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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               _________________

                                   FORM 10-K

                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
         |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
             SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

         |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
             SECURITIES EXCHANGE ACT OF 1934
                      FOR THE TRANSITION PERIOD FROM     TO

                       COMMISSION FILE NUMBER : 0-28670

                                TV FILME, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                  98-0160214
(STATE OR OTHER JURISDICTION OF          (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)


              C/O ITSA - INTERCONTINENTAL TELECOMUNICACOES LTDA.
                             SCS, QUADRA 07-B1.A
                        ED. EXECUTIVE TOWER, SALA 601
                           70.300-911 BRASILIA - DF
                                    BRAZIL
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)


    REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 011-55-61-314-9908

         SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                     NONE
         SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                   COMMON STOCK, PAR VALUE $0.01 PER SHARE

    INDICATE  BY CHECK MARK  WHETHER THE  REGISTRANT:  (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE  ACT OF
1934  DURING  THE  PRECEDING  12 MONTHS  (OR FOR SUCH  SHORTER  PERIOD  THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),  AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO

    INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT  FILERS  PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S  KNOWLEDGE,  IN DEFINITIVE PROXY OR INFORMATION  STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X].

    THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 25, 1997 WAS APPROXIMATELY $41,186,548.

    AS OF MARCH 24, 1997,  10,166,176  SHARES OF THE REGISTRANT'S  COMMON STOCK,
$0.01 PAR VALUE, WERE OUTSTANDING.

    DOCUMENTS INCORPORATED BY REFERENCE.  THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S
1997 ANNUAL MEETING OF STOCKHOLDERS,  WHICH WILL BE FILED ON OR BEFORE APRIL 30,
1997.

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<PAGE>



                               TABLE OF CONTENTS
                                                                          PAGE

PART I.....................................................................  1

    ITEM 1. BUSINESS.......................................................  1
      Background...........................................................  1
      Company Overview.....................................................  1
      Brazilian Pay Television Industry....................................  2
      Operating Systems and the Company's Markets..........................  3
      Application Markets..................................................  5
      Programming..........................................................  5
      Operations...........................................................  7
      Employees............................................................  7
      Facilities and Equipment.............................................  7
      Competition..........................................................  8
      Regulatory Environment...............................................  8

    ITEM 2. PROPERTIES..................................................... 11

    ITEM 3. LEGAL PROCEEDINGS.............................................. 11

    ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 11

PART II.................................................................... 12

    ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS............................................ 12

    ITEM 6. SELECTED FINANCIAL DATA........................................ 12

    ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS............................ 14

    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 24

    ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE............................ 36

PART III................................................................... 37

    ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 37

    ITEM 11. EXECUTIVE COMPENSATION........................................ 37

    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT. ...................................................37

    ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 37

PART IV.................................................................... 37

    ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
             ON FORM 8-K....................................................37


<PAGE>



           CAUTIONARY STATEMENT REGARDING FORWARD--LOOKING STATEMENTS


    STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT PURELY HISTORICAL
ARE  FORWARD  LOOKING  STATEMENTS  WITHIN  THE  MEANING  OF  SECTION  27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE  SECURITIES  EXCHANGE ACT OF 1934,
INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,  HOPES, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. FORWARD LOOKING STATEMENTS INCLUDE:  STATEMENTS
REGARDING  THE  COMPANY'S   EXPANSION  PLANS,  THE  IMPACT  OF  COMPETITION  AND
REGULATORY  REFORM,  THE START-UP OF CERTAIN OPERATIONS AND TRENDS AFFECTING THE
COMPANY'S FINANCIAL CONDITION AND  RESULTS  OF OPERATIONS.  ALL  FORWARD-LOOKING
STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION  AVAILABLE TO THE COMPANY (AS
HEREINAFTER DEFINED) AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND
EXCHANGE  COMMISSION,  AND THE COMPANY  ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING  STATEMENTS.  FACTORS   THAT  COULD  CAUSE  ACTUAL   RESULTS  TO
DIFFER  MATERIALLY  FROM THOSE  EXPRESSED OR  IMPLIED  BY  SUCH  FORWARD-LOOKING
STATEMENTS  INCLUDE,  BUT  ARE NOT LIMITED TO, THE FACTORS SET FORTH IN "ITEM 7.
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS -- CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS."


                                    PART I

ITEM 1.   BUSINESS.

      Unless the context otherwise  requires,  reference to (i) "TV Filme" means
TV Filme, Inc., a Delaware corporation,  (ii) "ITSA" means ITSA-Intercontinental
Telecomunicacoes Ltda., and (iii) the "Company" means TV Filme, its consolidated
subsidiaries,  which include ITSA, TV Filme Goiania Servicos de Telecomunicacoes
Ltda. ("TV Filme Goiania"),  TV Filme Belem Servicos de  Telecomunicacoes  Ltda.
("TV Filme Belem"),  TV Filme Brasilia Servicos de  Telecomunicacoes  Ltda. ("TV
Filme  Brasilia")  and their  predecessors  and  successors.  References  to the
"Company" also include TV Filme Servicos de  Telecomunicacoes,  Ltda. ("TV Filme
Servicos"),  a company in which the Company has a 49% voting interest and an 83%
equity interest.

     Except as otherwise noted, financial information has been presented in U.S.
dollars. The Consolidated  Financial Statements have been prepared in accordance
with generally accepted accounting principles in the United States ("U.S. GAAP")
in U.S. dollars.

BACKGROUND

      The  predecessor of TV Filme was founded in 1989 by certain members of the
Company's  current senior  management  team. In September  1989, the Company was
granted a license to operate a wireless cable television system in Brasilia, the
capital of Brazil, and commenced operations in 1990 with a one channel offering.
Licenses to operate the Goiania and Belem Systems were acquired in 1994 from TVA
Sistema de  Televisao  S.A.  ("TVA  Sistema"),  a  subsidiary  of  Tevecap  S.A.
("Tevecap").

      TV Filme is a publicly-traded  holding company organized in 1996 under the
laws of the State of Delaware  (Nasdaq  National  Market  symbol:  "PYTV").  Its
largest  stockholders  include  Tevecap,  one  of  the  leading  pay  television
operators in Brazil and one of the country's largest pay television  programming
distributors;  Warburg, Pincus Investors, L.P. ("Warburg,  Pincus"); and certain
members of management and their family.

COMPANY OVERVIEW

      The  Company  develops,  owns  and  operates  pay  television  systems  in
mid-sized  markets in  Brazil,  with  populations  of  between  100,000  and 2.5
million.  The  Company  is  the  sole  provider  of  multi-point,  multi-channel
distribution  systems  ("MMDS")  in the cities of  Brasilia,  Goiania and Belem.
Together,  these cities have a total population of approximately 5.7 million and
encompass approximately 1.3 million households, an estimated 1.1


<PAGE>



million  of  which  can  be  served  by  the  Company's   line-of-sight  ("LOS")
transmission.  Since the beginning of 1994,  the Company's  subscriber  base has
grown substantially,  increasing from 1,864 subscribers to 79,176 subscribers as
of December 31, 1996.

      The Company has filed  applications for licenses to operate wireless cable
systems in an additional 27 markets in Brazil which have an aggregate population
of  approximately   12.5  million  and  encompass   approximately   2.7  million
households.  An estimated  2.2 million of such  households  can be served by LOS
transmission. As a result of certain developments concerning the granting of new
concessions  and licenses for the  rendering  of  commercial  telecommunications
services in Brazil, in the absence of further  governmental  action, the process
of granting new concessions  and licenses for MMDS services is uncertain.  There
can be no assurance as to the grant of any such concessions and licenses and the
timing of any such grants generally.  See "-- Regulatory  Environment" and "Item
7. Management's  Discussion  and  Analysis of Financial Condition and Results of
Operations  -- Certain  Factors Which May Affect the Company  Future  Results --
Factors  Relating to the Company -- Risks Associated with New Markets and Growth
Strategy."

      Until September 9, 1996, licenses were granted for renewable periods of 10
years; under the Revised MMDS Rule (as defined herein) licenses would be awarded
for  renewable  15-year  periods.  However,  there can be no assurance as to the
applicability  of the  Revised  MMDS Rule.  Under the  Revised  MMDS Rule,  MMDS
licenses have a coverage area of up to a 50 kilometer  radius from  transmission
sites and permit  transmission of up to 31 analog  wireless cable channels.  The
Company requested and received approval to increase channel  transmission in its
existing  markets to 31  wireless  cable  channels  from its current 16 wireless
cable  channels  and to extend the  coverage  area in these  markets  beyond the
existing 25  kilometer  range.  See " --  Operating  Systems  and the  Company's
Markets."

      The  Company  primarily  targets  mid-sized  markets  with   demographics,
competitive environments and topographies that it believes offer the Company the
opportunity to become the leading  provider of pay television  services in those
markets.  The Company  believes that  mid-sized  markets in Brazil are currently
underpenetrated by existing pay television providers. There is only one hardwire
cable provider in each of Brasilia and Goiania and no hardwire cable provider in
Belem.  Of the  approximately  1.3 million  households in Brasilia,  Goiania and
Belem, the Company  estimates that  approximately  70% of such  households,  are
currently unpassed by hardwire cable.

      The Company  believes that wireless cable technology is well suited to its
current  and  targeted  markets  and is an  attractive  alternative  to existing
television  choices.  Wireless  cable  service can be deployed more rapidly than
most alternative technologies and provides immediate coverage of entire markets,
enabling  service to be delivered to all potential  subscribers  that are in the
unobstructed  path of the  transmission  tower.  Wireless  cable  service can be
deployed at a significantly  lower system capital cost per installed  subscriber
than hardwire  cable  because (i) the headend for a wireless  cable system has a
relatively low cost,  (ii) capital  expenditures  for wireless cable systems are
only required at the headend  facility and in connection  with  installation  of
subscriber  reception  equipment  and  (iii)  incremental   investment  is  only
undertaken  in  response  to  customer  demand  with  the  addition  of each new
subscriber.  The Company  believes that  subscribers  to television  services in
Brazil are concerned with such features as programming, service, reliability and
price and are generally indifferent to the method of delivery.

BRAZILIAN PAY TELEVISION INDUSTRY

      The pay television  industry in Brazil began in 1989 with the commencement
of UHF service in Sao Paulo.  In contrast to the U.S.,  the  Brazilian  hardwire
cable industry and wireless cable industry  began  developing  concurrently.  By
December 31, 1996,  approximately  100 hardwire  cable  licenses and 12 wireless
cable licenses had been issued by the Ministry of  Communications of Brazil (the
"Ministry  of  Communications").  The Company  believes  that as of December 31,
1996,  fewer  than 15% of  Brazilian  homes  were  passed by  hardwire  cable as
compared  to over 90% in the U.S.  Brazil is the  largest  television  market in
Latin  America  with an  estimated  34.5 million  television  households.  As of
December 31,  1996,  the Company  estimates  that there were  approximately  1.6
million pay television subscribers, representing approximately 4.7% of Brazilian
television households. The Ministry

                                      2

<PAGE>



of Communications  has estimated that Brazil will have  approximately 16 million
pay television subscribers by the year 2003.

      As of December 31, 1995, Brazilian television households viewed an average
of more than 6.5 hours of  television  per day, as compared to an average of 6.8
hours  per  day  in  the  United  States.  Viewers  prefer  Portuguese  language
programming,  including movies,  sports and "novelas" (soap operas).  The second
language of many Brazilians is English. U.S. culture generally,  and U.S. films,
shows and sports in particular,  are popular with  Brazilians.  The  programming
market  for  pay   television   is  dominated  by  Brazil's  two  largest  media
conglomerates,  Abril S.A.  ("Abril")  and the Globo  Organization.  Both groups
offer programming  packages  including movie,  sports and news channels and U.S.
prime  time  network  shows and  cartoons.  In  general,  much of the  Brazilian
programming  transmitted by pay  television  systems,  such as HBO Brazil,  ESPN
International and MTV Latino, is based on formats found in the U.S. In addition,
there are programming  packages which include  channels  directly from the U.S.,
such as Warner, Sony and Superstation, as well as packages from Europe and other
countries in Latin America.

OPERATING SYSTEMS AND THE COMPANY'S MARKETS

      The table below provides information regarding the Company's markets as of
December 31, 1996:

<TABLE>
<CAPTION>
                              ESTIMATED       ESTIMATED      ESTIMATED         NUMBER         FULL
                                TOTAL           TOTAL           LOS              OF          LAUNCH
                            POPULATION(1)  HOUSEHOLDS(1)  HOUSEHOLDS(1)(2)  CHANNELS(3)       DATE
                            -------------  -------------  ----------------  -----------      ------

<S>                           <C>              <C>              <C>               <C>     <C>
OPERATING MARKETS:
Brasilia....................   2,000,000        472,000          417,102           37      Feb. 1994(4)
Belem.......................   1,900,000        398,000          345,000           36      Feb. 1995
Goiania.....................   1,800,000        444,000          331,000           36      Jan. 1995
                              ----------      ---------        ---------
Total in Operating Market...   5,700,000      1,314,000        1,093,102
                              ==========      =========        =========
APPLICATION MARKETS:(5)       12,500,000      2,700,000        2,200,000
                              ==========      =========        =========
</TABLE>

----------

(1)  Represents the Company's  estimate of the number of total households within
     the  greater  metropolitan  areas  of  Brasilia,  Belem  and  Goiania.  The
     Company's estimates are based on data from the 1991 Census conducted by the
     Brazilian  Institute of  Geography  and  Statistics  as adjusted to reflect
     total  household  growth of 3.13% per year in  Brasilia,  2.65% per year in
     Belem and 2.33% per year in Goiania.

(2)  Represents the Company's estimate of the number of Estimated LOS Households
     within a 35 kilometer  radius in Brasilia and a 30 kilometer radius in each
     of Belem and Goiania  that can receive an adequate  signal from the Company
     (eliminating  those homes that the Company  estimates are unable to receive
     service due to certain physical  characteristics  of the particular  signal
     coverage  area,  such as  terrain  and  foliage,  although  some  of  these
     households can be served with the aid of signal repeaters).

(3)  Includes  six local  off-air  VHF/UHF  channels in Brasilia  and five local
     off-air VHF/UHF  channels in each of Goiania and Belem which are offered to
     the Company's  subscribers in addition to the subscription  channels and 15
     wireless cable channels which were recently granted to the Company but over
     which the Company is not currently transmitting programming.

(4)  Date when the Brasilia  System  increased  its channel  offering  from four
     channels to eight  channels.  The Brasilia  System  began  service with one
     channel in 1990.

(5)  Represents  the 27 markets for which the  Company has applied for  licenses
     with the  Ministry of  Communications.  There can be no assurance as to the
     grant of any such  concessions  and  licenses  and the  timing  of any such
     grants generally. See "--Regulatory Environment -- License Procedures."

                                      3
<PAGE>



      Since the  beginning  of 1994,  the  Company's  subscriber  base has grown
substantially,  increasing  from 1,864  subscribers to 79,176  subscribers as of
December 31, 1996. A description of the Company's current markets follows.

      BRASILIA SYSTEM. Brasilia, the capital of Brazil, had an estimated greater
metropolitan  population of  approximately  2.0 million as of December 31, 1996.
Brasilia,  which is located in the interior of Brazil,  was  established  in the
early  1960's as a planned city when the capital of Brazil was moved from Rio de
Janeiro.  Brasilia's  generally  flat  topography is  advantageous  for MMDS. In
addition,  Brasilia's zoning provisions favor MMDS by requiring that residential
buildings be of a similar height and located together.  The Company's current 35
kilometer coverage territory encompasses  approximately 417,102 households which
the Company believes can be served by LOS transmission.

      The Brasilia System currently  offers a 22 channel package,  consisting of
16 wireless cable channels and six local off-air VHF/UHF channels.  The Brasilia
System,  launched in 1990 with one channel,  increased to three channels in July
1992, to four channels in September 1992, to eight channels in February 1994 and
to 16 wireless  cable  channels in November  1994. In December 1996, the Company
received  approval to transmit an additional  15 wireless  cable  channels.  The
Company has not yet begun transmitting  programming over any of these additional
channels. The Brasilia System became system EBITDA positive in the third quarter
of 1994 with approximately 6,000 subscribers.  In addition to monthly subscriber
revenue, the Brasilia system recently began generating advertising revenues. The
Brasilia  System  transmits at 50 watts of power per channel from a transmission
tower which is 300 feet above average  terrain.  The  principal  pay  television
competitor in the city of Brasilia is NET Brasilia, a hardwire cable operator.

      BELEM  SYSTEM.   Belem,   with  a  greater   metropolitan   population  of
approximately  1.9 million as of  December  31,  1996,  lies at the mouth of the
Amazon River and is a major  trading port for the rich natural  resources of the
Amazon rain  forest.  The Company  launched  service in Belem in February  1995.
Although the city is relatively flat, trees block wireless cable transmission in
Belem more often than they do in Brasilia and Goiania and thus, the Belem System
requires increased utilization of signal repeaters. The Belem System reaches the
greater Belem area, including the cities of Mosqueiro,  Ananindeua, Icoaraci and
Marituba  and the islands of Outeiro and  Barcarena.  The  Company's  current 30
kilometer coverage territory encompasses  approximately 345,000 households which
the Company believes can be served by LOS transmission.

      The Belem System currently  offers a 21 channel package,  consisting of 16
wireless cable  channels and five local off-air  VHF/UHF  channels.  In December
1996, the Company received  approval to transmit an additional 15 wireless cable
channels.  The Company has not yet begun  transmitting  programming  over any of
these additional channels. The Belem System became EBITDA positive in the fourth
quarter of 1995 with approximately 5,000 subscribers. The Belem System transmits
at 50 watts of power per  channel  from a  transmission  tower which is 300 feet
above average  terrain.  There  currently is no hardwire or other wireless cable
provider in the city of Belem.

      GOIANIA  SYSTEM.  Goiania,  with  a  greater  metropolitan  population  of
approximately 1.8 million as of December 31, 1996, is located  approximately 100
miles  southwest  of Brasilia.  Goiania is the capital of the state Goias,  and,
like Brasilia,  its topography is favorable to LOS transmission because the city
is relatively flat. The Company launched service in Goiania in January 1995. The
Company's  current 30 kilometer  coverage  territory  encompasses  approximately
331,000 households which the Company believes can be served by LOS transmission.

      The Goiania System currently offers a 21 channel package, consisting of 16
wireless cable  channels and five local off-air  VHF/UHF  channels.  In December
1996, the Company received  approval to transmit an additional 15 wireless cable
channels.  The Company has not yet begun  transmitting  programming  over any of
these additional channels. The Goiania System transmits at 50 watts of power per
channel from a transmission  tower which is 350 feet above average terrain.  The
principal  pay  television  competitor in the city of Goiania is  Multicanal,  a
hardwire cable operator.

                                      4

<PAGE>






APPLICATION MARKETS

      The Company has filed  applications for licenses to operate wireless cable
systems in an additional 27 markets in Brazil which have an aggregate population
of  approximately   12.5  million  and  encompass   approximately   2.7  million
households.  In the second half of 1996, the Brazilian  government announced its
intention to auction MMDS licenses in 15 of its state capitals.  The Company has
filed  applications  in  14  of  these  15  markets.  As  a  result  of  certain
developments  concerning  the granting of new  concessions  and licenses for the
rendering of commercial telecommunications services in Brazil, in the absence of
further  governmental  action,  the process for  granting  new  concessions  and
licenses  for MMDS  services is  uncertain.  There can be no assurance as to the
grant of any such  concessions  and  licenses  and the timing of any such grants
generally.  See  "Item 7. Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations  -- Certain  Factors  Which May Affect the
Company  Future Results -- Factors  Relating to the Company -- Risks  Associated
with New Markets and Growth Strategy."

      In July 1996, TV Filme, through its wholly-owned  subsidiary ITSA, entered
into an agreement with TV Filme Servicos (the "Operating  Agreement") whereby TV
Filme Servicos granted exclusive licenses to each of TV Filme Brasilia, TV Filme
Goiania  and TV Filme  Belem to operate  wireless  cable  systems  in  Brasilia,
Goiania  and  Belem,  respectively.  TV  Filme  Servicos  also  granted  ITSA an
exclusive  license to operate  wireless  cable  systems in any market  where the
Company is  successful in obtaining a new license.  The  Operating  Agreement is
valid for the term of each license which it governs.

PROGRAMMING

      The Company currently purchases  substantially all of its programming from
Tevecap  and its  subsidiaries  pursuant  to an  exclusive  license to  transmit
programming  available  from  Tevecap  and its  subsidiaries  via  wireless  and
hardwire cable in the Company's current markets (the  "Programming  Agreement").
The Company has agreed  that it shall use 50% of its total  channel  capacity in
its operating  markets  where it has a  programming  license from Tevecap or its
subsidiaries to broadcast TVA Sistema programming,  with certain exceptions, and
the Company has a right of first  refusal to carry any new  programming  channel
that is  offered  by Tevecap  or its  subsidiaries.  Tevecap  may not charge the
Company an amount greater than the minimum rates charged by Tevecap to other pay
television  operators,  nor may such charges exceed  comparable  rates for other
programming  of a  similar  nature.  The  terms  of  the  Programming  Agreement
terminate on July 2004,  with  certain  limited  exceptions  with respect to the
Company's application markets.

      In addition,  pursuant to the Programming  Agreement,  Tevecap has granted
the  Company a  non-exclusive  license to  transmit  programming  in most of the
markets  where the Company has  applications  pending if such  applications  are
successful, with exclusivity to be negotiated on a case-by-case basis.

      From time to time,  in  connection  with the  Programming  Agreement,  the
Company  enters into  agreements  with  Tevecap and its  subsidiaries  regarding
specified channels.  The agreements typically have a two year term and determine
the monthly fees which the Company pays for such channels.

      In addition,  the Programming Agreement provides that if Tevecap obtains a
license to  operate  hardwire  cable  systems  in any of the  Company's  current
operating  markets,  Tevecap may only develop such  hardwire  cable systems in a
partnership or joint venture with the Company on mutually  agreeable  terms. The
Company also has certain rights with respect to marketing  satellite  television
services in the Company's current operating markets.

      The Company also offers  selected  local  programming  to  supplement  its
channel line-up.  For example,  the Company owns the rights to televise annually
through  1998 all of the games of the Goias State Soccer  Championship  matches,
which the  Company  offers to its  subscribers  in the Goiania  market,  and the
rights to  televise  annually  through  1999 all of the games of the Belem State
Soccer Championship, which the Company will offer to its

                                      5

<PAGE>



subscribers  in the Belem  market.  In  addition,  the  Company  offers  certain
exclusive sports  programming,  including ESPN Brazil on which selected games of
the Sao Paulo Soccer  Championship  and the Rio de Janeiro  Soccer  Championship
matches are offered. The Company is exploring other local programming, including
local news, cultural events,  home shopping and other sporting events,  although
there can be no assurance that such programming will be offered.

      The Company's channel offerings as of December 31, 1996 are as follows:

CHANNEL                                 DESCRIPTION
-------                                 -----------

HBO Brazil................. Brazilian version of HBO
HBO Brazil 2............... HBO Brazil with a six hour time delay
ESPN Brazil................ Brazilian version of ESPN
Eurochannel................ Package of programming from free TV in Europe
Superstation/History....... Package of programming from ABC, CBS and NBC/
                            Brazilian version of The History Channel
CMT Brazil................. Brazilian version of Country Music Television
MTV Brazil................. Brazilian version of MTV
MTV Latino................. Spanish language version of MTV
RTPi....................... Radio and Television Portugal, a free broadcast
                            channel from Portugal
CNN International.......... International version of CNN
TNT........................ Brazilian version of TNT
Cartoon Network............ Cartoon Network produced in the U.S.
Fox........................ General entertainment
Discovery Channel.......... Brazilian version of Discovery Channel
ESPN International......... International version of ESPN
Warner..................... Warner channel produced in the U.S.
Bravo...................... Brazilian version of Bravo
Sony....................... Sony channel produced in the U.S.
Globo...................... Local off-air channel
SBT........................ Local off-air channel
Bandeirantes............... Local off-air channel
Record..................... Local off-air channel
Nacional................... Local off-air channel
Manchete................... Local off-air channel
Cultura.................... Local off-air channel



      The  following  channels  are  expected  to be offered by Tevecap  and its
subsidiaries in the Brazilian pay television marketplace and, therefore,  by the
Company to its subscribers, in 1997:

CHANNEL                                   DESCRIPTION
-------                                   -----------

Cinemax.................... Brazilian version of Cinemax
E! Entertainment........... Brazilian version of E! Entertainment
Mundo Ole.................. Variety channel
CNA........................ Brazilian news channel




                                      6

<PAGE>



OPERATIONS

      MARKETING.  Prior to commencing  operations in a potential new market, the
Company conducts  pre-marketing surveys to evaluate the demographics and terrain
of such market.  The Company then develops a plan designed to manage  subscriber
growth by  maintaining a manageable  backlog of  installations.  Such backlog is
maintained  at  a  manageable  level  by  adjusting   installation  capacity  to
correspond  with sales  levels.  The amount of time a  subscriber  waits for the
commencement  of  service is  determined  based on  several  factors,  including
whether the  subscriber  has access to hardwire cable and whether the subscriber
is in a single family home or multiple  dwelling  unit.  This  development  plan
ensures that the quality of installations  and customer service remains high. In
each market,  the  Company's  marketing  staff  typically  applies the following
programs to attract subscribers: (i) extensive marketing tied to regional events
such as soccer matches,  (ii)  neighborhood  promotional  events featuring large
screen  broadcasts  of  its  channel  offerings,  (iii)  direct  mailings,  (iv)
telemarketing,  (v)  television  and newspaper  advertisements,  (vi)  prewiring
arrangements  with  residential  housing  developers  and (vii) other  marketing
activities, including referral programs and promotional gifts.

      INSTALLATION.  The  Company's  installation  package  features  a standard
rooftop  mount  linked to a small  antenna  and related  equipment,  including a
decoder,  located at the subscriber's  location.  Installations at single-family
homes require an entire  installation  package,  while installations at multiple
dwelling units in which drop lines already have been installed require less time
and,  accordingly,  are less  costly.  The Company  charges its  subscribers  an
installation  fee  ranging  from  $90 to  $180.  The  Company  expects  to lower
installation charges per subscriber as it expands its subscriber base.

      CUSTOMER  SERVICE.  The Company  believes that  delivering  high levels of
customer service in installation and maintenance enables it to maintain customer
satisfaction  and to minimize  churn.  To this end,  the  Company (i)  schedules
installations promptly, (ii) provides a customer service hotline, (iii) provides
quick response  repair service and (iv) makes follow-up calls to new subscribers
shortly after installation to ensure customer satisfaction. The Company seeks to
instill a customer  service focus in all its employees  through ongoing training
and has established an  intra-company  electronic mail system to provide a forum
for  employees  to  exchange  ideas  concerning   means  to  increase   customer
satisfaction.  The Company also has various  employee bonus  programs  linked to
measures of customer satisfaction.

      CUSTOMER  INFORMATION  SYSTEMS.  The Company believes that its proprietary
customer  information  systems enable it to deliver superior  customer  service,
monitor  customer  payment  patterns and facilitate the efficient  management of
each of its  operating  systems.  The Company has 11 employees  dedicated to the
development,  enhancement and integration of the Company's customer  information
systems.

EMPLOYEES

      As of  December  31,  1996,  the  Company  had a total  of 655  employees,
substantially  all of whom are employed by TV Filme's  subsidiaries.  All of the
Company's  employees,  except for Messrs.  Hermano  Lins,  Carlos Andre Lins and
Alvaro Aguirre,  are subject to collective  bargaining  agreements  which expire
from October 1997 to March 1998. The collective  bargaining  agreements are with
the Union for the Employees of Radio and TV Broadcasting Companies.  The Company
has  experienced  no work  stoppages.  The Company  provides its employees  with
health  insurance  (which is not  required by law in Brazil)  and certain  other
benefits  which it  believes  enable it to  attract  and  retain  qualified  and
motivated  employees.  The  Company  believes  that its  relationships  with its
employees are good.

FACILITIES AND EQUIPMENT

     ADMINISTRATIVE FACILITIES. A centralized administrative facility is located
in Brasilia  to handle  training,  engineering,  computer  systems  development,
controller services and strategic planning. In addition, the Company


                                      7

<PAGE>



has established  regional  offices in Brasilia,  Goiania and Belem to coordinate
sales, billing,  telemarketing,  general marketing, customer service and certain
other  administrative  functions on a regional level. Each facility is connected
to the Company's computer telecommunications network.

      TRANSMISSION FACILITIES.  The Company's headend and transmitter facilities
are located in leased  buildings at the  Company's  transmission  tower sites in
Brasilia,  Goiania and Belem.  The transmitting  antennas  generally are able to
serve the maximum  regulatory range for license coverage areas of 50 kilometers.
In   certain   areas   within  the   Company's   markets   that  are   otherwise
terrain-blocked,  the  Company  utilizes  signal  repeaters  to  enhance  signal
coverage.

      DIGITAL  TECHNOLOGY.  The Company  currently  transmits in analog  format.
Should competitive conditions require or if the Company deems such technology to
be cost effective and practical to provide, it may implement digital technology.

COMPETITION

      Through its affiliate,  TV Filme Servicos,  the Company is the only entity
licensed to operate  wireless cable systems in Brasilia,  Goiania and Belem. The
Company  currently  provides service via 16 wireless cable channels in each such
market and has authority to provide  service via an additional 15 wireless cable
channels  in each such  market.  The  Company  believes  it is the  largest  pay
television  provider  in  Brasilia  based on total  number of  subscribers.  The
Company's  principal  competitor  in the city of  Brasilia  is NET  Brasilia,  a
hardwire  cable  operator.  The Company  believes  it is the second  largest pay
television  provider  in  Goiania  based on total  number  of  subscribers.  The
Company's principal competitor in the city of Goiania is Multicanal,  a hardwire
cable operator.  There currently is no hardwire or other wireless cable provider
in the city of Belem.

      In addition to other wireless cable and hardwire cable operators, wireless
cable  television  operators in Brazil face or may face competition from several
other  sources,   such  as  direct   broadcasting   satellite  systems  ("DBS"),
direct-to-home  satellite ("DTH") systems, local off-air VHF/UHF channels,  home
videocassette  recorders  and  out-of-home  theaters.  Competition  in  the  pay
television   industry  is  based  upon  program  offerings,   customer  service,
reliability  and pricing.  Many actual and  potential  competitors  have greater
financial,  marketing and other resources than the Company.  No assurance can be
given that the Company will be able to compete  successfully.  See  "--Brazilian
Pay Television Industry," and "--Operating Systems and the Company's Markets."

REGULATORY ENVIRONMENT

      GENERAL.  The pay  television  industry  is subject to  regulation  by the
Ministry of Communications pursuant to the Brazilian  Telecommunications Code of
1962, as amended (the  "Telecommunications  Code"). The Telecommunications  Code
empowers the Ministry of Communications,  among other things, to issue,  revoke,
modify and renew licenses within the spectrum  available to MMDS, to approve the
assignments and transfer of control of such licenses, to approve the location of
channels that comprise MMDS  systems,  to regulate the type,  configuration  and
operation  of  equipment  used by MMDS  systems,  and to  impose  certain  other
reporting  requirements on MMDS license holders and MMDS operators.  On February
10, 1994,  the Ministry of  Communications  issued  Administrative  Rule No. 43,
which adopted Rule 002/94 (the "MMDS Rule"), which regulated the MMDS service.

      On November 28, 1995, the President of Brazil issued  Presidential  Decree
No. 1719 ("Decree No. 1719") providing for specific  competitive  procedures for
the  granting of  concessions  and  licenses  for the  rendering  of  commercial
telecommunication  services (including MMDS) in Brazil.  Based on the provisions
of Decree No. 1719,  the Ministry of  Communications  revised the MMDS Rule,  by
means of Directive No. 1085,  dated September 9, 1996 (the "Revised MMDS Rule").
However, on December 4, 1996, following the issuance of a preliminary injunction
by the  Brazilian  Federal  Supreme  Court,  Decree No.  1719 was revoked by the
Presidential Decree (as hereinafter defined) and, as a result, the applicability
of the Revised MMDS Rule is uncertain.


                                      8

<PAGE>




      Wireless   cable  or  MMDS  is   defined   as  the   special   service  of
telecommunication  which uses  microwaves  to  transmit  codified  signals to be
received in pre-established  points on a contractual basis. Any company in which
nationals  of Brazil own at least 51% of the voting  capital is  eligible  to be
granted a license to operate an MMDS service.  Until September 9, 1996, licenses
were granted for  renewable  periods of ten years;  under the Revised MMDS Rule,
MMDS licenses were granted for renewable periods of 10 years;  under the Revised
MMDS Rule,  licenses would be awarded for renewable  15-year  periods.  However,
there can be no assurance as to the applicability of the Revised MMDS Rule.

      Under the terms of the  Revised  MMDS Rule,  each  license  holder and its
affiliates  could  have been  granted  permission  to  operate  MMDS  systems in
different areas of Brazil, provided that no holder could be granted licenses for
(i) more than  seven  municipalities  with a  population  equal to or  exceeding
700,000  inhabitants  or (ii)  more  than 12  municipalities  with a  population
between  300,000 and 700,000  inhabitants.  In accordance  with the Revised MMDS
Rule,  the  restrictions  would  only  apply to areas in which  the MMDS  system
operator  (or  an  affiliate  thereof)  faces  no  competition  from  other  pay
television  services,  excluding  services  that utilize a satellite to transmit
their signal.  Under the Revised MMDS Rule, the Ministry of Communications would
have discretion to alter or eliminate such restrictions, taking into account the
level of diversity  among  information  sources  available and ownership of MMDS
providers.  The term  affiliate is defined for these  purposes as "(i) any legal
entity that directly or indirectly  holds at least 20% of the voting  capital of
another legal entity or any of two legal entities  under common  ownership of at
least 20% of their  respective  voting capital,  with successive  interests in a
chain being multiplied  against each other to calculate the 20%, (ii) any of two
legal  entities that have at least one officer or director in common,  (iii) any
of two legal entities when,  due to a financial  relationship  between them, one
entity is dependent on the other. If all of the 27 additional  markets for which
applications  have been made for the Company to operate  MMDS systems were to be
granted, no more than 7 of the Company's total markets with a competitor to MMDS
would have populations  exceeding 700,000 inhabitants and no more than 12 of the
Company's total markets with a competitor to MMDS would have populations between
300,000  and  700,000  inhabitants.  The Company  faces  competition  from other
terrestrial  pay  television  services  in two of its  three  current  operating
markets and 1 of the 27 application markets.

      Prices for pay  television  services  currently in operation may be freely
established by the system operator,  although the Ministry of Communications may
interfere in the event of abusive pricing.  The Ministry of  Communications  may
impose penalties including fines, suspension or revocation of the license if the
license holder fails to comply with applicable  regulations or becomes  legally,
technically  or  financially  unable to provide  MMDS  service.  The Ministry of
Communications  also may  intervene  to the  extent  operators  engage in unfair
practices intended to eliminate competition.

      CHANNELS  AVAILABLE  FOR WIRELESS  CABLE.  The Ministry of  Communications
grants  licenses and regulates the use of channels by MMDS operators to transmit
video programming,  entertainment  services,  advertising and other information.
Under the Revised MMDS Rule,  MMDS  licensees are permitted to transmit up to 31
analog  MMDS  channels   (constituting   a  spectrum   bandwidth  of  186  Mhz).
Historically,  however, only 16 analog channels had been available.  The Revised
MMDS Rule allows for the  utilization of all 31 analog  channels in markets with
more than 700,000 inhabitants. If a license is for 16 or more channels, at least
two channels must be reserved for  educational  and cultural  programming.  If a
license involves 15 channels,  only one channel must be reserved for educational
and cultural  purposes.  The Company believes,  but can give no assurance,  that
channels  such as  Discovery  and Bravo  qualify  as  cultural  and  educational
programming.

      LICENSE  PROCEDURES.  On November 28,  1995,  Decree No. 1719 was enacted,
which provided that all granting of  concessions  and licenses for the rendering
of most commercial  telecommunications services in Brazil, including MMDS, would
be made through bidding  procedures.  In accordance with Decree No. 1719 and the
Revised MMDS Rule, the Ministry of Communications would have been permitted,  in
its  discretion  or by means of  applications  filed by interested  parties,  to
publish public notices  requesting  comments by interested parties to determine,
among other things,  the geographic  area where the services were to be provided
and the number of


                                      9

<PAGE>



concessions to be granted.  In both cases,  the interested party would have been
required to present to or file with the Ministry of Communications  its comments
or  application,  as the  case  may be,  containing,  among  other  things,  the
technical  feasibility  of a proposed  MMDS  system and a  demonstration  of the
market  potential for the targeted  area. The Ministry of  Communications  would
have  thereafter  ascertained the public interest in granting the concession and
could  have  decided to open the public bid  process  for the  granting  of such
concessions.  During such public bid, applicants would have been evaluated based
on a number of  factors  including:  (i)  participation  of local  residents  as
stockholders of the applicant,  (ii) the number of days for the  installation of
the MMDS  system,  (iii) the  schedule  for the  implementation  of the programs
(including the number of programs available at the start of operations,  and one
and two years  thereafter),  (iv) the minimum time reserved for local  programs,
(v) the number of cultural  or  educational  channels,  (vi) the number of local
community  establishments  that would receive cultural and educational  programs
free of charge and (vii) the  subscription  price.  These  items would have been
rated  according to certain  criteria  established  in the Revised MMDS Rule and
licenses  could  have  been  granted:  (i) in the case of areas  with  less than
300,000  inhabitants,  to the applicant that offered the highest score,  (ii) in
the case of areas with more than 300,000 and less than 700,000  inhabitants,  to
the applicant  whose score  multiplied by a number based on the offered price of
the  license  was the  highest,  and  (iii) in the case of areas  with more than
700,000  inhabitants,  to the  applicant  that offered the highest price for the
license.  Once an MMDS concession was granted by the Ministry of Communications,
the license  holder would have been required to submit,  within four months,  an
installation  proposal for its MMDS system's headend.  Subsequent to approval of
such  proposal,  construction  would  have been  required  to be  finalized  and
commercial  operations  commenced within 12 months, which period could have been
extended by an additional 12 months.

      On December 4, 1996,  in response to a preliminary  injunction  granted by
the Brazilian  Federal Supreme Court suspending the  effectiveness of Decree No.
1719,  the  President  of  Brazil  signed  Presidential  Decree  No.  2087  (the
"Presidential  Decree"),  which  revoked  Decree  No.  1719.  The  effect of the
revocation  is that the process for  granting new  concessions  and licenses for
MMDS services remains uncertain.  Until such time as further governmental action
is taken to provide  for the  granting  of  concessions  and  licenses  for MMDS
services,  there can be no assurance as to the grant of any such concessions and
licenses  and the timing of any such grants  generally.  The  Company  believes,
based on  discussions  with the  Ministry of  Communications,  that revised MMDS
regulations  will be issued,  although  there can be no assurance  when, and if,
such regulations will be issued.

      In addition to qualifying under the application and bid process ultimately
adopted a license holder may also be required to  demonstrate  that its proposed
signal  does not  violate  interference  standards  in the area of another  MMDS
channel  license  holder.  The maximum  area to be covered by the  services is a
radius  of up to 50  kilometers  around  the  transmission  site.  If a  license
holder's  proposed  service  would  cause  interference  in the area of  another
wireless cable channel license holder,  the proposed operator may be required to
obtain the consent of such other license holder.

      OTHER  REGULATIONS.  MMDS license  holders are subject to regulation  with
respect  to the  construction,  marking  and  lighting  of  transmission  towers
pursuant to the Brazilian  Aviation  Code and certain  local zoning  regulations
affecting  construction  of  towers  and  other  facilities.  There  may also be
restrictions  imposed by local authorities.  The pay television industry also is
subject  to  the  Brazilian  Consumer  Code.  The  Consumer  Code  entitles  the
purchasers  of goods or  services  to  certain  rights,  including  the right to
discontinue  a service and obtain a refund if the  services  are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the  transmission  for a given  period,  the  subscriber  shall be entitled to a
discount  on the  monthly  fees.  The MMDS Rule and the  Revised  MMDS Rule also
contain certain  provisions  relating to consumer rights,  including a provision
for mandatory discounts in the event of interruption of service.

      Due to the regulated nature of the pay television  industry,  the adoption
of new,  or changes to  existing,  laws or  regulations  or the  interpretations
thereof  may  impede the  Company's  growth  and may  otherwise  have a material
adverse effect on the Company's results of operations and financial condition.


                                      10

<PAGE>




ITEM 2. PROPERTIES.

      The Company  leases  approximately  32,000 square feet of office space for
its corporate headquarters and the Brasilia System in Brasilia under leases that
expire in April 1997. The Company leases additional office space for the Goiania
System  and  Belem  System of  approximately  40,000  and  35,000  square  feet,
respectively.  In addition to leased  office  space,  the Company also owns less
than  1,500  square  feet of  office  space in  Goiania  and  leases  space  for
transmission towers located in Brasilia, Goiania and Belem. The Company believes
that office  space and space for  transmission  towers is readily  available  on
acceptable  terms in the  markets  where the  Company  operates  wireless  cable
systems.

ITEM 3. LEGAL PROCEEDINGS.

      The Company is from time to time involved in litigation  incidental to the
conduct of its  business.  There is no  pending  legal  proceeding  to which the
Company is a party  which,  in the opinion of Company  management,  is likely to
have a  material  adverse  effect on the  Company's  results  of  operations  or
financial condition.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      None.


EXECUTIVE OFFICERS OF THE REGISTRANT

      The following  table sets forth certain  information  as of March 24, 1997
with respect to each person who is an executive officer of the Company:

                NAME                                  POSITION
                ----                                  --------

Hermano Studart Lins de Albuquerque..........    Chief Executive Officer,
                                                 Secretary and Director
Carlos Andre Studart Lins de Albuquerque.....    President, Chief Operating
                                                 Officer, Treasurer and Director
Alvaro J. Aguirre............................    Chief Financial Officer and
                                                 Director



      HERMANO  STUDART  LINS  DE  ALBUQUERQUE,  one  of the  co-founders  of the
Company,  has served as Chief Executive Officer,  Secretary and a director of TV
Filme since its incorporation. Mr. Lins received a Master's degree in Artificial
Intelligence  from the  University of Sussex,  England and a Bachelor of Science
degree in Electronic Engineering from the University of Brasilia. Mr. Lins was a
member of the MMDS Regulation Commission,  a Brazilian government advisory board
and  is a  member  of  the  Technical  Advisory  Board  for  National  Satellite
Publishing Inc. Mr. Lins is 34 years old.

      CARLOS ANDRE STUDART LINS DE  ALBUQUERQUE,  one of the  co-founders of the
Company,  has served as  President,  Chief  Operating  Officer,  Treasurer and a
director of TV Filme since its  incorporation.  Mr. Lins  received a Bachelor of
Science  degree in Physics  from the  University  of Brasilia  and a Bachelor of
Science degree in Mathematics  from the University of Ceub. Mr. Lins is 32 years
old.

      ALVARO J. AGUIRRE has served as Chief Financial  Officer and a director of
TV Filme since June 1996. Prior to joining TV Filme, Mr. Aguirre was a member of
the Latin America Corporate Finance Group of Morgan Stanley & Co.,  Incorporated
from  1994 to 1996  and a  securities  attorney  at the law firm of  Sullivan  &
Cromwell from 1991 to 1994. Mr. Aguirre is 30 years old.



                                      11

<PAGE>




                                    PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS.

      The Company's common stock, $0.01 par value per share (the "Common Stock")
commenced  trading  on the  Nasdaq  National  Market on July 30,  1996 under the
symbol ("PYTV"). The high and low sales prices for the Common Stock, as reported
by the Nasdaq  National  Market  from July 30, 1996 to  September  30, 1996 were
$15.50 and $10.50, respectively,  and the high and low sales prices from October
1, 1996 to December 31, 1996 were $16.00 and $11.75, respectively.

      On March 24, 1997,  there were  approximately 11 stockholders of record of
the Common Stock.  The Company  believes that it has in excess of 300 beneficial
owners.

      The Company has never  declared or paid any cash  dividends  on the Common
Stock and does not presently  anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company currently expects that earnings, if
any, will be retained for growth and development of the Company's business.  The
Company's ability to declare and pay dividends is (i) affected by the ability of
the Company's present and future  subsidiaries to declare and pay cash dividends
or  otherwise  transfer  funds to the  Company  since the Company  conducts  its
operations  entirely through its subsidiaries,  and (ii) restricted by the terms
of the  Indenture,  dated as of December 20,  1996,  between the Company and IBJ
Schroder Bank & Trust Company (the  "Indenture"),  pursuant to which the Company
issued $140 million aggregate  principal amount of 12-7/8% Senior Notes due 2004
(the "Senior Notes").

      The Company,  as a holding  company,  depends on receipt of dividends  and
other  cash  payments  from  its  operating  subsidiaries  in  order to meet the
Company's cash requirements. Such receipts are subject to statutory restrictions
pursuant  to which  the  subsidiaries  may pay  dividends  only out of  retained
earnings.

      Subject to the  foregoing,  the  payment of cash  dividends  on the Common
Stock will be within the sole  discretion of the  Company's  Board of Directors,
and will depend upon the earnings,  capital  requirements and financial position
of the Company,  applicable requirements of law, general economic conditions and
other factors considered relevant by the Company's Board of Directors.


ITEM 6.     SELECTED FINANCIAL DATA.

      The selected consolidated balance sheet data as of December 31, 1994, 1995
and 1996 and the selected consolidated  statement of operations data for each of
the years ended  December  31,  1994,  1995 and 1996 are derived  from,  and are
qualified by reference to, the  Consolidated  Financial  Statements,  which have
been  audited  by  Ernst  &  Young  Auditores  Independentes  S.C.,  independent
auditors.  The selected  consolidated balance sheet data as of December 31, 1992
and 1993 and the selected consolidated statement of operations data for the year
ended  December 31, 1992, are derived from  unaudited  financial  statements and
include all  adjustments,  consisting of normal  recurring  accruals,  which the
Company considers  necessary for a fair  presentation of the financial  position
and the results of operations  for these  periods.  The  Consolidated  Financial
Statements have been prepared in accordance with U.S. GAAP in U.S. dollars.  For
this purpose,  amounts in Brazilian currency for all periods presented have been
remeasured  into U.S.  dollars in accordance  with the  methodology set forth in
Statement of Financial Accounting Standards No. 52 ("SFAS No. 52") as it applies
to entities operating in highly inflationary economies. Pursuant to SFAS No. 52,
supplies,  property, plant and equipment,  intangibles and deferred installation
fees and the related income statement  accounts are remeasured at exchange rates
in effect when the assets were acquired or the  liabilities  were incurred.  All
other assets and liabilities are remeasured at fiscal year end exchange


                                      12

<PAGE>



rates, and all other income and expense items are remeasured at average exchange
rates prevailing  during the year.  Remeasuring  adjustments are included in net
income  (loss)  for the  period.  The data  presented  below  should  be read in
conjunction with the Consolidated Financial Statements and related notes thereto
and  "Item 7. Management's  Discussion  and  Analysis of Financial Condition and
Results of Operations" and other information  included elsewhere in this Report.

<TABLE>
<CAPTION>

                                                              YEAR ENDED DECEMBER 31,(1)
                                             ------------------------------------------------------
                                                1992       1993      1994        1995        1996
                                                ----       ----      ----        ----        ----
                                                             (DOLLARS IN THOUSANDS, EXCEPT
                                                                 OTHER OPERATING DATA)

<S>                                          <C>        <C>        <C>          <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................   $     69   $    287   $  2,438     $11,404    $31,388
Operating costs and expenses:
  System operating........................          7        196        773       2,957      9,593
  Selling, general and administrative ....         38        558      2,394       8,975     16,737
  Depreciation and amortization...........         11         43        365       2,049      5,921
                                               ------     ------    -------     -------    -------
    Total operating costs and expenses ...         56        797      3,532      13,981     32,251
                                               ------     ------    -------     -------    -------
Operating income (loss)...................         13       (510)    (1,094)     (2,577)      (863)
Other income (expense)....................         --         (6)     1,612         360     (1,147)
                                               ------     ------    -------     -------    -------
Net income (loss).........................     $   13     $ (516)   $   518     $(2,217)   $(2,010)
                                               ======     ======    =======     =======    =======
Net income (loss) per share (2)...........      $0.00     $(0.10)     $0.08      $(0.27)    $(0.22)
Weighted average number of common stock
  and common stock equivalents (2)........      4,516      5,295      6,885       8,086      9,256

OTHER FINANCIAL DATA:
EBITDA(3).................................        $24      $(467)     $(729)    $  (216)   $ 5,330
Capital expenditures......................         31        852      3,637      16,621     25,225

OTHER OPERATING DATA:
Number of subscribers at end of year(4) ..        135      1,864      7,641      36,594     79,176
Average monthly revenue per subscriber(5).         --     $30.43     $34.13      $40.00     $39.63


                                                                     AS OF DECEMBER 31,
                                               ----------------------------------------------------
                                                 1992      1993       1994       1995       1996
                                                 ----      ----       ----       ----       ----
                                                                (dollars in thousands)

Balance Sheet Data:
Working capital (deficit)(6)..............     $   --     $  279    $ 3,204     $(6,430)   $123,263
Pledged securities(7).....................         --         --         --          --      33,512
Property, plant and equipment, net                 86        895      4,182      18,870      38,333
Total assets..............................         87      1,795     10,008      23,683     202,929
Total long-term debt......................         --         --        600         400     140,200
Stockholders' equity(8)...................         86        982      6,500       7,895      37,748

</TABLE>


-----------

(1)  The Selected Consolidated  Financial Data includes (i) TV Filme Servicos on
     a historical  basis and (ii) ITSA and its  subsidiaries  since May 1994 and
     the predecessor of ITSA on a historical basis, as though they had been part
     of TV Filme  for all  periods  presented.  See Note 1a to the  Consolidated
     Financial Statements.

(2)  Net income (loss) per share (after giving effect to the  Reorganization (as
     defined below)) is calculated  using the weighted  average number of shares
     of stock  outstanding  during the period together with the number of shares
     issuable upon the exercise of options and warrants issued during the twelve
     months prior to the Company's initial public offering of Common Stock which
     occurred in August 1996 (the "Initial Public Offering").

(3)  EBITDA  is  defined  as   operating   income   (loss)  plus   depreciation,
     amortization  and non-cash  charges.  EBITDA is a commonly  used measure of
     performance  in the pay  television  industry.  While EBITDA  should not be
     construed as a substitute  for operating  income (loss) or a better measure
     of liquidity  than cash flow from  operating  activities,  each of which is
     determined in accordance  with U.S. GAAP, it is included  herein to provide
     additional  information  regarding  the  ability of the Company to meet its
     capital  expenditures,  working  capital  requirements  and any future debt
     service.  EBITDA,  however,  is not  necessarily a measure of the Company's
     ability  to fund its  cash  needs,  because  it does  not  include  capital
     expenditures,  which the Company expects to continue to be significant. See
     "Item 7.  Management's Discussion  and  Analysis of Financial Condition and
     Results of Operations -- Overview."

(4)  See "Item 1.  Business -- Operating Systems and the Company's Markets."

                                      13

<PAGE>

(5)  Average   monthly   revenue  per   subscriber  is  calculated  by  dividing
     subscription revenue for the month by the average number of subscribers for
     the month.

(6)  Working capital includes current portion of pledged securities.

(7)  The pledged  securities  were purchased as collateral for the Senior Notes.
     See Note 6 to the Consolidated Financial Statements.

(8)  TV Filme has never paid cash dividends on its  Common  Stock.  See "Item 5.
     Market For Registrant's Common Equity and Related Stockholder Matters."


ITEM 7.  MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

OVERVIEW

      The  Company  develops,  owns  and  operates  pay  television  systems  in
mid-sized  markets in Brazil.  The  Company is the sole  provider of MMDS in the
cities of  Brasilia,  Goiania  and  Belem.  Since  the  beginning  of 1994,  the
Company's  subscriber  base  has  grown  substantially,  increasing  from  1,864
subscribers to 79,176 subscribers as of December 31, 1996.

      Historically,  the  Company  has  generated  operating  losses,  which may
increase to the extent that  operations of  additional  systems are commenced or
acquired. As the Company continues to develop systems, positive EBITDA from more
developed  systems is expected to be partially or completely offset by corporate
overhead, negative EBITDA from less developed systems and from development costs
associated  with  establishing  new systems.  This trend is expected to continue
until the Company has a sufficiently  large  subscriber base to absorb operating
and development costs of new systems. There can be no assurance that the Company
will be able to achieve  or sustain  net  income in the  future.  The  Company's
Brasilia System became system EBITDA positive in the third quarter of 1994, with
approximately 6,000 subscribers, and generated system EBITDA of $7.4 million and
operating  income of $4.0  million for the year ended  December  31,  1996.  The
Company's  Belem System became system EBITDA  positive in the fourth  quarter of
1995, with approximately 5,000 subscribers,  and generated system EBITDA of $1.6
million and  operating  income of $0.3  million for the year ended  December 31,
1996.

      Each of the Company's  systems has required an initial capital  investment
of  approximately   $1.0  million  to  $1.5  million  to  build  and  install  a
transmission  tower,  headend  facilities and other  equipment.  These costs are
generally depreciated over ten years. In addition,  each new subscriber requires
an average incremental investment of approximately $470, which includes the cost
of a  decoder  box,  installation  labor  and  materials,  other  equipment  and
supplies,  marketing and selling  costs.  The Company  capitalizes  installation
costs,  including  installation  labor,  decoders  and other direct  costs,  and
depreciates  these costs over five years.  The Company  charges new  subscribers
installation  fees which vary from market to market,  depending on factors which
include the subscriber's access to other forms of pay television and whether the
installation is the first  installation  in a building.  The Company charges its
subscribers an  installation  fee ranging from $90-$180.  The Company expects to
lower installation charges per subscriber as it expands its subscriber base. The
Company defers installation fees, net of direct selling expenses, and recognizes
these fees as revenues ratably over a five-year period.

      The Company's substantial subscriber growth has resulted from the addition
of subscribers  in Brasilia and from the launch of operating  systems in Goiania
and Belem.  Television  subscription  revenues primarily consist of monthly fees
paid by subscribers  for the programming  package as well as  installation  fees
recognized for the period.  System operating expenses include programming costs,
a portion of the costs of compensation and benefits for the Company's employees,
vehicle  rental  costs,   transmitter  site  rentals,   repair  and  maintenance
expenditures  and service call costs.  Depreciation  and  amortization  expenses
consist  primarily of  depreciation  of decoder  boxes,  headend  facilities and
installation costs.

      The  development  of a new system  requires  significant  expenditures,  a
substantial  portion of which are incurred  before the  realization of revenues.
These  expenditures,  together with the  associated  early  operating  expenses,
result in negative  cash flow until an adequate  revenue  generating  subscriber
base is established. As the


                                      14
<PAGE>



subscriber base increases, revenue, as well as certain costs such as programming
costs,  generally  increase while other costs,  such as tower rental and related
maintenance costs, remain constant or increase at proportionately  lower levels.
Accordingly,  although costs  increase in the aggregate as the  subscriber  base
grows,  costs  as a  percentage  of  revenues  decrease  and  operating  margins
generally increase.

     Although the Company's financial  statements are presented pursuant to U.S.
GAAP in U.S. dollars,  the Company's  transactions are consummated in both reais
and U.S. dollars. Inflation and devaluation in Brazil have had, and may continue
to  have,  substantial  effects  on the  Company's  results  of  operations  and
financial  condition.  The Company does not seek to hedge  currency risks in the
financial  markets or  otherwise.  See "-- Certain  Factors Which May Affect the
Company  Future Results -- Factors  Relating to the Company -- Risks  Associated
with New Markets and Growth Strategy."

      TV Filme, as a holding  company,  is dependent on the receipt of dividends
and payment of intercompany obligations from its operating subsidiaries in order
to meet its cash requirements. The payment of dividends from the subsidiaries of
TV Filme to TV Filme and the payment of any interest on or the  repayment of any
principal of any loans or advances  made by TV Filme to any of its  subsidiaries
may be subject to statutory or contractual  restrictions,  are contingent on the
earnings  and  performance  of such  subsidiaries  and are  subject  to  various
business  considerations.  See  "Item 5.  Market For Registrant's  Common Equity
and Related Stockholder Matters."

      As a result  of the  development  of the  Company's  business  and  system
launches  during  the  years  presented,  the  year-to-year  comparisons  of the
Company's results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.

RESULTS OF OPERATIONS

      SELECTED  OPERATING  DATA. The following  table sets forth certain expense
and  other  data  derived  from  the  Consolidated  Financial  Statements  as  a
percentage of the Company's revenues for each year presented.

                                                 YEAR ENDED DECEMBER 31,
                                            ---------------------------------
                                             1994          1995         1996
                                             ----          ----         ----

Revenues...............................     100.0%        100.0%       100.0%
Operating costs and expenses:
  System operating.....................      31.7          25.9         30.6
  Selling, general and administrative..      98.2          78.7         53.3
  Depreciation and amortization........      15.0          18.0         18.9
                                            -----         -----        -----
    Total operating costs and expenses.     144.9         122.6        102.8
                                            -----         -----        -----

Operating income (loss)................     (44.9)        (22.6)        (2.8)
Other income (expense).................      66.1           3.2         (3.6)
                                            -----         -----        -----
Net income (loss)......................      21.2%        (19.4)%       (6.4)%
                                            =====         =====        =====


      REVENUES. The Company's revenues primarily consist of monthly fees paid by
subscribers for the programming package, as well as installation fees recognized
for the period.  Revenues  increased from  approximately $2.4 million in 1994 to
approximately  $11.4 million in 1995 primarily due to an increase in the average
number of subscribers in the Brasilia System of 16,513 and the launch of two new
operating systems in Goiania and Belem, which had average  subscribers of 5,605.
Additionally,  installation fees recognized  increased by $1.4 million from 1994
to 1995. The average monthly revenue per subscriber increased due to an increase
in monthly  subscription fees implemented  during 1995.  Revenues increased from
approximately  $11.4  million in 1995 to  approximately  $31.4  million in 1996,
primarily due to an aggregate  increase of  approximately  39,000 in the average
number of subscribers in the Company's three operating systems.  Average monthly
revenue per subscriber remained essentially constant from 1995 to 1996.

                                      15

<PAGE>




      SYSTEM OPERATING  EXPENSES.  System operating expenses include programming
costs,  a  portion  of costs of  compensation  and  benefits  for the  Company's
employees,   vehicle  rental  costs,   transmitter  site  rentals,   repair  and
maintenance  expenditures and service call costs. System operating expenses, net
of capitalized installation costs, increased from approximately $800,000 in 1994
to approximately $3.0 million in 1995 due to an increase in programming expenses
of $1.2 million and to an increase in  compensation  and benefits,  primarily to
employees  in the customer  service and  engineering  departments,  of $500,000.
System operating expenses, net of capitalized installation costs, increased from
approximately  $3.0  million  in 1995 to  approximately  $9.6  million  in 1996,
primarily  due to an increase in  programming  expenses  of  approximately  $6.0
million and an increase  in  compensation  and  benefits of  approximately  $0.4
million,  primarily  to  employees  in  the  customer  service  and  engineering
departments.  From 1994 through 1996,  programming expenses were affected by the
increase  in the  number  of  subscribers  over the  period,  since  programming
expenses are charged on a per subscriber  basis, but this increase was mitigated
during 1994 through 1995 by decreasing  programming  costs per subscriber due to
volume discounts.  Additionally, the Company received discounts from list prices
on  Tevecap  programming  during  1994 and the  first ten  months of 1995  which
amounted to $340,000  and $539,000 in 1994 and 1995,  respectively.  The Company
did not receive any such  discounts in 1996 and such  discounts are not expected
to recur.

      SELLING,   GENERAL  AND  ADMINISTRATIVE   COSTS.   Selling,   general  and
administrative  expenses ("SG&A")  increased from  approximately $2.4 million in
1994 to  approximately  $9.0  million in 1995 but as a  percentage  of  revenues
decreased  to  approximately  78.7%  from  approximately   98.2%.  During  1995,
compensation and benefits  increased by $3.6 million,  primarily to employees in
the sales department and senior  management,  advertising  increased by $500,000
and there was non-cash  compensation  expense in 1995 of $300,000 in  connection
with a grant of stock options. SG&A increased from approximately $9.0 million in
1995 to  approximately  $16.7  million in 1996,  but as a percentage of revenues
decreased to approximately 53.3% from 78.7%. Compensation and benefits increased
by approximately  $3.4 million from 1995 to 1996,  primarily due to additions to
management,  additional  employees in the sales  department and more commissions
paid to sales  employees.  The Company  added  employees  primarily in the sales
department  to  service  the  Company's  expanded  subscriber  base and  growth,
including the expansion into the Goiania and Belem  markets.  From 1995 to 1996,
the Company also added  approximately $1.0 million to its allowance for bad debt
and incurred  approximately $0.8 million of additional  expenses associated with
advertising.  Bank  fees and  rents  also  increased  from  1995 to 1996 by $0.5
million and $0.3 million, respectively.

      The  termination  of  subscriber  accounts  resulted in the  write-off  of
accounts  receivables  of  approximately  $0.95  million.  The  result  of  such
terminations  increased  average  monthly  churn  to 1.22%  for the  year  ended
December 31, 1996 from historic levels of less than 1%. As of December 31, 1996,
the Company's accounts  receivable totaled  approximately $4.3 million before an
allowance for doubtful accounts of $0.7 million.

      DEPRECIATION AND  AMORTIZATION.  Depreciation  and  amortization  expenses
consist  primarily of  depreciation  of decoder  boxes,  headend  facilities and
capitalized  installation costs. Since inception,  the Company's direct costs of
obtaining subscribers generally have exceeded installation revenues. These costs
are  capitalized  and  depreciated  over a five year  period.  Depreciation  and
amortization   expense  increased  from   approximately   $400,000  in  1994  to
approximately  $2.0  million  in  1995  due  to an  increase  in the  number  of
subscribers in the Brasilia  System and the launch of two new operating  systems
in Goiania and Belem.  Depreciation  and  amortization  expense  increased  from
approximately  $2.0  million  in 1995 to  approximately  $5.9  million  in 1996,
primarily due to increases in the number of installed subscribers in each of the
Company's three operating systems.

      OPERATING  INCOME  (LOSS).  Operating loss increased from 1994 to 1995 and
from 1995 to 1996 primarily due to increases in expenses in connection  with the
development  of the  Company's  business,  as explained  above.  The Company may
continue to generate operating losses as it further expands its existing systems
and develops additional systems.


                                      16

<PAGE>



      OTHER  INCOME  (EXPENSE).  Interest  expense  for 1994 was  insignificant.
Interest  expense  increased in 1995 as a result of short-term  borrowings  from
Abril and certain of its affiliates of  approximately  $1.7 million  incurred by
the Company to finance the  development and launch of the Goiania System and the
Belem System and to support an increase in the number of  subscribers.  Interest
income during 1994 was generated by the short-term investment of the proceeds of
a $5.0 million private placement in 1994. In 1995, interest income was generated
by cash on hand at the  beginning of 1995 and the  short-term  investment of the
proceeds of a $3.3 million private placement in 1995. Interest expense increased
by $1.0  million  from 1995 to 1996  primarily  as a result  of  higher  average
short-term  borrowings  from Abril and  certain of its  affiliates  and  accrued
interest  associated with the Senior Notes.  Interest  income  increased by $0.3
million  from 1995 to 1996  primarily  as a result  of  earnings  on  additional
investments.

     Exchange  and  translation  gains  have  arisen  primarily  as a result  of
short-term  investments and borrowings  denominated in reals to U.S.  dollars in
accordance  with SFAS No. 52. These  amounts can  fluctuate  significantly  as a
result of changes in the exchange rate of the real relative to the U.S.  dollar.
In connection  with the transfer of the proceeds of the Senior Notes to ITSA and
the  remittance and conversion of reals to U.S.  dollars,  the Company  incurred
exchange losses of approximately $0.6 million.

      INCOME TAXES.  At December 31, 1996,  the Company had $12.2 million of net
operating  loss   carryforwards,   of  which  approximately  $1.2  million  were
attributable  to TV Filme  Servicos.  As a result  of the  restructuring  of the
Company (the "Restructuring"),  the net operating loss carryforwards of TV Filme
Servicos,  which is no longer a  wholly-owned  subsidiary  of the  Company,  are
available  only to offset  its own income  and are not  available  to offset any
profits generated by TV Filme and its consolidated subsidiaries. Under Brazilian
law, the carryforward period for net operating losses is unlimited. Use of these
losses,  however,  is restricted to 30% of taxable  income in a tax period.  The
Company  has not  recorded a tax  benefit  for any  period.  The  Company's  net
deferred tax assets have been entirely offset by a valuation allowance,  and the
Company  expects  to  generate  operating  losses  for the  foreseeable  future.
Effective  January  1,  1997,   Brazilian   effective  tax  rates  increased  to
approximately 33.5% from 30.5%.

      NET INCOME (LOSS). As explained above, net loss in the periods  presented,
other than 1994, is primarily  attributable to the significant expenses incurred
in connection with the development of the Company's business. Net income in 1994
was due to interest  income and exchange gains which were greater than operating
losses.

LIQUIDITY AND CAPITAL RESOURCES

      The pay television business is a capital intensive  business.  The Company
made capital  expenditures of approximately  $3.6 million in 1994, $16.6 million
in 1995 and $25.2  million in 1996.  Such  capital  expenditures  were  financed
principally  through vendor  financing,  loans from  affiliates and offerings of
equity and debt.  From 1993  through  1996,  the Company  raised an aggregate of
approximately  $16.8 million  through a series of private  equity  placements to
Tevecap  and  Warburg,  Pincus.  In August 1996 TV Filme  completed  the Initial
Public  Offering  with net  proceeds  to the  Company  of $24.4  million  and in
December  1996 TV Filme  completed  the sale of the Senior  Notes.  In the past,
working  capital  requirements  have been met primarily by (i) vendor  financing
which  requires  payment  within  360 days of  shipment,  some of which has been
supported by  irrevocable  letters of credit  guaranteed by Abril and certain of
its affiliates and (ii) borrowings from Abril and certain of its affiliates.  As
of December 31, 1996, the Company had repaid  working  capital  borrowings  from
Abril and certain of its  affiliates in their entirety with a portion of the net
proceeds from the Initial  Public  Offering.  As a result of the Initial  Public
Offering and the Senior Notes offering,  the Company does not expect to continue
borrowing from Abril or its affiliates. As of December 31, 1996, the Company has
a payable to Abril of $400,000 in connection with the Company's  purchase of the
Belem  and  Goiania  licenses  from  Abril.  Such  amount  is due  in two  equal
installments in February of 1997 and 1998.

      As of December 31, 1996,  approximately $7.3 million was outstanding under
letters of credit with  maturities  ranging  from 30 days to 360 days,  of which
approximately  $4.1 million was  guaranteed  by  affiliates  of TV Filme.  As of
December 31, 1996, the Company had importation  lines of credit in the aggregate
amount of $6.0


                                      17

<PAGE>



million with two  commercial  banks,  of which  approximately  $2.75 million was
available on such date.  The Company  currently  believes  that lines of credit,
additional  vendor  financing  and other  credit  facilities  are  available  on
acceptable  terms.  As a result of the Initial  Public  Offering  and the Senior
Notes offering, the Company had positive working capital at December 31, 1996 in
the amount of $107.1 million.  Net cash provided by operating activities for the
year ended December 31, 1996 was approximately $8.4 million.

      For 1997, the Company anticipates that its aggregate capital  expenditures
in its existing operating markets will be approximately $25.0 million, comprised
primarily of  subscriber  installation  equipment.  In addition to expanding its
subscriber  base in its  existing  systems,  the  Company  is  seeking to launch
additional  systems,  and applications have been made for the Company to operate
wireless  cable systems in 27 additional  markets in Brazil.  As a result of the
uncertainty  regarding the process for granting new concessions and licenses for
MMDS services following a preliminary injunction issued by the Brazilian Federal
Supreme Court and the Presidential  Decree,  there can be no assurance as to the
grant of any such  concessions  and  licenses  and the timing of any such grants
generally,  or  the  grant  of  any   such  concessions  and  licenses  and  the
timing  of  any  grants  to  the  Company.  See  "Item  1.  Business--Regulatory
Environment--License   Procedures."   Based  on  current  market  and  operating
conditions,  the  Company  estimates  that the  average  cost of  launching  and
deploying any additional wireless cable operating system after the granting of a
new license in the Company's  application  markets could be up to  approximately
$12.0 million, including construction of a headend facility,  subscriber-related
capital costs and funding initial  development and marketing costs and operating
losses,  depending on factors  particular to each market.  The Company also from
time to time may  selectively  pursue the acquisition of existing pay television
systems,  although it currently  has no  understanding,  commitment or agreement
with respect to any such  acquisitions.  The Company believes that the Company's
current cash and internally generated funds, will be sufficient to fund its cash
requirements  for at least the next  twelve  months.  In the  longer  term,  the
Company's  funding  needs are  subject to a variety of  factors,  including  the
number and size of new system launches or acquisitions,  the  implementation  of
alternative   transmission   technologies   and  the   offering  of   additional
communications services. Accordingly, there can be no assurance that the Company
will be able to meet its funding needs in the longer term.

INFLATION AND EXCHANGE RATES

      Inflation and exchange rate variations have had, and may continue to have,
substantial  effects  on the  Company's  results  of  operations  and  financial
condition. In periods of inflation,  many of the Company's expenses will tend to
increase.  Generally,  in periods of  inflation,  a company is able to raise its
prices  to  offset  the  rise in its  expenses  and may set its  prices  without
government   regulation.   However,  under  Brazilian  law  designed  to  reduce
inflation, the rates which the Company may charge to a particular subscriber may
not  be  increased  until  the  next  anniversary  of  the  subscribers  initial
subscription  date.  Thus, the Company is less able to offset expense  increases
with  revenue  increases.  Accordingly,  inflation  may have a material  adverse
effect on the Company's results of operations and financial condition.

      Generally,  the effects of inflation in Brazil have been offset in part by
devaluation of the Brazilian  currency relative to the U.S. dollar.  Devaluation
of the real may also have an adverse effect on the Company. The Company collects
substantially  all of its revenues in reais,  but pays certain of its  expenses,
including a substantial  portion of its equipment costs and substantially all of
its programming costs, in U.S. dollars.  To the extent the real depreciates at a
rate greater than the rate at which the Company raises prices,  the value of the
Company's  revenues (as  expressed in U.S.  dollars) may be adversely  affected.
This  effect on the  Company's  revenues  may  negatively  impact the  Company's
ability to fund U.S. dollar-based  expenditures.  The Company does not currently
seek to hedge exchange rate risks in the financial  markets or otherwise,  as it
believes that the costs of such hedging outweigh the related risks. Accordingly,
devaluation  of the real may have a  material  adverse  effect on the  Company's
results of operations and financial condition.


                                      18

<PAGE>



CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS.

     FACTORS RELATING TO BRAZIL GENERALLY

      GENERAL.   Social,   economic  or  political   instability,   among  other
developments  in Brazil,  could  adversely  affect the  financial  condition and
results of operations of the Company. In the past, Brazil has suffered from high
levels of inflation, low real growth rates and political uncertainty.  Brazil is
generally considered by investors to be an "emerging market" and thus political,
economic,  social or other  developments  in other such  markets  may  adversely
affect the Company.

      ECONOMIC  UNCERTAINTY;  EFFECTS OF EXCHANGE RATE FLUCTUATIONS.  Brazil has
experienced  extremely  high rates of inflation  for many years.  Inflation,  as
measured by the Getulio Vargas Foundation's  General Index of Market Prices (the
"IGPM Index"),  was approximately  458% in 1991, 1,175% in 1992, 2,567% in 1993,
870% in 1994, 15% in 1995 and 8.19% in the first nine months of 1996. Inflation,
government  actions to combat  inflation  and public  speculation  about  future
actions  have had  significant  negative  effects  on the  Brazilian  economy in
general and have also contributed  materially to economic uncertainty in Brazil.
In periods of inflation,  many of the Company's  expenses will tend to increase.
Generally,  in  periods of  inflation,  a company is able to raise its prices to
offset  the  rise in its  expenses  and may set its  prices  without  government
regulation. However, under Brazilian law designed to reduce inflation, the rates
which the Company may charge to a  particular  subscriber  may not be  increased
until the next anniversary of the subscriber's  initial subscription date. Thus,
the Company is less able to offset  expense  increases  with revenue  increases.
Accordingly,  inflation  may have a  material  adverse  effect on the  Company's
results of operations and financial condition.

      Beginning in 1994, the Brazilian  government commenced the "Real Plan," an
economic stabilization plan designed to reduce inflation by, among other things,
reducing  certain public  expenditures,  collecting  debts owed to the Brazilian
government,  increasing tax revenues and continuing the privatization of certain
state-owned  enterprises.  On  July 1,  1994,  as part  of the  Real  Plan,  the
Brazilian  government  introduced  a new  currency,  the  real.  There can be no
assurance that the Real Plan will continue to be successful in  controlling  the
level of  inflation,  that  future  governmental  actions  will not  trigger  an
increase in inflation or that inflation will not have a material  adverse effect
on the Company's results of operations and financial condition.

      Brazil's  rate  of  inflation  and  the  government's  actions  to  combat
inflation have also affected the relationship of the value of Brazil's  currency
to the value of the U.S. dollar. Historically,  Brazil's currency frequently had
been devalued in relation to the U.S. dollar.  However,  after its introduction,
the real initially  appreciated against the U.S. dollar. In an effort to address
concerns  about the  possible  overvaluation  of the real  relative  to the U.S.
dollar,  and in light of the economic  upheaval in Mexico that resulted from the
rapid  devaluation of the Mexican peso,  the Brazilian  government in March 1995
introduced new exchange rate policies  which  established a trading band for the
real against the U.S. dollar. This band has been adjusted frequently, and, as of
December 13, 1996,  was between  1.0360 reais and 1.0410 reais per U.S.  dollar.
From  September  30, 1995 to  September  30,  1996,  the real  declined in value
relative to the U.S.  dollar by  approximately  7.1%.  There can be no assurance
that the real will not again be devalued  relative to the U.S.  dollar,  or that
the real will not fluctuate significantly relative to the U.S. dollar.

                                      19

<PAGE>




      Substantially  all of the Company's  revenues are  denominated in reais. A
substantial  portion of the  Company's  indebtedness  is, and may be expected to
continue  to be,  denominated  in U.S.  dollars.  In  addition,  certain  of the
Company's operating  expenses,  including a substantial portion of its equipment
costs and a portion of its programming  costs, are denominated in U.S.  dollars.
Any devaluation of the Brazilian  currency  relative to any foreign  currency in
which debt or other obligations of the Company are denominated could result in a
foreign exchange loss with respect to such indebtedness or obligations,  if such
devaluation were in excess of inflation and the rate at which the Company raises
prices.  Any  devaluation  could  also  force  the  Company  to seek  additional
financing  although  the  Company's  ability  to obtain  such  financing  may be
impaired by such event. As a result,  the  relationship of Brazil's  currency to
the value of the U.S. dollar and other currencies,  and the rates of devaluation
of  Brazil's  currency  relative  to the  prevailing  rates  of  inflation,  may
adversely  affect the  Company's  financial  condition  and reported  results of
operations,  as well as its  ability to meet its debt  service  obligations  and
operating expenses. Moreover, if the Company cannot increase its prices to match
the  rate of  inflation,  even if the  rate of  inflation  matches  the  rate of
devaluation,  the  Company's  ability to meet its debt service  obligations  and
operating expenses may be impaired.

      The Company does not  currently  seek to hedge  exchange rate risks in the
financial  markets or  otherwise,  as it believes that the costs of such hedging
outweigh the related risks.  As a result,  the Company may  experience  economic
loss with respect to its investments and fluctuations in its reported results of
operations  solely as a result of currency rate  fluctuations,  which may have a
material adverse effect on the Company's financial condition.

      FOREIGN EXCHANGE CONTROLS AND EXCHANGE RATES.  There are two legal foreign
exchange markets in Brazil: the commercial rate exchange market (the "Commercial
Market") and the floating rate exchange market (the "Floating Market"). Prior to
the implementation of the Real Plan, the Commercial Market Rate and the Floating
Market Rate differed  significantly.  There can be no assurance  that there will
not be significant differences between such rates in the future.

      RESTRICTIONS  ON CONVERSION  AND U.S.  REMITTANCES  ABROAD.  The Brazilian
Government has the authority under current legislation to impose restrictions on
the remittance  abroad of capital when a serious deficit in Brazil's  balance of
payments is seriously  threatened  or occurs,  as it did for  approximately  six
months in 1989 and early  1990,  and on the  conversion  of reais  into  foreign
currencies.  Such  restrictions  may hinder or prevent the  Company's  Brazilian
subsidiaries from purchasing  equipment  required to be paid for in U.S. dollars
and from  converting  dividends  or  distributions  or  scheduled  interest  and
principal  payments into U.S. dollars and remitting U.S. dollars to TV Filme and
from  making  payment  on  judgments  obtained  in  a  court  in  Brazil.   Such
restrictions  could  adversely  affect the  Company.  The Company  could also be
adversely  affected by delays in, or a refusal to grant, any required  Brazilian
governmental  approval for conversion of real payments and remittances abroad in
respect of such dividends, distributions, interest and principal payments.

      There can be no assurance  that the Brazilian  Government  will not in the
future impose more restrictive foreign exchange  regulations that would have the
effect of eliminating or  restricting  the Company's or any of its  subsidiaries
access to foreign  currency that would be required to meet its foreign  currency
obligations.  The  likelihood  of the  imposition  of such  restrictions  by the
Brazilian  Government  may be affected  by, among other  factors,  the extent of
Brazil's foreign currency reserves,  the availability of foreign currency in the
foreign exchange markets on the date a payment is due, the size of Brazil's debt
service burden  relative to the economy as a whole,  and Brazil's  policy toward
the International Monetary Fund and political constraints to which Brazil may be
subject.


                                      20
<PAGE>




      POLITICAL  UNCERTAINTY.  Historically,  the Brazilian Government has often
changed monetary,  credit,  tariff and other policies to influence the course of
Brazil's economy.  Such government actions have included wage and price controls
as well as other  measures,  such as freezing bank  accounts,  imposing  capital
controls  and  inhibiting  imports  and  exports.  A  primary  objective  of the
Brazilian  Government in recent years has been to control  government  spending.
Some  progress has been made,  but fiscal  deficits  remain  high.  Reducing the
deficit is made more  difficult  by Brazil's  Constitution,  which  requires the
Brazilian   Government  to  make  substantial   funds  available  to  the  state
administrations,  while  limiting the  Brazilian  Government's  ability to raise
sufficient funds from taxes.  Changes in policy  involving,  among other things,
tariffs,  exchange controls,  regulatory policy and taxation,  as well as events
such as inflation,  devaluation, social instability or other political, economic
or diplomatic  developments,  could adversely  affect the Brazilian  economy and
have a  material  adverse  effect on the  Company's  results of  operations  and
financial condition.

      The  Brazilian  political  environment  has been  marked by high levels of
uncertainty  since  Brazil  returned to civilian  rule in 1985 after 20 years of
military government.  The death of a President-elect in 1985 and the resignation
of another  President in 1992 in the midst of his impeachment  trial, as well as
frequent  turnover at and immediately  below the cabinet level, have contributed
to delays in the  adoption of coherent  and  sustained  policies to confront the
country's  economic  issues.  Mr. Fernando  Henrique  Cardoso,  Brazil's Finance
Minister  at the  time of the  implementation  of the  Real  Plan,  was  elected
President of Brazil in October 1994 and took office in January  1995.  President
Cardoso was elected by a coalition of political  parties,  and, as a result, his
administration  may be  required to accept  more  compromises  than if his party
controlled the Brazilian  legislature.  In addition, the President is ineligible
for  re-election  when his current term expires in 1998.  President  Cardoso has
supported the Real Plan, the reduction of inflation,  privatization measures and
certain free-market policies. However, many political factions oppose certain of
the  administration's  policies,  and there can be no assurance  that any of the
administration's  policies,  including  the Real Plan,  will be supported by the
legislature.


     FACTORS RELATING TO THE COMPANY

      SUBSTANTIAL  LEVERAGE.  In December  1996,  TV Filme  issued $140  million
aggregate  principal  amount of Senior Notes.  At December 31, 1996, the Company
had total  long-term  debt of  approximately  $140.2  million and  stockholders'
equity of approximately $37.7 million.  The Company's leverage could: (i) impair
the  Company's  ability to obtain  additional  financing  for  working  capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
in the future;  (ii) require that a substantial  portion of the Company's future
cash flow from  operations be dedicated to the payment of principal and interest
on its  indebtedness;  (iii) hinder the Company's  ability to adjust  rapidly to
changing  market  conditions;  and (iv) make the Company more  vulnerable in the
event of a downturn in general  economic  conditions or its  business.  The long
term growth of the  Company  depends,  in part,  on its ability to expand by the
development or acquisition of new operating systems and, therefore, an inability
to finance such development or acquisitions  through borrowed funds could have a
material adverse effect on the Company's operations.

      HOLDING COMPANY STRUCTURE;  DEPENDENCE ON SUBSIDIARIES.  TV Filme conducts
its operations through, and substantially all of TV Filme's assets are owned by,
TV  Filme's  direct  and  indirect  subsidiaries.  Because TV Filme is a holding
company,  its ability to distribute dividends and meet its debt obligations will
be  primarily   dependent  upon  the  earnings  of  its   subsidiaries  and  the
distribution  of those  earnings to, or upon loans or other  payment of funds by
the  subsidiaries  to, the Company.  The  subsidiaries are separate and distinct
legal  entities and have no  obligation,  contingent  or  otherwise,  to pay any
amounts to  creditors  of the Company or to make any funds  available  therefor,
whether by  dividends,  loans or other  payments.  In  addition,  the payment of
dividends  from such  subsidiaries  and the  payment of any  interest  on or the
repayment  of any  principal  of any loans or  advances  made to TV Filme by its
subsidiaries, or by TV Filme to its subsidiaries (i) may be subject to statutory
or  contractual  restriction,  (ii) are  contingent  upon the  earnings  of such
subsidiaries and (iii) are subject to various business considerations.

      LIMITED OPERATING HISTORY;  LACK OF PROFITABLE  OPERATIONS;  MANAGEMENT OF
GROWTH. The Company commenced operations in Brasilia in October 1990, in Goiania
in January 1995 and in Belem in February 1995. Since inception,  the Company has
sustained  substantial  operating  losses,  due primarily to start-up  costs and
charges for depreciation and amortization of capital expenditures to develop its
wireless  cable  systems.  The Company  expects to  experience  net losses as it
expands its existing systems and develops  additional  systems.  There can be no
assurance  that the Company will be profitable  or will  generate  positive cash
flow in future years.  The Company is  experiencing  rapid  growth,  which could
place a  significant  strain on its  operational  and personnel  resources.  The
Company's  growth will  require it to continue  to improve its  operational  and
financial systems and to train, motivate and manage its employees. If management
is unable to manage the Company's growth effectively,  or if the productivity of
its employees falls below expectations,  it could have a material adverse effect
on the Company's results of operations and financial condition.



                                      21

<PAGE>


      NEED FOR  ADDITIONAL  FINANCING  FOR GROWTH.  The growth of the  Company's
business  requires  substantial  investment on a continuing basis to finance (i)
capital  expenditures  and  expenses  related  to  subscriber  growth and system
development,  (ii) the acquisition of new pay television licenses and operations
and (iii) net losses. There can be no assurance that the Company will be able to
obtain  additional debt and equity capital on satisfactory  terms, or at all, to
meet its future financing needs. Furthermore, the Indenture restricts the amount
of additional  Indebtedness (as defined therein) the Company may incur,  subject
to  certain  qualifications  and  exceptions.  Failure  to obtain  any  required
additional  financing  could  adversely  affect the growth of the  Company  and,
ultimately, could have a material adverse effect on the Company.

      RISKS ASSOCIATED WITH NEW MARKETS AND GROWTH STRATEGY.  Applications  have
been made for the Company to operate  wireless cable systems in an additional 27
markets in Brazil.  As a result of the issuance by the Brazilian Federal Supreme
Court of a preliminary  injunction  with respect to regulations  relating to the
granting  of new  concessions  and  licenses  for the  rendering  of  commercial
telecommunications  services in Brazil and the Presidential Decree, which decree
revokes such  regulations,  the process of granting new concessions and licenses
for MMDS is uncertain.  Until such time as further government action is taken to
provide for the granting of new  concessions  and  licenses  for MMDS  services,
there can be no assurance as to the grant of any such  concessions  and licenses
and  the  timing  of any  such  grants  generally,  or  the  grant  of any  such
concessions  and  licenses  and the  timing of any  grants to the  Company.  The
Company also may seek to enter into  operating  agreements  with pay  television
license holders other than TV Filme Servicos or seek to acquire licenses granted
to others,  but there can be no assurance that the Company will be able to enter
into any such operating agreements or consummate any such license  acquisitions.
The Company  believes  that the cost of  purchasing  or  acquiring  licenses has
increased  substantially  in recent years and will continue to increase,  due to
increased competition.  Similarly,  the cost of operating wireless cable systems
has  increased  due to  competition.  Based  on  current  market  and  operating
conditions,  the Company  estimates that the cost of launching and deploying any
additional  wireless cable operating  system after the granting of a new license
could be up to approximately $12.0 million,  including construction of a headend
facility,  subscriber-related  capital costs and funding initial development and
marketing costs and operating  losses,  depending on factors  particular to each
market.  The  Company's  ability  to expand  successfully  through  acquisitions
depends on many factors, including the successful identification and acquisition
of such systems and  management's  ability to integrate and operate the acquired
businesses  effectively.  The Company  may compete for new system  opportunities
with other companies that have  significantly  greater  financial and managerial
resources.  There can be no  assurance  that the Company will be  successful  in
obtaining new licenses or launching or acquiring any new pay television  systems
or that the Company will be able to integrate  successfully any acquired systems
into its current  business and operations.  The failure of the Company to obtain
new licenses or launch or acquire new pay  television  systems  could impede its
growth.  The failure of the Company to integrate  successfully  acquired systems
could have a material adverse effect on the Company's  results of operations and
financial condition.

      In order to finance further  subscriber growth,  capital  expenditures and
related expenses for additional system development and acquisitions, the Company
may  require  additional  funds in the  future.  The  amount  and  timing of the
Company's future capital requirements will depend upon a number of factors, many
of which  are not  within  the  Company's  control,  including  the grant of new
licenses, programming costs, capital costs, competitive conditions and the costs
of any necessary  implementation  of  technological  innovations  or alternative
technologies.  There  can be no  assurance  that the  Company's  future  capital
requirements   will  be  met  or  will  not  increase  as  a  result  of  future
acquisitions,  if any. Failure to obtain any required additional financing could
adversely  affect  the  growth of the  Company  and,  ultimately,  could  have a
material  adverse  effect on the Company's  results of operations  and financial
condition.

      COMPETITION.  Through its affiliate, TV Filme Servicos, the Company is the
only entity licensed to operate wireless cable systems in Brasilia,  Goiania and
Belem. The Company's principal pay television competitor in the city of Brasilia
is NET Brasilia,  and in the city of Goiania is Multichannel,  both of which are
hardwire cable operators. There currently is no hardwire or other wireless cable
provider in the city of Belem.  In addition to other wireless cable and hardwire
cable operators, wireless cable operators in Brazil face or may face competition
from several other sources,  DTH systems,  DBS, local off-air VHF/UHF  channels,
home videocassette recorders and out-of-home theaters.  Legislative,  regulatory
and  technological   developments  may  result  in  additional  and  significant
competition.  Competition in the pay  television  industry is based upon program
offerings,  customer service, reliability and pricing. Many actual and potential
competitors  have greater  financial,  marketing  and other  resources  than the
Company.  No  assurance  can be given that the  Company  will be able to compete
successfully.


                                      22

<PAGE>



      GOVERNMENT REGULATION.  The Company's business activities are regulated by
the Ministry of Communications.  Such regulation relates to, among other things,
licensing,  local access to MMDS  systems,  commercial  advertising  and foreign
investment in MMDS systems.  Changes in the regulation of the Company's business
activities, including decisions by regulators affecting the Company's operations
(such as the granting or renewal of licenses or decisions as to the subscription
rates the Company may charge its  customers)  or changes in  interpretations  of
existing  regulations  by courts  or  regulators,  could  adversely  affect  the
Company.  The Company's MMDS licenses may not be transferred  without regulatory
approval.  Any new regulations  could have a material  adverse effect on the pay
television industry, as a whole, and on the Company, in particular.

      DEPENDENCE ON SUPPLIERS.  The Company is dependent on certain suppliers of
its programming and equipment. The Company currently purchases substantially all
of its programming from Tevecap and its subsidiaries pursuant to the Programming
Agreement.  The  terms of the  Programming  Agreement  terminate  in July  2004.
Although  the  Company  has no reason to  believe  that such  agreement  will be
canceled  or will not be  renewed  upon its  expiration,  if such  agreement  is
canceled or not renewed,  the Company will have to seek  programming  from other
sources.  In addition,  there can be no assurance that other programming will be
available to the Company on acceptable terms or at all or, if so available, that
such programming will be acceptable to the Company's subscribers.  Additionally,
there can be no assurance that  programming  will be available to the Company in
its  application  markets on acceptable  terms,  although  Tevecap has agreed to
provide programming on a non-exclusive basis in most of such application markets
pursuant  to the  Programming  Agreement.  There also can be no  assurance  that
Tevecap's  and  its  subsidiaries'   contracts  with  their  individual  program
suppliers are or will remain exclusive,  will not be canceled or will be renewed
upon  expiration.  There can be no  assurance  that if Tevecap's  contracts  are
canceled or not  renewed,  other  programming  will be  available  to Tevecap on
acceptable terms or at all.

      The Company  currently  purchases  decoders  and  antennas  from a limited
number of sources.  The  inability to obtain  sufficient  components as required
from such sources,  or to develop  alternative sources if and as required in the
future, could result in delays or reductions in customer installations which, in
turn,  could have a material  adverse  effect on the results of  operations  and
financial condition of the Company.

                                      23

<PAGE>



ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The following  statements  are filed as part of this Annual Report on Form
10-K:

                                                                      FORM 10-K
                                                                       PAGE NO.
                                                                      ----------
FINANCIAL STATEMENTS:

  TV Filme, Inc.:
      Report of Independent Auditors................................      25
      Consolidated Balance Sheets as of December 31, 1995 and 1996        26
      Consolidated Statements of Operations for the years ended
        December 31, 1994, 1995, and 1996............................     27
      Consolidated Statements of Changes in Stockholders' Equity
        for the years ended December 31, 1994, 1995 and 1996.........     28
      Consolidated Statements of Cash Flows for the years ended
        December 31, 1994, 1995 and 1996.............................     29
      Notes to Consolidated Financial Statements.....................     30




      All  schedules  have been  omitted  because they are  inapplicable  or the
      requested information is shown in the consolidated financial statements or
      related notes.

                                   24

<PAGE>




                        REPORT OF INDEPENDENT AUDITORS

The Board of Directors
TV Filme, Inc.

      We have audited the accompanying  consolidated balance sheets of TV Filme,
Inc.  and  subsidiaries  as of  December  31,  1996 and  1995,  and the  related
consolidated statements of operations,  changes in stockholders' equity and cash
flows for each of the three years  ended  December  31,  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects, the consolidated financial position of
TV  Filme,  Inc.  and  subsidiaries  at  December  31,  1996 and  1995,  and the
consolidated  results of its  operations  and its cash flows for the three years
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles in the United States.




                                                ERNST & YOUNG
                                                AUDITORES INDEPENDENTES S.C.

Sao Paulo, Brazil
March 26, 1997



                                      25

<PAGE>




                           TV FILME, INC. AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS

                                                            DECEMBER 31,
                                                       -----------------------
                                                          1995         1996
                                                          ----         ----
                                                      (In thousands of dollars)

ASSETS
Current assets:
  Cash and cash equivalents.........................   $      43     $116,355
  Accounts receivable, net..........................       1,781        3,607
  Supplies..........................................       1,632        2,721
  Prepaids expenses and other current assets........         497        1,175
  Pledged securities-current........................          --       16,159
                                                       ---------     --------
      Total current assets..........................       3,953      140,017
Property, plant and equipment, net..................      18,870       38,333
Pledged securities..................................           -       17,353
Debt issuance costs.................................           -        6,036
Other assets........................................         860        1,190
                                                       ---------     --------
      Total assets..................................   $  23,683     $202,929
                                                       =========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................   $   6,876     $ 11,106
Short-term debt.....................................           -        2,996
Payroll and other benefits payable..................       1,283        1,538
Accrued interest payable............................           -          502
Accrued liabilities and taxes payable...............         361          412
Payables to affiliates-current......................       1,863          200
                                                       ---------     --------
      Total current liabilities.....................      10,383       16,754
Payables to affiliates-long term....................         400          200
Deferred installation fees..........................       5,005        8,227
Senior Notes........................................           -      140,000
Stockholders' equity:
  Preferred stock, $.01 par value, 1,000,000
    shares authorized, no shares issued.............           -            -
  Common stock, $.01 par value, 50,000,000
    shares authorized, 6,193,996 and 10,166,176
    shares issued and outstanding in 1995 and 1996..          62          102
    Additional paid-in capital......................      10,070       41,825
    Deficit.........................................      (2,237)      (4,179)
                                                        --------      -------
      Total stockholders' equity....................       7,895       37,748
                                                       ---------     --------
      Total liabilities and stockholders' equity....   $  23,683     $202,929
                                                       =========     ========







                               See accompanying notes.


                                         26

<PAGE>



                           TV FILME, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                                    YEAR ENDED DECEMBER 31,
                                           -------------------------------------
                                                 1994        1995         1996
                                                 ----        ----         ----
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues....................................    $ 2,438     $11,404     $31,388
                                                -------     -------     -------

Operating costs and expenses:
  System operating-Note 3...................        773       2,957       9,593
  Selling, general and administrative.......      2,394       8,975      16,737
  Depreciation and amortization.............        365       2,049       5,921
                                                -------     -------     -------
      Total operating costs and expenses....      3,532      13,981      32,251
                                                -------     -------     -------
      Operating loss........................     (1,094)     (2,577)       (863)
                                                =======     =======     =======

Other income (expense):
  Interest expense - Note 3.................         (2)        (49)     (1,049)
  Interest and other income - Note 3........        932         475         664
  Exchange and translation gains (losses)...        682         (66)       (762)
                                                -------     -------     -------
      Total other income (expense)..........      1,612         360      (1,147)
                                                -------     -------     -------
Net income (loss)...........................    $   518     $(2,217)    $(2,010)
                                                =======     =======     =======

Net income (loss) per share.................    $  0.08     $ (0.27)    $ (0.22)
                                                =======     =======     =======

Weighted average number of shares of
  common stock and common stock equivalents.      6,885       8,086       9,256
                                                =======     =======     =======





                               See accompanying notes.

                                         27

<PAGE>



                           TV FILME, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                     FOR THE THREE YEARS ENDED DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                                COMMON STOCK          ADDITIONAL
                                                          ------------------------     PAID-IN
                                                            SHARES       PAR VALUE     CAPITAL        DEFICIT       TOTAL
                                                            ------       ---------    ----------      -------       -----
                                                                       (In thousands of dollars, except shares)


<S>                                                       <C>             <C>          <C>           <C>           <C>
BALANCE AT DECEMBER 31, 1993 .........................    $ 2,596,352     $     26     $  1,494      $   (538)     $    982
Issuance of common stock .............................      2,126,132           21        4,979            --         5,000
Exercise of stock options ............................        274,756            3           (3)           --            --
Net income for the year ..............................             --           --           --           518           518
                                                          -----------     --------     --------      --------      --------
BALANCE AT DECEMBER 31, 1994 .........................      4,997,240           50        6,470           (20)        6,500
Issuance of common stock .............................      1,052,924           11        3,289            --         3,300
Non-cash compensation ................................             --           --          312            --           312
Exercise of stock options ............................        143,832            1           (1)           --            --
Net loss for the year ................................             --           --           --        (2,217)       (2,217)
                                                          -----------     --------     --------      ----------    --------
BALANCE AT DECEMBER 31, 1995 .........................      6,193,996           62       10,070        (2,237)        7,895
Issuance of common stock and warrants.................      1,097,180           11        7,140            --         7,151
Non-cash compensation ................................             --           --          272            --           272
Initial public offering of common stock,
 net of costs ........................................      2,875,000           29       24,343            --        24,372
Equity adjustment for restructuring ..................             --           --           --            68            68
Net loss for the year ................................             --           --           --        (2,010)       (2,010)
                                                          -----------     --------     --------      --------     ---------
BALANCE AT DECEMBER 31, 1996..........................    $10,166,176     $    102     $ 41,825      $ (4,179)    $  37,748
                                                          ===========     ========     ========      ========     =========

</TABLE>


                               See accompanying notes.


                                         28

<PAGE>



                           TV FILME, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                                      YEAR ENDED DECEMBER 31,
                                                                           -----------------------------------------
                                                                               1994          1995            1996
                                                                               ----          ----            ----
                                                                                        (In thousands of dollars)
<S>                                                                         <C>           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................          $   518       $  (2,217)      $  (2,010)
Adjustments to reconcile net loss to net cash
provided by operating activities:
  Depreciation and amortization ....................................            365           2,049           5,921
  Provision for losses on accounts receivable ......................             --             315           1,296
  Non-cash compensation ............................................             --             312             272
  Amortization of debt issuance costs ..............................             --              --              14
  Increase in deferred installation fees ...........................            934           3,884           3,222
Changes in operating assets and liabilities:
  Increase in accounts receivable ..................................           (369)         (1,669)         (3,122)
  Increase in supplies .............................................           (517)           (980)         (1,089)
  Increase in prepaids expenses and other current assets............            (76)           (419)           (678)
  Increase in other assets .........................................           (914)            (77)           (421)
  Increase in accounts payable .....................................            549           5,803           4,230
  Increase in payroll and other benefits payable ...................            403             815             255
  Increase in accrued interest payable .............................             --              --             502
  Increase in accrued liabilities and taxes payable ................             10             315              51
                                                                            -------       ---------       ---------
Net cash provided by operating activities ..........................            903           8,131           8,443
                                                                            -------       ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisitions:
  Property, plant and equipment ....................................         (3,637)        (16,621)        (25,225)
                                                                            -------       ---------       ---------
Net cash used in investing activities ..............................         (3,637)        (16,621)        (25,225)
                                                                            -------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt ........................................             --              --           2,996
Proceeds from initial public offering, net of costs ................             --              --          24,372
Proceeds from issuance of senior notes, net of costs ...............             --              --         133,950
Pledged securities .................................................             --              --         (33,512)
Issuance of common stock and warrants ..............................          5,000           3,300           7,151
Increase (decrease) in payables from affiliates ....................            800           1,463          (1,863)
(Increase) decrease in receivables from affiliates..................         (1,426)          2,111            --
                                                                            -------       ---------       ---------
Net cash provided by financing activities ..........................          4,374           6,874         133,094
                                                                            -------       ---------       ---------

Net change in cash and cash equivalents ............................          1,640          (1,616)        116,312

Cash and cash equivalents at beginning of year .....................             19           1,659              43
                                                                            -------       ---------       ---------

Cash and cash equivalents at end of year ...........................        $ 1,659       $      43       $ 116,355
                                                                            =======       =========       =========
</TABLE>


                               See accompanying notes.

                                        29

<PAGE>



                        TV FILME, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      1. Summary of Significant Accounting Policies

      A. COMPANY BACKGROUND

      In  connection  with an initial  public  offering of its Common Stock (the
"Initial Public  Offering"),  TV Filme, Inc. (the "Company") was formed in April
1996 to become the holding  company of and  successor  to  ITSA-Intercontinental
Telecomunicacoes S.A. and its subsidiaries ("ITSA"). The transfer of ITSA to the
Company has been  accounted  for in a manner  similar to a pooling of interests.
ITSA was formed in May 1994 as a holding  company for and  successor to TV Filme
Servicos de Telecomunicacoes  S.A. ("TVFSA").  The transfer of TVFSA to ITSA has
been accounted for in a manner similar to a pooling of interests.

      In connection  with the Initial Public  Offering,  the Company has entered
into  a  restructuring  (the  "Restructuring")  pursuant  to  which  all  of the
preferred  stock of ITSA was converted  into common stock of ITSA,  based on the
conversion rates at the date of issuance of the preferred  stock.  Each share of
common  stock of ITSA was  exchanged  for 1,844  shares  of Common  Stock of the
Company. As all of the preferred stock of ITSA has been converted and there were
no preferred dividends paid or due as a result of the conversion,  all preferred
and common stock issuances of the  predecessor  companies have been reflected as
issuances  of Common  Stock of the  Company.  Prior to the  consummation  of the
Initial  Public  Offering and the  Restructuring,  TVFSA  operated the Company's
wireless  cable  system  in  Brasilia,  and held the  licenses  to  operate  the
Company's  wireless  cable  systems in Brasilia,  Goiania and Belem.  ITSA owned
substantially all of TVFSA, TV Filme Goiania Servicos de Telecomunicacoes  Ltda.
("TV Filme Goiania") and TV Filme Belem Servicos de Telecomunicacoes  Ltda. ("TV
Filme  Belem").  Pursuant to the  Restructuring,  (i) 51% of the voting stock of
TVFSA was  transferred to an entity,  all of which is owned by certain  existing
shareholders of ITSA who are Brazilian nationals, with ITSA retaining 49% of the
voting stock and 83% of the  economic  interests  in TVFSA;  (ii) the  operating
assets of the wireless cable system of Brasilia were  transferred  from TVFSA to
TV Filme Brasilia  Servicos de  Telecomunicacoes  Ltda.  ("TV Filme  Brasilia"),
which is  substantially  owned by ITSA; and (iii) TVFSA has entered into various
agreements with ITSA and its subsidiaries pursuant to which, among other things,
TVFSA has authorized  ITSA to operate the existing  wireless cable systems under
its current  licenses.  Subsequent to the  Restructuring  and the Initial Public
Offering, the Company owns 100% of ITSA, which holds 49% of the voting stock and
83% of the economic  interests of TVFSA and 100% of TV Filme Brasilia,  TV Filme
Goiania and TV Filme Belem.

      Accordingly,  the consolidated financial statements of the Company include
(i) TVFSA on a historical  basis from  inception  through May 1994 and (ii) ITSA
and its  subsidiaries  on a historical  basis since May 1994 as though they have
been part of the Company for all periods presented. All significant intercompany
transactions and balances have been eliminated in consolidation.

      The  Company  develops,  owns  and  operates  pay  television  systems  in
mid-sized  markets  in  Brazil.  The  Company  has  established  wireless  cable
operating  systems in the cities of  Brasilia,  Goiania and Belem.  Applications
have been made for the Company to operate systems in an additional 27 markets in
Brazil.  Although the economic situation in Brazil has improved since July 1994,
when the  government  introduced  the Real  Plan,  a return  to high  levels  of
inflation  and  currency  fluctuations  could  adversely  affect  the  Company's
operations.

      B. METHOD OF PRESENTATION

      The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in the United States in
U.S.  dollars.  Amounts in Brazilian  currency  have been  remeasured  into U.S.
dollars in accordance  with the  methodology set forth in Statement of Financial
Accounting

                                      30

<PAGE>



Standards  No. 52 as it applies to  entities  operating  in highly  inflationary
economies.  Supplies,  property,  plant and equipment,  intangibles and deferred
installation  fees and the related income  statement  accounts are remeasured at
exchange rates in effect when the assets were acquired or the  liabilities  were
incurred.  All other assets and  liabilities are remeasured at year end exchange
rates, and all other income and expense items are remeasured at average exchange
rates  prevailing  during the year.  Remeasurement  adjustments  are included in
exchange and translation gains (losses).

      C. NET LOSS PER SHARE

      Net loss per share is  calculated  using the  weighted  average  number of
shares of stock outstanding during the period together with the number of shares
issuable  upon the  exercise of options and  warrants  issued  during the twelve
months prior to the filing of the Initial Public  Offering.  The  computation of
fully  diluted  pro forma net loss per share of common  stock was  antidilutive;
therefore, the amounts reported for primary and fully diluted loss per share are
the same.

      D. CASH EQUIVALENTS

      The Company  considers  all highly liquid  investments  with a maturity of
three months or less when purchased to be cash equivalents.

      E. SUPPLIES

      Supplies are recorded at the lower of cost or market.

      F. PROPERTY, PLANT AND EQUIPMENT

      Property,  plant and equipment are stated at cost. The Company capitalizes
materials,  subcontractor  costs,  labor and overhead  incurred  associated with
initial subscriber  installations.  The Company continues to depreciate the full
installation cost subsequent to any subscriber disconnections.

      Depreciation is computed on the straight-line basis using estimated useful
lives ranging from 5 to 10 years for buildings  and  leasehold  improvements,  5
years for  machinery  and  equipment,  furniture  and fixtures and  installation
costs.

      G. INTANGIBLE ASSETS

      Intangible  assets are  comprised  primarily of pay  television  licenses,
which  are  amortized  on a  straight-line  basis  over a  period  of 10  years.
Accumulated  amortization  at  December  31,  1995  and 1996  was  $131,000  and
$159,000, respectively.

      H. REVENUE RECOGNITION

      Revenues  from  subscribers  are  recognized  in  the  period  service  is
rendered.  Installation  fees are  recognized as revenue to the extent of direct
selling costs incurred, with the remainder deferred and amortized to income over
a five year period.

      I. ALLOWANCE FOR DOUBTFUL ACCOUNTS

      The Company  had an  allowance  for  doubtful  accounts  of  $315,000  and
$666,000 at December 31, 1995 and 1996,  respectively.  Charges to the allowance
during 1995 and 1996 were $0 and $945,000, respectively.


                                      31

<PAGE>



      J. STOCK OPTIONS

      The Company  accounts for stock options granted to employees in accordance
with  the  provisions  of  Accounting  Principles Board  Opinion 25, "Accounting
for Stock Issued to Employees"  ("APB 25").  Under APB 25,  because the exercise
price of the Company's  employee stock option grants is greater than or equal to
the market price on the date of grant, no compensation is recognized.

      K. INTEREST EXPENSE

      Interest expense approximates the amount of cash interest paid.

      L.  USE OF ESTIMATES

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

      M.  RECLASSIFICATION

      Certain  1994 and 1995 amounts  have been  reclassified  to conform to the
1996 presentation.

      2. Property, Plant and Equipment

      Property,  plant and  equipment is comprised of the  following at December
31:

                                                   1995          1996
                                                   ----          ----
                                               (In thousands of dollars)

Building and leasehold improvements............ $    597      $    665
Machinery and equipment........................   10,288        19,956
Furniture and fixtures.........................      308           610
Installation costs.............................    9,948        25,136
                                                --------      --------
                                                  21,141        46,367
Accumulated depreciation.......................   (2,271)       (8,034)
                                                --------      --------
                                                $ 18,870      $ 38,333
                                                ========      ========


      Depreciation expense of $350,000, $1,933,000 and $5,762,000 is included in
the  statements of operations  for the years ended  December 31, 1994,  1995 and
1996, respectively.

      3. Related Party Transactions

      Substantially  all programming is supplied by a subsidiary of Tevecap S.A.
("Tevecap"),  a stockholder of the Company,  pursuant to a programming contract.
Amounts paid to such affiliate in 1994, 1995 and 1996 were $178,000,  $1,334,000
and $6,731,000,  respectively,  net of discounts on programming fees compared to
list prices.  Such discounts were received  during 1994 and the first ten months
of 1995,  and in 1994 and 1995 were  $340,000  and  $539,000,  respectively.  No
discounts  were  received in 1996 and such  discounts are not expected to recur.
The Company  purchases  from Tevecap a program guide which it distributes to its
subscribers  monthly.  Amounts  paid to Tevecap in 1994,  1995 and 1996 were $0,
$113,000 and $750,000, respectively.



                                      32

<PAGE>



      Receivables   from  Tevecap  and  Abril  S.A.   ("Abril"),   the  majority
stockholder  of Tevecap,  bear interest at the Brazilian  interbank rate ("CDI")
then in effect or at CDI plus  0.8%.  The rate in effect  ranged  from  3.48% to
4.27% per month during 1995.  Interest  income from such affiliates was $433,000
in 1995.

      In 1994,  the Company  purchased  two licenses to operate  wireless  cable
systems from Abril for $400,000 each, payable in four equal annual installments,
which do not bear  interest.  Included in payables to affiliates at December 31,
1995 and 1996 is $600,000 and $400,000, respectively,  related to this purchase.
Other payables to Abril (and its affiliates) bear interest at the CDI plus 0.8%,
which ranged from 3.24% to 4.41% per month.  Interest  expense to Abril (and its
affiliates) was $433,000 in 1996.

      The  Company   purchases   equipment   and  supplies  from  vendors  under
irrevocable letters of credit. Total issued and outstanding letters of credit at
December  31,  1995  and  1996  were  $6,683,000  and  $7,296,000.  Abril  and a
subsidiary of Tevecap  guarantee such obligations from time to time. At December
31,  1995 and  1996,  issued  and  outstanding  letters  of  credit  secured  by
affiliates were $4,155,000 and  $4,097,000,  respectively.  The maturity date of
such letters of credit range from 30 days to 360 days.

      4. Stockholders' Equity

      In July 1994, the Company issued and sold 2,126,132 shares of Common Stock
to Warburg, Pincus Investors, L.P. for a purchase price of $5,000,000.

      In August 1995,  the Company  issued and sold  1,052,924  shares of Common
Stock to Warburg, Pincus Investors, L.P. for purchase price of $3,300,000.

      In 1994 and 1995,  the  Company  issued  options to  purchase  125,392 and
99,576 shares of Common  Stock,  respectively,  to officers of the Company.  All
options  were  vested at the date of grant.  The fair  value of the stock at the
date of the 1995 grant was deemed to be $312,000  and,  therefore,  a charge for
non-cash  compensation of $312,000 was recorded in 1995 and included in selling,
general and administrative  expenses.  All options were exercised in the year of
grant.

      As a finders'  fee in  connection  with the equity  offerings  in 1994 and
1995, the Company granted options to purchase  193,620 shares of Common Stock to
two advisers at a nominal  exercise  price.  In 1994 and 1995,  such options for
149,364 and 44,256 shares, respectively, were exercised.

      In March 1996,  the Company issued and sold 783,700 shares of Common Stock
and  warrants  to  purchase  an  additional  567,952  shares of Common  Stock to
Warburg,  Pincus Investors,  L.P. for approximately $5.1 million, and issued and
sold  287,664  shares of Common  Stock and  warrants to  purchase an  additional
208,372 shares of Common Stock to Tevecap for approximately  $1.9 million.  Such
warrants are exercisable at $6.52 per share.

      Immediately  prior to the consummation of the Initial Public Offering,  in
connection  with the  Restructuring,  the Company issued  3,962,756,  1,456,760,
254,472,  254,472  and  1,069,520  shares of  Common  Stock to  Warburg,  Pincus
Investors,  L.P., Tevecap,  Mr. Hermano Studart Lins de Albuquerque,  Mr. Carlos
Andre  Studart  Lins  de  Albuquerque  and  Mrs.  Maria  Nise  Studart  Lins  de
Albuquerque,  respectively, with a value at the initial public offering price of
$10.00  per  share  of  $39,627,560,  $14,567,600,  $2,544,720,  $2,544,720  and
$10,695,200,  respectively. Such shares were issued in exchange for all of their
shares of  common  stock of ITSA,  which  have the same  value as the  shares of
Common Stock received in the exchange.

      Immediately  prior to the consummation of the Initial Public Offering,  in
connection  with the  Restructuring,  the  Company  issued  warrants to purchase
567,952 shares of Common Stock to Warburg,  Pincus, warrants to purchase 208,372
shares of Common  Stock to Tevecap and  warrants to  purchase  18,440  shares of
Common  Stock to two other  stockholders  of the Company in exchange  for all of
their warrants to purchase shares of common stock of ITSA.


                                      33

<PAGE>




      The  Company  recorded  non-cash  compensation  of  $272,000  in  1996  in
connection with the issuance of 23,121 shares of Common Stock to officers of the
Company,  which amount has been included in selling,  general and administrative
expenses.

      5.  Stock-Option Plan

      In connection with the Initial Public Offering,  the Board of Directors of
the Company adopted and the  stockholders of the Company approved the 1996 Stock
Option Plan (the  "Plan").  The Plan  provides for the grant of stock options to
officers,  key employees,  consultants and directors of the Company. The Plan is
administered by the Compensation  Committee of the Board and the total number of
shares of Common Stock for which options may be granted  pursuant to the Plan is
936,432,  subject to certain  adjustments  reflecting  changes in the  Company's
capitalization.  The Plan allows the granting of incentive stock options,  which
may not have an  exercise  price  below the  greater  of par value or the market
value on the date of grant,  and  non-qualified  stock  options,  which  have no
restrictions  as to exercise price other than the exercise price cannot be below
par value. All options must be exercised no later than 10 years from the date of
grant.  Options to purchase 407,000 shares of Common Stock were granted upon the
consummation of the Initial Public Offering, 297,000 of which are exercisable at
$10.00 per share,  and 110,000 of which are exercisable at $11.00 per share, and
which  generally  vest  20% per  year  for five  years  beginning  on the  first
anniversary of consummation of the Initial Public Offering.  Options to purchase
an additional  10,000 shares of Common Stock were granted in December 1996 at an
exercise price of $11.75.

      Pro  forma  information  regarding  net loss and loss per  share  has been
determined as if the Company had accounted for its employee  stock options under
the fair value method of FASB  Statement No. 123,  "Accounting  for  Stock-Based
Compensation."  The fair value for these  options was  estimated  at the date of
grant  using  a   Black-Scholes   option   pricing   model  with  the  following
weighted-average assumptions for 1996: risk-free interest rate of 6.3%, dividend
yield of 0%;  volatility factor of the expected market price of the Common Stock
of .46; and a weighted-average expected life of the option of 7.5 years.

      For purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options vesting  period.  The Company's
pro forma information for the year ended December 31, 1996 follows (in thousands
of dollars):

                      Pro forma net loss         $(2,208)

                      Pro forma loss per share      (.22)


      6. Long-term debt

      On December 20, 1996, the Company issued $140 million  principal amount of
12-7/8% Senior Notes due December 15, 2004 (the "Senior Notes"). The proceeds of
the Senior  Notes were loaned to ITSA and  evidenced  by an  intercompany  note.
Interest is payable  semi-annually in arrears on June 15 and December 15 of each
year,  commencing  on June  15,  1997.  Of the  $140  million  loaned  to  ITSA,
approximately  $33.5  million  was  used  to  purchase  government   securities,
scheduled interest and principal payments on which is in an amount sufficient to
provide  for  payment  in full when due of the  first  four  scheduled  interest
payments on the Senior Notes. In connection with the transfer of the proceeds of
the Senior Notes to ITSA and  remittance of reais to U.S.  dollars,  the Company
incurred exchange losses of approximately $600,000. This amount was reflected in
exchange and translation gain (losses) at December 31, 1996. Debt issuance costs
are  capitalized  and amortized  over the period of the debt under the effective
yield method.

      The Senior  Notes are  redeemable  on or after  December  15,  2000 at the
option  of the  Company,  in whole or in part from  time to time,  at  specified
redemption prices declining annually to 100% of the principal amount on or after
December  15, 2003,  plus accrued  interest.  The Senior Notes  contain  certain
covenants  that,  among other things,  limit the ability of the Company to incur
additional indebtedness and pay dividends or make certain other

                                      34

<PAGE>



distributions.  Upon a change of  control,  the  Company is  required to make an
offer to  purchase  the Senior  Notes at a purchase  price  equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any. In
accordance  with the  covenants of the Senior Notes,  at December 31, 1996,  the
Company is unable to make any dividend payments.

      The Company  believes the recorded value of the Senior Notes  approximates
the fair value at December 31, 1996.

      7. Income Taxes

      The reasons for the difference between total tax expense (benefit) and the
amount  computed by applying the  effective  Brazilian tax rate to income before
income taxes are as follows:

                                              1994     1995      1996
                                              ----     ----      ----

                                              (IN THOUSANDS OF DOLLARS)
Income taxes (benefit) at effective
      Brazilian rate........................    $249   $(1,064)   $ (613)
Effect of monetary adjustments under
      Brazilian tax law.....................    (709)      765        --
Nondeductible compensation expense..........      --       150        78
Effect of change in tax rate................      --       267      (232)
Other ......................................      --       198        --
Increase (decrease) in valuation allowance..     460      (316)      767
                                              ------   -------    ------
Tax expense (benefit).......................     --        --         --
                                              ======   =======    ======


      The Company has not  recognized  any future income tax benefit for its net
operating loss  carryforwards in excess of net deferred tax liabilities as it is
not  assured  that it will be able to realize a benefit  for such  losses in the
future.  The net  operating  loss  carryforwards  amounted  to $12.2  million at
December 31, 1996, of which  approximately  $1.2 million was  attributable to TV
Filme  Servicos.  As a  result  of the  Restructuring,  the net  operating  loss
carryforwards of TV Filme Servicos, which is no longer a wholly-owned subsidiary
of the  Company,  are  available  only  to  offset  its own  income  and are not
available  to offset  any  profits  generated  by TV Filme and its  consolidated
subsidiaries.  Under Brazilian law, net operating  losses may be carried forward
for an unlimited period of time. Use of these losses,  however, is restricted to
30% of taxable income in a tax period.

      Deferred income taxes reflect the net tax effect of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. The approximate effect of
temporary differences as of December 31, 1995 and 1996 is as follows:



                                      35

<PAGE>



                                                           1995    1996
                                                           ----    ----
                                                          (In thousands of
                                                             dollars)

Deferred tax assets
Net operating loss carryforwards......................... $1,596  $ 4,155
Deferred installation fees...............................  1,526    2,715
Other....................................................    309      623
                                                          ------  -------
                                                           3,431    7,493
Valuation allowance......................................  (413)  (1,180)
                                                          ------  -------
                                                          $3,018  $ 6,313
                                                          ======  =======

Deferred tax liabilities
Fixed assets............................................. $2,670  $ 6,313
Other....................................................    348       --
                                                          ------  -------
                                                          $3,018  $ 6,313
                                                          ======  =======


      Effective January 1, 1996, the effective  Brazilian tax rate declined from
48% to 30.5%. This has been reflected in the deferred tax assets and liabilities
at December 31, 1995.  Effective  January 1, 1997,  the effective  Brazilian tax
rate increased from 30.5% to 33.5%.  This has been reflected in the deferred tax
assets and liabilities at December 31, 1996.

      7. Commitments

      The Company  leases office space and vehicles and has entered into various
transmission  tower rental  agreements.  Rent expense  amounted to approximately
$128,000,  $1,395,000 and $2,062,000 for the years ended December 31, 1994, 1995
and 1996,  respectively.  A substantial  number of these rental  agreements  are
renewed on a  continuous  basis.  The  Company  also has  entered  into  various
contracts to secure programming. These agreements are readjusted periodically.

      Lease commitments at December 31, 1996 are as follows:


1997...........................................................  $2,432,000
1998...........................................................   1,243,000
1999...........................................................      64,000
2000...........................................................      20,000


      At December 31, 1996,  payables to affiliates  include $400,000 related to
the purchase by the Company of two licenses to operate  wireless  cable  systems
(see Note 3).  Payments  for such  licenses of $200,000  are required in each of
1997 and 1998.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

      None.



                                      36

<PAGE>



                                   PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      Information with respect to executive officers of the Company is presented
in Item 4 of this Report under the caption "Executive Officers of the Company."

      The  information  appearing  under the captions  "Proposal 1 - Election of
Directors",  "Certain  Transactions"  and "Section  16(a)  Beneficial  Ownership
Reporting  Compliance"  in the  Company's  Proxy  Statement  for its 1997 Annual
Meeting of Stockholders (the "1997 Proxy  Statement") is incorporated  herein by
reference.

ITEM 11.    EXECUTIVE COMPENSATION.

      Information  appearing under the caption  "Executive  Compensation" in the
1997 Proxy Statement is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      Information  appearing under the caption "Security Ownership of Beneficial
Owners and  Management" in the 1997 Proxy  Statement is  incorporated  herein by
reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Information appearing under the caption "Certain Transactions" in the 1997
Proxy Statement is incorporated herein by reference.


                                    PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A)   1.    Financial Statements.

      The financial statements are included in Part II, Item 8. of this Report.

      2.    Financial Statement Schedules and Supplementary Information Required
            to be Submitted.

      All  schedules  have been  omitted  because they are  inapplicable  or the
      required information is shown in the consolidated  financial statements or
      notes.

(B) Reports on Form 8-K.

      The  Company  filed two  Reports on Form 8-K during the fourth  quarter of
1996, each pursuant to Item 5 thereof, one dated November 22, 1996 and the other
dated December 20, 1996.

(C)   Index to Exhibits

      The following is a list of all Exhibits filed as part of this Report:

                                      37

<PAGE>





EXHIBIT
NUMBER                         DESCRIPTION OF DOCUMENT
-------                        -----------------------

*3.1           Certificate of Incorporation of TV Filme (incorporated  herein by
               reference to Exhibit 3.1 to TV Filme's Registration  Statement on
               Form S-1,  dated May 3,  1996,  Registration  No.  333-4512  ("TV
               Filme's S-1").

*3.2           By-Laws of TV Filme (incorporated  herein by reference to Exhibit
               3.2 to TV  Filme's  Registration  Statement  on Form  S-4,  dated
               February 4, 1997, Registration No. 333-21057 ("TV Filme's S-4")).

*4.1           Indenture,  dated as of December 20,  1996,  between TV Filme and
               IBJ Schroder Bank & Trust Company, as Trustee (including the form
               of the Senior Notes) (incorporated herein by reference to Exhibit
               4.1 to TV Filme's S-4).

*4.2           Registration  Rights Agreement,  dated December 20, 1996, between
               TV Filme and Bear, Stearns & Co. Inc., BT Securities Corporation,
               J.P. Morgan  Securities Inc. and Alex. Brown & Sons  Incorporated
               (incorporated  herein by  reference  to Exhibit 4.2 to TV Filme's
               S-4).

*4.3           Purchase Agreement, dated December 16, 1996, between TV Filme and
               Bear, Stearns & Co. Inc., BT Securities Corporation,  J.P. Morgan
               Securities  Inc.  and  Alex.  Brown & Sons  Incorporated,  as the
               Initial  Purchasers (incorporated  herein by reference to Exhibit
               4.3 to TV Filme's S-4).

*4.4           Note, dated December 20, 1996, of ITSA to TV Filme  (incorporated
               herein by reference to Exhibit 4.4 to TV Filme's S-4).

*4.5           Note Pledge Agreement,  dated as of December 20, 1996, between TV
               Filme and IBJ Schroder Bank & Trust Company,  as Collateral Agent
               (incorporated  herein by  reference  to Exhibit 4.5 to TV Filme's
               S-4).

*4.6           Collateral  Pledge and Security  Agreement,  dated as of December
               20,  1996,  among ITSA,  TV Filme and IBJ  Schroder  Bank & Trust
               Company, as Collateral Agent (incorporated herein by reference to
               Exhibit 4.6 to TV Filme's S-4).

*4.7           Subsidiary  Guarantee,  dated as of December 20, 1996, made by TV
               Filme Brasilia Servicos de Telecomunicacoes  (incorporated herein
               by reference to Exhibit 4.7 to TV Filme's S-4).

*4.8           Subsidiary  Guarantee,  dated as of December 20, 1996, made by TV
               Filme Belem Servicos de Telecomunicacoes  (incorporated herein by
               reference to Exhibit 4.8 to TV Filme's S-4).

*4.9           Subsidiary  Guarantee,  dated as of December 20, 1996, made by TV
               Filme Goiania Servicos de Telecomunicacoes  (incorporated  herein
               by reference to Exhibit 4.9 to TV Filme's S-4).

*10.1          1996 Stock  Option  Plan  (incorporated  herein by  reference  to
               Exhibit 10.1 to TV Filme's S-4).+

*10.2          Form of Stock Option Agreement  (incorporated herein by reference
               to Exhibit 10.2 to TV Filme's S-1).+

*10.3          Stockholders  Agreement,  dated as of July 26, 1996, entered into
               by and among Warburg,  Pincus,  Tevecap,  Mrs. Maria Nise Studart
               Lins de Albuquerque, Mr. Hermano Studart Lins de Albuquerque, Mr.
               Carlos Andre Studart Lins de  Albuquerque  and Ms. Maria Veronica
               Studart Lins de Albuquerque  (incorporated herein by reference to
               Exhibit 10.3 to TV Filme's S-4).

*10.4          Registration Rights Agreement, dated as of July 26, 1996, entered
               into by and among  Warburg,  Pincus,  Tevecap,  Mrs.  Maria  Nise
               Studart  Lins  de  Albuquerque,   Mr.  Hermano  Studart  Lins  de
               Albuquerque,  Mr. Carlos Andre Studart Lins de  Albuquerque,  Ms.
               Maria  Veronica  Studart  Lins de  Albuquerque,  Joseph  Wallach,
               Donald  Deely  Pearson  and  TV  Filme  (incorporated  herein  by
               reference to Exhibit 10.4 to TV Filme's S-4).

*10.5          Employment Agreement,  dated as of July 26, 1996, entered into by
               and  among  TV  Filme,  ITSA  and  Mr.  Hermano  Studart  Lins de
               Albuquerque  (incorporated herein by reference to Exhibit 10.5 to
               TV Filme's S-4).+


                                 38

<PAGE>





*10.6          Employment Agreement,  dated as of July 26, 1996, entered into by
               and among TV Filme,  ITSA and Mr.  Carlos  Andre  Studart Lins de
               Albuquerque  (incorporated herein by reference to Exhibit 10.6 to
               TV Filme's S-4).

*10.7          Employment  Agreement, dated as of July 26, 1996, entered into by
               and between  TV Filme and Mr.  Aguirre  (incorporated  herein by
               reference  to Exhibit 10.7 to TV Filme's S-4).+

*10.8          Warrant,  dated  as of  July  24,  1996,  issued  by  TV Filme to
               Warburg,  Pincus  (incorporated  herein  by  reference to Exhibit
               10.8 to TV Filme's S-4).

*10.9          Warrant, dated as of July 24, 1996, issued by TV Filme to Tevecap
               (incorporated  herein by reference to Exhibit  10.9 to TV Filme's
               S-4).

*10.10         Warrant, dated as of July 24, 1996,  issued by TV Filme to Joseph
               Wallach (incorporated  herein by reference to Exhibit 10.10 to TV
               Filme's S-4).

*10.11         Warrant,  dated as of July 24, 1996,  issued by TV Filme to
               Donald Deely Pearson (incorporated herein by reference to Exhibit
               10.11 to TV Filme's S-4).

*10.12         Programming License Agreement, dated as of June 27, 1996, entered
               into by and between TV Filme and Tevecap (incorporated herein by
               reference to Exhibit 10.12 to TV Filme's  S-4).

*10.13         Master  Operating  Agreement, dated as of July 26, 1996,  entered
               into  by  and  among  TV  Filme,  ITSA  and  TV  Filme   Servicos
               (incorporated  herein by reference to Exhibit 10.13 to TV Filme's
               S-4).

*10.14         Articles of Association of TV Filme Servicos (incorporated herein
               by reference to Exhibit 10.14  to  TV  Filme's  S-4).

*10.15         Form  of   Indemnification  Agreement  between  TV  Filme and the
               directors and officers parties thereto  (incorporated  herein  by
               reference to Exhibit 10.12 to TV Filme's S-1).+

*21            Subsidiaries  of  TV  Filme (incorporated  herein by reference to
               Exhibit 21 to TV Filme's S-4).

**23.1         Consent   of   Ernst  &  Young   Auditores   Independentes  S.C.,
               independent auditors.

**24           Powers of  Attorney  (Appears on  signature  page).

**27.1         Financial Data Schedule.


-------------------------
 +  Management contract or compensatory plan or arrangement.
 *  Incorporated herein by reference.
**  Filed herewith.

                                     39

<PAGE>



                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned,  thereunto duly authorized,  in the City of New York,
State of New York, on the 28th day of March, 1997.

                                    TV FILME, INC.


                                    By: /S/ HERMANO STUDART LINS DE ALBUQUERQUE
                                        ---------------------------------------
                                          Hermano Studart Lins de Albuquerque
                                          Chief Executive Officer

      KNOWN BY ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below constitutes  and  appoints  Hermano  Studart Lins de  Albuquerque
and  Alvaro J. Aguirre  his  true  and  lawful  attorney-in-fact and agent, with
full power of substitution  and  resubstitution,  for him and in his name, place
and stead,  in any and all  capacities,  to sign any and all  amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits  thereto and
other  documents  in  connection  therewith,  with the  Securities  and Exchange
Commission,  granting  unto said  attorney-in-fact  and  agent,  full  power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and  about  the  premises,  as  fully  as he  might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or their or his  substitutes or substitute,  may lawfully do or cause to be done
by virtue hereof.

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated on the 28th day of March, 1997.

              SIGNATURE                                TITLE(S)
              --------                                 --------

 /s/ HERMANO STUDART LINS DE                  Chief Executive Officer,
   ALBUQUERQUE                                Secretary and Director
-----------------------------------------     (Principal Executive Officer)
Hermano Studart Lins de Albuquerque

  /s/ CARLOS ANDRE STUDART LINS DE            President, Chief Operating
   ALBUQUERQUE                                Officer, Treasurer and Director
-----------------------------------------
Carlos Andre Studart Lins de Albuquerque

     /S/ ALVARO J. AGUIRRE                    Chief Financial Officer (Principal
-----------------------------------------     Financial and Accounting
      Alvaro J. Aguirre                       Officer) and Director

    /S/ DOUGLAS M. KARP                       Chairman of the Board and
-----------------------------------------     Director
        Douglas M. Karp


      /S/ JOSE AUGUSTO PINTO MOREIRA          Director
------------------------------------------
      Jose Augusto Pinto Moreira

   /S/ CLAUDIO DASCAL                         Director
------------------------------------------
       Claudio Dascal



                                       40
<PAGE>



<TABLE>
<CAPTION>


EXHIBIT                                                                            SEQUENTIALLY
NUMBER                   DESCRIPTION OF DOCUMENT                                   NUMBERED PAGE
-------                  -----------------------                                   -------------

<S>        <C>                                                                     <C>
*3.1       Certificate  of  Incorporation  of TV Filme  (incorporated  herein by
           reference to Exhibit 3.1 to TV Filme's Registration Statement on Form
           S-1, dated May 3, 1996, Registration No. 333-4512 ("TV Filme's S-1").

*3.2       By-Laws of TV Filme (incorporated  herein by reference to Exhibit 3.2
           to TV Filme's  Registration  Statement on Form S-4, dated February 4,
           1997, Registration No. 333-21057 ("TV Filme's S-4").

*4.1       Indenture,  dated as of December 20,  1996,  between TV Filme and IBJ
           Schroder Bank & Trust Company,  as Trustee (including the form of the
           Senior Notes) (incorporated herein by reference to Exhibit 4.1 to TV
           Filme's S-4).

*4.2       Registration  Rights  Agreement, dated  December 20, 1996, between TV
           Filme and Bear, Stearns & Co. Inc.,  BT  Securities  Corporation, J.P.
           Morgan   Securities   Inc.  and   Alex.  Brown  &  Sons  Incorporated
           (incorporated  herein by reference to Exhibit 4.2 to TV Filme's S-4).

*4.3       Purchase  Agreement, dated  December  16,  1996, between TV Filme and
           Bear,  Stearns  &  Co.  Inc.,  BT Securities Corporation, J.P. Morgan
           Securities  Inc. and  Alex. Brown & Sons Incorporated, as the Initial
           Purchasers  (incorporated  herein  by  reference to Exhibit 4.3 to TV
           Filme's S-4).

*4.4       Note, dated  December  20,  1996,  of ITSA to TV Filme  (incorporated
           herein by reference to Exhibit 4.4 to TV Filme's S-4).

*4.5       Note Pledge  Agreement,  dated as of December  20,  1996,  between TV
           Filme and IBJ Schroder  Bank & Trust  Company,  as  Collateral  Agent
           (incorporated herein by reference to Exhibit 4.5 to TV Filme's S-4).

*4.6       Collateral  Pledge and Security  Agreement,  dated as of December 20,
           1996, among ITSA, TV Filme and IBJ Schroder Bank & Trust Company,  as
           Collateral Agent (incorporated  herein by reference to Exhibit 4.6 to
           TV Filme's S-4).

*4.7       Subsidiary Guarantee, dated as of December 20, 1996, made by TV Filme
           Brasilia  Servicos  de   Telecomunicacoes  (incorporated   herein  by
           reference to Exhibit 4.7 to TV Filme's S-4).

*4.8       Subsidiary Guarantee, dated as of December 20, 1996, made by TV Filme
           Belem Servicos de Telecomunicacoes (incorporated herein by reference
           to Exhibit 4.8 to TV Filme's S-4).

*4.9       Subsidiary Guarantee, dated as of December 20, 1996, made by TV Filme
           Goiania Servicos de Telecomunicacoes (incorporated herein by
           reference to Exhibit 4.9 to TV Filme's S-4).

*10.1      1996 Stock Option Plan (incorporated herein by reference to Exhibit
           10.1 to TV Filme's S-4).+

*10.2      Form of Stock Option Agreement (incorporated herein by reference to
           Exhibit 10.2 to TV Filme's S-1).+



                                       41

<PAGE>




*10.3     Stockholders Agreement, dated as of July 26, 1996, entered into by and
          among  Warburg,  Pincus,  Tevecap,  Mrs.  Maria Nise  Studart  Lins de
          Albuquerque, Mr. Hermano Studart Lins de Albuquerque, Mr. Carlos Andre
          Studart Lins de  Albuquerque  and Ms. Maria  Veronica  Studart Lins de
          Albuquerque  (incorporated  herein by  reference to Exhibit 10.3 to TV
          Filme's S-4).


*10.4     Registration Rights Agreement, dated as of July 26, 1996, entered into
          by and among Warburg, Pincus, Tevecap, Mrs. Maria Nise Studart Lins de
          Albuquerque, Mr. Hermano Studart Lins de Albuquerque, Mr. Carlos Andre
          Studart  Lins de  Albuquerque,  Ms.  Maria  Veronica  Studart  Lins de
          Albuquerque,  Joseph  Wallach,  Donald  Deely  Pearson  and  TV  Filme
          (incorporated  herein by reference to Exhibit 10.4 to TV Filme's S-4).

*10.5     Employment  Agreement,  dated as of July 26, 1996, entered into by and
          among TV  Filme,  ITSA and Mr.  Hermano  Studart  Lins de  Albuquerque
          (incorporated herein by reference to Exhibit 10.5 to TV Filme's S-4).+

*10.6     Employment  Agreement,  dated as of July 26, 1996, entered into by and
          among TV Filme,  ITSA and Mr. Carlos Andre Studart Lins de Albuquerque
          (incorporated herein by reference to Exhibit 10.6 to TV Filme's S-4).+

*10.7     Employment  Agreement,  dated as of July 26, 1996, entered into by and
          between TV Filme and Mr. Aguirre  (incorporated herein by reference to
          Exhibit 10.7 to TV Filme's S-4).+

*10.8     Warrant,  dated as of July 24,  1996,  issued by TV Filme to  Warburg,
          Pincus (incorporated herein by reference to Exhibit 10.8 to TV Filme's
          S- 4).

*10.9     Warrant,  dated as of July 24,  1996,  issued  by TV Filme to  Tevecap
          (incorporated herein by reference to Exhibit 10.9 to TV Filme's S-4).

*10.10    Warrant,  dated  as of July 24,  1996,  issued  by TV Filme to  Joseph
          Wallach  (incorporated  herein by  reference  to  Exhibit  10.10 to TV
          Filme's S-4).

*10.11    Warrant, dated as of July 24, 1996, issued by TV Filme to Donald Deely
          Pearson  (incorporated  herein by  reference  to  Exhibit  10.11 to TV
          Filme's S-4).

*10.12    Programming License Agreement, dated as of June 27, 1996, entered into
          by and between TV Filme and Tevecap  (incorporated herein by reference
          to Exhibit 10.12 to TV Filme's S-4).

*10.13    Master Operating Agreement, dated as of July 26, 1996, entered into by
          and among TV Filme, ITSA and TV Filme Servicos (incorporated herein by
          reference to Exhibit 10.13 to TV Filme's S-4).

*10.14    Articles of Association of TV Filme Servicos  (incorporated  herein by
          reference to Exhibit 10.14 to TV Filme's S-4).

*10.15    Form of  Indemnification  Agreement between TV Filme and the directors
          and  officers  parties  thereto  (incorporated  herein by reference to
          Exhibit 10.12 to TV Filme's S-1).+

*21       Subsidiaries of TV Filme (incorporated  herein by reference to Exhibit
          21 to TV Filme's S-4).

**23.1    Consent of Ernst & Young  Auditores  Independentes  S.C.,  independent
          auditors.


                                       42

<PAGE>



**24      Powers of Attorney (Appears on signature page).

**27.1    Financial Data Schedule.

</TABLE>

--------------------------
 +  Management contract or compensatory plan or arrangement.
 *  Incorporated herein by reference.
**  Filed herewith.


                                       43