other comprehensive income (loss)
    1,074       (93 )           93       (4)       1,074  
                                     
Total shareholders’ equity
    181,878       6,431       6,782       312,551               507,642  
                                     
Total liabilities and shareholders’
equity
  $ 201,737     $ 20,177     $ 53,286       325,351             $ 600,551  
                                     

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    Focus Media                        
    Holding for       Framedia for   Target Media            
    the year       the year   for the year            
    ended   Certain   ended   ended            
    December 31,   Former   December 31,   December 31,   Pro forma        
    2004(1)   Subsidiaries(3)   2004   2004(2)   Adjustments   Notes(12)   Pro forma
                             
    (in thousands of U.S. dollars, except share numbers and per share data)
Unaudited Pro Forma Condensed Consolidated Statement of Operation
                                                       
Revenues:
                                                       
 
Advertising service revenue:
                                                       
   
— Unrelated parties
  $ 22,896     $ 425     $ 4,324     $ 9,723                   $ 37,368  
   
— Related parties
    3,425                                         3,425  
 
Advertising equipment revenue
    2,889                                         2,889  
                                           
 
Total revenues
    29,210       425       4,324       9,723                     43,682  
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
    6,823       719       3,337       3,915       8,836       (6)(10)       23,630  
 
Net advertising equipment cost
    1,934                                       1,934  
                                           
 
Total cost of revenues
    8,757       719       3,337       3,915       8,836               25,564  
                                           
Gross profit
    20,453       (294 )     987       5,808       (8,836 )             18,118  
                                           
Operating expenses:
                                                       
 
General and administrative (including share-based compensation of $488,711)
    4,015       366       543       646       (202 )     (10)       5,368  
 
Selling and marketing
    3,426       111       822       1,971                     6,330  
 
Goodwill impairment loss
    59                                       59  
                                           
 
Total operating expenses
    7,500       477       1,365       2,617       (202 )             11,757  
                                           
Income from operations
    12,953       (771 )     (378 )     3,191       (8,634 )             6,361  
 
Net interest income (expense)
    10             (253 )     (34 )                   (277 )
 
Other income (expense), net
    (4 )           37       (3 )                   30  
  Change in fair value of derivative liability associated with Series B convertible redeemable preference shares     (11,692 )                                     (11,692 )
                                           
Income (loss) before income taxes and minority interest
    1,267       (771 )     (594 )     3,154       (8,634 )             (5,578 )
Income taxes:
                                                       
 
Current
    829       4       4       53                     890  
 
Deferred
    79                   (13 )                   66  
                                           
 
Total income taxes
    908       4       4       40                     956  
                                           
Net income (loss) after income taxes before minority interest and equity income
    359       (775 )     (598 )     3,114       (8,634 )             (6,534 )
                                           
Minority interest
    13                                       13  
                                           
Net income (loss)
    372       (775 )     (598 )     3,114       (8,634 )             (6,521 )
                                           
Accretion to Series A redeemable convertible preferred shares redemption value
                      (1,047 )     1,047       (8)        
Deemed dividend on Series A convertible redeemable preference shares
    (8,308 )                                     (8,308 )
Deemed dividend on Series B convertible redeemable preference shares
    (2,191 )                                     (2,191 )
Deemed dividend on Series C-1 convertible redeemable preference shares
    (13,356 )                                     (13,356 )
Premium of Series B convertible redeemable preference shares
    12,906                                       12,906  
                                           
Loss attributable to holders of ordinary shares
  $ (10,577 )   $ (775 )   $ (598 )   $ 2,067     $ (7,587 )           $ (17,470 )
                                           
Loss per share - basic and diluted
  $ (0.07 )                                         $ (0.07 )
                                           
Shares used in calculating basic and diluted loss per share
    160,998,600                                             270,751,317  
                                           

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    Focus Media                        
    Holding for   Capital Beyond   Framedia for   Target Media            
    the nine   for the three   the nine   for the nine            
    months ended   months ended   months ended   months ended            
    September 30,   March 31,   September 30,   September 30,   Pro forma        
    2005(1)   2005   2005   2005(2)   Adjustment   Notes(12)   Pro forma
                             
    (in thousands of U.S. dollars, except share numbers and per share data)
Unaudited Pro Forma Condensed Consolidated Statement Of Operation
                                                       
Revenues:
                                                       
Advertising service revenue:
                                                       
 
— Unrelated parties
  $ 39,337     $     $ 7,021     $ 21,599                   $ 67,957  
 
— Related parties
    3,515                                       3,515  
Advertising equipment revenue
    772                                       772  
                                           
Total revenues
    43,624             7,021       21,599                     72,244  
                                           
Cost of revenues
                                                       
 
Net advertising service cost
    16,479       122       3,619       10,234       6,428       (7)(10)       36,882  
 
Net advertising equipment cost
    544                                       544  
                                           
Total cost of revenues
    17,023       122       3,619       10,234       6,428               37,426  
                                           
Gross profit
    26,601       (122 )     3,402       11,365       (6,428 )             34,818  
                                           
Operating expenses:
                                                       
 
General and administrative (including share-based compensation of $646,400)
    6,578       1       2,437       1,377       (125 )     (10)       10,268  
 
Selling and marketing
    6,135             1,872       5,919                     13,926  
                                           
 
Total operating expenses
    12,713       1       4,309       7,296       (125 )             24,194  
                                           
Income loss from operations
    13,888       (123 )     (907 )     4,069       (6,303 )             10,624  
 
Net interest income (expense)
    822             (116 )     32                     738  
 
Other income (expense), net
    10             79       (76 )                   13  
Income (loss) before income taxes and minority interest
    14,720       (123 )     (944 )     4,025       (6,303 )             11,375  
Income tax expense
                                                       
 
Current
    759             1                           760  
 
Deferred
    (268 )                                     (268 )
                                           
Total income taxes
    491             1                           492  
                                           
Net income (loss) after income taxes before minority interest
    14,229       (123 )     (945 )     4,025       (6,303 )             10,883  
Minority interest
    (107 )                                     (107 )
                                           
Net income (loss)
    14,122       (123 )     (945 )     4,025       (6,303 )             10,776  
                                           
Deemed dividend — ordinary share
                (15,187 )                         (15,187 )
Deemed dividend — Series A-1 convertible redeemable preference shares — Redesignation
                (1,137 )           1,137       (8)        
Deemed dividend — Series A-1 convertible redeemable preference shares — Accretion of redemption premium
                (345 )           345       (8)        
Deemed dividend — Series A-2 convertible redeemable preference share — Redesignation
                (624 )           624       (8)        
Deemed dividend — Series A-2 convertible redeemable preference shares — Accretion of redemption premium
                (189 )           189       (8)        
Accretion to Series A redeemable convertible preferred shares redemption value
                      (2,351 )     2,351       (8)        
Accretion to Series B redeemable convertible preferred shares redemption value
                      (389 )     389       (8)        
Beneficial conversion of Series A redeemable convertible preferred shares
                      (3,013 )                   (3,013 )
Beneficial conversion of Series B redeemable convertible preferred shares
                      (804 )                   (804 )
Income (Loss) attributable to holders of ordinary shares
  $ 14,122     $ (123 )   $ (18,427 )   $ (2,532 )   $ (1,268 )           $ (8,228 )
                                           
Income per share — basic
  $ 0.07                                             $ (0.03 )
                                           
Shares used in calculating basic income per share
    210,377,820                                       (11)     $ 309,534,822  
                                           
Income per share — diluted
  $ 0.06                                             $ (0.03 )
                                           
Shares used in calculating diluted income per share
    238,206,610                                       (11)       309,534,822  
                                           
 
(1) Excludes the Framedia and Target Media acquisitions as they occurred after September 30, 2005.
 
(2) Translations of amounts from Renminbi into United States dollars are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB8.0920, on September 30, 2005, representing the noon buying rate in the City of New York for cable transfers of RMB, as certified for customs purposes by the Federal Reserve Bank of New York. No representation is intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2004, or at any other rate.
 
(3) Presents the condensed consolidated statements of operation of: Perfect Media for the nine months ended September 30, 2005, Focus Media Changsha for the period from March 11, 2004, which was its date of inception, to October 31, 2004, Focus Media Qingdao for the period from March 22, 2004, which was its date of inception to October 31, 2004, Focus Media Dalian for the period from March 24, 2004, which was its date of inception, to October 31, 2004, and Capital Beyond for the year ended December 31, 2004.

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(4) Reflects the estimated purchase price allocation of the net assets acquired from Framedia. The allocation of the purchase price was based on a preliminary internal study and discussions with our independent third party valuation firm and is subject to refinement regarding the intangible assets acquired.
  The aggregate purchase price of $99.8 million is comprised of the following:
         
    (in thousands
    of U.S. dollars)
     
Cash consideration
  $ 39,600  
Fair Value of ordinary shares issued
    59,248  
       
    $ 98,848  
       
  The fair value of ordinary shares, issued for pro forma purchase price allocation purposes was determined using the quoted market price as of September 30, 2005, which assumes the transaction was consummated on this date. Upon recording of this transaction for accounting purposes the market price for a reasonable period before and after the acquisition date, which was October 15, 2005, will be used. Because of the change in the trading price of the ordinary shares since September 30, 2005, the actual value of the ordinary shares to be issued may differ substantially, with the effect that purchase price allocation may differ substantially from these amounts and the effect that acquired intangible assets and goodwill will be higher or lower than the fair value calculated according to September 30, 2005 share price.
 
  Estimated purchase price allocation:
                 
    (in thousands   Amortization
    of U.S. dollars)   period
         
Net tangible assets acquired
  $ 8,729        
Acquired intangible assets
    14,827       7 years  
Goodwill
    75,292        
             
Total
  $ 98,848          
             
  The intangible assets include licenses, customer base and employee contracts.
 
  Upon obtaining the final valuation report from our independent third party valuation firm the preliminary purchase price allocation and the amortization period for the acquired intangible assets may materially be modified. For example if the purchase price allocation relating to intangible assets were to increase by approximately 15% the amortization expense for the nine months ended September 30, 2005 would increase by approximately $214,000 and for the year ended December 31, 2005 would increase by $285,000.
 
  The total consideration to be paid is determined to be a maximum of $183.0 million which is comprised of $39.6 million cash payment, 22,157,003 ordinary shares. The remaining shares to be issued up to a maximum of 35,830,619 will be issued based on an earnout provision of Infoachieve achieves net earnings in 2006 of more than $8.0 million. The number of shares that have been issued and those pursuant to the earnout provision were calculated on a per share price of $2.456 which was the average trading price of our ADSs for the ten days prior to the signing of the share purchase agreement divided by ten to derive a price per share.
(5) Reflects the estimated purchase price allocation of the net assets acquired from Target Media. The allocation of the purchase price was based on a preliminary internal study and discussions with our independent third party valuation firm and is subject to refinement regarding the intangible assets acquired.
  The aggregate purchase price of $300.0 million is comprised of the following:
         
    (in thousands
    of U.S. dollars)
     
Cash consideration
  $ 45,000  
Other payables
    49,000  
Fair Value of ordinary shares issued
    205,898  
       
    $ 299,898  
       
  The cash portion of the purchase price will be paid in three installments. The first installment of $45 million is to be paid at closing. The second installment of $25 million is to be paid on April 28, 2006. The final installment of $24 million is to be paid on July 31, 2006.
 
  The fair value of the ordinary shares issued for purchase price allocation purposes was determined using the quoted market price as of September 30, 2005 assuming the transaction was consummated on this date. Upon recording of this transaction for accounting purposes the market price for a reasonable period before and after the acquisition date, which is January 7, 2006, will be used. Because of the increase in trading price of the ordinary shares since September 30, 2005, the actual value of the ordinary shares to be issued may be substantially higher, with the effect that purchase price allocation may differ substantially from these amounts and the effect that acquired intangible assets and goodwill will be higher than the fair value calculated according to September 30, 2005 share price.
 
  Estimated purchase price allocation:
                 
    (in thousands   Amortization
    of U.S. dollars)   period
         
Net tangible assets acquired
  $ 40,051        
Acquired intangible assets
    44,985       7 years  
Goodwill
    214,862          
             
Total
  $ 299,898          
             
  The intangible assets include licenses, customer base and employee contracts.
 
  Upon obtaining the final valuation report from our independent third party valuation firm the preliminary purchase price allocation and the amortization period for the acquired intangible assets may be materially modified. For example of the purchase price allocation relating to intangible assets were to increase by approximately 15% the amortization expense for the nine months ended September 30, 2005 would be approximately $722,000 and for the year ending December 31, 2005 would increase by $963,000.
(6) Reflects amortization for the acquired intangible assets recorded as a result of our acquisitions of Perfect Media in September 2004, Focus Media Changsha, Focus Media Qingdao, Focus Media Dalian in October 2004, Capital Beyond in March 2005, Framedia in January 2006 and Target Media in the first quarter of 2006 to reflect amortization for the year ended December 31, 2004. The amortization expense has been classified as part of cost of revenues.

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  The amortization expense for Framedia and Target Media of $2.1 million and $6.4 million, respectively, for the year ended December 31, 2004 have been calculated based on a preliminary purchase price allocation and may change materially once the independent third party valuation report is obtained.
(7) Reflects amortization for the intangible assets recorded as a result of our acquisition of Capital Beyond in March 2005, Framedia in January 2006 and Target Media in February 2006 to reflect amortization for the period ended September 30, 2005. The amortization expense has been classified as part of cost of revenues.
  The amortization expense for Framedia and Target Media of $1.6 million and $4.8 million, respectively, for the period ended September 30, 2005 have been calculated based on a preliminary purchase price allocation and may change materially once the independent third party valuation report is obtained.
(8) Assumes the conversion upon completion of the acquisitions of all convertible redeemable convertible preference shares of Framedia and Target Media. Accordingly, the deemed dividends and redemption value accretion relating to these shares have been reversed.
 
(9) Gives effect to the issuance and sale of 15,000,000 ordinary shares for total expected proceeds of $60.0 million.
 
(10) Reflects the adjustment relating to the conformity in accounting policy of Target Media for employee stock options from FAS 123(R) to APB 25 which is the accounting policy we have adopted.
 
(11) The following table sets forth the shares used in computing pro forma per share amounts for the periods indicated:
                 
    December 31,   September 30,
    2004   2005
         
Shares used in calculating basic and diluted income (loss) per share on a pro forma basis:
               
Weighted average ordinary shares outstanding used in computing basic income (loss) per share for Focus Media Holding
    160,998,600       210,377,820  
Issuance of ordinary shares for the acquisition of Framedia
    22,157,003       22,157,003  
Issuance of ordinary shares for the acquisition of Target Media
    77,000,000       77,000,000  
Issuance of ordinary shares for the acquisition of Perfect Media
    14,594,200        
Weighted average ordinary shares for the acquisition of Perfect Media used in computing basic income (loss) per Focus Media Holding Limited
    (3,998,486 )      
             
      270,751,317       309,534,823  
             
(12) There have been no pro forma tax adjustments recorded because our effective tax rate is approximately 0%.

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RISK FACTORS
       You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.
Risks Relating to Our Recent Acquisitions
During our due diligence investigation of Target Media, we were given and continue to have only limited access to commercially sensitive information, and there may be liabilities associated with Target Media of which we are not aware, the effects of which could materially and adversely affect our business, reputation, results of operations and financial condition.
       We and Target Media operate in a similar line of business and, until the completion of our acquisition of Target Media, we and Target Media will remain competitors in the out-of-home advertising sector. Accordingly, because of the sensitive nature of the transaction, particularly if the transaction is not completed, we agreed not to have access to contracts and other documents containing commercially sensitive information of Target Media, including their display placement agreements, advertising agreements, customer contracts, supply contracts, acquisition agreements and other contracts, prior to the completion of the acquisition. Moreover, under the terms of the definitive share purchase agreement, other than a customary covenant by Target Media not to engage in specified business activities, we have agreed not to interfere with Target Media’s operation of its business until the completion of the acquisition. As such, our ability to collect additional information about Target Media remains limited until we gain actual control over its operations after the completion of the acquisition. Accordingly, there may be undisclosed liabilities related to these documents for which we may not be indemnified. Moreover, because of the foregoing concerns, we have not had an opportunity to independently verify all of the information relating to Target Media included in this prospectus, including information relating to Target Media’s business, operations, financial condition and results of operations. For example, once we obtain access to Target Media’s books and records, we may discover internal or disclosure control deficiencies, accounting or financial irregularities or weaknesses, or other material problems that may result in material liability or loss to us. Any such liability or loss could materially and adversely affect our business reputation, results of operations and financial condition.
       Target Media shareholders that hold an approximately 49.7% equity interest in Target Media have agreed to indemnify us for losses resulting from undisclosed contracts, other than losses resulting from the ordinary course of business. Those obligations are subject to minimum thresholds and maximum caps. See “Recent Developments — Our Proposed Acquisition of Target Media”. In addition, our ability to successfully assert and enforce indemnification claims against Target Media’s selling shareholders could be costly and time-consuming or may not be successful at all, and we may be required to seek enforcement of those rights in the PRC. See “— Risks Relating to the People’s Republic of China — The PRC legal system embodies uncertainties which could limit legal protections available to you and us”.
If our pending acquisition of Target Media is challenged by the PRC government on antitrust grounds, we may be required to stop or unwind the transaction or undergo a restructuring, which would have a material adverse effect on our business, reputation and results of operations.
       Both we and Target Media operate primarily within one sector of China’s overall advertising industry, out-of-home advertising in urban areas of China. In addition, we and Target Media operate similar networks consisting largely of flat-panel television displays placed in lobbies and near elevators of commercial buildings. Although our networks and Target Media’s network account for a

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small portion of the out-of-home advertising sector in China and an even smaller portion of the overall advertising industry in China, we believe that by acquiring Target Media we will have a substantial share of the out-of-home flat-panel display advertising market in commercial buildings in cities in China. Under current PRC laws and regulations, there are circumstances and events that trigger antitrust review by the Ministry of Commerce of the PRC, or Mofcom, or the State Administration for Industry and Commerce of the PRC, or SAIC, but there is no regulatory guidance on how parties are to properly define markets and no implementing regulations have been promulgated to determine what measures are to be taken by the government in the event that an antitrust review is conducted. Among the circumstances and events that may trigger antitrust review are transactions involving participants with significant market share in a common industry. For example, if any party in an acquisition transaction has a 20% or higher market share in a particular industry, or the surviving entity will have a 25% or higher market share in that industry following a merger or acquisition, antitrust related filings and registration are required. There are no specific rules or official guidance on how parties are to define or determine “market share” under PRC laws and regulations. Based on our understanding of PRC law and the legal advice of PRC counsel in connection with our acquisition of Target Media, we do not believe that an antitrust filing with and review by the relevant PRC authorities is required in connection with our acquisition of Target Media and we have not sought to make any such filing. We cannot assure you that our understanding will not be challenged by the PRC authorities and that the acquisition of Target Media will not be determined to trigger PRC antitrust review. In the event that the acquisition is found to violate PRC antitrust laws and regulations, we may be prohibited from completing the acquisition, required to undo the acquisition or to undergo a restructuring to comply with PRC antitrust laws and regulations, which would have a material adverse effect on our business, reputation and results of operations.
We may be liable for significant damages and a break-up fee if we breach any of the representations or warranties set forth in our definitive share purchase agreement with Target Media, payment of which could have a materially adverse effect on our financial condition and results of operation.
       Under the terms of the definitive share purchase agreement we have entered into with Target Media, if we violate any of the representations or warranties we made in the agreement, we are liable to indemnify the shareholders of Target Media for any resulting damages they suffer in excess of $500,000 up to a maximum of $39,000,000 or, in the case of representations and warranties we made with regard to our organization, authorization of the acquisition and the validity of the shares issued to them, to a maximum of the value of the shares issued to them. In addition, if the agreement is terminated as a result of our breach of the representations and warranties and the breach would prevent the acquisition from being completed, we will be required to pay a break-up fee to Target Media of $20,000,000 or, if we pursue an acquisition of Tulip Media (International) Limited or its subsidiaries and affiliates, which operates an out-of-home LED advertising business in Shanghai, a penalty of $50,000,000, in each case, in addition to our agreement to reimburse Target Media for expenses up to $2 million. Any indemnity payments, break-up fee or other penalties we may be required to pay to Target Media or its shareholders pursuant to the agreement would have a material adverse effect on our financial condition and results of operation. See “Recent Developments — Our Proposed Acquisition of Target Media — Share Purchase Agreement — Fees, Deposit and Break-up Fee”.
Our acquisition of Framedia and pending acquisition of Target Media and any future acquisitions may expose us to potential risks and have an adverse effect on our ability to manage our business.
       Selective acquisitions, such as our recent acquisition of Framedia and Target Media, form part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire additional businesses, services or products that are complementary to our core business. Our integration of the acquired entities into our business may not be successful and may

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not enable us to expand into new advertising platforms as well as we expect. This would significantly affect the expected benefits of these acquisitions. Moreover, the integration of Framedia into our operations and the negotiations for our acquisition of Target Media have required significant attention from our management. Future acquisitions, including that of Target Media, will also likely present similar challenges.
       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. Recent or pending acquisitions, including those of Framedia and Target Media, 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 be sure that we will be able to realize the benefits we anticipate from acquiring Framedia, Target Media and other 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 our acquisition of Framedia.
       Although we have conducted due diligence with respect to Framedia, we may not be aware of all of the risks associated with Framedia. For example, we may not be aware of all of the existing disputes or potential disputes against Framedia. Any discovery of adverse information concerning Framedia since we acquired it could have a material adverse effect on our business, financial condition and results of operations. While we are entitled to seek indemnification from former shareholders of Framedia, successfully asserting indemnification against them or enforcing such indemnification could be costly and time-consuming or may not be successful at all.
Historical deficiencies in Framedia’s compliance with relevant corporate law requirements could result in fines, revocation of its business license or the invalidation of agreements to which it is a party.
       Our acquisition of Framedia may expose us to other risks. For example, Framedia Investment was not able to satisfy its capitalization requirement within the statutorily prescribed time-frame, which could trigger the invalidation of the approval and revocation of the registration of Framedia Investment and the potential dissolution or invalidation of the agreements to which Framedia Investment is a party. Framedia Investment has now completed its capital contribution and is now re-applying for issuance of a new approval certificate and business license. In addition, several affiliated entities of Framedia may not have fully discharged their obligations to pay or withhold taxes, which could result in potential administrative or criminal liabilities. We are in the process of taking actions to pay or withhold the defaulted taxes. However, we cannot assure that past deficiencies in Framedia’s capitalization will not result in fines, revocation of its business license or the invalidation of agreements to which it is a party.
Risks Relating to Our Business and Industry
We have a limited operating history, which may make it difficult for you to evaluate our business and prospects.
       We began operations of our commercial location network in May 2003. In addition, we have operated our in-store network since April 2005 and began to operate Framedia’s poster frame network on January 1, 2006. Accordingly, we have a very limited operating history for our current

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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 use of audiovisual advertising displays in commercial buildings, hypermarkets, supermarkets and convenience stores and other out-of-home commercial locations and our use of advertising poster frames in residential complexes 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.
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 and in-store networks, to be disruptive or intrusive, commercial locations and stores may decide not to place our flat-panel displays in their properties 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.
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; or
 
  •  a decline in advertising spending in general.
       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.

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A substantial majority of our revenues are currently concentrated in four of China’s major cities. If any of these major cities experiences an event negatively affecting its advertising industry, our advertising network, and our ability to generate adequate cash flow would be materially and adversely affected.
       A substantial majority of our revenues are currently concentrated in Beijing, Shanghai, Guangzhou and Shenzhen, four of China’s major cities. We derived more than 75% and 78% of our total revenues in 2004 and for the nine months ended September 30, 2005, respectively, from these four cities. We expect these four cities to continue to constitute important sources of our revenues, and as a result of our acquisition of Framedia, this percentage may increase, as the substantial majority of Framedia’s revenues are derived from these four cities. After we complete our acquisition of Target Media, this percentage may further increase, as we believe Target Media derives a significant percentage of its revenues from these four cities. If any of these major cities experiences an event negatively affecting its advertising industry, such as a serious economic downturn, a construction moratorium that would have the effect of materially limiting the supply of new buildings in which we can place our flat-panel displays or advertising poster frames or similar changes in government policy, or a natural disaster, our advertising network and our ability to generate adequate cash flow would be materially and 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, a deterioration of economic conditions in China and potential changes to the regulation of the advertising industry in China, are discussed elsewhere in this prospectus. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating 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 flat-panel displays and advertising poster frames in their buildings and other commercial 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 flat-panel displays placed in desirable building, commercial and store locations and of advertising poster frames placed in residential complexes throughout major urban areas in China. 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. As of September 30, 2005, with regard to our commercial location network, we had entered into separate display placement agreements with landlords and property managers to operate 34,079 flat-panel displays in 18,538 locations in 23 cities in China, and our regional distributors had entered into their own separate display placement agreements with landlords and property managers to operate approximately 3,273 flat-panel displays in approximately 2,656 locations in 31 other cities in China. In addition, as of September 30, 2005, with regard to our in-store network, we had entered into separate display placement agreements with hypermarkets, supermarkets and convenience stores to operate 20,061 flat-panel displays in 2,702 stores throughout China. Although a majority of our display

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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, 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, or even result in a decrease in revenues.
       We are pursuing a strategy to expand our network into new regions, new advertising channels, such as hypermarkets, supermarkets and convenience stores, beauty parlors, golf country clubs and other commercial locations as well as residential complexes. We are also expanding our network into new advertising media, such as advertising poster frames. For example:
  •  in April 2005, we commenced operation of our in-store network of flat-panel television displays placed in hypermarkets, supermarkets and convenience stores;
 
  •  in January 2006, we acquired Framedia, which operates an advertising poster frame network located primarily in residential complexes; and
 
  •  we recently began marketing separate channels of our commercial location network, such as golf country club locations and airport shuttle bus locations on our network, to enable advertisers to focus on additional targeted consumer audiences.
       Because portions of our existing network are rapidly reaching saturation, in order to successfully expand our networks, we must expand our networks to include new regions and new advertising channels. In order to expand our networks into new regions, we must enter into new display or frame placement agreements in new cities. In the case of our commercial location network, we generally expand our networks into new cities by means of establishing new operations through entering into contractual relationships with regional distributors. If these regional distributors

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are not successful in expanding our commercial location network in other cities, our ability to grow our commercial location network in other regions may be hampered. The process of diversifying our networks into new advertising channels is also time consuming and requires us to expend time and resources in educating landlords and property managers about the benefits of separate advertising channels that are dedicated to specific demographics characteristics. If we are unable to grow our new in-store network or our poster frame network or to successfully diversify into other new advertising channels, our advertising network may not be as attractive as those of our competitors, which could harm or reverse our growth potential and our ability to increase our revenues, or even result in a decrease in revenues.
If we are unable to obtain or retain desirable placement locations for our flat-panel displays and advertising poster frames on commercially advantageous terms, 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. For the nine months ended September 30, 2005, our location costs for our out-of-home television networks accounted for 53% of our cost of revenues and 24% of our total revenues, respectively. 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 and advertising poster frames 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.
When our out-of-home television advertising networks reach saturation in the cities where we operate, we may be unable to grow our revenue base or to satisfy all of our advertisers’ needs, which could hamper our ability to generate higher levels of revenues over time.
       Our commercial location and in-store networks currently operate with a repeating nine- or twelve-minute cycle of advertisements per week broadcast repeatedly approximately 60 or 80 times per day consisting of 18 or 24 30-second time slots per week. Where demand for time slots by advertisers is high, such as in our Tier I cities, our out-of-home television networks may reach saturation, meaning we cannot sell additional advertising time slots for that week’s cycle without further increasing the length of the cycle and correspondingly reducing the number of broadcasts per day of each advertisement. When our commercial location and in-store networks reach saturation in any particular city, we will be forced to lengthen our advertising cycle to accommodate additional advertisers, as we have done in all of our directly operated cities, or increase our advertising rates to increase our revenues in our existing cities of operation. However, advertisers may be unwilling to accept rate increases or the placement of their advertisement on a longer time cycle that gives their advertisement less exposure each day. If we are unable to increase the duration of our advertising cycle in cities that reach saturation, or if we are unable to pass through rate increases to our advertising clients in those cities, we may be unable to grow our revenue base or to satisfy all of our advertisers’ needs, which could hamper our ability to generate higher levels of revenues over time.
If the market supply of desirable commercial, store and residential locations diminishes or ceases to expand, we may be unable to expand our network into locations advertising clients find desirable, which could decrease the value of our network to advertisers.
       We believe advertisers place a premium on having their advertisements broadcast or placed in the most commercially desirable locations, which we believe includes commercial and residential

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locations frequented by more affluent consumer groups in China’s major urban areas. As some of China’s cities have undergone development and expansion for several decades while others are still at an early stage of development, the supply of desirable commercial and residential locations varies considerably from region to region. 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. 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 as well as the quality of the services we offer. If we fail to maintain or increase the number of locations and displays 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.
We may be unable to maintain the growth of our network of flat-panel displays into hypermarkets, supermarkets, convenience stores and other types of businesses that have control over many stores, and our failure to maintain such growth could materially reduce the attractiveness of our network and harm our business, reputation and results of operations.
       Our strategy includes expanding our in-store network into hypermarkets and other types of businesses that have control over many store locations such as supermarkets and convenience stores. We commenced operation of our in-store network in April 2005. As of September 30, 2005, we had placed 20,061 flat-panel displays in 2,702 hypermarkets, supermarkets and convenience stores. As a relatively new and untested portion of our business, it is difficult to evaluate whether our in-store network will continue to attract advertisers, and there exists the risk that it may not succeed at all. For the three month periods ended June 30, 2005 and September 30, 2005 and for the nine months ended September 30, 2005, revenues from our in-store network accounted for 2.3%, 9.4% and 5.0% of our advertising service revenue, respectively. Many of our arrangements with such businesses are and will continue to be handled through a single or small number of display

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placement agreements designed to cover a chain’s entire network of stores, either nationwide or throughout an entire city. We may, therefore, increase our dependence on one or a small number of retail store chains in terms of our coverage. If our network becomes more concentrated in major chains, any dispute we have with any single chain, or any failure to renew our display placement agreements or maintain our exclusivity terms with any single chain, could materially reduce the attractiveness of our in-store network and harm our business, reputation and results of operations.
       For example, we have been expanding our network into the Hymart chain of hypermarkets in Shanghai. We subsequently received a notice from Shanghai Xichen Cultural Dissemination Co., Ltd., also referred to as CGEN, a competitor claiming to have established an exclusive business relationship with Hymart. Hymart subsequently notified us that it had requested in writing to terminate its relationship with CGEN. In order to maintain our presence in the Hymart stores, we have agreed with Hymart to compensate it for any reasonable costs it incurs in defending against any breach of contract suit that may be brought by CGEN against Hymart. In July 2005, CGEN brought a suit against Hymart in Changling District Court in Shanghai. The court dismissed the case against Hymart in October 2005 and CGEN subsequently appealed. If CGEN prevails in such appeal, we may be required to compensate Hymart for any damages it suffers or to remove our displays from some Hymart stores or both, which would reduce the size of our network and make us less attractive to potential advertising clients.
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 September 30, 2005, we covered 31 out of the 54 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 city where they operate. We also grant our regional distributors the right to use our “Focus Media” brand name and logo. 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.
Suodi Advertising, our network development and maintenance agent in Beijing, may have a claim against us under the non-competition clause of our contract with it, and if Suodi Advertising were successful in bringing a claim against us, our financial condition and results of operations may be materially and adversely affected.
       We entered into an agency agreement with Beijing Suodi Advertising Co., Ltd., or Suodi Advertising, that contains a non-competition clause which restricts us from developing new network locations in commercial buildings in Beijing without the assistance of Suodi Advertising through 2008. We have entered into display placements agreements with landlords and property managers of commercial buildings in Beijing without the assistance of Suodi Advertising. We believe that Suodi Advertising does not have the right to require us to terminate or otherwise void the display

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placement agreements we have entered into without its assistance, although it can pursue claims against us for monetary damages. Although Suodi Advertising has not pursued any claim against us in connection with our having entered into such display placement agreements, we cannot assure you that Suodi will not do so in the future. If Suodi Advertising successfully pursues a claim against us, we could be liable for monetary damages we may have caused to Suodi Advertising. If we are found to have violated our contract with Suodi Advertising, our payment obligations over the five year term of the contract can be accelerated, and we estimate our liability under the agreement could reach as much as $730,000, excluding possible consequential damages, which could materially and adversely affect our financial condition and results of operations.
Failure to manage our growth 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 are beginning to operate, either of which could materially and adversely affect our business and growth potential.
       We have been rapidly expanding, and plan to continue to rapidly expand, our operations in China. We must continue to expand our operations to meet the demands of advertisers for larger and more diverse network coverage and the demands of current and future landlords and property managers for installing and configuring flat-panel displays and advertising poster frames in our existing and future commercial, store and residential locations. This expansion has resulted, and will continue to result, in substantial demands on our management resources. It has also increased our need for a reliable supply of equipment, particularly flat-panel displays for our out-of-home television networks which are manufactured by a few third-party contract assemblers according to our specifications. To manage our growth, 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. We commenced operation of our in-store network in April 2005 and as of September 30, 2005, had placed a total of 20,061 flat-panel displays in 2,702 stores. We intend to continue to expand our in-store network in cities throughout China. In addition, we have already begun expanding our out-of-home advertising network through contractual arrangements with local operators in several cities outside of China, including Hong Kong, Taipei and Singapore and may in the future expand to other countries or regions. As we continue this effort, we may incur substantial costs and expend substantial resources in connection with any such expansion 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 of our operations, recruit top talent and train our personnel. Any failure to efficiently manage our expansion may materially and adversely affect our business and future growth.
       In addition, we have recently expanded our business to new advertising networks and media, including in-store television advertising and in-elevator poster frame advertising, and we may continue to enter into additional types of advertising businesses, such as the creation of additional networks of out-of-home television advertising or the use of direct marketing techniques. 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. 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.

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We depend on the leadership and services of Jason Nanchun Jiang, who is our founder, chairman, chief executive officer and our largest shareholder, 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 a major shareholder. 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.
If we do not continue to expand and maintain an effective sales and marketing team it will cause short-term disruptions of our operations, restrict our sales efforts and negatively affect our advertising service revenue.
       We market our advertising services directly to advertisers and to advertising agencies. As of September 30, 2005, we had 645 dedicated sales and marketing personnel. As we only commenced our current business operations in May 2003, many of our sales and marketing personnel have only worked for us for a short period of time. With the acquisition of Framedia, we have added an additional 178 sales and marketing personnel. We depend on our marketing staff to explain our service offerings to our existing and potential clients and to cover a large number of clients in a wide variety of industries. We will need to further increase the size of our sales and marketing staff if our business continues to grow. We may not be able to hire, retain, integrate or motivate our current or new marketing personnel which would cause short-term disruptions of our operations, restrict our sales efforts and negatively affect our advertising service revenue.
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, cash flow from operations and the proceeds from our recent initial public offering and this offering 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, including from this offering, 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

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  •  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 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 requires 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 42-inch plasma screens. We currently broadcast advertisements on our commercial location network and in-store network primarily through compact flash, or CF, cards and through digital video disks, or DVDs, that are manually installed in our flat-panel displays each week. 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 wireless or 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. In addition, Framedia is in the process of developing an advertising poster frame with a rolling display that would allow for changing up to three advertising posters on each display. If we cannot succeed in 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 out-of-home advertising 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 are fair and accurate and are 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

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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. However, we cannot assure you that each advertisement an advertising client or agency provides to us and which we include in our weekly advertising cycle in our out-of-home television advertising networks is in compliance with relevant PRC advertising laws and regulations or that the supporting documentation and government approvals provided to us by our advertising clients in connection with specific advertising content are complete; nor can we assure you that the advertisements that our regional distributors have procured for broadcasting on our network have received required approval from the relevant local supervisory bodies or are content compliant.
       Following our acquisition of Framedia, 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. We cannot assure you that each advertisement shown on our poster frame network is in compliance with 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 complete.
       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 or property managers 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 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

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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.
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, such as Target Media and Shanghai Xichen Cultural Dissemination Co., Ltd, also referred to as CGEN. If we complete our acquisition of Target Media, we will no longer compete with Target Media. 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. For example, our competitor in the in-store out-of-home television advertising space, CGEN, currently provides flat-panel advertising display technology for many Carrefour stores in China, creating a barrier to our entry into many such store locations. 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.
       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. These two factors present potential entrants to our sector of the advertising industry with relatively low entry barriers. 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.
Our senior management and employees have worked together for a short period of time, which may make it difficult for you to evaluate their effectiveness and ability to address challenges.
       Due to our limited operating history and recent additions to our management team, some of our senior management and employees have worked together at our company for only a relatively short period of time. For example, several key employees including the vice president in charge of our in-store network and our in-house general counsel joined us in March 2005. We also hired our internal auditor and chief accounting officer in April 2005, our chief marketing officer in June 2005, and our chief strategy officer in August 2005. Following our acquisition of Framedia in January 2006, Tan Zhi, the former chairman and chief executive officer of Framedia, continues to be involved in the operation of our poster frame network. In addition, if we complete our acquisition of Target Media, we expect that David Yu, the current chairman and chief executive officer of Target Media, will join

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as a co-chairman of our board of directors and president. As a result of these circumstances, it may be difficult for you to evaluate the effectiveness of our senior management and other key employees and their ability to address future challenges to our business.
Any business 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, except for fire insurance, 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 U.S. tax consequences to U.S. investors.
       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 for 2005, we do not expect to be a passive foreign investment company for 2006, and we do not expect to become one in the future, although there can be no assurance in this regard. If, however, we were a passive foreign investment company, such characterization could result in adverse U.S. 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 U.S. 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 U.S. 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. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. We cannot assure you that we will not be a PFIC for 2005 or any future taxable year. For more information on PFICs, see “Taxation — United States Federal Income Taxation”.
There have been historical material weaknesses with our internal controls and there remain areas of our internal and disclosure controls that require improvement. If we fail to maintain an effective system of internal controls, 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.
       When our auditors audited our financial statements as of and for the period ended December 31, 2004, they identified one “reportable condition”, as that term is defined under standards established by the American Institute of Certified Public Accountants, in our internal accounting controls. Specifically the auditors noted that we did not have dedicated financial reporting and accounting resources sufficient to comply with accounting principles generally accepted in the U.S. This reportable condition constituted a material weakness in the design and operation of our internal controls that, in our independent auditors’ judgment, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements.
       Following the identification of these material weaknesses, we consulted with our audit committee and undertook remedial steps to address these deficiencies, including hiring additional

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staff and training our new and existing staff. In particular, we hired our chief financial officer, an internal auditor, a financial controller and an in-house general counsel, and we continue to take additional steps to improve our internal controls and disclosure controls. If we are unable to implement solutions to any weaknesses in our existing internal and disclosure controls and procedures, or if we fail to maintain an effective system of internal and disclosure controls in the future for our company and for companies that we acquire, including Framedia and Target Media, 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.
       We have also hired an outside consultant to assist us in establishing measures to enable us to comply with internal control requirements under the Sarbanes-Oxley Act, but we cannot assure you that these measures will enable us to achieve or maintain compliance with all such internal control requirements.
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 Focus Media Technology and Framedia Investment, our indirectly wholly-owned operating subsidiaries in China, Focus Media Digital, a 90%-owned subsidiary of Focus Media Technology, and through our contractual arrangements with several of our consolidated affiliated entities in China. PRC regulations require any foreign entities that invest 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 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 subsidiaries, Focus Media Technology, Focus Media Digital and Framedia Investment, are currently ineligible to apply for the required licenses for providing advertising services in China. Substantially all of our advertising business is currently provided through our contractual arrangements with our and Framedia’s consolidated affiliated entities in China, including Focus Media Advertisement and its subsidiaries. Focus Media Advertisement is currently owned by two PRC citizens, Jason Nanchun Jiang, our chairman and chief executive officer, and Jimmy Wei Yu, one of our directors who is affiliated with UCI Group (China) Limited, one of our principal shareholders. Focus Media Advertisement, several of its subsidiaries, and New Focus Media Advertisement hold the requisite licenses to provide advertising services in China. Focus Media Advertisement and its subsidiaries directly operate our advertising network, enter into display placement agreements and New Focus Media Advertisement sells advertising time slots to our clients. We have been and are expected to continue to be dependent on Focus Media Advertisement and its subsidiaries to operate our advertising business for the foreseeable future. We have entered into contractual arrangements with Focus Media Advertisement and its subsidiaries, pursuant to which we, through Focus Media Technology and Focus Media Digital, provide technical support and consulting services to Focus Media Advertisement and its subsidiaries, including Focus Media Advertising Agency. In addition, we have entered into agreements with Focus Media Advertisement and each of the shareholders of Focus Media Advertisement and Guangdong Framedia which provide us with the substantial ability to control Focus Media Advertisement and its existing and future subsidiaries, including Focus Media Advertising Agency, Framedia Advertisement and Guangdong Framedia.

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       If we, Focus Media Technology, Framedia Investment, Focus Media Digital, New Focus Media Advertisement, Focus Media Advertisement or its existing and future subsidiaries, including Framedia Advertising, Guangdong Framedia and New Structure Advertisement 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;
 
  •  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 rely on contractual arrangements with Focus Media Advertisement and other operating companies and their subsidiaries and shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.
       We have in the past relied, and to a lesser but significant extent will continue in the future to rely, on contractual arrangements with Focus Media Advertisement and its subsidiaries and shareholders, and with Framedia Advertisement, Guangdong Framedia and New Structure Advertisement to operate our advertising business. For a description of these contractual arrangements, see “Our Corporate Structure”, “Related Party Transactions” and “Recent Developments — Our Recent Acquisition of Framedia — Control Over Framedia”. These contractual arrangements may not be as effective in providing us with control over Focus Media Advertisement and its subsidiaries as direct ownership. If we had direct ownership of Focus Media Advertisement and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Focus Media Advertisement and its subsidiaries, 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 Focus Media Advertisement or any of its 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 Jason Nanchun Jiang were to refuse to transfer his equity interest in Focus Media Advertisement to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if Mr. Jiang 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. In addition, Focus Media Advertisement, which holds certain of the business licenses required to operate our advertising network in China, is jointly owned and effectively managed by Mr. Jiang and Mr. Yu. Accordingly, it may be difficult for us to change our corporate structure or to bring claims against Focus Media Advertisement if Focus Media Advertisement does not perform its obligations under its contracts with us or Mr. Jiang and Mr. Yu 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

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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Taxation” for a discussion of the transactions referred to above. A finding by the PRC tax authorities that we are ineligible for the tax savings we achieved in 2004, or that Focus Media Digital, Focus Media Advertising Agency or New Focus Media Advertising 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 Focus Media Technology and Framedia Investment for our cash requirements, including the funds necessary to service any debt we may incur. If Focus Media Technology or Framedia Investment 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 Focus Media Technology, Focus Media Digital, Framedia Investment and New Focus Media Advertisement currently have in place with Focus Media Advertisement and its subsidiaries in a manner that would materially and adversely affect Focus Media Technology’s and Framedia Investment’s ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by Focus Media Technology and Framedia Investment only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, each of Focus Media Technology and Framedia Investment 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 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, 2004, the amount of these restricted portions was approximately $14,792,000. Any limitation on the ability of Focus Media Technology or Framedia Investment 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.

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Some of our PRC operating companies previously engaged in activities outside the authorized scope of their business licenses. This could subject those companies to fines and other penalties, which could have a material adverse effect on our business.
       Under PRC law, the business license of a company sets forth the authorized scope of business it may legally undertake, and in order to engage in activities outside its authorized scope of business, it must apply for and receive approval to expand its scope of business. Three of our PRC operating companies, Focus Media Advertisement, Focus Media Technology and Shanghai On-Target Advertisement Co., Ltd., and, prior to our acquisition of them, four of our additional operating companies, Zhejiang Ruihong Focus Media Advertising Co., Ltd., Xiamen Advertising Co., Ltd., Shanghai Qianjian Advertising Co., Ltd. and Shanghai Perfect Media Advertising Co., Ltd., historically engaged in business activities that were not within the authorized scope of their respective business licenses. Each of these companies subsequently ceased such conduct or expanded the business scope of their respective business licenses to include such activities; and in the case of the four entities who exceeded their authorized business scope prior to our acquisition of them, we required such companies to cease such conduct or expand their business scope during the process of our acquiring them. While these companies all currently operate within their authorized scope of business, the relevant PRC authorities have the authority to impose fines or other penalties. In rare instances, these authorities may require the disgorgement of profits or revocation of the business license, but as a matter of practice, the authorities will typically only impose such an extreme penalty after repeated warnings where a violation is blatant and continuing. While we do not believe these past violations will have a material effect on our business, operations or financial condition, due to the discretionary nature of regulatory enforcements in the PRC, we cannot assure you that those of our PRC operating companies that exceeded the scope of their business licenses in the past will not be subject to such fines or penalties, including the disgorgement of profits or revocation of the business license of one or more of these companies, or that such fines or penalties will not have a material adverse effect on 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 advertising. It has been reported that the relevant PRC government authorities are currently considering adopting new regulations governing out-of-home television advertising. We cannot predict the timing and effects of such new regulations. Changes in laws and regulations governing the content of out-of-home television advertising, our business licenses or otherwise affecting our business in China may materially and adversely affect our business prospects and results of operations. For example, the PRC government has promulgated regulations allowing foreign companies to hold a 100%-interest in PRC advertising companies starting from December 10, 2005. We are not certain how the PRC government will implement this regulation or how it could affect our ability to compete in the advertising industry in China.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries and affiliates.
       In utilizing the proceeds of this offering in the manner described in “Use of Proceeds”, 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 Focus Media Technology or to Framedia Investment, each a foreign invested enterprise, to finance its activities cannot exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange or its local counterpart; and

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  •  loans by us to Focus Media Advertisement or its 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 Focus Media Technology, Focus Media Digital and New Focus Media Advertisement through Focus Media Technology or Framedia Investment, by means of capital contributions. These capital contributions to Focus Media Technology and Framedia Investment must be approved by the PRC Ministry of Commerce or its local counterpart. Because Focus Media Advertisement and its 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 the “Regulation of Our Industry” section of this prospectus. 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 Focus Media Technology, Focus Media Digital, New Focus Media Advertisement, Framedia Investment, Focus Media Advertisement or any of their respective subsidiaries, including Framedia Advertisement, Guangdong Framedia and New Structure Advertisement. 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, starting December 10, 2005, foreign entities are 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 larger 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-

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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 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.
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

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proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company. 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.
       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 the ability of Focus Media Technology, Focus Media Digital, New Focus Media Advertisement or Framedia Investment, 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 “Regulation of Our Industry — Regulation of Foreign Exchange in Onshore and Offshore Transactions.”
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 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions”.
If any of our PRC affiliates becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy those assets, which could reduce the size of our advertising network and materially and adversely affect our business, ability to generate revenue and the market price of our ADSs.
       To comply with PRC laws and regulations relating to foreign ownership restrictions in the advertising business, we currently conduct our operations in China through contractual arrangements with Focus Media Advertisement, its shareholders and subsidiaries. As part of these arrangements, Focus Media Advertisement and its subsidiaries hold some of the assets that are important to the operation of our business. If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of Focus Media Advertisement and its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, our ability to generate revenue and the market price of our ADSs.
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

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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 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. For example, on July 21, 2005 the Renminbi was revalued against the U.S. dollar to approximately RMB8.11 to the U.S. dollar, representing an upward revaluation of 2.1% of the Renminbi against the U.S. dollar, as compared to the exchange rate the previous day. 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 after this offering 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 or avian 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, some Asian countries, including China, have recently encountered incidents of the H5N1 strain of bird flu, or avian flu. This disease, which is spread through poultry populations, is

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capable in some circumstances of being transmitted to humans and is often fatal. A new outbreak of SARS or an outbreak of avian 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 venues, which comprise the primary locations where we provide our advertising services. Any recurrence of the SARS outbreak, an outbreak of avian 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 advertising network to advertisers, significantly reduce the advertising time purchased by advertisers and severely disrupt our business and operations.
Risks Relating to this Offering
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 National Market has ranged from $17.60 to $53.34 per ADS and the last reported sale price on January 26, 2006 was $44.10. 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.
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
       Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our future ability to raise capital through offerings of our ADSs. For example, we issued 22,157,003 new ordinary shares in connection with our acquisition of Framedia and in 2007 we may be required to issue additional new ordinary shares based on a fixed ordinary share price of $2.456 per ordinary share up to $88.0 million to the former shareholders of Framedia if Framedia meets agreed upon earnings and operating targets in 2006. In addition, upon completion of our acquisition of Target Media, we will be required to issue 77 million of our ordinary shares to the current shareholders of Target Media Holdings. See “Recent Developments — Our Recent Acquisition of Framedia — Share Purchase Agreement — Purchase Price” and “— Our Proposed Acquisition of Target Media — Share Purchase Agreement — Purchase Price”.
       There will be 415,463,003 ordinary shares (equivalent to 41,546,300 ADSs) outstanding immediately after this offering, whether or not the underwriters exercise their option to purchase additional ADSs in full. In addition, as of December 31, 2005, there were outstanding options to purchase 44,251,830 ordinary shares, 17,880,969 of which are exercisable as of that date. All of the ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. 400,463,003 of our ordinary shares outstanding prior to this offering are “restricted securities” as defined in Rule 144 and may not be sold in the absence of registration other than in accordance with Rule 144 under the Securities Act or another exemption from registration.

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       In connection with this offering, we, the selling shareholders and our directors and executive officers have agreed not to sell any ordinary shares or ADSs for 90 days after the date of this prospectus without the written consent of the underwriters. In addition, in connection with our initial public offering on July 13, 2005, we, our controlling shareholders, the selling shareholders in our initial public offering and our directors and executive officers agreed not to sell any ordinary shares or ADSs prior to January 11, 2006 and, until July 13, 2006 to sell no more than half of their ordinary shares or ADSs owned immediately prior to the initial public offering, which sales include sales from the initial public offering, the public offering of additional ADSs pursuant to the underwriters’ exercise of their over-allotment option in August 2005 and this offering. In connection with the announcement of our acquisition of Target Media, the initial lock-up period was automatically extended through January 26, 2006. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the National Association of Securities Dealers, or NASD. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.
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.
       Following this offering, Jason Nanchun Jiang beneficially will own, through his 100% ownership of JJ Media Investment Holding Ltd., approximately 24.9% of our outstanding ordinary shares or 24.1% if the underwriters exercise their option to purchase additional ADSs in full. Jason Nanchun Jiang is currently and is expected to remain an affiliate within the meaning of the Securities Act after the offering, due to the size of his respective shareholdings in us after the offering. Accordingly, Jason Nanchun Jiang will have 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 an 85% shareholder of our affiliated PRC entity, Focus Media Advertisement, with which we have contractual arrangements that are essential to our business. The continuing cooperation of Focus Media Advertisement, and its shareholders, branches and subsidiaries, is important to our business. Without Jason Nanchun Jiang’s consent, 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.
Anti-takeover provisions in our charter documents may discourage our acquisition 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

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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. See “Description of Share Capital — Issuance of Additional Ordinary Shares or Preference Shares”.
       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 action, such as a merger or other change of control, that could be in the interest of our shareholders. See “Description of Share Capital — Board of Directors”.
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.
       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

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the PRC against us or such persons predicated upon the securities laws of the United States or any state. See “Enforcement of Civil Liabilities”.
We have not determined a specific use for a portion of our net proceeds from this offering and we may use these proceeds in ways with which you may not agree.
       We have not determined a specific use for a portion of our net proceeds of this offering. Our management will have considerable discretion in the application of these proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our ADS price. The net proceeds from this offering may also be placed in investments that do not produce income or lose value.
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.

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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.
       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.

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FORWARD-LOOKING STATEMENTS
       This prospectus 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 prospectus 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 prospectus 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, including statements concerning estimated revenues and net income for the three months ended December 31, 2005;
 
  •  our ability to complete acquisitions we have entered into, including that of Target Media, 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, including Framedia and Target Media;
 
  •  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 and Framedia’s poster frame network;
 
  •  our plan to develop our business into a multi-platform out-of-home 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;
 
  •  competition in the PRC advertising industry;
 
  •  the expected growth in the urban population, consumer spending, average income levels and advertising spending levels; and
 
  •  PRC governmental policies and regulations relating to the advertising industry and regulations and policies promulgated by the State Administration of Foreign Exchange.
       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. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary — Selected Estimated Fourth Quarter 2005 Results”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and other sections of this prospectus.
       This prospectus also contains data relating to the advertising industry that includes projections based on a number of assumptions. The advertising market may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In particular, the relatively new and rapidly changing nature of the out-of-home television advertising sector subjects any projections or estimates relating to the growth prospects or future condition of our sector to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the market

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data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
       The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. 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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OUR CORPORATE STRUCTURE
Our History
       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 National Market.
       In January 2006, we acquired Framedia, which operates a network of advertising poster frames placed primarily in elevators and public areas of residential complexes in China. For a description of Framedia, see “Recent Developments — Our Recent Acquisition of Framedia”.
       On January 7, 2006, we entered into a definitive share purchase agreement to acquire Target Media. Target Media operates 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. We expect to complete our acquisition of Target Media in the first quarter of 2006.
Our Corporate Structure and Contractual Arrangements
       Substantially all of our operations are conducted in China 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, a 90%-owned subsidiary 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 New Focus Media Advertisement. In connection with our acquisition and current operation of Framedia, Focus Media Advertisement and Focus Media Advertising Agency became or are expected to become the 90% shareholder and 10% shareholder, respectively, of each of Framedia Advertisement, Guangdong Framedia and New Structure Advertisement. Focus Media Advertisement, Focus Media Advertising Agency, Framedia Investment, Framedia Advertisement, Guangdong Framedia, New Structure Advertisement, and Liu Lei and Shi Yong, who are the current shareholders of Guangdong Framedia, have entered into contractual arrangements substantially similar to those control agreements entered into and described below among Focus Media Technology, Focus Media Digital, New Focus Media Advertisements, Focus Media Advertisement and its shareholders and subsidiaries. See “Related Party Transactions — Agreements Among Focus Media Advertisement, Focus Media Advertising Agency, Framedia Investment, Framedia Advertisement, Guangdong Framedia and New Structure Advertisement”.

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       The following diagram illustrates our corporate structure as we expect it to be at the time of this offering:
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 Focus Media Advertisement and its subsidiaries, as described below.
 
(3)  Agreements that transfer a substantial portion of the economic benefits of Focus Media Advertisement and its subsidiaries to us, as described below.
 
(4)  Agreements that give Framedia Investment effective control over the PRC-based operations of Framedia, as described in “Related Party Transactions”.
 
(5)  The remaining equity interests in Focus Media Advertisement’s subsidiaries are held by Jimmy Wei Yu, Focus Media Advertising Agency or unrelated third parties.
       In connection with its entry into the World Trade Organization, China is required to relax restrictions on foreign investment in the advertising industry in China. Accordingly, PRC regulations stipulate that starting from December 10, 2005, foreign investors are allowed to directly own 100% of PRC 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 Focus Media Advertisement and its 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 identity 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.

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       Accordingly, since we have not been involved in the direct operation of an advertising business outside of China, our domestic PRC subsidiaries, Focus Media Technology and Focus Media Digital, which are considered foreign-invested, are currently ineligible to apply for the required advertising services licenses in China. Our advertising business is currently mainly provided through contractual arrangements with our consolidated affiliated entities in China, including Focus Media Advertisement and its subsidiaries. Focus Media Advertisement is owned by two PRC citizens, Jason Nanchun Jiang, our chairman and chief executive officer, and Jimmy Wei Yu, one of our directors, affiliated with UCI Group (China) Limited, one of our principal shareholders. Focus Media Advertisement, several of its subsidiaries and our newly established indirect subsidiary New Focus Media Advertisement which is 90%-owned by Focus Media Digital and 10%-owned by Focus Media Advertisement, hold the requisite licenses to provide advertising services in China. In 2006, we expect to begin operating a portion of our advertising business through our 90%-owned indirect subsidiary New Focus Media Advertisement after which time we will no longer entirely rely on contractual arrangements with Focus Media Advertisement and its subsidiaries for the operation of our advertising business.
       Focus Media Advertisement and its subsidiaries directly operate our advertising network and enter into display placement agreements and our indirect subsidiary New Focus Media Advertisement sells advertising time slots to our clients. We have been and are expected to continue to be dependent on Focus Media Advertisement, its subsidiaries and our indirect subsidiary New Focus Media Advertisement to operate our advertising business until we acquire Focus Media Advertisement and its subsidiaries as our wholly-owned subsidiaries, as described below. We, Focus Media Technology and Focus Media Digital have entered into, and New Focus Media Advertisement is in the process of entering into, contractual arrangements with Focus Media Advertisement and its subsidiaries and shareholders, pursuant to which:
  •  we are able to exert effective control over Focus Media Advertisement and its subsidiaries;
 
  •  a substantial portion of the economic benefits of Focus Media Advertisement and its subsidiaries will be transferred to us; and
 
  •  Focus Media Technology or its designee has an exclusive option to purchase all or part of the equity interests in Focus Media Advertisement, all or part of the equity interests in Focus Media Advertisement’s subsidiaries that are owned by Focus Media Advertisement or its nominee holders, or all or part of the assets of Focus Media Advertisement, in each case when and to the extent permitted by PRC law.
Agreements that Transfer Economic Benefits to Us
       Pursuant to our contractual arrangements with Focus Media Advertisement and its subsidiaries, we, Focus Media Technology and Focus Media Digital provide licenses, technical support and consulting services to Focus Media Advertisement and its subsidiaries in exchange for fees. The principal license and service agreements that we, Focus Media Technology and Focus Media Digital have entered into with Focus Media Advertisement and its subsidiaries are:
  •  a technical services agreement with Focus Media Advertisement and its subsidiaries, pursuant to which Focus Media Digital licenses technology to, and provides technical support and consulting services for the operations of, Focus Media Advertisement and its subsidiaries for a fixed monthly fee; and
 
  •  a trademark license agreement with Focus Media Advertisement and its subsidiaries, pursuant to which Focus Media Technology provides a non-exclusive license for the use of our trademarks and brand name to Focus Media Advertisement and its subsidiaries in exchange for a monthly license fee.

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Agreements that Provide Effective Control over Focus Media Advertisement and Its Subsidiaries
       We made several loans to Jason Nanchun Jiang and Jimmy Wei Yu that allow us to capitalize our PRC operating affiliates and which facilitate the establishment of our current corporate structure, including setting up the agreements transferring the economic benefits and providing effective control over Focus Media Advertisement and its subsidiaries. These loans were made to Jason Nanchun Jiang and Jimmy Wei Yu as the shareholders of Focus Media Advertisement, for purposes of capitalizing Focus Media Advertisement and to implement the contractual arrangements in our corporate structure. By granting the loans to our directors, we are in a better position to structure the contractual relationships that give us control over Focus Media Advertisement. As of September 30, 2005, the full amounts of the loans to Messrs. Jiang and Yu remained outstanding. Focus Media Technology granted these loans without interest. The loans have a term of ten years starting from March 28, 2005 and are payable in full at the end of such ten-year term or, with thirty-days’ written notice from Focus Media Technology to Messrs. Jiang and Yu, on demand.
       In addition, we, Focus Media Technology and Focus Media Digital have entered into the following agreements with Focus Media Advertisement and its subsidiaries and shareholders that provide us with effective control over Focus Media Advertisement and its subsidiaries:
  •  a voting rights proxy agreement, pursuant to which Jason Nanchun Jiang, as the shareholder of Focus Media Advertisement, Jimmy Wei Yu, as the shareholder of Focus Media Advertisement and some of its subsidiaries, and Focus Media Advertisement, as the shareholder of its subsidiaries, have granted a PRC individual designated by Focus Media Technology the right to appoint directors and senior management of Focus Media Advertisement and its subsidiaries and to exercise all of their other voting rights as shareholders of Focus Media Advertisement and its subsidiaries, as the case may be, as provided under the articles of association of each such entity;
 
 
  •  a call option agreement, pursuant to which:
  •  neither Focus Media Advertisement nor any of its subsidiaries may enter into any transaction that could materially affect its assets, liabilities, equity or operations without the prior written consent of Focus Media Technology;
 
 
  •  neither Focus Media Advertisement nor any of its subsidiaries will distribute any dividends without the prior written consent of Focus Media Technology; and
 
 
  •  Focus Media Technology or its designee has an exclusive option to purchase all or part of the equity interests in Focus Media Advertisement, all or part of the equity interests in Focus Media Advertisement’s subsidiaries owned by Focus Media Advertisement or its nominee holders, or all or part of the assets of Focus Media Advertisement, in each case when and to the extent permitted by PRC law. The purchase price for such equity interests shall be equal to the respective portion of equity interest in the registered capital multiplied by the amount of registered capital of Focus Media Advertisement and its subsidiaries, or such higher price as is required under PRC laws at the time of such purchase. The purchase price for all of the assets of Focus Media Advertisement shall be equal to the registered capital of Focus Media Advertisement, or a pro rata portion thereof for a purchase of a portion of the assets, or such higher price as is required under PRC Laws at the time of such purchase. Pursuant to a separate letter of undertaking entered into by and among us, Focus Media Technology, Jason Nanchun Jiang and Jimmy Wei Yu, dated as of March 28, 2005, each of Jason Nanchun Jiang and Jimmy Wei Yu agrees to pay to Focus Media Technology or us any excess of the purchase price paid for such equity interests in, or assets of, Focus Media

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  Advertisement or its subsidiaries over the respective registered capital of Focus Media Advertisement or its subsidiaries in the event that Focus Media Technology or its designee exercises such option; and

  •  an equity pledge agreement pursuant to which each of Jason Nanchun Jiang, Jimmy Wei Yu and Focus Media Advertisement has pledged his or its equity interest in Focus Media Advertisement and its subsidiaries, as the case may be, to Focus Media Technology and Focus Media Digital to secure their obligations under the relevant contractual control agreements, including but not limited to, the obligations of Focus Media Advertisement and its subsidiaries under the technical services agreement and trademark license agreement described above, and each of them has agreed not to transfer, sell, pledge, dispose of or create any encumbrance on their equity interest in Focus Media Advertisement or its subsidiaries without the prior written consent of Focus Media Technology and Focus Media Digital.
       Each of our contractual arrangements with Focus Media Advertisement and its shareholders and subsidiaries can only be amended with the approval of our audit committee or another independent body of our board of directors. See “Related Party Transactions” for further information on our contractual arrangements with these parties.
       In the opinion of Fangda Partners, our PRC legal counsel:
  •  the respective ownership structures of (i) Focus Media Technology, Focus Media Digital, New Focus Media Advertisement, Focus Media Advertisement and their respective subsidiaries and (ii) except as already disclosed under “Risk Factors — Risks Relating to Our Recent Acquisitions — Historical deficiencies in Framedia’s compliance with relevant corporate law requirements could result in fines, revocation of its business license or the invalidation of agreements to which it is a party”, Framedia Investment, Framedia Advertising, Guangdong Framedia and New Structure Advertisement, are in compliance with existing PRC laws and regulations;
 
 
  •  the contractual arrangements (i) among us, Focus Media Technology, Focus Media Digital, Focus Media Advertisement and its shareholders and subsidiaries and (ii) except as already disclosed under “Risk Factors — Risks Relating to Our Recent Acquisitions — Historical deficiencies in Framedia’s compliance with relevant corporate law requirements could result in fines, revocation of its business license or the invalidation of agreements to which it is a party”, among Focus Media Advertisement, Focus Media Advertising Agency, Framedia Investment, Framedia Advertisement, Guangdong Framedia, New Structure Advertisement, Liu Lei and Shi Yong, in each case governed by PRC law, are or, with respect to Framedia, will be after completion of legal formalities for those newly-signed agreements, valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and
 
 
  •  the business operations of (i) Focus Media Technology, Focus Media Digital, New Focus Media Advertisement, Focus Media Advertisement and their respective subsidiaries and (ii) Framedia Investment, Framedia Advertisement, Guangdong Framedia and New Structure Advertisement, as described in this prospectus, 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

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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 “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”.

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USE OF PROCEEDS
       We estimate that we will receive net proceeds from this offering of approximately $60.6 million, whether or not the underwriters exercise their option in full to purchase additional ADSs, after deducting underwriting discounts and the estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
       We anticipate using approximately $40.0 million of the net proceeds of this offering to fund a portion of the cash consideration in connection with the acquisitions we made prior to the date of this offering. We may use any remaining amounts for our future strategic acquisitions, expansion of our advertising network and general corporate purposes. If and when we qualify for direct ownership of Focus Media Advertisement, as discussed more fully in “Our Corporate Structure — Our Corporate Structure and Contractual Arrangements”, we may explore the possibility of using a portion of the proceeds of this offering to acquire Focus Media Advertisement, taking into consideration relevant cost, market, competitive and other factors.
       The foregoing represents our current intentions with respect to the use of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering. The occurrence of new business opportunities, unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.
       To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. It is possible that we may become a passive foreign investment company for United States federal income tax purposes, which could result in negative tax consequences for you. These consequences are described in more detail in “Risk Factors — Risks Relating to Our Business and Industry — We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors” and “Taxation — United States Federal Income Taxation — Passive Foreign Investment Companies”.
       In utilizing the proceeds of this offering in the manner described above, 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 Focus Media Technology and Focus Media Digital through Focus Media Technology, each a foreign invested enterprise, to finance its activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange or its local counterpart; and
 
  •  loans by us to Focus Media Advertisement or its subsidiaries, which are domestic PRC enterprises, must be approved by the relevant government authority and must also be registered with the State Administration of Foreign Exchange or its local counterpart.
       We may also determine to finance Focus Media Technology, Focus Media Digital and New Focus Media Advertisement through Focus Media Technology or Framedia Investment by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart. Because Focus Media Advertisement, Framedia Advertising, Guangdong Framedia, New Structure Advertisement 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 “Regulation of Our Industry” included elsewhere in this prospectus. We cannot assure you that we can obtain these government registrations or approvals

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on a timely basis, if at all, with respect to future loans or capital contributions by us to Focus Media Technology, Focus Media Digital, New Focus Media Advertisement, Framedia Investment, Focus Media Advertisement or any of their respective subsidiaries. See “Risk Factors — Risks Relating to Regulation of Our Business and to Our Structure — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries and affiliates”.

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DIVIDEND POLICY
       We have not previously declared any dividends. In 2004, we recorded deemed dividends of $8.3 million, $2.2 million and $13.4 million in connection with our Series A, Series B and Series C-1 and Series C-2 convertible redeemable preference shares, of which $4.9 million of the deemed dividend related to the difference between the fair value at that time of the Series C-1 convertible redeemable preference shares and ordinary shares in connection with a sale of 9,729,600 ordinary shares by Jason Nanchun Jiang, our chairman and CEO, to a third-party investor, which shares were redesignated as Series C-1 convertible redeemable preference shares. These deemed dividends were not cash dividends and upon conversion of our Series A, Series B and Series C-1 and Series C-2 convertible redeemable preference shares into ordinary shares, we are no longer required to record deemed dividends prospectively. 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. See “Description of American Depositary Shares”.

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MARKET PRICE INFORMATION FOR OUR ADSs
       Our ADSs, each representing ten of our ordinary shares, have been listed on the Nasdaq National Market since July 13, 2005. Our ADSs trade under the symbol “FMCN”. For the period from July 13, 2005 to January 26, 2006 the trading price of our ADSs on Nasdaq has ranged from US$17.60 to US$53.34 per ADS. The following table provides the high and low trading prices for our ADSs on the Nasdaq National Market Inc. for each of the seven months since July 2005.
                   
    Sale Price
     
    High   Low
         
    US$   US$
Monthly Highs and Lows
               
2005 (from July 13)
               
 
July (from July 13 until July 31)
    21.00       17.60  
 
August
    22.09       18.25  
 
September
    27.00       18.25  
 
October
    27.31       22.50  
 
November
    31.94       26.00  
 
December
    35.30       29.70  
2006
               
 
January (through January 26)
    53.34       34.51  

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CAPITALIZATION
       The following table sets forth, as of September 30, 2005:
  •  our actual capitalization; and
 
  •  to give effect to the issuance and sale of 1,500,000 ADSs offered by our company in this offering at a public offering price of $40.43 per ADS, after deducting underwriting discounts, commissions and estimated offering expenses.
       You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, included elsewhere in this prospectus.
                 
    As of September 30, 2005
     
    Actual    
        Pro Forma(1)(2)
         
    (in thousands of
    U.S. dollars, except for
    share and per share data)
Shareholders’ equity:
               
Ordinary shares ($0.00005 par value; 885,516,600 shares authorized; 400,463,003 shares issued and outstanding (actual) and 415,463,003 shares issued and outstanding)(pro forma)
  $ 19     $ 20  
Additional paid-in capital
    178,027       238,669  
Deferred share-based compensation
    (814 )     (814 )
Retained earnings (accumulated deficit)
    3,572       3,572  
Accumulated other comprehensive loss
    1,074       1,074  
             
Total shareholders’ equity
    181,878       242,521  
             
Total capitalization
    181,878     $ 242,521  
             
 
(1)  Assumes that the underwriters do not exercise their over-allotment option.
 
(2)  To give effect to this offering.

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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.
       The conversion of Renminbi into U.S. dollars in this prospectus is 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 your convenience, this prospectus contains translations of Renminbi at $1.00 to RMB8.0930, which was the prevailing rate on September 30, 2005. The prevailing rate at January 26, 2006 was $1.00 to RMB8.0620. 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

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are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.
                                   
    Renminbi per U.S. dollar noon buying rate
     
    Average   High   Low   Period-End
                 
2000
    8.2784       8.2799       8.2768       8.2774  
2001
    8.2770       8.2786       8.2676       8.2766  
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
                               
 
January
    8.2765       8.2765       8.2765       8.2765  
 
February
    8.2765       8.2765       8.2765       8.2765  
 
March
    8.2765       8.2765       8.2765       8.2765  
 
April
    8.2765       8.2765       8.2765       8.2765  
 
May
    8.2765       8.2765       8.2765       8.2765  
 
June
    8.2765       8.2765       8.2765       8.2765  
 
July
    8.2264       8.2765       8.1056       8.1056  
 
August
    8.1017       8.1090       8.0954       8.0998  
 
September
    8.0919       8.0956       8.0871       8.0920  
 
October
    8.0895       8.0924       8.0840       8.0845  
 
November
    8.0845       8.0877       8.0816       8.0815  
 
December
    8.0755       8.0808       8.0702       8.0702  
2006 (through January 26)
                               
 
January (through January 26)
    8.0662       8.0702       8.0596       8.0620  
 
Source: Federal Reserve Bank of New York.

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
       The following selected consolidated financial information has been derived from our consolidated financial statements. Our consolidated financial statements are prepared by including the financial statements of Focus Media Advertisement, formerly Aiqi Advertising, through May 2003 and our consolidated financials, which include the consolidation of Focus Media Advertisement as a variable interest entity, thereafter and presented in accordance with U.S. GAAP. Our statements of operations for 2002, 2003 and 2004 and our balance sheets as of December 31, 2002, 2003 and 2004 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 prospectus.
       Our selected consolidated financial information for the years ended December 31, 2000 and 2001 and our balance sheet data as of December 31, 2000 and 2001 have been derived from Focus Media Advertisement unaudited consolidated financial statements, which are not included in this prospectus. Our statement of operations for each of the nine months ended September, 2004 and 2005 and balance sheet data as of September 30, 2004 and 2005 has been derived from our unaudited consolidated financial data which has been included elsewhere in this prospectus. We have prepared the unaudited consolidated financial data on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
       Prior to May 2003, we operated as an advertising agency, the operations and services of which differ markedly from our current business. As an advertising agency, we assisted media companies in selling their advertising time or space to companies seeking to advertise in exchange for a commission. In May 2003, we ceased acting as an advertising agency and commenced our current business as an operator of an out-of-home advertising network.
                                                             
                        For the nine months
        ended
    For the year ended December 31,   September 30,
         
    2000   2001   2002   2003   2004   2004   2005
                             
    (in thousands of U.S. dollars, except per share and per ADS data)
Selected Consolidated Statements of Operations Data:
                                                       
Revenues:
                                                       
 
Advertising services revenue(1)
  $ 36     $ 30     $ 24     $ 3,369     $ 26,321     $ 15,238     $ 42,852  
 
Advertising equipment revenue
                      389       2,889       2,206       772  
                                           
   
Total revenues
    36       30       24       3,758       29,210       17,444       43,624  
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
                      1,566       6,823       4,080       16,479  
 
Net advertising equipment cost
                      275       1,934       1,694       544  
                                           
   
Total cost of revenues
                      1,841       8,757       5,774       17,023  
                                           
Gross profit
    36       30       24       1,917       20,453       11,670       26,601  

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                        For the nine months
        ended
    For the year ended December 31,   September 30,
         
    2000   2001   2002   2003   2004   2004   2005
                             
    (in thousands of U.S. dollars, except per share and per ADS data)
Operating expenses:
                                                       
 
General and administrative (including share-based compensation of $489 for 2004, $nil and $646 for the nine months ended September 30, 2004 and 2005, respectively)
    31       28       21       985       4,015       2,009       6,578  
 
Selling and marketing
    5       2       3       407       3,426       1,928       6,135  
 
Goodwill impairment loss
                            59              
                                           
Total operating expenses
    36       30       24       1,392       7,500       3,937       12,713  
                                           
Income from operations
                      525       12,953       7,733       13,888  
Interest income
                      1       10       5       822  
Other income (expense), net
                      (9 )     (4 )     (3 )     10  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                            (11,692 )     (3,166 )      
                                           
Income before income taxes and minority interest
                      517       1,267       4,569       14,720  
Total income taxes
                      482       908       2,830       491  
Minority interest
                      8       13       (41 )     (107 )
Equity loss of affiliates
                      (18 )                  
                                           
Net income
                      25       372       1,698       14,122  
                                           
                                         
        For the nine months ended
    For the year ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
    (in thousands of U.S. dollars, except share data)
Earnings per share data:
                                       
Deemed dividend on Series A convertible redeemable preference shares(2)
                (8,308 )     (8,308 )      
Deemed dividend on Series B convertible redeemable preference shares(2)
                (2,191 )     (2,191 )      
Deemed dividend on Series C-1 convertible redeemable preference shares(2)
                (13,356 )            
Premium of Series B convertible redeemable preference shares
                12,906              
Income (loss) attributable to holders of ordinary shares
  $     $ 25     $ (10,577 )   $ (8,801 )   $ 14,122  
                               
Income (loss) per share — basic
  $     $ 0.00     $ (0.07 )   $ (0.06 )   $ 0.07  
                               
Income (loss) per share — diluted
  $     $ 0.00     $ (0.07 )   $ (0.06 )   $ 0.06  
Shares used in calculating basic income per share
          144,657,600       160,998,600       138,027,670       210,377,820  
Shares used in calculating diluted income per share
          144,657,600       160,998,600       138,027,670       238,206,610  
                                 
    As of December 31,   As of
        September 30,
    2002   2003   2004   2005
                 
    (in thousands of U.S. dollars)
Consolidated Balance Sheet Data:
                               
Cash and cash equivalents
  $ 15     $ 716     $ 22,669     $ 83,974  
Other current assets(4)
    106       1,902       12,713       60,589  
Non-current assets(5)
    8       2,688       21,033       57,174  
Total assets
    129       5,306       56,415       201,737  
Total current liabilities
    7       4,119       8,634       19,666  
Minority interest
          4       81       193  
Mezzanine equity
                53,273        
Total shareholders’ equity (deficiency)
  $ 122     $ 1,183     $ (5,573 )   $ 181,878  

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    As of    
    December 31,   As of
        September 30,
    2003   2004   2005
             
Selected Operating Data:
                       
Number of displays in our commercial location network:
                       
 
Our direct cities
    827       12,786       34,079  
 
Our regional distributors(6)
    201       2,629       3,273  
   
Total
    1,028       15,415       37,352  
Number of displays in our in-store network(7)
                20,061  
Number of stores in our in-store network
                2,702  
                                 
    For the three months ended
     
    December 31,   September 30,
         
    2003   2004   2004   2005
                 
Commercial Location Network:
                               
Number of time slots available for sale(8)
    1,299       5,170       3,542       8,348  
Number of time slots sold(9)
    292       2,209       1,280       4,240  
Average utilization rate(10)
    22.5 %     42.7 %     36.1 %     50.8 %
Average quarterly advertising service revenue per time slot sold (US$)
  $ 8,177     $ 5,018     $ 5,506     $ 4,077  
 
(1)  Advertising service revenue is presented net of business tax, which amounted to $1,405, $311,770, $2,788,233, $1,559,989 and $4,346,367 in 2002, 2003 and 2004 and for the nine months ended September 30, 2004 and 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0% of our gross advertising service revenue.
 
(2)  We are no longer required to record deemed dividends prospectively following conversion at the Closing of our initial public offering of our Series A, Series B, Series C-1 and Series C-2 convertible redeemable preference shares into ordinary shares.
 
(3)  Each ADS represents ten of our ordinary shares.
 
(4)  Other current assets is equal to total current assets less cash and cash equivalents.
 
(5)  Non-current assets is equal to total assets less total current assets.
 
(6)  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.
 
(7)  We commenced operation of our in-store network in April 2005.
 
(8)  Includes the time slots for our directly operated cities and the time slots we are entitled to sell on the portion of our network operated by our regional distributors. Number of time slots available refers to the number of 30-second equivalent time slots available on our network during the period presented and is calculated by taking the total advertising time available on our network during the period presented, calculated in aggregate seconds, which we then divide by 30 to determine the number of 30-second equivalent time slots available. The number of advertising time slots available for sale is determined by the number of cities in which we directly operate, the two-ninths portion of time slots on our regional distributors’ networks which we have the right to sell and the length of the advertising cycle, which is currently twelve minutes in all of our directly operated cities.
 
(9)  Number of time slots sold refers to the number of 30-second equivalent time slots sold during the period presented and is calculated by taking the total advertising time we sold during the period presented, calculated in aggregate seconds, which we then divide by 30 to determine the number of 30-second equivalent time slots sold.
(10)  Utilization rate refers to total time slots sold as a percentage of total time slots available during the relevant period.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       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 prospectus. 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 prospectus reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contains 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 “Risk Factors”.
Overview
       Our out-of-home advertising network consists of our commercial location network, our in-store network and our recently acquired poster frame network. We have experienced significant revenue and earnings growth, and the size of our network has grown significantly, since the commercial launch of our advertising network in May 2003:
  •  In 2003, we generated total revenues and net income of $3.8 million and $25,483, respectively, which we derived primarily from operating our out-of-home television advertising network and partially from the advertising agency business we operated prior to May 2003. As of December 31, 2003, we operated 827 flat-panel displays located in 754 locations in six cities in China;
 
  •  In 2004, we generated total revenues and recorded net income of $29.2 million and $372,752, respectively, which we derived primarily from the operation of our advertising network. Our net income of $372,752 in 2004 reflected a one-time non-cash charge of $11.7 million from a change in fair value of derivative liability associated with our Series B convertible redeemable preference shares; and
 
  •  For the nine months ended September 30, 2005, we generated total revenues and net income of $43.6 million and $14.1 million, respectively, which we derived primarily from the operation of our commercial location network. As of September 30, 2005, our commercial location network consisted of 34,079 flat-panel displays in 18,538 locations in the 23 cities where we operate directly and approximately 3,273 flat-panel displays in approximately 2,656 locations in the 31 cities where the network is operated by our regional distributors. As of September 30, 2005, our in-store network comprised a total of 20,061 flat-panel displays in 553 hypermarkets, 1,272 supermarkets and 877 convenience stores throughout China.
       The significant increase in our operating results since we commenced our current business operations is attributable to a number of factors, including the substantial expansion of our flat-panel display network, including placement of our flat-panel displays in a majority of the buildings surveyed by CTR, an independent market research company, in Beijing, Shanghai, Guangzhou and Shenzhen, which we refer to as our Tier I cities, and the growing acceptance of our flat-panel display network as an appealing advertising medium by our clients. We have also expanded our network through contractual arrangements with regional distributors who operate our network in cities throughout China.
       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;

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  •  The anticipated expansion of our commercial location network when we complete our acquisition of Target Media, which we expect to occur in the first quarter of 2006;
 
  •  Our ability to expand our network into new locations and additional cities;
 
  •  Our ability to expand our sales force and engage in increased sales and marketing efforts;
 
  •  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;
 
  •  Our ability to expand our client base through promotion of our services;
 
  •  Our ability to successfully operate and expand our poster frame network, which we acquired from Framedia in January 2006, including increasing the number of residential complexes in which we place advertising poster frames;
 
  •  Our ability to expand our in-store network which commenced operation in April 2005; and
 
  •  Our ability to identify and create new advertising channels by establishing separate advertising networks that enable advertisers to target consumer groups with specific demographic profiles, such as our stand-alone golf country club network and our airport shuttle bus network.
       Because our primary source of revenue is our advertising service revenue, we pay particular attention to factors that directly affect our advertising service revenue such as the number of advertising time slots that we have available for sale, our utilization rate as measured by the percentage of available time slots that we actually sell to advertisers, and the price we charge for our advertising time slots after taking into account any discounts. On July 1, 2005, we extended the cycle time to twelve minutes, or 24 30-second time slots per week in those of our directly operated cities that used nine-minute cycles. The effective price we charge advertising clients for time slots on our network and our utilization rate are affected by the attractiveness of our network to advertisers, the level of demand for time slots in each city and the perceived effectiveness of our network in achieving the goals of our advertising clients. On July 1, 2005, we also implemented a 5-10% price increase for time slots on our commercial location network in Beijing, Shanghai, Guangzhou and Shenzhen. On October 30, 2005, we implemented a 30-40% price increase for time slots on our commercial location network in our other directly operated cities. The attractiveness and effectiveness of our commercial location network is in turn directly related to our ability to secure and retain prime locations for our displays and to increase the number of displays, locations and cities in our network.
       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 must continue to enter into new advertising media platforms, such as our poster frame network, and to establish other stand-alone networks that provide effective channels for advertisers. In addition, we must react to continuing technological innovations, such as the potential uses of wireless and broadband technology in our network, and changes in the regulatory environment, such as the regulations allowing 100% foreign ownership of PRC advertising companies and new regulations governing cross-border investment by PRC persons.
Corporate Structure
       We were incorporated on April 11, 2003 as an international business company formed under the laws of the British Virgin Islands. We changed our corporate domicile to the Cayman Islands on April 1, 2005 and are now a Cayman Islands company. Substantially all of our operations are conducted through Focus Media Technology, our indirectly wholly-owned operating subsidiary in China, Focus Media Digital, a 90%-owned subsidiary of Focus Media Technology, and through

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contractual arrangements with several of our consolidated affiliated entities in China. These affiliated entities include Focus Media Advertisement, which is 85% and 15% owned by Jason Nanchun Jiang and Jimmy Wei Yu, and Focus Media Advertisement’s subsidiaries, including Focus Media Advertising Agency. See “Our Corporate Structure — Our Corporate Structure and Contractual Arrangements”.
       In January 2006, we acquired Framedia, which we believe operates the largest out-of-home residential advertising network of advertising poster frames placed mainly in elevators of residential complexes. Since we did not begin to place advertising poster frames in elevators and public areas of residential complexes and commercial locations until our acquisition of Framedia in January 2006, Framedia was not consolidated with our financial statements for any period prior to that time and its financial conditions and results of operations are not discussed in this section. For more information concerning Framedia, see “Recent Developments — Our Recent Acquisition of Framedia”.
       On January 7, 2006, we entered into a definitive share purchase agreement to acquire Target Media. Target Media operates 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 similar to our commercial location network. We expect to complete our acquisition of Target Media in the first quarter of 2006.
Revenues
       In 2003 and 2004 and for the nine months ended September 30, 2005, we had total revenues of $3.8 million, $29.2 million and $43.6 million, respectively. We generate revenues primarily from the sale of advertising time slots on our out-of-home television advertising network. Since April 2005, our network comprises both our commercial location network and our in-store network. Our advertising service revenue includes the sale of advertising time slots on our network, as well as a small amount of revenue attributable to other advertising related services we provide to our advertising clients. Prior to May 2003, advertising revenue included commissions from our advertising agency business. We also derive revenues from the sale of our flat-panel displays to regional distributors, which we refer to as our advertising equipment revenue. In 2003 and 2004 and for the nine months ended September 30, 2005, our advertising service revenue accounted for 89.6%, 90.1% and 98.2% of our total revenues, respectively. After the completion of our acquisition of Framedia in January 2006, we began to generate revenues from the sale of advertising frame space on Framedia’s poster frame network.
       The following table sets forth a breakdown of our total revenues for the periods indicated:
                                                                                   
        For the nine months ended
    For the year ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
        % of total       % of total       % of total       % of total       % of total
    $   revenues   $   revenues   $   revenues   $   revenues   $   revenues
                                         
    (in thousands of U.S. dollars, except percentages)
Revenues:
                                                                               
Advertising service revenue(1):
                                                                               
 
Unrelated parties
  $ 24       100.0 %   $ 2,270       60.4 %   $ 22,896       78.4 %   $ 15,001       86.0 %   $ 39,337       90.2 %
 
Related parties
                1,099       29.2 %     3,425       11.7 %     237       1.4 %     3,515       8.0 %
Advertising equipment revenue
                389       10.4 %     2,889       9.9 %     2,206       12.6 %     772       1.8 %
                                                             
Total revenues
  $ 24       100.0 %   $ 3,758       100.0 %   $ 29,210       100.0 %   $ 17,444       100.0 %   $ 43,624       100.0 %
                                                             
 
(1)  Advertising service revenue is presented net of business tax, which amounted to $1,405, $311,770, $2.8 million, $1.6 million and $4.3 million in 2002, 2003 and 2004 and for the nine months ended September 30, 2004 and 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0%.

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Advertising Service Revenue
       Sources of Revenues. We derive most our total revenues from the sale of time slots on our commercial location network and our in-store network to unrelated third parties and to some of our related parties. We report our advertising revenue between related and unrelated parties because more than 10% of our advertising service revenues come from clients related to our directors. 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. In addition, we generate a small percentage of advertising services revenue from other advertising related services we provide to our advertising clients. Prior to May 2003, these other advertising-related services included commissions we received when we operated as an advertising agent. Since May 2003, these other advertising-related services have been derived from technical services we provide to some of our regional distributors and other advertising-related services commissioned by some of our advertising clients.
       Our advertising service revenue is recorded net of any sales discounts 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. As of January 2006, we also derive revenue from the sale of frame space on our poster frame network, which we acquired from Framedia.
       Our advertising service revenue reflects a deduction for business taxes and related surcharges incurred in connection with the operations of Focus Media Advertisement and its subsidiaries. Their revenues are subject to a 5.55% business tax and a 4.0% cultural industries tax on revenues earned from their 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.
       Commercial location network. Our advertising service revenue derived from our commercial location network is directly affected by:
  •  the number of advertising time slots that we have available to sell, which is determined by the number of cities in which we directly operate, our expansion into additional cities, the two-ninths portion of cycle time available on our regional distributors’ networks and the length of the advertising cycle, which is currently twelve minutes in our directly operated cities and nine minutes in the cities operated by our regional distributors. We calculate the number of time slots available by taking the total advertising time available on our network during a particular period, calculated in aggregate seconds, which we then divide by 30 to determine the number of 30-second equivalent time slots available. We can increase the number of advertising time slots that we have available to sell by expanding into additional cities or acquiring our regional distributors, which provides us with seven minutes of additional time slots per regional distributor. The length of our advertising cycle can potentially be extended to longer durations depending on demand in each city. In our directly operated cities, the twelve-minute advertising cycle amounts to the equivalent of 24 30-second time slots per week, except for time slots reserved for use by the landlord. In the cities where our regional distributors operate, the nine-minute advertising cycle amounts to the equivalent of 18 30-second time slots per week, except for time slots reserved for use by the landlord;

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  •  our utilization rate, or the percentage of available time slots that we actually sell to advertisers. In order to provide meaningful comparisons of our utilization rate, we normalize our time slots into 30-second units, which we can then compare across each city and period to allow us to chart the normalized utilization rate of our network by geographic region and over time; and
 
  •  the average price we charge for our advertising time slots, which we calculate by dividing our advertising service revenue by the number of 30-second equivalent time slots sold during that period, after taking into account any discount offered. We calculate average quarterly advertising service revenue for our Tier I, Tier II cities and as a blended average of all cities each quarter. On July 1, 2005, we implemented a 5-10% price increase for time slots on our commercial location network in Beijing, Shanghai, Guangzhou and Shenzhen and on October 1, 2005, we implemented a 30-40% increase for time slots on our commercial location network in our Tier II cities.
       In-store network. Our advertising service revenue derived from our in-store network is directly affected by:
  •  the number of stores in our in-store network. As the location and size of particular stores affects advertisers’ decisions to place advertisements on our in-store network, we sell time slots on our in-store network on a per store basis. Increasing the number of stores on our network therefore increases the total number of available time slots for sale to advertisers;
 
  •  the number of advertising time slots that we have available to sell, which is determined by the number of stores in which we operate, our expansion into additional stores, and the length of the advertising cycle, which is currently twelve minutes, or 24 30-second equivalent time slots. As with our commercial location network, for our in-store network we calculate the number of time slots according to the number of 30-second equivalent time slots available. The length of our advertising cycle can potentially be extended to longer durations depending on demand in each city;
 
  •  our utilization rate, or the percentage of available time slots that we actually sell to advertisers. In order to provide meaningful comparisons of our utilization rate, we normalize our time slots into 30-second units, which we can then compare across each city and period to allow us to chart the normalized utilization rate of our network by geographic region and over time;
 
  •  the average price we charge for our advertising time slots, which we calculate by dividing our advertising service revenue by the number of 30-second equivalent time slots sold during that period, after taking into account any discount offered. Our revenues are also affected by the average quarterly advertising service revenue we derive per 30-second equivalent time slot sold per quarter.
       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 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. We generally place up to three advertising poster frames in each elevator where we deploy frames per display. When we complete development of a rolling display that will allow display of up to three advertising posters, we expect to further increase the total available frame space on our poster frame network;
 
  •  our utilization rate, or the percentage of available frame space that we actually sell to advertisers;

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  •  the average price we charge for frame space on a per frame basis, after taking into account any discount offered.
       Network expansion. As we have expanded our network in China’s major urban areas, many of the most desirable locations for our network have been occupied, either by our network or by competitors. In addition, as our utilization rate on our network in key cities increases, the number of time slots or frame spaces available for sale in those cities decreases. As a result, we will need to rely on means other than the rapid increase in the number of locations, flat-panel displays and advertising poster frames in order to continue growing our revenues. We have focused, and expect to continue to focus, on developing new channels in our out-of-home television advertising networks and entering into new types of advertising media operations to continue to grow our revenues and to address these potential capacity constraints on our existing network. In recent months, these steps have included: (1) launching our in-store network in April 2005 allowing advertisers to reach consumers at the point-of-purchase in hypermarkets, supermarkets and convenience stores, (2) establishing discrete stand-alone channels on our commercial location network, such as the golf country club locations and airport shuttle bus locations on our commercial location network, enabling us to increase the number of time slots available for sale, and (3) acquiring Framedia’s network of advertising poster frames placed mainly in elevators and public areas of residential complexes. 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. We believe these measures will enable us to continue the future growth of our business. We have also expanded our advertising network with the addition of Framedia’s frame advertising network in January 2006. 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 and poster frame networks and through strategic acquisition of competitors and businesses that complement our existing out-of-home advertising network. Upon the completion of our acquisition of Target Media, which we expect to occur in the first quarter of 2006, our network will expand significantly when we combine Target Media’s flat-panel display network with our current network.
       Seasonality. 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. We believe this effect will be less pronounced with regard to advertising spending on our in-store network, as we believe commercial activity in hypermarkets and supermarkets is stable or even enhanced during the period of Chinese Lunar New Year. 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. We expect this effect to be partially offset by steady or enhanced advertising service revenue from our in-store network, which we believe is less susceptible to the effects of seasonality than our commercial location network and poster frame network.
       Revenue Recognition. 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 understand that the corresponding periods in Target Media’s contracts are longer. If we complete the acquisition, the average contract period of our advertising contracts may increase as a result of our taking over their contracts. We expect the contract period to revert to our current historical periods as we re-sign these contracts using our form contract to replace Target Media’s form contract. We recognize advertising service

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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 beginning in January 2006 will be recognized in substantially the same manner as revenues collected under the advertising contracts used for our commercial location and in-store networks.
       We 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. We understand that Target Media’s accounts receivable historically have remained outstanding for longer periods of time than ours. If we complete the Target Media acquisition, we expect the average number of days outstanding for our accounts receivable to increase in the near term as a result of our acquiring Target Media’s accounts receivable. We expect the average period that our accounts receivable will remain outstanding to revert to our historical levels after we begin to apply our accounts receivable policy to Target Media’s accounts receivable.
       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. We made no provision for uncollectible accounts in 2003. In 2004 and for the nine months ended September 30, 2005, we made provision of $173,837 and $430,124, respectively, for accounts receivable that were outstanding for longer than six months. The average number of days outstanding of our accounts receivable, including from related parties, was 71, 66 and 78, respectively, as of December 31, 2003 and 2004 and September 30, 2005.
Advertising Equipment Revenue
       We also derive a portion of our total revenues from the sale of flat-panel displays to our regional distributors on a cost-plus basis, which we record as advertising equipment revenue. Our advertising equipment revenue represented 10.4%, 9.9% and 1.8% of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005, respectively. Our advertising equipment revenue is recorded net of the 17% value added tax to which equipment sales in China are subject.
       Factors that Affect our Advertising Equipment Sales. We expect that advertising equipment sales in future periods as a percentage of our total revenues will remain relatively low for a number of reasons:
  •  As we acquire our regional distributors, any growth in our network in these cities will not involve any future sales of advertising equipment and accordingly we expect the growth in advertising equipment revenue to decrease over time.
 
  •  Growth in the size of the networks of our regional distributors is expected to slow as the most desirable locations have been occupied by them or our competitors, which will result in reduced sales of flat-panel displays to our regional distributors, including by replacing existing equipment as it becomes worn or obsolete.
 
  •  We expect that the revenues from advertising equipment sales will constitute a smaller percentage of our revenues in future periods, as we believe the growth of our advertising service revenue will be significantly higher than our ability to increase the amount we charge for our advertising equipment and due to the decreasing unit cost of flat-panel displays and components.
       Revenue Recognition. We recognize advertising equipment revenue when delivery of flat-panel displays has occurred and risk of ownership has passed to the distributor. We bill our regional distributors for flat-panel displays upon delivery and generally require payment within three to five days of delivery.

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Cost of Revenues
       Our cost of revenues consists of costs directly related to the offering of our advertising services and costs related to our sales of advertising equipment.
       The following table sets forth our cost of revenues, divided into its major components, by amount and percentage of our total revenues for the periods indicated:
                                                                                       
        For the nine months ended
    For the year ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
        % of total       % of total       % of total       % of total       % of total
    $   revenues   $   revenues   $   revenues   $   revenues   $   revenues
                                         
    (in thousands of U.S. dollars, except percentages)
Total revenues
  $ 24       100.0 %   $ 3,758       100.0 %   $ 29,210       100.0 %   $ 17,444       100.0 %     43,624       100.0 %
Cost of revenues:
                                                                               
 
Net advertising service cost:
                                                                               
   
Location costs
                    1,159       30.8 %     4,643       15.9 %     2,924       16.7 %     10,481       24.0 %
   
Flat-panel display depreciation
                    149       4.0 %     774       2.6 %     436       2.5 %     2,474       5.7 %
   
Other(1)
                258       6.9 %     1,406       4.8 %     720       4.2 %     3,524       8.1 %
     
Sub-total
                1,566       41.7 %     6,823       23.4 %     4,080       23.4 %     16,479       37.8 %
 
Net advertising equipment cost
                275       7.3 %     1,934       6.6 %     1,694       9.7 %     544       1.2 %
                                                             
Total cost of revenues
              $ 1,841       49.0 %   $ 8,757       30.0 %   $ 5,774       33.1 %     17,023       39.0 %
                                                             
Gross profit
  $ 24       100.0 %   $ 1,917       51.0 %   $ 20,453       70.0 %   $ 11,670       66.9 %   $ 26,601       61.0 %
                                                             
 
(1)  Includes primarily salaries for and travel expenses incurred by our network maintenance staff and costs for materials.
Net Advertising Service Costs
       Our cost of revenues related to the offering of our advertising services on our commercial location network and our in-store network 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.
       Location Costs. Location costs are the largest component of our cost of revenues. Location costs for our out-of-home television advertising networks accounted for approximately 30.8%, 15.9% and 24.0% of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005, respectively. Our location costs 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.
       Rental fees under our display placement agreements form the largest component of our location costs, representing approximately 71.1%, 69.8% and 84.1%, of our out-of-home television advertising network location costs in 2003 and 2004 and for the nine months ended September 30, 2005, respectively. As a result, 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 our location costs to continue to increase in 2006 as we expand our in-store network, continue to acquire regional distributors, other companies, including Target Media, and as a result of possible rate increases we may experience upon renewal of our existing agreements. However, we expect these costs to decrease as a percentage of our total revenues in the future, as our advertising service revenue 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. We expect any additional location costs for our commercial location network to be lower than in the past, as many of the most desirable locations have already

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been occupied and many of the remaining locations will have a lower cost base. 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. In addition, location costs incurred in connection with the expansion and maintenance of our in-store network are expected to increase as we increase the size of our in-store network. We also expect our total location costs to increase upon the completion of our acquisition of Target Media, which we expect to occur in the first quarter of 2006.
       We expect our results of operations for a period of at least seven years beginning in 2006 to be negatively affected by the amortization of intangible assets in relation to, among other things, material contracts and customer lists as a result of several acquisitions, particularly Framedia and Target Media, if consummated. Specific items of intangible assets that are subject to amortization are yet to be identified upon the completion of our acquisitions of Framedia and Target Media.
       Flat-panel Display Depreciation. Flat-panel display depreciation costs for our out-of-home television advertising networks accounted for 4.0%, 2.6% and 5.7%, respectively, of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005. Generally, we capitalize the cost of our flat-panel 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. As we continue to increase the size of our commercial location and in-store networks and as we update and replace our existing displays with new technology, our depreciation costs are expected to increase. Moreover, we expect depreciation costs as a percentage of total revenues to increase in 2005 and 2006 as we substantially increased the size of our in-store network, including through our acquisition of Target Media. However, we expect these costs to decrease as a percentage of total revenues in the longer term.
       Other. Our other net advertising service costs accounted for 6.9%, 4.8% and 8.1% of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005, respectively. 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. As the size of our network increases, we expect our network maintenance staff, and associated costs, to increase. However, we expect that other cost of revenues will decrease as a percentage of total revenues as we expect our advertising service revenue to outpace any increases in our other cost of revenues.
Net Advertising Equipment Cost
       Our net advertising equipment cost consists of the amounts we pay to the contract assembler who purchases the components and assembles them into the flat-panel displays we sell to our regional distributors. Our net advertising equipment cost accounted for 7.3%, 6.6% and 1.2%, respectively, of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005. The primary factors affecting our net advertising equipment cost are the number of flat-panel displays we sell and the unit cost we pay to our contract assembler for each such flat-panel display. We expect our net advertising equipment cost as a percentage of total revenues to decrease for the foreseeable future as the growth rate of the size of our regional distributors’ portion of our commercial location network slows, as we acquire more of our regional distributors and as our revenues from advertising services are expected to outpace our net advertising equipment cost.
Operating Expenses and Net Income
       Our operating expenses consist of general and administrative and selling and marketing expenses. In 2004, our operating expenses also included a goodwill impairment loss. The following

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table sets forth our operating expenses, divided into their major categories by amount and as a percentage of our total revenues for the periods indicated.
                                                                                     
        For the nine months ended
    For the year ended December 31,   September 30,
         
    2002   2003   2004   2004   2005
                     
        % of total       % of total       % of total       % of total       % of total
    $   revenues   $   revenues   $   revenues   $   revenues   $   revenues
                                         
    (in thousands of U.S. dollars, except percentages)
Gross profit
  $ 24       100 %   $ 1,917       51.0 %   $ 20,453       70.0 %   $ 11,670       66.9 %   $ 26,601       61.0 %
Operating expenses:
                                                                               
 
General and administrative (including share-based compensation of $489 in 2004, $nil and $646 in the nine months ended September 30, 2004 and 2005)
    21       87.5 %     985       26.2 %     4,015       13.7 %     2,009       11.5 %     6,578       15.1 %
Selling and marketing
    3       12.5 %     407       10.8 %     3,426       11.7 %     1,928       11.1 %     6,135       14.1 %
Goodwill impairment loss
                            59       0.2 %                        
                                                             
   
Total
  $ 24       100.0 %   $ 1,392       37.0 %   $ 7,500       25.7 %     3,937       22.6 %     12,713       29.2 %
                                                             
Income from operations
              $ 525       14.0 %   $ 12,953       44.3 %   $ 7,733       44.3 %   $ 13,888       31.8 %
                                                             
       General and Administrative. General and administrative expenses primarily consist of salary and benefits for management, business tax mainly relating to license fees paid by our affiliated PRC companies to Focus Media Advertisement and to Focus Media Digital, accounting and administrative personnel, office rental, maintenance and utilities expenses, depreciation of office equipment, other office expenses and professional services fees. General and administrative expenses accounted for 26.2%, 13.7% and 15.1%, respectively, of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005. The decrease in general and administrative expenses as a percentage of total revenues between 2003 and 2004 was largely attributable to our establishment of a dedicated sales force in 2004 and assignment of sales, maintenance and location relationship personnel previously included within our administrative department to our newly established sales and location relationship and maintenance departments. The increase in our general and administrative expenses in the nine months ended September 30, 2005 is a result of increased business tax during this period, share-based compensation, increased personnel costs and increases in costs associated with enhancing our internal controls and preparing to become a publicly listed company. Salaries and benefits accounted for 28.1%, 20.2% and 26.7% of our general and administrative expenses in 2003 and 2004 and for the nine months ended September 30, 2005, respectively. We expect that our general and administrative expenses will increase as a percentage of total revenues in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a publicly traded company, including costs of enhancing our internal controls.
       Share-based Compensation Relating to General and Administrative. Our share-based compensation expense relating to general and administrative consists of the amortized portion of deferred share-based compensation recognized by us. We adopted the 2003 Employee Share Option Scheme, or our 2003 Option Plan, in June 2003, under which we were authorized to issue options with the right to purchase up to 30% of our share capital to our directors, officers, employees, individual consultants and advisors. We issued options representing 10.87% of our issued share capital under the 2003 Option Plan. In May 2005, we adopted our 2005 Share Option Plan, or our 2005 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 10.9% already granted under our 2003 Option Plan. In addition, during the three years from the adoption of our 2005 Option Plan, we may issue no more than 5% of our share capital for grants of new options. We have issued options representing 3.95% of our issued share capital under the 2005 Option Plan. In connection

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with the adoption of our 2005 Option Plan, no additional options may be granted under the 2003 Option Plan. Our general and administrative expenses, including our share-based compensation, are expected to increase after the effectiveness of the new accounting treatment Statement of Financial Accounting Standards No. 123(R) relating to share-based compensation.
       In July and August 2004, we issued options to purchase 20,643,400 of our ordinary shares to our directors, officers and employees with an exercise price of $0.24 per share. 10,620,600 of these options vest over three years while the remaining 10,022,800 options vest over one year. In addition, in July and August 2004, we also issued options to purchase 4,564,800 of our ordinary shares to third-party consultants at an exercise price of $0.24 per share. 1,310,400 of these options vest over three years while 3,254,400 of these options vest over one year. In July 2005, we granted options to purchase 11,683,630 of our ordinary shares to some of our directors and executive officers at an exercise price of $1.70 per share. These options vest over three years. In February and July 2005, we also granted options to purchase 1,340,000 of our ordinary shares to third-party consultants with an exercise price of $0.75 to $1.70 per share. These options vest over three years.
       Selling and Marketing. Our selling and marketing expenses primarily consist of salaries and benefits for our sales staff, marketing and promotional expenses, and other costs related to supporting our sales force. Selling and marketing expenses accounted for 10.8%, 11.7% and 14.1% of our total revenues in 2003 and 2004 and for the nine months ended September 30, 2005, respectively. As we acquired more of our regional distributors and continue to expand our client base, we increased our sales force, which resulted in an increase in salary expenses. Although this has increased our salary expenses as a percentage of total revenues in the nine months ended September 30, 2005, we do not expect this to result in a significant increase in salary expenses as a percentage of total revenues on a long-term basis. We now budget approximately 15% of our advertising revenues to be used for selling and marketing. We expect selling and marketing expenses to remain relatively stable as a percentage of total revenues.
Critical Accounting Policies
       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.
Share-based Compensation
       Our Option Plan is described more fully in Note 12 to the consolidated financial statements. We account for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Option No. 25, Accounting for Stock Issued to Employees, and related interpretations. We amortize deferred share-based compensation over the vesting periods of the related options, which are generally four years, in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an interpretation of APB Options No. 15 and 25.
       We have recorded deferred share-based compensation representing the difference between the deemed fair market value of our ordinary shares for accounting purposes and the option exercise price. We determined the fair value of the ordinary shares underlying the options granted in July and

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August 2004 to be $0.29 per ordinary share. In determining the deemed fair value of the ordinary shares underlying the options granted in July and August 2004, we calculated the deemed fair value of the ordinary shares on August 1, 2004 based on a retrospective third-party valuation using a generally accepted valuation methodology, the guideline companies approach, which incorporates specific assumptions including the market performance of comparable listed companies as well as our financial results and growth trends to derive our total equity value. The valuation model then allocated the equity value between the ordinary shares and the preference shares and determined the fair value of ordinary shares based on two assumptions: where conversion into ordinary shares would result in a higher economic value, preference shares were treated as if they had converted into ordinary shares; and preference shares that have a value higher than their conversion price were assigned a value that took into consideration their liquidation preference. Our ordinary shares were assigned a value equal to their pro rata share of the residual amount, if any, that remained after consideration of the liquidation preference of preference shares with a value below their conversion price. Had different assumptions or criteria been used to determine the fair market value of our ordinary shares, materially different amounts of share-based compensation could have been reported. Our determination of the fair value of the ordinary shares underlying the options granted on January 1, 2005 and February 2, 2005 of $0.51 was based on the cash sale price of our Series C convertible redeemable preference shares to third party investors in November and December 2004.
       Subsequent to the initial public offering, options were granted at the fair market value at the date of grant. We did not grant any stock options subsequent to the initial public offering.
       Pro forma information regarding net loss attributable to ordinary shareholders and net loss per share attributable to ordinary shareholders is required in order to show our net loss as if we had accounted for employee share options under the fair value method of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. This information is contained in Note 2 to our consolidated financial statements. The fair value of options issued pursuant to our option plan at the grant date were estimated using the Black-Scholes option-pricing model.
Income Taxes
       We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes”, with the required disclosures as described in note 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 Acquisition Impairment
       Beginning in 2002, with the adoption of SFAS 142, “Goodwill and Other Intangible Assets”, goodwill is no longer amortized, but instead tested for impairment upon first adoption and annually thereafter, or more frequently if events or changes in circumstances indicate that it might be impaired. SFAS No. 142 requires us to complete a two-step goodwill impairment test. The first step compares the fair values of each business unit to its carrying amount, including goodwill. If the fair value of each business unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. SFAS No. 142 requires completion of this first step within the first six months of initial adoption and annually thereafter. If the carrying amount of a reporting

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unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a business 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.
       As of December 31, 2003 and December 31, 2004, we had a goodwill balance of nil and $9.1 million, respectively, which is not deductible for tax purposes. We incurred a goodwill impairment loss of $58,397 in 2004 in connection with our acquisition of Perfect Media. In conducting our annual impairment test, we undertook a valuation of Perfect Media using the expected present value of cash flow and the income approach valuation methods, which resulted in a goodwill impairment loss of $58,397 in 2004, indicating that the value of Perfect Media was less than what we paid at the time we acquired it. We will perform the annual goodwill impairment test generally as of December 31, to determine if there is any further goodwill impairment. We recorded goodwill of $9.1 million in 2004 in connection with the acquisition of ten of the eleven companies we acquired during that year, which will be subject to the annual goodwill impairment test on December 31 of each year. The purpose of our acquisitions of our regional distributors was to expand the size of our network while our acquisition of Shanghai Qianjian Advertising Co., Ltd., or Qianjian, and Perfect Media enhanced our advertising services by adding to our existing network complementary lines of business, such as advertising networks placed in commercial banks, in the case of Qianjian, and advertising services offered at automatic shoe-shine machines located in buildings, in the case of Perfect Media. The recognition of goodwill from these acquisitions was a result of a purchase price in excess of the tangible assets of these companies and the goodwill they had generated from the operation of various advertising services. We may incur additional goodwill impairment charges in the future although we cannot predict whether this will occur when we perform our goodwill impairment test each year.
Taxation
       Under the current laws of the Cayman Islands and Hong Kong, neither Focus Media Holding Limited, incorporated in the Cayman Islands, nor Focus Media Hong Kong, our wholly owned subsidiary incorporated in Hong Kong, is subject to tax on its income or capital gains. In addition, payment of dividends by either company is not subject to withholding tax in those jurisdictions.
       Our PRC entities are also subject to PRC business tax. We primarily pay business tax on gross revenues generated from our advertising services. Focus Media Advertisement and its subsidiaries pay a 5% business tax on the gross revenues derived from advertising services and this business tax is deducted from total revenues. Focus Media Technology and Focus Media Digital pay a 5% business tax on the gross revenues derived from their contractual arrangements with Focus Media Advertisement and its subsidiaries and these taxes are primarily recorded in operating expenses.
       In addition to business tax and cultural industries tax imposed on our advertising business and VAT imposed on our sales of advertising equipment, as discussed in greater detail above, Focus Media Technology, Focus Media Digital and Focus Media Advertisement and its subsidiaries, including Focus Media Advertising Agency and New Focus Media Advertisement, 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.
       Pursuant to PRC law, enterprise income tax is generally assessed at the rate of 33% of taxable income. Focus Media Technology, Focus Media Advertisement and New Focus Media Advertisement are currently subject to this 33% enterprise income tax. State tax bureaus of the PRC are authorized

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to grant an exemption from enterprise income tax of up to two years to newly established domestic companies that have no direct foreign ownership and that are financially independent and engaged in consulting services, technology services or the information industry, which includes advertising services. A qualifying company must apply for this tax-exempt status for each of the two years separately. Focus Media Digital and Focus Media Advertising Agency were established in October 2004 and both were granted exemptions from enterprise income tax in 2004 and 2005. In 2006 and 2007, we intend to continue our tax exempt status through New Focus Media Advertisement Co., Ltd., or New Focus Media Advertisement, which was established in December 2005 and has applied for tax-exempt status for 2006 and 2007.
       In November 2004, Focus Media Technology, Focus Media Advertisement and some of its subsidiaries sold all of their flat-panel display equipment to Focus Media Digital at fair market value. As a result of this sale, Focus Media Technology and Focus Media Advertisement recorded a non-cash charge to earnings in the aggregate of $4,773,030 in the fourth quarter of 2004, which reflected the difference between the fair market value of the equipment and its then current book value. In addition, since its establishment, Focus Media Advertising Agency has generated revenue by selling time slots on our advertising network and pays a distribution fee to Focus Media Advertisement, which places advertisements for Focus Media Advertising Agency’s clients on our network. Finally, Focus Media Advertisement and its subsidiaries also license technology used in our business operations from Focus Media Digital in exchange for license fees paid to Focus Media Digital. As a result of Focus Media Advertisement’s amortization of the license fee paid to Focus Media Digital, it incurred a charge to earnings of $3.7 million in the fourth quarter of 2004. See “Related Party Transactions” for further information on these transactions and contractual agreements. Although these transactions were eliminated upon consolidation as transactions among members of our consolidated companies for financial accounting purposes, they did have the affect of reducing our total income tax expense and increasing our net income in 2004.
       As a result of these transactions, our effective tax rate was 72% in 2004. Excluding the non-recurring non-cash charge resulting from the change in fair value of derivative liability associated with Series B convertible redeemable preference shares and goodwill impairment loss, our effective tax rate for 2004 would have been 7.0%. The tax savings resulting from the non-cash charge to earnings from the write-down of flat-panel display equipment in 2004 and the charge to earnings from the amortization of the license fee paid in 2004 will not continue in the future. We expect our effective tax rate to be approximately 5% in each of 2005 and 2006, which rate may increase in the future depending on PRC tax regulations. In addition, once their tax exemptions expire, the income from operations of Focus Media Digital and Focus Media Advertising Agency will each become subject to the full 33% enterprise income tax rate. Moreover when income generated by Focus Media Advertisement and its subsidiaries, which are subject to the ordinary enterprise income tax rate of 33%, is subsequently transferred to Focus Media Technology, it may also be subject to additional enterprise income tax. This would result in an effective tax rate of greater than 33% on a substantial portion of our total revenues. However, we believe that through effective tax planning and management of our potential tax exposure, the total effective tax rate applicable to us should not exceed 33%, although we cannot assure you that it will not exceed 33%. For example, we established New Focus Media Advertisement in December 2005 which has applied for tax-exempt status for 2006 and 2007.
       In December 2005, Focus Media Digital sold all of its flat-panel display equipment to New Focus Media Advertisement at fair market value and we expect Focus Media Digital to sell all of its technology to New Focus Media Advertisement in January 2006 at a fixed fee. Starting in January 2006, New Focus Media Advertisement will generate revenue by selling time slots on our advertising network and pay a distribution fee to Focus Media Advertisement, which places advertisements for New Focus Media Advertisement’s clients on our network. We also expect to execute license trademarks used in our business operations to New Focus Media Advertisement, Focus Media Advertisement and its subsidiaries for a fee. While we expect these transactions to be eliminated

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upon consolidation as transactions among members of our consolidated companies for financial accounting purposes, we expect them to have the affect of reducing our total income tax expense and increasing our net income in 2006 and 2007. See “Related Party Transactions” for further information on these transactions and contractual agreements. In addition, upon expiration of these tax exemptions, we will consider available options, in accordance with applicable law, that would enable us to qualify for further tax exemptions, if any, to the extent they are then available to us.
       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 described above 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. A finding by the PRC tax authorities that we are ineligible for the tax savings we achieved in 2004, or that we expect to achieve in 2005, 2006 and 2007, or that Focus Media Digital, Focus Media Advertising Agency or New Focus Media Advertisement 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. See “Risk Factors — Risks Relating to Regulation of Our Business and to Our Structure — 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.”
Recently Issued Accounting Standards
       In January 2003, the FASB issued FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than voting rights, referred to as variable interest entities or “VIEs” and how to determine when and which business enterprise should consolidate the VIEs. This new model for consolidation applies to an entity in which either: (i) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. Disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities”, or “FIN 46 (Revised)”, to address several FIN 46 implementation issues. We have elected to retroactively apply FIN 46-R and have consolidated Focus Media Advertisement and Shanghai Perfect Media as our variable interest entities from their respective inception.
       In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This statement establishes standards for how an issuer classifies and measures certain financial instruments. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity be classified as liabilities (or assets in some circumstances) in statement of operations or consolidated balance sheets, as appropriate. The financial instruments within the scope of the statement are: (i) mandatorily redeemable shares that an issuer is obligated to buy back in exchange for cash or other assets; (ii) financial instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets; and (iii) financial instruments that embody an obligation that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer’s shares (excluding certain financial instruments indexed partly to the issuer’s equity shares and partly, but not predominantly, to something else). This statement does not apply to features embedded in a

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financial instrument that is not a derivative in its entirety. The statement also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on our financial condition, cash flows or results of operations.
       In December 2003, the SEC issued Staff Accounting Bulletin No. 104, or SAB 104, “Revenue Recognition”. SAB 104 updates portions of existing interpretative guidance in order to make this guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material effect on our consolidated financial statements.
       In March 2004, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. EITF No. 03-01 provides guidance on recording other-than-temporary impairments of cost method investments and requires additional disclosures for those investments. The recognition and measurement guidance provided in EITF No. 03-01 is required to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The disclosure requirements are effective for fiscal years ending after June 15, 2004 and are required only for annual periods. We do not believe that the adoption of this standard will have a material impact on our financial condition or results of operations.
       In December 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123, However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on the grant-date fair values. Pro forma disclosure previously permitted under SFAS 123 is no longer an alternative. The new standard will be effective for us in the first annual reporting period beginning after January 1, 2006. Under SFAS 123(R), we could elect the modified prospective or modified retrospective method for transition on the adoption of this new standard. Under the modified retrospective method, prior periods are adjusted on a basis consistent with the pro forma disclosures previously required for those periods by SFAS 123. Under the modified prospective method, compensation expense for all unvested stock options must be recognized on or after the required effective date based on the grant-date fair value of those stock options. We are currently evaluating the impact of adopting this standard on our financial statements. Prior to the adoption of SFAS 123(R), we will continue to utilize the accounting method prescribed by APB Opinion No. 25 and have adopted the disclosure requirements of SFAS 123, as amended by SFAS No. 148.
Acquisitions
       Since we commenced our current business operations in May 2003, we have acquired 19 companies to expand the coverage of our network in China and to acquire companies that are complementary to our business operations.
       Since September 30, 2005, we have acquired an additional six companies including Fuzhou Focus Media Advertising Co., Ltd., Jinan Hezhong Advertising Co., Ltd., and four companies consolidated with Framedia: Infoachieve, New Structure Advertising Co., Ltd., Guangdong Framedia and Framedia Advertisement. On January 7, 2006, we entered into a definitive share purchase agreement to acquire Target Media. For more information concerning our acquisitions of Framedia and Target Media, see “Recent Developments — Our Recent Acquisition of Framedia” and “— Our Proposed Acquisition of Target Media”.
       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

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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 “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”.
       As required under SEC regulations, 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;
 
  •  Capital Beyond Limited for the periods ended, and as of, December 31, 2004 and March 31, 2005, respectively;
 
  •  Infoachieve, for the periods ended, and as of, December 31, 2003 and 2004 and September 30, 2004 and 2005 and;
 
  •  Target Media Holdings, for the periods ended, and as of, December 31, 2003 and 2004 and September 30, 2004 and 2005,
are included elsewhere in this prospectus.
Quarterly Results of Operation
       The following tables present unaudited consolidated quarterly financial data by amount and as a percentage of our total revenues for each of the seven quarters in the period from January 1, 2004 to September 30, 2005. You should read the following table in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information on substantially the same basis as our audited consolidated financial statements and using information derived from our unaudited consolidated financial statements which are not included in this prospectus. The following information contains normal recurring adjustments which are, in the opinion of our management, necessary for a fair presentation of the results for such unaudited period. Our operating results for any quarter are not necessarily indicative of results that may be expected for any future period.
                                                             
    For the three months ended
     
Consolidated Statement   March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,
of Operations Data   2004   2004   2004   2004   2005   2005   2005
                             
    (in thousands of U.S. dollars)
Revenues:
                                                       
Advertising service revenue(1):
                                                       
   
Commercial location network:
                                                       
   
Unrelated parties
  $ 2,694     $ 5,395     $ 7,049     $ 7,758     $ 8,400     $ 12,439     $ 16,346  
   
Related parties
          100             3,325       1,032       1,542       941  
                                           
 
Total commercial location network
    2,694       5,495       7,049       11,083       9,432       13,981       17,287  
                                           
In-store network
                                                       
   
Unrelated parties
                                  339       1,813  
   
Related parties
                                         
                                           
 
Total in-store network
                                  339       1,813  
                                           
 
Total advertising service revenue
    2,694       5,495       7,049       11,083       9,432       14,320       19,100  
                                           
 
Advertising equipment revenue
    438       905       863       683       142       264       366  
                                           

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    For the three months ended
     
Consolidated Statement   March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,
of Operations Data   2004   2004   2004   2004   2005   2005   2005
                             
    (in thousands of U.S. dollars)
 
Total revenues
    3,132       6,400       7,912       11,766       9,574       14,584       19,466  
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
    1,037       1,377       1,665       2,742       3,256       5,554       7,669  
 
Net advertising equipment cost
    304       722       668       242       71       189       285  
                                           
 
Total cost of revenues
    1,341       2,099       2,333       2,984       3,327       5,743       7,954  
                                           
Gross profit
    1,791       4,301       5,579       8,782       6,247       8,841       11,512  
                                           
Operating expenses:
                                                       
 
General and administrative
    405       500       1,105       2,005       1,895       2,346       2,337  
 
Selling and marketing
    289       704       936       1,497       1,478       1,954       2,703  
 
Goodwill impairment loss
                      59                    
                                           
Total operating expenses
    694       1,204       2,041       3,561       3,373       4,300       5,040  
                                           
Income from operations
    1,097       3,097       3,538       5,221       2,874       4,541       6,472  
Interest income
    3       1       1       5       11       20       791  
Other income (expenses), net
    (2 )                 (2 )     5       (3 )     8  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                (3,166 )     (8,526 )                  
Income (loss) before income taxes and minority interest
    1,098       3,098       373       (3,302 )     2,890       4,558       7,271  
Total income taxes
    (382 )     (1,065 )     (1,382 )     1,922       (249 )     (155 )     (87 )
Minority interest
    (2 )     (49 )     10       54       1       (55 )     (52 )
Equity income (loss) of affiliates
                                         
                                           
Net income (loss)
    714       1,984       (999 )     (1,326 )     2,642       4,348       7,132  
                                           
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
  $ 714     $ (8,515 )   $ (999 )   $ (1,776 )   $ 2,642     $ 4,348     $ 7,132  
                                           
 
(1)  Advertising service revenue is presented net of business tax, which amounts to $324,634, $574,729, $714,647, $1.6 million, $936,405, $1.5 million and $2.0 million for the three months ended March 31, 2004, June 30, 2004, September 30, 2004, December 31, 2004, March 31, 2005, June 30, 2005 and September 30, 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0%.

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    For the three months ended
     
Consolidated Statement   March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,
of Operations Data   2004   2004   2004   2004   2005   2005   2005
                             
    (in thousands of U.S. dollars)
Revenues:
                                                       
 
Advertising service revenue(1) :
                                                       
   
Commercial location network:
                                                       
   
Unrelated parties
    86.0 %     84.3 %     89.1 %     65.9 %     87.7 %     85.3 %     84.0 %
   
Related parties
          1.6 %           28.3 %     10.8 %     10.6 %     4.8 %
                                           
 
Total commercial location network
    86.0 %     85.9 %     89.1 %     94.2 %     98.5 %     95.9 %     88.8 %
                                           
   
In-store network:
                                                       
   
Unrelated parties
                                  2.3 %     9.3 %
   
Related parties
                                         
                                           
 
Total in-store network
                                  2.3 %     9.3 %
                                           
 
Total advertising service revenue
    86.0 %     85.9 %     89.1 %     94.2 %     98.5 %     98.2 %     98.1 %
                                           
 
Advertising equipment revenue
    14.0 %     14.1 %     10.9 %     5.8 %     1.5 %     1.8 %     1.9 %
                                           
 
Total revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
    33.1 %     21.5 %     21.0 %     23.3 %     34.0 %     38.1 %     39.4 %
                                           
 
Net advertising equipment cost
    9.7 %     11.3 %     8.5 %     2.1 %     0.7 %     1.3 %     1.5 %
                                           
 
Total cost of revenues
    42.8 %     32.8 %     29.5 %     25.4 %     34.7 %     39.4 %     40.9 %
                                           
Gross profit
    57.2 %     67.2 %     70.5 %     74.6 %     65.3 %     60.6 %     59.1 %
                                           
Operating expenses:
                                                       
 
General and administrative
    12.9 %     7.8 %     14.0 %     17.0 %     19.8 %     16.1 %     12.0 %
 
Selling and marketing
    9.2 %     11.0 %     11.8 %     12.7 %     15.5 %     13.4 %     13.9 %
 
Goodwill impairment loss
                      0.5 %                  
                                           
Total operating expenses
    22.1 %     18.8 %     25.8 %     30.2 %     35.3 %     29.5 %     25.9 %
                                           
Income from operations
    35.1 %     48.4 %     44.7 %     44.4 %     30.0 %     31.1 %     33.2 %
Interest income
    0.1 %                 0.04 %     0.1 %     0.1 %     4.1 %
Other expenses, net
    (0.1 )%                 (0.01 )%                 0.1 %
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                (40.0 )%     (72.5 )%                  
Income (loss) before income taxes and minority interest
    35.1 %     48.4 %     4.7 %     (28.1 )%     30.1 %     31.2 %     37.4 %
Total income taxes
    (12.2 )%     (16.6 )%     (17.4 )%     16.3 %     (2.6 )%     (1.0 )%     (0.4 )%
Minority interest
    (0.1 )%     (0.8 )%     0.1 %     0.5 %     0.1 %     (0.4 )%     (0.3 )%
Equity income (loss) of affiliates
                                         
                                           
Net income (loss)
    22.8 %     31.0 %     (12.6 )%     (11.3 )%     27.6 %     29.8 %     36.7 %
                                           
Deemed dividend on Series A convertible redeemable preference shares
          (129.8 )%                              
Deemed dividend on Series B convertible redeemable preference shares
          (34.2 )%                              
                                           
Deemed dividend on Series C-1 convertible redeemable preference shares
                      113.5 %                  
Premium of Series B convertible redeemable preference shares
                      109.7 %                  
                                           
Income (loss) attributable to holders of ordinary shares
    22.8 %     (133.0 )%     (12.6 )%     (15.1 )%     27.6 %     29.8 %     36.7 %
                                           

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(1)  Advertising service revenue is presented net of business tax, which represents 8.6%, 9.0%, 9.0%, 13.6%, 9.8%, 10.0% and 10.1% of total revenues for the three months ended 2003, March 31, 2004, June 30, 2004, September 30, 2004, December 31, 2004, March 31, 2005 June 30, 2005 and September 30, 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0%.
Results of Operations
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
       Total Revenues. Our total revenues increased substantially from $17.4 million for the nine months ended September 30, 2004 to $43.6 million for the nine months ended September 30, 2005 due to an increase in our advertising service revenue which was partially offset by a decrease in advertising equipment revenue.
       Our total advertising service revenue increased significantly from $15.2 million for the nine months ended September 30, 2004 to $42.9 million for the nine months ended September 30, 2005. Advertising service revenue from our commercial location network increased significantly from $15.2 million, including $236,843 to related parties, for the nine months ended September 30, 2004 to $40.7 million, including $3.5 million to related parties, for the nine months ended September 30, 2005. Advertising service revenue from our in-store network, which commenced operations in April 2005, totaled $2.1 million for the nine months ended September 30, 2005. This increase in advertising service revenue is attributable to:
  •  an increase in the number of 30-second-equivalent advertising time slots we sold on our commercial location network from 2,515 for the nine months ended September 30, 2004 to 9,295 for the nine months ended September 30, 2005 and partially offset by a decrease in the average selling price per time slot sold from $6,060 for the nine months ended September 30, 2004 to $4,379 for the nine months ended September 30, 2005. Total network capacity, measured by number of available time slots, also increased from 7,664 for the nine months ended September 30, 2004 to 21,095 for the nine months ended September 30, 2005. The increase in the number of 30-second-equivalent advertising time slots sold between these two periods is due primarily to the following factors:
  •  Our network reach increased from 35 cities as of September 30, 2004, including 14 cities directly operated by our company and 21 cities operated by our regional distributors, to 54 cities as of September 30, 2005, including 23 cities directly operated by our company and 31 cities operated by our regional distributors;
 
  •  We gained an additional seven minutes of advertising cycle time from each of our regional distributors after we acquired them between September 30, 2004 and September 30, 2005; and
 
  •  On July 1, 2005, we extended the cycle time in our directly operated Tier II cities from nine minutes to twelve minutes.
  •  The increase in the number of 30-second-equivalent advertising time slots sold on our commercial location network was also attributable to an increase in our utilization rate from 32.8% for the nine months ended September 30, 2004 to 43.9% for the nine months ended September 30, 2005, which reflects the increased acceptance of our network among our advertising clients, which we believe is primarily due to the increased coverage and effectiveness of our network that grew from 4,664 commercial locations as of September 30, 2004 to 21,194 commercial locations as of September 30, 2005, and from 9,794 flat-panel displays as of September 30, 2004 to 37,352 displays as of September 30, 2005, including our regional distributors.
 
  •  The decrease in the average selling price was largely due to growth in sales of time slots with lower selling prices in our Tier II cities, while the average selling price of our advertising services in our Tier I cities increased between these two periods.

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  •  The launch of our in-store network in April 2005. We generated advertising service revenues of $2.1 million from our in-store network for the nine months ended September 30, 2005. We expect the contribution to our total revenues from our in-store network to increase in the near future.
 
  •  Our advertising equipment revenue decreased from $2.2 million for the nine months ended September 30, 2004 to $772,414 for the nine months ended September 30, 2005. This decrease was primarily attributable to our acquisition of fourteen regional distributors during 2004 and the nine months ended September 30, 2005 because, following each acquisition, we no longer sell flat-panel displays to each former regional distributor. This decrease was also partially attributable to decreased sales to our existing regional distributors, as the initial installation of the network in their respective cities of operation was largely completed in 2004 and the first quarter of 2005.
       Cost of Revenues. Our cost of revenues increased significantly from $5.7 million for the nine months ended September 30, 2004 to $17.0 million for the nine months ended September 30, 2005 due to increases in our net advertising service cost for our commercial location network and our in-store network and in our net advertising equipment cost.
  •  Net advertising service cost — commercial location network. Our net advertising services cost for our commercial location network increased substantially from $4.1 million for the nine months ended September 30, 2004 to $12.2 million for the nine months ended September 30, 2005. This increase was due to the substantial increase in our advertising service business on our commercial location network between these two periods.
  •  Our location costs increased substantially from $2.9 million for the nine months ended September 30, 2004 to $10.5 million for the nine months ended September 30, 2005 due to a substantial increase in the number of commercial locations where we entered into display placement agreements from 4,256 as of September 30, 2004 to 18,538 as of September 30, 2005. Our rental fees increased as a percentage of total revenues between these two periods as a result of (1) a significant increase in the number of locations in our commercial network (2) increased rental payments for the renewal of display placement agreements in the more desirable locations on our commercial location network offset in part by lower rental payments paid for new locations in our commercial location network because of a further reduction in the number of available desirable locations that command more expensive rental fees, many of which have been occupied either by us or our competitors.
 
  •  Flat-panel display depreciation costs increased from $435,501 for the nine months ended September 30, 2004 to $2.5 million for the nine months ended September 30, 2005, as a result of an increase in the number of flat-panel displays we own and operate directly from 7,476 as of September 30, 2004 to 34,079 as of September 30, 2005. This increase in our depreciation costs was also attributable to our acquisition of 14 regional distributors and the expansion of our network in our directly operated cities during this period.
 
  •  Other cost of revenues related to net advertising service cost increased from $720,384 for the nine months ended September 30, 2004 to $3.5 million for the nine months ended September 30, 2005. This was primarily a result of (1) an increase in the volume of CF cards we purchased even as the per-unit cost of CF cards decreased and (2) an increase in salary and benefit expenses for personnel responsible for location relations and display placement agreements with landlords and property managers and for maintaining and monitoring our network. Other cost of revenues related to net advertising service cost for our commercial location network decreased as a percentage of total revenues between these two periods as a result of the increase in advertising service revenue significantly outpacing the increase in other cost of revenues.

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  •  Net advertising service cost — in-store network. We began incurring net advertising service cost relating to our in-store network in April 2005 when we launched our in-store network. We incurred $4.3 million in net advertising service cost for our in-store network for the nine months ended September 30, 2005, consisting of location costs and depreciation costs relating to the installation and maintenance of our in-store network.
 
  •  Net advertising equipment cost. We incurred net advertising equipment costs of $1.7 million for the nine months ended September 30, 2004 compared to $544,145 for the nine months ended September 30, 2005, which decrease reflects the fact that we have acquired many of our fastest-growing regional distributors. We expect net advertising equipment costs to continue to decrease.
       Gross Profit. As a result of the foregoing, our gross profit increased from $11.7 million for the nine months ended September 30, 2004 to $26.6 million for the nine months ended September 30, 2005 although our gross margin decreased during the same period from 66.9% to 60.9%. The decrease in our gross margin was largely a result of increased rental payments, including fixed initial payments, to stores and depreciation costs incurred as we launched our in-store network. 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.
       Operating Expenses. Our operating expenses increased significantly from $3.9 million for the nine months ended September 30, 2004 to $12.7 million for the nine months ended September 30, 2005. This increase was primarily due to increases in our business tax, our selling and marketing expenses and in our general and administrative expenses associated with the growth of our business, such as salaries and costs associated with preparing to become a publicly listed company.
  •  General and Administrative. General and administrative expenses increased substantially from $2.0 million for the nine months ended September 30, 2004 to $6.6 million for the nine months ended September 30, 2005 mainly due to an increase in the size of our administrative staff and corresponding increases in expenses for salary and benefits by $1.3 million as our operations have grown. In addition, in connection with the options granted to our directors, employees and consultants since July 2004, we recorded stock based compensation of $646,400 for the nine months ended September 30, 2005.
 
  •  Selling and Marketing. Selling and marketing expenses increased substantially from $1.9 million for the nine months ended September 30, 2004 to $6.1 million for the nine months ended September 30, 2005 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. Marketing and promotional expenses increased significantly from $1.6 million for the nine months ended September 30, 2004 to $4.7 million for the nine months ended September 30, 2005 as a result of increased sales and promotional activities relating to the increase in our advertising services revenue between these two periods and to our in-store network. Salary expenses in connection with our sales force increased from $281,647 for the nine months ended September 30, 2004 to $1.0 million for the nine months ended September 30, 2005 as we hired additional sales staff to meet the growth in our advertising business, including our in-store network.
       Income from Operations. As a result of the foregoing, we had income from operations of $7.7 million for the nine months ended September 30, 2004 compared to $13.9 million for the nine months ended September 30, 2005.
       Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest was $4.6 million for the nine months ended September 30, 2004 compared to $14.7 million for the nine months ended September 30, 2005, which included interest income and

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other income (expenses) and change in fair value of series B convertible redeemable preferred shares for the nine months ended September 30, 2004.
  •  Interest Income. Interest income increased from $5,210 for the nine months ended September 30, 2004 to $822,163 for the nine months ended September 30, 2005. This interest income was the result of a significant increase in our cash and cash equivalents balances resulting from cash payments collected from our advertising operations, sales of our preference shares and proceeds from our initial public offering.
 
  •  Other Income (Expense). We recorded other expense of $2,759 for the nine months ended September 30, 2004 compared to other income of $9,894 for the nine months ended September 30, 2005.
 
  •  Change in Fair Value of Series B Convertible Redeemable Preferred Shares. We incurred a change in fair value of series B convertible redeemable preferred shares of $3.2 million for the nine months ended September 30, 2004. Upon the occurrence of our initial public offering in July 2005, all outstanding preference shares were converted into ordinary shares, and accordingly we did not incur any change in fair value of series B convertible redeemable preferred shares for the nine months ended September 30, 2005.
 
  •  Income Taxes. Our income taxes were $2.8 million for the nine months ended September 30, 2004 compared to $491,067 for the nine months ended September 30, 2005, which decrease resulted from the fact that in the nine months ended September 30, 2005, we derived most of our revenue from Focus Media Advertising Agency, which had no tax liability during this period, whereas during the nine months ended September 30, 2004, we derived most of our revenues from Focus Media Advertisement, which had tax liability.
 
  •  Minority Interest. We had minority interest expense of $40,616 and $106,304 for the nine months ended September 30, 2004 and 2005, respectively, in connection with the pro rata income attributable to minority shareholders of four of our subsidiaries.
       Net Income. As a result of the foregoing, we recorded net income of $1.7 million for the nine months ended September 30, 2004 compared to net income of $14.1 million for the nine months ended September 30, 2005.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
       Total Revenues. Our total revenues increased substantially from $3.8 million in 2003 to $29.2 million in 2004 due primarily to an increase in our advertising service revenue and partially to sales of our flat-panel displays to our regional distributors which commenced in the fourth quarter of 2003. For the periods prior to January 1, 2005, our out-of-home advertising network consisted of our commercial location network, and all discussion for these periods, including references to our network, refers only to our commercial location network.
  •  Our advertising service revenue increased significantly from $3.4 million in 2003 to $26.3 million in 2004 (including $3.4 million to related parties). This increase is attributable to:
  •  the fact that we commenced our advertising network operations in May 2003 and therefore derived no revenues from the sale of time slots on our advertising network for the first five months of 2003;
 
  •  an increase in the number of 30-second-equivalent advertising time slots we sold from 415 in 2003 to 4,723 in 2004, which increase was slightly offset by a decrease in the average selling price per time slot sold from $8,088 in 2003 to $5,573 in 2004. The increase in the number of 30-second-equivalent advertising time slots sold between these two periods is due primarily to the following factors:

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  •  we expanded our network to include an additional 24 cities in 2004, including eleven cities operated by our company and 23 cities operated by our regional distributors;
 
  •  we gained an additional seven minutes of advertising cycle time from each of our regional distributors after we acquired them in 2004; and
 
  •  we extended the cycle time from nine minutes in 2003 to twelve minutes in 2004 in our Tier I cities.
  •  The increase in the number of 30-second-equivalent advertising time slots sold was also attributable to an increase in our utilization rate from 25.0% in 2003 to 36.8% in 2004, which reflects the increased acceptance of our network among our advertising clients, which we believe is primarily due to the increased coverage and effectiveness of our network that grew from 923 commercial locations in 2003 to 8,977 commercial locations in 2004, and from 1,028 flat-panel displays in 2003 to 15,415 displays in 2004, including our regional distributors.
 
  •  The decrease in the average selling price was largely due to growth in sales of time slots with lower selling prices in our second-tier cities, while the average selling price of our advertising services in our major four cities increased between 2003 and 2004.
 
  •  We commenced sales of flat-panel displays to regional distributors in the fourth quarter of 2003 and generated $389,282 in advertising equipment revenue in 2003 compared to $2.9 million in 2004.
 
  •  Revenues generated by the eleven companies we acquired in 2004 accounted for approximately 1% of our total revenues in 2004.
       Cost of Revenues. Our cost of revenues increased significantly from $1.8 million in 2003 to $8.8 million in 2004 due to increases in both of our net advertising service cost and net advertising equipment cost.
  •  Net Advertising Service Cost. Our net advertising services cost increased substantially from $1.6 million in 2003 to $6.8 million in 2004. This increase was due to the substantial increase in our advertising service business between these two periods.
  •  Our location costs increased substantially from $1.2 million in 2003 to $4.6 million in 2004 due to a substantial increase in the number of commercial locations where we entered into display placement agreements from 754 in 2003 to 8,866 in 2004. Despite the increase in our rental expense between these two periods, our rental fees decreased as a percentage of total revenues in 2004 as a result of (i) the increase in our advertising services revenue significantly outpacing the increase in rental payments due to the increase in the number of display placement agreements we entered into and (ii) lower rental payments paid for new locations because many of the most desirable and expensive locations had been occupied either by us or our competitors.
 
  •  Flat-panel display depreciation costs increased from $148,701 in 2003 to $774,375 in 2004, as a result of an increase in the number of flat-panel displays we own and operate directly from 827 as of December 31, 2003 to 12,786 as of December 31, 2004. This increase in our depreciation costs was also attributable to our acquisition of eight regional distributors during this period. Flat-panel display depreciation costs decreased as a percentage of total revenues, however, because the growth in our advertising services revenue significantly outpaced our purchase of flat-panel displays and corresponding depreciation costs.
 
  •  Other cost of revenues related to net advertising service cost increased significantly from $257,574 in 2003 to $1.4 million in 2004. This was primarily a result of (i) an

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  increase in the volume of DVDs we purchased even as the per-unit cost of DVDs decreased and (ii) an increase in salary and benefit expenses for personnel responsible for location relations and display placement agreements with landlords and property managers and for maintaining and monitoring our network. Other cost of revenues related to net advertising service cost decreased as a percentage of total revenues between these two periods as a result of the increase in advertising service revenue significantly outpacing the increase in other cost of revenues.

  •  Net Advertising Equipment Cost. We incurred net advertising equipment costs of $275,360 in 2003 compared to $1.9 million in 2004, refl