F-1 1 u99440fv1.htm FOCUS MEDIA HOLDING LIMITED FOCUS MEDIA HOLDING LIMITED
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As filed with the Securities and Exchange Commission on June 14, 2005
Registration No 333-                    
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
Focus Media Holding Limited
(Exact name of Registrant as Specified in its Charter)
         
Cayman Islands   7311   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
Focus Media Holding Limited
28-30/F, Zhao Feng World Trade Building
369 Jiangsu Road
Shanghai 100032
China
(86-21) 3212-4661
(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 894-8940
(Name, Address, Including Area Code, and Telephone Number, Including Area Code, of Agent For Service)
 
Copies to:
     
Chris K. H. Lin, Esq.
Simpson Thacher & Bartlett LLP
ICBC Tower, 7th Floor
3 Garden Road, Central,
Hong Kong SAR
China
  Douglas C. Freeman, Esq.
O’Melveny & Myers LLP
Suite 1905, Tower Two
Lippo Center
89 Queensway, Central
Hong Kong SAR
China
         Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
         If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.    o
         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
         If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o
CALCULATION OF REGISTRATION FEE
                 
 
 
    Proposed Maximum   Proposed Maximum    
Title of Each Class of Securities to be   Amount to be   Offering Price Per   Aggregate Offering   Amount of
Registered(1)   registered(1)(2)   Ordinary Share(1)   Price(1)   Registration Fee
 
Ordinary Shares, par value $0.00005 per share(3)
          $100,000,000   $11,770
 
(1)  Estimated solely for the purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
 
(2)  Includes (a) all ordinary shares represented by American depositary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of the distribution or within 40 days after the later of the effective date of this registration statement and the date the securities are first bona fide offered to the public, and (b) ordinary shares represented by                  American depositary shares that are issuable upon the exercise of the underwriters’ option to purchase additional shares.
 
(3)  American depositary shares evidenced by American depositary receipts issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6. Each American depositary share represents ten ordinary shares.
         The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated                     , 2005.
                            Shares
FOCUS MEDIA LOGO
Focus Media Holding Limited
American Depositary Shares
Representing
Ordinary Shares
 
       This is an initial public offering of American depositary shares, or ADSs, of Focus Media Holding Limited, or Focus Media.
       Focus Media is offering                     ADSs, and the selling shareholders identified in this prospectus are offering an additional                     ADSs. Focus Media will not receive any of the proceeds from the sale of the                     ADSs being sold by the selling shareholders. Each ADS represents ten ordinary shares, par value $0.00005 per share. The ADSs are evidenced by American depositary receipts, or ADRs.
       Prior to this offering, there has been no public market for the ADSs or the shares. It is currently estimated that the initial public offering price per ADS will be between $                    and $                    . Application has been made to have the ADSs quoted on the Nasdaq National Market under the symbol “FMCN”.
       See “Risk Factors” beginning on page 11 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
         
Initial public offering price
  $       $    
Underwriting discount
  $       $    
Proceeds, before expenses, to Focus Media
  $       $    
Proceeds, before expenses, to the selling shareholders
  $       $    
       To the extent the underwriters sell more than                     ADSs, the underwriters have an option to purchase up to an additional                     ADSs from Focus Media and the selling shareholders at the initial 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                     , 2005.
Goldman Sachs (Asia) L.L.C.
Credit Suisse First Boston
CIBC World Markets               Piper Jaffray
 
Prospectus dated                     , 2005.


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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 operate the largest out-of-home advertising network in China using audiovisual television displays instead of traditional billboards to broadcast advertising, based on the number of locations and number of flat-panel television displays in our network. As of March 2005, our network was located in 70% of commercial buildings surveyed in thirteen cities across China, including 72%, 70%, 67% and 58% of commercial buildings with audiovisual television displays in Beijing, Guangzhou, Shanghai and Shenzhen, respectively, according to an independent survey conducted by CTR Market Research, or CTR. In addition, according to the same survey, our displays accounted for 77% of total television displays located in commercial buildings across the same thirteen cities, including 79% in each of Beijing and Guangzhou, 77% in Shanghai and 70% in Shenzhen. These four cities are the primary urban centers of the three regions that together accounted for 49.3% of total advertising spending in China in 2003, according to the State Administration for Industry and Commerce. We believe our significant market share of commercial buildings in many key cities in China, combined with the exclusivity and renewal terms contained in over 90% of our display placement agreements with landlords and property managers, creates high barriers to entry for potential competitors.
       We derive revenue principally by selling advertising time slots on our network. Our displays are placed primarily in high-traffic areas of commercial office buildings such as in lobbies and near elevators, as well as in large retail chain stores and other venues that have a high concentration of consumers with higher-than-average disposable incomes or that have 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 our advertising clients to reach segmented consumer groups with attractive demographic characteristics when compared to other forms of media such as traditional television or outdoor billboards. Due to the captive and low distraction nature of the locations where we place our displays, our network produces higher consumer recall rates of advertisements than traditional television advertisements. According to a December 2004 AC Nielsen study of 800 consumers in Beijing, Shanghai, Guangzhou and Chengdu, consumers on average recalled more advertisements viewed on our network than on traditional television stations. In April 2005, we commenced operation of our in-store network, which refers to our network of flat-panel displays located in large-scale chain retail stores, or hypermarkets, and supermarkets and convenience stores, and our advertising network now includes both our commercial network and our in-store network.
       As of March 31, 2005, more than 680 advertisers purchased advertising time on our network, and for the three months ended March 31, 2005, we acquired over 180 new advertising clients. Some of our largest advertising clients in terms of revenue include 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, we believe that low installation and maintenance costs for operating our network allow us to grow our business rapidly and efficiently.
       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 March 31, 2005, we operated our network directly in 22 cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen and also covered an additional 22 cities through contractual arrangements with regional

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distributors. Between January 1, 2004 and March 31, 2005, the number of commercial locations in which we operate directly increased from 754 to 8,866, and the number of displays in those locations increased from 827 to 16,025. We commenced operations of our in-store network in April 2005. As of March 31, 2005, our in-store network consisted of 3,149 flat-panel displays placed in 423 hypermarket and store locations in 20 of our directly operated cities.
       For the three months ended March 31, 2005, we recorded total revenues of $9.6 million, income from operations of $2.9 million and net income of $2.6 million as compared to total revenues, income from operations and net income of $3.1 million, $1.1 million and $713,495 for the three months ended March 31, 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 will not incur any such charges commencing January 1, 2005 as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004.
Our Industry
       The advertising market in China is one of the largest and fastest growing in the world. According to ZenithOptimedia, it is the largest in Asia excluding Japan, with total advertising spending of US$7.7 billion in 2003 and is expected to grow at a compound annual growth rate of 16.3% from 2004 to 2007, a much faster rate compared to 6.8%, 4.9% and 4.8%, respectively, for Asia, the United States and Europe. We believe the growth of China’s advertising industry is being driven by a number of factors, including high and sustained levels of economic growth, a growing consumer class, as well as relatively low levels of advertising spending per capita and as a percentage of gross domestic product. Our sector of the advertising industry in China, which is referred to as out-of-home television advertising, is characterized by its newness, ability to target desirable and segmented consumer audiences and its comparatively higher recall rates compared to other media.
Our Strategies, Risks and Uncertainties
       In order to enhance our position as the largest out-of-home television advertising network in China, we intend to expand our network, promote our brand name, create increasingly segmented network channels 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:
  •  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.
 
  •  Competition from present and future competitors in China’s growing advertising market.
 
  •  Our limited ability to control and oversee the everyday business activities or regulatory compliance of our regional distributors.
 
  •  The possibility that the PRC government could determine that the agreements that establish our operating structure do not comply with PRC government restrictions on foreign investment in the advertising industry, which could potentially subject us to severe penalties.
       Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks.

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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. We are currently 41.3%-owned by JJ Media Investment Holding Ltd., or JJ Media, a company whose sole shareholder is Jason Nanchun Jiang, our founder, chairman and chief executive officer. Our other investors include investment funds affiliated with and managed by Goldman, Sachs & Co., CDH FM Limited, United Capital Investment, 3i Group, Draper Fisher Jurvetson, Capital International Private Equity, Victory Venture Capital Limited and SOFTBANK Corp. Due to certain restrictions and qualification requirements under PRC law 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 and several of its subsidiaries 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.
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 March 31, 2005, which was RMB8.2765 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                     , 2005, the noon buying rate was RMB                    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                     additional ADSs representing                     ordinary shares;
 
  •  conversion of all outstanding preference shares to ordinary shares upon the closing of this offering; and
 
  •  none of our outstanding options as of                     , 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
 
ADSs offered by Focus Media                     ADSs
 
ADSs offered by the selling shareholders                     ADSs
 
ADSs outstanding after this offering                     ADSs
 
Ordinary shares outstanding after this offering                     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 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.
 
Depositary Citibank, N.A.
 
Option to purchase additional ADSs We and 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                      ADSs.
 
Timing and settlement for ADSs The ADSs are expected to be delivered against payment on                     , 2005. 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

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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 $                     million, assuming an initial public offering price per ADS of $                    , the mid-point of the estimated public offering price range shown on the front cover of this prospectus. We anticipate using approximately $20 million of the net proceeds of this offering in 2005 and approximately $20 million in 2006 for capital expenditures in connection with the expansion of our advertising network and operations, of which approximately $14 million will be used in 2005 for the expansion and operation of our in-store network. We expect to use the balance for general corporate purposes, including incremental costs associated with being a public company, and for acquisitions or investments in certain of our regional distributors, other businesses, products or technologies that we believe are complementary to our own business or that otherwise extend our business or brand.
 
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 three months ended March 31, 2004 and 2005 and balance sheet data as of March 31, 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 television advertising network.

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        For the three months ended
    For the year ended December 31,   March 31,
         
    2002   2003   2004   2004   2005
                     
    (in thousands of U.S. dollars, except share data)
Consolidated Statements of Operations Data:
                                       
Revenues:
                                       
 
Advertising service revenue(1):
                                       
   
Unrelated parties
    24     $ 2,270     $ 22,896       2,694       8,400  
   
Related parties
          1,099       3,425             1,032  
 
Advertising equipment revenue
          389       2,889       438       142  
                               
   
Total revenues
    24       3,758       29,210       3,132       9,574  
                               
Cost of revenues
          1,841       8,757       1,341       3,327  
                               
Gross profit
    24       1,917       20,453       1,791       6,247  
Total operating expenses
    24       1,391       7,500       694       3,373  
                               
Income from operations
          525       12,953       1,097       2,874  
Interest income
          1       10       3       11  
Other expense — net
          (9 )     (4 )     (2 )     5  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                (11,692 )            
                               
Income before income taxes and minority interest
          517       1,267       1,098       2,890  
Total income taxes
          482       908       383       249  
                               
Minority interest
          8       13       (2 )     1  
Equity loss from affiliates
          (18 )                    
                               
Net income(2)
          25       372       713       2,642  
Earnings per share data:
                                       
Deemed dividend on Series A convertible redeemable preference shares(3)
                (8,308 )            
Deemed dividend on Series B convertible redeemable preference shares(3)
                (2,191 )            
Deemed dividend on Series C-1 convertible redeemable preference shares(3)
                (13,356 )                
Premium of Series B convertible redeemable preference shares
                12,906              
Income (loss) attributable to holders of ordinary shares
  $     $ 25     $ (10,577 )   $ 713     $ 2,642  

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        For the three months ended
    For the year ended December 31,   March 31,
         
    2002   2003   2004   2004   2005
                     
    (in thousands of U.S. dollars, except share data)
Income (loss) per share — basic
  $     $ 0.00     $ (0.07 )   $ 0.00     $ 0.02  
Income (loss) per share — diluted
  $     $ 0.00     $ (0.07 )   $ 0.00     $ 0.01  
Income (loss) per ADS, basic and diluted(4)
                                       
Shares used in calculating basic income per share
          144,657,600       160,998,600       200,000,000       142,464,600  
Shares used in calculating diluted income per share
          144,657,600       160,998,600       200,000,000       315,135,258  
Pro forma net income per share on an as converted basis, basic
                  $ 0.05             $ 0.01  
Pro forma net income per share on an as converted basis, diluted
                  $ 0.05             $ 0.01  
Shares used in calculating pro forma per share amounts on an as converted basis, basic
                    242,229,400               300,731,000  
Shares used in calculating pro forma per share amounts on an as converted basis, diluted
                    243,237,323               315,135,258  
ADSs used in calculating basic and diluted net income per ADS(4)
                    242,229,400                  
                                 
        As of
    As of December 31,   March 31,
         
    2002   2003   2004   2005
                 
    (in thousands of U.S. dollars)
Consolidated Balance Sheets Data:
                               
Cash and cash equivalents
  $ 15     $ 716     $ 22,669       15,114  
Other current assets(5)
    106       1,902       12,713       14,084  
Non-current assets(6)
    8       2,688       21,033       31,642  
Total assets
    129       5,306       56,415       60,840  
Total current liabilities
    7       4,119       8,634       10,083  
Minority interest
          4       81       80  
Mezzanine equity
                53,273       53,273  
Total shareholders’ equity (deficiency)
  $ 122     $ 1,183     $ (5,573 )   $ (2,596 )

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        As of
    As of December 31,   March 31,
         
    2003   2004   2005
             
Selected Operating Data:
                       
Number of displays in our commercial location network:
                       
 
Our direct cities
    827       12,786       16,025  
 
Our regional distributors(7)
    201       2,629       1,847  
   
Total
    1,028       15,415       17,872  
Number of displays in our in-store network(8)
                3,149  
                         
    For the three months ended
     
    December 31,   March 31,
         
    2003   2004   2005
             
Number of time slots available for sale(9)
    1,299       5,170       6,010  
Number of time slots sold(10)
    292       2,209       1,998  
Utilization rate(11)
    22.5 %     42.7 %     33.2%  
Average quarterly advertising service revenue per time slot sold (US$)
  $ 8,177     $ 5,018     $ 4,721  
                         
    For the year ended
    December 31,
     
    2002   2003   2004
             
    (in thousands of U.S.
    dollars)
Other Financial Data:
                       
Adjusted net income(12)
        $ 25     $ 12,065  
 
(1)  Advertising service revenue is presented net of business tax, which amounted to $1,405, $311,770, $2,788,233, $324,634 and $936,405 in 2002, 2003 and 2004 and for the three months ended March 31, 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)  See “Other Financial Data” below for a presentation of our adjusted net income.
 
 
(3)  Upon conversion of our Series A, Series B, Series C-1 and Series C-2 convertible redeemable preference shares into ordinary shares, we will no longer be required to record deemed dividends prospectively.
 
 
(4)  Each ADS represents ten of our ordinary shares.
 
 
(5)  Other current assets is equal to total current assets less cash and cash equivalents.
 
 
(6)  Non-current assets is equal to total assets less total current assets.
 
 
(7)  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.
 
 
(8)  We commenced operation of our in-store network in April 2005.
 
 
(9)  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-minute 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 Beijing, Shanghai, Guangzhou and Shenzhen and nine minutes in the other cities in which we operate.
(10)  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.

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(11)  Utilization rate refers to total time slots sold as a percentage of total time slots available during the relevant period.
 
 
(12)  We define adjusted net income as net income excluding change in fair value of derivative liability associated with Series B convertible redeemable preference shares. This definition may not be comparable to similarly titled measures reported by other companies. We are presenting adjusted net income because it provides an additional way to view our operations, when considered with both our GAAP results and the reconciliation to net income which we believe provides a more complete understanding of our business than could be obtained without this disclosure for the following reason. The change in fair value of derivative liability associated with Series B convertible redeemable preference shares was a one-time non-cash charge we incurred in 2004 in connection with an embedded derivative feature of our Series B convertible redeemable preference shares that will not affect us in the future, as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004. This financial measure shows what our net income would have been without the effect of this one-time non-cash charge. The use of adjusted net income has limitations and you should not consider adjusted net income in isolation from or as an alternative to GAAP measures, such as net income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. The following table sets forth the reconciliation of adjusted net income, a non-GAAP financial measure, from net income, our most directly comparable financial measure presented in accordance with GAAP:
                         
    For the year ended
    December 31,
     
    2002   2003   2004
             
    (in thousands of U.S. dollars)
Net income
        $ 25     $ 373  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                11,692  
                   
Adjusted net income
        $ 25     $ 12,065  
                   

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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 Business and Industry
We have a limited operating history, which may make it difficult for you to evaluate our business and prospects.
       We began our current business operations in May 2003. Accordingly, we have a very limited operating history for our current operations upon which you can evaluate the viability and sustainability of our business and its acceptance by advertisers and consumers. It is also difficult to evaluate the viability of our use of audiovisual advertising displays in commercial buildings and other out-of-home commercial locations 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.
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, certain of our senior management and employees have worked together at our company for only a relatively short period of time. For example, our chief financial officer joined us in February 2005. Other 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 financial controller in April 2005. 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.
If advertisers or the viewing public do not accept, or lose interest in, our out-of-home television advertising network, our revenues may be negatively affected and our business may not expand or be successful.
       The market for out-of-home television 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 television advertising network by advertisers and their continuing interest in this medium as a component 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 network or that our network does not provide sufficient value as an effective advertising medium. Likewise, if consumers find some element of our network, such as the audio feature, to be disruptive or intrusive, commercial locations may decide not to place our flat-panel displays in their properties and advertisers may view our 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.

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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 our advertising time slots, 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 network 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.
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% of our total revenues in 2004 from these four cities. We expect these four cities to continue to constitute important sources of our revenues. 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 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 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 a large network of flat-panel displays placed in desirable building and commercial locations

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throughout major urban areas in China. This, in turn, requires that we develop and maintain business relationships with real estate developers, property managers, hypermarkets, retailers and other businesses and locations in which we rent space for our displays. As of March 31, 2005, we had entered into separate display placement agreements with landlords and property managers to operate 16,025 flat-panel displays in 8,866 locations in 22 cities in China, and our regional distributors had entered into their own separate display placement agreements with landlords and property managers to operate approximately 1,847 flat-panel displays in approximately 1,611 locations in 22 other cities in China. Although a majority of our display placement agreements have terms ranging from three to five years 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 placement agreements are terminated or not renewed, advertisers may find advertising on our network unattractive and may not wish to purchase advertising time slots on our network, which would cause our revenues to decline and our business and prospects to deteriorate.
       Under certain of our display placement agreements in Guangzhou, the landlord or property manager has the right to terminate the agreement if 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 certain 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.
We may not be able to successfully expand our advertising network into new regions or diversify our network into new advertising channels 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 advertising network into new regions and new advertising channels, such as hypermarkets, supermarkets and convenience stores, beauty parlors, golf country clubs and other commercial locations. For example, in April 2005, we commenced operation of our network placed in hypermarkets, supermarkets and convenience stores, which we refer to as our in-store network. In order to successfully expand our network, we must expand our network to include new regions and new advertising channels. In order to expand our network into new regions, we must enter into new display placement agreements in new cities. We generally expand our network into new cities by means of entering into contractual relationships with regional distributors. If these regional distributors are not successful in expanding our network in other cities, our ability to grow our network in other regions may be hampered. The process of diversifying our network 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 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 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 three months ended March 31, 2005,

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our location costs accounted for 60.7% of our cost of revenues and 21.1% of our total revenues. In the future, we may need to increase our expenditures on our flat-panel display 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 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 advertising network reaches 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 advertising network in each city generally is designed to have a repeating nine-minute cycle of advertisements per week. In cities where there is higher demand for time slots on our network, such as Beijing, Shanghai, Guangzhou and Shenzhen, we use a twelve-minute repeating cycle. Starting July 1, 2005, we intend to extend the cycle time to twelve minutes, or 24 30-second time slots per week in those of our directly operated cities that currently use nine-minute cycles. Where demand for time slots by advertisers is high, our network 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 network reaches saturation in any particular city, we will be forced to lengthen our advertisement cycle to accommodate additional advertisers, as we have done in Beijing, Shanghai, Shenzhen and Guangzhou, 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 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 in the most commercially desirable locations, which we believe includes commercial 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 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 locations. If, as a result of these possibilities, we are unable to increase the placement of our network into commercial locations that advertisers find desirable, we may be unable to expand our client base, sell advertising time slots on our network or increase the rates we charge for time slots, which could decrease the value of our network to advertisers.

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Acquisitions, including acquisitions of some of our regional distributors, which forms a part of our growth strategy, may have an adverse effect on our ability to manage our business, and our revenues and net income.
       In 2004, we acquired eleven companies, including eight of our former regional distributors. Subsequent to December 31, 2004, we have acquired an additional six companies, five of which are former regional distributors. Acquisitions, including acquisitions of some of our regional distributors, continue to form a part of our growth strategy. If we are presented with appropriate opportunities, we may acquire some or all of our regional distributors or other businesses, technologies, services or products which are complementary to our core out-of-home television advertising network business. Future acquisitions and the subsequent integration of our regional distributors and other companies with our existing operations may require significant attention from our management. The diversion of our management’s attention and any difficulties encountered in the integration of newly acquired companies could have an adverse effect on our ability to manage our business. Future acquisitions may also expose us to potential risks, including risks associated with the integration of new operations, services and personnel, 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, any of which could have a material and adverse effect on our ability to manage our business, and our revenues and net income.
If we are unable to attract advertisers to purchase advertising time on our network, we will be unable to maintain or increase our advertising fees and the demand for time on our network, which could negatively affect our ability to grow revenues.
       The amounts of fees we can charge advertisers for time slots on our network depend on the size and quality of our network and the demand by advertisers for advertising time on our network. Advertisers choose to advertise on our network in part based on the size of our network 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 commercial locations and flat-panel displays in our network, diversify advertising channels in our network, or solidify our brand name and reputation as a quality provider of advertising services, advertisers may be unwilling to purchase time on our network or to pay the levels of advertising fees we require to remain profitable. Our failure to attract advertisers to purchase time on our network will reduce demand for time slots on our network and the number of time slots 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.
Our strategy of expanding our network of flat-panel displays into hypermarkets, supermarkets, convenience stores and other types of businesses that have control over many stores may not succeed, and our failure to do so could materially reduce the attractiveness of our network and harm our business, reputation and results of operations.
       Our strategy includes expansion of our network of flat-panel displays into large-scale chain retail stores, or hypermarkets, and other types of businesses that have control over many store locations such as supermarkets and convenience stores. We commenced operation of this network, which we refer to as our in-store network, in April 2005. As a relatively new and untested portion of our business, it is difficult to evaluate how our in-store network will perform, and there exists the risk that it may not succeed at all. Many of our arrangements with such businesses are and will continue to be handled through a single or small number of display 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

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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 network and harm our business, reputation and results of operations.
       For example, we are in the process of expanding our network into the Hymart chain of hypermarkets in Shanghai. We subsequently received a notice from Shanghai Xichen Cultural Dissemination Co., Ltd., or Xichen, 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 Xichen. 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 Xichen against Hymart. If Xichen brings such a suit against Hymart, we may be required to compensate Hymart for any damages it suffers or to remove our displays from certain of 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 March 31, 2005, we covered 22 out of the 44 cities where we provide our out-of-home advertising 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 network that they operate independently, and our regional distributors may include advertising content on their part of the 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 mangers 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 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

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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, 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 in our existing and future commercial 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 flat-panel displays for our network which are manufactured by a third-party contract assembler 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 have already begun expanding our advertising network and 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. We may encounter difficulties when we expand into the Hong Kong market or if we begin operations in other countries due to 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.
We depend on the leadership and services of Jason Nanchun Jiang, who is our founder, chairman, chief executive officer and our largest shareholder; 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 March 31, 2005, we had 413 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. 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

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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 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 could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
       Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
  •  investors’ perception of, and demand for, securities of alternative advertising media companies;
 
  •  conditions of the U.S. and other capital markets in which we may seek to raise funds;
 
  •  our future results of operations, financial condition and cash flows;
 
  •  PRC governmental regulation of foreign investment in advertising services companies in China;
 
  •  economic, political and other conditions in China; and
 
  •  PRC governmental policies relating to foreign currency borrowings.
       We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
If we are unable to adapt to changing 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 LCD screens. We also have a small number of displays that use 42-inch plasma screens. We currently broadcast advertisements on our advertising network primarily through digital video disks, or DVDs, and increasingly through compact flash, or CF, cards 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 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

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advantage over us. If we cannot succeed in defining, developing and introducing new features on a timely and cost-effective basis, advertiser demand for our advertising network 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 television 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 network 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 network each of them operates. In general, the advertisements shown on our network and the portion of our network operated by our regional distributors have previously been broadcast over public television networks and have been subjected to internal review and verification of such networks. We and our regional distributors are still separately required to independently review and verify these advertisements for content compliance before displaying the advertisements. In addition, where a special government review is required for certain 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 certain 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 require 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 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 certain 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.
       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 network. If consumers find the content displayed on our 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 DVDs or CF cards in our flat-panel displays and unauthorized images, text or audio sounds are displayed on our 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

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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 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 flat-panel displays or other aspects of our business do not or will not infringe upon patents, copyrights or other intellectual property rights held by third parties. Although we are not aware of any such claims, we may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, which may materially and adversely disrupt our business.
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.
       Our primary competitors are other advertising companies that operate out-of-home television advertising networks in China, such as 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 network operators for access to the most desirable locations in economically developed cities in China. Individual buildings, hotels, restaurants and other commercial locations and hypermarket, supermarket and convenience store chains may also decide to install and operate their own flat-panel television screens on a small scale. We also compete for overall advertising spending with other alternative advertising media companies, such as Internet, street furniture, billboard 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 sector with relatively low entry barriers. In addition, wholly foreign owned advertising companies will be allowed to operate in China starting on December 10, 2005, 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 and may be able to 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.

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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 nature of our business activities, we may be classified as a passive foreign investment company by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. 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 deficiencies with our internal controls and there remain areas of our internal 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.
       Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a young, private company with limited accounting personnel and other resources with which to address our internal controls and procedures. As a result, when our auditors audited our financial statements in connection with this offering, 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 had not 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 or 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 our receipt of this report, we consulted with our audit committee and undertook remedial steps to address these deficiencies, including hiring additional staff and training our new and existing staff. In particular, we recently hired our chief financial officer, an internal auditor, a financial controller and an in-house general counsel. As of March 31, 2005, our auditors found that we no longer had any material weaknesses. However, we still need to take further actions to continue to improve our internal controls. If we are unable to implement solutions to any weaknesses

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in our existing internal controls and procedures, or if we fail to maintain an effective system of internal controls in the future, we may be unable to accurately report our financial results or prevent fraud and investor confidence and the market price of our ADSs may be adversely impacted.
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 conducted through Focus Media Technology, our indirectly wholly-owned operating subsidiary in China, and 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 currently limit foreign ownership of companies that provide advertising services to 70% and 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. We do not currently directly operate an advertising business outside of China and cannot qualify under PRC regulations any earlier than two 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 and Focus Media Digital, are currently ineligible to apply for the required licenses for providing advertising services in China. Our advertising business is currently provided through our contractual arrangements with our 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 and several of its subsidiaries 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 sell 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. 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. In addition, we have entered into agreements with Focus Media Advertisement and each of the shareholders of Focus Media Advertisement, which provide us with the substantial ability to control Focus Media Advertisement.
       If we, Focus Media Technology, Focus Media Digital, Focus Media Advertisement or its subsidiaries 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 of 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.

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       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 its subsidiaries and shareholders for a substantial portion of our China operations, which may not be as effective in providing operational control as direct ownership.
       We rely on contractual arrangements with Focus Media Advertisement and its subsidiaries and shareholders to operate our advertising business. For a description of these contractual arrangements, see “Our Corporate Structure” and “Related Party Transactions”. These contractual arrangements may not be as effective in providing us with control over Focus Media Advertisement as direct ownership. If we had direct ownership of Focus Media Advertisement, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Focus Media Advertisement, 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 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 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 of 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 or Focus Media Advertising Agency are ineligible for their tax exemptions, would substantially increase our taxes owed and reduce our net income and the value of your investment.

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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 subsidiary 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 for our cash requirements, including the funds necessary to service any debt we may incur. If Focus Media Technology incurs debt on its own behalf in the future, the instruments governing the debt may restrict Focus Media Technology’s 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 and Focus Media Digital currently have in place with Focus Media Advertisement and its subsidiaries in a manner that would materially and adversely affect Focus Media Technology’s ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by Focus Media Technology only out of its retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Focus Media Technology is also required to set aside a portion of its net income each year to fund certain 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 this restricted portion was approximately $14,792,000. Any limitation on the ability of Focus Media Technology 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.
Certain 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. Certain of our PRC operating companies historically engaged in business activities that were related to the advertising industry but 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. 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, 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, 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

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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 beginning on 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 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 authorities 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, or Focus Media Digital through Focus Media Technology, by means of capital contributions. These capital contributions to Focus Media Technology 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, Focus Media Advertisement or any of its subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations would be negatively affected which would adversely and materially affect our liquidity and our ability to expand our business.
Risks Relating to the People’s Republic of China
       Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
The PRC’s economic, political and social conditions, as well as governmental policies, could affect the financial markets in China and our liquidity and access to capital and our ability to operate our business.
       The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in

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the past 25 years, 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. Moreover, the PRC government has passed regulations encouraging investment in the advertising industry, including regulations that, subject to certain requirements, currently allow foreign entities to own 70% of a PRC advertising business and, beginning on December 10, 2005 will allow 100% foreign ownership. 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-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 certain 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 25 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Our PRC operating subsidiary, Focus Media Technology, is a wholly foreign-owned enterprise which is an enterprise incorporated in China and wholly-owned by foreign investors. Focus Media Technology is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to wholly foreign-owned enterprises in particular. 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. 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

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protections available to us, including our ability to enforce our agreements with Focus Media Advertisement, and other foreign investors, including you.
Recent regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.
       Regulations were recently promulgated by the PRC State Development and Reform Commission, or SDRC, and the PRC State Administration of Foreign Exchange, or SAFE, that will require registrations with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. These regulations apply to our shareholders who are PRC residents and may also apply to certain of our offshore acquisitions as well.
       The SAFE regulations retroactively require registration of direct or indirect investments previously made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
       We have already notified our shareholders, and the shareholders of the offshore entities in our corporate group, who are PRC residents to urge them to make the necessary applications and filings, as required under these regulations and under any implementing rules or approval practices that may be established under these regulations. However, as a result of the newness of the regulations, lack of implementing rules and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains 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. We are committed to complying, and to ensuring that our shareholders who are subject to these regulations comply, with the relevant rules. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by these regulations or other related legislation. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which 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 Certain 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

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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 certain 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 service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans. Currently, Focus Media Technology may purchase foreign exchange for settlement of “current account transactions”, including payment of dividends to us, without the approval of the State Administration of Foreign Exchange. 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 Focus Media Technology’s ability 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. For example, due to the recent devaluation of the U.S. dollar against the euro and several other currencies, the PRC government has indicated that it may be re-evaluating its decade-old policy of pegging the value of the Renminbi to 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.

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       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 in China, or similar adverse public health developments, may severely disrupt our business and operations.
       From December 2002 to June 2003, China and certain 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. A new outbreak of SARS 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, or a development of a similar health hazard in China, may deter people from congregating in public places, including a range of commercial locations such as office buildings and retail stores. Such occurrences would severely impact the value of our out-of-home television advertising network to advertisers, significantly reduce the advertising time purchased by advertisers and severely disrupt our business and operations.
Risks Relating to this Offering
An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.
       Prior to this offering, there has been no public market for our ADSs or our ordinary shares underlying the ADSs. If an active public market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be adversely affected. We have applied for quotation of our ADSs on The Nasdaq Stock Market Inc.’s National Market. We can provide no assurances that a liquid public market for our ADSs will develop. The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the price at which the ADSs are traded after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a decrease in the value of their ADSs regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our results of operations.
The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.
       The trading prices of our ADSs are likely to be volatile and could fluctuate widely in response to factors beyond our control. In particular, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. Recently, a number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. Some of these companies have experienced significant volatility, including significant price declines in connection with their initial public offerings. The

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trading performances of these PRC companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. These broad market and industry factors may significantly affect the market price and volatility of our ADSs, regardless of our actual operating performance.
       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.
       There will be                      ordinary shares (equivalent to                      ADSs) outstanding immediately after this offering, or                      ordinary shares (equivalent to                      ADSs) if the underwriters exercise their option to purchase additional ADSs in full. In addition, as of                     , there were outstanding options to purchase 32,468,200 ordinary shares, including options to purchase                      ordinary shares that are immediately exercisable. 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. The 300,731,000 ordinary shares outstanding prior to this offering (assuming the conversion of all outstanding preference shares into ordinary shares and the exercise of all outstanding options to acquire ordinary shares) 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.
       In connection with this offering, we, our controlling shareholders and our directors and executive officers who have received options to purchase 20,643,400 ordinary shares and have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus and to sell no more than half of their ordinary shares or ADSs owned immediately prior to this offering until the first anniversary of the date of this prospectus without the written consent of the underwriters. 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 owns, through his 100% ownership of JJ Media Investment Holding Ltd., approximately           % of our outstanding ordinary shares (assuming the conversion of all outstanding preference shares into ordinary shares) or           % if the underwriters exercise their option to purchase additional ADSs in full. Jason Nanchun Jiang is

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expected to be 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.
Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will incur immediate and substantial dilution.
       If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $                    per ADS (assuming the conversion of all outstanding preference shares into ordinary shares and no exercise of outstanding options to acquire ordinary shares), representing the difference between our pro forma net tangible book value per ADS as of                     , after giving effect to this offering and the assumed initial public offering price per ADS of $                    per ADS (the mid-point of the estimated offering price range set forth on the front cover page of this prospectus). In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. Substantially all of the ordinary shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.
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 memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.
       For example, our board of directors will have the authority, without further action by our shareholders, to issue preference shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preference shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if the Board of Directors issues preference shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. See “Description of Share Capital — Issuance of Additional Ordinary Shares or Preference Shares.”
       In addition, certain 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

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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 our 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.
Certain 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, none of whom is resident in the United States and the substantial majority of whose assets is located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of United States courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, there is uncertainty as to whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state. See “Enforcement of Civil Liabilities”.
We have not determined a specific use for a portion of the 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 the 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

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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 10 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 notify the depositary that:
  •  we do not deliver voting materials and instructions to the depositary in a timely manner, or
 
  •  we do not wish to receive a discretionary proxy, or
 
  •  we think there is substantial shareholder opposition to the particular question, or
 
  •  we think the particular question would have a material adverse impact on our shareholders, or
whenever the vote is made on a show of hands.
       The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
You may not receive distributions on our ordinary shares or any value for them if it is illegal or impractical to make them available to you.
       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

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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;
 
  •  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 new in-store network;
 
  •  our plans to identify and create new advertising networks that target specific consumer demographics, which could allow us to charge a separate fee;
 
  •  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 relating to the advertising industry.
       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 the “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 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 Shareholders
       We are currently 41.3% owned by JJ Media, a company whose sole shareholder is Jason Nanchun Jiang, our founder, chairman and chief executive officer.
       Assuming conversion of the preference shares owned by our preference shareholders, our other principal shareholders include:
  •  GS Focus Holding Limited, a Cayman Islands company whose shareholders are investment funds affiliated with and managed by Goldman, Sachs & Co., an affiliate of Goldman Sachs (Asia) L.L.C., which beneficially owns 12.9% of our outstanding shares;
 
  •  CDH FM Limited, which beneficially owns 8.3% of our outstanding shares;
 
  •  United Capital Investment and its affiliated entities, which together beneficially own 6.0% of our outstanding shares;
 
  •  3i Group, which beneficially owns 5.2% of our outstanding shares;
 
  •  Draper Fisher Jurvetson and its affiliated entities, which together beneficially own 5.0% of our outstanding shares;
 
  •  Capital International Private Equity, which beneficially owns 3.2% of our outstanding shares;
 
  •  Victory Venture Capital Limited, which beneficially owns 3.2% of our outstanding shares; and
 
  •  SOFTBANK Corp., which beneficially owns 3.0% of our outstanding shares.
       Together, the holdings of these institutional investors equal 46.9% of our outstanding shares.
       The remaining 11.8% of our ordinary shares is held by various institutional and individual investors. See “Principal and Selling Shareholders” for further information on our shareholding structure.
Our History
       Our predecessor company, Shanghai Aiqi Advertisement Co., Ltd., or Aiqi Advertisement, was established by certain 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 continues 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.
Our Corporate Structure and Contractual Arrangements
       Substantially all of our operations are conducted in China through Focus Media Technology, our indirect wholly-owned subsidiary in China, and 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, including Focus Media Advertisement and its subsidiaries. Focus Media Advertisement owns the remaining 10% equity interest in Focus Media Digital.

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       The following diagram illustrates our corporate structure:
LOGO
 
(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)  Prior to May 2003, Focus Media Advertisement’s corporate name was Shanghai Aiqi Advertisement Co., Ltd.
(5)  Focus Media Advertisement’s ownership interests in its subsidiaries are set forth in the table below under “— Subsidiaries of Focus Media Advertisement”.
       PRC regulations currently limit foreign ownership of companies that provide advertising services in China to 70% and require any foreign companies that invest in businesses that provide advertising services in China to have 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 allowing 70% foreign ownership of a PRC advertising company any earlier than two years 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. 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 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 and several of its subsidiaries 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 sell 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 until we qualify for direct ownership of an advertising business in China under PRC laws and regulations and acquire Focus Media Advertisement and its subsidiaries as our direct, wholly-owned subsidiaries, as described below. We, Focus Media Technology and

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Focus Media Digital have entered 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.
       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 on December 10, 2005, foreign investors will be allowed to own 100% of PRC companies operating advertising business if the foreign entity has at least three 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 100% ownership of a PRC advertising company under PRC regulations any earlier than three years 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.
Agreements that Transfer Economic Benefits to Us
       Pursuant to our contractual arrangements with Focus Media Advertisement and its subsidiaries, 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 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 license technology to, and provide technical support and consulting services for the operations of, Focus Media Advertisement and its subsidiaries for a fixed monthly fee.
 
  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 its trademarks and brand name to Focus Media Advertisement and its subsidiaries in exchange for a monthly license fee.
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

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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 March 28, 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 certain 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 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

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  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 ownership structures of Focus Media Technology, Focus Media Digital, Focus Media Advertisement and its subsidiaries, both currently and after giving effect to this offering, are in compliance with existing PRC laws and regulations;
 
  •  the contractual arrangements among Focus Media Technology, Focus Media Digital, Focus Media Advertisement and its shareholders and subsidiaries governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and
 
  •  the business operations of Focus Media Technology, Focus Media Digital and Focus Media Advertisement and their respective subsidiaries, 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 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 — 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”.
Subsidiaries of Focus Media Advertisement
       The following table sets forth information concerning Focus Media Advertisement’s subsidiaries:
                     
    Focus Media        
    Advertisement’s   Region of    
    Ownership Percentage   Operations   Primary Business
             
Shanghai Focus Media Advertising Agency Co., Ltd.
    90.0% (1)     Shanghai     Advertising agency
Shanghai Perfect Media Advertising Co., Ltd.
    90.0% (1)     Shanghai     Advertising company that operates advertising services network on shoe-shining machines
Qingdao Fukesi Advertisement Co., Ltd.
    90.0% (1)     Qingdao     Operation and maintenance of out-of- home television advertising network (former regional distributor)

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    Focus Media        
    Advertisement’s   Region of    
    Ownership Percentage   Operations   Primary Business
             
Changsha Focus Media Shiji Advertisement Co., Ltd.
    90.0% (1)     Changsha     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Dalian Focus Media Advertising Co., Ltd.
    90.0% (1)     Dalian     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Shanghai Qianjian Advertising Co., Ltd.
    90.0% (1)     Shanghai     Operation and maintenance of out-of- home television advertising network in banking locations
Guangzhou Framedia Advertising Company Ltd.
    90.0% (1)     Guangzhou     Operation and maintenance of out-of- home television advertising network
Zhuhai Focus Media Culture and Communication Company Ltd.
    90.0% (1)     Zhuhai     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Hebei Tianma Weiye Advertising Company Ltd.
    90.0% (2)     Hebei     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Xiamen Focus Media Advertising Company Ltd.
    90.0% (2)     Xiamen     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Sichuan Focus Media Advertising Communications Co., Ltd.
    90.0% (3)     Chengdu     Operation and maintenance of out-of- home television advertising network
Nanjing Focus Media Advertising Co., Ltd.
    90.0% (3)     Nanjing     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Yunnan Focus Media Co., Ltd.
    89.5% (3)     Kunming     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Tianjin Focus Tongsheng Advertising Company Ltd.
    80.0% (3)     Tianjin     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Zhejiang Ruihong Focus Media Advertising Communications Co., Ltd.
    80.0% (3)     Hangzhou     Operation and maintenance of out-of- home television advertising network (former regional distributor)

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    Focus Media        
    Advertisement’s   Region of    
    Ownership Percentage   Operations   Primary Business
             
Wuhan Geshi Focus Media Advertising Co., Ltd.
    75.0% (3)     Wuhan     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Xian Focus Media Advertising & Information Company Ltd.
    70.0% (3)     Xian     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Chongqing Geyang Focus Media Culture & Broadcasting Co., Ltd. 
    60.0% (3)     Chongqing     Operation and maintenance of out-of- home television advertising network (former regional distributor)
Shanghai On-Target Advertisement Communications Co., Ltd. 
    60.0% (3)     Shanghai     Advertising agency
 
(1)  The remaining equity interest in this entity is owned by Jimmy Wei Yu as our nominee holder.
 
(2)  The remaining equity interest is held by Focus Media Advertising Agency.
 
(3)  The remaining equity interest in this entity is owned by unrelated third parties.

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USE OF PROCEEDS
       We estimate that we will receive net proceeds from this offering of approximately $                     million, or approximately $                     million if 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.
       As of the date of this prospectus, we have not allocated any specific portion of the net proceeds of this offering for any particular purpose discussed below. We anticipate using approximately $20 million of the net proceeds of this offering in 2005 and approximately $20 million in 2006 for capital expenditures in connection with the expansion of our advertising network and operations, of which approximately $14 million will be used in 2005 for the expansion and operation of our in-store network. We expect to use the balance for general corporate purposes, including incremental costs associated with being a public company, and for acquisitions or investments in certain of our regional distributors, other businesses, products or technologies that we believe are complementary to our own business or that otherwise extend our business or brand. If and when we qualify for direct ownership of Focus Media Advertisement, as discussed more fully in “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.
       For a discussion of our strategies, see “Business — Our Strategies”. We do not currently have any agreements or understandings to make any material acquisitions of, or investments in, other businesses.
       The foregoing represents our current intentions with respect of 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 or 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.

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       We may also determine to finance Focus Media Technology or Focus Media Digital through Focus Media Technology 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 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 “Regulation of Our Industry” included elsewhere in 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, Focus Media Advertisement or any of its 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 48,648 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 will no longer be 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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CAPITALIZATION
       The following table sets forth, as of March 31, 2005:
  •  our actual capitalization; and
 
  •  our pro forma capitalization to give effect to the issuance and sale of                     ADSs offered hereby at an assumed initial public offering price of $                     per ADS, the mid-point of the estimated public offering price range shown on the front cover of this prospectus, 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.
       Upon the completion of this offering:
  •  under the terms of our Series A and Series B convertible redeemable preference shares, all of the outstanding Series A and Series B convertible redeemable preference shares will mandatorily convert into ordinary shares if (i) the offering involves the successful issuance of at least 25% of our fully-diluted share capital upon completion of the offering and (ii) our total market capitalization upon completion of the offering is not less than $200,000,000; and
 
  •  under the terms of our Series C convertible redeemable preference shares, all outstanding preference shares will mandatorily convert into ordinary shares if (i) the offering involves the successful issuance of at least 25% of our fully-diluted share capital upon completion of the offering and (ii) our total market capitalization upon completion of the offering is not less than $335,000,000.
                 
    As of March 31, 2005
     
    Actual   Pro Forma(1)
         
    (in thousands of U.S. dollars,
    except for share and per share data)
Shareholders’ equity (deficiency):
               
Ordinary shares ($0.00005 par value;
885,516,600 shares authorized, 300,731,000 shares issued and outstanding)
  $ 7     $    
Series A convertible redeemable preference shares ($0.00005 par value; 41,967,400 shares authorized and 41,967,400 shares issued and outstanding as of March 31, 2005)
    6,295        
Series B convertible redeemable preference shares ($0.00005 par value; 48,191,600 shares authorized and 48,191,600 shares issued and outstanding as of March 31, 2005)
    12,063        
Series C-1 convertible redeemable preference shares ($0.00005 par value; 34,054,000 shares authorized and 34,054,000 shares issued and outstanding as of March 31, 2005)
    17,500        
Series C-2 convertible redeemable preference shares ($0.00005 par value; 34,053,400 shares authorized and 34,053,400 shares issued and outstanding as of March 31, 2005)
    17,415        
Additional paid-in capital
    6,168          
Deferred share-based compensation
    (823 )        
Retained earnings (accumulated deficit)
    (7,908 )        
Accumulated other comprehensive loss
    (41 )        
Total shareholders’ equity (deficiency)
    50,676          
             
Total capitalization
  $ 50,676     $    
             
 
(1)  Assumes that the underwriters do not exercise their over-allotment option.

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DILUTION
       Our net tangible book value as of March 31, 2005 was approximately $                     million, or $                    per ordinary share outstanding at that date, and $                    per ADS. Net tangible book value per ordinary share is determined by dividing our net tangible book value by the number of outstanding ordinary shares. Our net tangible book value is determined by subtracting the value of our intangible assets and total liabilities from our total assets. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share. The number of ordinary shares used to calculate dilution assumes the conversion of our outstanding preference shares into ordinary shares that will occur upon the consummation of this offering.
       Without taking into account any other changes in such net tangible book value after March 31, 2005, other than to give effect to (i) the conversion of all our preference shares into ordinary shares that will occur upon the consummation of this offering, and (ii) our sale of the                     ADSs offered in this offering at the assumed initial public offering price of $                    per ADS with estimated net proceeds of $                     million after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value at March 31, 2005 would have been $                     million, $                    per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and $                    per ADS. This represents an immediate increase in pro forma net tangible book value of $                    per ordinary share, or $                    per ADS, to existing shareholders and an immediate dilution in pro forma net tangible book value of $                    per ordinary share, or $                    per ADS, to new investors in this offering.
       The following illustrates each per ordinary share dilution:
         
Assumed initial public offering price per ordinary share
  $    
Pro forma tangible book value per ordinary share at March 31, 2005, assuming conversion of           preference shares
       
Increase in net tangible book value per ordinary share attributable to price paid by new investors
       
Pro forma net tangible book value per ordinary share after the offering
       
Dilution in net tangible book value per ordinary share to new investors in the offering
  $    
Dilution in net tangible book value per ADS to new investors in the offering
  $    
       The following table summarizes on a pro forma basis the differences as of March 31, 2005 between the shareholders at our most recent fiscal year end and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid. The total ordinary shares do not include                     ADSs issuable if the underwriters exercise their over-allotment option or any exercise of the                     share options to purchase our ordinary shares outstanding as of March 31, 2005.
                                                   
    Ordinary shares       Average price    
    purchased   Total consideration   per ordinary   Average price
            share   per ADS
    Number   Percent   Amount   Percent   equivalent   equivalent
                         
Existing shareholders
                  $               $       $    
New investors
                  $               $       $    
                                     
 
Total
            100 %   $         100 %   $       $    
                                     

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       The foregoing discussion and table also assumes no exercise of any outstanding share options. As of March 31, 2005, there were share options outstanding to purchase an aggregate of 162,341 ordinary shares at a weighted average exercise price of $                    per share. If all these options had been exercised on March 31, 2005, before giving effect to this offering, our pro forma net tangible book value would have been approximately $                    , or $                    per ordinary share and $                    per ADS, the increase in net tangible book value attributable to existing shareholders would have been $ per ordinary share, or $                    per ADS, and the dilution in net tangible book value to new investors would have been $ per ordinary share, or $                    per ADS. In addition, the dilution will be $                    per ordinary share, or $                    per ADS, if the underwriters exercise their option to purchase additional ADSs in full.

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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 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 RMB8.2765, which was the prevailing rate on March 31, 2005. The prevailing rate at                     , 2005 was $1.00 to RMB                    . We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
       The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this 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  
 
July
    8.2767       8.2769       8.2766       8.2769  
 
August
    8.2768       8.2770       8.2766       8.2766  
 
September
    8.2766       8.2768       8.2766       8.2766  
 
October
    8.2766       8.2768       8.2765       8.2765  
 
November
    8.2765       8.2765       8.2764       8.2765  
 
December
    8.2765       8.2765       8.2765       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 (through June 10)
    8.2765       8.2765       8.2765       8.2765  
 
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 three months ended March 31, 2004 and 2005 and balance sheet data as of March 31, 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 television advertising network.
                                                             
        For the three months
    For the year ended December 31,   ended March 31,
         
    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 service revenue(1) :
                                                       
   
Unrelated parties
  $ 36     $ 30     $ 24     $ 2,270     $ 22,896       2,694       8,400  
   
Related parties
                      1,099       3,425             1,032  
 
Advertising equipment revenue
                      389       2,889       438       142  
                                           
   
Total revenues
    36       30       24       3,758       29,210       3,132       9,574  
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
                      1,566       6,823       1,037       3,256  
 
Net advertising equipment cost
                      275       1,934       304       71  
                                           
Total cost of revenues
                      1,841       8,757       1,341       3,327  
                                           
Gross profit
    36       30       24       1,917       20,453       1,791       6,247  
                                           

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        For the three months
    For the year ended December 31,   ended March 31,
         
    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 $334 for the three months ended March 31, 2004 and 2005, respectively)
    31       28       21       985       4,015       405       1,895  
 
Selling and marketing
    5       2       3       407       3,426       289       1,478  
 
Goodwill impairment loss
                                    59              
                                           
Total operating expenses
    36       30       24       1,392       7,500       694       3,373  
                                           
Income from operations
                      525       12,953       1,097       2,874  
Interest income
                      1       10       3       11  
Other income (expense)
                      (9 )     (4 )     (2 )     5  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                            (11,692 )            
                                           
Income before income taxes and minority interest
                      517       1,267       1,098       2,890  
Total income taxes
                      (482 )     (908 )     383       249  
Minority interest
                      8       13       (2 )     1  
Equity loss of affiliates
                      (18 )                  
                                           
Net income(2)
                      25       372       713       2,642  
                                           

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        For the three months
    For the year ended December 31,   ended March 31,
         
    2000   2001   2002   2003   2004   2004   2005
                             
    (in thousands of U.S. dollars, except per share and per ADS data)
Earnings per share data:
                                                       
Deemed dividend on Series A convertible redeemable preference shares(3)
                            (8,308 )            
Deemed dividend on Series B convertible redeemable preference shares(3)
                            (2,191 )            
Deemed dividend on Series C-1 convertible redeemable preference shares(3)
                            (13,356 )            
Premium of Series B convertible redeemable preference shares
                            12,906              
Income (loss) attributable to holders of ordinary shares
  $     $     $     $ 25     $ (10,576 )     713       2,642  
Income (loss) per share-basic
                          $ 0.00     $ (0.07 )   $ 0.00     $ 0.02  
Income (loss) per share — diluted
  $     $     $     $ 0.00     $ (0.07 )   $ 0.00     $ 0.01  
Income (loss) per ADS, basic and diluted(4)
                                                       
Shares used in calculating basic income per share
                      144,657,600       160,998,600       200,000,000       142,464,600  
Share used in calculating diluted income per share
                      144,657,600       160,998,600       200,000,000       315,135,258  
Pro forma net income per share on an as converted basis, basic
                          $ 0.05           $ 0.01  
Pro forma net income per share on an as converted basis, diluted
                          $ 0.05           $ 0.01  
Shares used in calculating pro forma per share amounts on an as converted basis, basic
                            242,229,400             300,731,000  
Shares used in calculating pro forma per share amounts on an as converted basis, diluted
                            243,237,323             315,135,258  
ADSs used in calculating basic and diluted net income per ADS(4)
                            242,229,400              
                                                 
        As of
    As of December 31,   March 31,
         
    2000   2001   2002   2003   2004   2005
                         
    (in thousands of U.S. dollars)
Consolidated Balance Sheets Data:
                                               
Cash and cash equivalents
  $ 24     $ 12     $ 15     $ 716     $ 22,669     $ 15,114  
Other current assets(5)
    86       120       106       1,902       12,713       14,084  
Non-current assets(6)
    13       12       8       2,688       21,033       31,642  
Total assets
    123       144       129       5,306       56,415       60,840  
Total current liabilities
    1       22       7       4,119       8,634       10,083  
Minority interest
                      4       81       80  
Mezzanine equity
                            53,273       53,273  
Total shareholders’ equity (deficiency)
  $ 122     $ 122     $ 122     $ 1,183     $ (5,573 )   $ (2,596 )

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    As of    
    December 31,   As of
        March 31,
    2003   2004   2005
             
Selected Operating Data:
                       
Number of displays in our commercial location network:
                       
 
Our direct cities
    827       12,786       16,025  
 
Our regional distributors(7)
    201       2,629       1,847  
   
Total
    1,028       15,415       17,872  
Number of displays in our in-store network(8)
                3,149  
                         
    For the three months ended
     
    December 31,    
        March 31,
    2003   2004   2005
             
Number of time slots available for sale(9)
    1,299       5,170       6,010  
Number of time slots sold(10)
    292       2,209       1,998  
Utilization rate(11)
    22.5 %     42.7 %     33.2 %
Average quarterly advertising service revenue per slot sold (US$)
  $ 8,177     $ 5,018     $ 4,721  
                                         
    For the year ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (in thousands of U.S. dollars)
Other Financial Data:
                                       
Adjusted net income(12)
                    $ 25     $ 12,065  
 
(1)  Advertising service revenue is presented net of business tax, which amounted to $1,405, $311,770, $2,788,233, $324,634 and $936,405 in 2002, 2003 and 2004 and for the three months ended March 31, 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)  See “Other Financial Data” below for a presentation of our adjusted net income.
 
 
(3)  Upon conversion of our Series A, Series B, Series C-1 and Series C-2 convertible redeemable preference shares into ordinary shares, we will no longer be required to record deemed dividends prospectively.
 
 
(4)  Each ADS represents ten of our ordinary shares.
 
 
(5)  Other current assets is equal to total current assets less cash and cash equivalents.
 
 
(6)  Non-current assets is equal to total assets less total current assets.
 
 
(7)  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.
 
 
(8)  We commenced operation of our in-store network in April 2005.
 
 
(9)  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-minute 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 Beijing, Shanghai, Guangzhou and Shenzhen and nine minutes in the other cities in which we operate.
(10)  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.
 
 
(11)  Utilization rate refers to total time slots sold as a percentage of total time slots available during the relevant period.

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(12)  We define adjusted net income as net income excluding change in fair value of derivative liability associated with Series B convertible redeemable preference shares. This definition may not be comparable to similarly titled measures reported by other companies. We are presenting adjusted net income because it provides an additional way to view our operations, when considered with both our GAAP results and the reconciliation to net income which we believe provides a more complete understanding of our business than could be obtained without this disclosure for the following reason. The change in fair value of derivative liability associated with Series B convertible redeemable preference shares was a one-time non-cash charge we incurred in 2004 in connection with an embedded derivative feature of our Series B convertible redeemable preference shares that will not affect us in the future, as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004. This financial measure shows what our net income would have been without the effect of this one-time non-cash charge. The use of adjusted net income has limitations and you should not consider adjusted net income in isolation from or as an alternative to GAAP measures, such as net income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. The following table sets forth the reconciliation of adjusted net income, a non-GAAP financial measure, from net income, our most directly comparable financial measure presented in accordance with GAAP:
                                         
    For the year ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (in thousands of U.S. dollars)
Net income
                    $ 25     $ 373  
Change in fair value of derivative liability associated with Series B convertible redeemable preference shares
                            11,692  
                               
Adjusted net income
                    $ 25     $ 12,065  
                               

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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
       We operate the largest out-of-home advertising network in China using audiovisual television displays instead of traditional billboards to broadcast advertising, based on the number of locations and number of flat-panel television displays in our network. We derive revenue principally by selling advertising time slots on our network. Our flat-panel television displays are placed primarily in high-traffic areas of commercial office buildings such as in lobbies and near elevators, as well as in large retail chain stores, beauty parlors, karaoke parlors, golf country clubs, auto shops, banks, pharmacies, hotels and airports.
       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; and
 
  •  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.
 
  •  For the three months ended March 31, 2005, we generated total revenues and net income of $9.6 million and $2.6 million, respectively, which we derived primarily from the operation of our commercial location network. As of March 31, 2005, our commercial location network consisted of 16,025 flat-panel displays in 8,866 locations in the 22 cities where we operate directly and approximately 1,847 flat-panel displays in approximately 1,611 locations in the 22 cities where the network is operated by our regional distributors.
       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 the four most important cities in which we operate, — Beijing, Shanghai, Guangzhou and Shenzhen — 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. Our relationships with regional distributors allow us to generate revenue through (i) the sale of our flat-panel displays to them and, (ii) because we receive the right to use two minutes of each nine-minute cycle of advertising time on their networks, the subsequent sale of

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that time to our advertising clients. Our regional distributors also enable us to provide advertising customers with a broader network.
       We expect our future growth to be driven by a number of factors and trends including:
  •  Overall economic growth in China, which we expect to contribute to an increase in advertising spending in major urban areas in China where consumer spending is concentrated;
 
  •  Our ability to 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;
 
  •  Our ability to expand our client base through promotion of our services;
 
  •  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 beauty parlors and golf country clubs.
       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. Starting July 1, 2005, we intend to extend the cycle time to twelve minutes, or 24 30-second time slots per week in those of our directly operated cities that currently use 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 intend to implement a 5-10% price increase for time slots on our network in our directly operated cities. The attractiveness and effectiveness of our 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 identify and occupy desirable locations and to establish other stand alone networks that provide effective channels for advertisers, such as our in-store network. 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
       Our predecessor entity, Aiqi Advertisement, was established by certain immediate family members of Jason Nanchun Jiang in September 1997 and operated as an advertising agency prior to May 2003, when we changed our business model to the operation of an out-of-home television advertising network. To carry out this change in business model, in May 2003, Aiqi Advertisement discontinued its advertising agency business, was renamed Shanghai Focus Media Advertisement Co., Ltd, or Focus Media Advertisement, commenced operation of our out-of-home advertising network in China and reorganized its shareholdings to become a part of our group.

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       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 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”.
Revenues
       In 2003 and 2004 and for the three months ended March 31, 2005, we had total revenues of $3.8 million, $29.2 million and $9.6 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 network and our new 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 three months ended March 31, 2005, our advertising service revenue accounted for 89.6%, 90.1% and 98.5% of our total revenues, respectively.
       The following table sets forth a breakdown of our total revenues for the periods indicated:
                                                                                     
    For the year ended December 31,   For the three months ended March 31,
         
    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 %   $ 2,694       86.0 %   $ 8,400       87.7 %
   
Related parties
                1,099       29.2 %     3,425       11.7 %                 1,031       10.8 %
 
Advertising equipment revenue
                389       10.4 %     2,889       9.9 %     438       14.0 %     142       1.5 %
                                                             
   
Total revenues
  $ 24       100.0 %   $ 3,758       100.0 %   $ 29,210       100.0 %   $ 3,132       100.0 %   $ 9,574       100.0 %
                                                             
 
(1)  Advertising service revenue is presented net of business tax, which amounted to $1,405, $311,770, $3.1 million, $324,634 and $936,405 in 2002, 2003 and 2004 and for the three months ended March 31, 2004 and 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0%.
Advertising Service Revenue
       Sources of Revenues. We derive most our total revenues from the sale of time slots on our advertising network to unrelated third parties and to certain 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 certain of our

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regional distributors and other advertising-related services commissioned by certain 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 in the foreseeable future.
       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 the PRC. 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. Our advertising service revenue 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-minute portion of time slots available on our regional distributors’ networks and the length of the advertising cycle, which is currently twelve minutes in Beijing, Shanghai, Guangzhou and Shenzhen and nine minutes in the other cities in which we operate. 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 Beijing, Shanghai, Guangzhou and Shenzhen, 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 other cities where we or 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. Starting July 1, 2005, we intend to extend the cycle time to twelve minutes, or 24 30-second time slots per week, in those of our directly operated cities that currently use nine minute cycles;
 
  •  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. On July 1, 2005, we intend to implement a 5-10% price increase for time slots on our network in our directly operated cities.
       The primary factors that affect the effective price we charge advertising clients for time slots on our network and our utilization rate include the attractiveness of our network to advertisers, which depends on the number of locations and flat-panel displays in our network, the level of demand for time slots in each city, and the perceived effectiveness by advertisers of their advertising campaigns

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placed on our network. As demand for advertising time in our cities increases, we generally consider:
  •  increasing the price we charge for our time slots to generate more revenues; and
 
  •  extending the duration of our advertising cycle in order to increase the number of time slots we can sell each week in that city. We have found we can increase the duration of our weekly advertising cycle from nine to twelve minutes without negatively affecting the price we can charge for each time slot because an increase in the duration of the cycle generally indicates that there is significant demand for time slots on our network, which we believe also indicates a willingness to pay increased rates for time slots.
       Network expansion. As we have expanded our advertising 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 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 and screens in order to continue growing our revenues. We expect to focus on a number of other areas and factors to continue to grow our revenues. To address these potential capacity constraints on our existing network, we are taking steps to create new standalone networks in new types of venues, such as our in-store network, which we expect will attract additional advertisers and increase demand for our services. We are also taking steps to divide our current network into discrete standalone networks that will increase the number of time slots available for sale. We believe these measures will enable us to continue the future growth of our business.
       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 also experience a slight decrease in revenues during the hot summer months of July and August each year, when there is a relative slowdown in overall commercial activity in urban areas in China. Our past experience, although limited, indicates that our revenues would tend to be lower in the first quarter and higher in the fourth quarter of each year, assuming other factors were to remain constant, such as our advertising rates and the number of available time slots on our network.
       Revenue Recognition. 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 between one week and one month. We recognize advertising services revenues 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.
       We collect our advertising services fees by billing our advertising clients within 60 to 90 days after completion of the advertising contract and book these unbilled or unpaid amounts as accounts receivable until we receive payment or determine the account receivable to be uncollectible. Our accounts receivable are general unsecured obligations of our advertising clients and we do not receive interest on unpaid amounts. We make specific reserves for accounts that we consider to be uncollectible. We also provide for 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 three months ended March 31, 2005, we made provision of $173,837 and $211,760, 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 90, respectively, as of December 31, 2003 and 2004 and March 31, 2005.

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Advertising Equipment Revenue
       We also derive a portion of our total revenues from the sale of flat-panel displays to our regional distributors, which we record as advertising equipment revenue. Our advertising equipment revenue represented 10.4%, 9.9% and 1.5% of our total revenues in 2003 and 2004 and for the three months ended March 31, 2005, respectively. We generally set the price of our advertising equipment at our unit cost for procuring them, plus an additional markup that we negotiate with our regional distributors. Because sales of equipment in China are subject to a value added tax, or VAT, equal to 17% of the purchase price, our advertising equipment revenue is recorded net of VAT payments.
       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:
  •  Although we expect to increase the size of our network by entering into distributor relationships in new cities, we also expect to acquire a number of our existing and future regional distributors as the operations of these distributors in their respective cities become more important to our network. After we acquire our regional distributors, any growth in our network in these cities will not involve any future sales of advertising equipment. Accordingly, as we plan to continue to acquire our regional distributors, we expect the growth in advertising equipment revenue to decrease over time as the aggregate number of panels we sell to regional distributors is expected to decrease.
 
  •  We also expect our existing and future regional distributors to continue to expand our network in their respective cities of operation, including by replacing existing equipment as it becomes worn or obsolete. However, we expect that the revenues from advertising equipment sales attributable to that expansion 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 and our ability to increase our advertising rates will be substantially greater than our ability to increase the amount we charge for our advertising equipment.
 
  •  We also expect the downward trend in the unit cost of flat-panel displays and other components to result in sales of advertising equipment accounting for a decreasing portion of our revenues.
       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.
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.

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       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 three months ended
    For the year ended December 31,   March 31,
         
    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 %   $ 3,132       100.0 %     9,574       100.0 %
Cost of revenues:
                                                                               
 
Net advertising service cost:
                                                                               
   
Location costs
                1,159       30.8 %     4,643       15.9 %     737       23.5 %     2,022       21.1 %
   
Flat-panel display depreciation
                149       4.0 %     774       2.6 %     132       4.2 %     518       5.4 %
   
Other(1)
                258       6.9 %     1,406       4.8 %     168       5.4 %     716       7.5 %
     
Sub-total
                1,566       41.7 %     6,823       23.4 %     1,037       33.1 %     3,256       34.0 %
 
Net advertising equipment cost
                275       7.3 %     1,934       6.6 %     304       9.7 %     71       0.8 %
                                                             
Total cost of revenues
              $ 1,841       49.0 %   $ 8,757       30.0 %   $ 1,341       42.8 %     3,327       34.8 %
                                                             
Gross profit/margin
  $ 24       100.0 %   $ 1,917       51.0 %   $ 20,453       70.0 %   $ 1,791       57.2 %   $ 6,247       65.2 %
                                                             
 
(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 consists of location costs, flat-panel display depreciation costs and other cost items, including salary for our network maintenance staff, travel expenses and costs for materials.
       Location Costs. Location costs are the largest component of our cost of revenues and accounted for approximately 30.8%, 15.9% and 21.1% of our total revenues in 2003 and 2004 and for the three months ended March 31, 2005, respectively. Our location costs consist of:
  •  rental fees and one-time signing payments we pay to landlords and property managers 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 83.1%, respectively, of our location costs in 2003 and 2004 and for the three months ended March 31, 2005. 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 2005 as we expand our in-store network and continue to acquire regional distributors 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 been occupied and many of the remaining locations will have a lower cost base. We also expect many new locations we will add to our network to have lower location costs because many of the most desirable and expensive locations have already been occupied. However, when any of 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.

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       Flat-panel Display Depreciation. Our flat-panel display depreciation costs accounted for 4.0%, 2.6% and 5.4%, respectively, of our total revenues in 2003 and 2004 and for the three months ended March 31, 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 network in the cities in which we directly operate and through the acquisition of certain of our regional distributors, 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 as we invest in new networks such as our in-store network. 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 7.5% of our total revenues in 2003 and 2004 and for the three months ended March 31, 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 are 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 0.8%, respectively, of our total revenues in 2003 and 2004 and for the three months ended March 31, 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. Because most of the components used in our flat-panel displays are not designed specifically for our flat-panel displays, they are generally inexpensive and readily available in off-the-shelf form from numerous suppliers. Accordingly, we expect the costs for our flat-panel displays to decrease in the foreseeable future as a percentage of total revenues. Moreover, we expect our net advertising equipment cost to decrease as we continue to acquire certain of our regional distributors, although the amount of this decrease would be partially offset by costs associated with sales to new regional distributors we may add in the future. However, we expect our net advertising equipment cost as a percentage of total revenues to decrease for the foreseeable future as our revenues from advertising services are expected to outpace our net advertising equipment cost.

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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 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 year ended December 31,   For the three months ended March 31,
         
    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/margin
  $ 24       100 %   $ 1,917       51.0 %   $ 20,453       70.0 %   $ 1,791       57.2 %     6,247       65.2 %
Operating expenses:
                                                                               
 
General and administrative (including share-based compensation of $489 in 2004, $nil and $334 in the three months ended March 31, 2004 and 2005)
    21       87.5 %     985       26.2 %     4,015       13.7 %     405       12.9 %     1,895       19.8 %
 
Selling and marketing
    3       12.5 %     407       10.8 %     3,426       11.7 %     289       9.3 %     1,478       15.4 %
 
Goodwill impairment loss
                            59       0.2 %                        
                                                             
   
Total
  $ 24       100 %   $ 1,392       37.0 %   $ 7,500       25.7 %     694       22.2 %     3,373       35.2 %
                                                             
Income from operations/margin
              $ 525       14.0 %   $ 12,953       44.3 %     1,097       35.0 %     2,874       30.0 %
                                                             
       General and Administrative. General and administrative expenses primarily consist of salary and benefits for management, business tax mainly relating to licence 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 19.8%, respectively, of our total revenues in 2003 and 2004 and for the three months ended March 31, 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 certain 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 three months ended March 31, 2005 is a result of increased business tax during this period, 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 30.0% of our general and administrative expenses in 2003 and 2004 and for the three months ended March 31, 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. We expect an increase of approximately $900,000 in 2005 of costs related to enhancing our internal controls and costs related to being a public company. We expect to fund any anticipated increases in our general and administrative expenses through cash from operations and from the proceeds of this offering.
       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,

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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 10.87% 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 options. In connection 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. The amount of deferred share-based compensation expense with regard to the options granted to our directors, officers and employees was determined based on the estimated fair value of our ordinary shares at the time of grant, which was calculated on a straight line basis between the fair market value of our Series A preference shares determined on April 28, 2004 and our Series C-1 and Series C-2 preference shares on November 29, 2004. As a result, we recorded deferred share-based compensation of $969,959 as of December 31, 2004, which will be amortized to our statements of operations over the next three years as the granted options vest, and share-based compensation expense for options granted to employees of $364,876 in 2004. The amount of deferred share-based compensation expense for options granted to third-party consultants was determined based on the Black-Scholes option pricing model. As a result, we recorded share-based compensation expense for options granted to third-party consultants of $123,835 in 2004. In January and February 2005, we granted options to purchase 6,020,000 of our ordinary shares to some of our directors and executive officers at an exercise price ranging from $0.58 to $0.75 per share. These options vest over three years. We recorded deferred share based compensation of $1.1 million as of March 31, 2005 and compensation expense of $245,208 for the three months ended March 31, 2005 related to the difference between the exercise price and the deemed fair value of the ordinary shares. In February 2005, we also granted options to purchase 1,240,000 of our ordinary shares to third-party consultants with an exercise price of $0.75. These options vest over three years. We recorded compensation expense of approximately $88,752 for the three months ended March 31, 2005 in connection with these options determined according to the Black-Scholes option pricing model. See “Management — Share Option Plan” and notes 2p and 11 to our consolidated financial statements. Had the deemed fair value of our ordinary shares been the offering price of the shares in this offering, the intrinsic value of our outstanding vested and unvested options would have been $               .
       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 15.4% of our total revenues in 2003 and 2004 and for the three months ended March 31, 2005, respectively. We budget approximately 10% of our advertising revenues to be used for marketing and promotional expenses. In addition, as we acquire more of our regional distributors and continue to expand our client base, we expect to increase our sales force, which has resulted in an increase in salary expenses. Although this has increased our salary expenses as a percentage of total revenues in the three months ended March 31, 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 expect selling and marketing expenses to increase as a percentage of our total revenues as we invest

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greater resources in sales and marketing in connection with our in-store network. We expect to fund any increases in our selling and marketing expenses through cash from operations.
       Goodwill Impairment Loss. We are required under SFAS No. 142 to complete a two-step goodwill impairment test on an annual basis, as described in greater detail in “— Critical Accounting Policies — Goodwill and Acquisition Impairment”. In connection with our acquisition of Perfect Media, we incurred a goodwill impairment loss of $58,397 in 2004. 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 recorded goodwill of $9.1 million and $2.9 million in 2004 and for the three months ended March 31, 2005, respectively, in connection with the acquisition of ten of the eleven companies we acquired in 2004 and five of the six companies we acquired in the three months ended March 31, 2005. This goodwill will be subject to the annual goodwill impairment test on December 31 of each year. The purpose of these acquisitions was to expand the size of our network through the acquisition of certain of our regional distributors and to enhance our advertising services by acquiring companies with complementary lines of business, such as advertising networks placed in commercial banks and advertising services offered at automatic shoe-shine machines. 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.
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 stock-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 stock-based compensation representing the difference between the deemed fair market value of our common stock for accounting purposes and the option exercise price. We determined the fair market value of our common stock based upon several factors, including trends in the broad market for technology stocks and the expected valuation we would obtain in an initial public offering. Had different assumptions or criteria been used to determine the fair market value of our common stock, materially different amounts of stock-based compensation could have been reported.

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       Pro forma information regarding net loss attributable to common stockholders and net loss per share attributable to common stockholders is required in order to show our net loss as if we had accounted for employee stock 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 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

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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, 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, 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 and Focus Media Advertisement are currently subject to this 33% enterprise income tax. State tax bureaus of the PRC are authorized 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. Focus Media Advertising Agency has already obtained approval to extend its tax-exempt status through 2005, and Focus Media Digital is currently in the process of applying for approval to extend its tax-exempt status through 2005.
       In November 2004, Focus Media Technology, Focus Media Advertisement and certain 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 certain 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.

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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%. Because 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 increase in 2005 and to increase further in 2006. 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%. 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 Focus Media Digital or Focus Media Advertising Agency 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 — 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, which would substantially increase our taxes owed, and reduce our net income and the value of your investment.”
Recently Issued Accounting Standards
       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 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.

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       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 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 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 (“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. Certain 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” (“FIN 46 (Revised)”) to address certain 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 December 2004, the FASB issued SFAS No. 123 (revised 2004) (“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.

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Acquisitions
       Since we commenced our current business operations in May 2003, we have acquired seventeen companies to expand the coverage of our network in China and to acquire companies that are complementary to our business operations. These acquired companies contributed approximately 1% of our total revenues in 2004 and for the three months ended March 31, 2005. The table below sets forth certain information regarding the seventeen acquisitions we made in 2004 and for the three months ended March 31, 2005:
                 
        Nature of business   Consideration   Percentage
Name of subsidiary   Date of acquisition   operations   paid for acquisition   acquired
                 
            (in U.S. dollars)    
Shanghai On-Target Advertisement Co., Ltd.   April 23, 2004   Advertising design and production services   $36,247   30.0%
(total 60.0%)
Wuhan Geshi Focus Media Advertising Co., Ltd.   April 23, 2004   Flat-panel display advertising network operator (former regional distributor)   Assumption of assets and liabilities   75.0%
Yunnan Focus Media Advertising Co., Ltd.   July and November 2004   Flat-panel display advertising network operator (former regional distributor)   $273,062   89.5%
Nanjing Focus Media Advertising Co., Ltd.   August 10, 2004   Flat-panel display advertising network operator (former regional distributor)   Assumption of assets and liabilities   90.0%
Zhejiang Ruihong Focus Media Advertising Co., Ltd.   September 15, 2004   Flat-panel display advertising network operator (former regional distributor)   $821,593   80.0%
Chongqing Geyang Focus Media Culture Advertising & Broadcasting Co., Ltd.   September 18, 2004   Flat-panel display advertising network operator (former regional distributor)   $72,494   60.0%
Perfect Media Holding Ltd.   September 22, 2004   Advertising company that operates advertising services network through shoe-shining machines   $4,984,798 including cash of $500,000 and 72,971 of our ordinary shares   100.0%
Qingdao Fukesi Advertisement Co., Ltd.   October 15, 2004   Flat-panel display advertising network operator (former regional distributor)   $989,496   100.0%(1)

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        Nature of business   Consideration   Percentage
Name of subsidiary   Date of acquisition   operations   paid for acquisition   acquired
                 
            (in U.S. dollars)    
Dalian Focus Media Advertising Co., Ltd.   October 15, 2004   Flat-panel display advertising network operator (former regional distributor)   $989,584   100.0%(1)
Changsha Focus Media Shiji Advertisement Co. Ltd.   October 15, 2004   Flat-panel display advertising network operator (former regional distributor)   $989,484   100.0%(1)
Shanghai Qianjian Advertising Co., Ltd.   October 15, 2004   Advertising network operator in commercial banks   $338,307   100.0%(1)
Xiamen Advertising Co., Ltd.   March 4, 2005   Flat-panel display advertising network operator (former regional distributor)   $327,505   100.0%(1)
Xian Focus Media Advertising and Information Co., Ltd.   March 21, 2005   Flat-panel display advertising network operator (former regional distributor)   $84,577   60.0%
(total 70.0%)
Tianjin Focus Tongsheng Advertising Company Ltd.   March 21, 2005   Flat-panel display advertising network operator (former regional distributor)   $797,439   80.0%
Zhuhai Focus Media Culture and Communication Company Ltd.   March 21, 2005   Flat-panel display advertising network operator (former regional distributor)   $42,288   100.0%(1)
Guangzhou Framedia Advertising Company Ltd.   March 21, 2005   Flat-panel display advertising network operator   $2,054,008   100.0%(1)
Hebei Tianma Weiye Advertising Company Ltd.   March 22, 2005   Flat-panel display advertising network operator (former regional distributor)   $773,274   100.0%
 
(1)  10% of the equity interest in this entity is owned by Jimmy Wei Yu as our nominee holder.
       Some of the businesses we acquired had entities located both in and outside of China. The consideration we paid for these businesses was made in two parts, one part for the entity located in China, and the other part for the entity located outside of China. For consideration paid to acquire entities located in China, we withheld on behalf of sellers who are natural persons 20% of the amount by which the acquisition price exceeded the registered capital of such PRC entity as required under the PRC Individual Income Tax Law and related implementation rules. We were not

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required to and did not withhold any tax in connection with payments made to acquire the entities located outside of China. See “Risk Factors — The PRC tax authorities may require us to pay additional tax in connection with our acquisitions of offshore entities that conducted their PRC operations primarily 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, are included elsewhere in this prospectus.
Limited Operating History
       We began our current business operations in May 2003 and, accordingly, we have a very limited operating history upon which you can evaluate the viability and sustainability of our business. It may also be difficult to evaluate the viability of our use of flat-panel television advertising displays in commercial building and other out-of-home commercial locations as a business model because we may not have sufficient experience to address the risks frequently encountered by early stage companies using new business models and entering new and rapidly evolving markets. In addition, certain of our senior management and employees have worked together with us for only a relatively short period of time. Our future results and performance are likely to depend on the success of our advertising network, as well as other specialized networks we may launch and that remain untested, and on the synergies that may develop among our senior management in implementing our business model.
Quarterly Results of Operation
       The following tables present certain 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 July 1, 2003 to March 31, 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   September 30,   December 31,   March 31,   June 30,   September 30,   December 31,   March 31,
of Operations Data   2003   2003   2004   2004   2004   2004   2005
                             
    (in thousands of U.S. dollars)
Revenues:
                                                       
 
Advertising service revenue (1)
  $ 972     $ 2,387     $ 2,694     $ 5,495     $ 7,049     $ 11,083     $ 9,432  
 
Advertising equipment revenue
          389       438       905       863       683       142  
                                           
 
Total revenues
    972       2,776       3,132       6,400       7,912       11,766       9,574  
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
    571       866       1,037       1,377       1,665       2,742       3,256  
 
Net advertising equipment cost
          275       304       722       668       242       71  
                                           
 
Total cost of revenues
    571       1,141       1,341       2,099       2,333       2,984       3,327  
                                           
Gross profit
    401       1,635       1,791       4,301       5,579       8,782       6,247  
                                           

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    For the three months ended
     
Consolidated Statement   September 30,   December 31,   March 31,   June 30,   September 30,   December 31,   March 31,
of Operations Data   2003   2003   2004   2004   2004   2004   2005
                             
    (in thousands of U.S. dollars)
Operating expenses:
                                                       
 
General and administrative
    430       492       405       500       1,105       2,005       1,895  
 
Selling and marketing
    142       264       289       704       936       1,497       1,478  
 
Goodwill impairment loss
                                  59        
                                           
Total operating expenses
    572       756       694       1,204       2,041       3,561       3,373  
                                           
Income (loss) from operations
    (171 )     879       1,097       3,097       3,538       5,221       2,874  
Interest income
          1       3       1       1       5       11  
Other expenses, net
          (1 )     (2 )                 (2 )     5  
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
    (171 )     879       1,098       3,098       373       (3,302 )     2,890  
Total income taxes
    (123 )     (359 )     (383 )     (1,065 )     (1,382 )     1,922       (249 )
Minority interest
          8       (2 )     (49 )     10       54       1  
Equity income (loss) of affiliates
    (18 )                                    
                                           
Net income (loss)
    (312 )     528       714       1,984       (999 )     (1,326 )     2,642  
                                           
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
  $ (312 )   $ 528     $ 714     $ (8,515 )   $ (999 )   $ (1,776 )   $ 2,642  
                                           
 
(1)  Advertising service revenue is presented net of business tax, which amounts to $74,942, $236,825, $324,634, $574,729, $714,647, $1.6 million and $936,405 for the three months ended September 30, 2003, December 31, 2003, March 31, 2004, June 30, 2004, September 30, 2004, December 31, 2004 and March 31, 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   September 30,   December 31,   March 31,   June 30,   September 30,   December 31,   March 31,
of Operations Data   2003   2003   2004   2004   2004   2004   2005
                             
Revenues:
                                                       
 
Advertising service revenue (1)
    100.0 %     86.0 %     86.0 %     85.9 %     89.1 %     94.2 %     98.5 %
 
Advertising equipment revenue
          14.0 %     14.0 %     14.5 %     10.9 %     5.8 %     1.5 %
                                           
 
Total revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100 %     100 %
                                           
Cost of revenues:
                                                       
 
Net advertising service cost
    58.7 %     31.2 %     33.1 %     21.5 %     21.0 %     23.3 %     34.0 %
 
Net advertising equipment cost
          9.9 %     9.7 %     11.3 %     8.5 %     2.1 %     0.7 %
                                           
 
Total cost of revenues
    58.7 %     41.1 %     42.8 %     32.8 %     29.5 %     25.4 %     34.7 %
                                           
Gross profit
    41.3 %     58.9 %     57.2 %     67.2 %     70.5 %     74.6 %     65.3 %
                                           
Operating expenses:
                                                       
 
General and administrative
    44.2 %     17.7 %     12.9 %     7.8 %     14.0 %     17.0 %     19.8 %
 
Selling and marketing
    14.6 %     9.5 %     9.2 %     11.0 %     11.8 %     12.7 %     15.4 %
 
Goodwill impairment loss
                                  0.5 %      
                                           
Total operating expenses
    58.8 %     27.2 %     22.1 %     18.8 %     25.8 %     30.2 %     35.2 %
                                           
Income (loss) from operations
    (17.6 %)     31.7 %     35.1 %     48.4 %     44.7 %     44.4 %     30.0 %
Interest income
                0.1 %                 0.04 %     0.1 %
Other expenses, net
                                  (0.01 %)      
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
    (17.6 %)     31.7 %     35.1 %     48.4 %     4.7 %     (28.1 %)     30.1 %
Total income taxes
    (12.7 %)     (12.9 %)     12.2 %     (16.6 %)     (17.5 %)     16.3 %     2.6 %
Minority interest
          0.3 %     (0.1 %)     (0.8 %)     0.1 %     0.5 %     0.1 %
Equity loss of affiliates
    (1.9 %)                                    
                                           
Net income (loss)
    (32.1 %)     19.0 %     22.8 %     31.0 %     (12.6 %)     (11.3 %)     27.6 %
                                           
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 share
    (32.1 %)     19.0 %     22.9 %     (133.0 %)     (12.6 %)     (15.1 %)     35.6 %
                                           
 
(1)  Advertising service revenue is presented net of business tax, which represents 7.7%, 8.5%, 8.6%, 9.0%, 9.0%, 13.6% and 9.8% of total revenues for the three months ended September 30, 2003, December 31, 2003, March 31, 2004, June 30, 2004, September 30, 2004, December 31, 2004 and March 31, 2005, respectively. Business tax includes business tax of 5.55% and cultural industries tax of 4.0%.

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Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
       Total Revenues. Our total revenues increased substantially from $3.1 million for the three months ended March 31, 2004 to $9.6 million for the three months ended March 31, 2005 due to an increase in our advertising service revenue which was partially offset by a decrease in advertising equipment revenue.
  •  Our advertising service revenue increased significantly from $2.7 million for the three months ended March 31, 2004 to $9.4 million for the three months ended March 31, 2005, including $1.0 million to related parties. This increase is attributable to:
  •  an increase in the number of 30-second-equivalent advertising time slots we sold from 403 for the three months ended March 31, 2004 to 1,998 for the three months ended March 31, 2005 and partially offset by a decrease in the average selling price per time slot sold from $6,693 for the three months ended March 31, 2004 to $4,721 for the three months ended March 31, 2005. Total network capacity, measured by number of available time slots, also increased from 1,775 for the three months ended March 31, 2004 to 6,010 for the three months ended March 31, 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 19 cities as of March 31, 2004, including five cities directly operated by our company and 14 cities operated by our regional distributors, to 44 cities as of March 31, 2005, including 22 cities directly operated by our company and 22 cities operated by our regional distributors; and
 
  •  we gained an additional seven minutes of advertising cycle time from each of our regional distributors after we acquired them between March 31, 2004 and March 31, 2005.
  The increase in the number of 30-second-equivalent advertising time slots sold was also attributable to an increase in our utilization rate from 22.7 % for the three months ended March 31, 2004 to 33.2% for the three months ended March 31, 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 1,529 commercial locations as of March 31, 2004 to 10,477 commercial locations as of March 31, 2005, and from 1,970 flat-panel displays as of March 31, 2004 to 17,872 displays as of March 31, 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 second-tier cities, while the average selling price of our advertising services in our four major cities increased between these two periods.
       Cost of Revenues. Our cost of revenues increased significantly from $1.3 million for the three months ended March 31, 2004 to $3.3 million for the three months ended March 31, 2005 due to increases in both our net advertising service cost and net advertising equipment cost.
  •  Net advertising service cost. Our net advertising services cost increased substantially from $1.0 million for the three months ended March 31, 2004 to $3.2 million for the three months ended March 31, 2005. This increase was due to the substantial increase in our advertising service business between these two periods.
  •  Our location costs increased substantially from $737,073 for the three months ended March 31, 2004 to $2.0 million or the three months ended March 31, 2005 due to a substantial increase in the number of commercial locations where we entered into display placement agreements from 1,127 as of March 31, 2004 to 8,866 as of

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  March 31, 2005. Our rental fees increased as a percentage of total revenues between these two periods as a result of (i) a significant increase in the number of locations in our commercial network and (ii) location costs incurred in developing our in-store network, offset in part by (i) 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 $131,921 for the three months ended March 31, 2004 to $514,122 for the three months ended March 31, 2005, as a result of an increase in the number of flat-panel displays we own and operate directly from 1,491 as of March 31, 2004 to 16,025 as of March 31, 2005. This increase in our depreciation costs was also attributable to our acquisition of 13 regional distributors during this period.
 
  •  Other cost of revenues related to net advertising service cost increased from $168,952 for the three months ended March 31, 2004 to $719,444 for the three months ended March 31, 2005. This was primarily a result of (i) an 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 $303,573 for the three months ended March 31, 2004 compared to $70,571 for the three months ended March 31, 2005, which decrease reflects the fact that we have acquired many of our fastest-growing regional distributors. We expect net advertising equipment costs to stabilize as our purchase of flat-panel displays for resale to regional distributors levels off.
       Gross Profit. As a result of the foregoing, our gross profit increased from $1.8 million for the three months ended March 31, 2004 to $6.2 million for the three months ended March 31, 2005.
       Operating Expenses. Our operating expenses increased significantly from $693,506 for the three months ended March 31, 2004 to $3.4 million for the three months ended March 31, 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 $404,781 for the three months ended March 31, 2004 to $1.9 million for the three months ended March 31, 2005 mainly due to an increase in the size of our administrative staff and corresponding increases in expenses for salary and benefits by $329,383 as our operations have grown, and an increase in our office rental payments by $168,926 as we expanded our business. In addition, in connection with the options granted to our directors, employees and consultants since July 2004, we recorded stock based compensation of $333,960 for the three months ended March 31, 2005.
 
  •  Selling and Marketing. Selling and marketing expenses increased substantially from $288,725 for the three months ended March 31, 2004 to $1.5 million for the three months ended March 31, 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, for which we budget 10% of our advertising revenues, increased significantly from $211,144 for the three months ended March 31, 2004 to $1.0 million for the

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  three months ended March 31, 2005 as a result of increased sales and promotional activities relating to the increase in our advertising services revenue between these two periods. Salary expenses in connection with our sales force increased from $54,143 for the three months ended March 31, 2004 to $282,282 for the three months ended March 31, 2005 as we hired additional sales staff to meet the growth in our advertising business.

       Income from Operations. As a result of the foregoing, we had income from operations of $1.1 million for the three months ended March 31, 2004 compared to $2.9 million for the three months ended March 31, 2005.
       Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest was $1.1 million for the three months ended March 31, 2004 compared to $2.9 million for the three months ended March 31, 2005, which included interest income and other expenses.
  •  Interest Income. Interest income increased from $3,296 for the three months ended March 31, 2004 to $10,985 for the three months ended March 31, 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 and sales of our preference shares.
 
  •  Other Expense. We recorded other expense of $2,127 for the three months ended March 31, 2004 compared to other revenue of $5,315 for the three months ended March 31, 2005.
 
  •  Income Taxes. Our income taxes were $382,551 for the three months ended March 31, 2004 compared to $248,801 for the three months ended March 31, 2005, which decrease resulted from the fact that in the three months ended March 31, 2005, we derived most of our revenue from Focus Media Advertising Agency, which had no tax liability during this period, whereas during the three months ended March 31, 2004, we derived most of our revenues from Focus Media Advertisement, which had tax liability.
 
  •  Minority Interest. We had minority interest expense of $2,346 and minority interest income of $598 for the three months ended March 31, 2004 and 2005, respectively, in connection with the pro rata income and loss, respectively, attributable to minority shareholders of four of our subsidiaries.
       Net Income. As a result of the foregoing, we recorded net income of $713,495 for the three months ended March 31, 2004 compared to net income of $2.6 million for the three months ended March 31, 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.
  •  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

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  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:

  •  we expanded our network to include an additional 30 cities in 2004, including nine cities operated by our company and 21 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 the four major cities where we offer our advertising services.
  •  The increase in the number of 30-second-equivalent advertising time slots sold was also attributable to an increase in our utilization rate from 19.4% in 2003 to 38.2% 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 923 in 2003 to 7,070 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

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  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 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, reflecting our cost for flat-panel displays we sold to our regional distributors. We did not commence our regional distributor relationships until November 2003 and, accordingly, we recorded significantly lower costs related to such sales in 2003. We expect net advertising equipment costs to decrease as our purchase of flat-panel displays for resale to regional distributors decreases as a result of our ongoing acquisition of our regional distributors.
       Gross Profit. As a result of the foregoing, our gross profit increased from $1.9 million in 2003 to $20.5 million in 2004.
       Operating Expenses. Our operating expenses increased significantly from $1.4 million in 2003 to $7.5 million in 2004. This increase was primarily due to increases in our selling and marketing expenses and in our general and administrative expenses associated with the growth of our business and to the share-based compensation expense we recognized in 2004.
  •  General and Administrative. General and administrative expenses increased substantially from $1.0 million in 2003 to $4.0 million in 2004 due to an increase in the size of our administrative staff and corresponding increases in expenses for salary and benefits of $435,665 as our operations have grown, an increase in our office rental payments of $292,078 as we established branch offices in a number of new cities, and increases in public relations expenses, communications and travel expenses and fees for professional services of $170,898. General and administrative expenses, however, decreased as a percentage of total revenues from 26.2% to 13.7% due to (i) the overall growth of our total revenues which outpaced these expenses and (ii) our establishment of a dedicated sales force in 2004 and assignment of certain sales, maintenance and location relationship personnel previously included within our administrative department, respectively, to our newly established sales and location relationship and maintenance departments. Our general and administrative expenses in 2004 include share-based compensation. We incurred share-based compensation expense of $488,711 in 2004 relating to the issuance of options to purchase 126,041 of our ordinary shares that were granted to certain directors, officers, employees and individual consultants and advisers in July and August 2004. We did not incur share-based compensation expense in 2003.
 
  •  Selling and Marketing. Selling and marketing expenses increased substantially from $406,634 in 2003 to $3.4 million in 2004 due to increases in marketing and promotional expenses by our sales force, and in salary and benefits associated with the creation and expansion of our sales force. Marketing and promotional expenses, for which we budget 10% of our advertising revenues, increased significantly from $355,398 in 2003 to $2.8 million in 2004 as a result of increased sales and promotional activities relating to the increase in our advertising services revenue between these two periods. Salary expenses in connection with our sales force increased from $49,870 in 2003 to $471,723 in 2004 because, prior to 2004, we did not have a dedicated sales force and for prior periods all salary expenses of our

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  employees were classified under general and administrative expenses. Our salary expenses increased slightly as a percentage of total revenues between these two periods because we hired additional sales staff to meet the growth in our advertising business.
 
  •  Goodwill Impairment Loss. We incurred a one-time goodwill impairment loss of $58,397 in 2004 in connection with our acquisition of Perfect Media. This goodwill impairment loss represents the difference between the amount we paid to acquire Perfect Media on September 22, 2004 and the fair market value 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.

       Income from Operations. As a result of the foregoing, we had income from operations of $525,110 in 2003 compared to $13.0 million in 2004.
       Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest was $516,751 in 2003 compared to income of $1.3 million in 2004, which included taxes and minority interest included interest income and other expenses and a one-time non-cash charge of $11.7 million for the change in fair value of derivative liability associated with Series B convertible redeemable preference shares.
  •  Interest Income. Interest income increased from $1,005 in 2003 to $9,739 in 2004. 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 and sales of our preference shares.
 
  •  Change in Fair Value of Derivative Liability Associated with Series B Convertible Redeemable Preference Shares. We recorded a one-time non-cash charge to reflect the change in fair value of derivative liability associated with Series B convertible redeemable preference shares of $11.7 million in 2004, which, under applicable accounting rules required us to mark to market the conversion feature of our Series B convertible redeemable preference shares because they may be net settled in cash upon conversion. We will not incur any such charges commencing January 1, 2005 as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004.
 
  •  Other Income (Expense). We recorded other expense of $9,364 in 2003 compared to other expense of $3,843 in 2004.
 
  •  Income Taxes. Our income taxes increased from $481,505 in 2003 to $907,550 in 2004 increased taxable income by certain of our consolidated entities that are subject to PRC income tax.
 
  •  Minority Interest. We had minority interest income of $8,360 and $13,516 in 2003 and 2004, respectively in connection with the pro rata loss attributable to four affiliates in which we hold a minority interest.
       Net Income. As a result of the foregoing, we recorded net income of $372,752 in 2004 compared to net income of $25,483 in 2003. Our net income of $372,752 in 2004 includes a one-time non-cash charge of $11.7 million reflecting the change in fair value of derivative liability associated with our Series B convertible redeemable preference shares. We will not incur any any such charges commencing January 1, 2005 as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
       Total Revenues. Our total revenues increased substantially from $23,895 in 2002 to $3.8 million in 2003. Our revenues in 2002 and for the first four months of 2003 consisted of

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commissions from the placement of advertisements with media companies on behalf of advertising clients. Beginning in May 2003, we no longer earned revenues as an advertising agency and began deriving revenue from the sale of advertising time slots on our out-of-home television advertising network to advertising clients and, in the fourth quarter of 2003, from equipment sales to our regional distributors.
       Cost of Revenues. Our cost of revenues increased from nil in 2002 to $1.8 million in 2003 due largely to costs associated with the substantial increase in our advertising services revenue and the commencement of our sales of flat-panel displays in 2003 to our regional distributors. In 2002 and prior to May 2003 all of our costs were booked as operating expenses.
       Gross Profit. As a result of the foregoing, gross profit increased from $23,895 in 2002 to $1.9 million in 2003.
       Operating Expenses. Our operating expenses increased significantly from $23,710 in 2002 to $1.4 million in 2003. This resulted from the increase in our operating expenses associated with the commencement and expansion of our current business operations after May 2003.
       Income from Operations. As a result of the foregoing, our income from operations increased significantly from $185 in 2002 to $525,110 in 2003.
       Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest increased significantly from $223 in 2002 to $516,751 in 2003 largely as a result of an increase in our total income taxes from $40 in 2002 to $481,505 in 2003 as a result of the significant increase in our revenues from 2002 to 2003.
       Net Income. As a result of the foregoing, our net income increased substantially from $183 in 2002 to $25,483 in 2003.
Liquidity and Capital Resources
Cash Flows and Working Capital
       To date, we have financed our operations primarily through internally generated cash and the sale of our shares to investors in May 2003, April 2004 and November 2004. As of December 31, 2004, we had approximately $22.7 million in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash on hand and liquid investments with original maturities of three months or less that are deposited with banks and other financial institutions. We generally deposit our excess cash in interest bearing bank accounts. Although we consolidate the results of Focus Media Advertisement and its subsidiaries in our consolidated financial statements and we can utilize their cash and cash equivalents in our operations through Focus Media Advertisement and its subsidiaries, we do not have direct access to the cash and cash equivalents or future earnings of Focus Media Advertisement. As we have expanded our network, entered into a large number of display placement agreements and increased our acquisition of regional distributors and related businesses, our cash needs for such acquisitions, the purchase of flat-panel displays, payment of our location and maintenance costs and employee costs increased significantly and accounted for the net cash used in investing activities. However, these cash balances can be utilized by us for our normal operations pursuant to our agreements with Focus Media Advertisement and its subsidiaries that provide us with effective control over Focus Media Advertisement and its subsidiaries. In addition, we have access to the cash flows of Focus Media Advertisement and its subsidiaries through contractual arrangements with our subsidiaries Focus Media Technology and Focus Media Digital, which provide technical and other services in exchange for fees. See “Related Party Transactions — Agreements Among Us, Focus Media Technology, Focus Media Digital, Focus Media Advertisement and Its Subsidiaries”.
       We expect to require cash in order to fund our ongoing business needs, particularly the location costs connected with the placement of our television displays, and to fund the ongoing

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expansion of our network. Other possible cash needs may include the upgrading of technology on our network as well as any payment of claims that could be made against us. See “Risk Factors — 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 have not encountered any difficulties in meeting our current cash obligations and expect to continue meeting our liquidity and cash needs through revenue generated by our business and through the proceeds of this offering.
       The following table shows our cash flows with respect to operating activities, investing activities and financing activities in 2002, 2003 and 2004 and for the three months ended March 31, 2005:
                                 
        For the
    For the year ended   three months
    December 31,   ended
        March 31,
    2002   2003   2004   2005
                 
    (in thousands of U.S. dollars)    
Net cash provided by operating activities
  $ 3     $ 1,891     $ 5,080       1,852  
Net cash used in investing activities
          (3,277 )     (12,106 )     (9,407 )
Net cash provided by financing activities
          2,125       28,978        
Net increase (decrease) in cash and cash equivalents
    3       701       21,953       (7,555 )
Cash and cash equivalents at beginning of period
    12       15       716       22,669  
Cash and cash equivalents at end of period
  $ 15     $ 716     $ 22,669       15,114  
       We had cash provided by operating activities of $1.9 million for the three months ended March 31, 2005. This was primarily attributable to net income generated from the operation of our advertising network, adjusted up $1.4 million, $1.0 million, $637,052 and $622,175 to reflect amounts due from related parties, accounts payable, income taxes payable and depreciation and amortization, and adjusted down $2.2 million, $1.8 million, and $788,522 to reflect accrued expenses and other current liabilities, accounts receivable and inventory. We had net cash provided by operating activities of $5.1 million in 2004. This was primarily attributable to our net income from operation of our network, adjusted down $4.5 million, $2.5 million, $1.6 million and $1.7 million to reflect our accounts receivable from our advertising clients and regional distributors, a decrease in amounts due from related parties, accounts payable from location and maintenance costs owed to third parties and prepaid expenses and other current assets including location costs, respectively, and adjusted up $11.7 million, $4.2 million and $0.8 million to reflect the change in fair value of derivative liability, accrued expenses from location costs and maintenance costs and other current liabilities and income taxes payable, respectively. We had net cash provided by operating activities of $1.9 million in 2003. This was primarily attributable to accounts payable for location costs and equipment, accrued expenses and other current liabilities, amount due to related parties and income taxes payable, which was partially offset by accounts receivable from our advertising clients and regional distributors, prepaid expenses and other current assets, amount due from related parties and inventory, which consists primarily of our television displays. Our net cash provided by operating activities was $3,303 in 2002, which was attributable to accounts receivable, offset in large part by prepaid expenses and other current assets and accounts payable.
       We had net cash used in investing activities of $9.4 million for the three months ended March 31, 2005, primarily in connection with the purchase of equipment used to expand our commercial location network and our in-store network, rental deposits paid for locations on both our commercial location and in-store networks, and with our purchase of subsidiaries. We had net cash used in investing activities of $12.1 million in 2004. This was primarily attributable to our purchase of property and equipment for the operation of our network, rental deposits made in connection with our display placement agreements and our acquisition of eleven businesses, seven of which were our former regional distributors. We had net cash used in investing activities of $3.3 million in 2003,

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largely as a result of purchases of property and equipment and the acquisition of a business from a related party. We had no net cash used in investing activities in 2002.
       No cash was provided by financing activities for the three months ended March 31, 2005. We had net cash provided by financing activities of $29.0 million in 2004. This was attributable to the proceeds from the issuance of our Series B and Series C-2 convertible redeemable preference shares, offset slightly by the repayment of a short-term loan from one of our shareholders. We had net cash provided by financing activities of a $2.1 million in 2003. This was attributable to the proceeds from the issuance of ordinary shares in May 2003 and proceeds from a short-term loan from one of our shareholders. We used this loan for our business operations and the loan was secured by our ordinary shares. We repaid the loan when it came due in June 2004. We had no net cash provided by financing activities in 2002.
       We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs, including for working capital and capital expenditures, for the foreseeable future. These additional cash needs may include costs associated with the expansion of our network, such as the purchase of flat-panel displays and increased location costs, as well as possible acquisitions of our regional distributors. We are also required under PRC law to set aside 10% of our after-tax profits into a general reserve fund. We expect that revenues from operation of our advertising network and the proceeds from this offering will be sufficient to cover any such obligations and costs. We may, however, require additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
       From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment.
Contractual Obligations and Commercial Commitments
       The following table sets forth our contractual obligations as of March 31, 2005:
                                                   
    Payments due by period
     
    Total   2005   2006   2007   2008   Thereafter
                         
    (in thousands of U.S. dollars)
Display placement agreement obligations
    14,302       4,939       3,790       2,689       1,590       1,294  
Operating lease obligations
    748       515       174       27       23       9  
                                     
 
Total contractual obligations
  $ 15,050     $ 5,454     $ 3,964     $ 2,716     $ 1,613     $ 1,303  
                                     
       We have entered into certain leasing arrangements relating to the placement of our flat-panel displays in the commercial locations where we operate our network and in connection with the lease of our office premises. Our rental expenses under these leases were $5,030, $803,079 and $3.6 million in 2002, 2003 and 2004, respectively. Apart from the above, as of March 31, 2005, we did not have any long-term debt obligations, operating lease obligations or purchase obligations. However, pursuant to our option agreement with the owners of Focus Media Advertisement, Focus Media Technology has an option, exercisable at such time as it becomes legally permissible to acquire 100% of the equity interest in Focus Media Advertisement at a purchase price equal to the registered capital of Focus Media Advertisement or such higher price as required by PRC law on the date of such purchase.

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       As of March 31, 2005, we did not have any indebtedness, debt securities, material contingent liabilities, or material mortgages or liens. We intend to meet our future funding needs through net cash provided from operating activities and the proceeds of this offering. Our objective is to maintain safety and liquidity of our cash. Therefore we intend to keep our cash and cash equivalents in short-term bank deposits and short-term bonds.
Capital Expenditures
       The following table sets forth our historical capital expenditures for the periods indicated. Actual future capital expenditures may differ from the amounts indicated below.
                         
        For the
    For the year ended   three months
    December 31,   ended
        March 31,
    2003   2004   2005
             
    (in thousands of U.S. dollars)
Total capital expenditures
  $ 1,468     $ 6,373     $ 3,621  
       Our capital expenditures were made primarily to acquire flat-panel displays for our advertising network. Our capital expenditures were made primarily to acquire flat-panel displays for our advertising network. Our capital expenditures are primarily funded by net cash provided from operating activities. We expect our capital expenditures in 2005 and 2006 to primarily consist of purchases of components for our flat-panel displays as we continue to expand our commercial location network and purchase flat-panel displays in connection with the development of our in-store network. We also intend to upgrade our financial, accounting systems and internal control systems. As opportunities arise, we may make additional acquisitions of regional distributors and other businesses that complement our operations. These plans will require us to purchase additional flat-panel displays and other equipment. In addition, we expect to use approximately $20 million of the net proceeds of this offering in 2005 and approximately $20 million in 2006 for capital expenditures in connection with the expansion of our advertising network and operations, of which approximately $14 million will be used in 2005 for the expansion and operation of our in-store network. We believe that we will be able to fund these upgrades and equipment purchases through the revenues we generate and the proceeds of this offering, and do not anticipate that these obligations will have a material impact on our liquidity needs.
Foreign Exchange
       We maintain our accounts in Renminbi and substantially all of our revenues and expenses are denominated in Renminbi, while we report our financial results in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S. dollar against Renminbi, may affect our reported operating results in U.S. dollar terms. In addition, we will receive the proceeds of this offering in U.S. dollars and changes in the U.S. dollar/ Renminbi exchange rate could affect the buying power of those proceeds. Under the current foreign exchange system in the PRC, our operations in the PRC may not be able to hedge effectively against currency risk, including any possible future Renminbi devaluation. Moreover, due to the recent devaluation of the U.S. dollar against the Euro and several other currencies, the PRC government is re-evaluating its decade-old policy of pegging the value of the yuan to the U.S. dollar. See “Risk Factors — Fluctuations in exchange rates could result in foreign currency exchange losses”.
Restricted Net Assets
       Relevant PRC laws and regulations permit payments of dividends by our PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of 10% of after-tax income for our general reserve fund should be set aside prior to payment of dividends. As a

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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 our restricted net assets was approximately $14,792,000.
Off-balance Sheet Commitments and Arrangements
       We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
       Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in market interests rates. However, our future interest income may fall short of expectations due to changes in market interest rates.
Foreign Currency Risk
       Substantially all our revenues and expenses are denominated in Renminbi. We have not had any material foreign exchange gains or losses. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars relative to the Renminbi because the value of our business is effectively denominated in Renminbi, while the ADSs will be traded in U.S. dollars. Furthermore, a decline in the value of the Renminbi could reduce the U.S. dollar equivalent of the value of the earnings from, and our investments in, our subsidiaries and PRC-incorporated affiliates in China. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our reported financial results in U.S. dollar terms.
Inflation
       In recent years, China has not experienced significant inflation, and thus inflation has not had a significant effect on our business historically. According to the National Bureau of Statistics of China, the change in the Consumer Price Index in China was 0.7%, (0.8)%, 1.2% and 2.9% in 2001, 2002, 2003 and 2004, respectively.
       However, following a 3.2% average change in the Consumer Price Index in China in the fourth quarter of 2004 and a 3.9% change in the month of February 2005, the PRC government has announced measures to restrict lending and investment in China in order to reduce inflationary pressures in China’s economy. The PRC government may introduce further measures intended to reduce the rate of inflation in China. Any such measures adopted by the PRC government may not be successful in reducing or slowing the increase in China’s rate of inflation. Sustained or increased inflation in China may adversely affect our business and financial results.

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OUR INDUSTRY
China’s Advertising Market
       The advertising market in China is one of the largest and fastest growing advertising markets in the world and has the following characteristics:
  •  Largest Market in Asia Excluding Japan. Advertising spending in China totaled $7.7 billion in 2003 according to ZenithOptimedia’s December 2004 Advertising Expenditure Forecasts report, making it the largest advertising market in Asia excluding Japan.
 
  •  High Growth Rate. According to ZenithOptimedia, advertising spending in China grew 20.8% between 2002 and 2003 compared to the average worldwide growth rate of 3.0%, making it one of the fastest growing advertising markets in the world during that period.
 
  •  Urban Concentration of Advertising Spending. Advertising spending in China is highly concentrated in China’s more economically developed regions and increasingly concentrated in urban areas. For example, Beijing, Shanghai and Guangdong province (Guangdong province includes the major cities of Guangzhou and Shenzhen), together accounted for 49.3% of total advertising spending in China in 2003, according to the State Administration for Industry and Commerce.
 
  •  Importance of New Alternative Advertising Media. Alternative advertising media, which is a term we use to refer to media other than traditional broadcast and print media, account for a larger percentage of total advertising spending in China compared to Europe, the United States and other countries in Asia.
 
  •  Fragmented Industry. The advertising industry in China is highly fragmented and is not dominated by a small number of advertising companies. According to the China Advertising Association, there were approximately 66,400 advertising companies in China in 2003.
       Market Size and Composition. According to ZenithOptimedia statistics, China’s advertising market in terms of advertising spending is expected to remain the largest in Asia excluding Japan through at least 2007. The following table sets forth historical and estimated future advertising spending in the countries and regions described and for the years indicated:
                                                           
    2001   2002   2003   2004E   2005E   2006E   2007E
                             
    (In billions of U.S. dollars)
China
    5.1       6.3       7.7       9.0       10.5       12.2       14.2  
South Korea
    5.6       6.5       6.8       6.4       6.3       6.6       6.9  
India
    1.8       1.9       2.1       2.7       2.9       2.8       3.3  
Taiwan
    1.9       1.9       2.1       2.2       2.3       2.4       2.5  
Hong Kong
    1.9       1.9       2.0       2.1       2.3       2.4       2.5  
Other Asia(1) (excluding Japan)
    4.9       5.7       6.4       8.0       9.2       10.7       12.4  
                                           
 
Total Asia (excluding Japan)
    21.2       24.2       27.0       30.5       33.5       37.4       41.8  
Japan
    38.9       36.3       36.2       38.0       39.2       40.3       41.5  
                                           
 
Total Asia
    60.1       60.4       63.2       68.5       72.6       77.7       83.3  
                                           
United States
    147.2       149.8       152.3       161.5       168.2       177.0       186.2  
                                           
 
(1)  Other Asia includes Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.
Source:  Advertising Expenditure Forecasts, ZenithOptimedia, December 2004.

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       The advertising industry is generally divided into television, newspaper, magazine, radio and other types of advertising media. Other advertising media includes Internet, outdoor, billboard, out-of-home, bus-stop display and other outdoor advertising media. Other advertising media account for a larger percentage of total advertising spending in China than in Europe, the United States or other countries in the Asia Pacific region. The following table sets forth the percentage breakdown of advertising spending by medium in the countries and regions described below for 2003:
                                         
Country/Region:   Television   Newspaper   Magazine   Radio   Other
                     
China
    40.2 %     38.3 %     3.8 %     4.0 %     13.5 %
Asia(1)
    44.7 %     30.4 %     7.9 %     4.4 %     12.6 %
United States
    33.9 %     30.4 %     14.3 %     12.9 %     8.6 %
Europe(2)
    33.3 %     32.3 %     19.6 %     5.6 %     9.3 %
 
(1)  Asia includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.
 
(2)  Europe includes Austria, Belgium, Czech Rep., Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.
Source: Advertising Expenditure Forecasts, ZenithOptimedia, December 2004.
       Growth. We believe advertising spending in China has considerable growth potential over the next few years. According to ZenithOptimedia, advertising spending in China is expected to increase to $14.2 billion in 2007 from $7.7 billion in 2003, an increase of 85.7% over that period compared to expected growth in Asia, the United States and Europe of 31.9%, 22.3% and 21.2%, respectively, during the same period. However, we cannot provide any assurance that we or our business will benefit from growth that occurs in China’s advertising industry. The following table sets forth the historical and prospective growth in advertising spending in China for the periods indicated.
LOGO
 
Source:  Advertising Expenditure Forecasts, ZenithOptimedia, December 2004.
       The growth of China’s advertising industry is being driven by a number of factors including:
  •  High and Sustained Levels of Economic Growth. China’s economy has grown and continues to grow rapidly compared to the growth experienced by other developed economies. China’s

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  GDP grew by 8.9%, 8.1% and 11.1% in 2001, 2002 and 2003, respectively, and is projected to grow by 13.2%, 10.7%, 10.0% and 9.8% in 2004, 2005, 2006 and 2007 according to ZenithOptimedia.
 
  •  Growing Consumer Class. We believe the emergence and ongoing expansion of a consumer class concentrated in major cities in China will encourage companies to spend increasing amounts on advertising for new products and services particularly in major urban areas.
 
  •  Relatively Low Levels of Advertising Spending in China Per Capita and as a Percentage of GDP. Advertising spending per capita and as a percentage of GDP in China remains very low relative to other countries and regions, indicating that there is significant growth potential in China’s advertising industry as its consumer markets continue to develop and income levels increase.

       The following table sets forth advertising spending per capita and as a percentage of GDP for the countries and regions indicated for 2003:
                 
    Advertising Spending
     
        As a
    Per   Percentage
Country/Region   Capita   of GDP
         
    (in U.S. dollars,
    except percentages)
China
  $ 6       0.5 %
Hong Kong
  $ 282       1.3 %
South Korea
  $ 142       1.1 %
Japan
  $ 284       0.8 %
Asia(1) Weighted Average
  $ 21       0.8 %
United Kingdom
  $ 288       1.0 %
United States
  $ 518       1.4 %
 
(1)  Asia includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.
       Rapid Urbanization and Concentration of Advertising Spending. While the total size of China’s advertising market is expected to increase by a compound annual growth rate of 16.3% from 2004 to 2007, we expect that advertising spending in certain regions and urban areas will increase at a faster rate compared to the national average. This is due to:
  •  Rapid urbanization. According to the National Bureau of Statistics of China, China’s urban population increased from 17.9% in 1978 to 29.0% in 1995, to 40.5%, or 523 million people, in 2003. China’s Academy of Social Sciences estimates that China’s urban population will reach 610 million people by 2010.
 
  •  Faster growth of consumer spending in urban areas. Rapid urbanization, in turn, will result in faster growth of consumer spending in urban areas, which already accounts for a disproportionately larger amount of consumer spending. According to the National Bureau of Statistics, in 2004, 77.4% of retail sales for consumer goods took place in urban areas. Retail sales in urban areas grew by 14.4% compared to growth in rural areas of 9.9% relative to the same period in 2003.
       The impact of these trends is particularly notable in certain regions and urban centers. For example, Beijing, Shanghai and Guangdong province (Guangdong includes the major cities of Guangzhou and Shenzhen) together accounted for 49.3% of total advertising spending in China in 2003, according to the State Administration for Industry and Commerce, while accounting for only 8.6% of the population in 2003.

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Out-of-Home Television Advertising Networks in China
       The rapid development of out-of-home television advertising networks is a relatively recent development in China. This form of advertising allows advertisers to effectively reach increasingly mobile and urbanized target audiences. We believe that this form of advertising appeals to advertisers for several reasons:
       Provides an Alternative and Supplement to Other Advertising Media. We believe technological innovations and changing consumer habits have eroded the market appeal of more traditional advertising media. For instance, total television advertising spending as a percentage of all advertising spending in China has decreased from 45.4% in 1999 to 40.2% in 2003 according to ZenithOptimedia.
       We believe that the primary reasons for this include:
  •  the prevalence of digital-video recording and other technologies that enable consumers to avoid watching television advertising;
 
  •  the overall lack of high quality entertainment options for television viewers in China leading to low viewer rates by desired consumer groups;
 
  •  changes in consumer demographics and behavior, including the tendency of high-income consumers to spend greater periods of time out of home in professional and commercial settings; and
 
  •  technological innovations in recent years that have provided advertisers with new means to reach consumers in a wider range of locations, including the Internet and, in our case, the development of lighter, flat television displays.
       Enhanced Market Segmentation through Ability to Target Audiences. Our out-of-home advertising networks are usually installed in venues, such as office buildings, that have a high concentration of consumers with higher-than-average disposable incomes, or venues, such as golf country clubs, that have a high concentration of consumers likely to be interested in particular types of products and services. Our network provides viewer segmentation through placement in locations with comparatively high proportions of consumers with college-level education and higher than average disposable incomes. According to Sinomonitor, 90% of our viewers have a college degree while approximately 90% of our viewers have monthly income of over RMB3,000 ($362), compared to the average monthly wage of an urban resident in Shanghai of approximately RMB1,300 ($157) according to a 2003 government census report prepared by the National Bureau of Statistics of China. In addition, according to Sinomonitor, approximately 87% of our viewers are between 20 and 40 years old. Our network therefore allows advertisers to target well-educated, high-income viewers with an age profile we believe is attractive to advertisers. We believe this ability to direct advertisements at desirable and segmented consumer audiences makes out-of-home television advertising an effective medium for reaching a targeted consumer audience.
       Effective Audience Reach. Most out-of-home advertising displays are placed in locations where there is less competition for viewers’ attention, such as elevator banks, lobbies or on public transportation. The displays are often the only form of media provided in these environments. Accordingly, out-of-home television advertising can be more effective than other advertising media in reaching its intended audience, as evidenced by its comparatively high recall rate, which refers to the number of advertisements an interview subject recalls unaided by prompting from the interviewer. According to an independent study conducted in December 2004 by AC Nielsen Media Research (China), or AC Nielsen, television advertisements placed by elevators produced higher recall rates than traditional television advertising. Under AC Nielsen’s study, the recall rate refers to the average number of specific advertisements that surveyed consumers were able to recall without any prompting from the AC Nielsen pollster. In its survey of 200 respondents in each of four major PRC cities, AC Nielsen found that television advertisement placed near elevators produced a recall rate of

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3.4, 2.9, 3.3 and 3.3 in Shanghai, Beijing, Guangzhou and Chengdu, compared with rates of 3.0, 1.9, 2.4 and 2.3 for traditional television advertising among the same respondents in these cities.
       Attractive Medium Welcomed by Consumers. We believe Chinese consumers are receptive to out-of-home advertising networks. According to a survey conducted by AC Nielsen in December 2004, over 92% of 800 people polled in each of Shanghai, Beijing, Guangzhou and Chengdu stated that they liked or had a neutral attitude toward the presence of our flat-panel displays placed near elevator banks and other public areas in commercial locations. We believe this level of acceptance results from consumers’ willingness to voluntarily watch advertisements in situations where they are otherwise idle. This contrasts with traditional television advertising, which is often viewed as a distraction and interruption from the primary content to which audiences are attracted.
       Cost Effective. Placed in public areas in populous urban centers where large numbers of people congregate, out-of-home advertising can reach consumers at a lower cost than most mass media advertising such as traditional television. In December 2004, CTR Market Research, a certified independent research institution established as a joint venture between China International Television Corporation and Taylor Nelson Sofres plc and specializing in broadcast and advertising media surveys, conducted research into the cost effectiveness of our network in Shanghai and found our advertising medium to be more efficient at reaching consumers, including consumers with higher-than-average incomes, than advertisements broadcast on local television networks. The cost to reach a thousand consumers, or CPM, is the standard metric used in the advertising industry to determine cost effectiveness. According to CTR Market Research, the CPM for advertising on our network in Shanghai was substantially lower than the CPM for advertising on local television networks in Shanghai, Beijing, Guangzhou and Shenzhen. Moreover, according to CTR Market Research, the CPM for reaching consumers with average monthly incomes greater than RMB3,000 ($362) was substantially lower on our network than on all of the local television networks in Shanghai, Beijing, Guangzhou and Shenzhen. The following table sets forth the CPM in U.S. dollars for 30 second television advertising time slots on the networks described for consumers with average monthly incomes greater than RMB3,000 ($362):
                                 
    CPM for Consumers with Average Monthly
    Incomes Greater than RMB3,000 (US$362)(1)
     
City:   Shanghai   Beijing   Guangzhou   Shenzhen
                 
Focus Media
  $ 9.8     $ 15.7     $ 8.9     $ 9.8  
Local television networks(2)
  $ 356.2     $ 409.7     $ 357.5     $ 117.0  
 
(1)  Amounts are translated into U.S. dollars using the exchange rate of $1.00 = RMB8.2767, which was the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollars as of December 31, 2004.
 
(2)  Represents the average cost for placing television advertisements in each city.
Source: CTR Market Research, Focus Media Audience Research Survey, January 2005.
       We believe that as advertisers increase their appreciation of the potential consumer segmentation, cost and other advantages of out-of-home television advertising, this relatively new alternative advertising medium will continue to experience significant growth in terms of market share of total advertising spending in China.

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BUSINESS
Overview
       We operate the largest out-of-home advertising network in China using audiovisual television displays instead of traditional billboards to broadcast advertising, based on the number of locations and number of flat-panel television displays in our network. As of March 2005, our network was located in 70% of commercial buildings surveyed in thirteen cities across China, including 72%, 70%, 67% and 58% of commercial buildings with audiovisual television displays in Beijing, Guangzhou, Shanghai and Shenzhen, respectively, according to an independent survey conducted by CTR Market Research, or CTR. In addition, according to the same survey, our displays accounted for 77% of total television displays located in commercial buildings across the same thirteen cities, including 79% in each of Beijing and Guangzhou, 77% in Shanghai and 70% in Shenzhen. These four cities are the primary urban centers of the three regions that together accounted for 49.3% of total advertising spending in China in 2003, according to the State Administration for Industry and Commerce.
       We derive revenue principally by selling advertising time slots on our network. Substantially all of the content displayed on our network consists of advertisements which are broadcast repeatedly for approximately twelve-hours per day in nine- or twelve-minute cycles depending on the city in which the cycle is operated. Our displays are placed primarily in high-traffic areas of commercial office buildings such as in lobbies and near elevators, as well as in large retail chain stores, beauty parlors, karaoke parlors, golf country clubs, auto shops, banks, pharmacies, hotels and airports.
       Our 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, our network produces higher consumer recall rates of advertisements than traditional television advertisements. According to a December 2004 AC Nielsen study of 800 consumers in Beijing, Shanghai, Guangzhou and Chengdu, consumers on average recalled more advertisements viewed on our network than on traditional television stations. In April 2005, we commenced operation of our in-store network, which refers to our network of flat-panel displays located in large-scale chain retail stores, or hypermarkets, and supermarkets and convenience stores, and our advertising network now includes both our commercial network and our in-store network.
       As of March 31, 2005, more than 680 advertisers purchased advertising time slots on our network and for the three months ended March 31, 2005, we acquired over 180 new advertising clients. Some of our largest advertising clients in terms of revenue include 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.
       We believe our high market share of desirable locations in key cities in China and the exclusivity and renewal terms contained in over 90% of our display placement agreements with landlords and property managers create higher barriers to entry for potential competitors than other out-of-home and outdoor advertising business models, such as billboards.
       Key data concerning our display placement agreements as of March 31, 2005 include the following:
  •  95.3% give us the exclusive right to install our television displays in the elevator and lobby areas of the locations in which we operate;

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  •  87.9% give us the right to renew the contract under terms no less favorable than those offered by competing bidders;
 
  •  94.3% of the agreements that had expired were renewed; and
 
  •  no one landlord or property manager accounts for more than 1% of the locations in our network.
       In addition, we believe that lower installation costs and ongoing maintenance costs for operating our network have allowed us to generate higher gross margins than several competing advertising business models, including outdoor billboards and bus stop displays.
       As of March 31, 2005, we operated our network directly in 22 cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen. As of the same date, we also covered an additional 22 cities through contractual arrangements with regional distributors. As of March 31, 2005, our commercial location network consisted of 16,025 flat-panel television displays in 8,866 locations in the 22 cities where we operated directly and approximately 1,847 flat-panel displays in approximately 1,611 locations in the 22 cities where the network is operated by our regional distributors.
       Our television advertising network has the following key features:
  •  Substantially all of the content we broadcast consists of advertisements.
 
  •  The advertising cycle consists of nine or twelve minutes of advertising content per week and is sold to advertising clients in 30-, 15- or five-second time slots.
 
  •  The advertising cycle is broadcast repeatedly, approximately twelve-hours per day.
 
  •  The majority of our flat-panel displays contain a 17-inch LCD screen, while the remainder contain 42-inch plasma screens.
       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 March 31, 2005, we operated our network directly in 22 cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen and also covered an additional 22 cities through contractual arrangements with regional distributors. Between January 1, 2004 and March 31, 2005, the number of commercial locations in which we operate directly increased from 754 to 8,866, and the number of displays in those locations increased from 827 to 16,025. We commenced operations of our in-store network in April 2005. As of March 31, 2005, our in-store network consisted of 3,149 flat-panel displays placed in 423 hypermarket and store locations in 20 of our directly operated cities.
       For the three months ended March 31, 2005, we recorded total revenues of $9.6 million, income from operations of $2.9 million and net income of $2.6 million as compared to total revenues, income from operations and net income of $2.6 million, $1.1 million and $713,495 for the three months ended March 31, 2004. In 2004, we recorded total revenues of $29.2 million, income from operations of $13.0 million and net income of $372,751 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 $372,751 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 will not incur any such charges commencing January 1, 2005 as the redemption feature of our Series B convertible redeemable preference shares was removed prior to December 31, 2004.

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       The following table sets forth certain operating data related to our network and our total advertising service revenues for the periods indicated:
                                                             
    For and as of the three months ended
     
    September 30,   December 31,   March 31,   June 30,   September 30,   December 31,   March 31,
    2003   2003   2004   2004   2004   2004   2005
                             
Number of displays in our commercial location network:
                                                       
 
Our direct cities.
    356       827       1,491       3,128       7,476       12,786       16,025  
 
Our regional distributors (1)
    27       201       479       1,040       2,318       2,696       1,847  
   
Total
    383       1,028       1,970       4,168       9,794       15,482       17,872  
Number of displays in our in-store network
                                        3,149  
Number of stores in our in-store network
                                        423  
Time slot data:
                                                       
 
Number of time slots available for sale
    364       1,299       1,775       2,347       3,542       5,170       6,010  
 
Number of time slots sold
    123       292       403       832       1,280       2,209       1,998  
 
Utilization rate(2)
    33.9 %     22.5 %     22.7 %     35.4 %     36.1 %     42.7 %     33.2 %
 
Average advertising service revenue per time slot (US$)
  $ 7,877     $ 8,177     $ 6,693     $ 6,607     $ 5,506     $ 5,018     $ 4,721  
                                           
Total advertising service revenues (in ’000s of US$)
  $ 972     $ 2,387     $ 2,694     $ 5,495     $ 7,049     $ 11,083     $ 9,432  
                                           
 
(1)  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.
 
(2)  Utilization rate refers to total time slots sold as a percentage of total time slots available during the relevant period.
Our Competitive Strengths
       We believe we have the following competitive strengths:
Effective and Focused Advertising Network Accepted by Both Advertisers and Consumers.
       Since commencing our current business operations in May 2003, we have created an advertising medium that:
  •  Targets Segmented Consumer Groups. Our television displays are primarily placed in venues that have a high concentration of consumers with higher-than-average disposable incomes. As a result, our network enables advertisers to target consumers with demographic profiles attractive to them. Moreover, our network will also allow advertisers to further segment these consumers by creating separate specified advertising channels, such as in beauty parlors or golf country clubs.
 
  •  Effectively Reaches Captive Viewers in Low Distraction Environments. Our flat-panel displays are placed in lobbies, near elevator banks and in other environments where there are few broadcast or display media competing for viewers’ attention, increasing the effectiveness of our network. This is demonstrated by the higher recall rate produced by viewing advertisements on our network compared to traditional broadcast television. According to a report by AC Nielsen, our network produced a higher average recall rate among 800 consumers surveyed in Beijing, Shanghai, Guangzhou and Chengdu than advertisements seen on broadcast television.

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  •  Employs an Attractive Innovative Display Medium. We believe our network has been well-received by consumers. According to a December 2004 survey by AC Nielsen, over 92% of viewers polled in each of Shanghai, Beijing, Guangzhou and Chengdu stated they liked or had a neutral attitude toward our out-of-home television advertising network.
 
  •  Cost-effectively Reaches Consumers with Desired Demographic Profiles. Because our network is able to target specific consumer groups, it allows advertisers to more cost-effectively reach consumers with demographic profiles desirable to them. According to a study by CTR, the cost of reaching 1,000 consumers with average monthly incomes greater than RMB3,000 ($362) was significantly lower on our network than advertising on traditional television stations in Shanghai, Beijing, Guangzhou, and Shenzhen.
       We believe these characteristics and advantages of our business model have made us an effective and well-accepted alternative advertising medium with a strong market position that enables us to compete successfully in the PRC advertising market.
The Largest Out-of-home Television Advertising Network in China.
       We operate the largest out-of-home television advertising network in China based on the number of locations and the number of flat-panel displays in our network. As of March 31, 2005, we directly operated 16,025 flat-panel displays installed in 8,866 commercial locations in 22 cities in China, and through our regional distributors, we also operated approximately 1,847 flat-panel displays in approximately 1,611 commercial locations in 22 cities in China. As of March 2005, our network was located in 70% of commercial buildings surveyed in the urban centers of thirteen cities across China, including 72%, 70%, 67% and 58% of buildings surveyed in Beijing, Guangzhou, Shanghai and Shenzhen, respectively, according to an independent survey conducted by CTR. In addition, according to the same survey, our displays accounted for 77% of television displays located in commercial buildings across the same thirteen cities, including 79% in each of Beijing and Guangzhou, 77% in Shanghai and 70% in Shenzhen. We believe our comprehensive geographic coverage and our strong presence in many major cities in China, including the four key cities of Beijing, Shanghai, Guangzhou and Shenzhen, makes our network attractive to advertisers who wish to reach consumers with higher-than-average disposable incomes in economically developing cities across China.
Low Capital Expenditure Requirements and Low Cost Base that Allow Us to Grow Our Business Rapidly.
       We believe we can increase the size of our network rapidly due to our low capital expenditure requirements and low cost base. Our capital expenditures consist primarily of component and assembly costs for our flat-panel television displays and costs to install our displays at new locations as we expand our network. These costs are low relative to our total revenues given the relatively low cost of flat-panel television screens and other off-the-shelf components used in our television displays. Our cost base consists largely of rental payments to landlords and property managers under our display placement agreements, selling and marketing expenses and general and administrative expenses. Our rental payments are fixed annually and are not linked to revenues. Therefore we expect our rental payment costs to decrease as a percentage of total revenues as we grow. Our selling and marketing expenses and general and administrative expenses are also expected to decrease as a percentage of revenues as we increasingly take advantage of economies of scale.
       We believe that lower installation costs and ongoing maintenance costs for operating our network have allowed us to generate higher gross margins than several competing advertising business models, including outdoor billboards and bus stop displays. We believe these characteristics of our business model will allow us to effectively pursue future growth opportunities.

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Sustainable Competitive Advantages through the Size of Our Network and Our Exclusive, Renewable Agreements.
       We believe the following factors provide us with a sustainable business advantage over existing and prospective competitors:
  •  Early Market Presence and Coverage in Many of the Most Desirable Locations. We were one of the first companies to establish a large-scale out-of-home television advertising network in commercial buildings and other commercial locations in China. By recognizing this market opportunity and entering this sector early, we have occupied many of the most desirable locations and have grown the size of our network, which we believe has created high barriers to entry for potential competitors. We believe that we have secured a high percentage of the most desirable locations in many of China’s major urban centers, and that this early market presence advantage is important because landlords and building managers typically permit only one out-of-home television advertising network operation in each building.
 
  •  Large-scale Network that Attracts Advertising Clients. Our network includes flat-panel displays located in a wide range of commercial locations in 43 cities in China and we believe the extent of our network coverage makes us more attractive to advertising clients than competing networks. Through the number of flat-panel displays we operate and the national scope of our network, we enable advertising clients to reach a wide audience in urban consumer markets across China. We believe the size and scope of our network has attained a scale that draws advertising clients to our network and gives us a competitive edge over competing networks as well as over many traditional advertising media.
 
  •  Exclusive and Renewable Display Placement Agreements. As of March 31, 2005, 95.3% of our display placement agreements give us the exclusive right to place our flat-panel displays in the elevator and lobby areas of the locations in which we operate. In addition, as of March 31, 2005, in the cities we operate directly, 87.9% of our display-placement agreements give us the right to renew the contract under terms that are no less favorable than those offered by competing bidders, enabling us to maintain exclusive coverage of many of the most desirable locations in our network for significant lengths of time. As of March 31, 2005, 94.3% of the agreements that expired were renewed.
       We believe our high market share of desirable locations in key cities in China, the wide extent of our network coverage and the exclusivity and renewal terms contained in over 90% of our display placement agreements with landlords and property managers create higher barriers to entry for potential competitors than other out-of-home and outdoor advertising business models, such as billboards.
Our Brand Name and Reputation Have Attracted a Large Base of Leading Advertising Clients.
       We believe we are building a respected brand name in the advertising industry in China by developing a reputation for innovative and effective delivery of large-scale yet focused high-quality television advertising to consumers with desirable demographic profiles. This has enabled us to develop a strong client base consisting of major international brand name advertisers such as NEC, Nokia, Samsung, Toyota and Volkswagen, and major 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. Eight of our top ten advertising clients during 2003 remained as our clients as of December 31, 2004. In addition, as of March 31, 2005, more than 680 advertisers purchased advertising time on our network and for the three months ended March 31, 2005, we acquired over 180 new advertising clients. The strength and depth of our client base enhance our reputation in the industry and position us to further expand our advertising network.

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Strong Management and Sales Team with Extensive Industry Experience.
       We have assembled a management and sales team with extensive experience in China’s advertising industry. Jason Nanchun Jiang, our founder, chairman, chief executive officer and a major shareholder, has 10 years of experience in China’s advertising industry, including his previous experience until 2003 as chief executive officer of Shanghai Everease Advertising Corporation, or Everease, one of China’s top 50 advertising agencies. Daniel Mingdong Wu, our chief financial officer, has over six years of experience in investment banking, including for Merrill Lynch and Lehman Brothers, and served as chief financial officer of Harbor Networks, one of the leading telecommunications equipment providers in China. In addition, we employ experienced and knowledgeable managers to run operations in each of the cities we operate directly. Our marketing managers have an average of eight years’ experience in the advertising industry in China and have worked for a number of major domestic and international advertising firms in China. We believe the strength and experience of our management and sales teams have enabled us to expand our advertising network, enhance our reputation in our industry and build up a strong client base.
Our Strategies
       Our objectives are to extend our position as the largest out-of-home television advertising network in China and to become a leading brand in China’s advertising industry. We intend to grow our business by:
  •  expanding our network, both in cities in which we currently operate as well as in additional cities;
 
  •  continuing to promote the effectiveness of our business model while enhancing our brand name, with the aim to increase advertiser demand for time slots on our network which in turn will allow us to increase our advertising fees;
 
  •  creating additional advertising channels based on new types of locations, such as our in-store network placed in hypermarkets, supermarkets and convenience stores; and
 
  •  expanding into new digital advertising media operations as opportunities arise.
Enhance Our Market Position and Revenues by Expanding Our Network.
       We intend to aggressively expand our flat-panel display network in order to erect barriers to expansion and entry by current and prospective competitors, enhance its critical mass appeal to our advertisers, and increase our fee rates and revenues. To achieve this goal, we intend to:
  •  Increase the Number of Locations and Flat-Panel Displays in Our Network. We intend to aggressively enter into new display placement agreements to increase the number of locations in which we install our flat-panel displays in order to enhance our current position in many of the most desirable locations in key urban areas in China.
 
  •  Expand into New Cities including through Strategic Acquisitions of Important Regional Distributors. We expect to continue to acquire certain of our regional distributors as a means to expand the size and scope of our network. Pursuant to our arrangements with our regional distributors, they are licensed to use our technology, and bear all of the revenues, profits or losses of their operations. This method enables us to evaluate the potential profitability of executing our business model in a specific city and expanding the size of the network before we incur the expense of operating in the city directly. As of March 31, 2005, we have successfully acquired 13 of our regional distributors. We will continue to pursue this strategy as a means of expanding our national coverage and offering advertising clients wider distribution of their advertising content.
       We typically charge advertising clients fees for placement of an advertisement over the entire network in a particular city. While we do not directly tie our advertising fee rates to the number of

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our commercial locations in a particular city, we adjust our fee rates from time to time based on the number of such locations as well as the estimated audience reached. Accordingly, we believe that expanding our network will lead to higher fee rates and, in turn, increased revenues.
Promote our Brand Name and Augment Our Service Offerings to Attract a Wider Client Base and Increase Revenues.
       Enhancing our brand name in the industry will allow us to solidify and broaden our client base by enhancing market awareness of our services and our ability to target discrete consumer groups more effectively than mass media. We believe the low cost of reaching consumers with higher-than-average disposable incomes through our network and the additional advertising channels within our network we plan to develop in the future can enable advertisers to reach that goal.
       As we increase our advertising client base and increase sales, demand for and sale of time slots on our network will grow. As demand for time slots on our network increase, we believe we will be able to increase our rates and thereby improve our results of operations.
Identify and Create New and More Focused Networks and Advertising Channels that Target Specific Consumer Demographics.
       In-store Network. We have begun to place our flat-panel displays in large-scale chain retail stores, or hypermarkets, as well as supermarkets and convenience stores, which we refer to as our in-store network, enabling our advertising clients to target consumers at the time and place where consumers are likely to purchase a range of consumer and household products. As of March 31, 2005, we had placed 3,149 flat-panel displays in 423 locations on our in-store network, and we commenced operations of our in-store network in April 2005. We have begun to operate our in-store network as a stand-alone network, and will continue to market this network separately from our commercial location network. To carry out this strategy, we will continue to strengthen efforts to enter into long-term and exclusive relationships with hypermarkets, supermarkets and convenience stores and to market this new service to advertisers.
       Segmented Advertising Channels. We have placed flat-panel displays in office buildings, shopping malls, restaurants, beauty parlors, golf country clubs, automobile repair shops, banks, pharmacies, airports, hospitals and other commercial locations. Currently, these channels are integral parts of our advertising network, and we typically charge advertising clients a fee based on an advertising campaign over the entire advertising network in a given city. However, many of these venues are suitable for targeting specific audience segments. As we expand the number of these venues, we intend to separate some of them into distinct stand-alone networks and to market them to specific advertising clients who wish to advertise their products and services to targeted consumer groups. We believe our ability to identify and create focused advertising networks will distinguish us from our competitors and attract additional advertising clients who will use our services to reach their target consumers in a more effective manner.
Continue to Explore New Digital Media Opportunities to Target Segmented Consumer Groups.
       Consumer acceptance of technology-driven advertising and entertainment media, including the Internet and advanced mobile communications systems, is a feature of the advertising industry in China. We intend to identify and take advantage of new opportunities in the PRC advertising market in order to enhance our ability to target segmented consumer groups through innovative advertising techniques and media. As new opportunities that fit our brand image and business model present themselves, we expect to expand our operations and continue to pursue innovative advertising techniques and media that provide effective solutions to advertising clients and target consumers with desirable demographic profiles.

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Our Advertising Network
       Our advertising network, or our network, includes commercial locations and, increasingly, large-scale chain retail stores, which we refer to as hypermarkets, and supermarkets and convenience stores. The commercial locations in our network also include shopping malls and hotels as well as more specialized locations such as beauty parlors and golf country clubs. The majority of our displays are currently placed in high-traffic areas of commercial office buildings. We market our commercial location network to advertisers of consumer products and services, such as home electronics, mobile communications devices and services, cosmetics, health products and financial services. As we expand the number of venues in our advertising network, we intend to separate certain types of venues into distinct stand-alone networks. As of March 31, 2005, our commercial location network, including the portions of our network operated by our regional distributors, was comprised of approximately 17,872 flat-panel displays placed in approximately 10,477 distinct locations in 44 cities throughout China. We operate our commercial location network directly in 22 cities and indirectly through contractual arrangements with regional distributors in an additional 22 cities. We also offer our advertising services in several cities outside of China, including Hong Kong, Taipei and Singapore through contracts with local operators. None of these arrangements outside of China currently constitutes a material part of our business.
       As part of our growth strategy, we commenced operations of our in-store network in April 2005. As of March 31, 2005, our in-store network had placed 3,149 flat-panel displays in 423 hypermarket and store locations in 20 cities, including Beijing, Shanghai, Guangzhou and Shenzhen. We believe the rapid expansion of hypermarkets and other chain retail stores in China will provide opportunities and incentives for advertisers to take advantage of in-store television advertising networks such as our in-store network. Hypermarkets in which we have placed flat-panel displays include Carrefour and Lotus. We expect our in-store network primarily to attract advertisers of food and beverage products, household, kitchen and bathroom products, and household appliances. An independent survey conducted by CTR indicates that television advertising networks placed in hypermarkets and other stores allow advertisements to effectively reach the consumer during the purchasing decision-making process. According to a 2005 survey conducted by CTR, with 600 samples taken across Beijing, Shanghai, and Guangzhou, over 11,600 people visit a typical hypermarket each day of the week. Over 70% of these visitors are the primary decision makers in determining purchases. Such viewers were also found to visit hypermarkets on average over five times per month. The CTR survey also indicates that the majority of purchases are unplanned purchases. We believe that this suggests that shoppers could be highly receptive to advertisements in these settings and that by placing advertisements to these shoppers where they make purchases, advertisers may have more influence on purchasing decisions through an in-store network than through traditional media. According to CTR, over 98% of shoppers noticed Focus Media’s displays, over 84% of all shoppers paid attention to the advertisements shown on those displays and on average, viewers spent over 24 minutes shopping in hypermarkets. As our displays are placed in various locations throughout the store, we believe viewers are likely to encounter our displays frequently. CTR survey results show that on average, shoppers view our advertisements a total of over seven minutes per visit.
       We also intend to develop other stand-alone networks, such as a beauty parlor network, that will provide advertisers of cosmetics, hair care, skin care and other beauty products with an advertising channel able to reach consumers with their desired demographic characteristics in a relatively captive environment. We believe that by increasingly segmenting our network into new advertising channels, we will be able to offer advertisers more targeted and effective audience reach, thereby enabling us to increase our advertising rates.

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       The following map sets forth the geographic coverage of our advertising network as of March 31, 2005:
LOGO
       Our Direct Operations. As of March 31, 2005, we operated our network directly in 22 cities throughout China, including Beijing, Shanghai, Guangzhou and Shenzhen which are the four major cities located in the three regions that together accounted for 49.3% of total advertising spending in China in 2003, according to the State Administration for Industry and Commerce. We believe we have established ourselves as the leading provider of out-of-home television advertising in each of these four cities. As of March 2005, our network was located in 70% of commercial buildings in urban centers across thirteen cities in China, including 72%, 70%, 67% and 58% of buildings in Beijing, Guangzhou, Shanghai and Shenzhen, respectively, according to an independent survey conducted by CTR. In addition, according to the same survey, our displays accounted for 77% of television displays located in commercial buildings across the same thirteen cities, including 79% in each of Beijing and Guangzhou, 77% in Shanghai and 70% in Shenzhen. These four key cities accounted for more than 75% of our total revenues in 2004. We believe that many of the other cities in which we operate directly will contribute to our future revenue growth as the populations and income levels in these cities continue to grow.
       In CTR’s independently conducted survey, CTR surveyed the scope of out-of-home television networks in terms of percentage of commercial buildings and percentage of television displays in thirteen major cities across China. CTR selected thirteen cities that together account for over 60% of advertising spending in China: Shanghai, Beijing, Guangzhou, Shenzhen, Chongqing, Tianjin,

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Qingdao, Xian, Nanjing, Wuhan, Hangzhou, Shenyang and Chengdu. We operate our network directly in each of these cities. CTR conducted its study by tallying a wide sample of commercial buildings along three kilometer stretches of streets from each city’s commercial center and randomly selecting a cross-section of buildings and systematically recording (1) the types of buildings, (2) whether flat-panel television advertising displays were installed and (3) the name of the advertising company operating each display. CTR surveyed a total of 80 streets and 400 buildings in each of Shanghai, Beijing and Guangzhou, and 50 streets and 200 buildings in each of Shenzhen, Chongqing, Tianjin, Qingdao, Xian, Nanjing, Wuhan, Hangzhou, Shenyang and Chengdu. In addition to the network coverage and display percentage data described above, CTR found that the network of our nearest competitor was located in 28% of buildings surveyed and accounted for 21% of television displays installed.
       Our Regional Distributors. As of March 31, 2005, we entered into distribution agreements with 22 regional distributors who currently operate in 22 of the 44 cities covered by our advertising network. Under the terms of our contractual relationships with our regional distributors:
  •  We provide training, operational and logistical instructions to our regional distributors and allow them to use our brand name, all at no cost.
 
  •  We also sell our flat-panel displays to our regional distributors.
 
  •  Each regional distributor is responsible for signing display placement agreements with commercial locations to establish and grow a network presence in the city in which they operate.
 
  •  Each regional distributor is responsible for selling advertising time slots to advertisers and for maintenance, monitoring and other client services.
 
  •  Our regional distributors have the right to sell seven minutes of the nine-minute cycle, or if the duration of the cycle is extended, seven-ninths of the time, while we retain the right to sell two minutes out of the nine-minute cycle, or, if the duration of the cycle is extended, two-ninths of the cycle time on the portion of the network for which they are responsible. This gives us the flexibility to sell those time slots directly to advertisers or to sell the time to the regional distributor.
 
  •  We do not share any of the revenues, profits or losses of our regional distributors.
       Expanding our network through regional distributors enables us to provide our advertisers with broader nationwide coverage and to test, develop and evaluate these regional advertising markets without our having to incur start-up and ongoing expenses at the early stages of their development. We also seek to acquire our regional distributors when we believe it is more likely for us to benefit economically from the full integration of their operations into our network. We do not have the contractual right to purchase our regional distributors, and any such acquisition must be negotiated with each regional distributor separately. As of March 31, 2005, we had acquired 13 former regional distributors.
       Each of our regional distributors operates independently from us and is responsible for independently complying with all relevant PRC laws and regulations including those related to advertising. We periodically monitor our regional distributors to ensure they have obtained all required licenses and are complying with regulations relating to advertising content, although it is possible that one or more of our regional distributors may not be in compliance with all PRC regulations. If we learn of any such non-compliance, we will notify the relevant regional distributor and monitor what steps it needs to take to become compliant. See “Risk Factors — One or more of our regional distributors could engage in activities that are harmful to our reputation in the industry and to our business”.

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Advertising Clients, Sales and Marketing
       Our Advertising Clients. The quality and coverage of our network has attracted a broad base of international and domestic advertising clients. As of March 31, 2005, more than 680 advertisers purchased advertising time slots on our network, including leading international brand name advertisers 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. Dongfeng Motor, Toyota, Samsung, NEC and Volkswagen, which were our top five customers in 2004, accounted for 4.0%, 3.7%, 2.5%, 2.5% and 2.5%, respectively, of our total revenues in that year.
       Advertisers purchase advertising time slots on our advertising network either directly from us or through their advertising agencies which purchase advertising time on our network on behalf of their domestic and international clients. In 2003 and 2004 and for the three months ended March 31, 2005, direct sales to advertisers accounted for 55.4%, 48.7% and 51.0% of our revenues, respectively. In 2003 and, 2004 and for the three months ended March 31, 2005, sales to advertising agencies accounted for 44.6%, 51.3% and 49.0% of our revenues, respectively.
       Our top thirty advertising clients accounted for 46.6%, 39.0% and 39.0% of our revenues in 2003, 2004 and for the three months ended March 31, 2005, respectively. No single advertising client accounted for more than 4% of our revenues in 2003, 2004 or for the three months ended March 31, 2005. We believe the appeal and effectiveness of our advertising network is largely evidenced by the number of advertising clients who place multiple advertising campaigns on our network, which is reflected in the percentage increase of advertising fees we receive from clients over time.
       Sales. We employ an experienced advertising sales force in each city in which we operate. Our marketing managers have an average of eight years’ experience in the advertising industry in China. The members of our current sales team have an average of five years of sales experience in the advertising industry. We provide in-house education and training to our sales force to ensure they provide our current and prospective clients with comprehensive information about our services, the advantages of using our out-of-home television advertising network as a marketing channel, and relevant information regarding the advertising industry. Our sales team is organized by city, industry and client accounts. We also market our advertising services from time to time by placing advertisements on third-party media, including primarily magazines and Internet websites.
       Advertising Contracts. We offer advertisers five-, fifteen- or thirty-second time slots on our advertising network. Our standard advertising package includes a time slot on our entire network in each city in which the advertiser wishes to display the advertisement. Our sales are made pursuant to written contracts with commitments ranging from one week to several months. Our advertising rates vary by city and by the number of cities in which the advertisement is placed, as well as by the length of the time slot purchased and the duration of the advertising campaign.
       Certain of our advertising contracts provide that up to 10% of the specific locations at which an advertisement will be displayed for an advertiser may vary from the list of sites provided under the relevant contract. If the number of locations and/or the actual sites where advertisements are displayed vary from the sites prescribed under the contract by more than 10%, we will arrange to extend the duration of the advertising campaign or display such advertisements at additional sites, although to date, we have never needed to do so. This provision gives us flexibility to account for any potential technical problems, advertiser conflicts or turnover in the composition of our physical network location.
       We generally require our clients to submit advertising content at least seven days prior to the campaign start date. We also reserve the right to refuse to disseminate advertisements that are not in compliance with content requirements under PRC laws and regulations.

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       Network Monitoring and Evaluation. We provide a number of services in connection with each client’s advertising campaign following the sales process. Our network operations team monitors the displays in our network on a daily basis. They are also responsible for compiling reports that are supplied under some of our agreements to clients as evidence of the broadcast of their advertisements on our network. The report generally includes a list of buildings the advertisements of clients were broadcast as well as photographs of representative television displays showing their advertisements being displayed. The advertising campaign reports are provided to our clients for information purposes and do not constitute a customer acceptance provision. The reports we provide to our clients may also contain portions prepared by independent third-party research companies that verify the proper functioning of our flat-panel displays and the proper dissemination of the advertisement, by conducting on-site evaluations and polls to analyze the effectiveness of and public reaction to the advertisement.
       Aside from third-party verification services, we and our regional distributors conduct substantially all client services using our own employees or the employees of the relevant regional distributor. In Beijing and Guangzhou, we contract some of these services to third-party agents. These agents provide us with network development, installation, maintenance, monitoring and reporting services.
       Market Research. We believe our advertising clients derive substantial value from our ability to provide advertising services targeted at specific segments of consumer markets. Market research is an important part of evaluating the effectiveness and value of our business to advertisers. We conduct market research, consumer surveys, demographic analysis and other advertising industry research for internal use to evaluate new and existing advertising channels. We also purchase or commission studies containing relevant market study data from reputable third-party market research firms, such as AC Nielsen, CTR Market Research and Sinomonitor. We typically consult such studies to assist us in evaluating the effectiveness of our network to our advertisers. A number of these studies contains research on the numbers and socio-economic and demographic profiles of the people who visit the locations of our network.
Programming
       Substantially all of the content on our advertising network consists of audiovisual television advertising provided to us by our advertising clients. We also provide a limited amount of time for landlords and property managers to display location-specific information, building announcements and related promotional material on our network. We do not produce or create any of the advertising content shown on our network, except our own marketing content. All of the advertising content displayed on the portion of the network we operate directly is reviewed by qualified members of our staff to ensure compliance with PRC laws and regulations, while our agreements with our regional distributors require each of them to review the contents shown on the portion of the network they operate for compliance with PRC laws and regulations. See “Regulation of Our Industry — Regulation of Advertising Operations — Advertising Content”.
       Each flat-panel display contains a pre-recorded digital video disc, or DVD, or CF card containing a nine-minute or, in Shanghai, Beijing, Guangzhou and Shenzhen, twelve-minute, cycle of advertising content and other information, such as building-specific promotional information. We change the DVDs and CF cards to update the advertising content in each flat-panel display in our network on a weekly basis. We and each regional distributor compile each nine-or twelve-minute cycle from advertisements of five, 15 or 30 seconds in length provided by advertisers to us and our regional distributors. Each of our flat-panel displays plays the advertising content on the DVD or CF card repeatedly throughout the day so that the nine- or twelve-minute cycle is broadcast in each building within our network a total of 80 or 60 times per day, respectively.

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Prices and Utilization
       We generate revenues through the sale of advertising time slots on our advertising network. Our revenues are 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 the two-minute portion of time slots available on our regional distributors’ networks and the length of the advertising cycle, which is currently twelve minutes in Beijing, Shanghai, Guangzhou and Shenzhen and nine minutes in the other cities in which we operate. 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 Beijing, Shanghai, Guangzhou and Shenzhen, 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 other cities where we or 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. Starting July 1, 2005, we intend to extend the cycle time to twelve minutes, or 24 30-second time slots per week, in those of our directly operated cities that currently use nine minute cycles;
 
  •  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. On July 1, 2005, we intend to implement a 5-10% price increase for time slots on our network in our directly operated cities.
       Prices for time slots on our advertising network vary by city and by the number of cities in which the advertisement is placed, as well as by the length of the time slot purchased and the duration of the advertising campaign. We periodically review our prices for each city, every six months. We base our prices on a number of factors, including the location and duration of the advertising campaign, the demand for network time in the city in which the advertising campaign is to appear, and the number of network locations in a city that in turn affect the estimated number of consumers reached. As the demand for time slots on the network in a particular city increases and therefore the nine-or twelve-minute cycle reaches saturation, we review our price structure for that city and either increase our rates for that city or extend the duration of the cycle, which effectively increases our rates by giving each advertisement fewer exposures per day and allows us to sign up more clients within that cycle. Extending the length of our advertising cycle from nine minutes to twelve minutes in Beijing, Shanghai, Guangzhou and Shenzhen has not affected advertisers’ willingness to place advertisements on our network or resulted in pressure to reduce our prices for time slots.
Relationships with Location Providers
       We install our flat-panel displays in selected spaces we lease in office buildings and other commercial locations. Establishing and maintaining long-term relationships with landlords and

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property managers is a critical aspect of our business. We employ a team of location relationship personnel in each city in which we operate directly who are responsible for identifying desirable locations, negotiating display placement agreements and engaging in ongoing site placement relations.
       In addition to helping us expand our network, our location relationship personnel ensure that the needs and concerns of landlords and property managers are being met and addressed effectively and on a timely basis. These concerns generally include ensuring that the flat-panel displays are properly installed and are in proper working condition. We undertake to landlords and property managers in our network to maintain the proper operation of our flat-panel displays. We generally rely on our own employees to install, maintain, monitor and repair our flat-panel displays. Each of our flat-panel displays is inspected at least once daily.
       We enter into display placement agreements with individual landlords, property managers, hotels and shopping malls under which we generally pay a fixed annual rent in exchange for the right to display advertising and commercial media in the lobby and elevator areas of the building. In Beijing and Guangzhou, we contract a portion of the location development, monitoring and maintenance work to local agents. As of March 31, 2005, 95.3% of our display placement agreements gave us the exclusive right to place television advertising in the lobby and elevator bank area of the locations in which we operate. As of March 31, 2005, we had entered into display placement agreements covering 8,866 commercial locations in our directly operated cities and our regional distributors had entered into display placement agreements with landlords and property managers covering an additional 1,127 commercial locations. We are not reliant on any one landlord or property manager for a material portion of our network coverage and as of March 31, 2005, no individual landlord or property manager accounted for more than 1% of the locations in our network. As hypermarkets, supermarkets and convenience stores have control over multiple locations, it is likely that a smaller number of display placement agreements and contractual arrangements will account for a larger percentage of our in-store network coverage. Accordingly, we may rely on fewer display placement agreements to provide us with a larger percentage of locations in our in-store network than is typical for other types of locations in our advertising network.
       We believe that landlords and property managers generally do not view us as a major source of revenue and are instead primarily attracted to our flat-panel displays as an innovative and visually pleasing medium that complements their public areas and that provides an engaging means of conveying building-related information to their tenants. In connection with certain of our display placement agreements, we agree to provide concessions and services, such as displaying building-related notifications, publicity and other information provided by the landlord or property manager or granting time slots to the landlord or property manager for their own promotional purposes. Under some of our display placement agreements, the landlord or property manager can also sell time slots to their tenants in the building and split fees with us. Of our 297 display placement agreements that expired as of or prior to March 31, 2005, 94.3% were renewed.
       The following table provides summary information about our display placement agreements in the cities we operate directly as of March 31, 2005:
                 
    Percentage   Percentage with
    with   best offer
City/Region   exclusivity   renewal rights
         
    (%)   (%)
Beijing
    98.5       97.5  
Shanghai
    91.8       94.4  
Guangzhou
    98.1       91.6  
Other cities
    94.5       83.8  
       Our display placement agreements have initial terms ranging anywhere from one to ten years. As of March 31, 2005, approximately 81.3% display placement agreements will expire during or after

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2007. As of March 31, 2005, we had the right under 87.9% of our display placement agreements to renew the display placement agreements provided that the terms offered by us are no less favorable than those offered by competing bidders. The rental terms and fees under our display placement agreements vary considerably depending on the city, location of the building, number of flat-panel displays that may be installed and the needs of the landlord or property manager. Under our display placement agreements, we retain ownership of the flat-panel displays.
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