##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 
 (Mark One)o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company reportFor the transition period from                         to
 Commission file number 000-33143
 CLAXSON INTERACTIVE GROUP INC.
 (Exact name of Registrant as specified in its charter)
 CLAXSON INTERACTIVE GROUP INC.  (Translation of Registrants name into English)
 British Virgin Islands  (Jurisdiction of incorporation or organization)
 Avenida Melian 2780
C1430EYH Buenos Aires, Argentina  (Address of principal executive offices)
 Securities registered or to be registered pursuant to Section 12(b) of the Act.
 Title of Each Class
    
    Name of Each Exchange on Which Registered
 NONE
 Securities registered or to be registered pursuant to Section 12(g) of the Act.
 Class A Common Shares, Par Value U.S.$0.01 Per Share  (Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 None  (Title of Class)
  o x
 o x
  x o
   Large accelerated filer
    
    o
    
    Accelerated filer
    
    o
    
    Non-accelerated filer
    
    x
 o x
 o x




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC.
FORM 20-F
ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2006
INDEX
 PART I
    
    
    
    
    1Item 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    1Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    1Item 3.
    
    Key Information
    
    
    1A.
    
    Selected Financial Data
    
    
    1B.
    
    Capitalization and Indebtedness
    
    
    3C.
    
    Reasons for the Offer and Use of Proceeds
    
    
    3D.
    
    Risk Factors
    
    
    3Item 4.
    
    Information on the Company
    
    
    7A.
    
    History and Development of the Company
    
    
    7B.
    
    Business Overview
    
    
    7C.
    
    Organizational Structure
    
    
    18D.
    
    Property, Plant and Equipment
    
    
    19Item 5.
    
    Operating and Financial Review and Prospects
    
    
    19Item 6.
    
    Directors, Senior Management and Employees
    
    
    32A.
    
    Directors and Senior Management
    
    
    32B.
    
    Compensation
    
    
    36C.
    
    Board Practices
    
    
    39D.
    
    Employees
    
    
    41E.
    
    Share Ownership
    
    
    41Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    41A.
    
    Major Shareholders
    
    
    41B.
    
    Related Party Transactions
    
    
    44C.
    
    Interests of Experts and Counsel
    
    
    48Item 8.
    
    Financial Information
    
    
    48A.
    
    Consolidated Statements and Other Financial Information
    
    
    48B.
    
    Significant Changes
    
    
    50Item 9.
    
    The Offer and Listing
    
    
    50A.
    
    Offer and Listing Details
    
    
    50B.
    
    Plan of Distribution
    
    
    51C.
    
    Markets
    
    
    51D.
    
    Selling Shareholders
    
    
    51E.
    
    Dilution
    
    
    51




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F.
    
    Expense of the Issue
    
    
    51Item 10.
    
    Additional Information
    
    
    51A.
    
    Share Capital
    
    
    51B.
    
    Memorandum and Articles of Association
    
    
    51C.
    
    Material Contracts
    
    
    55D.
    
    Exchange Controls
    
    
    55E.
    
    Taxation
    
    
    55F.
    
    Dividends and Paying Agents
    
    
    59G.
    
    Statement by Experts
    
    
    59H.
    
    Documents on Display
    
    
    59I.
    
    Subsidiary Information
    
    
    59Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    59Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    60PART II
    
    
    
    
    60Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    60Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    60Item 15.
    
    Controls and Procedures
    
    
    60Item 16.A.
    
    Audit Committee Financial Expert
    
    
    61B.
    
    Code of Ethics
    
    
    61C.
    
    Principal Accountant Fees and Services
    
    
    61D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    61E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    61PART III
    
    
    
    
    62Item 17.
    
    Financial Statements
    
    
    62Item 18.
    
    Financial Statements
    
    
    62Item 19.
    
    Exhibits
    
    
    62EX-4.14 Stock Purchase AgreementEX-4.15 First Amendment to the Stock Purchase AgreementEX-4.16 Shareholders AgreementEX-4.17 Parent Company AgreementEX-4.18 Share Purchase AgreementEX-8.1 List of Significant SubsidiariesEX-12.1 Section 302 Certification of CEOEX-12.2 Section 302 Certification of CFOEX-13.1 Section 906 Certification of CEOEX-13.2 Section 906 Certification of CFOEX-15.1 Consent of Deloitte & Co. S.R.L.EX-15.2 Consent of Deloitte & Touche LLPEX-15.3 Consent of Grant ThorntonEX-15.4 Consent of Morrison, Brown, Argiz & Farra, LLPEX-15.5 Consent of McClain & Company L.C.




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INTRODUCTION
    
    
    El Sitio, Inc., which we refer to as El Sitio;
    
    1945 Carlton Investments LLC and 1947 Carlyle Investments LLC, which are the
assignees of Newhaven Overseas Corp. and members of the Cisneros Group, which we
sometimes refer to as 1945 Carlton and 1947 Carlyle, respectively;
    
    Hicks, Muse, Tate & Furst Latin America Fund, L.P.; Hicks, Muse, Tate & Furst Latin
America Private Fund, L.P.; and HMLA 1-SBS Coinvestors, L.P., which are funds
affiliated with Hicks, Muse, Tate & Furst Incorporated, which together with Davivo
International, HMTF Holdings, and their affiliated Funds, we sometimes collectively
refer to as Hicks Muse; and
    
    Ibero-American Media Partners II, Ltd. which we refer to as Ibero-American Media
Partners, which was controlled by members of the Cisneros Group and funds affiliated
with Hicks Muse.
   
 PART I
 
 Item 1.
    
    Identity of Directors, Senior Management and Advisers
Not Applicable
 
 Item 2.
    
    Offer Statistics and Expected Timetable
Not Applicable
 
 Item 3.
    
    Key Information
 
 A.
    
    Selected Financial Data
 Selected Financial Data
  1




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Consolidated Statements of Income and Comprehensive Income Data
for the Years Ended December 31:
 2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(In thousands of U.S. dollars)Total net revenues
    
    $
    13,056
    
    
    $
    21,228
    
    
    $
    19,136
    
    
    $
    22,396
    
    
    $
    26,413Total operating expenses
    
    
    (22,662
    )
    
    
    (29,536
    )
    
    
    (25,511
    )
    
    
    (28,322
    )
    
    
    (28,845
    )Operating loss
    
    
    (9,606
    )
    
    
    (8,308
    )
    
    
    (6,375
    )
    
    
    (5,926
    )
    
    
    (2,432
    )Other (expense) income
    
    
    (2,068
    )
    
    
    632
    
    
    
    777
    
    
    
    1,486
    
    
    
    1,025Equity in (losses) earnings from
unconsolidated affiliates and related
transactions
    
    
    (6,745
    )
    
    
    367
    
    
    
    245
    
    
    
    (2,593
    )
    
    
    (313
    )(Provision) benefit for income taxes
    
    
    34
    
    
    
    (971
    )
    
    
    (471
    )
    
    
    296
    
    
    
    (233
    )Minority interest
    
    
    
    
    
    
    27
    
    
    
    267
    
    
    
    267
    
    
    
    (71
    )Net loss from continuing operations
    
    
    (18,385
    )
    
    
    (8,253
    )
    
    
    (5,557
    )
    
    
    (6,470
    )
    
    
    (2,024
    )Discontinued operations
    
    
    (120,881
    )
    
    
    16,196
    
    
    
    12,247
    
    
    
    12,702
    
    
    
    14,041Net (loss) income
    
    $
    (139,266
    )
    
    $
    7,943
    
    
    $
    6,690
    
    
    $
    6,232
    
    
    $
    12,017Net loss from continuing operations
per common shareBasic
    
    $
    (0.98
    )
    
    $
    (0.46
    )
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.10
    )Diluted
    
    $
    (0.98
    )
    
    $
    (0.46
    )
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.10
    )Net (loss) income per common shareBasic
    
    $
    (7.46
    )
    
    $
    0.42
    
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.57Diluted
    
    $
    (7.46
    )
    
    $
    0.42
    
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.57
 Consolidated Balance Sheet Data
as of December 31:
 2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(In thousands of U.S. dollars)Cash and cash equivalents
    
    $
    3,697
    
    
    $
    4,750
    
    
    $
    4,491
    
    
    $
    19,716
    
    
    $
    14,183Total assets (1)
    
    
    155,922
    
    
    
    157,192
    
    
    
    169,949
    
    
    
    167,997
    
    
    
    165,755Working capital (1)
    
    
    (11,064
    )
    
    
    (1,553
    )
    
    
    11,342
    
    
    
    18,497
    
    
    
    32,051Total long-term liabilities
    
    
    1,109
    
    
    
    466
    
    
    
    3,616
    
    
    
    
    
    
    
    Minority interest
    
    
    1,208
    
    
    
    1,191
    
    
    
    562
    
    
    
    293
    
    
    
    360Shareholders equity
    
    
    3,195
    
    
    
    9,993
    
    
    
    22,603
    
    
    
    33,101
    
    
    
    47,533Total common shares
    
    
    18,678
    
    
    
    19,407
    
    
    
    20,313
    
    
    
    20,486
    
    
    
    21,651
 
 (1)
    
    For 2002, 2003, 2004, 2005 and 2006, includes assets and liabilities of discontinued
operations. 2




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B.
    
    Capitalization and IndebtednessNot Applicable
 
 C.
    
    Reasons for the Offer and Use of ProceedsNot Applicable
 
 D.
    
    Risk Factors
  RISKS RELATED TO OUR BUSINESS
 We depend on a limited number of pay television system operators for a significant portion of
our revenues and the loss of any of our major pay television system operators or renegotiation of
existing contractual terms could significantly reduce our revenues.
  Members of the Cisneros Group and Hicks Muse control Claxson, which could inhibit or cause
potential changes of control of Claxson.
   Hicks Muse and members of the Cisneros Group could have interests in other businesses which
conflict with ours.
   3




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Competition in the media industry is intense and we expect it to increase significantly so that
any failure by us to compete successfully would adversely affect our financial performance.
   Our businesses involve risks of liability claims for media content, which could result in
significant costs.
  
    
    defamation;
    
    negligence;
    
    copyright, patent or trademark infringement; and
    
    other claims based on the nature and content of the materials distributed.
  The nature of our business and our reliance on intellectual property and other proprietary
rights subjects us to the risk of significant litigation.
   4




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Changes in governmental regulation could reduce our revenues, increase our operating expenses
and expose us to significant liabilities.
  
    
    Adult content. Regulation of adult content could prevent us from making our content
available in various jurisdictions or otherwise have a material adverse effect on our
business, financial condition or results of operations. Regulation aimed at limiting
minors access to adult content could also increase our cost of operations and
introduce technological challenges, such as by requiring development and implementation
of age verification systems.
    
    Internet. Various governmental agencies are considering a number of legislative and
regulatory proposals that may lead to laws or regulations concerning various aspects of
the Internet, including online content, intellectual property rights, user privacy,
taxation, access charges, liability for third-party activities and jurisdiction.
Regulation of the Internet could materially adversely affect our business, financial
condition or results of operations by reducing the overall use of the Internet,
reducing the demand for our services or increasing our cost of doing business.
 El Sitio, one of our wholly-owned subsidiaries, is a defendant in several civil securities cases
arising out of its initial public offering, which could result in significant litigation expense
and, if not decided in its favor, damage payments to the plaintiffs.
  We intend to take the Company private. Failure to complete such transaction will result in the
continuation of the incurrence of substantial accounting and legal costs in order to comply with
the internal control over financial reporting requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, as codified by Item 308 of Regulation S-K, and we may experience a loss of investor
confidence, and a decrease in the market price of our Class A common shares, if we are unable to so
comply.
   5




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RISKS RELATED TO LATIN AMERICA
    
    
    the risk of expropriation, nationalization, war, revolutions, border disputes,
renegotiation or modification of existing contracts, import, export and transportation
regulations and tariffs;
    
    exchange controls, currency fluctuations and other uncertainties arising out of
foreign government sovereignty over our international operations;
    
    taxation policies, including royalty and tax increases and retroactive tax claims;
    
    laws and policies of the United States affecting foreign trade, taxation and
investment; and
    
    the possibilities of being subjected to the exclusive jurisdiction of foreign courts
in connection with legal disputes and the inability to subject foreign persons to the
jurisdiction of courts in the United States.
 RISKS RELATED TO OUR CLASS A COMMON SHARES
 Our Class A common shares are not listed on any national exchange. Therefore, it may be more
difficult for investors to trade in our Class A common shares.
  Our shareholders may face difficulties in protecting their interests because we are a British
Virgin Islands international business company.
  6




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You may experience difficulty in enforcing civil liabilities against us.
  We are a foreign private issuer and you will receive less information about us than you would
from a domestic U.S. corporation.
  
 Item 4.
    
    Information on the Company
 
 A.     History and Development of the Company
   
 B.     Business Overview
    7




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8




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Year Ended December 31, 2006
 Broadband and
    
    
    
    
    
    
    DiscontinuedPay Television
    
    
    Internet
    
    
    Corporate
    
    
    Operations
    
    
    TotalTotal net revenues
    
    $
    25,428
    
    
    $
    694
    
    
    $
    291
    
    
    $
    
    
    
    $
    26,413Operating (Loss) Income
    
    
    727
    
    
    
    293
    
    
    
    (3,452
    )
    
    
    
    
    
    
    (2,432
    )Net (Loss) Income
    
    
    194
    
    
    
    543
    
    
    
    (2,761
    )
    
    
    14,041
    
    
    
    12,017Cash Flows from Operating Activities
    
    
    4,897
    
    
    
    79
    
    
    
    (412
    )
    
    
    7,802
    
    
    
    12,366Cash Flows from Investing Activities
    
    
    (1,304
    )
    
    
    (151
    )
    
    
    (1,906
    )
    
    
    560
    
    
    
    (2,801
    )Cash Flows from Financing Activities
    
    $
    (924
    )
    
    $
    100
    
    
    $
    (5,678
    )
    
    $
    (8,213
    )
    
    $
    (14,715
    )
 Year Ended December 31, 2005
 Broadband and
    
    
    
    
    
    
    DiscontinuedPay Television
    
    
    Internet
    
    
    Corporate
    
    
    Operations
    
    
    TotalTotal net revenues
    
    $
    21,998
    
    
    $
    95
    
    
    $
    303
    
    
    $
    
    
    
    $
    22,396Operating Loss
    
    
    (1,592
    )
    
    
    (576
    )
    
    
    (3,758
    )
    
    
    
    
    
    
    (5,926
    )Net (Loss) Income
    
    
    (4,153
    )
    
    
    309
    
    
    
    (2,626
    )
    
    
    12,702
    
    
    
    6,232Cash Flows from Operating Activities
    
    
    3,782
    
    
    
    (278
    )
    
    
    4,617
    
    
    
    8,607
    
    
    
    16,728Cash Flows from Investing Activities
    
    
    (1,887
    )
    
    
    637
    
    
    
    (710
    )
    
    
    9,216
    
    
    
    7,256Cash Flows from Financing Activities
    
    $
    (1,289
    )
    
    $
    (60
    )
    
    $
    (3,490
    )
    
    $
    (1,337
    )
    
    $
    (6,176
    )
 Year Ended December 31, 2004
 Broadband and
    
    
    
    
    
    
    DiscontinuedPay Television
    
    
    Internet
    
    
    Corporate
    
    
    Operations
    
    
    TotalTotal net revenues
    
    $
    18,985
    
    
    $
    101
    
    
    $
    50
    
    
    $
    
    
    
    $
    19,136Operating Loss
    
    
    (2,051
    )
    
    
    (397
    )
    
    
    (3,927
    )
    
    
    
    
    
    
    (6,375
    )Net (Loss) Income
    
    
    (1,454
    )
    
    
    (96
    )
    
    
    (4,007
    )
    
    
    12,247
    
    
    
    6,690Cash Flows from Operating Activities
    
    
    2,685
    
    
    
    435
    
    
    
    539
    
    
    
    454
    
    
    
    4,113Cash Flows from Investing Activities
    
    
    (3,880
    )
    
    
    (3
    )
    
    
    (1,960
    )
    
    
    957
    
    
    
    (4,886
    )Cash Flows from Financing Activities
    
    $
    (1,835
    )
    
    $
    (144
    )
    
    $
    3,691
    
    
    $
    (1,414
    )
    
    $
    298
 Business Strategy
  
    
    Increase Subscription Revenues from a Portfolio of Leading Pay Television Brands. We
expect to increase subscriber-based revenues by increasing penetration within the
systems that already carry our Playboy TV Latin America channel package, and by
benefiting from anticipated growth in pay television subscribers in Ibero America.
    
    Develop Additional Revenue Streams. We intend to capitalize on our content
production to develop additional sources of revenue, including, among others, the sale
or license of content through existing and new media, such as broadband and/or mobile
devices.
    
    Exploit Market Opportunities for Growth Through Strategic Alliances. Our strategy
includes geographic expansion of our existing pay television business, as well as
increasing penetration in those geographic markets in which we currently operate
primarily through strategic alliances.
 9




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
    
    Leverage Strategic Relationships. We believe that our relationships with the
Cisneros Group and Hicks Muse, our principal shareholders, provide us with competitive
advantages. We draw upon the relationships, regional expertise and, in the past have
drawn on the extensive media assets, of our principal shareholders to enhance our
content offerings and facilitate access to distribution and technology platforms.
 PAY TELEVISION BUSINESS
   Playboy TV Latin America Joint Venture
   
    
    transferred our 80.1% interest in Playboy TV International (outside of Latin
America, Spain and Portugal) to Playboy Enterprises, Inc.;
    
    contributed the Venus channel to Playboy TV Latin America;
    
    transferred all of our preferred shares of Playboy.com, Inc. to Playboy Enterprises,
Inc;
    
    were released from our capital commitments to Playboy TV International; and
    
    revised the terms for our continued relationship in Latin America, Spain and
Portugal by retaining through a wholly-owned subsidiary an 81% interest in Playboy TV
Latin America and now controlling the management of this joint venture.
   10




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Lifestyle TV
 
    
    a ten year extension to the term of the joint venture and related agreements to end
in December 2022;
    
    a grant by an affiliate of Playboy Enterprises, Inc. of the rights to use the
Playboy brand in relation to the Lifestyle TVchannel in television and wireless media
in Latin America, Spain and Portugal. Playboy TV Latin America pays an additional
license fee of 6% of the net revenues generated from the exploitation of the Lifestyle
TV channel;
    
    the amendment of Playboy Enterprises, Inc.s buy up options so that Playboy
Enterprises, Inc. has now an option to increase its ownership interest up to 49.9% in
the joint venture at any time prior to December 2022. In addition, Playboy Enterprises,
Inc. has an option to buy the remaining 50.1% of the joint venture during the ten-year
period from December 23, 2012 to December 23, 2022, provided that the 49.9% option has
been exercised. Both options are at the fair market value at the time of exercise;
    
    a loan of up to U.S.$5.0 million to be made by Claxson over time for the development
of the Playboy Lifestyle channel through a Promissory Note issued by a subsidiary of
Playboy TV Latin America created to own and operate the Lifestyle TVchannel; and
    
    the right until September 2008 to negotiate with Playboy Enterprises, Inc. the
launch of the Lifestyle TVchannel in the United States.
    Playboy TV Latin America Channels
 Playboy TV
 Venus
 G-Channel
 11




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Private Gold
 Lifestyle TV
 Production Operations
 Claxson Playout, Inc., formerly known as The Kitchen, Inc .
 Pay Television Distribution
   Total Average Number of Subscribersas of December 31,2004
    
    
    2005
    
    
    2006(In thousands)Playboy TV
    
    
    371
    
    
    
    457
    
    
    
    446Venus
    
    
    199
    
    
    
    238
    
    
    
    254Private Gold
    
    
    31
    (1)
    
    
    165
    
    
    
    11G-Channel (only pay-per-view)
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
 
 (1)
    
    Subscriber for Spice Channel, later replaced by Private. Pay Television Revenue Sources
  Subscriber-Based Fees
 12




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Advertising Revenue Miss Playboy TV
Latin America and Iberia
 Production Services Revenue
 Other Revenues.
 Marketing
    Programming Sources
 Lifestyle TV
 13




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DMX Latin America
  Digital Latin America
  Pay television discontinued operations
  Space I.Sat Retro Infinito FTV MuchMusic HTV Cronica TV CM Venevision Continental Space I.Sat Retro MuchMusic HTV CM Infinito FTV Venevision
Continental Cronica TV
 BROADCAST RADIO BUSINESS
  14




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Broadcast Radio discontinued operations
  Radio Chile
 Radio Sarandi
 BROADBAND AND INTERNET BUSINESS
    Intellectual Property and Proprietary Rights
  15




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REGULATION
 Regulation of the Pay Television Industry in Latin America
    16




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Regulation of the Brazilian Pay Television Industry
    COMPETITION
    17




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C.     Organizational Structure
  
 18




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D.     Property, Plant and Equipment
 Properties
  Pay Television Facilities
   Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   Critical Accounting Policies
  19




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Goodwill
  Allowance for Doubtful Accounts Receivable
 Programming Rights Accounting by Producers or
Distributors of Films,
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement
No. 109"
  Fair Value Measurements
 The Fair Value Option of Financial Assets and Financial
Liabilities
 20




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Less than
    
    
    1-3
    
    
    3-5
    
    
    More than1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases
    
    $
    5,567
    
    
    $
    9,010
    
    
    $
    7,823
    
    
    $
    14,678Purchase obligations
    
    
    6,481
    
    
    
    9,479
    
    
    
    9,897
    
    
    
    66,246Sublease agreements
    
    
    1,097
    
    
    
    1,303
    
    
    
    
    
    
    
    
   Introduction to Operating Results
 Net Revenues
  Subscriber-Based Fees
   Advertising Revenues
  21




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##### Table of Contents



Production Services Revenues
  Other Revenues
  Revenues from Related Parties
  Operating Expenses
  
    
    product, content and technology;
    
    marketing and sales;
    
    corporate and administration;
    
    depreciation and amortization; and
    
    related parties.
 Product, Content and Technology Expenses
  Marketing and Sales Expenses
 Corporate and Administration Expenses
 22




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##### Table of Contents



Depreciation and Amortization Expenses
 
    
    buildings 50 years;
    
    computers, software and other equipment 3-10 years;
    
    leasehold improvements 5-7 years; and
    
    furniture, fixtures and other fixed assets 5-10 years.
 Expenses from related parties
 Other Income (Expense)
 Discontinued Operations
 23




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##### Table of Contents



Year Ended December 31, 2005 Compared to Year Ended December 31, 2006
  Year Ended December 31,(1)2005
    
    
    2006Broadband
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BroadbandPay
    
    
    and
    
    
    
    
    
    
    
    
    
    
    Pay
    
    
    andTelevision
    
    
    Internet
    
    
    Corporate
    
    
    Total
    
    
    Television
    
    
    Internet
    
    
    Corporate
    
    
    Total(in thousands of U.S. dollars)Net revenues:Subscriber-based fees
    
    $
    16,447
    
    
    $
    
    
    
    $
    
    
    
    $
    16,447
    
    
    $
    18,369
    
    
    $
    
    
    
    $
    
    
    
    $
    18,369Advertising
    
    
    47
    
    
    
    24
    
    
    
    
    
    
    
    71
    
    
    
    340
    
    
    
    115
    
    
    
    
    
    
    
    455Production services
    
    
    1,619
    
    
    
    
    
    
    
    
    
    
    
    1,619
    
    
    
    2,203
    
    
    
    
    
    
    
    
    
    
    
    2,203Other
    
    
    3,885
    
    
    
    71
    
    
    
    303
    
    
    
    4,259
    
    
    
    4,516
    
    
    
    579
    
    
    
    291
    
    
    
    5,386Total revenues net
    
    
    21,998
    
    
    
    95
    
    
    
    303
    
    
    
    22,396
    
    
    
    25,428
    
    
    
    694
    
    
    
    291
    
    
    
    26,413Operating expenses:Product, content and technology
    
    
    13,081
    
    
    
    149
    
    
    
    (70
    )
    
    
    13,160
    
    
    
    14,207
    
    
    
    894
    
    
    
    17
    
    
    
    15,118Marketing and sales
    
    
    6,272
    
    
    
    327
    
    
    
    350
    
    
    
    6,949
    
    
    
    6,902
    
    
    
    (725
    )
    
    
    220
    
    
    
    6,397Corporate and administration
    
    
    3,485
    
    
    
    195
    
    
    
    3,781
    
    
    
    7,461
    
    
    
    3,073
    
    
    
    174
    
    
    
    3,505
    
    
    
    6,752Depreciation and amortization
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    752
    
    
    
    519
    
    
    
    58
    
    
    
    1
    
    
    
    578Total operating expenses
    
    
    23,590
    
    
    
    671
    
    
    
    4,061
    
    
    
    28,322
    
    
    
    24,701
    
    
    
    401
    
    
    
    3,743
    
    
    
    28,845Operating (loss) income
    
    $
    (1,592
    )
    
    $
    (576
    )
    
    $
    (3,758
    )
    
    $
    (5,926
    )
    
    $
    727
    
    
    $
    293
    
    
    $
    (3,452
    )
    
    $
    (2,432
    )
 
 (1)
    
    Each line item includes revenues and expenses from related parties. Net Revenues
       24




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##### Table of Contents



Operating Expenses
 Product, Content and Technology Expenses
    Marketing and Sales Expenses
    Corporate and Administration Expenses
   25




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##### Table of Contents



Depreciation and Amortization Expenses
  Other Income (Expense)
  Provision for Income Taxes
  Discontinued Operations
   26




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##### Table of Contents



Year Ended December 31, 2004 Compared to Year Ended December 31, 2005
  Year Ended December 31,(1)2004
    
    
    2005Broadband
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BroadbandPay
    
    
    and
    
    
    
    
    
    
    
    
    
    
    Pay
    
    
    andTelevision
    
    
    Internet
    
    
    Corporate
    
    
    Total
    
    
    Television
    
    
    Internet
    
    
    Corporate
    
    
    Total(in thousands of U.S. dollars)Net revenues:Subscriber-based fees
    
    $
    14,891
    
    
    $
    
    
    
    $
    
    
    
    $
    14,891
    
    
    $
    16,447
    
    
    $
    
    
    
    $
    
    
    
    $
    16,447Advertising
    
    
    20
    
    
    
    56
    
    
    
    
    
    
    
    76
    
    
    
    47
    
    
    
    24
    
    
    
    
    
    
    
    71Production services
    
    
    887
    
    
    
    
    
    
    
    
    
    
    
    887
    
    
    
    1,619
    
    
    
    
    
    
    
    
    
    
    
    1,619Other
    
    
    3,187
    
    
    
    45
    
    
    
    50
    
    
    
    3,282
    
    
    
    3,885
    
    
    
    71
    
    
    
    303
    
    
    
    4,259Total revenues net
    
    
    18,985
    
    
    
    101
    
    
    
    50
    
    
    
    19,136
    
    
    
    21,998
    
    
    
    95
    
    
    
    303
    
    
    
    22,396Operating expenses:Product, content and technology
    
    
    9,964
    
    
    
    363
    
    
    
    270
    
    
    
    10,597
    
    
    
    13,081
    
    
    
    149
    
    
    
    (70
    )
    
    
    13,160Marketing and sales
    
    
    5,475
    
    
    
    54
    
    
    
    444
    
    
    
    5,973
    
    
    
    6,272
    
    
    
    327
    
    
    
    350
    
    
    
    6,949Corporate and administration
    
    
    4,369
    
    
    
    74
    
    
    
    3,254
    
    
    
    7,697
    
    
    
    3,485
    
    
    
    195
    
    
    
    3,781
    
    
    
    7,461Depreciation and amortization
    
    
    1,228
    
    
    
    7
    
    
    
    9
    
    
    
    1,244
    
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    752Total operating expenses
    
    
    21,036
    
    
    
    498
    
    
    
    3,977
    
    
    
    25,511
    
    
    
    23,590
    
    
    
    671
    
    
    
    4,061
    
    
    
    28,322Operating loss
    
    $
    (2,051
    )
    
    $
    (397
    )
    
    $
    (3,927
    )
    
    $
    (6,375
    )
    
    $
    (1,592
    )
    
    $
    (576
    )
    
    $
    (3,758
    )
    
    $
    (5,926
    )
 
 (1)
    
    Each line item includes revenues and expenses from related parties. Net Revenues
       27




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##### Table of Contents



Operating Expenses
 Product, Content and Technology Expenses
    Marketing and Sales Expenses
    Corporate and Administration Expenses
    28




---



##### Table of Contents



Depreciation and Amortization
  Other Income (Expense)
  Provision for Income Taxes
  Discontinued Operations
   Liquidity and Capital Resources
  29




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##### Table of Contents



30




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##### Table of Contents



Research and Development, Patents and Licenses, etc.
  Trend Information
   31




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 6. Directors, Senior Management and Employees
 
 A. Directors and Senior Management
  Name
    
    Age
    
    Director SinceRoberto Vivo-Chaneton
    
    
    54
    
    
    September 21, 2001Carlos Bardasano
    
    
    62
    
    
    September 21, 2001Eric C. Neuman
    
    
    63
    
    
    September 21, 2001Steven Bandel
    
    
    54
    
    
    April 7, 2006Frank Feather
    
    
    64
    
    
    September 21, 2001John A. Gavin
    
    
    76
    
    
    September 21, 2001Gabriel Montoya
    
    
    38
    
    
    April 30, 2002José Antonio Ríos
    
    
    61
    
    
    September 21, 2001Emilio Romano
    
    
    42
    
    
    November 12, 2001Ricardo Verdaguer
    
    
    56
    
    
    September 21, 2001Luis Villanueva
    
    
    50
    
    
    April 30, 2002Christina Vest
    
    
    36
    
    
    November 30, 2005
   Executive Officers
  Current PositionName
    
    Age
    
    Position
    
    Held SinceRoberto Vivo-Chaneton
    
    
    54
    
    
    Chairman of the Board and Chief Executive
Officer
    
    September 21, 2001Marcelo Zuñiga
    
    
    57
    
    
    Executive DirectorIbero American Radio Chile
    
    August 30, 2002José Antonio Ituarte
    
    
    47
    
    
    Chief Operation Officer Broadband and Internet
    
    November 1, 2007Amaya Ariztoy
    
    
    39
    
    
    Senior Vice President and General Counsel
    
    September 21, 2001Mariano Varela
    
    
    40
    
    
    Executive Vice President and General Manager
of Playboy TV Latin America
    
    May 1, 2007Fernando Gastón
    
    
    39
    
    
    Senior Vice President Channels
    
    Since December 1,
2006 through August
9, 2007Ezequiel Paz
    
    
    33
    
    
    Chief Financial Officer
    
    November 1, 2007Ralph Haiek
    
    
    50
    
    
    Chief Strategy Officer  Pay TV
    
    Since January 1,
2006 through May
30, 2007
 32




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##### Table of Contents



Biographical Information
 Directors
 Roberto Vivo-Chaneton
 Carlos Bardasano
 Eric C. Neuman
 Steven Bandel
 Frank Feather
 33




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##### Table of Contents



John A. Gavin
 Gabriel Montoya
 José Antonio Ríos
 Emilio Romano
 Ricardo Verdaguer
 34




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##### Table of Contents



Christina Vest
 Luis Villanueva
 Executive Officers
 José Antonio Ituarte
 Marcelo Zuñiga
 Amaya Ariztoy
 Mariano Varela
 35




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##### Table of Contents



Fernando Gastón
 Ezequiel Paz
 Ralph Haiek
 
 B. Compensation
     36




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##### Table of Contents



Options to Purchase Securities from Registrant or Subsidiaries
 2001 Share Incentive Plan
  Administration
  Shares Subject to Plan
  Share Options
    37




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##### Table of Contents



Restricted Shares
    Change in Control
  
    
    any acquisition by a person, other than a member or affiliate of the Cisneros Group,
an affiliate of Hicks Muse or an affiliate of the El Sitio founders, of more than 50%
of our outstanding share capital or voting securities, in each case subject to
specified exceptions;
    
    a change in the majority of the members of the board of directors, unless approved
by the incumbent directors;
    
    the consummation of certain mergers or restructurings, or certain sales of all or
substantially all of our assets; or
    
    approval by our shareholders of a liquidation, dissolution or sale of substantially
all of our assets.
 Amendments
  38




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##### Table of Contents



Grant of Stock Options
  Manager
    
    Business
    
    
    Stock OptionsRoberto Vivo-Chaneton
    
    Corporate
    
    
    403,565José Antonio Ituarte
    
    Corporate
    
    
    109,112
  Grant of Restricted Shares to Cisneros Television Group Employees
  
 C. Board Practices
 Directors
  Members of Management Body
  Benefits Upon Termination of Employment
   39




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##### Table of Contents



Committees of the Board of Directors
  Executive Committee
  
    
    strategic initiatives;
    
    material transactions and matters; and
    
    matters to be presented to the full board of directors and board committees; and
such other matters as the board of directors may determine from time to time.
  Audit Committee
  
    
    is responsible for selecting and overseeing the engagement of our independent
auditors;
    
    reviews the results and scope of the audit and other services provided by our
independent registered public accounting firm;
    
    reviews our financial statements;
    
    reviews and evaluates our internal control functions and financial reporting
process; and
    
    review and approve all related party transactions.
  Compensation Committee
  
    
    executive compensation;
    
    salaries and incentive compensation for our employees and consultants; and
    
    the administration of our share option plans.
  40




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##### Table of Contents



D. Employees
        
 E. Share Ownership
  
 Item 7. Major Shareholders and Related Party Transactions
 
 A. Major Shareholders
 Ownership of Major Shareholders
  
    
    each person or entity which, to our knowledge, owns beneficially more than 5% of the
outstanding shares;
    
    each of our directors and executive officers; and
    
    all of our directors and executive officers as a group.
  Percentage of Class ANumber of Class A
    
    
    Common Shares
    
    
    Number of Class C
    
    
    Number of Class F
    
    
    Number of Class HBeneficial Owner
    
    Common Shares
    
    
    (%)(1)
    
    
    Common Shares
    
    
    Common Shares
    
    
    Common Shares1945 Carlton Investments LLC(2)(12)
    
    
    4,178,846
    
    
    
    19.2
    
    
    
    
    
    
    
    11947 Carlyle Investments LLC(3)(12)
    
    
    4,358,058
    
    
    
    20.0
    
    
    
    
    
    
    
    1Ricardo J. Cisneros(4)(12)
    
    
    4,358,058
    
    
    
    20.0Gustavo A. Cisneros(5)(12)
    
    
    4,178,846
    
    
    
    19.2Hicks Muse(6)
    
    
    7,769,901
    
    
    
    35.6
    
    
    
    
    
    
    
    
    
    
    
    1Luis H Moreno III(7)(12) (13)
    
    
    639,266
    
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    1
 41




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##### Table of Contents



Percentage of Class ANumber of Class A
    
    
    Common Shares
    
    
    Number of Class C
    
    
    Number of Class F
    
    
    Number of Class HBeneficial Owner
    
    Common Shares
    
    
    (%)(1)
    
    
    Common Shares
    
    
    Common Shares
    
    
    Common SharesRoberto Vivo-Chaneton(8)(12)(13)
    
    
    1,342,019
    
    
    
    6.0
    
    
    
    
    
    
    
    
    
    
    
    6Carlos Bardasano
    
    
    5,000
    
    
    
    *Eric C. Neuman
    
    
    7,532
    
    
    
    *Steven Bandel (9)
    
    
    65
    
    
    
    *Gabriel Montoya
    
    
    5,865
    
    
    
    *John A. Gavin
    
    
    5,000
    
    
    
    *Ricardo Verdaguer
    
    
    5,000
    
    
    
    *Frank Feather
    
    
    5,000
    
    
    
    *José Antonio Ríos
    
    
    5,000
    
    
    
    *Emilio Romano
    
    
    5,000
    
    
    
    *Luis Villanueva
    
    
    
    
    
    
    *Christina Vest
    
    
    
    
    
    
    *Ralph Haiek
    
    
    278,672
    
    
    
    1.3José Antonio Ituarte (10)
    
    
    190,772
    
    
    
    *Amaya Ariztoy
    
    
    800
    
    
    
    *Mariano Varela
    
    
    2,433
    
    
    
    *Marcelo Zuñiga
    
    
    
    
    
    
    *Ezequiel Paz
    
    
    625
    
    
    
    *All directors and executive officers as a group
(18 persons)
    
    
    1,858,718
    
    
    
    8.3Black Horse Capital Advisors, LLC (11)
    
    
    2,230,805
    
    
    
    10.2
 
 *
    
    indicates less than 1%(1)
    
    Based on 21,808,290 shares of our Class A common shares outstanding as of
December 1, 2007 and calculated according to Rule 13(d)-3(d) of the
Securities Exchange Act of 1934. Under Rule 13d-3(d), shares not outstanding
which are subject to options, warrants, rights, or conversion privileges
exercisable within 60 days are deemed outstanding for the purpose of
calculating number and percentage owned by the holder of the options,
warrants, rights or conversion privileges but not deemed outstanding for the
purpose of calculating the percentage owned by any other person listed.(2)
    
    Excludes 4,358,057 Class A common shares owned by 1947 Carlyle Investments
LLC, of which 1945 Carlton Investments LLC disclaims beneficial ownership.
1945 Carlton Investments LLC is indirectly owned by a trust established by
Gustavo A. Cisneros primarily for the benefit of himself and members of his
family. Gustavo A. Cisneros disclaims beneficial ownership of the shares
owned by 1947 Carlyle Investments LLC. Both 1945 Carlton Investments LLC and
1947 Carlyle Investments LLC are members of the Cisneros Group of Companies.(3)
    
    Excludes 4,178,846 Class A common shares owned by 1945 Carlton Investments
LLC, of which 1947 Carlyle Investments LLC disclaims beneficial ownership.
1947 Carlyle Investments LLC is indirectly owned by a trust established by
Ricardo J. Cisneros primarily for the benefit of himself and members of his
family. Ricardo J. Cisneros disclaims beneficial ownership of the shares to
be owned by 1945 Carlton Investments LLC. Both 1947 Carlyle Investments LLC
and 1945 Carlton Investments LLC are members of the Cisneros Group of
Companies.(4)
    
    Includes 4,358,057 Class A common shares owned by 1947 Carlyle Investments
LLC. Ricardo J. Cisneros disclaims beneficial ownership of the shares to be
owned by 1945 Carlton Investments LLC.(5)
    
    Includes 4,178,846 Class A common shares owned by 1945 Carlton Investments
LLC. Gustavo A. Cisneros disclaims beneficial ownership of the shares owned
by 1947 Carlyle Investments, LLC. 42




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##### Table of Contents



(6)
    
    Includes:
    
    5,589,525 Class A common shares and 1 Class H Common Shares, held of record by Hicks, Muse, Tate & Furst Latin America Fund, L.P.;
    
    1,014,813 Class A common shares held of record by Hicks, Muse, Tate & Furst Latin America Private Fund, L.P.;
    
    830,259 Class A common shares held of record by Davivo International Ltd;
    
    217,360 Class A common shares held of record by HMLA 1-SBS Coinvestors, L.P.;
    
    107,945 Class A common shares held of record by HMTF Holdings;
    
    10,000 Class A common shares held of record by Hicks, Muse Co. Partners, L.P.
 John R. Muse is the sole shareholder, director and an executive officer of
Hicks, Muse, Latin America Fund I Incorporated, which is the ultimate general
partner of Hicks, Muse Tate & Furst Latin America Fund, L.P.; Hicks, Muse
Tate & Furst Latin America Private Fund, L.P. and HMLA 1-SBS Coinvestors,
L.P. Accordingly, Mr. Muse may be deemed to be the beneficial owner of Class
A common shares held by Hicks, Muse, Tate & Furst Latin America Fund, L.P.;
Hicks, Muse, Tate & Furst Latin America Private Fund, L.P.; andHMLA 1  SBS Coinvestors, L.P. Mr. Muse, Jack D. Furst and Thomas O. Hicks
are members of a three-person committee which exercises voting and
dispositive and/or voting power over the shares held by Hicks Muse. No
single member of the committee has dispositive and/or voting power over the
shares held by Hicks Muse. As a result of the foregoing, each of Messrs.
Muse, Furst and Hicks may be deemed to beneficially own all or a portion of
the Class A common shares held by Hicks Muse as described above. Each of
Messrs. Muse, Furst and Hicks disclaims the existence of a group and
disclaims beneficial ownership of Class A common shares not owned of record
by him.(7)
    
    Includes:489,417 Class A common shares held of record by SLI.com Inc.2,285 Class A common shares held of record by Gallia Enterprises Ltd.100,859 Class A common shares held of record by Luis H. Moreno III26,700 Class A common shares held of record by Interamerican Technology, S.A.20,005 Class A common shares held of record by Bulls & Bears Enterprises Inc.(8)
    
    Includes 6,250 Class A common shares issued to Sarandi Comunicaciones S.A.,
which is also an affiliate of Mr. Vivo-Chaneton. Mr. Vivo-Chaneton disclaims
beneficial ownership of all shares owned by Sarandi Comunicaciones S.A.
Includes options to acquire 403,565 shares of Class A common shares granted
to Mr. Vivo-Chaneton under the Claxson 2001 Share Incentive Plan which are
currently exercisable.(9)
    
    Includes 62 Class A common shares owned by Mr. Bandels spouse. Mr. Bandel
disclaims beneficial ownership of Mr. Bandels spouses shares.(10)
    
    Includes options to acquire 109,112 shares of Class A common shares granted
to Mr. Ituarte under the Claxson 2001 Share Incentive Plan which are
currently exercisable.(11)
    
    Black Horse Capital Advisors, LLC and its affiliates Black Horse Capital
Offshore Ltd., Black Horse Capital LP and Black Horse Capital (QP) LP are the
beneficial owners of 2,230,805 Class A common shares according to a Form 4
filed by Black Horse Capital Advisors, LLC on November 16, 2007.(12)
    
    Certain shareholders entered into an agreement dated as of September 21, 2001
(the Holdco Agreement). Pursuant to Section 2.1 of the Holdco Agreement,
the Company will not propose and the board of directors of the Company will
not approve or recommend, any amendment of the Amended and Restated
Memorandum of Association or Amended and Restated Articles of Association of
the Company which materially adversely affects the rights of the shareholder
under the Holdco Agreement, without the prior written consent of the
shareholder.(13)
    
    Each holder of Class F Common Shares, which is a party to the Holdco
Agreement, must consult with, and take into account the views of Luis H.
Moreno, III in exercising the voting rights of those shares. 43




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Voting
  
 B. Related Party Transactions
     44




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##### Table of Contents




    
    the joint provision of a paid, personal listing and matchmaking service under the
brand Cupido VIP;
    
    El Sitios operation of virtual, web-based interactive chat rooms to be used by
America On Line Latin Americas subscribers and general Internet users under the AOL
and El Sitio brands; and
    
    the launch of a new web-based personal listing service, provided to general Internet
users for a monthly fee, on a subscription basis, leveraging the brand Cupido, and
combining the databases of Amor and Cupido existing services to create a new joint
database.
  45




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46




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47




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##### Table of Contents



C. Interests of Experts and Counsel
  
 Item 8. Financial Information
 
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
   48




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##### Table of Contents



In re Initial Public Offering Securities Litigation
    49




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##### Table of Contents



Dividend Policy
  
 B. Significant Changes
  
 Item 9. The Offer and Listing
 
 A. Offer and Listing Details
  Fiscal Year Ended
    
    Sales PricesDecember 31,
    
    High
    
    Low2002
    
    
    U.S.$1.4000
    
    
    
    U.S.$0.06002003
    
    
    3.0500
    
    
    
    0.16002004
    
    
    6.3500
    
    
    
    2.50002005
    
    
    5.8000
    
    
    
    3.15002006
    
    
    10.7500
    
    
    
    2.3000
 Sales PricesHigh
    
    Low2005First Quarter
    
    
    U.S.$5.8000
    
    
    
    U.S.$3.4500Second Quarter
    
    
    5.5000
    
    
    
    3.7000Third Quarter
    
    
    4.7500
    
    
    
    3.6500Fourth Quarter
    
    
    4.7500
    
    
    
    3.15002006First Quarter
    
    
    U.S.$4.2500
    
    
    
    U.S.$3.0500Second Quarter
    
    
    4.2500
    
    
    
    3.5000Third Quarter
    
    
    4.4200
    
    
    
    2.3000Fourth Quarter
    
    
    10.7500
    
    
    
    3.25002007First Quarter
    
    
    10.7500
    
    
    
    9.0000Second Quarter
    
    
    12.7500
    
    
    
    10.3000Third Quarter
    
    
    12.6000
    
    
    
    12.0000
 50




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##### Table of Contents



Sale PricesHigh
    
    LowNovember 2007
    
    
    U.S.$12.2500
    
    
    
    U.S.$10.9000October 2007
    
    
    12.6000
    
    
    
    12.0000September 2007
    
    
    12.0000
    
    
    
    12.0000August 2007
    
    
    12.0000
    
    
    
    12.0000July 2007
    
    
    12.0000
    
    
    
    11.5000June 2007
    
    
    12.5000
    
    
    
    11.5000May 2007
    
    
    13.0500
    
    
    
    12.0000
 
 B. Plan of Distribution
  
 C Markets
  
 D. Selling Shareholders
  
 E. Dilution
  
 F. Expense of the Issue
  
 Item 10. Additional Information
 
 A.     Share Capital
  
 B.     Memorandum and Articles of Association
 Register
  51




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##### Table of Contents



Corporate Object and Purpose
  Board of Directors
    Rights, Preferences and Restrictions Attaching to Each Class of Shares
 Dividends
  Voting Rights
  
    
    four directors to be designated by 1945 Carlton/1947 Carlyle, as the holders of the
Class C common shares (Class C Group);
    
    one director designated by the holders of the Class F common shares (Class F Group);
    
    three directors to be designated by Hicks Muse, as the holder of the Class H common
share (Class H Group); and
    
    one director elected by a resolution of directors who shall also be the chief
executive officer of the company.
 52




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##### Table of Contents




    
    when the shareholder owns less than 25% of the outstanding common shares, the
shareholder would be able to designate two directors;
    
    when the shareholder owns less than 15% of outstanding common shares, the
shareholder could designate one director; and
    
    if the shareholder owns less than 3% of the outstanding common shares, the
shareholder would not have any right to designate directors to our board of directors.
   Rights to Share in Profits
  Redemption and Liquidation Rights
   Procedures to Change the Rights of Shareholders
  Ordinary and Extraordinary Shareholders Meeting
    53




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##### Table of Contents



Limitations to Own Securities
  Differences in Applicable Law
 Enforceability of Certain Civil Liabilities
    Availability of Representative Actions
  54




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##### Table of Contents



C. Material Contracts
  
 D. Exchange Controls
   
 E. Taxation
   British Virgin Islands Tax Considerations
  55




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##### Table of Contents



U.S. Federal Income Tax Considerations
  
    
    a citizen or resident alien individual of the United States,
    
    a corporation (or an entity treated as a corporation) organized under the law of the
United States, any State thereof or the District of Columbia,
    
    an estate the income of which is subject to U.S. federal income tax without regard
to its source or
    
    a trust if a court within the United States is able to exercise primary supervision
over the administration of the trust, and one or more United States persons have the
authority to control all substantial decisions of the trust, or the trust was in
existence on August 20, 1996 and properly elected to continue to be treated as a United
States person.
  Taxation of Dividends
    56




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##### Table of Contents



Taxation of Capital Gains
    Passive Foreign Investment Company Rules
   57




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##### Table of Contents



de minimis
 58




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##### Table of Contents



Information Reporting and Backup Withholding
   
 F. Dividends and Paying Agents
  
 G. Statement by Experts
  
 H. Documents on Display
 http://www.sec.gov
 
 I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
 Market Risks
  Exchange Rate Sensitivity
  59




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##### Table of Contents



Monetary Assets and Liabilities ExposureAs of December 31, 2006Monetary
    
    
    Monetary
    
    
    NetCountry
    
    Assets
    
    
    Liabilities
    
    
    ExposureArgentina
    
    $
    111
    
    
    $
    291
    
    
    $
    (180
    )Chile
    
    
    50
    
    
    
    9
    
    
    
    41Other (1)
    
    
    2,390
    
    
    
    451
    
    
    
    1,939Total
    
    $
    2,551
    
    
    $
    751
    
    
    $
    1,800
 
 (1)
    
    Primarily represents Spain.   
 Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
   60




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
    
    The implementation of an internal communication policy between our legal, finance
and accounting departments to properly obtain information about the non-routine
transactions.
    
    Corporate Accounting developed and communicated policies regarding our most
important accounting issues.
    
    Implementation of check-lists during the financial reporting preparation process
based on the principal accounting aspects to be considered in a closing of this kind.
    
    Hiring of an accounting firm to offer technical support in U.S. GAAP. We also
worked on a policy for the hiring of this kind of services, including control
procedures that our employees must put into practice on external services rendered.
 
 Item 16.
 
 A. Audit Committee Financial Expert
  
 B. Code of Ethics
  
 C. Principal Accountant Fees and Services
  Amount of FeesDescription of Fees
    
    2005
    
    
    2006(In thousands of U.S.Dollars)Audit Fees
    
    $
    496
    
    
    $
    783Audit-Related Fees.
    
    
    
    
    
    
    82Tax Fees
    
    
    97
    
    
    
    185All Other Fees
    
    
    
    
    
    
    Total
    
    $
    593
    
    
    $
    1,050
 Audit Fees
 Audit-Related Fees
 Tax Fees
 Other Fees
 
 D. Exemptions from the Listing Standards for Audit Committees
  
 E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  61




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##### Table of Contents






PART III





Item 17. Financial Statements







Item 18. Financial Statements







Item 19. Exhibits


(a)
    
    Index to Financial Statements.Report of Deloitte & Co. S.R.L.Report of Deloitte & Touche LLPReport of Grant ThorntonReport of Morrison, Brown, Argiz & Farra, LLPReport of McClain & Company L.C.(b)
    
    List of Exhibits


Exhibit Number
    
    Description of Documents1.1
    
    Amended and Restated Memorandum of Association of
Claxson Interactive Group Inc. (incorporated
herein by reference to the Registration Statement
on Form F-4/A (No. 333-13062) filed with the
Commission on August 15, 2001).1.2
    
    Amended and Restated Articles of Association of
Claxson Interactive Group Inc. (incorporated
herein by reference to the Registration Statement
on Form F-4/A (No. 333-13062) filed with the
Commission on August 15, 2001).2.1
    
    Combination Agreement, dated as of October 30,
2000, by and among Claxson Interactive Group Inc.
(formerly, New Site Inc.), Newhaven Overseas
Corp., Hicks, Muse, Tate & Furst Latin America
Fund, L.P., Hicks, Muse, Tate and Furst Latin
America Private Fund, L.P.; HMLA 1-SBS
Coinvestors, L.P., and El Sitio, Inc. (included
as Annex A-1 to the proxy statement/prospectus
forming a part of the Registration Statement on
Form F-4 (No. 333-13062) filed with the
Commission on August 17, 2001 which is
incorporated herein by reference).2.2
    
    Amendment No. 1 to Combination Agreement, dated
as of June 26, 2001, by and among Claxson
Interactive Group Inc., formerly known as New
Site Inc., Carlyle Investments LLC and Carlton
Investments LLC, Ibero-American Media Partners II
Ltd., Hicks, Muse, Tate & Furst Latin America
Fund, L.P., Hicks, Muse, Tate & Furst Latin
America Private Fund, L.P., HMLA 1-SBS
Coinvestors, L.P. and El Sitio, Inc. (included as
Annex A-2 to the proxy statement/prospectus
forming a part of the Registration Statement on
Form F-4 (No. 333-13062) filed with the
Commission on August 17, 2001 which is
incorporated herein by reference).2.3
    
    Amendment No. 2 to Combination Agreement, dated
as of August 7, 2001, by and among Claxson
Interactive Group Inc., formerly known as New
Site Inc., Carlyle Investments LLC and Carlton
Investments LLC, Ibero-American Media Partners II
Ltd., Hicks, Muse, Tate & Furst Latin America
Fund, L.P., Hicks, Muse, Tate & Furst Latin
America Private Fund, L.P., HMLA 1-SBS
Coinvestors, L.P. and El Sitio, Inc. (included as
Annex A-3 to the proxy statement/prospectus
forming a part of the Registration Statement on
Form F-4 (No. 333-13062) filed with the
Commission on August 17, 2001 which is
incorporated herein by reference).2.4
    
    Indenture, dated as of April 4, 1998, among
IMASAC S.A. and Imagen Satelital, S.A. (as
guarantor), The Bank of New York, Banco Rio de la
Plata S.A. and Banque International a Luxembourg
(incorporated herein by reference to the
Registration Statement on Form F-4/A (No.
333-13062) as filed with the Commission on
February 26, 2001).2.5
    
    Indenture, dated as of November 7, 2002, among
Claxon Interactive Group, Inc., Imagen Satelital,
S.A. (as guarantor), The Bank of New York and
Banco Río de la Plata S.A. (incorporated herein by reference to
Claxsons annual report on Form 20-F filed with the Commission
on July 15, 2003).3.1
    
    Holdco Agreement, dated September 21, 2001, by
and among 1947 PTVI, LLC, 1945 PTVI, LLC, Hicks,
Muse, Tate & Furst Latin America Fund, L.P.,
Hicks, Muse, Tate & Furst Latin America Private
Fund, L.P., HMLA 1-SBS Coinvestors, L.P., Certain
Claxson Interactive Group, Inc. Stockholders and
Claxson Interactive Group, Inc. (incorporated herein by reference to
Claxsons annual report on Form 20-F filed with the Commission
on July 15, 2003).4.1
    
    Transfer Agreement, dated as of December 23,
2002, by and among Playboy Enterprises, Inc.,
Playboy Entertainment Group, Inc., Playboy
Enterprises International, Inc., Claxson
Interactive Group Inc., Carlyle Investments LLC
(in its own right and as a successor in interest
to Victoria Springs Investments Ltd.), Carlton
Investments LLC (in its own right and as a
successor in interest to Victoria Springs
Investments Ltd.), Lifford International Co. Ltd.
and Playboy TV International, LLC (incorporated
herein by reference to Form 6-K (No. 035-22883)
filed with the Commission on January 23, 2003).
Claxson agrees to furnish supplementally any
omitted schedule to the Commission upon request.


62



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##### Table of Contents



Exhibit Number
    
    Description of Documents4.2
    
    Full-Time Transponder Lease Agreement, dated
October 22, 1997, by and between PanAmSat
International Systems, Inc. and Cisneros
Television Services, Inc. (incorporated herein by
reference to the Registration Statement on Form
F-4/A (No. 333-13062) as filed with the
Commission on April 26, 2001).4.3
    
    First Amendment to Full-Time Transponder Lease
Agreement (Pre Launch), dated as of July 31,
2000, by and between PanAmSat International
Systems, Inc. and Cisneros Television Services,
Inc. (incorporated herein by reference to the
Registration Statement on Form F-4/A (No.
333-13062) as filed with the Commission on April
26, 2001).4.4
    
    Letter Agreement Re: Full-Time Transponder Lease
Agreement, dated as of May 1, 1998, by and
between PanAmSat International Systems, Inc. and
Cisneros Television Services, Inc. (incorporated
herein by reference to the Registration Statement
on Form F-4/A (No. 333-13062) as filed with the
Commission on April 26, 2001).4.5
    
    First Amendment to Full-Time Transponder Lease
Agreement, dated as of July 31, 1998, by and
between PanAmSat International Systems, Inc. and
Cisneros Television Services, Inc. (incorporated
herein by reference to the Registration Statement
on Form F-4/A (No. 333-13062) as filed with the
Commission on April 26, 2001).4.6
    
    Letter Agreement Re: First Amendment to the
Full-Time Transponder Lease Agreement, dated July
31, 2000, by and between PanAmSat International
Systems, Inc. and Cisneros Television Services,
Inc. (incorporated herein by reference to the
Registration Statement on Form F-4/A (No.
333-13062) as filed with the Commission on April
26, 2001).4.7
    
    Letter Agreement Re: Full-Time Transponder Lease
Agreement, as amended (dated October 22, 1997),
Full-Time Transfer Lease Agreement, as amended
(dated May 1, 1998) and Letter Agreement for
Retransmission Services, as amended (dated
October 17, 1997), dated as of April 3, 2003, by
and between PanAmSat International Systems, Inc.
and Claxon USA Inc., formerly known as Cisneros
Television Services, Inc. (incorporated herein by reference to
Claxsons annual report on Form 20-F filed with the Commission
on July 15, 2003).4.8
    
    Claxson Interactive Group Inc. 2001 Share
Incentive Plan (included as Annex E to the proxy
statement/prospectus forming a part of the
Registration Statement on Form F-4 (No.
333-13062) filed with the Commission on August
17, 2001 which is incorporated herein by
reference).*4.9
    
    Third Amended and Restated Operating Agreement
for Playboy TV  Latin America, LLC, dated
November 10, 2006, by and between Playboy
Entertainment Group, Inc. and Lifford
International Co. Ltd. (incorporated herein by
reference to Form 6-K (No. 000-33143) filed with
the Commission on December 6, 2006). Claxson
agrees to furnish supplementally any omitted
schedule to the Commission upon request.*4.10
    
    Amended and Restated Program Supply and Trademark
License Agreement, dated November 10, 2006, by
and between Playboy Entertainment Group, Inc. and
Playboy TV  Latin America, LLC (incorporated
herein by reference to Form 6-K (No. 000-33143)
filed with the Commission on December 6, 2006).
Claxson agrees to furnish supplementally any
omitted schedule to the Commission upon request.*4.11
    
    Venus Contribution Agreement, dated as of
December 23, 2002, by and among Claxson
Interactive Group Inc., Lifford International Co.
Ltd, Playboy TV  Latin America, LLC and Playboy
Entertainment Group, Inc. (incorporated herein by
reference to Form 6-K (No. 035-22883) filed with
the Commission on January 23, 2003). Claxson
agrees to furnish supplementally any omitted
schedule to the Commission upon request.
 63




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##### Table of Contents



Exhibit Number
    
    Description of Documents4.12
    
    Playboy TV International Program Supply
Agreement, dated as of August 31, 1999 by and
among Playboy Entertainment Group, Inc., Playboy
TV International LLC and PTVLA U.S., LLC
(incorporated herein by reference to the
Registration Statement on Form F-4/A (No.
333-13062) as filed with the Commission on April
26, 2001).4.13
    
    Amendment No. 1 to the Playboy TV International
Program Supply Agreement, dated as of December
22, 2002, by and among Playboy Entertainment
Group, Inc., Playboy TV International LLC and
PTVLA U.S., LLC (incorporated herein by reference
to Form 6-K (No. 035-22883) filed with the
Commission on January 23, 2003).4.14
    
    Stock Purchase Agreement, dated as of December
14, 2006, by and among
Claxson Interactive Group
Inc., Claxson USA II, Inc., El Sitio, Inc.,
Santori N.V., Morehaven Investments, Inc.,
Mandary S.A., Turner International, Inc., Turner
International Holding Company and Turner International
Latin America Networks LLC. Claxson agrees to
furnish supplementally any omitted schedule to
the Commission upon request.4.15
    
    First Amendment to the Stock
Purchase Agreement, dated as of October 3, 2007, by and among
Claxson Interactive Group
Inc., Claxson USA II, Inc., El Sitio, Inc.,
Santori N.V., Morehaven Investments, Inc.,
Mandary S.A., Turner International, Inc., Turner
International Holding Company and Turner International
Latin America Networks LLC.4.16
    
    Shareholders Agreement, dated as of July 4, 2007,
by and among Globosat Programadora Ltda., Playboy
TV Latin America, LLC and PB Brasil
Entretenimento S.A.4.17
    
    Parent Company Agreement, dated as of December
15, 2006, by and among Globosat Programadora
Ltda., Claxson Interactive Group Inc. and Playboy
Entertainment Group, Inc. Claxson agrees to
furnish supplementally any omitted schedule to
the Commission upon request.4.18
    
    Share Purchase Agreement entered into on December
22, 2006, by and among Claxson Chile, S.A.,
Claxson Interactive Group Inc., Grupo Latino de
Radiodifusión Chile Limitada and GLR Services,
Inc.8.1
    
    List of Significant Subsidiaries.11.1
    
    Claxson Interactive Group Inc. Code of Business
Conduct and Ethics (incorporated herein by
reference to Exhibit 11.1 to Form 20-F filed with
the Commission on July 15, 2004).12.1
    
    Certification of Claxon Interactive Group Inc.s
Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification of Claxon Interactive Group Inc.s
Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification of Claxson Interactive Group Inc.s
Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.13.2
    
    Certification of Claxson Interactive Group Inc.s
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.15.1
    
    Consent of Deloitte & Co. S.R.L.15.2
    
    Consent of Deloitte & Touche
LLP.15.3
    
    Consent of Grant Thornton.15.4
    
    Consent of Morrison, Brown, Argiz
& Farra, LLP.15.5
    
    Consent of McClain & Company L.C.
 
 *
    
    Portions of this exhibit have been omitted and filed separately with the Commission pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended, requesting confidential treatment. 64




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Signatures
  /s/ Roberto Vivo-ChanetonName:
    Roberto Vivo-ChanetonDecember 14, 2007
    Title:
    Chief Executive Officer and Chairman of the Board of Directors /s/ Ezequiel PazName:
    Ezequiel PazDecember 14, 2007
    Title:
    Chief Financial Officer 65




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INDEX TO FINANCIAL STATEMENTS
 - Claxson Interactive Group Inc.Report of Independent Registered Public Accounting Firm of Claxson Interactive Group Inc. for the Years Ended December 31, 2006 and 2005
    
    
    F-3Report of Independent Registered Public Accounting Firm of Claxson Interactive Group Inc. for the Year Ended December 31, 2004
    
    
    F-4Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    
    F-5Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2004, 2005 and 2006
    
    
    F-6Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2004, 2005 and 2006
    
    
    F-7Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006
    
    
    F-8Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2005 and 2006
    
    
    F-9- DLA Holdings, Inc.Report of independent registered public accounting firm of DLA Holdings, Inc. as of
December 31, 2006 and 2005
    
    
    F-30Report of independent registered public accounting firm of DLA Holdings, Inc. as of
December 31, 2005
    
    
    F-31Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F-32Consolidated
Statements of Operations audited for fiscal years ended
December 31, 2006, 2005 and reviewed for the period from October 29, 2004 through December 31, 2004
    
    
    F-33Consolidated
Statements of Changes in Stockholders Deficit audited for
fiscal years ended December 31, 2006, 2005 and reviewed for the period from October 29, 2004
through December 31, 2004
    
    
    F-34Consolidated
Statements of Cash Flows for the audited fiscal years ended December 31,
2006, 2005 and reviewed for the period from October 29, 2004 through
December 31, 2004 (reviewed)
    
    
    F-35Notes to
Consolidated Financial Statements as of December 31, 2006
(audited), 2005 and 2004 (reviewed)
    
    
    F-36- AEI Collingham Holdings Co. Ltd., (audited)Report of independent registered public accounting firm of AEI Collingham Holdings Co. Ltd. as of
December 31, 2006
    
    
    F-51Consolidated Balance Sheet as of December 31, 2006
    
    
    F-52Consolidated Statement of Operations for fiscal year ended December 31, 2006
    
    
    F-53Consolidated Statement of Stockholders Equity for the fiscal year ended December 31, 2006
    
    
    F-54Consolidated Statement of Cash Flows for the fiscal year ended December 31, 2006
    
    
    F-55Notes to Consolidated Financial Statements as of December 31, 2006
    
    
    F-56- AEI Collingham Holdings Co. Ltd., (unaudited)Consolidated Balance Sheet as of December 31, 2005 and 2004
    
    
    F-60Consolidated Statements of Operations for fiscal years ended December 31, 2005 and 2004
    
    
    F-61Consolidated Statement of Stockholders Equity for the fiscal year ended December 31, 2005
    
    
    F-62Notes to Consolidated Financial Statements as of December 31, 2005 and 2004
    
    
    F-63
 F-1




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[This Page Intentionally Left Blank]
 F-2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     DELOITTE & Co. S.R.L.
 
 F-3




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 
 F-4




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2006
(In thousands of U.S. dollars, except share data)
 2005
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    19,716
    
    
    $
    14,183Accounts receivable, net (1)
    
    
    2,531
    
    
    
    4,710Due from related parties
    
    
    2,324
    
    
    
    2,745Assets held for sale
    
    
    126,191
    
    
    
    127,036Other current assets
    
    
    2,338
    
    
    
    1,239Total current assets
    
    
    153,100
    
    
    
    149,913PROPERTY AND EQUIPMENT, NET
    
    
    1,686
    
    
    
    1,736PROGRAMMING RIGHTS, NET
    
    
    1,068
    
    
    
    1,237INVESTMENTS IN UNCONSOLIDATED AFFILIATES
    
    
    2,333
    
    
    
    4,366GOODWILL
    
    
    8,046
    
    
    
    8,046OTHER ASSETS, NET
    
    
    1,764
    
    
    
    457TOTAL ASSETS
    
    $
    167,997
    
    
    $
    165,755LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses (2)
    
    $
    11,345
    
    
    $
    14,727Liabilities related to assets held for sale
    
    
    112,179
    
    
    
    97,211Due to related parties
    
    
    1,036
    
    
    
    1,163Accrued compensation
    
    
    1,430
    
    
    
    1,197Other current liabilities
    
    
    3,332
    
    
    
    1,258Current portion of programming rights obligations
    
    
    1,506
    
    
    
    1,568Current portion of long-term debt
    
    
    3,620
    
    
    
    Unearned revenues
    
    
    155
    
    
    
    738Total current liabilities
    
    
    134,603
    
    
    
    117,862MINORITY INTEREST
    
    
    293
    
    
    
    360COMMITMENTS AND CONTINGENCIES (Note 9)SHAREHOLDERS EQUITY:Class A common shares; $0.01 par value; 30,000,000 shares
authorized, 20,486,465 and 21,651,380 shares issued and
outstanding as of December 31, 2005 and 2006,
respectively
    
    
    205
    
    
    
    217Class C common shares; $1.00 par value; 2 shares
authorized, issued and outstanding as of December 31,
2005 and 2006
    
    
    
    
    
    
    Class F common shares; $1.00 par value; 7 shares
authorized, issued and outstanding as of December 31,
2005 and 2006
    
    
    
    
    
    
    Class H common shares; $1.00 par value; 1 share
authorized, issued and outstanding as of December 31,
2005 and 2006
    
    
    
    
    
    
    Additional paid-in capital
    
    
    265,263
    
    
    
    268,986Deferred share-based compensation
    
    
    (17
    )
    
    
    Accumulated deficit
    
    
    (248,534
    )
    
    
    (236,517
    )Accumulated other comprehensive income
    
    
    16,184
    
    
    
    14,847Total shareholders equity
    
    
    33,101
    
    
    
    47,533TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    167,997
    
    
    $
    165,755
  
 (1)
    
    Includes $50 and $294 in 2005 and 2006, respectively of intercompany balances
related to discontinued operations not eliminated in consolidation (see note 2)(2)
    
    Includes $7,857 and $10,483 in 2005 and 2006, respectively of intercompany
balances related to discontinued operations not eliminated in consolidation (see note 2) F-5




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2004, 2005 and 2006
(In thousands of shares and U.S. dollars, except per share data)
 2004
    
    2005
    
    2006REVENUES:Subscriber-based fees
    
    $
    8,064
    
    
    $
    11,628
    
    
    $
    12,470Advertising
    
    
    76
    
    
    
    39
    
    
    
    455Production services (1)
    
    
    277
    
    
    
    1,124
    
    
    
    1,510Other (2)
    
    
    2,247
    
    
    
    2,499
    
    
    
    3,621Related parties
    
    
    8,472
    
    
    
    7,106
    
    
    
    8,357Total revenues, net
    
    
    19,136
    
    
    
    22,396
    
    
    
    26,413OPERATING EXPENSES:Product, content and technology (3)
    
    
    (10,597
    )
    
    
    (12,972
    )
    
    
    (14,879
    )Marketing and sales (4)
    
    
    (5,973
    )
    
    
    (6,949
    )
    
    
    (6,389
    )Corporate and administration (5)
    
    
    (7,298
    )
    
    
    (7,065
    )
    
    
    (6,358
    )Depreciation and amortization
    
    
    (1,244
    )
    
    
    (752
    )
    
    
    (578
    )Related parties
    
    
    (399
    )
    
    
    (584
    )
    
    
    (641
    )Total operating expenses
    
    
    (25,511
    )
    
    
    (28,322
    )
    
    
    (28,845
    )OPERATING LOSS
    
    
    (6,375
    )
    
    
    (5,926
    )
    
    
    (2,432
    )OTHER INCOME (EXPENSE)Interest expense
    
    
    (283
    )
    
    
    (39
    )
    
    
    (27
    )Interest income
    
    
    91
    
    
    
    298
    
    
    
    754Foreign currency exchange gain (loss)
    
    
    416
    
    
    
    797
    
    
    
    (302
    )Other
    
    
    633
    
    
    
    167
    
    
    
    225Interest expense  related parties
    
    
    (116
    )
    
    
    (286
    )
    
    
    (168
    )Interest income  related parties
    
    
    36
    
    
    
    549
    
    
    
    543Equity in earnings (losses) from unconsolidated
affiliates and related transactions
    
    
    245
    
    
    
    (2,593
    )
    
    
    (313
    )Other income (expense), net
    
    
    1,022
    
    
    
    (1,107
    )
    
    
    712LOSS BEFORE (PROVISION) BENEFIT FOR INCOME TAXES,
MINORITY INTEREST, AND DISCONTINUED OPERATIONS
    
    
    (5,353
    )
    
    
    (7,033
    )
    
    
    (1,720
    )(PROVISION) BENEFIT FOR INCOME TAXES
    
    
    (471
    )
    
    
    296
    
    
    
    (233
    )LOSS BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS
    
    
    (5,824
    )
    
    
    (6,737
    )
    
    
    (1,953
    )MINORITY INTEREST
    
    
    267
    
    
    
    267
    
    
    
    (71
    )NET LOSS FROM CONTINUING OPERATIONS
    
    
    (5,557
    )
    
    
    (6,470
    )
    
    
    (2,024
    )DISCONTINUED OPERATIONS   income from operations of
discontinued divisions, net (Note 12)
    
    
    12,247
    
    
    
    12,702
    
    
    
    14,041NET INCOME
    
    
    6,690
    
    
    
    6,232
    
    
    
    12,017OTHER COMPREHENSIVE INCOME (LOSS)  Change in
foreign currency translation
    
    
    2,419
    
    
    
    4,081
    
    
    
    (1,337
    )COMPREHENSIVE INCOME
    
    $
    9,109
    
    
    $
    10,313
    
    
    $
    10,680NET INCOME PER COMMON SHARE:Net loss from continuing operationsBasic
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.10
    )Diluted
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.10
    )Discontinued operationsBasic
    
    $
    0.62
    
    
    $
    0.63
    
    
    $
    0.67Diluted
    
    $
    0.62
    
    
    $
    0.63
    
    
    $
    0.67Net incomeBasic
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.57Diluted
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.57WEIGHTED AVERAGE NUMBER OF COMMON SHARES:Basic
    
    
    19,611
    
    
    
    20,416
    
    
    
    20,932Diluted
    
    
    19,611
    
    
    
    20,416
    
    
    
    20,932
  
 (1)
    
    Includes $3, $216 and $225 in 2004, 2005 and 2006, respectively of
intercompany transactions related to discontinued operations not eliminated in consolidation
(see note 2)(2)
    
    Includes $2,148, $2,151 and $2,345 in 2004, 2005 and 2006, respectively of
intercompany transactions not eliminated in consolidation (see note 2)(3)
    
    Includes $804, $2,000 and $2,472 in 2004, 2005 and 2006, respectively of
intercompany transactions related to discontinued operations not eliminated in consolidation
(see note 2)(4)
    
    Includes $2,888, $3,224 and $3,353 in 2004, 2005 and 2006, respectively of
intercompany transactions related to discontinued operations not eliminated in consolidation
(see note 2)(5)
    
    Includes $753, $666 and $701 in 2004, 2005 and 2006, respectively of intercompany
transactions related to discontinued operations not eliminated in consolidation (see note 2) F-6




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2004, 2005 and 2006
(In thousands of shares and U.S. dollars)
 Additional
    
    Deferred
    
    
    
    
    
    OtherPreferred
    
    
    
    
    
    Common
    
    
    
    
    
    Paid-In
    
    Share-based
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    Income
    
    TotalBALANCE,
DECEMBER 31,
2003
    
    
    
    
    
    
    
    
    
    
    19,428
    
    
    $
    195
    
    
    $
    261,584
    
    
    $
    (14
    )
    
    $
    (261,456
    )
    
    $
    9,684
    
    
    $
    9,993Deferred share-based
compensation related to
share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    885
    
    
    
    9
    
    
    
    3,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,690
    
    
    
    
    
    
    
    6,690Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,419
    
    
    
    2,419BALANCE, DECEMBER 31, 2004
    
    
    
    
    
    
    
    
    
    
    20,313
    
    
    $
    204
    
    
    $
    265,136
    
    
    $
    (74
    )
    
    $
    (254,766
    )
    
    $
    12,103
    
    
    $
    22,603Amortization of deferred
share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    173
    
    
    
    1
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,232
    
    
    
    
    
    
    
    6,232Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,081
    
    
    
    4,081BALANCE,
DECEMBER 31,2005
    
    
    
    
    
    
    
    
    
    
    20,486
    
    
    $
    205
    
    
    $
    265,263
    
    
    $
    (17
    )
    
    $
    (248,534
    )
    
    $
    16,184
    
    
    $
    33,101Amortization of deferred
share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    245Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    1,165
    
    
    
    12
    
    
    
    3,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,507Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,017
    
    
    
    
    
    
    
    12,017Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,337
    )
    
    
    (1,337
    )BALANCE, DECEMBER 31, 2006
    
    
    
    
    
    
    
    
    
    
    21,651
    
    
    $
    217
    
    
    $
    268,986
    
    
    
    
    
    
    $
    (236,517
    )
    
    $
    14,847
    
    
    $
    47,533
  F-7




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars)
 Year Ended December 31,2004
    
    2005
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,690
    
    
    $
    6,232
    
    
    $
    12,017Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of programming rights
    
    
    2,291
    
    
    
    4,111
    
    
    
    3,292Share-based compensation
    
    
    71
    
    
    
    57
    
    
    
    245Depreciation and amortization
    
    
    4,910
    
    
    
    4,456
    
    
    
    3,546Accrued and (uncollected) unpaid interest
    
    
    211
    
    
    
    (324
    )
    
    
    (597
    )Net loss (gain) on disposal of assets
    
    
    32
    
    
    
    (1,135
    )
    
    
    220Exchange rate loss
    
    
    175
    
    
    
    1,546
    
    
    
    1,584Equity in (earnings) losses from unconsolidated affiliates and
related transactions
    
    
    (245
    )
    
    
    2,593
    
    
    
    313Dividends from unconsolidated affiliates
    
    
    493
    
    
    
    478
    
    
    
    308Minority interest
    
    
    (267
    )
    
    
    (267
    )
    
    
    71Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,568
    
    
    
    300
    
    
    
    (4,618
    )Acquisition of programming rights
    
    
    (3,600
    )
    
    
    (3,750
    )
    
    
    (3,514
    )Due from related parties and other current assets
    
    
    (5,713
    )
    
    
    568
    
    
    
    1,937Other assets
    
    
    (1,442
    )
    
    
    (1,648
    )
    
    
    (6,107
    )Accounts payable, accrued expenses and other
    
    
    96
    
    
    
    3,663
    
    
    
    4,999Due to related parties
    
    
    (579
    )
    
    
    83
    
    
    
    8Programming rights obligations
    
    
    (662
    )
    
    
    (336
    )
    
    
    (1,573
    )Other long-term liabilities
    
    
    84
    
    
    
    101
    
    
    
    235Net cash provided by operating activities
    
    
    4,113
    
    
    
    16,728
    
    
    
    12,366CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of property and equipment
    
    
    (1,984
    )
    
    
    (2,465
    )
    
    
    (1,927
    )Acquisition of minority interest and transaction costs paid
    
    
    (1,580
    )
    
    
    
    
    
    
    Investments in unconsolidated affiliates
    
    
    (3,375
    )
    
    
    (1,128
    )
    
    
    (1,872
    )Restricted cash released in guarantee of Chilean syndicated loan
    
    
    907
    
    
    
    
    
    
    
    Proceeds from sale of investments in subsidiaries and affiliates.
    
    
    625
    
    
    
    10,938
    
    
    
    998Proceeds from sale of equity securities
    
    
    
    
    
    
    417
    
    
    
    Deposit for (Redemption of) the sale of subsidiary
    
    
    521
    
    
    
    (506
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (4,886
    )
    
    
    7,256
    
    
    
    (2,801
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of long-term debt
    
    
    (6,252
    )
    
    
    (6,304
    )
    
    
    (14,722
    )Proceeds from issuance of convertible debentures
    
    
    3,500
    
    
    
    
    
    
    
    Proceeds from sale of common shares to shareholders (see Note 3).
    
    
    3,375
    
    
    
    
    
    
    
    Distributions to minority owners of consolidated subsidiary
    
    
    (380
    )
    
    
    
    
    
    
    Proceeds from exercised stock options (see Note 7)
    
    
    55
    
    
    
    128
    
    
    
    7Net cash provided by (used in) financing activities
    
    
    298
    
    
    
    (6,176
    )
    
    
    (14,715
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS
    
    
    68
    
    
    
    48
    
    
    
    (84
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (407
    )
    
    
    17,856
    
    
    
    (5,234
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    7,677
    
    
    
    7,270
    
    
    
    25,126CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    7,270
    
    
    $
    25,126
    
    
    $
    19,892SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (See Note 11)
  F-8




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 1. GENERAL BACKGROUND AND ORGANIZATION
 General
 Organization
  Basis of Presentation
    F-9




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
    2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Consolidation
 Consolidated Financial Statements Consolidation of All
Majority Owned Subsidiaries Consolidation of
Variable Interest Entities
    
    
    Claxson USA II Inc. and subsidiaries excluding HTV LLC, 100% owned (see Note 3);
    
    El Sitio, Inc. and subsidiaries, 100% owned (see Note 3); and
    
    Playboy TV Latin America, LLC (PTVLA) and subsidiaries, 81% owned (see Note 3)
 F-10




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Discontinued operations:Pay TV business:
 
    
    CTG Inversora S.A. and subsidiaries, 100% owned (see Note 3);
    
    Carson International Ltd., 100% owned (see Note 3);
    
    HTV LLC, subsidiary of Claxson USA II Inc., 100% owned (see Note 3);
    
    Hispanic Television Channel BV, 100% owned (see Note 3);
 Broadcast business:
 
    
    El Sitio Uruguay S.A., 100% owned until November 17, 2006 (see Note 3);
    
    Iberoamerican Radio Chile S.A. (Radio Chile) and subsidiaries, 100% owned (see Note
3).
   Use of Estimates
 Fair Value of Financial Instruments
 Foreign Currency Translation/Foreign Currency Exchange Loss Foreign Currency Translation
  F-11




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Cash and Cash Equivalents
 Allowance for Doubtful Accounts Receivable
 Year Ended December 31,2004
    
    2005
    
    2006Beginning balance
    
    $
    1,170
    
    
    $
    1,160
    
    
    $
    1,217Provision
    
    
    677
    
    
    
    122
    
    
    
    119Write-offs, net
    
    
    (716
    )
    
    
    (79
    )
    
    
    (242
    )Exchange rate effect
    
    
    29
    
    
    
    14
    
    
    
    (21
    )Ending balance
    
    $
    1,160
    
    
    $
    1,217
    
    
    $
    1,073
 Programming Rights
  Accounting by Producers or Distributors of Films,
 Property and Equipment
 Buildings
    
    50 yearsEquipment
    
    3-10 yearsLeasehold improvements
    
    5-7 yearsFurniture, fixtures and other fixed assets
    
    5-10 years
 Investments in Debt and Equity Securities Accounting for Certain Investments in Debt
and Equity Securities
 F-12




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Goodwill Goodwill and Other Intangible Assets
  Revenue Recognition Revenue
Recognition
 Revenue Concentration
 Share-based Compensation
 Advertising Expenses
 Income Taxes Accounting for Income Taxes.
 F-13




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Net Income Per Common Share
 New Accounting Pronouncements Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109
  Fair Value Measurements
 The Fair Value Option of Financial Assets and Financial
Liabilities
 F-14




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Earnings Per Share (EPS)
 (In thousands of Shares and U.S. dollars, except per share data)
 2004
    
    2005
    
    2006Numerator:Net income
    
    $
    6,690
    
    
    $
    6,232
    
    
    $
    12,017Denominator:Weighted average number of common shares:Basic
    
    
    19,611
    
    
    
    20,416
    
    
    
    20,932Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    Convertible debentures
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    19,611
    
    
    
    20,416
    
    
    
    20,932Basic net income per share
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.57Diluted net income per share
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.57
  3. ACQUISITIONS AND DISPOSALS
 Sale of Radio Chile 
  Sale of Basic pay television networks -
 F-15




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
  Sale of El Sitio Uruguay S.A.
 Sale of certain assets and operations of Claxson Playout, Inc.
   Sale of Chilevision
  Sale of certain assets of El Sitio México
 F-16




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Investment in DLA Holdings, Inc (DLA) 
      ,
    F-17




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 4.     PROPERTY AND EQUIPMENT
  December 31,2005
    
    2006Land and buildings
    
    $
    
    
    
    $
    99Furniture, fixtures, equipment and software
    
    
    12,404
    
    
    
    12,920Leasehold improvements
    
    
    4,012
    
    
    
    4,012Total
    
    
    16,416
    
    
    
    17,031Less accumulated depreciation and amortization
    
    
    (14,730
    )
    
    
    (15,295
    )Property and equipment, net
    
    $
    1,686
    
    
    $
    1,736
  5.     LONG-TERM DEBT
 Convertible Debentures
   6.     INCOME TAXES
 2004
    
    2005
    
    2006Current
    
    $
    471
    
    
    $
    76
    
    
    $
    44Deferred
    
    
    
    
    
    
    (372
    )
    
    
    189Total provision for income taxes
    
    $
    471
    
    
    $
    (296
    )
    
    $
    233
 F-18




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
  Year Ended December 31,2004
    
    2005
    
    2006Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Expected tax provision
(benefit) using statutory tax
rate
    
    $
    (2,034
    )
    
    
    38
    
    
    $
    (2,673
    )
    
    
    38
    
    
    $
    (654
    )
    
    
    38Non taxable results (1)
    
    
    1,932
    
    
    
    (36
    )
    
    
    3,067
    
    
    
    (44
    )
    
    
    1,407
    
    
    
    (82
    )Effect of differences in rates
    
    
    28
    
    
    
    (1
    )
    
    
    135
    
    
    
    (2
    )
    
    
    63
    
    
    
    (4
    )Effects of change in valuation
allowance
    
    
    14
    
    
    
    
    
    
    
    (636
    )
    
    
    9
    
    
    
    (495
    )
    
    
    29Other items
    
    
    531
    
    
    
    (10
    )
    
    
    (189
    )
    
    
    3
    
    
    
    (88
    )
    
    
    5Total provision for income taxes
    
    $
    471
    
    
    
    (9
    )
    
    $
    (296
    )
    
    
    4
    
    
    $
    233
    
    
    
    (14
    )
 
 (1)
    
    Includes non taxable income from foreign sources, non deductible expenses and results from non
taxable corporations.  December 31,2005
    
    2006Net operating loss carry forwards
    
    $
    13,169
    
    
    $
    12,503Property, equipment, and other assets
    
    
    1,591
    
    
    
    1,577Total deferred tax assets
    
    
    14,760
    
    
    
    14,080Valuation allowance
    
    
    (14,261
    )
    
    
    (13,766
    )Net deferred tax asset
    
    $
    499
    
    
    $
    314
   2011
    
    $
    6292018 through 2023
    
    
    34,291Total
    
    $
    34,920
 7.     SHARE OPTION PLAN
  F-19




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
 Share Based
Payment Accounting for Stock Issued to Employees
  Risk free rate
    
    
    3.39
    %Dividend yield
    
    
    0.0
    %Volatility factors
    
    
    344.30
    %Weighted-average life (years)
    
    
    7.50
   Weighted-AverageRemainingContractual Terms
    
    Aggregate Intrinsic
    
    Weighted-AverageShares
    
    (years)
    
    Value
    
    Exercise PriceOptionsOutstanding at January 1, 2006
    
    
    679,589
    
    
    
    
    
    
    
    
    
    
    
    2.319Exercised
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    0.738Outstanding at December 31, 2006
    
    
    669,589
    
    
    
    4
    
    
    
    7.713
    
    
    
    2.343Exercisable at December 31, 2006
    
    
    495,009
    
    
    
    4
    
    
    
    8.025
    
    
    
    2.040
  F-20




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
    Weighted-Average Grant-Shares
    
    Date Fair ValueNonvested sharesNonvested at January 1, 2006
    
    
    436,451
    
    
    
    3.500Vested
    
    
    (261,871
    )
    
    
    3.500Nonvested at December 31, 2006
    
    
    174,580
    
    
    
    3.500
   Year Ended December 31,2004
    
    2005Net income as reported in the accompanying Income
statements
    
    $
    6,690
    
    
    $
    6,232Add: Total stock based employee compensation expense
included in reported net income
    
    
    71
    
    
    
    57Deduct: Total fair value stock based employee compensation
expense not included in reported net income
    
    
    (660
    )
    
    
    (662
    )Pro forma net income
    
    
    6,101
    
    
    
    5,627Net income per share as reported:Basic
    
    $
    0.34
    
    
    $
    0.31Diluted
    
    $
    0.34
    
    
    $
    0.31Pro forma net income per share:Basic
    
    $
    0.31
    
    
    $
    0.28Diluted
    
    $
    0.31
    
    
    $
    0.28
  F-21




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 8.     SEGMENT INFORMATION
  DiscontinuedPay
    
    Broadband and
    
    
    
    
    
    operationsTelevision
    
    Internet
    
    Corporate
    
    (See Note 12)
    
    TotalYear Ended December 31, 2004Total net revenues
    
    $
    18,985
    
    
    $
    101
    
    
    $
    50
    
    
    $
    
    
    
    $
    19,136Operating loss
    
    
    (2,051
    )
    
    
    (397
    )
    
    
    (3,927
    )
    
    
    
    
    
    
    (6,375
    )Net income (loss)
    
    
    (1,454
    )
    
    
    (96
    )
    
    
    (4,007
    )
    
    
    12,247
    
    
    
    6,690Depreciation and amortization
    
    
    (1,228
    )
    
    
    (7
    )
    
    
    (9
    )
    
    
    
    
    
    
    (1,244
    )Total assets
    
    
    22,928
    
    
    
    610
    
    
    
    4,699
    
    
    
    141,712
    
    
    
    169,949Year Ended December 31, 2005Total net revenues
    
    $
    21,998
    
    
    $
    95
    
    
    $
    303
    
    
    $
    
    
    
    $
    22,396Operating loss
    
    
    (1,592
    )
    
    
    (576
    )
    
    
    (3,758
    )
    
    
    
    
    
    
    (5,926
    )Net income (loss)
    
    
    (4,153
    )
    
    
    309
    
    
    
    (2,626
    )
    
    
    12,702
    
    
    
    6,232Depreciation and amortization
    
    
    (752
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (752
    )Total assets
    
    
    20,861
    
    
    
    466
    
    
    
    20,479
    
    
    
    126,191
    
    
    
    167,997Year Ended December 31, 2006Total net revenues
    
    $
    25,428
    
    
    $
    694
    
    
    $
    291
    
    
    $
    
    
    
    $
    26,413Operating income (loss)
    
    
    727
    
    
    
    293
    
    
    
    (3,452
    )
    
    
    
    
    
    
    (2,432
    )Net income (loss)
    
    
    194
    
    
    
    543
    
    
    
    (2,761
    )
    
    
    14,041
    
    
    
    12,017Depreciation and amortization
    
    
    (519
    )
    
    
    (58
    )
    
    
    (1
    )
    
    
    
    
    
    
    (578
    )Total assets
    
    
    25,677
    
    
    
    1,907
    
    
    
    11,135
    
    
    
    127,036
    
    
    
    165,755
  9.     COMMITMENTS AND CONTINGENCIES
 Commitments
  F-22




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
  Years Ending December 31,2007
    
    $
    5,5672008
    
    
    4,5882009
    
    
    4,4222010
    
    
    4,4222011
    
    
    3,401Thereafter
    
    
    14,678Total
    
    $
    37,078
  Playboy Lifestyle
 
    
    a ten-year extension to the term of the joint venture and related agreements to end
in December 2022;
    
    an affiliate of PEI granted the rights to use the Playboy brand in relation to the
Playboy Lifestylechannel in television and wireless media in Latin America, Spain and
Portugal;
    
    PEIs buy up options were amended. PEI has an option to increase its ownership
interest up to 49.9% in the joint venture at any time prior to December 2022. In
addition, PEI has an option to buy the remaining 50.1% of the joint venture during the
ten-year period from December 23, 2012 to December 23, 2022, provided that the 49.9%
option has been exercised. Both options are exercisable at the fair
market value of the shares at the time of exercise;
    
    Claxson committed to fund up to $5 million for the development of the Playboy
Lifestyle channel through a Promissory Note to be issued by a subsidiary of PTVLA
created to own and operate the Playboy Lifestylechannel; and
    
    In the event there is an opportunity to launch the Playboy Lifestyle channel in the
United States, then Claxson has the right to invest in the Playboy Lifestyle US channel.
   F-23




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
  Years Ending December 31,2007
    
    $
    6,4812008
    
    
    4,7462009
    
    
    4,7332010
    
    
    4,8752011
    
    
    5,022Thereafter
    
    
    66,246Total
    
    $
    92,103
  Legal Proceedings
  F-24




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
   10. RELATED PARTY TRANSACTIONS
 Management Services
 Revenues
  Expenses
  F-25




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
      11.     SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 Acquisitions and disposals
 Investments in equity securities
 Supplemental Disclosure of Cash Flow Information (continuing and discontinuing)
  F-26




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 12.     SUPPLEMENTAL DISCLOSURE OF DISCONTINUED OPERATIONS
 Discontinued operations
 Balance Sheet information as of December 31, 2005
 Pay TV
    
    
    
    
    
    Total(Basic channels)
    
    Broadcast
    
    DiscontinuedCash and cash equivalents
    
    $
    3,626
    
    
    $
    1,783
    
    
    $
    5,409Accounts receivable, net
    
    
    26,068
    
    
    
    7,451
    
    
    
    33,519Due from related parties
    
    
    2,674
    
    
    
    
    
    
    
    2,674Other current assets
    
    
    507
    
    
    
    3,161
    
    
    
    3,668Property and equipment, net
    
    
    4,600
    
    
    
    4,297
    
    
    
    8,897Programming rights, net
    
    
    3,346
    
    
    
    
    
    
    
    3,346Broadcast and television licenses, net
    
    
    
    
    
    
    16,841
    
    
    
    16,841Goodwill
    
    
    17,434
    
    
    
    27,684
    
    
    
    45,118Other non current assets(1)
    
    
    4,747
    
    
    
    1,972
    
    
    
    6,719Total assets classified as Assets held for sale(2)
    
    $
    63,002
    
    
    $
    63,189
    
    
    $
    126,191Accounts payable and accrued expenses
    
    $
    14,804
    
    
    $
    2,145
    
    
    $
    16,949Due to related parties
    
    
    556
    
    
    
    222
    
    
    
    778Accrued compensations
    
    
    943
    
    
    
    897
    
    
    
    1,840Other current liabilities
    
    
    2,265
    
    
    
    4,551
    
    
    
    6,816Current portion of programming rights obligation
    
    
    3,182
    
    
    
    
    
    
    
    3,182Unearned revenues
    
    
    78
    
    
    
    1,847
    
    
    
    1,925Long-term debt(3)
    
    
    59,975
    
    
    
    18,184
    
    
    
    78,159Other long-term liabilities
    
    
    1,069
    
    
    
    1,461
    
    
    
    2,530Total liabilities classified as Liabilities related to
assets held for sale(4)
    
    $
    82,872
    
    
    $
    29,307
    
    
    $
    112,179
 
 (1)
    
    Includes $368 with related parties in broadcast segment.(2)
    
    Includes $9,728 of intercompany balances related to discontinued operations not eliminated in
consolidation (see Note 2).(3)
    
    Includes 8.75% Senior Notes due 2010.(4)
    
    Includes $17,537 of intercompany balances related to discontinued operations not eliminated
in consolidation (see Note 2). F-27




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Balance Sheet information as of December 31, 2006
 Pay TV
    
    
    
    
    
    Total(Basic channels)
    
    Broadcast
    
    DiscontinuedCash and cash equivalents
    
    $
    3,784
    
    
    $
    1,910
    
    
    $
    5,694Accounts receivable, net
    
    
    28,095
    
    
    
    6,630
    
    
    
    34,725Due from related parties
    
    
    1,554
    
    
    
    
    
    
    
    1,554Other current assets
    
    
    1,687
    
    
    
    1,881
    
    
    
    3,568Property and equipment, net
    
    
    4,186
    
    
    
    3,673
    
    
    
    7,859Programming rights, net
    
    
    3,357
    
    
    
    
    
    
    
    3,357Broadcast and television licenses, net
    
    
    
    
    
    
    14,959
    
    
    
    14,959Goodwill
    
    
    17,434
    
    
    
    25,601
    
    
    
    43,035Other non current assets
    
    
    11,336
    
    
    
    949
    
    
    
    12,285Total assets classified as Assets held for sale(1)
    
    $
    71,433
    
    
    $
    55,603
    
    
    $
    127,036Accounts payable and accrued expenses
    
    $
    17,203
    
    
    $
    2,225
    
    
    $
    19,428Due to related parties
    
    
    489
    
    
    
    170
    
    
    
    659Accrued compensations
    
    
    958
    
    
    
    930
    
    
    
    1,888Other current liabilities
    
    
    2,459
    
    
    
    4,306
    
    
    
    6,765Current portion of programming rights obligation
    
    
    1,871
    
    
    
    
    
    
    
    1,871Unearned revenues
    
    
    403
    
    
    
    1,249
    
    
    
    1,652Long-term debt(2)
    
    
    53,446
    
    
    
    9,398
    
    
    
    62,844Other long-term liabilities
    
    
    730
    
    
    
    1,374
    
    
    
    2,104Total liabilities classified as Liabilities related to
assets held for sale(3)
    
    $
    77,559
    
    
    $
    19,652
    
    
    $
    97,211
 
 (1)
    
    Includes $6,822 of intercompany balances related to discontinued operations not eliminated
in consolidation (see Note 2).(2)
    
    Includes 8.75% Senior Notes due 2010.(3)
    
    Includes $17,012 of intercompany balances relate to discontinued operations not eliminated in
consolidation (see Note 2). Statements of operations Pay TV:
 Year Ended December 31,2004
    
    2005
    
    2006Revenues
    
    $
    41,378
    
    
    $
    45,872
    
    
    $
    44,638Expenses
    
    
    (32,471
    )
    
    
    (32,086
    )
    
    
    (36,485
    )Other
    
    
    (1,257
    )
    
    
    (2,077
    )
    
    
    3,342Net income from Discontinued operations
    
    $
    7,650
    
    
    $
    11,709
    
    
    $
    11,495
 F-28




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2005 and 2006
(In thousands of U.S. dollars, or as otherwise indicated)
 Statements of operations Broadcast:
 Year Ended December 31,2004
    
    2005
    
    2006Revenues
    
    $
    45,745
    
    
    $
    29,805
    
    
    $
    23,795Expenses
    
    
    (39,212
    )
    
    
    (26,668
    )
    
    
    (18,161
    )Other
    
    
    (1,936
    )
    
    
    (2,144
    )
    
    
    (3,088
    )Net income from Discontinued operations
    
    $
    4,597
    
    
    $
    993
    
    
    $
    2,546
 Statements of operations Total:
 Year Ended December 31,2004
    
    2005
    
    2006Revenues
    
    $
    87,123
    
    
    $
    75,677
    
    
    $
    68,433Expenses
    
    
    (71,683
    )
    
    
    (58,754
    )
    
    
    (54,646
    )Other
    
    
    (3,193
    )
    
    
    (4,221
    )
    
    
    254Net income from Discontinued operations (1)
    
    $
    12,247
    
    
    $
    12,702
    
    
    $
    14,041
 
 (1)
    
    Includes $2,293, $3,523 and $3,956 in 2004, 2005 and 2006, respectively, of
intercompany transactions net related to discontinued operations not eliminated in
consolidation (see note 2) and $10,047, $11,446 and $5,379 in 2004, 2005 and 2006,
respectively, with related parties net (see note 10).  13.     SUBSEQUENT EVENTS
    F-29




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-30




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets  December 31,
 2006
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,415,917
    
    
    $
    599,057Accounts receivable, net
    
    
    2,392,722
    
    
    
    1,090,001Unbilled revenue
    
    
    449,633
    
    
    
    455,256Prepaid expenses and other current assets
    
    
    90,733
    
    
    
    50,750TOTAL CURRENT ASSETS
    
    
    6,349,005
    
    
    
    2,195,064PROPERTY AND EQUIPMENT, NET
    
    
    3,565,422
    
    
    
    5,589,044DEPOSITS AND OTHER ASSETS
    
    
    223,569
    
    
    
    2,133,550TOTAL ASSETS
    
    $
    10,137,996
    
    
    $
    9,917,658LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIES:Notes payable, current portion
    
    $
    802,111
    
    
    $
    402,052Accounts payable and accrued expenses
    
    
    4,356,525
    
    
    
    3,840,380Accrued payroll and related costs
    
    
    225,137
    
    
    
    8,381Other current liabilities
    
    
    2,695,723
    
    
    
    913,801TOTAL CURRENT LIABILITIES
    
    
    8,079,496
    
    
    
    5,164,614OTHER LIABILITIES:Notes payable
    
    
    5,581,412
    
    
    
    6,283,523Preferred shares subject to mandatory redemption
    
    
    8,219,040
    
    
    
    7,591,773Other liabilities
    
    
    942,577
    
    
    
    617,088TOTAL OTHER LIABILITIES
    
    
    14,743,029
    
    
    
    14,492,384TOTAL LIABILITIES
    
    
    22,822,525
    
    
    
    19,656,998COMMITMENTS AND CONTINGENCIES (NOTES 6, 10 AND 12)STOCKHOLDERS DEFICIT:Common stock  $0.01 par value; 15,000,000
shares authorized; 9,375,001 issued and
outstanding at December 31, 2006 and 2005
    
    
    93,750
    
    
    
    93,750Additional paid-in capital
    
    
    1,425,000
    
    
    
    1,425,000Accumulated deficit
    
    
    (14,203,279
    )
    
    
    (11,258,090
    )TOTAL STOCKHOLDERS DEFICIT
    
    
    (12,684,529
    )
    
    
    (9,739,340
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    10,137,996
    
    
    $
    9,917,658
  F-32




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##### Table of Contents





DLA HOLDINGS, INC. AND SUBSIDIARIES





Consolidated Statements of Operations  For the Years Ended December 31, 2006, 2005 and the Period from  October 29, 2004 (Date of Inception) to December 31, 2004 (Reviewed)


2006
    
    2005
    
    2004(Reviewed)REVENUE
    
    $
    8,775,321
    
    
    $
    5,708,692
    
    
    $
    711,464OPERATING COSTS AND EXPENSES:Direct operating (excluding depreciation
and amortization)
    
    
    4,640,375
    
    
    
    4,368,991
    
    
    
    798,608Other selling, general and administrative
    
    
    3,943,578
    
    
    
    4,231,884
    
    
    
    1,272,320Depreciation and amortization
    
    
    2,080,347
    
    
    
    2,095,596
    
    
    
    346,609TOTAL OPERATING COSTS
AND EXPENSES
    
    
    10,664,300
    
    
    
    10,696,471
    
    
    
    2,417,537OPERATING LOSS
    
    
    (1,888,979
    )
    
    
    (4,987,779
    )
    
    
    (1,706,073
    )OTHER EXPENSES:Interest expense  preferred shares
subject to mandatory redemption
    
    
    (627,267
    )
    
    
    (578,060
    )
    
    
    (96,675
    )Other interest expense
    
    
    (428,943
    )
    
    
    (413,018
    )
    
    
    (68,737
    )TOTAL OTHER EXPENSES
    
    
    (1,056,210
    )
    
    
    (991,078
    )
    
    
    (165,412
    )NET LOSS
    
    $
    (2,945,189
    )
    
    $
    (5,978,857
    )
    
    $
    (1,871,485
    )




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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Changes in Stockholders Deficit  For the Years Ended December 31, 2006, 2005 and the Period from  October 29, 2004 (Date of Inception) to December 31, 2004 (Reviewed)
 Common Stock
    
    Additional
    
    AccumulatedShares
    
    Amount
    
    Paid-In Capital
    
    Deficit
    
    TotalBalance at October 29, 2004
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (Date of inception)Issuance of common stock
    
    
    9,375,001
    
    
    
    93,750
    
    
    
    
    
    
    
    
    
    
    
    93,750Contribution to capital
    
    
    
    
    
    
    
    
    
    
    1,425,000
    
    
    
    
    
    
    
    1,425,000Transfer of net members
equity as a result of
corporate reorganization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,407,748
    )
    
    
    (3,407,748
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,871,485
    )
    
    
    (1,871,485
    )Balance at December 31, 2004
    
    
    9,375,001
    
    
    
    93,750
    
    
    
    1,425,000
    
    
    
    (5,279,233
    )
    
    
    (3,760,483
    )(Reviewed)Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,978,857
    )
    
    
    (5,978,857
    )Balance at December 31, 2005
    
    
    9,375,001
    
    
    
    93,750
    
    
    
    1,425,000
    
    
    
    (11,258,090
    )
    
    
    (9,739,340
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,945,189
    )
    
    
    (2,945,189
    )Balance at December 31, 2006
    
    
    9,375,001
    
    
    $
    93,750
    
    
    $
    1,425,000
    
    
    $
    (14,203,279
    )
    
    $
    (12,684,529
    )
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows  For the Years Ended December 31, 2006, 2005 and the Period from  October 29, 2004 (Date of Inception) to December 31, 2004 (Reviewed)
 2006
    
    2005
    
    2004(Reviewed)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,945,189
    )
    
    $
    (5,978,857
    )
    
    $
    (1,871,485
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Net gain on disposal of fixed assets
    
    
    (23,769
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    2,080,347
    
    
    
    2,095,596
    
    
    
    346,609Provision for bad debts
    
    
    226,009
    
    
    
    175,873
    
    
    
    57,926Accrued interest expense on preferred stock
    
    
    627,267
    
    
    
    578,060
    
    
    
    96,675Currency exchange loss
    
    
    23,385
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (1,552,115
    )
    
    
    (783,620
    )
    
    
    33,223Decrease (increase) in unbilled revenue
    
    
    5,623
    
    
    
    (82,023
    )
    
    
    (250,927
    )(Increase) decrease in prepaid expenses and other
current assets
    
    
    (39,984
    )
    
    
    603,597
    
    
    
    (488,385
    )Increase (decrease) in accounts payable and
accrued expenses
    
    
    516,145
    
    
    
    1,465,955
    
    
    
    (1,667,996
    )Increase (decrease) in accrued payroll and related costs
    
    
    216,756
    
    
    
    (22,595
    )
    
    
    (18,458
    )Increase in other current liabilities
    
    
    1,781,922
    
    
    
    323,019
    
    
    
    378,904Increase in other liabilities
    
    
    325,489
    
    
    
    56,741
    
    
    
    49,390TOTAL ADJUSTMENTS
    
    
    4,187,075
    
    
    
    4,410,603
    
    
    
    (1,463,039
    )NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES
    
    
    1,241,886
    
    
    
    (1,568,254
    )
    
    
    (3,334,524
    )CASH FLOWS FROM INVESTING ACTIVITIES:Retirements (purchases) of property and equipment
    
    
    4,526
    
    
    
    (356,150
    )
    
    
    (9,426
    )NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
    
    
    4,526
    
    
    
    (356,150
    )
    
    
    (9,426
    )CASH FLOWS FROM FINANCING ACTIVITIES:Decrease in notes payable
    
    
    (302,052
    )
    
    
    
    
    
    
    Increase in preferred shares subject to
mandatory redemption
    
    
    
    
    
    
    
    
    
    
    3,000,000Proceeds from subscription receivable
    
    
    1,872,500
    
    
    
    1,127,500
    
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    1,500,000NET CASH PROVIDED BY
FINANCING ACTIVITIES
    
    
    1,570,448
    
    
    
    1,127,500
    
    
    
    4,500,000NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    2,816,860
    
    
    
    (796,904
    )
    
    
    1,156,050CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
    
    
    599,057
    
    
    
    1,395,961
    
    
    
    239,911CASH AND CASH EQUIVALENTS,
END OF YEAR
    
    $
    3,415,917
    
    
    $
    599,057
    
    
    $
    1,395,961SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Cash paid during the year for interest
    
    $
    41,570
    
    
    $
    67,857
    
    
    $
    9,563
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 1.
    
    ORGANIZATION AND NATURE OF BUSINESSOrganization and BusinessDLA Holdings, Inc. and Subsidiaries (the Company) is a British Virgin Island
international business company (IBC) formed on October 29, 2004 (date of inception)
to acquire 100% of the membership interest in Digital Latin America, LLC (DLA), and
its 100% owned subsidiary, PPV Services, LLC. The Company is owned by HMTF DLA, Inc.
(HM), Motorola, Inc. (Motorola), and Lifford International Co. Ltd. (Lifford). The
Company is an end-to-end provider of, reliable high quality and cost efficient digital
content. The Company operates from its headquarters in South Florida.On October 29, 2004, DLA executed an ownership restructuring plan, pursuant to the
Exchange, Contribution and Subscription Agreement (Exchange Agreement) dated October
29, 2004 among the Company, DLA, HM, DLA Partners, Inc., General Instrument Corporation
(Motorola Parent), Motorola, Claxson Interactive Group Inc. (Claxson), and Lifford.
The details of the agreement are as follows (NOTES 6, 7, 8 and 10).HM contributed 35,260,000 units of DLA. Outstanding notes and accrued interest were
consolidated and contributed to the Company in exchange for 3,604,688 Class A Common
Shares and 417,038 Series A Preferred Shares in the Company and a note from the Company
in the amount of $512,316.Motorola contributed 5,740,000 units of DLA. Outstanding notes and accrued interest
were consolidated into one and contributed, and Motorola released the obligations under
the Motorola Management and Oversight agreement in exchange for 1,270,313 shares of
Class A Common Shares and 750,000 Series A Preferred Shares of the Company, a secured
note and security agreement for $4,000,000 and a common stock warrant. The issuance of
250,000 of the 750,000 Series A Preferred Shares was subject to the release of a
security interest in certain surplus equipment which DLA planned to sell. As of
December 31, 2006, the equipment had not yet been sold, thus $250,000 remains as a
liability to Motorola and is included in accounts payable and accrued expenses in the
accompanying consolidated balance sheets.Lifford contributed $4,500,000 in cash, and agreed to contribute an additional
$3,000,000 over three years to pay the fees pursuant to the terms of the Claxson
Services Agreement. In exchange Lifford received 4,500,000 Class A Common Shares and
6,000,000 Series A Preferred Shares of the Company. At December 31, 2005, $1,872,500
was pending to be contributed. During 2006, the Company received contributions in the
amount of $1,872,500 from Lifford pursuant to the Exchange Agreement.In addition, to the aforementioned contributions and exchanges, the Company amended
certain agreements and entered into various other agreements with shareholders and
affiliates as discussed in Note 6.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 1.
    
    ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)Managements PlanIn 2002, the Company commenced its planned principal operations of delivery of digital
programming, data and other services to cable operators in Latin America. The Company
has been subject to all the risks inherent in establishing a new business venture. In
2002, the Companys primary focus was launching and marketing its services to cable
operators in Latin America and the Caribbean.The Companys cash flows from operations have been insufficient to pay for its
operations. Shortfalls in cash flows have been met through shareholder financing. On
October 29, 2004, the Company restructured its obligations and obtained funding from new
investors to help ensure there is sufficient capital to maintain the Company during its
growth phase, and to continue as a going concern.During 2005, the Company focused on reducing operating structure, restructuring content
agreements, and rearranging satellite capacity to be able to reduce operating costs as
it continued to sell to new clients and increase penetration in its existing clients.
Management believed that by reducing costs it would be able to continue operating until
the market for digital services in Latin America improved. During 2006, the market for
digital pay television services improved and the Company was able to increase its
revenues. Management continues to seek new clients and improve penetration within
existing clients as well as launching new services such as video-on-demand in order to
achieve higher level of revenues to reach operating profits.The Company continued generating losses through the year ended December 31, 2006, as it
builds its customer base and markets its services. However, there can be no assurance
that managements plans will be successful in enabling the Company to meet its
liabilities or to continue operations without additional support. The consolidated
financial statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESConsolidationThe consolidated financial statements of the Company include the accounts of DLA
Holdings, Inc., Digital Latin America, LLC, and its wholly-owned subsidiary, PPV
Services, LLC. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company consolidates subsidiaries in which they hold,
directly or indirectly, more than 50% of the voting rights or where they exercise
control. Entities where the Company holds 20% to 50% of the voting rights and/or has the
ability to exercise significant influence are accounted for under the equity method.Cash and Cash EquivalentsThe Company considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates are used for, but not limited to, the allowance for doubtful accounts.Accounts ReceivableAccounts receivable, net, are due from sales of digital programming and other services
and are net of an allowance for doubtful accounts of $1,258,519 and $1,036,924 as of
December 31, 2006 and 2005, respectively. Included in accounts receivable as of December
31, 2006 is approximately $285,000 due from related parties. As of December 31, 2005,
there were no amounts due from related parties.
 
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Accounts Receivable (continued)Accounts receivable are stated at the amount the Company expects to collect. The Company
maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. Management considers the following
factors when determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current economic industry
trends, and changes in customer payment terms. Based on managements assessment, the
Company provides for estimated uncollectible amounts through a charge to earnings and a
credit to a valuation allowance. Management records a 100% allowance for doubtful
accounts for all accounts receivable that are past due over 180 days. Balances that
remain outstanding after the Company has used reasonable collection efforts are written
off through a charge to the valuation allowance and a credit to accounts receivable.Unbilled RevenueThe Company recognizes unbilled revenue in accordance with the provisions of the
respective contract. As of December 31, 2006 and 2005, the Company has approximately
$450,000 and $455,000, respectively, in unbilled revenues. As of December 31, 2006,
there are no unbilled revenues from related parties. As of December 31, 2005, unbilled
revenue includes approximately $20,000 due from related parties.Prepaid License and Production CostsThe Company has paid license fees and production costs for movies to be aired on its pay
 per-view channels during 2006 and 2005. License fees are expensed when the movies
first air. Production costs generally relate to movie language translation and
promotional spots and are expensed when incurred.Property and Equipment, NetProperty and equipment, net are carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser of the
lease term or useful life of the asset. Estimated useful lives of these assets are as
follows:
 Computer equipment and software
    
    3 yearsOffice furniture and equipment
    
    5 to 7 yearsLeasehold improvements
    
    Shorter of life or term of leaseAudio and video reception, processing
and monitoring equipment
    
    7 years
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Property and Equipment, Net (continued)Maintenance and repairs are charged to expense as incurred; improvements and betterments
are capitalized. When assets are retired or otherwise disposed of, the related costs and
accumulated depreciation are removed from the accounts and any resulting gains or losses
are credited or charged to income.Impairment of Long-Lived AssetsThe Companys long-lived assets, such as property and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows an impairment charge is recognized by the amount
by which the carrying amount of the assets exceeds the fair value of the asset. Assets
to be disposed of would be separately presented in the consolidated balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell, and are
no longer depreciated. The assets and liabilities of a disposal group classified as held
for sale would be presented separately in the appropriate asset and liability sections
of the balance sheet.Deferred RevenueRevenue collected in advance is deferred and recognized as the services are rendered. At
December 31, 2006 and 2005, deferred revenue totaled approximately $2,679,000 and
$63,000, respectively, which is included under other current liabilities in the
accompanying consolidated balance sheets.Preferred Shares Subject to Mandatory RedemptionIn May 2003, the FASB issued Statement of Financial Accounting Standard (SFAS) No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. SFAS No. 150
is effective for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the fiscal year 2004. The adoption of SFAS
No. 150 did have a material impact on the Companys consolidated financial statements
(NOTE 8).
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Revenue RecognitionRevenue is primarily the result of providing basic, pay-per-view, niche channel and
transport/playout services.Basic services revenue is comprised of per subscriber fees which includes digital music,
interactive programming guide, and general access to pay-per-view services. Basic
services revenue is recognized in the month the services are delivered to subscribers.Pay-per-view services include movies, events and adult programming. Revenues are based
on a per buy basis and may include minimum guarantees. Revenues from minimum guarantees
are recognized when the programming is first aired, and revenues generated from buys are
recognized in the month buys occur. Revenue generated from buys in excess of the minimum
guarantee is recognized in the month the buys occur during the license period.Transport/playout services and niche channel revenue represent technical and operational
services, including satellite capacity. These services are provided to third party
channels and are carried as part of the Companys multiplex services. Revenues for these
services are recognized in the month the service is provided to customers.For the years ended December 31, 2006, 2005, and for the period ended December 31, 2004,
revenue consisted of the following:
 2006
    
    2005
    
    2004Basic and niche services
    
    
    51
    %
    
    
    64
    %
    
    
    49
    %Pay-per-view services
    
    
    38
    
    
    
    20
    
    
    
    31Transport/playout services
    
    
    9
    
    
    
    14
    
    
    
    19Other
    
    
    2
    
    
    
    2
    
    
    
    1100
    %
    
    
    100
    %
    
    
    100
    %
 Direct Operating CostsDirect operating costs consist primarily of transport costs which include satellite and
uplink services. The Companys license fees and production costs are included in direct
operating costs in the accompanying consolidated statements of operations and are based
on contracts with programming content suppliers whose compensation is typically based on
a flat fee, and/or a percentage of the Companys gross receipts from such content or a
fee determined by calculating the number of average subscribers in the period.
 
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Direct Operating Costs (continued)For the years ended December 31, 2006, 2005 and for the period ended December 31, 2004,
direct operating costs consisted mainly of the following:
 2006
    
    2005
    
    2004Transport costs
    
    
    57
    %
    
    
    64
    %
    
    
    70
    %License fees and
production costs
    
    
    32
    
    
    
    25
    
    
    
    26Other
    
    
    11
    
    
    
    11
    
    
    
    4100
    %
    
    
    100
    %
    
    
    100
    %
 Other Selling, General and Administrative CostsOther selling, general and administrative costs include all other costs directly related
to the generation of the Companys services and are expensed as incurred. Some of these
costs include, but are not limited to, production, marketing and web design maintenance
fees.Foreign Currency AdjustmentsThe Companys functional currency for all operations worldwide is the U.S. dollar.
Transaction gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the results
of operations as incurred. Gains and losses resulting from foreign currency transactions
are included in current results of operations.Concentrations of Credit RiskFinancial instruments which potentially subject the Company to concentrations of credit
risk include cash and cash equivalents. The Company maintains cash balances at financial
institutions that may exceed federally insured limits. The Company has not experienced
any losses on such accounts and believes it is not exposed to any significant credit
risks. The exposure to the Company from these transactions is solely dependent upon the
bank balances and the financial strength of the respective institutions. The Company
also invests its excess cash in a money market mutual fund and overnight repurchase
agreements. The overnight repurchase agreements represent an interest in low risk U.S.
government reserves, the Federal Deposit Insurance Corporation or any other U.S.
government agency.During 2006, approximately 60% and 14% of the Companys sales were made to customers in
Mexico and Brazil, respectively. During 2005, approximately 52% and 7% of the Companys
sales were made to customers in Mexico and Brazil, respectively. During 2004,
approximately 67% of the Companys sales were made to customers in Mexico. An adverse
change in economic conditions in Mexico or Brazil could negatively affect the volume of
the Companys sales and results of operations.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Income TaxesThe Company is not a taxpaying entity for purpose of federal or state income taxes. An
election has been made by the Company to be treated as a partnership for U.S. tax
purposes, with income or loss of the Company passed through to the stockholders in
proportion to their ownership interest and, accordingly, no provision for income taxes
is made in these consolidated financial statements. As a British Virgin Islands IBC, the
Company is exempt from that countrys income and capital gains taxes for 20 years from
the date of inception.Recent Accounting PronouncementsAccounting Changes and Error CorrectionsIn May 2005, the FASB issued FASB SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 establishes, unless impracticable, retrospective application
as the required method for reporting a change in accounting principle in the absence of
explicit transition requirements specific to a newly adopted accounting principle. The
adoption of this Statement on January 1, 2006 did not have a significant effect on the
Companys consolidated financial statements.Fair Value MeasurementIn September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. SFAS No. 157
provides enhanced guidance for measuring fair value. Under the standard, fair value
refers to the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in which
the entity transacts. The standard clarifies that fair value should be based on
assumptions market participants would use when pricing the asset or liability. This
Statement is effective for fiscal years beginning after November 15, 2007, with early
adoption permitted. Management believes the adoption of this Statement will not have a
material effect on the Companys consolidated financial statements.The Fair Value Option for Financial Assets and Financial LiabilitiesIn February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at specified
election dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at each subsequent reporting
date.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Recent Accounting Pronouncements (continued)The Fair Value Option for Financial Assets and Financial Liabilities  (continued)The fair value option:1.
    
    
    May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method.2.
    
    
    Is irrevocable (unless a new election date occurs).3.
    
    
    Is applied only to entire instruments and not to portions of instrumentsSFAS No. 159 is effective as of the beginning of an entitys first fiscal year that
begins after November 15, 2007. Management has not determined what impact, if any,
adopting this statement will have on the Companys consolidated financial statements.NOTE 3.
    
    PROPERTY AND EQUIPMENT, NETProperty and equipment, net, consist of the following at December 31,
 2006
    
    2005Computer equipment and software
    
    $
    907,868
    
    
    $
    880,244Office furniture and equipment
    
    
    401,405
    
    
    
    427,187Leasehold improvements
    
    
    1,471,065
    
    
    
    1,471,065Audio and video reception,
processing and monitoring
equipment
    
    
    12,277,730
    
    
    
    12,284,62715,058,068
    
    
    
    15,063,123Less accumulated depreciation
and amortization
    
    
    (11,492,646
    )
    
    
    (9,474,079
    )Property and equipment, net
    
    $
    3,565,422
    
    
    $
    5,589,044
 Depreciation and amortization of property and equipment amounted to approximately
$2,043,000 and $2,052,000 for the years ended December 31, 2006 and 2005, respectively,
and $336,000 for the period ended December 31, 2004. All of the Companys property and
equipment have been pledged to secure the Companys notes payable at December 31, 2006
and 2005 (NOTE 7).
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 4.
    
    DEPOSITS AND OTHER ASSETSDeposits and other assets consist of the following at December 31,
 2006
    
    2005Related party receivable
    
    $
    
    
    
    $
    1,872,500Facility, utility and other deposits
    
    
    195,087
    
    
    
    195,086Other assets
    
    
    28,482
    
    
    
    65,964$
    223,569
    
    
    $
    2,133,550
 Amortization of intangibles included in other assets amounted to approximately $37,000
and $44,000 for the years ended December 31, 2006 and 2005, respectively, and $11,000
for the period ended December 31, 2004.NOTE 5.
    
    ACCOUNTS PAYABLE AND ACCRUED EXPENSESAccounts payable and accrued expenses consist of the following at December 31:
 2006
    
    2005Accounts payable
    
    $
    2,389,311
    
    
    $
    1,780,280Accrued expenses
    
    
    1,967,214
    
    
    
    2,060,100$
    4,356,525
    
    
    $
    3,840,380
 NOTE 6.
    
    COMMITMENTS AND CONTINGENCIESOperating LeasesThe Company leases its corporate office space under a renewable lease agreement which
expires in 2010. Also, the Company has entered into non-cancelable agreements with
certain companies for satellite transponder space and uplink service. The lease term for
the satellite transponder space expires on April 30, 2017. The uplink service agreement
expires in December 2010. The uplink service agreement is cancelable; however, the
Company would have to replace such service if the uplink service agreement were
cancelled. Total lease expense for the above leases for 2006, 2005 and 2004 was
approximately $2,098,000, $2,575,000 and $589,000, respectively.Service AgreementsThe Company has two monitoring and oversight agreements, one with Claxson Interactive
Group, an affiliate of Lifford, and one with HM each requiring an annual fee of
$290,500, payable quarterly until December 31, 2009. Total monitoring and oversight
expense for each of 2006 and 2005 was approximately $581,000, and $77,000 for the period
ended December 31, 2004.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 6.
    
    COMMITMENTS AND CONTINGENCIES (CONTINUED)Service Agreements (continued)Pursuant to the Exchange Agreement, the Company entered into an agreement with an
affiliate of Lifford, Claxson Playout, Inc. (Claxson Playout). For a five-year term,
Claxson Playout will provide services including program origination and playback
services for the playback of certain channels, traffic management, post-production and
digital editing services, library organization services, and signal distribution
satellite space. The fee for all services is $80,834 per month adjusted annually by the
Consumer Price Index in the United States of America. The satellite service commenced
during May 2005. Total expense under this agreement for 2006 and 2005 was approximately
$1,003,000 and $747,000, respectively, and $25,000 for the period ended December 31,
2004.Pursuant to the Exchange Agreement, the Company entered into an agreement with Claxson
USA II, Inc. (Claxson USA), an affiliate of Lifford. For a five-year term, Claxson USA
will provide management services to the Company. These services include cash management,
accounting and financial reporting, human resources and facilities management, business
and legal affairs, information technology services, website services, and program
administration and scheduling services. The fee for these services is $265,000 per year
with annual increase based on the Consumer Price Index in the U.S., billed monthly.
Total expense for these services for 2006 and 2005 were approximately $273,000 and
$225,000, respectively, and $20,000 for the period ended December 31, 2004.Minimum future payments under the operating leases and service agreements at December
31, 2006 are:
 Related
    
    Non-relatedDecember 31
    
    Parties
    
    Parties
    
    Total2007
    
    $
    1,805,996
    
    
    $
    2,222,554
    
    
    $
    4,028,5502008
    
    
    1,805,996
    
    
    
    2,231,582
    
    
    
    4,037,5782009
    
    
    1,504,997
    
    
    
    2,241,061
    
    
    
    3,746,0582010
    
    
    
    
    
    
    2,233,263
    
    
    
    2,233,2632011
    
    
    
    
    
    
    2,041,992
    
    
    
    2,041,992Thereafter
    
    
    
    
    
    
    8,730,624
    
    
    
    8,730,624$
    5,116,989
    
    
    $
    19,701,076
    
    
    $
    24,818,065
 GuaranteesPursuant to an agreement between the Company, one of its vendors, and an affiliate third
party, the Company has guaranteed to pay the vendor up to approximately $27,000, should
the third party either not return certain equipment borrowed for testing purposes by the
vendor or default on payment if the third party elects to purchase the equipment.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 6.
    
    COMMITMENTS AND CONTINGENCIES (CONTINUED)Guarantees (continued)Pursuant to the Exchange Agreement, the Company entered into an agreement with Motorola
to provide Set-Top Authorization Services to cable operators (MSOs) that are the
Companys customers at a fixed price for a five-year term with any customers which were,
or became, a customer of the Company during the period from October 29, 2004 to July 31,
2005. Motorola agrees to provide the service exclusively to the Companys MSO customers.
The Company agrees to cooperate with Motorola in the marketing to MSOs of head-end
units and Set-Top terminals for use with the Companys services and will establish, with
some exceptions, that as a condition for MSOs to receive the Companys services,
Motorola shall be the exclusive provider of Set-Top terminals.Loss ContingenciesLoss contingencies, including claims and legal actions arising in the ordinary course of
business are recorded as liabilities when the likelihood of loss is probable and an
amount or range of loss can be reasonably estimated. Management does not believe there
are such matters that will have a material effect on the financial statements.NOTE 7.
    
    NOTES PAYABLENotes payable consisted of the following at December 31:
 2006
    
    2005Notes payable to Motorola, secured by a senior
security interest in the Companys assets;
interest at 6% per annum, compounded
quarterly, accrued interest and principal
payments payable based on a formula and
certain criteria stipulated in the note,
matures on December 31, 2008. The note
contains optional conversion rights that may
be exercised at any time at one share per each
$0.01 of debt outstanding, up to 289,948 Class
A Common Shares
    
    $
    4,000,000
    
    
    $
    4,000,000Note payable to an affiliate of HM, interest
at 6% per annum, compounding quarterly;
interest and principal payments payable based
on a formula and certain criteria stipulated
in the note, matures on June 30, 2009.
    
    
    534,548
    
    
    
    534,548Note payable to HM, interest at 6% per annum
compounding quarterly; interest and principal
payments payable based on a formula and
certain criteria stipulated in the note,
matures on June 30, 2009
    
    
    534,548
    
    
    
    534,548
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 7.
    
    NOTES PAYABLE (CONTINUED)
 2006
    
    2005Note payable to HM, interest at 6% per annum,
compounding quarterly; interest and principal
payments payable based on a formula and
certain criteria stipulated
on the note, matures on December 31, 2008
    
    
    512,316
    
    
    
    512,316Note payable to a vendor, PanAmSat, secured by
a subordinated security interest in the
Companys assets, interest at 5% per annum,
monthly interest only payments until December
31, 2005, monthly principal and interest
payments of $25,000 commencing on January 2006
through June 2006, $50,000 commencing on July
2006 through December 31, 2006, $100,000
commencing on January 2007 through May 2007,
and the balance due in June 2007
    
    
    802,111
    
    
    
    1,104,1636,383,523
    
    
    
    6,685,575Less current portion
    
    
    802,111
    
    
    
    402,052Notes payable  noncurrent
    
    $
    5,581,412
    
    
    $
    6,283,523
 Interest expense on these notes for 2006 and 2005 was approximately $429,000
and $401,000, respectively, and $67,000 for the period ended December 31, 2004.The maturities of notes payable are as follows at December 31, 2006:
 2007
    
    $
    802,1112008
    
    
    5,581,412$
    6,383,523
 NOTE 8.
    
    SHARES SUBJECT TO MANDATORY REDEMPTIONPursuant to the Exchange Agreement discussed in Note 1, the Company issued
6,917,038 Series A Preferred Shares of $1.00 par value with mandatory redemption
requirements. The Company may redeem or purchase all or any part of the issued and
outstanding preferred shares, but is required to redeem the shares upon the twelfth
anniversary of the issued date, October 29, 2016. The redemption price shall be equal to
its liquidation preference which is defined as the original par value plus all accrued,
unpaid dividends. Cumulative cash dividends of 8% of the par value plus accrued and
unpaid dividends per annum are payable quarterly in arrears but will not be paid until
after October 29, 2009. The amount of all accrued and unpaid dividends shall be added to
the liquidation preference for each share.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 8.
    
    SHARES SUBJECT TO MANDATORY REDEMPTION (CONTINUED)Interest accrued and unpaid at December 31, 2006 and 2005 were approximately
$1,302,000 and $675,000, respectively. Dividends expense for the years ended December
31, 2006, 2005 and the period ended December 31, 2004 were approximately $627,000,
$578,000 and $97,000, respectively, and are included in interest expense  preferred
shares subject to mandatory redemption in the accompanying consolidated statements of
operations. Total liquidation preference of the shares subject to mandatory redemption,
including accrued and unpaid dividends at 2006 and 2005 are $8,219,040 and $7,591,773,
respectively.NOTE 9.
    
    RELATED-PARTY TRANSACTIONSAs of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005
and the period ended December 31, 2004, in addition to the transactions discussed in
Notes 6, 7 and 8, the accompanying consolidated balance sheets and statements of
operations include the following amounts relating to subscriber  based fees, transport
and uplink services, monitoring fees, management services and other services discussed
in these consolidated financials statements:
 2006
    
    2005Accounts receivable
    
    $
    284,661
    
    
    $
    Unbilled revenue
    
    
    
    
    
    
    19,788Accounts payable and accrued
expenses
    
    
    1,564,812
    
    
    
    1,393,3702006
    
    2005
    
    2005Revenue
    
    $
    318,029
    
    
    $
    272,207
    
    
    $
    12,282Other operating general and
administrative expenses
    
    
    2,887,522
    
    
    
    1,609,129
    
    
    
    109,770
 NOTE 10.
    
    STOCK WARRANTSPursuant to the Exchange Agreement, the Company issued a warrant to Motorola to
purchase 445,416 fully paid and non-assessable Class A Common Shares of the Company at
an exercise price of $5.17 per share. The warrant may be exercised in whole or in part
during the period from October 29, 2004 to October 28, 2009, paid in cash or through the
surrender of that portion of the $4,000,000 promissory note (NOTE 7). As of December 31,
2006, the warrant had not been exercised.
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##### Table of Contents



DLA HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004 (Reviewed)
 NOTE 11.
    
    EMPLOYEE BENEFIT PLAN401(k) PlanThe Company has a 401(k) plan (the Plan) whereby substantially all employees
participate in the Plan. Employees may contribute any percentage or amount of their
compensation subject to certain limits based on federal tax laws. The Company makes
matching contributions equal to 50% percent of the first 6% percent of an employees
compensation contributed to the Plan. Matching contributions are immediately vested to
the employee. For the years ended December 31, 2006, 2005 and the period ended December
31, 2004 expense attributable to the Plan amounted to approximately $15,300, $8,800,
and $7,600, respectively, and is included in the Companys other selling, general, and
administrative expenses in the accompanying consolidated statements of operations.NOTE 12.
    
    SUBSEQUENT EVENTIn February 2005, the Company was a party in a lawsuit with a private equity firm
that was contracted in 2003 to find additional investors for the Company. As a result,
on May 25, 2007, the Company entered into a settlement agreement and agreed to pay
$70,000 to the private equity firm in a settlement, which is included in other selling,
general and administrative expenses in the accompanying consolidated statements of
operations.
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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 F-51




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    890Accounts receivable  trade, net of allowance for
doubtful accounts of $64
    
    
    2,356Inventories
    
    
    5Total current assets
    
    
    3,251PROPERTY AND EQUIPMENT, NET
    
    
    30DUE FROM RELATED PARTY
    
    
    1,727OTHER ASSETS
    
    
    2Total assets
    
    $
    5,010LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESDue to related party
    
    $
    105Accrued expenses
    
    
    251Total liabilities
    
    
    356STOCKHOLDERS EQUITYClass A common stock; par value $1 per share
(231 shares issued and outstanding)
    
    
    Class C common stock; par value $1 per share
(103 shares issued and outstanding)
    
    
    Additional paid-in-capital
    
    
    1,242Retained earnings
    
    
    3,412Total stockholders equity
    
    
    4,654Total liabilities and stockholders equity
    
    $
    5,010
 F-52




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 Subscriber fees revenue
    
    $
    5,994Operating costs and expenses:Cost of equipment sales
    
    
    573Selling, general and administrative expenses
    
    
    2,163Depreciation and amortization
    
    
    3Total operating costs and expenses
    
    
    2,739Net income
    
    $
    3,255
  F-53




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 Class A
    
    Class C
    
    Additional
    
    
    
    
    
    TotalCommon Stock
    
    Common Stock
    
    paid-in
    
    Retained
    
    stockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    earnings
    
    equityBeginning balance,
January 1, 2006
(unaudited)
    
    
    231
    
    
    $
    
    
    
    
    103
    
    
    $
    
    
    
    $
    1,242
    
    
    $
    1,157
    
    
    $
    2,399Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    (1,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,255
    
    
    
    3,255Ending balance,
December 31, 2006
    
    
    231
    
    
    $
    
    
    
    
    103
    
    
    $
    
    
    
    $
    1,242
    
    
    $
    3,412
    
    
    $
    4,654
  F-54




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 Cash flows from operating activities:Net income
    
    $
    3,255Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    3Bad debt expense
    
    
    67Changes in operating assets and liabilities:Accounts receivable
    
    
    (707
    )Due from related party
    
    
    (895
    )Other assets
    
    
    3Due to related party
    
    
    105Accounts payable and accrued expenses
    
    
    (610
    )Net cash provided by operating activities
    
    
    1,221Cash flows from investing activities:Purchases of property and equipment
    
    
    (28
    )Net cash used in investing activities
    
    
    (28
    )Cash flows from financing activities:Dividends paid
    
    
    (1,000
    )Net cash used in financing activities
    
    
    (1,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    193Cash and cash equivalents at beginning of period
    
    
    697Cash and cash equivalents at end of period
    
    $
    890
  F-55




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 NOTE A  OPERATIONS AND ORGANIZATION
   NOTE B  SUMMARY OF ACCOUNTING POLICIES
 Cash and Cash Equivalents
   Accounts Receivable
   Beginning balance
    
    $
    48Bad debt expense
    
    
    67Accounts written off, net of recoveries
    
    
    (51
    )Ending balance
    
    $
    64
 F-56




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 NOTE B  SUMMARY OF ACCOUNTING POLICIES  Continued
 Inventories
  Property and Equipment
   Revenue Recognition
    Income Taxes
  Basis of Accounting
  F-57




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 NOTE B  SUMMARY OF ACCOUNTING POLICIES  Continued
 Use of Estimates
  Advertising Expense
  NOTE C  PROPERTY AND EQUIPMENT
  Furniture and fixtures
    
    $
    676Computer equipment and software
    
    
    20Less: Accumulated depreciation and amortization
    
    
    (666
    )Net property and equipment
    
    $
    30
  NOTE D  ACCRUED EXPENSES
  Payroll and benefits
    
    $
    147Customer advances
    
    
    54Subcontractor expenses
    
    
    27Other
    
    
    23$
    251
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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
  
 NOTE E  MAJOR CUSTOMERS
  NOTE F  RELATED PARTY TRANSACTIONS
     NOTE G  COMMITMENTS AND CONTINGENCIES
  NOTE H  SUBSEQUENT EVENTS
   F-59




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
 
 2005
    
    2004ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    697
    
    
    $
    339Accounts receivable  trade, net of allowance for
doubtful accounts of $48 and $16
    
    
    1,716
    
    
    
    1,536Inventories
    
    
    5
    
    
    
    5Total current assets
    
    
    2,418
    
    
    
    1,880PROPERTY AND EQUIPMENT, NET
    
    
    4
    
    
    
    15DUE FROM RELATED PARTY
    
    
    832
    
    
    
    28OTHER ASSETS
    
    
    6
    
    
    
    5Total assets
    
    $
    3,260
    
    
    $
    1,928LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESDue to related party
    
    $
    332
    
    
    $
    142Accrued expenses
    
    
    529
    
    
    
    489Total liabilities
    
    
    861
    
    
    
    631STOCKHOLDERS EQUITYClass A common stock; par value $1 per share
(231 shares issued and outstanding)
    
    
    
    
    
    
    Class C common stock; par value $1 per share
(103 shares issued and outstanding)
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    1,242
    
    
    
    1,242Retained earnings
    
    
    1,157
    
    
    
    55Total stockholders equity
    
    
    2,399
    
    
    
    1,297Total liabilities and stockholders equity
    
    $
    3,260
    
    
    $
    1,928
  F-60




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
 
 2005
    
    2004Subscriber fees revenue
    
    $
    5,254
    
    
    $
    3,628Operating costs and expenses:Cost of equipment sales
    
    
    13
    
    
    
    62Selling, general and administrative expenses
    
    
    2,560
    
    
    
    2,084Depreciation and amortization
    
    
    9
    
    
    
    12Total operating costs and expenses
    
    
    2,582
    
    
    
    2,159Other (expense) income
    
    
    (21
    )
    
    
    Net income
    
    $
    2,652
    
    
    $
    1,470
  F-61




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
 
 Class A
    
    Class C
    
    Additional
    
    
    
    
    
    TotalCommon Stock
    
    Common Stock
    
    paid-in
    
    Retained
    
    stockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    earnings
    
    equityBeginning balance,
January 1, 2004
(unaudited)
    
    
    231
    
    
    $
    
    
    
    
    103
    
    
    $
    
    
    
    $
    1,242
    
    
    $
    185
    
    
    $
    1,427Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,600
    )
    
    
    (1,600
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,470
    
    
    
    1,470Ending balance,
December 31, 2004
    
    
    231
    
    
    $
    
    
    
    
    103
    
    
    $
    
    
    
    $
    1,242
    
    
    $
    55
    
    
    $
    1,297Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,550
    )
    
    
    (1,550
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,652
    
    
    
    2,652Ending balance,
December 31, 2005
    
    
    231
    
    
    $
    
    
    
    
    103
    
    
    $
    
    
    
    $
    1,242
    
    
    $
    1,157
    
    
    $
    2,399
  F-62




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##### Table of Contents



AEI Collingham Holdings Co. Ltd.
 
 NOTE A  OPERATIONS AND ORGANIZATION
   NOTE B  SUMMARY OF ACCOUNTING POLICIES
 Cash and Cash Equivalents
  Accounts Receivable
    2005
    
    2004Beginning balance
    
    $
    16
    
    
    $
    382Bad debt expense
    
    
    32
    
    
    
    40Accounts written off, net of recoveries
    
    
    
    
    
    
    (406
    )Ending balance
    
    $
    48
    
    
    $
    16
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##### Table of Contents



NOTE B  SUMMARY OF ACCOUNTING POLICIES  Continued
 Inventories
  Property and Equipment
   Revenue Recognition
    Income Taxes
  Basis of Accounting
  F-64




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##### Table of Contents



NOTE B  SUMMARY OF ACCOUNTING POLICIES  Continued
 Use of Estimates
  Advertising Expense
  NOTE C  PROPERTY AND EQUIPMENT
  2005
    
    2004Furniture and fixtures
    
    $
    666
    
    
    $
    668Computer equipment and software
    
    
    
    
    
    
    Less: Accumulated depreciation and amortization
    
    
    (661
    )
    
    
    (653
    )Net property and equipment
    
    $
    4
    
    
    $
    15
  NOTE D  ACCRUED EXPENSES
  2005
    
    2004Payroll and benefits
    
    $
    3
    
    
    $
    36Professional Fees
    
    
    138
    
    
    
    73Subcontractor expenses
    
    
    28
    
    
    
    36Other
    
    
    360
    
    
    
    345$
    529
    
    
    $
    489
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##### Table of Contents



NOTE E  MAJOR CUSTOMERS
  NOTE F  RELATED PARTY TRANSACTIONS
     NOTE G  COMMITMENTS AND CONTINGENCIES
  NOTE H  SUBSEQUENT EVENTS
   F-66




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description4.14
    
    Stock Purchase Agreement, dated as of December 14, 2006, by and among Claxson Interactive Group
Inc., Claxson USA II, Inc., El Sitio, Inc., Santori N.V., Morehaven Investments, Inc., Mandary
S.A., Turner International, Inc., Turner International Holding Company and Turner International Latin
America Networks LLC. Claxson agrees to furnish supplementally any omitted schedule to the
Commission upon request.4.15
    
    First Amendment to the Stock
Purchase Agreement, dated as of October 3, 2007, by and among
Claxson Interactive Group
Inc., Claxson USA II, Inc., El Sitio, Inc.,
Santori N.V., Morehaven Investments, Inc.,
Mandary S.A., Turner International, Inc., Turner
International Holding Company and Turner International
Latin America Networks LLC.4.16
    
    Shareholders Agreement, dated as of July 4, 2007, by and among Globosat Programadora Ltda.,
Playboy TV Latin America, LLC and PB Brasil Entretenimento S.A.4.17
    
    Parent Company Agreement, dated as of December 15, 2006, by and among Globosat Programadora Ltda.,
Claxson Interactive Group Inc. and Playboy Entertainment Group, Inc. Claxson agrees to furnish
supplementally any omitted schedule to the Commission upon request.4.18
    
    Share Purchase Agreement entered into on December 22, 2006, by and among Claxson Chile, S.A.,
Claxson Interactive Group Inc., Grupo Latino de Radiodifusión Chile Limitada and GLR Services,
Inc.8.1
    
    List of significant subsidiaries.12.1
    
    Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.12.2
    
    Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.13.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.13.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.15.1
    
    Consent of Deloitte & Co. S.R.L.15.2
    
    Consent of Deloitte & Touche
LLP.15.3
    
    Consent of Grant Thornton.15.4
    
    Consent of Morrison, Brown, Argiz
& Farra, LLP.15.5
    
    Consent of McClain & Company L.C.