As Filed with the Securities and Exchange Commission on July 17,2006.

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 20-F**

 

**o****REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR(g) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31,2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to             **

 

**OR**

 

**o****SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**Date of event requiring this shellcompany report**

 

**Commission file number**

 

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**Tevecap S.A.**

(Exact name of Registrant as specified in its charter)

 

| **TEVECAP INC.**                                     | ** ** | **THE FEDERATIVE REPUBLIC OF BRAZIL**           |
|------------------------------------------------------|------------|-------------------------------------------------|
| (Translation of Registrant’s name into English) |       | (Jurisdiction of incorporation or organization) |

 

**Av. dasNações Unidas, 7221 - 7o andar**

**São Paulo, SPBrazil**

**05425-902**

**(Telephone:  55-11-3037-5127)**

(Address and telephone number of principal executive offices)

 

----

 

Securities registered or to be registered pursuant to Section 12(b) ofthe Act:

 

**None**

(Title of Class)

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:

 

**None**

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) ofthe Act:

 

**12-5/8% Senior Notes due 2009 of Tevecap S.A. and guaranteesthereof by each of TVA Sistema de Televisão S.A., TVA Communications Ltd., ComercialCabo TV São Paulo Ltda., TVA Sul Paraná Ltda. and CCS Camboriú Cable System deTelecomunicações Ltda.**

 

**Indicate the number of outstanding shares of each of theissuer’s classes of capital or common stock as of the close of the periodcovered by the annual report:**

 

**485,220,440 Common Shares**

 

**Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act.**

 

**YES  ****o    NO  ****ý**

 

**If this report is an annual or transitional report, indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.**

 

**YES  ****o    NO  ****ý**

 

**Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days:**

 

**YES  ****ý    NO  ****o**

 

**Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act (Check one):**

 
| **LARGE ACCELERATED FILER  ****o** | **ACCELERATED  FILER  ****o** | **NON-ACCELERATED  FILER  ****ý** |
|----------------------------------------------|-----------------------------------------|--------------------------------------------------|

 

**If this is an annual report, indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).**

 

**YES  ****o    NO  ****ý**

 

**Indicate by check mark which financial statements item theregistrant has elected to follow:**

 

**ITEM 17  ****o    ITEM 18  ****ý**

 

 

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**TABLE OF CONTENTS**

 
| ITEM 1.               | IDENTITY OF DIRECTORS, SENIOR  MANAGEMENT AND ADVISORS                        |   |   |
|-----------------------|-------------------------------------------------------------------------------|--------|--------|
|                  |                                                                          |   |   |
| ITEM 2.               | OFFER STATISTICS AND  EXPECTED TIMETABLE                                      |   |   |
|                  |                                                                          |   |   |
| ITEM 3.               | KEY INFORMATION                                                               |   |   |
|                  |                                                                          |   |   |
| ITEM 4.               | INFORMATION ON THE COMPANY                                                    |   |   |
|                  |                                                                          |   |   |
| ITEM 5.               | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 |   |   |
|                  |                                                                          |   |   |
| ITEM 6.               | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |   |   |
|                  |                                                                          |   |   |
| ITEM 7.               | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |   |   |
|                  |                                                                          |   |   |
| ITEM 8.               | FINANCIAL  INFORMATION                                                        |   |   |
|                  |                                                                          |   |   |
| ITEM 9.               | THE OFFER AND  LISTING                                                        |   |   |
|                  |                                                                          |   |   |
| ITEM 10.              | ADDITIONAL  INFORMATION                                                       |   |   |
|                  |                                                                          |   |   |
| ITEM 11.              | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |   |   |
|                  |                                                                          |   |   |
| ITEM 12.              | DESCRIPTION  OF SECURITIES OTHER THAN DEBT SECURITIES                         |   |   |
|                  |                                                                          |   |   |
| 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                                                      |   |   |
|                  |                                                                          |   |   |
| ITEM 16.              | [RESERVED]                                                                    |   |   |
|                  |                                                                          |   |   |
| ITEM 16A.             | AUDIT  COMMITTEE FINANCIAL EXPERT.                                            |   |   |
|                  |                                                                          |   |   |
| ITEM 16B.             | CODE OF ETHICS                                                                |   |   |
|                  |                                                                          |   |   |
| ITEM 16C.             | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        |   |   |
|                  |                                                                          |   |   |
| ITEM 17.              | FINANCIAL  STATEMENTS                                                         |   |   |
|                  |                                                                          |   |   |
| ITEM 18.              | FINANCIAL  STATEMENTS                                                         |   |   |
|                  |                                                                          |   |   |
| ITEM 19.              | EXHIBITS                                                                      |   |   |
|                  |                                                                          |   |   |
| GLOSSARY              |                                                                          |   |
|                  |                                                                          |   |
| FINANCIAL  STATEMENTS |                                                                          |   |

 

i

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**EXPLANATORY NOTE**

 

**Presentationof Certain Information**

 

ThisAnnual Report on Form 20-F for the year ended December 31, 2005 isreferred to herein as the Annual Report.

 

TevecapS.A., which we refer to as Tevecap and, together with our subsidiaries, TVA orthe Company, is a corporation (*sociedadeanônima)* organized under the laws of the Federative Republic ofBrazil. Unless the context otherwise requires, “we,” “our,” or “us” refers toTVA. Our accounts, which are maintained in Brazilian *reais*, were prepared in accordance with the accountingprinciples generally accepted in the United States of America, or U.S. GAAP,and translated into U.S. dollars on the basis set forth in Note 2.3 of ourconsolidated financial statements, or the Tevecap Financial Statements and,together with the financial statements of CCS Camboriú Cable System de TelecomunicaçõesLtda. included in this Annual Report, the Financial Statements. Certain amountsstated herein in U.S. dollars (other than as set forth in the FinancialStatements and financial information derived therefrom) have been translated,for the convenience of the reader, from *reais*at the rate in effect on December 31, 2005 of R$2.3407 = U.S.$1.00. Suchtranslations should not be construed as a representation that *reais* could have been converted at suchrate on such date or at any other date. See Item 3, “Key Information—SelectedFinancial Data—Exchange Rates.”

 

Capitalizedterms used in this Annual Report are defined, unless the context otherwiserequires, in the Glossary attached hereto. All references in this Annual Reportto (i) ”U.S. Dollars,” “dollars,” or “U.S.$” are to United States dollarsand (ii) “*reais,*”**“*real*”or “R$” are to Brazilian *reais*.

 

Unlessotherwise specified, data regarding population or homes in a licensed area areprojections based on 2000 population census figures compiled by the *Instituto Brasileiro de Geografia e Estatística*,or IBGE and our knowledge of our markets. There can be no assurance that thenumber of people or the number of households in a specified area has notincreased or decreased by a higher or lower rate than those estimated by theIBGE since the 2000 census. Unless otherwise indicated, references to thenumber of our subscribers are based on our data as of December 31, 2005. Dataconcerning total MMDS and cable subscribers and penetration rates representestimates made by us based on the data of Pay TV Survey, Associação Brasileirade Telecomunicações por Assinatura (ABTA), Kagan World Media, Inc., IBGEdata, our knowledge of our pay television systems and public statements ofother Brazilian pay television providers. Although we believe such estimatesare reasonable, no assurance can be made as to their accuracy.

 

**Forward-LookingStatements**

 

ThisAnnual Report contains statements which are forward-looking within the meaningof the Private Securities Litigation Reform Act of 1995. These statementsappear in a number of places in this Annual Report and include statementsregarding the intent, belief or current expectations of the Company or ourofficers. Investors are cautioned that any such forward-looking statements arenot guarantees of future performance and involve risks and uncertainties, andthat actual results may differ materially from those in theforward-looking statements as a result of various factors. Neither ourindependent auditors, nor any other independent accountants, have compiled,examined, or performed any procedures, with respect to the prospectivefinancial information contained herein, nor have they expressed any opinion orany other form of assurance on such information or its achievability, andassume no responsibility for, and disclaim any association with, theprospective financial information.

 

ii

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**PART I**

 

**ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT ANDADVISORS.**

 

Notapplicable.

 

**ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.**

 

Notapplicable.

 

**ITEM 3. KEY INFORMATION**

 

**A.Selected Financial Data**

 

Theselected financial data as of December 31, 2005 and 2004 and for each ofthe three years in the period ended December 31, 2005 have been derivedfrom, and should be read in conjunction with, the Tevecap Financial Statementsincluded in this Annual Report. The selected financial data as of December 31,2003, 2002 and 2001 and for each of the two years in the period ended December 31,2002 have been derived from our audited financial statements that are notincluded elsewhere in this Annual Report.

 

Asrequired by Brazilian law, and in accordance with local accounting practices,our financial records are maintained in the applicable Brazilian currency, orthe *real*. However, the FinancialStatements are presented in U.S. dollars in accordance with U.S. GAAP. In orderto prepare the Financial Statements, our accounts have been translated fromBrazilian *reais*, on the basisdescribed in Note 2.3 to the Tevecap Financial Statements included in thisAnnual Report. Because of the differences between the evolution of the rates ofinflation in Brazil and the changes in the rates of devaluation, amountspresented in U.S. dollars may show distortions when compared on a period-to-periodbasis.

 

**SELECTEDFINANCIAL AND OTHER DATA**

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                              | ** ** | **(Dollars in Thousands)**       | ** ** |
| **Consolidated Statement of Operation:**                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Gross revenues**                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Monthly subscriptions                                   |       | $                                          | 126,641    |   | $ | 94,063 |   | $ | 83,794 |   | $ | 83,138 |   | $ | 90,218 |   |
| Installation                                            |       | 2,086                                      |       | 989 |   | 1,211 |   | 1,099 |   | 270 |   |
| Advertising                                             |       | 3,644                                      |       | 1,848 |   | 2,586 |   | 1,624 |   | 1,005 |   |
| Additional services and others (a)                      |       | 6,793                                      |       | 6,197 |   | 3,781 |   | 3,907 |   | 16,413 |   |
| Total gross revenue                                     | ** ** | **139,164**                                | ** ** | **103,097** | ** ** | **91,372** | ** ** | **89,768** | ** ** | **107,906** | ** ** |
| Direct operating expenses (b)                           |       | 46,087                                     |       | 37,122 |   | 37,217 |   | 43,963 |   | 51,296 |   |
| Taxes on revenues (c)                                   |       | 19,985                                     |       | 14,392 |   | 13,038 |   | 12,444 |   | 15,636 |   |
| Selling, general and administrative expenses            |       | 45,873                                     |       | 24,948 |   | 21,352 |   | 18,656 |   | 31,420 |   |
| Depreciation and amortization                           |       | 29,536                                     |       | 24,356 |   | 23,683 |   | 28,017 |   | 34,364 |   |
| Tax recovery program                                    |       | —                                     |       | — |   | 5,029 |   | — |   | — |   |
| Other operating expense, net                            |       | 6,929                                      |       | 3,315 |   | 3,671 |   | 4,281 |   | 1,762 |   |
| **Total operating expenses**                            |       | 148,410                                    |       | 104,133 |   | 103,990 |   | 107,361 |   | 134,478 |   |
| **Operating Income (loss) from continuing  operations** |       | (9,246                                     | )          | (1,036 | ) | (12,618 | ) | (17,593 | ) | (26,572 | ) |
| **Nonoperating (income) expenses**                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                   |       | 32,172                                     |       | 20,717 |   | 16,624 |   | 15,233 |   | 37,849 |   |
| Foreign Currency transaction (income) loss, net         |       | (6,379                                     | )          | (3,561 | ) | (11,019 | ) | 31,520 |   | 11,067 |   |
| Other nonoperating expenses (income), net               |       | —                                     |       | (8,443 | ) | 5,897 |   | 590 |   | (2,046 | ) |
| Income tax expense                                      |       | 28,046                                     |       | 9,171 |   | 19,382 |   | 79 |   | — |   |
| Equity in (income) losses of affiliates, net (d)        |       | 241                                        |       | 723 |   | (3,503 | ) | 6,401 |   | 2,375 |   |
| **Net income (loss)**                                   |       | (63,326                                    | )          | (19,643 | ) | (39,999 | ) | (71,416 | ) | (75,817 | ) |
|                                                         |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

1

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| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| **Other data:**                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Purchase of property, plant and equipment            |       | 26,577                                     |       | 13,085 |   | 11,223 |   | 11,195 |   | 30,722 |   |
|                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| **Ratio of earnings to fixed charges**(e)            |       | —                                     |       | — |   | — |   | — |   | — |   |
|                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| **Cash Flow Data:**                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities            |       | 31,159                                     |       | 24,409 |   | 10,627 |   | 25,795 |   | 11,695 |   |
| Net cash used in investing activities                |       | (26,577                                    | )          | (13,085 | ) | (11,082 | ) | (4,942 | ) | 3,823 |   |
| Net cash (used in) provided by financing activities  |       | 4,852                                      |       | (10,058 | ) | (467 | ) | (11,620 | ) | (33,739 | ) |
|                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| **Selected Operating Data:**                         |       |                                       |       |   |   |   |   |   |   |   |   |
| **Pay Television**                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Number of Subscribers (f)                            |       | 300,575                                    |       | 293,548 |   | 284,190 |   | 300,621 |   | 359,282 |   |
| Average monthly revenue per Subscriber (g)           |       | $                                          | 35.39      |   | $ | 29.57 |   | $ | 25.50 |   | $ | 21.24 |   | 24.56 |   |
| **Internet Broadband – Residential**            |       |                                       |       |   |   |   |   |   |   |   |   |
| Number of Subscribers (f)                            |       | 42,202                                     |       | 28,410 |   | 18,773 |   | 14,116 |   | 9,527 |   |
| Average monthly revenue per Subscriber (g)           |       | $                                          | 30.73      |   | $ | 28.31 |   | $ | 27.39 |   | $ | 21.65 |   | 29.72 |   |
| **Internet Broadband – SOHO**                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Number of Subscribers (f)                            |       | 2,174                                      |       | 1,780 |   | 1,410 |   | 839 |   | 526 |   |
| Average monthly revenue per Subscriber (g)           |       | $                                          | 185.79     |   | $ | 167.56 |   | $ | 161.12 |   | $ | 162.59 |   | 263.86 |   |
|                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data (at period end):** |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                            |       | 9,753                                      |       | 1,368 |   | 292 |   | 245 |   | 634 |   |
| Property, plant and equipment, net                   |       | 71,898                                     |       | 68,220 |   | 76,317 |   | 76,907 |   | 149,594 |   |
| Total assets                                         |       | 118,853                                    |       | 102,564 |   | 107,931 |   | 111,475 |   | 198,834 |   |
| Loans payable to related companies                   |       | 68,196                                     |       | 49,634 |   | 39,712 |   | 12,117 |   | 7,016 |   |
| Long-term liabilities                                |       | 231,175                                    |       | 152,084 |   | 69,380 |   | 86,298 |   | 83,177 |   |
| Redeemable common stock                              |       | 30,380                                     |       | 27,599 |   | 24,201 |   | 99,365 |   | 115,252 |   |
| Total shareholders’ deficit                     |       | (199,655                                   | )          | (120,317 | ) | (89,431 | ) | (119,618 | ) | (54,764 | ) |

 

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**Notes to Selected Financial and Other Data**

 

(a)          Includes revenues (such as cable modem fee, frequencies lease, wholesaleand technical assistance).

 

(b)         Represents costs directly related to the subscriber base and newinstallations evolution.

 

(c)          Represents various non-income based taxes paid on certain of our grossrevenue items with rates ranging from 3.65% to 15.15%.

 

(d)         Represents our pro rata share of the Net loss or income of our equityinvestments and minority interest.

 

(e)          For the five years ended December 31, 2005, earnings wereinsufficient to cover fixed charges by U.S.$35,039, U.S.$9,749, U.S.$24,120,U.S.$64,936 and U.S.$73,726, respectively. In calculating the Ratio of earningsto fixed charges, earnings represents pre-tax Net loss before minorityinterest, Equity in (losses) income of affiliates, plus fixed charges.

 

(f)            Represents the number of subscribers as of thelast day of each period.

 

(g)         Average monthly revenue per subscriber refers to the average monthlysubscription fee as of the last day of each period.

 

**ExchangeRates**

 

Until March 2005,there were two legal foreign exchange markets in Brazil: the commercial rateexchange market, or the Commercial Market, and the floating rate exchange market,or the Floating Market. The rate for the Commercial Market, or the CommercialMarket Rate, was reserved primarily for foreign trade transactions andtransactions that generally required prior approval from Brazilian monetaryauthorities, such as the purchase and sale of registered investments by foreignpersons and related remittances of funds abroad. The rate for the FloatingMarket, or the Floating Market Rate, generally applied to transactions to whichthe Commercial Market Rate did not apply. On March 4, 2005, the NationalMonetary Council issued Resolution No. 3,265 unifying the Floating Market

 

2

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and the Commercial Market.Despite such unification of the foreign exchange markets, the transactions thatused to be carried out in the Commercial Market generally still require priorregistration with and the approval of the Central Bank.

 

Foreignexchange rates are freely negotiated but are strongly influenced by the CentralBank. After the implementation of the *Real*Plan in 1994, the Central Bank initially allowed the *real* to float with minimal intervention. On March 6,1995, the Central Bank announced that it would intervene in the market and buyor sell U.S. dollars, establishing a trading band (*faixa de flutuação*) in which the exchange rate between the *real* and the U.S. dollar would fluctuate. From1995 through 1998, the Central Bank periodically adjusted the trading bandupward.

 

On January 13,1999, the Central Bank attempted a limited devaluation of the *real* by modestly elevating the band widthin which the *real* was allowed totrade. When this limited devaluation proved unsuccessful, the Central Bankannounced that it would no longer use its foreign currency reserves to protectthe value of the *real* (with theexception of limited interventions to restrain abrupt fluctuations in theexchange rate), thereby allowing the *real*to float freely against other currencies. Consequently, in the weeks followingthe initial devaluation, the *real*lost more than 40% of its value against the U.S. dollar. There can be noassurance that the Central Bank will not institute a new band in the future orthat the *real* will not devaluefurther.

 

On January 25,1999, in the wake of the devaluation and the adoption of a floating exchangeregime, the National Monetary Council adopted Resolution No. 2588,effective as of February 1, 1999. Pursuant to such resolution, the CentralBank ordered the banks authorized to operate in the Commercial Market to unifytheir positions in the two different markets then in place. During the periodfrom the unification of the banks’ positions in the Commercial Market and theFloating Market until the final unification of such markets into one singleforeign exchange market in 2005, the exchange rates offered in both markets hadidentical pricing and liquidity.

 

Thefollowing table provides the foreign exchange rate for the purchase of U.S.dollars expressed in *reais* perU.S. dollar for the periods and dates indicated.

 
| ** **             | ** ** | **Exchange Rates of reais per U.S.$ 1.00** | ** ** |
|------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **             | ** ** | **Low**                                                                  | ** ** | **High** | ** ** | **Average(1)** | ** ** | **Period End** | ** ** |
| **Year Ended:**        |       |                                                                     |       |   |   |   |   |   |   |
|                   |       |                                                                     |       |   |   |   |   |   |   |
| December 31, 2001 |       | 1.9357                                                                   |       | 2.8007 |   | 2.3506 |   | 2.3204 |   |
| December 31, 2002 |       | 2.2709                                                                   |       | 3.9552 |   | 2.9236 |   | 3.5333 |   |
| December 31, 2003 |       | 2.8219                                                                   |       | 3.6623 |   | 3.0783 |   | 2.8892 |   |
| December 31, 2004 |       | 2.6544                                                                   |       | 3.2051 |   | 2.9262 |   | 2.6544 |   |
| December 31, 2005 |       | 2.1633                                                                   |       | 2.7621 |   | 2.4352 |   | 2.3407 |   |
|                   |       |                                                                     |       |   |   |   |   |   |   |
| **Month Ended:**       | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                   |       |                                                                     |       |   |   |   |   |   |   |
| January 31, 2006  |       | 2.2116                                                                   |       | 2.3460 |   | 2.2739 |   | 2.2160 |   |
| February 28, 2006 |       | 2.1177                                                                   |       | 2.2217 |   | 2.1622 |   | 2.1355 |   |
| March 31, 2006    |       | 2.1067                                                                   |       | 2.2238 |   | 2.1520 |   | 2.1724 |   |
| April 30, 2006    |       | 2.0892                                                                   |       | 2.1524 |   | 2.1289 |   | 2.0892 |   |
| May 31, 2006      |       | 2.0586                                                                   |       | 2.3711 |   | 2.1781 |   | 2.3005 |   |
| June 30, 2006     |       | 2.1643                                                                   |       | 2.3018 |   | 2.2485 |   | 2.1643 |   |

 

----

(1)  Calculated as the average of the month-endexchange rates during the relevant period.

Source: Central Bank.

 

On July 14,2006, the Commercial Market rate (sell) as reported by the Central Bank was R$2.2130per U.S.$1.00.

 

For adescription of certain applicable exchange controls, see Item 10, “AdditionalInformation—Exchange Controls.”  See alsoItem 3, “Key Information—Risk Factors—Factors Relating to Brazil.”

 

3

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**B.Capitalization and Indebtedness**

 

Notapplicable.

 

**C.Reasons for the Offer and Use of Proceeds**

 

Notapplicable.

 

**D.Risk Factors**

 

Beforemaking any investment decision, investors should carefully read this entireAnnual Report and should consider carefully, in light of their own financialcircumstances and investment objectives, all the information set forth hereinand, in particular, certain matters with respect to debt securities issued byBrazilian companies, including, without limitation, those set forth below.

 

**FactorsRelating to the Company**

 

*We have incurred substantial operating losses and have aworking capital deficiency.*

 

Sinceour inception in 1989, we have been developing our businesses and continue tosustain substantial operating losses due primarily to insufficient revenue withwhich to fund build-out, interest expense and charges for depreciation andamortization. Net losses incurred have been funded principally by capitalcontributions from shareholders, borrowings under shareholder loans,dispositions of non-strategic assets, bank loans and other borrowings made fromtime to time. Our management has undertaken efforts to generate the cash flownecessary to meet our cost structure, including the sale of non-strategicassets, the reduction of indebtedness and internal cost-cutting measures. We cannotassure that these efforts will be successful in the long term.

 

*Voice over Internet Protocol is an uncertain regulatoryarea, and changes in regulation may affect our ability to succeed in thismarket.*

 

Voiceover Internet Protocol, or VoIP, is a new industry in Brazil, and theregulatory environment with respect to this technology is still uncertain. Changesin the regulation of our business activities with respect to VoIP, includingdecisions by regulators affecting our operations (such as the granting orrenewal of licenses or decisions as to the telephone rates we may chargeour customers) or changes in interpretations of existing regulations by courtsor regulators, could adversely affect our ability to succeed in the VoIP marketand hurt our financial position. Although we have attempted to minimize thisrisk by utilizing our own SCM license and entering into a partnership with atelephony provider licensed for STFC services by the Brazilian federaltelecommunications agency (*Agência Nacionalde Telecomunicações* or ANATEL) in the provision of VoIP services,any new regulations could have a material adverse effect on the VoIP industryas a whole and on us in particular.

 

*We must experience growth in our subscriber base in order tosustain our business operations and prospects.*

 

Overthe past three years, we have pursued a strategy of reduction of the number ofunprofitable customers, allowing us to improve the programming and customerservice that we are able to provide to profitable customers. In 2004 our paytelevision subscriber base returned to growth, with a 3% increase during theyear (7% in our cable operations in São Paulo), while the broadband internetcustomer base grew by 51% (71% in São Paulo). This growth continued in 2005,with a growth of 2.5% in our pay television subscriber base (5% in our cableoperations in São Paulo) and a growth of 47% in our internet customer base. Inorder for us to sustain our business operations and prospects, we must continueto experience growth in the ensuing years. We cannot assure you that we willexperience growth in our subscriber base, or that the rate of growth will besufficient to allow us to continue our operations.

 

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*Our activities are extensively regulated.*

 

Substantiallyall of our business activities are regulated by ANATEL. Such regulation relatesto, among other things, licensing, local access to cable and MMDS systems,commercial advertising, and foreign investment in cable and MMDS systems. Changesin the regulation of our business activities, including decisions by regulatorsaffecting our operations (such as the granting or renewal of licenses ordecisions as to the subscription rates we may charge our customers) orchanges in interpretations of existing regulations by courts or regulators,could adversely affect us. ANATEL has the authority to grant cable and MMDSlicenses pursuant to public bidding processes. We are unable to predict whatimpact, if any, such public bidding will have on our ability to launch andoperate new systems. Any new regulations could have a material adverse effecton the subscription television industry as a whole and on us in particular.

 

*We have a high level of indebtedness and a current deficit.*

 

We hadapproximately U.S.$81.1 million of net consolidated indebtedness tounaffiliated third parties as of December 31, 2005. As of the same date,we had current assets of approximately U.S.$23.7 million and currentliabilities of approximately U.S.$56 million, resulting in negative workingcapital of approximately U.S.$32.3 million. We may not be able to repayour debts, implement our business strategy or obtain financing for workingcapital or investments or other purposes. Furthermore, our indebtedness may limitour ability to implement strategies or adapt to market changes, such asdownturns in economic activity, which would adversely affect our ability toface those competitors of lower leverage, resulting in adverse effects on ourfinancial condition and results of operations.

 

*We may requireadditional financing, which may not be readily available when necessary.*

 

If we fail to generatesufficient operating results, or if our capital needs exceed our projectedcapital requirements, we may require substantial additional investment ona continuing basis to finance our corresponding capital expenditures. Inaddition, in order to implement our business strategies, we may requiresubstantial additional capital to acquire new pay television licenses orentities holding such licenses, or to make any investments in or acquire otherexisting pay television operations. Also, our future cash requirements may increaseas a result of unexpected developments in the Brazilian pay television orbroadband internet markets and the amount and timing of our future capitalrequirements will depend on a number of factors, many of which are not withinour control, including subscriber growth and retention, capital costs, currencydevaluation, regulatory changes and competitive conditions. Our failure toobtain any needed financing in the future may adversely affect ourfinancial condition and results of operations.

 

*Our debt obligations are subject to foreign exchange risk.*

 

Asignificant portion of our debt obligations (i.e., our senior notes) aredenominated in U.S. dollars, while we generate revenues only in Brazilian *reais.*We also incur a significant portionof our programming costs in U.S. dollars. Consequently, a significantdevaluation of the *real* againstthe U.S. dollar can significantly affect our ability to meet our obligationsand fund our capital expenditures, and could adversely affect our results ofoperations. In addition, shifts in currency exchange rates may have amaterial adverse effect on us and may force us to seek additional capital,which may not be available to us. While we may consider entering intotransactions to hedge or otherwise share with programmers the risk of exchangerate fluctuations, it may not be possible for us to obtain sucharrangements on commercially satisfactory terms.

 

*Tevecap has limited assets and depends on its subsidiariesto repay indebtedness.*

 

Tevecap’soperations are conducted through, and substantially all of Tevecap’s assets areowned by, Tevecap’s direct and indirect subsidiaries. The ability of Tevecap tomeet its obligations in respect of its indebtedness, including the Seniornotes, will depend on, among other things, the future performance of suchsubsidiaries (including the Guarantors) and the ability of Tevecap to refinancesuch indebtedness at maturity (or upon early redemption or otherwise). Inaddition, the ability of Tevecap’s subsidiaries to pay dividends and make otherpayments to Tevecap may be restricted by, among other things, applicablecorporate and other laws and regulations and by the terms of agreements towhich such subsidiaries may become subject. In particular, Braziliancompanies are allowed to distribute dividends only if, after a given fiscalyear, their net profits exceed accumulated

 

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losses. In addition, theproperty and assets (including receivables) of certain of Tevecap’ssubsidiaries have, and may in the future have, liens placed upon thempursuant to existing and future financings.

 

*Because we have engaged in a significant number of relatedparty transactions, our financial statements may not be trulyrepresentative of our financial position.*

 

Wehave engaged in a significant number and variety of related party transactions,including, without limitation, transactions with respect to administrativeservices, including payroll, human resources, accounting, tax, finance andlegal services; publishing and advertising; financing transactions; andlicenses. Although we believe such transactions are conducted on an arm’s-lengthbasis, we have not performed any studies or analyses to determine whether theterms of past transactions with related parties have been equivalent to arm’s-lengthtransactions and cannot state with any certainty the extent to which suchtransactions are comparable to those which might have been obtained from anon-affiliated third party. If we were to be unable to obtain these servicesfrom our affiliates, our financial position may be adversely or positivelyaffected.

 

*Wemay experience high churn rates among our pay television and internetsubscribers.*

 

Our ability togenerate pay television and broadband internet subscription revenues isdependent on our attraction and retention of subscribers, which requires us toincur acquisition and installation costs, including sales commissions,marketing costs and equipment installation costs. Our ability to recover thesecosts requires us to retain our clients as subscribers of our services.

 

Highrates of subscriber churn could have a material adverse effect on our revenuesand profitability given the costs that we incur to attract each new subscriber.We may experience high churn rates in the future and we cannot assure youthat we will experience growth in our subscriber base that will offsetsubscriber customer churn rates. If this occurs, our financial condition andresults of operations may be adversely affected.

 

*We facesignificant competition in the pay television and broadband internetindustries.*

 

The pay televisionindustry and broadband internet segment in Brazil are, and are expected tocontinue to be, highly competitive. New competitors may emerge as a resultof changing technology, changes in regulations governing the pay television andhigh-speed data industries or as a result of new licenses granted by ANATEL inmarkets in which we currently operate. Similarly, if we expand into additionalservices, we will face competition from other service providers.

 

For pay televisionservices, we primarily compete with other main pay television service providersin the markets in which we operate, as well as with satellite direct-to-home,or DTH, service providers and Brazilian broadcast networks and their localaffiliates. For broadband internet services, we compete with fixed linetelephony carriers that provide digital subscriber line, or DSL, service, atechnology that transmits data through copper lines used in telephone networks,and with other dial-up internet service providers. For pay television andbroadband internet services, cable and MMDS services, we compete indirectlywith movie theaters and video rental stores, as well as with otherentertainment and leisure activities.

 

For VoIP services, wemainly compete with fixed line telephony carriers, including *Telecomunicações de São Paulo S.A. – TELESP*in the State of São Paulo and *Telemar NorteLeste S.A*. in the State of Rio de Janeiro, in addition to other paytelevision and broadband internet service providers.

 

Some of our competitorshave greater financial resources than we do. In addition, further consolidationamong our competitors, particularly DTH service providers, may increasethe economies of scale of certain of our competitors. As a result, we cannotassure you that we will be able to compete successfully, which could adverselyaffect our business and results of operations.

 

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*Existingand future technological developments may allow new competitors to emerge.*

 

Technology in thecommunications industry is subject to rapid and significant change. Technologicaladvances could require us to expend substantial financial resources to developor implement new technologies or to upgrade our existing equipment in order toensure that our existing equipment and services do not become obsolete. We may nothave sufficient financial resources to fund new technology our access newresources. Our failure to introduce new technology and services as rapidly asthose of our competitors could adversely affect our financial condition andresults of operations.

 

We arepresently upgrading our cable and MMDS systems to offer digital services andbelieve that, for the foreseeable future, existing and developing alternativetechnologies will not materially adversely affect the viability orcompetitiveness of our pay television business. Although we believe that ourrecently implemented technological changes have produced and will continue toproduce positive results, future technological advances may require us toexpend substantial financial resources in the development or implementation ofnew competitive technologies.

 

*We may besubject to substantial additional taxes or obligations.*

 

We may be subject tosubstantial additional taxes on our network, the most significant of which is acharge (*preço público* or *tarifa)* on the use of public thoroughfares(which includes the installation and passage of cables, as well as the use ofsoil, subsoil and aerial space) which has been approved by several Brazilianmunicipalities. This tax is assessed per meter of cable installed in therelevant municipality, with the tax rate varying widely by municipality. Wehave over 4,394 kilometers of installed cable in municipalities that haveapproved this tax. We have challenged the application of this tax and have notmade any judicial deposits or provisions for our payment based on the favorableopinion of our lawyers as to the merits of the challenge. In a related lawsuit,the Brazilian Superior Court of Justice (*SuperiorTribunal de Justiça*) recently ruled that municipalities do not have thepower to create charges or taxes on the use of public thoroughfares.

 

In addition, theBrazilian Superior Court of Justice recently judged that internet service isnot a communication service, and therefore, is not subject to state value-addedtax (*Imposto sobre a Circulação deMercadorias e Serviços* or ICMS). If this decision is confirmed, it may resultin our being subject to municipal services tax (*Imposto sobre Serviços de Qualquer Natureza*or ISS) taxationat a rate of 5.0% on our gross revenues, for as long as internet services areincluded on a list of services under Supplementary Law No. 116/03. On theother hand, if internet services are deemed to be a type of communicationservices, these activities would be subject to ICMS taxation, with a rate thatis currently reduced. If we become subject to increased tax obligations as aresult of the taxes described above or otherwise, our financial condition andresults of operations may be adversely affected.

 

*We may haveto remove our aerial cables and transfer them underground.*

 

The municipalities inwhich we operate may require us to remove our aerial cables and transferthem underground. For instance, in July 2005, the mayor of São Pauloenacted Municipal Law No. 14,023, requiring that all cables and wire(including the electricity, telecommunications and pay television cables) polesbe transferred underground. The law provides for a term of five years for thetransfer to take place. However, the law was vetoed and the matter awaitsfuture regulation. Currently, all of our cable network in São Paulo isinstalled through aerial poles. In addition, we cannot assure that othermunicipalities will not enact similar laws. If we are required to transfer asignificant portion of our cables underground, our financial condition andresults of operations may be adversely affected.

 

**FactorsRelating to Brazil**

 

*The Brazilian government has exercised, and continues toexercise, significant influence over the Brazilian economy.*

 

Sincesubstantially all of our operations and customers are located in Brazil, ourfinancial condition and results of operations are substantially dependent onBrazil’s economy and may be negatively affected as a result of theintervention by the Brazilian government in the economy.

 

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TheBrazilian economy has been characterized by significant volatility and byfrequent and significant interventions by the Brazilian government. During the1980s and the beginning of the 1990s, in response to periods of high inflation,recession and fiscal imbalances, the Brazilian government often changedmonetary, tax, credit, tariff and other policies to influence the course ofBrazil’s economy. Governmental actions to control inflation and implement otherpolicies have, at times, involved wage and price controls as well as otherinterventionist measures, such as raising interest rates, freezing bankaccounts, imposing capital controls and inhibiting international trade inBrazil. Changes in policy involving tariffs, exchange controls, regulation andtaxation could adversely affect our business and financial results, as couldinflation, currency devaluation, social unrest and other political, economic ordiplomatic developments, and the Brazilian government’s response to suchdevelopments. In particular, a number of members of the Brazilian Congress andthe administration of President Luiz Inácio Lula da Silva are presently underinvestigation regarding allegations of corruption, including aninfluence-peddling arrangement in which political parties and Congressionalmembers allegedly received payments in return for voting in favor of theinitiatives of the Workers Party (the President’s political party).

 

Governmentintervention in the Brazilian economy may increase our costs and restrictour capacity to conduct our business as presently being conducted. Moreover,social, political or economic developments resulting from the Braziliangovernment’s imposition of new economic policies, or the Brazilian government’sresponse to those developments, could also adversely affect our operations.

 

*Brazilian political and economic conditions have beenunstable in the past.*

* *

The Brazilian government’spolitical and economic policies may have important effects on Braziliancorporations and other entities, including us, and on market conditions andprices of Brazilian securities. Our financial condition and results ofoperations may be adversely affected by the following factors and theBrazilian government’s response to these factors:

 

•                  the results of presidential electionsin October 2006;

•                  devaluations and other exchange ratemovements;

•                  inflation;

•                  exchange control policies;

•                  social instability;

•                  price instability;

•                  energy shortages;

•                  interest rates;

•                  liquidity of domestic capital andlending markets;

•                  compliance with InternationalMonetary Fund performance guidelines;

•                  tax policy; and

•                  other political, diplomatic, socialand economic developments in or affecting Brazil.

 

*The Brazilian currency has fluctuated significantly inthe past.*

* *

The Brazilian currency has been devalued repeatedlyduring the last four decades primarily as a result of inflationary pressures.Throughout this period, the Brazilian government has implemented variouseconomic plans and utilized a number of exchange rate policies, includingsudden devaluations, periodic mini-devaluations (with the frequency ofadjustments ranging from daily to monthly), floating exchange rate systems,exchange controls and dual exchange rate markets. Although over long periods oftime devaluations of the Brazilian currency generally have correlated with therate of inflation in Brazil, such governmental actions over shorter periodshave resulted in significant fluctuations in the *real* exchange rate between the Brazilian currency and theU.S. dollar.

 

Theexchange rate between the *real*and the U.S. dollar, the relative rates of real devaluation and the prevailingrates of inflation have affected our financial results and may continue todo so in the future. A substantial portion of our indebtedness and some of ouroperating expenses and capital expenditures are, and are expected to continueto be, denominated in or indexed to the U.S. dollar and other foreigncurrencies. See Item 3, “Key Information—Selected Financial Data—ExchangeRates.”

 

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Devaluations of the *real* relative to the U.S. dollar alsocreate additional inflationary pressures in Brazil that may negativelyaffect us. In addition, a significant devaluation generally results in acurtailment of access to foreign financial markets for Brazilian issuers andcan lead to government intervention, including recessionary governmentpolicies.

 

*The Brazilian economy has experienced extremeinflation in the past.*

* *

Until mid-1994 Brazilexperienced extremely high rates of inflation, with annual rates of inflationreaching as high as 2,708.6% in 1993 and 909.61% in 1994, as measured by theGeneral Price Index—Domestic Availability (*ÍndiceGeral de Preços Disponibilidade Interna*, or the IGP-DI). Inflationcontributed materially to economic uncertainty in Brazil and to heightenedvolatility in the Brazilian securities markets.

 

After the introduction ofthe *Real* Plan in 1994, the rateof inflation as measured by the IGP-DI fell steadily to 1.71% in 1998. Inflationincreased to 19.98% in 1999 as a result of the devaluation of the real in January 1999,decreased to 9.81% for 2000, and reached 10.40% in 2001 and 26.41% in 2002. In2003, 2004 and 2005 the annual inflation rate was 7.67%, 12.1% and 1.24%,respectively. Inflation itself and governmental actions taken to combatinflation have in the past had significant negative effects on the Brazilianeconomy. Inflation, actions taken to combat inflation and public speculationabout possible future actions have also contributed to economic uncertainty inBrazil and heightened volatility in the Brazilian securities markets. In aneffort to control the inflationary pressures derived from the devaluation ofthe *real*, the Braziliangovernment has taken deflationary actions, such as raising interest rates andimposing credit restrictions, which are highly unpopular and may beunsustainable for long periods of time. Periods of substantial inflation may inthe future have material adverse effects on the Brazilian economy, theBrazilian market for television advertising and on our business, condition(financial or other), properties, prospects and results of operations.

 

*The availability of credit in the Brazilian market may belimited by external events.*

 

Anumber of developments or conditions have significantly affected theavailability of credit in the Brazilian economy. External events have from timeto time resulted in considerable outflows of funds and declines in the amountof foreign currency invested in Brazil. Such events include the devaluation ofthe Mexican peso in December 1994, the Asian economic crisis of 1997, theRussian currency crisis of 1998, the currency instability that Brazil faced in1999, and the recent recession in Argentina. To defend the *real* during such events and to controlinflation, the Brazilian government has maintained a tight monetary policy,with associated high interest rates, and has constrained the growth of credit. Itis uncertain whether these disruptions in the Brazilian economy will adverselyaffect our financial condition or results of operations.

 

*The Brazilian government has enacted tax and socialsecurity reforms in the past.*

* *

To implement its fiscalpolicies, the Brazilian government regularly enacts reforms to the tax andother assessment regimes to which we are subject. These reforms include theenactment of new taxes or assessments, changes in the bases of calculation orrates of assessment and, occasionally, enactment of temporary taxes, theproceeds of which are earmarked for designated governmental purposes. Theeffects of these changes and any other changes that could result from enactmentof additional tax reforms cannot be quantified but may reduce our volumeof transactions, increase our costs or limit our profitability. There can be noassurance that these changes will occur in the future. If these changes dooccur, they may adversely affect our operations or financial condition.

 

President da Silva’scoalition controls less than a majority of the Senate and less than the 60%required in each house to approve constitutional amendments. President da Silva’ssuccess in enacting his initiatives will, therefore, depend on his ability to form andmaintain alliances with other major parties in the Brazilian Congress. Thesuccess of President da Silva’s initiatives will also be influenced by publicopinion toward the reforms and the strength of any opposition to the reforms byaffected interest groups. If the reforms are not approved by the Congress, Brazil’seconomic growth may be impeded, which in turn could have a negative impacton our business.

 

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*The Brazilian currency is subject to exchange controlsand restrictions.*

* *

The purchase and sale offoreign currency in Brazil is subject to governmental control through theCentral Bank. Brazilian law provides that, in the event of a serious imbalancein Brazil’s balance of payments or a foreseeable likelihood of such animbalance, the Brazilian government may, for a limited period of time, imposerestrictions on the remittance of foreign currency and on the conversion ofBrazilian currency into foreign currencies. Brazil has not restricted theremittance of foreign currency since 1990. However, no assurance can be giventhat such measures, which could affect our ability to make principal andinterest payments with respect to the Senior notes will not be instituted inthe future.

 

Many factors beyond ourcontrol could affect the likelihood of the Brazilian government imposingexchange control restrictions. Among these factors are:

 

•                  the level of Brazil’s foreign currency reserves;

•                  the availability of sufficient foreign exchange onthe date a payment is due;

•                  the size of Brazil’s debt service burden relativeto the economy as a whole;

•                  Brazil’s policy towards the International MonetaryFund; and

•                  political constraints to which Brazil may besubject.

 

**ITEM 4. INFORMATION ON THE COMPANY**

 

**A. History and Development**

 

We are one of the major multiservice telecommunicationsoperators in Brazil. We provide the following services to our subscribers:

 

•                  paytelevision services (through digital and analog MMDS and cable technologies);

 

•                  broadbandinternet services; and

 

•                  VoIPand other telecommunications services.

 

In 1991we launched the first pay television service in Brazil and, in 1999, became thefirst provider in Brazil of high speed internet services under the name *Ajato.*Today *Ajato* offers broadband internet access and Editora Abrilcontent to residential and corporate subscribers. In 2004 we became the firstBrazilian pay television operator to offer digital services by launching *TVA Digital*, our digital pay televisionservice, to our cable subscribers in São Paulo. In 2005 we digitalized our MMDSnetwork in São Paulo, which permitted the supply of digital service to the city’sentire metropolitan region.

 

Withthe launching of *TVA Voz* (“TVAVoice,” a VoIP service) in 2005, we became the first “triple-play” operator inthe Brazilian market, offering pay television, broadband internet and voiceservices. In 2005 we also became the first Brazilian pay television operator tooffer digital video recorder (DVR) service, which is a first step towards thelaunch of video-on-demand (VOD) services for our digital TVA subscribers. Beingthe triple-play pioneer in Brazil strengthens our reputation as an innovator inthe segments in which we operate.

 

Interms of number of subscribers, according to Pay TV Survey, as of December 31,2005 we were the second largest terrestrial pay television company and thelargest terrestrial digital television operator in Brazil, and one of theprincipal broadband internet providers in the country.

 

Throughour digital and analog MMDS and cable networks, we serve both residential andcorporate customers. We offer services in seven cities (São Paulo, Rio deJaneiro, Curitiba, Porto Alegre, Foz do Iguaçu, Florianópolis and BalneárioCamboriú), with a total population of approximately 28.5 million people as of December 31,2005. In Balneário Camboriú, we are the only terrestrial pay televisionoperator. According to IBGE statistics, the States of São Paulo, Rio de Janeiroand Paraná (the capital of which is Curitiba) alone represented approximately51% of Brazil’s GDP in 2004. Residents of these areas have substantially higher

 

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average household income,*per capita*consumption andreceptivity to products with technological innovations than the respectivenational averages. In addition, the population density in these states issubstantially higher than the national average and has a higher concentrationof classes with greater purchasing power. Thus, we believe we are active in thelargest and most attractive markets in Brazil.

 

From2001 to 2003 we implemented a strategic and financial restructuring, followingwhich we significantly improved our results, increased our profitability andsubscriber base and created a new business model with the launch of newproducts and services focused on the triple-play concept.

 

Webelieve that the profitability of our operations in São Paulo, where we operatein the triple play business model, is in line with benchmarks worldwide. Weexpect the digitalization of the MMDS network in Rio de Janeiro to occur by theend of 2006, and in Curitiba by the end of 2007. At that time, we will be ableto offer digital services in these cities with the same quality as we providecurrently in São Paulo. We believe that the digitalization of our networkssignificantly improves our profitability by allowing us to offer bundledservices and launch new products to our subscriber base.

 

Webelieve that there is high potential for growth in the markets in which weoperate because, with the digitalization of our MMDS network in São Paulo, Rioand Curitiba, we will have a highly competitive product in metropolitan areaswith more than 2 million class ABC+ households, of which more than 900,000did not have pay television services as of December 31, 2005. In addition,when compared with cable, our MMDS network requires lower infrastructuredevelopment and operating costs, while allowing us to supply the same servicesas cable, plus mobile services.

 

The chart below shows the evolution of our subscriberbase in each of the services that we provide:

 

**SubscriberBase (in thousands)**

 

 

Webelieve the increase in our subscriber base and profitability is due in large part tothe flexibility of options we offer to our subscriber base and our dedicationto customer service. We take a long-term approach to our relations with oursubscribers by offering bundled video, voice and data services, with a widevariety of pricing options.

 

Wehope to expand our portfolio of innovative and quality products and services toinclude WiMAX technology, which will add restricted portability and mobility toour video, data and voice services, thereby permitting the expansion of ourbusiness model to “quadruple play.”   In November 2005,we signed a memorandum of understanding with Samsung for the development ofWiMAX technology, and in March 2006 we signed a trial contract for theanalysis of the commercial feasibility of WiMAX technology in São Paulo, whichis expected to occur by the end of 2006. The objective of this contract is toadapt WiMAX technology to the topological conditions of São Paulo, which wouldmake Brazil the second country, after South Korea, to offer WiMAX on a broadbasis. We believe that we are the first operator in Brazil to test WiMAXtechnology. We expect that the WiMAX NLOS (Non-line of Sight) in our digitalMMDS network will avoid blockages of shadow areas, permitting greater coverageand better service quality.

 

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Webelieve that MMDS has gained increasing importance as a distribution platform.Our digital MMDS network, together with the use of WiMAX technology, makes itpossible to add portability and restricted mobility to the video, voice anddata services we already offer. This should provide a new experience andentertainment concept for our subscribers, as we will be able to offer accessto our content in different platforms and terminals (“anytime, anywhere, anydevice”). This development of our business model will expand the market ofconsumers for our services beyond households as a whole and into differentconsumers in each household. We also believe that there are significantbarriers to entry for new service providers in this segment, includingregulatory issues (such as the limited MMDS radiofrequency spectrum availableto new providers, especially in São Paulo and Rio de Janeiro, where we holdconcessions for the entire MMDS spectrum).

 

Throughour cable and MMDS licenses, we are able to provide multiservices in our majormarkets until the expiration date of these licenses. We believe that, as we usethe MMDS spectrum in an efficient manner, and satisfy other applicablerequirements, we will obtain the renewal of each of our licenses for a further15 years. In 2006, we requested renewal of our MMDS licenses (which presentlyexpire in 2009) by ANATEL, together with the permission to supply wirelessmultiservices with portability and restricted mobility in the 2.5GHZ band ofthe MMDS spectrum. With the renewal of these MMDS licenses, we expect to obtainthe first wireless multiservices license in Brazil.

 

As of December 31,2003, we also held a minority interest in several companies known as “CanbrasTVA”, which collectively provided cable television services to an additional 19cities in southern Brazil with a total population of 2.9 million. In October 2003,we entered into an agreement to sell our entire equity interest in each of theCanbras TVA companies to Horizon Cablevision do Brasil S.A. The federal AgênciaNacional de Telecomunicações (Brazilian Telecommunications Agency, or ANATEL)approved this sale on June 16, 2004, and all other conditions precedent tothe closing of the sale were waived by the parties during the first half of2004. Abril Comunicações S.A., our main shareholder, received the entireproceeds of the sale in the amount of US$5.5 million, for which we recognized ashareholders’ receivable.  In addition,upon the consummation of this sale, we and the Canbras TVA companies terminatedour Association Agreement, dated June 14, 1995.

 

Duringthe three years ended December 31, 2005, we incurred capital expendituresof $50.9 million, primarily in connection with the purchase of receptionequipment, converters for installation throughout our cable and MMDS systems,other equipment required to upgrade our cable and MMDS networks (including theintroduction of digital services in São Paulo) and the increase of our paytelevision and internet subscriber base. We estimate that approximately $47.7million will be required in 2006, principally in connection with the purchaseof installation materials and equipment, technological upgrades (including theintroduction of digital services in Rio de Janeiro) and the increase of our paytelevision and internet subscriber base.  We estimate that approximately 85% of theseinvestments are variable (due to growth of the subscriber base and Churnreplacement) and that the payback for such investments will occur within asix-month period (for analog services and broadband internet services) or a 12to 15-month period (for digital services).

 

TevecapS.A. is a corporation of unlimited duration under the laws of the FederativeRepublic of Brazil.  Our registeredoffice is located at Av. das Nações Unidas, 7221 - 7o andar, São Paulo,05425-902 SP, Brazil (telephone: +55-11-3037-5127).

 

**B. Business Overview**

 

**Our Strategy**

 

Ourbusiness strategy is focused on creating long-term relationships with ourcustomers by offering quality programming and multiple communications servicesfor all age groups.  We are takingadvantage of technological developments to use our core cable and MMDSinfrastructure to provide high speed data transmission, interactive servicesand other telecommunications services and expect to take advantage of possiblederegulation and the growing demand for these services in Brazil.  We were the first company in Brazil to providecustomers with a single source of “triple-play” (video, data and voice)multimedia services, and through the development of our WiMAX services weexpect to become the first company in Brazil to provide a single source of “quadruple-play”(video, data, voice and portability) services.

 

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**The Brazilian Pay Television Market**

 

Brazil is the largest television and video market inLatin America with an estimated 51.8 million TV Homes which, as of December 31,2005, watched on average approximately 2.3 hours of television per day. Inresidences that have access to free television, pay television, Internetservices, newspapers and magazines, pay television is the leader in terms ofshare of time, with a 24% share, in spite of its relatively recent entry intothe market. Approximately seven million television sets and three million DVDunits were sold in Brazil during 2005.

 

The pay television industry in Brazil began in 1989with the commencement by TVA of UHF service in São Paulo (which was followed bythe introduction by TVA of MMDS services in São Paulo in 1991). As of December 31,2005, there were an estimated 4.1 million pay television subscribers,representing approximately 8.7% of Brazilian TV Homes. By comparison, as of December 31,2005, 75% of TV Homes in Argentina, 18.9% of TV Homes in Mexico and 82% of TVHomes in the United States of America subscribed to pay television. Managementbelieves that the number of pay television subscribers in Brazil will continueto grow as pay television reaches more households both through the expansion ofexisting and new MMDS and cable systems and through development of nationwideKu-Band transmission systems. In addition, management expects that the paytelevision industry in Brazil will undergo a period of consolidation in thenear future due to the failure of the industry to grow as expected since itsinception and the need by pay television companies to increase numbers of subscribersand revenue in order to reach or maintain profitability.

 

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**Our Services**

 

***Pay television***

 

Weoffer diverse pay television and video services, catering to various audiencesin a flexible manner. We deliver these services through digital and analog MMDSand cable distribution networks.

 

Thefollowing table sets forth information regarding the markets in which weoperate pay television systems and distribute programming, as of December 31,2005: 

 
| ** **                                  | ** ** | **Service Launch  Date** | ** ** | **TV  Homes(a)** | ** ** | **Class ABC  TV  Homes(a)** | ** ** | **Subscribers** | ** ** | **Average Revenue  per Month per  Subscriber** | ** ** | **Pay Television  Programming  Channels  Offered** | ** **            |
|---------------------------------------------|------------|-------------------------------|------------|------------------|------------|----------------------------------|------------|-----------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------|-----------------------|
| **MMDS:**                                   |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
|                                        |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| TVA Sistema                                 |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| São Paulo  (digital & analog) |       | September 1991           |       | 2,258,831        |       | 785,288                          |       | 30,542          |       | U.S.$                                                         | 40.90      |                                                    | 10 analog/107 digital |   |
| Rio de Janeiro                              |       | March 1992               |       | 1,907,346        |       | 1,007,975                        |       | 64,119          |       | U.S.$,                                                        | 31.38      |                                                    | 28                    |   |
|                                        |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| TVA Sul                                     |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| Curitiba                                    |       | March 1992               |       | 426,836          |       | 241,405                          |       | 5,081           |       | U.S.$                                                         | 23.39      |                                                    | 15                    |   |
|                                        |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| **Cable(b):**                               |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
|                                        |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| TVA Sistema                                 |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| São Paulo  (analog & digital) |       | October 1994             |       | 2,258,831        |       | 785,288                          |       | 154,794         |       | U.S.$                                                         | 37.32      |                                                    | 63 analog/107 digital |   |
|                                        |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| TVA Sul                                     |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| Curitiba                                    |       | January 1995             |       | 426,836          |       | 158,896                          |       | 21,511          |       | U.S.$                                                         | 34.84      |                                                    | 68                    |   |
| Camboriú                               |       | June 1996                |       | 22,925           |       | 14,854                           |       | 10,535          |       | U.S.$                                                         | 32.16      |                                                    | 60                    |   |
| Foz do Iguacu                               |       | June 1996                |       | 105,894          |       | 42,944                           |       | 7,448           |       | U.S.$                                                         | 23.81      |                                                    | 65                    |   |
| Florianopolis                               |       | September 1996           |       | 202,549          |       | 124,924                          |       | 6,545           |       | U.S.$                                                         | 32.88      |                                                    | 63                    |   |
|                                        |       |                          |       |             |       |                             |       |            |       |                                                          |       |                                                    |                  |
| Total MMDS and Cable Subscribers            |       |                          |       |             |       |                             |       | 300,575         |       |                                                          |       |                                                    |                  |
| Subscribers Awaiting Installation           |       |                          |       |             |       |                             |       | 443             |       |                                                          |       |                                                    |                  |
| Total Subscribers                           |       |                          |       |             |       |                             |       | 301,018         |       |                                                          |       |                                                    |                  |

 

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(a)          This datais based on information provided by Pay TV Survey and IBGE.

(b)         TVA’s cablesystems in São Paulo, Curitiba, Camboriú, Foz do Iguaçú and Florianópolis haveapproximately 668,191, 201,615, 19,890, 18,060 and 29,822 Homes Passed,respectively, as of December 31, 2005.

 

*MMDS*

 

Weoperate Brazil’s largest MMDS network and serve the country’s majormetropolitan areas.  We own four MMDSlicenses and operate MMDS systems in São Paulo, Rio de Janeiro, Curitiba andPorto Alegre, which have an aggregate population of approximately 26.1 million.As of December 31, 2005, we served 99,742 MMDS subscribers in these cities. All of our MMDS systems use addressableconverters, which allow us to offer tiered pricing options that allow us toattract new customers, retain existing customers and reduce Churn.

 

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In2005 we launched our digital MMDS service in São Paulo. We expect to launchdigital MMDS service in Rio de Janeiro in late 2006 and in Curitiba in 2007. Ourdigital MMDS service offers 87 pay television channels plus 20 audio channels. Ouranalog MMDS systems offer between 10 and 29 analog channels, although in theSão Paulo and Rio de Janeiro metropolitan areas our concession permits us touse all 31 frequencies currently available in these markets.

 

MMDSsystems are typically easier to deploy and require relatively little capitalinvestment for construction and maintenance as compared to cable systems. Contentis broadcast by signals through the air from microwave transmitters to a smallreceiving antenna located at a subscriber’s home or dwelling unit. At thesubscriber’s location, the microwave signals are converted to frequencies thatcan pass through a conventional coaxial cable into a decoder located near atelevision set.

 

Inaccordance with Brazilian regulations, each MMDS license allows an MMDSoperator to provide service to households in a circular area within a radius of35 kilometers, expandable to 50 kilometers, depending on operator’s technicalcapability and viable economic business models. Tall buildings and other tallstructures may block reception of MMDS signals, although we areexperimenting transmissions with NLOS (non-line of sight) MMDS technology thatwould avoid such blockages and allow us to defer costly investments, inparticular for Internet services.

 

Since2000 we have also had ANATEL authorization to utilize, under our MMDS licenses,the frequencies corresponding to the return channels of our MMDS systems in SãoPaulo and Rio de Janeiro. We use these frequencies, which range from 2170 to2182 MHz, to provide bi-directional broadband Internet services.

 

*Cable*

 

Throughour subsidiaries TVA Sistema and TVA Sul, we own five cable licenses andoperate cable systems in São Paulo, Curitiba, Camboriú, Florianópolis and Fozdo Iguaçú, which have an aggregate population of approximately 15.9 million. Asof December 31, 2005, we served 200,833 cable subscribers in these cities.  Our cable systems use fully addressableconverters in São Paulo and Curitiba (85% of our cable subscriber base), whichallow the provision of pay-per-view services and enable TVA to upgrade,downgrade or disconnect a subscriber’s service from the headend on shortnotice.

 

In2004 we launched our digital cable service in São Paulo. Our digital cableservice offers 87 pay television channels plus 20 audio channels. We currentlyoffer between 60 to 68 analog channels of programming (including off-airchannels) on our cable systems, depending on the market, and have thecapability of offering up to 77 analog and digital channels using up to 550 MHzand 110 analog and digital channels using up to 750 MHz. During the twelvemonths ended December 31, 2005, we averaged approximately 855 net newcable subscribers per month. Following a restructuring period, during which weeliminated unprofitable subscribers, our cable subscriptions have grown at aprofitable and sustainable pace.

 

Cableservice involves a broadband network employing radio frequency transmissionthrough coaxial and/or fiber optic cable. Cable systems consist of four majorparts: a headend, a distribution network, a subscriber network and a houseterminal. The content is collected from providers in the headend, thenprocessed and fed into the distribution path (trunk and distribution cable),which consists of coaxial and/or fiber optic cables. The signal is then fedinto a subscriber network that is either located in an apartment building or asubscriber’s house. Most of our cable systems are constructed with 750 MHzbandwidth capacity, which allow a larger data transmission as compared to otherBrazilian operators and enables us to provide interactive services, includingInternet and telecommunications services. In São Paulo, our entire network isconstructed with 750 MHz capacity. Those systems that are not constructed with750 MHz capacity are equipped with 550 MHz capacity, which is readilyupgradeable to 750 MHz capacity. We have used our cable system in São Paulo toprovide our Ajato high-speed internet service since 1999.

 

As of December 31,2005, we had deployed approximately 4,394 kilometers of our cable network,including 819 kilometers of fiber optic cable, consisting of a 701 kilometerfiber optic loop in São Paulo and a 118 kilometer fiber optic network servingCuritiba, Camboriú, Foz do Iguaçú and Florianópolis. As of December 31,

 

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2005, our cable systemspassed 937,578 homes, consisting of 668,191 homes in São Paulo, 201,615 homesin Curitiba and 67,772 homes in Florianópolis, Camboriú and Foz do Iguaçu.

 

*TVADigital*

 

Wecurrently offer digital pay television services to our cable and MMDSsubscribers in São Paulo under the brand name “TVA Digital”. In addition, weexpect to launch digital MMDS service to our subscribers in Rio de Janeiro inlate 2006 and Curitiba in 2007. Digital services allow customers to access anelectronic programming guide, view additional channels, including pay-per-viewand audio channels, and select a number of languages and subtitles in which toview programs.

 

Thedigitalization of the cable and MMDS networks in São Paulo increased ARPU andreduced the disconnection rate, as well as permit renewed growth in the areascovered by MMDS, at competitive prices. In the cable network in São Paulo, theavailability of already amortized analog decoders, together with the largenumber of households covered by our cable network, permits the supply oflow-cost products targeted at classes B- and C+.

 

Thedevelopment of Digital TVA was based on various studies and usability surveys. Theprincipal innovations of our digital service are:

 

•                  program synopses on the screen;

 

•                  Dolby Digital 5.1 audio;

 

•                  *mosaicoTVA*, a channel selection system which arranges channels by varioustypes;

 

•                  option to change the audio andsubtitle language;

 

•                  pay-per-view with purchase by remotecontrol;

 

•                  programming guide of all channels;

 

•                  timer programming**/ notices of favorite programs;

 

•                  creation of favorite channel lists;and

 

•                  20 audio channels of various kinds(with the name of the author and music on the screen).

 

Weoffer our digital subscribers a number of programming package options and theflexibility to choose channels in accordance with their user profiles.

 

Weperiodically launch innovative video products and premium products, designedfor our customers with greater purchasing power, who have high definitiontelevision sets or who desire greater interaction and control of theirprogramming. Among these products are included digital video recording (DVR)and high definition television (HDTV).

 

Welaunched our DVR service in 2005, allowing our digital subscribers toexperience a high level of interactivity with our programming.

 

Amongthe principal functions of DVR, are:

 

•                  recording of Digital TVA programmingevents, which permit the customer to watch them at the most convenient time;

 

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•                  pausing events (including livetelevision), at any time, which allows the customer to watch them later, as ofthe pause point;

 

•                  instant replay (including livetelevision) with the touch of a button;

 

•                  possibility of recording an eventwhile watching another (dual tuner);

 

•                  picture in picture features (twochannels at the same time, one of which displays on a smaller screen);

 

•                  enhanced navigability (TVA Portal andguides), and

 

•                  set up of a “Digital Videolibrary”with favorite programs to watch when and as often as desired.

 

Welaunched the first transmission of HDTV in Brazil in June 2006 with abroadcast of the World Cup for subscribers with high definition television sets(such as plasma and LCD sets). Transmission in HDTV brings the followinginnovations to the Brazilian market:

 

•                  high image definition - “Full HD”(1920 x 1080i );

 

•                  HDMI interface – video and audiodigital quality in a unique digital interface, and

 

•                  transmission of television signals inHDTV.

 

*Programming*

 

Weoffer more than 120 channels throughout our pay television network, catering tosubstantially all interest groups (films, serials, documentaries, sports,children’s programming, adult programming, news and variety, including audiochannels, Pay-per-view, *a la carte*,and others). We offer a series of tiered programming options, with morethan 70 packages ranging from 67 – 107 channels for digital service and 9-68channels for analog service, depending on a subscriber’s marketplace. Thisprovides our subscribers with a large range of programming, platform andpricing choices.

 

Our main content suppliers are HBO, Discovery,Turner, Fox, ESPN, Viacom and Digital Latin America.

 

Amongothers, we offer ten HBO, TNT, Sony, Warner and FOX channels, with more than1,000 movie titles shown per month. The news segment includes such channels asCNN, BBC and Band News (Brazilian and world news) and, in the sports segment,ESPN, ESPN Brasil, Bandsports, RAI, RTPi and local broadcast televisionchannels, which among other events, broadcast the World Cup and otherinternational soccer matches.

 

Thesynergies between our programming area and the other areas of the Abril Group(our controlling shareholder), in particular in relation to content, permit thedevelopment of local channels based on Abril’s magazine brands, such as *Veja SP Recommends* and *Placar Cup*.

 

In 2002, in partnership with other paytelevision operators, we created Associação Neo TV (“NeoTV”), with theobjective of purchasing content from programmers under more favorableconditions. Today the association has various members, which, together, havemore than 820,000 subscribers in various states in Brazil. Currently, thepresident of Neo TV is a member of our board of directors.

 

In recent years Neo TV has led a movementagainst Globosat to end an exclusivity arrangement that has prevented us frommaking available Brazilian soccer games that are not available on broadcasttelevision to our pay television subscribers. In May 2006 the Administrative Council for Economic Defense (*ConselhoAdministrativo de Defesa Econômica* - CADE) entered intoan agreement with Globosat under which other pay television providers will beable to acquire soccer games from Globosat.

 

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The majority of our programming contracts havea duration of two to three years. Most of our programming comes frominternational programmers, whose prices are generally denominated in U.S.dollars or other foreign currencies, with the remainder being furnished bydomestic programmers. Our contracts with international programmers generallycontain clauses protecting us against exchange rate losses above a certaindetermined level in the event of a significant devaluation of the *real* in relation to the currency in whichthe programming agreement is denominated.

 

***Broadband Internet***

 

In July 1999,we launched Brazil’s first broadband internet service and an Internet serviceprovider (ISP), offering broadband access and a content portal, in a packageproviding centralized service. We presently provide bi-directional broadbandInternet access and service using our MMDS and cable networks in themetropolitan areas of São Paulo and Rio de Janeiro under the “Ajato” brand. Unlike****our primary competitors, Ajato providesboth Internet access and Internet service, thereby avoiding the need for ourcustomers to contract a separate access provider. With the digitalization ofour MMDS network, we will be offering broadband Internet services in new areascovered by our wireless infrastructure.

 

Ajatocan be purchased with or without a pay television subscription and permits theuser to make live video transmissions and downloads. Ajato currently offersusers thirteen speed options, ranging from 400 Kbps to 2.1 Mbps, access to the *Veja São Paulo* portal (using content basedon Editora Abril’s *Veja*magazine,Brazil’s most widely-read news magazine) and to the diversified content ofother Editora Abril magazines, as well as e-mail services. In addition toresidential customers, Ajato also provides services to the corporate market,through *Ajato Empresas* and *Ajato Negócios*.

 

Ajatoalso offers pay-per-band services to its corporate and residential customers,which enables customers to increase connection speed for a specific period,without the need to the customer’s originally contracted speed.

 

As of December 31,2005, we had 42,202 residential Internet subscribers and 2,174 corporateInternet clients with a monthly subscription fee of $30.73 and 185.79,respectively, for unlimited internet service. In the São Paulo metropolitanarea, where bidirectional cable services are provided, approximately 48% of ourcable pay television subscribers also subscribe to Ajato.

 

***VoIP***

 

Wealso offer telephony service under the “TVA Voz” (*TVA Voice)* brand using VoIP technology, which is the thirdelement of our “triple-play” strategy (i.e., pay television (TVA), broadbandinternet (Ajato) and telephony (TVA Voz)). This technology permits the customerto make calls using a broadband internet connection, instead of a standardtelephone line. With this service, customers receive and make calls from and toany telephone, including local, long-distance, mobile and international numbers.TVA Voz customers may also make calls free of charge to other TVA Vozcustomers. With an adapter connected to a common telephone and a broadbandinternet connection, there is no need to use a computer to make or receivecalls. The chief advantage of this technology is the extremely low cost incomparison to the prices charged for long distance calls using conventionaltelephony.

 

In2006, we entered into a memorandum of understanding with Telemar and Neo Voice pursuantto which we provide VoIP service that offers greater coverage in the nationaland international territories, option of numbers in Brazil and the world,account control with fixed minute plans per month and portability, which permitsa user to take his or her number to any place in Brazil or the world. 

 

**Commercialand Marketing Strategy**

 

Weoperate in an integrated and segmented manner, based on our knowledge ofhousehold profiles and the characteristics of each of the markets in which weoperate, exploiting the following concepts:

 

•                  jointoffer of various services (bundling);

 

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•                  qualityin the provision of services;

 

•                  flexibleprogramming packages with a variety of content and pricing options (over 70programming packages for pay television and 17 broadband internet plans), and

 

•                  leadershipin the launch of innovative services.

 

Wehave a commercial team of approximately 300 sales consultants, distributed inactive and receptive telemarketing, field team and website channels. We havedeveloped a sales and service concept for condominiums (including pre-wiringarrangements with residential housing developers) in differentiated offers andpersonalized after-sale service. In Brazil a “condominium” refers toresidential and non-residential buildings or building complexes that haveentered into a legal association. This collective subscriber base currentlyaccounts for 35% of our total subscribers, with a high satisfaction index, alow delinquency rate and reduced churn rate compared with our total subscriberbase.

 

Inaccordance with Brazilian law, we can adjust the pricing on our contracts withcurrent subscribers every 12 months based on the general market price index(IGPM) index.

 

**CustomerService**

 

We usea call center, operated by CSU Cardsystem, one of the largest call centercompanies in Brazil, where calls from São Paulo, Rio de Janeiro and other areasof the southern region of Brazil are answered. As of December 31, 2005, wehad 157 service consultants, segmented in cells by type of product and customercharacteristics.

 

Wealso have back office areas, personal service and exclusive service forcollective and corporate contracts. Communication with the customer is done throughthe programming magazine, web sites, chat, customer relationship center andlocal channels.

 

In2000 we launched an innovative customer loyalty program in the pay televisionmarket in which we offer to our subscribers the ability to attend events (suchas theater shows, movie premieres and children’s events) and redeem points forbenefits (such as magazine subscriptions and movie tickets). In 2005 more than100,000 subscribers participated in this program, which allows us to conductcross-selling and up-selling of products and services and secure subscriberloyalty, all of which significantly contribute to retaining subscribers**.**

 

**ChurnRate**

 

Churnis measured through spontaneous cancellation requests and delinquency ofsubscribers. Our monthly average churn fell from 2.4% in 2002 to 1.5% in both2004 and 2005, reaching a level we believe to be consistent with internationalstandards. The churn rate for our digital technology subscribers is lower thanthe overall averages stated above.

 

#### **Suppliers and Partners**

####  

The provision of our services depends on the licensingof content, the contracting of network and equipment installation andmaintenance services and post installation and rental services with suppliers.

 

Ourmain suppliers are:

 

•                  programmingcontent: HBO, Turner, Discovery, ESPN, Bandsports, Disney, FOX, among others;

 

•                  technology:Samsung, Intel and NAGRA;

 

•                  infrastructure:Cisco, Furukawa, GI, and Pirelli;

 

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•                  supplierof IP ports for access to internet: Global Crossing and Embratel.;

 

•                  outsourcedservices: Telefônica (network maintenance); and

 

•                  customerservice and sales: CSU and SERCOM.

 

Weentered into a contract with Samsung in March 2006 to test the commercialfeasibility and implementation in São Paulo of WiMAX technology through ourdigital MMDS distribution network. In addition, we have worked with othercompanies in the development of innovative products for our market. Forexample, we have worked with Intel in the utilization of WiMAX technology andthe digitalization of content, and with NAGRA, a leading supplier ofconditional access solutions, in the development of our digital service and DVRservice.

 

**Infrastructure**

 

***Distribution Infrastructure***

 

*Addressable Network*

 

Unlikemany other pay television operators, our network in the cities of São Paulo,Rio de Janeiro, and Curitiba are fully addressable, thus enabling flexibleprogramming options and minimizing the ratio of irregular connections, inaddition to a more effective collection of fees and lower operational costsrelated thereto.

 

*Adapting network capacity*

 

We designed and built our distribution networkwith a view to satisfying current and future market requirements. To this end,our network allows us to:

 

•                  adapt the network to adequatelydistribute the volumes of information characteristic of current marketrequirements;

 

•                  rapidly expand capacity, in line withmarket requirements;

 

•                  introduce upgrades and technologicalinnovations with the minimum possible disturbance for subscribers.

 

As aresult, our network allows users to have one source of digital and analog paytelevision services and broadband internet services and VoIP. In addition, ournetwork will allow users to access future interactive services, including videoon demand, games, home banking and home shopping.

 

*CableNetwork*

 

Ourcable network uses HFC (Hybrid Fiber Coaxial) topology, which uses fiber optictechnology to transport signals from to the various optical nodes of thenetwork. From this point it uses coaxial cable for the distribution of signalsto subscribers. The coaxial cables transport radio frequency signals and, insome cases, also feed amplifiers.

 

Ourcable network in São Paulo covers approximately 670,000 homes passed (HPs),implemented in 2,000 HP per node and prepared for segmentation in 500 HPs withthe addition of optical transmitters. The network, which consists of 2400 km ofcoaxial cable, 701 km of fiber optic cable in optical ring and sub-ringtopology distributed in 330 optical nodes, is designed to ensure reliabilityand eliminate the risk that one single event might affect the provision ofservices on a widespread basis. We believe that this distribution networkstructure allows us to offer all video and telecommunications services.

 

Webelieve that we occupy a unique position in the multiservices area because ofthe following factors:

 

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•                  node architecture, which permitsexpansion, introduction of updatings and technological innovations withoutaffecting the services offered, as well as the location of failures in thenetwork, through the checking of the centers responsible for each area;

 

•                  expandable network, which permits theincrease of band IP with the installation of IP equipment in the NetworkOperations Center (NOC).

 

•                  high penetration of pay televisionand broadband internet subscribers;

 

•                  all the equipment is of opentechnology of the principal international manufacturers (Harmonic, Philips, GI,Cisco.);

 

•                  centralized management andmonitoring, which reduces operating costs and places our network withininternational standards of reliability and availability, and

 

•                  optical ring with a separatestructure for pay television and data with 10 Gigabit Ethernet technology.

 

Our networkwas designed with a transport capacity of 750 MHz, sufficient for the provisionof pay television services, permitting roughly 70 analog channels and thedistribution of digital video, using 64QAM and 256 QAM modulation with 40Mbpsband capacity per channel of 6 MHz, in addition to broadband internet accessand voice.

 

Thedigital distribution is allocated in the 500 to 700MHz band, permitting roughly250 digital channels; the telephony services are allocated in the 700 to 750MHzband. Systems equipped with 550 MHz capacity (Curitiba, Camboriú, Foz do Iguaçúand Florianópolis) are immediately upgradable to 750 MHz capacity.

 

As of December 31,2005, our cable network consisted of 4,394 km, of which 819 km are constructedof fiber optic cables. In São Paulo, we constructed a fiber optic loop of 55km, plus 7 optical sub-rings, totaling 701 km.

 

As of December 31,2005, our cable network reached a total of 937,578 homes, consisting of 668,191homes in São Paulo, 201,615 homes in Curitiba and 67,772 homes inFlorianópolis, Camboriú and Foz do Iguaçu.

 

*MMDS Network*

 

MMDStechnology has been acquiring greater importance in recent years, with largecompanies investing in research and development in the wireless technology. Thefrequency plan designated in Brazil for MMDS services consists of the bandbetween 2500 to 2686 MHz, comprising 31 frequencies of 6 MHz (plus 12 MHz forreturn channels), modulated and codified. The codified signal is irradiatedfrom the transmission system (principal station) and captured by the subscriber’sreceiving antenna. Next, it is converted into another frequency, which isamplified and demodulated to be delivered and processed by the subscriber’stelevision receiver.

 

Manyleading companies have invested in digital MMDS networks for such newtechnologies as WiMAX in the 2.5 to 2.7GHz spectrum. This distribution networkis of great importance for convergence, portability and mobility. MMDS requiresa lower capital investment for the construction of its infrastructure, and hasa lower operating cost than those of the cable and DTH systems, besidespermitting rapid service in areas not covered by the physical network (time tomarket) and the supply of bundles with innovative services such as:

 

•                  Fixed and mobile broadband with QoS(quality of service);

 

•                  WiMAX for mobile, portable and fixeddevices;

 

•                  VoIP with restricted mobility;

 

•                  multimedia services, and

 

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•      mobile business*.*

 

Wehave a license in the most “noble” band of 2.5GHz and operate the largest MMDSnetwork in Brazil (198 MHz in São Paulo and Rio de Janeiro and 90 MHz inCuritiba and in Porto Alegre).

 

Tooptimize signal reception in shady areas (i.e., areas not reached by the signalof the principal station), signal reinforcers (repeaters) are installed, whichcan only be installed within the service rendering area. The WiMAX NLOS(non-line of sight) technology in the digital MMDS network avoids shady areas,permitting greater coverage, operations in new areas and better qualityservices, as well as the possibility of multiservices with restrictedportability and mobility.

 

OurMMDS network in São Paulo was digitalized in 2005. We believe that the digitalizationof our MMDS network in Rio de Janeiro will occur at the end of 2006, whiledigitalization in Curitiba is planned for 2007. With the digitalization of ourMMDS networks in these additional markets, we will be offering the same qualitydigital services in the São Paulo, Rio de Janeiro and Curitiba markets.

 

In themetropolitan areas of São Paulo and Rio de Janeiro, we hold all the 31currently available frequencies, and, in Curitiba, we have 15 frequencies. Eachfrequency permits the supply of up to 8 digital channels, through the use ofcompression technology. The MMDS frequencies can also be allocated to the datatraffic for broadband internet.

 

In2000, we obtained authorization from ANATEL to use the frequenciescorresponding to the return channels of our MMDS systems in São Paulo and Riode Janeiro. We currently use these frequencies, which vary between 2170 and2182 MHz, to provide broadband internet services.

 

*IP Network*

 

Thetechnology used for our IP network is DOCSIS, with an open standard and adoptedworldwide by multiple service operators (MSOs). The DOCSIS cable modems permitthe supply of high-speed broadband with 10 Mbps of downstream**per user. This capacity permits highquality multimedia services and differentiates itself from the ADSL networksinstalled in São Paulo.

 

Thedecentralized topology of the network and the five points of presence (POP) ofthe distribution of data minimize noise and interference.

 

Themain technologies deployed in our network are:

 

•      CMTS - Cable Modem TerminationSystem: this equipment is responsible for connecting broadband users to ourcore back bone. We currently have 200 downstream ports and 46 upstream ports*;*

 

•      Coreback-bone: responsible for transporting the data from the IP port with thecarriers (Embratel, Globalcrossing, Brasil Telecom, etc.) to the CMTS. Our coreuses Ethernet technology. We are expanding this core tenfold, from 1 Giga Bitto 10 GigaBit Ethernet; and

 

•      QoS/TrafficShapping:  These tools provide networkanalysis and control, and are responsible for analyzing all the protocols andapplications that are transmitted in our core individually by subscriber,supplying detailed information of the consumer profile by user, day and time ofthe week, as well as accounting information including the volume of trafficused per hour/day/week. These tools allow us to comply with our QoS levelagreement.

 

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*NOC / IDC*

 

Toguarantee a quality level of internet services, we are the only pay televisionoperator in Brazil that maintains a sophisticated Network Operations Center(NOC) and Internet Data Center (IDC), based in São Paulo, which monitors allactive network equipment, including CMTS, routers, switches, multiplexers, etc.This management platform is supported by a software system developedin-house. It is possible to also monitor the volume of users and data byequipment, the number of on-line and provisioned users, signal/noise level ofthe network, and the opening and monitoring of trouble tickets between thevarious areas including the relationship center, Engineering, headend, externaland internal network. The platform is also responsible for theprovisioning and diagnosis of network users, working as an Operation SupportSystem – OSS, an interface between the billing system and the DHCP servers,which is responsible for the IP addressing assignment policy and Ajato users.

 

*Monitoringand Management*

 

Ournetwork command and control is conducted by the Network Operations Center, oneof the largest and most advanced network management centers in the world, operatedby Telefônica, which provides us with the following:

 

•      SLA– Service Level Agreement of 99.98% for hosting and infrastructure services;

 

•      datacenter**with 250m2 of area, with total capacityof 80 racks (Racks 19” x 44U);

 

•      professionalinfrastructure for feeding electrical current, electrical fixtures, airconditioning system, security and maintenance.

 

UnderBrazilian law, the providers of public electric power, telecommunications andpetroleum services have the right to share with one another the necessaryinfrastructure for the rendering of these services, in a non-discriminatorymanner and at just and reasonable prices and conditions. As such, we haveentered into non-exclusive contracts with various electricity distributionservice providers for the use of part of the excess occupation capacity ofthe light posts belonging to the electricity distribution system. Currently,99.6% of our cable network is aerial. These are long term contracts (normallyfive years, renewable for an equivalent period) and establish a fixed monthlyprice, calculated per fixing point used by us. Pursuant to our contracts, theprices we pay are adjusted annually in accordance with the IGP-M (general marketprice index) or INPC (national consumer price index) and are currently in therange of R$2.00 to R$2.30 per fixing point in São Paulo.

 

*Installation and Technical Assistance*

 

Theobjective of our installation and technical assistance process is for sales andtechnical assistance requests made prior to 3:00 p.m. to be concluded onthe same day, and sales and technical assistance requests made after 3:00 p.m.to be concluded up to 24 hours from the moment of the respective request.

 

Weoutsource installation services in all the cities where we are present. Wecontract with eight different companies, divided by operating area, to assurethe highest quality and lowest costs possible.

 

***IT Infrastructure***

 

*Subscription System*

 

Ourintegrated subscription system (Si@) was developed in web technology, inconformity with advanced standards, using Oracle technology, thus enablingsignificant productivity gains.

 

Thearchitecture of our system meets our needs derived from the entry of newproducts and services, from the prospecting of new subscribers to self-service(via internet or telephone service). The Si@ system is equipped to serve theentire organization, incorporating information in real time in support of theoperating and financial areas. 

 

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It also has functionsrelating to billing, collection, CRM, provisioning and management of therelationship with the subscriber.

 

*Collections*

 

Ourcollection process is completely automated and integrated with Si@. Its objectiveis the retention and loyalty of customers, as well as the recovery of debtors’balances. It is a segmented process, based on the profile and past records ofeach subscriber. The methods of approach vary from letters and telephonecontacts to offers of packages with more affordable prices and automaticpayment plans.

 

Allthe information relating to the collection process is stored in the system,which permits us to have a complete history of each subscriber for customerservice, relationship actions and cross promotion.

 

Wehave a high recovery index of subscribers that enter the collection process,which contributed towards our having a churn rate that is comparable withinternational rates and relatively low delinquency rates.

 

**Competition**

 

***Pay television***

 

Wecompete with providers of pay television services that use cable, MMDS and DTHcable transmission technologies.

 

Weexpect to continue facing competition from existing and future operators,including possible competition derived from new and developing technologies andthe easing of regulations in the pay television industry. We believe thatcompetition is and will continue to be primarily based on program offerings,customer satisfaction, network quality and price of services. We believe our competitiveposition will improve significantly as a result of the May 2006 decisionby CADE requiring Globosat to provide soccer programming rights to paytelevision operators other than NET.

 

Wealso compete with national broadcast networks and regional and local broadcaststations.

 

*MMDSand Cable Service*

 

Wecompete with other major cable and MMDS operators in each of our principalmarkets, with the exception of Camboriú, where we are the only provider of paytelevision service. Our main competitors are cable and MMDS systems operated byNet, which is controlled by Telmex. Net competes with cable systems in themetropolitan areas of São Paulo, Rio de Janeiro, Curitiba, Foz do Iguaçu andFlorianópolis. In the overbuilt cable areas (i.e., areas where customers have achoice between providers), the Net and TVA cable systems have similarpenetration rates. We are the leaders of the MMDS market in the metropolitanarea of Curitiba, with a market share of 91% in 2005, as compared to Net’s 9%in the same period. We also compete with the cable system of TV Cidade in themetropolitan area of Rio de Janeiro.

 

With the digitalizationof our MMDS services and the resulting increase in coverage area, we began tocompete with other operators in pay television services. In the “ABCDOG”region, a region of the state of São Paulo comprising the cities of SantoAndré, São Bernardo do Campo, São Caetano do Sul, Diadema, Osasco andGuarulhos, we compete with Vivax, Adatel and Big TV.

 

*DTHSatellite Service*

 

Wealso compete with DTH satellite service operators in Brazil, especially Sky andDirecTV, as well as TECSAT. Sky is controlled by News Corporation Plc, asubsidiary of The News Corporation Limited and Globopar. Sky currently offers110 audio and video programming channels (including pay-per-view channels), 

 

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while DirecTV offers 128audio and video programming channels, including 35 pay-per-view channels. Afterthe acquisition of DirecTV in the United States by News Corporation, it isexpected that DirecTV will be absorbed by Sky Brasil (this transaction wasapproved by ANATEL in November 2005 and CADE in May 2006).

 

*BroadcastTelevision*

 

Broadcasttelevision services are currently available to substantially all of the Brazilianpopulation without payment of a subscription fee by six privately-ownednational broadcast television networks and a government-owned national publictelevision network.  The nationalbroadcast television networks and local broadcast stations receive nearly allof their revenues from the sale of television advertising, the price of whichis based in part on the audience share and ratings for the networks’programs. Programming offered by pay television providers, including us,directly competes for audience share and ratings with the programming offeredby broadcast television networks as well as regional and local televisionbroadcasters. The six national broadcast television networks are Globo, SBT, TVBand, Rede TV, TV Record and CNT. The national television networks utilize oneor more satellites to retransmit their signals to their local affiliatesthroughout Brazil.

 

***Broadband Internet Services***

 

Wecompete with fixed telephony carriers, cable television operators and otherbroadband providers in the broadband internet market, in addition to providersof dial-up internet on a smaller scale. We believe that competition dependsespecially on the speed, price, technical support and quality of the network.

 

In2005, approximately 81% of all residential broadband internet service in Brazilwas provided by ADSL providers, while approximately 19% was provided by cableproviders (such as our Ajato). Our main competitors in this market are Internetproviders of companies from Grupo Telefónica (Speedy), with a market share ofapproximately 33%, Brasil Telecom (Br Turbo), with a market share of 27%,Telemar (Velox), with a market share of 22%, and NET-Virtua, with a marketshare of approximately 9%. Ajato currently has a market share of approximately1.3%.

 

***Voice Services***

 

Invoice service we compete with fixed telephony carriers, such as Telefônica,that utilize fixed residential and commercial lines, and with carriers thatoffer fixed telephony and VoIP, as is the case of GVT, which suppliesintegrated local and long distance voice, data, internet and VoIP services.

 

Embratelrecently formalized the acquisition of an equity interest in Net, with the hopeof unifying their service infrastructure and preparing Net to supply VoIP tothe residential segment.

 

**RegulatoryFramework**

 

Thesubscription television industry in Brazil is subject to regulation by the *Agência Nacional de Telecomunicações*(ANATEL), an independent federal agency, pursuant to Law No. 9472/97 (“Law9472”), Law No. 9295/96 (“Law 9295”) and Law No. 8977/95 (“Law 8977”).ANATEL is authorized to grant concessions for MMDS, cable, and DTH licenses.

 

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*MMDSRegulations*

 

*General.*Law 9472 authorizes ANATEL, amongother things, to issue, revoke, modify and renew licenses within the spectrumavailable to MMDS systems, to approve the assignments and transfer of controlof such licenses, to approve the location of channels that comprise MMDSsystems, to regulate the kind, configuration and operation of equipment used byMMDS systems, and to impose certain other reporting requirements on channellicense holders and MMDS operators. The licensing and operation of MMDSchannels are currently governed by Decree No. 2196/97 (“Decree 2196”),Ordinance No. 254/97 (as amended by Ordinance No. 319/97, “Ordinance254”), Rule No. 002/Rev. 97 (“Rule 002”) and Resolution 429/2006.Under these regulations, MMDS is defined as the special service oftelecommunication which uses microwaves to transmit codified signals to bereceived in pre-established points on a contractual basis.

 

*Licenses.*ANATEL grants licenses andregulates the use of channels by MMDS operators to transmit video programming,entertainment services and other information. A maximum of 31 MMDS channels(constituting a spectrum bandwidth of 186 MHz) may be authorized for usein an MMDS market. While licenses are usually granted for the use of up to 16channels, depending on technical feasibility and the existence of competition,ANATEL can grant a license for all 31 channels available in one specific area. Ifthe license is for 16 or more channels, at least two channels must be reservedfor educational and cultural programming. If the license involves 15 or fewerchannels, there is no obligation to reserve any channel for educational andcultural purposes. In each of the Company’s São Paulo and Rio de Janeiromarkets, up to 31 MMDS channels are available for MMDS (in addition to anylocal off-air VHF/UHF channels which are offered).

 

Alicense to use MMDS frequencies is granted for a renewable period of 15 years. Theapplication for renewal of a license must be filed with ANATEL during theperiod from 18 months before the end of the license term. To renew the license,the license holder must (i) meet applicable legal and regulatoryrequirements, (ii) have complied with all legal and contractualobligations during the term of such license and (iii) meet certaintechnical and financial requirements. Our MMDS licenses presently expire in2009, and we filed requests for their renewal with ANATEL in February 2006.

 

Underthe provisions of Rule 002, each license holder and its affiliates may begranted permission to operate MMDS systems in different areas of Brazil,provided that no holder may be granted licenses for (i) more thanseven municipalities with a population equal to or exceeding 700,000inhabitants and (ii) more than 12 municipalities with a population between300,000 and 700,000 inhabitants. The restrictions only apply to areas in whichthe MMDS system operator (or an affiliate thereof) faces no competition fromother pay television services, excluding services that utilize a satellite totransmit their signal. Rule 002 grants ANATEL full discretion to alter oreliminate the restrictions. The term affiliate is defined by Rule 002 asany legal entity that directly or indirectly holds at least 20% of the votingcapital. We currently control four MMDS licenses in cities of more than 700,000inhabitants (São Paulo, Rio de Janeiro, Curitiba and Porto Alegre), but in eachof these cities we have at least one competitor. Prices for pay televisionservices may be freely established by the system operator, although ANATELmay interfere in the event of abusive pricing. ANATEL may imposepenalties including fines, suspension or revocation of the license if thelicense holder fails to comply with applicable regulations or becomes legally,technically or financially unable to provide MMDS service. ANATEL also may interveneto the extent operators engage in unfair practices intended to eliminatecompetition.

 

ANATELawards licenses to use MMDS channels based upon applications demonstrating thatthe applicant is qualified to hold the license, that the proposed market isviable and that the operation of the proposed channels will not causeimpermissible interference to other permitted channels. After ANATEL determinesthat an application has met these requirements, it publishes a noticerequesting comments from all parties interested in providing the same servicesin the same or a near area. Depending on the comments received, ANATEL may decideto open a public bid for the service in that area, although it has not done soin the past. In the case of a public bid, applicants would be evaluated basedon a number of factors including the applicant’s proposed schedule forimplementing commercial operations, the applicant’s commitment to localprogramming and the extent to which the applicant provides free programming tolocal cultural and educational institutions. Once an MMDS license applicationis granted by ANATEL, the license holder must finalize construction and beginoperations within 12 months, which period may be extended by an additional12 months.

 

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Inaddition to qualifying under the application process described above, a licenseholder must also demonstrate that its proposed signal does not violateinterference standards in the area of another MMDS channel license holder. Tothis end, existing license holders are given a 30-day period in which toascertain and comment to ANATEL whether the new license holder’s proposedsignal will interfere with existing signals. The area covered by the servicesis to a radius of five to 50 kilometers around the transmission site, dependingon the technical capability of the operator.

 

*Other Regulations*. MMDS license holdersare subject to regulation with respect to the construction, marketing andlighting of transmission towers pursuant to the Brazilian Aviation Code andcertain local zoning regulations affecting construction of towers and otherfacilities. There may also be restrictions imposed by local authorities. Thesubscription television industry also is subject to the Brazilian Consumer Code.The Consumer Code entitles the purchasers of goods or services to certainrights, including the right to discontinue a service and obtain a refund if theservices are deemed to be of low quality or not rendered adequately. Forinstance, in case of a suspension of the transmission for a given period, thesubscriber shall be entitled to a discount on the monthly fees.Rule No. 002 contains certain provisions relating to consumer rights,including a provision for mandatory discounts in the event of interruption ofservice. As of December 31, 2005, we had not been required to repay anyamounts or provide any discounts due to interruptions of service. However, wedo refund prepaid installation service fees when we discover such service isunavailable for any reason.

 

Due tothe regulated nature of the subscription television industry, the adoption ofnew, or changes to existing, laws or regulations or the interpretations thereofmay impede our growth and may otherwise have a material adverseeffect on our results of operations and financial condition.

 

*CableRegulation*

 

*General.*Cable services in Brazil arelicensed and regulated by ANATEL pursuant to Law No. 8977/95 (“Law 8977”),Decree No. 2206/97 (“Decree 2206”), which authorized the regulation of cableservices, and Ordinance 256/97 (“Ordinance 256”), which approved the NormaComplementar do Serviço de TV a Cabo regulating the granting of licenses for,and the operation of, cable services. Until Law 8977 was enacted in 1995, theBrazilian cable industry had been governed by two principal regulatory measuressince its inception in 1989: Ordinance No. 250, issued by the Ministry ofCommunications on December 13, 1989 (“Ordinance 250”), and its successor,Ordinance No. 36, issued by the Ministry of Communications on March 21,1991 (“Ordinance 36”).

 

Ordinance250 regulated the distribution of television signals (“DISTV”) by physicalmeans (i.e., by cable) to end-users. DISTV services generally are limited onlyto the reception and transmission of signals without any interference by aDISTV operator with the signal content. Under Ordinance 250, 101 authorizationswere granted by the Ministry of Communications to local operators tocommercially exploit DISTV services. Although Ordinance 250 did notspecifically address cable services, a number of DISTV operators (including theCompany’s cable systems) began to offer cable services based on DISTVauthorizations.

 

*Licenses*. Under Law 8977, a cable operatormust obtain a license from ANATEL in order to provide cable services in Brazil.All cable licenses are nonexclusive licenses to provide cable services in aservice area. Cable licenses are granted by ANATEL for a period of 15 years andare renewable for equal and successive periods. Renewal of the cable license byANATEL is mandatory if the cable system operator has (i) complied with theterms of the license grant and applicable governmental regulations and (ii) agreesto meet certain technical and economic requirements relating to the furnishingof adequate service to subscribers, including system modernization standards.

 

OrdinanceNo. 256/97 (“Ordinance 256”) imposes restrictions on the number of areasthat can be served by a cable television system operator (or an affiliatethereof). Pursuant to Ordinance 256, a cable system operator (or an affiliatethereof) may only hold licenses with respect to (i) a maximum ofseven areas with a population of 700,000 and above and (ii) a maximum of12 areas with a population of 300,000 or more and less than 700,000. Therestrictions only apply to areas in which the cable system operator (or anaffiliate thereof) faces no competition from other pay television services,excluding services that utilize a satellite to transmit their signal. Ordinance256 grants ANATEL full discretion to alter or eliminate the restrictions. Theterm affiliate is defined by Ordinance 256 as any legal entity that directly orindirectly holds at least 20% of the voting capital of another legal entity orany of two legal entities under common ownership of at least 20% of theirrespective voting capital. The Company 

 

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currently controls two cablelicenses in cities of more than 700,000 inhabitants (São Paulo and Curitiba),but in each such city TVA has at least one competitor.

 

Generally,only legal entities that are headquartered in Brazil and that have 51% of theirvoting capital by Brazilian-born citizens or persons who have held Braziliancitizenship for more than 10 years are eligible to receive a license to operatecable systems in Brazil. In the event that no private entity displays aninterest in providing cable services in a particular service area, ANATEL may grantthe local public telecommunications operator a license to provide cableservices.

 

Cableoperators that previously provided cable services under a DISTV authorizationgranted under Ordinance 250 were required under Law 8977 to file applicationsto have their DISTV authorizations converted into cable licenses. Ordinance 256grants a one year period from the date a DISTV authorization is converted intoa cable television license for any cable system operator to comply with therestrictions. Our cable systems, all of which were operating under DISTVauthorizations, applied for conversion of their DISTV authorizations andreceived approval for such conversion from the Ministry of Communications.

 

Cablelicenses for service areas not covered by existing authorizations are grantedpursuant to a public bidding process administered by ANATEL after prior publicconsultation. All such licenses are nonexclusive licenses. In order to submit abid for a license, a bidder must meet certain financial and legal prerequisites.After such prerequisites are met, a bidder must then submit a detailed bid describingits plan to provide cable services in the service area. In the qualificationphase of the bidding process, ANATEL assigns a number of points to each bidbased on certain weighted criteria, including the timetable for offeringsubscription programming; the time allocated to local public interestprogramming; the number of channels allocated to educational and culturalprogramming; and the number of establishments, such as schools, hospitals andcommunity centers, to which basic service programming will be offered free ofcharge. After calculating the number of points awarded to each bidder, ANATELwill then apply a formula based on the population of the service area to selectthe winning bid from among those bidders that meet certain defined minimumqualifying thresholds. For service areas with a population of 700,000 or moreinhabitants, the qualified bidder that submits the highest bid for the licensewill be selected. For service areas with a population between 300,000 and700,000 inhabitants, the winning bid is selected based on the highest productobtained by multiplying the number of points awarded in the qualification phaseand the amount bid for the license. For service areas with less than 300,000inhabitants, the winning bid is selected on the basis of the number of pointsawarded in the qualification phase and the payment of a fixed fee.

 

Once acable license is granted, the licensee has an 18 month period from the date ofthe license grant to complete the initial stage of the installation of the cablesystem and to commence providing cable services to subscribers in the servicearea. The 18 month period is subject to a single 12 month extension for causeat the discretion of ANATEL.

 

Anytransfer of a cable license is subject to the prior approval of ANATEL. Alicense generally may not be transferred by a licensee until it hascommenced providing cable services in its service area. Transfers of sharescausing a change in the control of a license or the legal entity which controlsa license also is subject to the prior approval of ANATEL. ANATEL must receivenotice of any change in the capital structure of a licensee, including anytransfer of shares or increase of capital that do not result in a change ofcontrol.

 

Alicense can be revoked, upon the issue of a judicial decision, in the event thelicensee lacks technical, financial or legal capacity to continue to operate acable system; is under the management of individuals, or under the control ofindividuals or corporations who, according to Law 8977, do not qualify for suchpositions; has its license transferred, either directly or by virtue of achange in control, without the prior consent of ANATEL; does not start toprovide cable services within the time limit specified by Law 8977; or suspendsits activities for more than thirty consecutive days without justification,unless previously authorized by ANATEL.

 

*CableRelated Service Regulation*

 

*General*. Brazilian telecommunicationsservices are governed primarily by (i) Article 21 of the FederalConstitution, as amended by Amendment No. 8 of August 15, 1995 (“Amendment8”), (ii) Law 9472, (iii) Law 9295 and (iv) Law 8977. TheBrazilian Government also has issued detailed regulations covering specificareas of 

 

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telecommunicationsservices, including radio broadcasting, paging, trunking, subscription television,cable television, cellular telephony and multimedia communications services. ANATELis responsible for the regulation of telecommunications services in Brazil. Priorto its amendment in 1995, Article 21 of the Federal Constitution requiredthe Brazilian Government to operate directly, or through concessions granted tocompanies whose shares are controlled by the Brazilian Government, alltelephone, telegraph, data transmission and other public telecommunicationsservices. This constitutional requirement was the basis for the establishmentof the state-owned telephone monopoly, Telebrás, which held controllinginterests in 27 regional telephone operating companies. With the adoption ofAmendment 8, Article 21 was modified to permit the Brazilian Government tooperate telecommunications services either directly or through authorizations,concessions or permissions granted to private entities. In particular,Amendment 8 removed the constitutional requirement that the BrazilianGovernment must either directly operate or control the shares of companieswhich operate telecommunications services. Even with the adoption of Amendment8, the Brazilian Government still retains broad regulatory powers over telecommunicationsservices.

 

Privatecompanies have been permitted under Brazilian law to provide a number oftelecommunications services, including telephony, radio broadcasting, paging,trunking, subscription television, cable television services and SCM (Serviçode Comunicação Multimídia). In 1998 the Ministry of Communications and ANATELconcluded the privatization of all public fixed and cellular telephonecompanies.

 

*High-Speed Cable Data Services*. Law 8977and Decree 2206, among other things, authorize cable television operators, suchas the Company, in addition to furnishing video and audio signals on theircable networks, to utilize their networks for the transmission ofmeteorological, banking, financial, cultural, price and other data. This broadgrant of authority is understood to permit cable television operators tofurnish services such as interactive home banking and high-speed cable dataservices to subscribers through their cable television networks, although asimplified licensing procedure for high-speed cable data services may beinstalled by ANATEL in the future.

 

On November 29,1999, ANATEL issued Regulation 190, which authorized the use of subscriber communicationnetworks (such as cable systems) by unidirectional or bi-directional value-addedservice providers. Regulation 190 also regulates certain terms betweenvalue-added service providers and subscriber network operators. Initially, wewere subject to Resolution 190 both as a cable operator (through TVA Sistema)and a provider of high speed internet service (through Ajato).  With the passage of Anatel Resolution272/2001, which regulated SCM (multimedia communications services), ourInternet service began to be provided directly by TVA Sistema (and Ajato becamea division of TVA Sistema).

 

*Cable Telephony*. In accordance with Law8977, no entity is permitted to furnish fixed telephone services in Brazilwithout a specific license to do so. There are, however, certain limitedregulatory exceptions pursuant to which private entities other than telephoneoperating companies have been permitted to provide limited fixed telephonyservices in Brazil. Under one particular exception, certain private telephonenetworks (Centrais Privadas de Comutação Telefônica or “CPCT”) serving “condominiums”(as such term is defined under Brazilian law) have been permitted tointerconnect their private telephone networks to the public telephone networkoperated by the local telephone operating company. A CPCT is comparable to aprivate branch exchange (PBX) found in some larger apartment complexes, hotelsand businesses in the United States. Under Brazilian law, the term “condominium”refers to residential and nonresidential buildings or building complexes thathave entered into a legal association. In practice, a condominium desiring toestablish a CPCT will generally contract with a private service provider toinstall, operate and maintain the CPCT and to secure interconnection with thepublic telephone network. Ordinance No. 119/90 of 10 December 1990 (“Ordinance119”), which was issued by the predecessor to the Ministry of Communications,sets forth requirements for the interconnection of CPCTs with the publictelephone network. In general the installation, operation and maintenance of aCPCT does not require any authorization from the Ministry of Communications orTelebrás. In order to interconnect with the public telephone network, a CPCTmust comply with the requirements set forth in Ordinance 119. Such requirementsprimarily relate to meeting technical equipment certification and acceptancestandards. Assuming that such standards are met, the regional telephoneoperating company is required under Ordinance 119 to interconnect the CPCTrequesting interconnection to the public telephone network. We believe that,under current Brazilian law, cable television operators can utilize their cabletelevision networks in order to facilitate the installation and operation of aCPCT. Furthermore, under the authority granted by Ordinance 119, CPCTs may beinterconnected through cable television networks to the public telephonenetwork.

 

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In November 2001Anatel revised regulations concerning the provision of fixed telephony servicesto the general public (*Servico TelefônicoFixo Comutado*, or “STFC”). These regulations provide that anycompany meeting certain criteria can provide STFC services throughout Brazil. InMarch 2002 we requested authorizations to provide STFC services in thecities of São Paulo, Rio de Janeiro, Curitiba and Porto Alegre. In November 2002we received ANATEL approval to offer STFC services in these areas. In February 2004we voluntarily returned our STFC license to ANATEL due to the lack ofinvestment opportunity partners in this sector and our focus on other strategicinvestments.  The license can be returnedto us upon request.

 

In August 2001ANATEL revised regulations concerning the provision of telecommunicationsservices other than STFC, radio and television broadcasting, pay television andcellular services to the general public (*Servicode Comunicação Multimídia*, or “SCM”). In January 2002 werequested that our existing license for such services be converted into an SCMlicense. This request was approved by ANATEL in November 2002.

 

*Other.*On November 24, 1999, ANATELand ANEEL (*Agência Nacional de EnergiaElétrica*, or National Electric Energy Agency) published JointResolution No. 001, which sets guidelines for the use of infrastructureamong the electric energy, telecommunications and oil industries in order tomaximize the use of resources and reduce operating costs. We are involved inlegal proceedings against Centrais Elétricas de Santa Catarina—CELESC andCompanhia Paranaense de Energia Elétrica—COPEL in order to resolve certainquestions relating to our contracts with these entities, particularly withrespect to increases in pole rental fees requested by these entities. Wediscuss these proceedings in more detail below under “Legal Proceedings.”

 

**LegalProceedings**

 

We areparty to certain legal actions arising in the ordinary course of our businesswhich, individually or in the aggregate, are not expected to have a materialadverse effect on our consolidated financial position. As of December 31,2005, we had reserved approximately $43.2 million as contingent liabilities inconnection with certain litigation contingencies, involving primarily claims bypersons arising in connection with the termination of their employment and ICMS(state value-added tax).

 

We areinvolved in litigation against Centrais Elétricas de Santa Catarina–CELESC andCompanhia Paranaense de Energia Elétrica–COPEL in order to resolve certainquestions relating to our contracts with these entities, particularly withrespect to increases in pole rental fees requested by these entities.

 

Until May 2006we were challenging before Conselho Administrativo de Defesa Econômica–CADE,the Brazilian antitrust authority, certain exclusivity rights with respect toBrazilian soccer programming enjoyed by Globosat, an affiliate of one of our maincompetitors. During the first half of 2004, we received two favorable decisionsfrom Secretaria de Direito Econômico, the Secretariat of Economic law, and in2006 CADE entered into an agreement with Globosat under which other paytelevision providers will have the right to purchase rights to broadcastBrazilian soccer programming. We believe our purchase of Brazilian soccer willsignificantly help us attract new subscribers and maintain current subscribers.

 

We arejudicially disputing the payment of ICMS (sales tax on operations relating tothe provision of goods and services) before the São Paulo Court of Justice. TheState of São Paulo asserts that ICMS is due at the rate of 25% with respect tothe provision of advertising on pay television. On the other hand, theMunicipality of São Paulo asserts that the provision of advertising on paytelevision constitutes the rendering of services and therefore that only ISS(tax over services), and not ICMS, is due at the rate of 5.0%. We consider anunfavorable outcome in this claim to be probable and have made a provision of$23.3 million with respect thereto. Currently, we pay ICMS over advertising onpay television.

 

Certainmunicipalities in the States of São Paulo, Paraná and Santa Catarina haveannounced their intention to charge us for the use of public highways wheretelecommunication equipment necessary for the rendering of our services isinstalled. We are currently involved in seven claims relating to this issue. Fiveof these claims are in the appeals phase in the Courts of Justice of São Paulo,Paraná and Santa Catarina, and two of these claims are in the Appeal Court ofthe State of São Paulo. We have made no provision in this respect. Based on theopinion of our external counsel, we believe that the likelihood of anunfavorable outcome relating to these claims is remote.

 

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Ouroperating companies are currently defending a lawsuit brought by the EscritórioCentral de Arrecadação e Distribuição (Central Collection and DistributionOffice, or “ECAD”), entity authorized to enforce copyright laws relating tomusical works. ECAD filed a lawsuit in 1993 against all pay-televisionoperators in Brazil seeking to collect royalty payments in connection withmusical works broadcast by the operators. ECAD is seeking a judgment award of2.55% of all past and present revenues generated by the operators. The suitsare currently being submitted to the Superior Tribunal de Justiça in order todetermine whether ECAD is entitled to benefit from the copyrights relating tomusical works broadcast on pay television. Suits were filed against TVA Sul inthe 1a Vara Cível Forum Central de Curitiba and against TVBrasil in the 14a Vara Cível Forum Central de São Paulo. Thesuit against TVA Sul has been initially ruled in TVA’s favor, while the suitagainst TVA Brasil is currently awaiting judgment. Based on the opinion of ourattorneys, we believe that we are likely to prevail in these suits. In theevent we do not prevail in these proceedings, however, our consolidatedfinancial position  may bematerially adversely affected.

 

In addition, we are party to several *administrative proceedings*before ANATEL,which may result in the imposition of penalties. These proceedings relateprimarily to

 

•      licensetransfers;

 

•      areairradiation limit;

 

•      signaldistribution;

 

•      stoppage ofservices;

 

•      approval ofequipment;

 

•      communicationof corporate acts; and

 

•      channelinclusion.

 

**TaxRecovery Program**

 

On April 5,2000, we and our subsidiaries opted to participate in the Government’s TaxRecovery Program (REFIS), implemented by Decree No. 3,342 dated January 25,2000, later converted into Law No. 9,964 dated April 10, 2000.  In addition, TVA Sistema used its credits fortax loss carryforwards amounting to $6.4 million for amortization of interestand fines. As guarantee of the payment of the debts included in the program,TVA Sistema pledged property with an aggregate value of $15.0 million ascollateral.

 

On July 31,2003, certain of our subsidiaries, including TVA Sistema, through a protocolfiled with the Federal Revenue Service, opted to refinance certain taxobligations under the Federal Tax Financing Program (PAES), established by Law No. 10,684dated May 30, 2003. The main reasons for this action were the extension ofmaturity dates, refinancing through PAES (special installment program),inclusion of new taxes, and the use of TJLP (long-term interest rate) formonetary restatement. Management believes that this payment will be madein approximately 111 monthly installments, adjusted by TJLP.

 

**UHFLicenses**

 

On December 17,2003, we signed an agreement of intent to sell the licenses of Televisão ShowTime Ltda., TVA Brasil Radioenlaces Ltda. and TV Delta Curitiba Ltda. relatingto UHF services to an unrelated party. We received an advance of $2.7 millionwhich is recorded as advances from customers. This balance has been monetarilyrestated using the IGPM + CDI indexes and amounted to US$5.4 million as of December 31,2005 (US$3.9 million as of December 31, 2004). The consummation of thetransaction is still subject to the approval of ANATEL.

 

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**C.Organizational Structure**

 

Thefollowing chart sets forth the significant subsidiaries comprising thecorporate structure of our cable, MMDS and Internet businesses.

 

 

TVASistema and TVA Sul operate our MMDS and cable businesses. TVA Sistema operatesour MMDS operations in São Paulo and Rio de Janeiro and cable operations in SãoPaulo. TVA Sistema also operates the business of Ajato, our high speed Internetservice. TVA Sul operates our MMDS operations in Curitiba and cable operationsin Curitiba, Foz do Iguaçú and Florianópolis. TVA Sul holds a 60% equityinterest in CCS-Camboriú Cable System Telecomunicações Ltda., the operatingcompany for our services in Balneário de Camboriú. An unaffiliated third partyholds the remaining 40% equity interest in CCS.

 

**D.Property, Plant and Equipment**

 

We ownmost of the assets essential to our operations. Our major fixed assets arecoaxial and fiber optic cable, converters for subscribers’ homes, electronictransmission, receiving, processing and distribution equipment, microwaveequipment and antennae. We lease certain distribution facilities from thirdparties, including space on utility poles, roof rights and land leases for theplacement of certain of our hub sights and head ends and space for otherportions of our distribution system. We lease offices from third parties, withthe exception of certain offices of TVA Sul, located in Curitiba, State ofParaná, which are owned by us. We also own our data processing facilities andtest equipment.

 

**ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS**

 

Thefollowing discussion should be read in conjunction with the FinancialStatements (including the notes thereto) included in this Annual Report. Forthe purposes of the following discussion, all dollar amounts, with theexception of average installation and subscriber fees, are set forth inthousands of U.S. dollars.

 

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Thisdiscussion of our operating review and prospects reflects our historicalresults. Due to the limited operating history, startup nature, translations ofBrazilian currency into U.S. dollars, and our rapid growth, period-to-periodcomparisons of financial data are not necessarily indicative, and should not berelied upon as an indicator of our future performance.

 

**A.Results of Operations**

 

**Overview**

 

Sinceour inception in 1989, we have been developing our businesses. Despite positiveoperating cash flows since 2002, we continue to sustain substantial net lossesdue primarily to insufficient revenue with which to fund build-out, interestexpense and charges for depreciation and amortization. Our net losses incurredsince inception have been funded principally by (i) net contributions ofU.S.$516,487 from our shareholders, (ii) borrowings from Editora AbrilS.A., or Editora Abril, under a revolving credit facility, dated December 6,1995, between us, as the borrower, and Editora Abril, as the lender, or theAbril Credit Facility, (iii) dispositions of non-strategic assets, and (iv) bankloans and other borrowings made from time to time. In November 2001, ourshareholders agreed to capitalize outstanding loans in the aggregate principalamount of U.S.$123,159 made to us by Editora Abril under the Abril CreditFacility.

 

Ourresults of operations for the year ended December 31, 2005 weresignificantly affected by the following factors: (i) the depreciation ofinvestments in the construction and modernization of infrastructure used toimprove current services and develop new services, (ii) the relativelyhigh cost of local financing, (iii) the impact of the appreciation of the *real*, as discussed below, and (iv) anincrease in income tax expense and accrual for fiscal contingencies as requiredunder rules recently implemented by the Brazilian Securities Commission(CVM).

 

**CriticalAccounting Estimates**

 

TheFinancial Statements are presented in accordance with U.S. GAAP. As such, weare required to make certain estimates, judgments and assumptions thatmanagement believes are reasonable based upon the information available. Theseestimates, judgments and assumptions affect the reported amounts of assets andliabilities at the dates of the Financial Statements and the reported amountsof revenues and expenses during the periods presented. The significantaccounting policies which management believes are the most critical to aid infully understanding and evaluating our reported financial results include thefollowing:

 

*Deferred income taxes*. We recognizedeferred tax assets and liabilities based on the differences between thefinancial statement carrying amounts and the tax bases of assets andliabilities as well as operating loss and tax credit carryforwards. Weregularly review the deferred tax assets for recoverability and establish avaluation allowance if it is more likely than not that the deferred tax assetswill not be realized, based on historical taxable income, projected futuretaxable income, and the expected timing of the reversals of existing temporarydifferences. As of December 31, 2005, we had approximately U.S.$350.7million of accumulated tax losses, to offset against regular taxes. These accumulatedtax losses do not expire. We have a limited operating history and havegenerated losses since our inception. In view of this, we have established afull valuation allowance for the amount of the deferred tax assets attributableto the accumulated tax losses carryforwards and other deductible differences. Inthe event that we generate taxable income in the future, it will be able toutilize these accumulated tax losses.

 

*Impairment of long-lived assets*. Wereviews our property, plant and equipment for impairment whenever events orcircumstances indicate that the carrying amount may not be recoverable. Inorder to estimate the fair value of long-lived assets, we typically makevarious assumptions about the future prospects for the business that the assetrelates to, consider market factors specific to that business and estimatefuture cash flows to be generated by that business. Based on these assumptionsand estimates, we determine whether we need to take an impairment charge toreduce the value of the asset stated on our balance sheet to reflect itsestimated fair value. Assumptions and estimates about future values andremaining useful lives are complex and often subjective. They can be affectedby a variety of factors, including external factors such as industry andeconomic trends, and internal factors such as changes in our business strategyand internal forecasts. A change in assumptions and estimates in the futurecould materially impact our reported financial results in the event that we arerequired to recognize impairment charges, which would decrease net income andresult in lower asset values on our balance sheet.

 

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*Depreciation of property, plant and equipment*.Depreciation of property, plant and equipment is provided using thestraight-line method based on the estimated useful lives of the underlyingassets disclosed in Note 9 to the Tevecap Financial Statements. Given thecomplex nature of our property, plant and equipment, the estimates of useful livesrequire considerable judgment and are inherently uncertain. In the event thatwe change our estimates of useful lives, the amount of future depreciationexpense could be materially different.

 

*Provision for doubtful accounts.*Aprovision for doubtful accounts is established on the basis of an analysis ofthe accounting receivable, in light of the risks involved, and is consideredsufficient to cover any losses incurred in realization of credits. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

 

*Provisionsfor contingencies.* We are subject to proceedings, lawsuitsand other claims related to tax, labor and civil matters. We are required toassess the likelihood of any adverse judgments or outcomes to these matters aswell as potential ranges of probable losses. A determination of the amount ofreserves required, if any, for these contingencies is made after carefulanalysis of each individual issue, based on legal advice. The required reservesmay change in the future due to new developments in each matter or changes inour approach in dealing with these matters, such as a change in settlementstrategy. Future possible changes in the recorded reserve amounts would impactour results of operations in the period that such changes are recorded.

 

**Impactof *Real* Fluctuation**

 

Allforms of our revenue were affected in dollar terms as a result of thesignificant fluctuation of the Brazilian *real*against other major currencies. The devaluation of the *real*, which occurred primarily in 1999 andcontinued through 2002, resulted in a loss in the value of the *real* against the U.S. dollar ofapproximately 18.7% during the year ended December 31, 2001 and approximately52.3% during the year ended December 31, 2002. This devaluation alsoresulted in an increase in our U.S. dollar-denominated liabilities. For theyears ended December 31, 2003, 2004 and 2005, however, the *real* appreciated approximately 18.2%, 8.1%and 11.8%, respectively, against the U.S. dollar. This appreciation resulted inan increase in all amounts presented in our consolidated statement ofoperations. In particular, this appreciation significantly affected our foreigncurrency gains and losses, which represented a gain of U.S.$11.0 million(or 14.0% of net revenue) in 2003, a gain of U.S.$3.6 million (or 4% ofnet revenue) in 2004 and a gain of U.S.$6.4 million (or 5% of net revenue)in 2005. See Item 3, “Key Information—Risk Factors—Factors Relating to theCompany” and “—Factors Relating to Brazil.”

 

**RecentAccounting Pronouncements**

 

In November 2004, theFASB issued SFAS 151 “Inventory Costs – an Amendment of ARB No.43, Chapter 4”.This statement clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). This Statementrequires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, this Statement requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. The Company will apply this statement, ifapplicable, from fiscal periods beginning after June 15, 2005.

 

In December 2004, theFASB issued SFAS 153 “Exchange of Nonmonetary Assets – an Amendment of APBOpinion No.29”. This statement addresses the measurement of exchanges ofnonmonetary assets by eliminating the exception from fair value measurement fornonmonetary exchanges of similar productive assets and replacing it with anexception for exchanges that do not have commercial substance. The Company willapply this statement, if applicable, from fiscal periods beginning after June 15,2005.

 

In March 2005, the FASBissued FASB Interpretation No. 47 “Accounting for Conditional AssetRetirement Obligations”, which refers to legal obligations to perform anasset retirement activities. The Company does not expect FASB Interpretation No. 47to have a significant impact on the financial position, results of operationsor cash flows.

 

In March 2006, the FASBissued SFAS No. 156 Accounting for Servicing of Financial Assets. SFAS 156amends SFAS No. 140, Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities, that establishes, among otherthings, the accounting for all separately recognized servicing assets andservicing liabilities. SFAS 156 amends Statement 140 to require that allseparately recognized servicing assets and servicing liabilities be initiallymeasured at fair value, if practicable. SFAS 156 permits, but does not require,the subsequent measurement of separately recognized servicing assets andservicing liabilities at fair value. An entity that uses derivative instrumentsto mitigate the risks inherent in servicing assets and servicing liabilities isrequired to account for those derivative instruments at fair value. Under thisStatement, an entity can elect subsequent fair 

 

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value measurement to account for its separatelyrecognized servicing assets and servicing liabilities. By electing that option,an entity may simplify its accounting because this Statement permitsincome statement recognitionof the potential offsetting changes in fair value of those servicing assets andservicing liabilities and derivative instruments in the same accounting period.An entity shall adopt this Statement as of the beginning of its first fiscalyear that begins after September 15, 2006. Earlier adoption is permittedas of the beginning of an entity’s fiscal year, provided the entity has not yetissued financial statements, including interim financial statements, for anyperiod of that fiscal year.

 

**ConsolidatedStatements of Operations Data**

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **Amount**                                 | ** ** | **% of Net  Revenue** | ** ** | **Amount** | ** ** | **% of Net  Revenue** | ** ** | **Amount** | ** ** | **% of Net  Revenue** | ** ** |
|                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Gross revenues                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Monthly subscriptions                         |       | $                                          | 126,641    |   | 106.3 | % | $ | 94,063 |   | 106.0 | % | $ | 83,794 |   | 107.0 | % |
| Installation                                  |       | 2,086                                      |       | 1.8 | % | 989 |   | 1.1 | % | 1,211 |   | 1.5 | % |
| Additional services and others                |       | 10,437                                     |       | 8.8 | % | 8,045 |   | 9.1 | % | 6,367 |   | 8.1 | % |
| Taxes on revenue                              |       | (19,985                                    | )          | (16.8 | )% | (14,392 | ) | (16.2 | )% | (13,038 | ) | (16.6 | )% |
| Net revenue                                   |       | 119,179                                    |       | 100.0 | % | 88,705 |   | 100.0 | % | 78,334 |   | 100.0 | % |
| Direct operating expenses                     |       | 46,087                                     |       | 38.7 | % | 37,122 |   | 41.8 | % | 37,217 |   | 47.5 | % |
| Selling, general and administrative expense   |       | 45,873                                     |       | 38.5 | % | 24,948 |   | 28.1 | % | 21,352 |   | 27.3 | % |
| Depreciation and amortization                 |       | 29,536                                     |       | 24.8 | % | 24,356 |   | 27.5 | % | 23,683 |   | 30.2 | % |
| Tax recovery program                          |       | —                                     |       | — | % | — |   | — | % | 5,029 |   | 6.4 | % |
| Other operating expense, net                  |       | 6,929                                      |       | 5.8 | % | 3,315 |   | 3.7 | % | 3,671 |   | 4.7 | % |
| Total operating expenses (income)             |       | 128,425                                    |       | 107.8 | % | 89,741 |   | 101.2 | % | 90,952 |   | 116.1 | % |
| Operating income (loss)                       |       | (9,246                                     | )          | (7.8 | )% | (1,036 | ) | (1.2 | )% | (12,618 | ) | (16.1 | )% |
| Interest (income)                             |       | (1,010                                     | )          | (0.8 | )% | (701 | ) | (0.8 | )% | (1,511 | ) | (1.9 | )% |
| Interest expense                              |       | 33,182                                     |       | 27.8 | % | 21,418 |   | 24.1 | % | 18,135 |   | 23.2 | % |
| Foreign currency transaction (gain) loss, net |       | (6,379                                     | )          | (5.4 | )% | (3,561 | ) | (4.0 | )% | (11,019 | ) | (14.1 | )% |
| Other nonoperating expenses (income), net     |       | —                                     |       | — | % | (8,443 | ) | (9.5 | )% | 5,897 |   | 7.5 | % |
| Minority interest                             |       | 241                                        |       | 0.2 | % | 255 |   | 0.3 | % | 82 |   | 0.1 | % |
| Income taxes(1)                               |       | 28,046                                     |       | 23.5 | % | 9,171 |   | 10.3 | % | 19,382 |   | 24.7 | % |
| Equity in (losses) income of affiliates, net  |       | —                                     |       | — | % | 468 |   | 0.5 | % | (3,585 | ) | (4.6 | )% |
| Net loss                                      |       | (63,236                                    | )          | (53.1 | )% | (19,643 | ) | (22.1 | )% | (39,999 | ) | (51.1 | )% |
|                                               |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Includes provision for deferred income taxesin 2005, 2004 and 2003 due to foreign currency gains in respect of our seniornotes.

 

**YearEnded December 31, 2005 Compared to Year Ended December 31, 2004**

 

Thetable below sets forth the number of our cable and MMDS subscribers at December 31,2005 and December 31, 2004.

 
| **Cable/MMDS Subscribers**        | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| MMDS(1)                                |       | 99,742                      |       | 102,966                     |       |
| Cable                                  |       | 200,833                     |       | 190,582                     |       |
|                                   |       | 300,575                     |       | 293,548                     |       |
| Paid subscribers awaiting installation |       | 443                         |       | 406                         |       |
| Total                                  |       | 301,018                     |       | 293,954                     |       |

 

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(1)           Includes UHF subscribers

 

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Thetable below sets forth the number of our internet subscribers at December 31,2005 and December 31, 2004.

 
| **Internet Subscribers**          | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Ajato(1)                               |       | 44,376                      |       | 30,190                      |       |
| Paid Subscribers Awaiting Installation |       | 249                         |       | 248                         |       |
| Total internet Subscribers             |       | 44,625                      |       | 30,438                      |       |

 

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(1)           Excludes subscribers that formerly subscribedseparately to Acesso for internet access, and who now receive both internetaccess and internet service through Ajato.

 

*Gross revenues*. Gross revenues consistprimarily of monthly subscription revenue (which principally consists ofmonthly fees paid by subscribers to us for programming services, includingequipment use), installation revenue and additional services and others (whichconsist of advertising revenues and other revenues). For the year endedDecember 31, 2005, gross revenues for the pay television segment wereU.S.$121.2 million (or 87% of total revenues) and for the internet segment wereU.S.$18.0 million (or 13% of gross revenues), as compared with U.S.$91.8million (or 89% of total revenues) and U.S.$11.3 million (or 11% of grossrevenues) for the previous year.

 

Monthlysubscription revenue for the year ended December 31, 2005 wasU.S.$126.6 million, an increase of 34.6%, as compared to U.S.$94.1 millionfor the same period in 2004. The increase in revenue was due to the largegrowth in our internet subscriber base of 48%, together with a growth of 2% inthe pay television subscriber base. Average monthly fees for existing paytelevision subscribers increased 20%, from U.S.$29.57 in 2004 to U.S.$35.39 in2005, largely due to the upgrade in our programming offerings and higher ARPUsfor digital subscribers, which represented 18% of total pay televisionsubscribers (as opposed to 1.4% in 2004). The average monthly subscriptionprice for the year ended December 31, 2005 was U.S.$33.89 for MMDSservice, U.S.$36.14 for cable service, U.S.$30.73 for residential internetservice and U.S.$185.79 for corporate internet service, as compared toU.S.$27.74, U.S.$30.56, U.S.$28.31 and U.S.$167.56, respectively, for the sameperiod of 2004. In November 2005 our MMDS operation in São Paulo was fullydigitized, thereby impacting favorably our ARPU and churn indicators. ARPU fordigital cable subscribers in São Paulo was U.S.$48.52 as of December 31,2005.

 

Installationrevenue for the year ended December 31, 2005 was U.S.$2.1 million, ascompared to U.S.$1.0 million for the same period in 2004, an increase ofU.S.$1.1 million or 111%. This increase was primarily due to the increaseof  14% in new sales  and the higheraverage hook-up fee charged tonew digital subscribers, which reduced the subsidy involved in installing a newset top box. The average installation fee in 2005 was U.S.$18.00 for MMDSservice and U.S.$19.60 for cable service, as compared to U.S.$19.95 andU.S.$15.42, respectively, in 2004. The average installation fee for internetsales was U.S.$5.50 in 2005, as compared to U.S.$7.19 in 2004.

 

Advertising,additional services and other revenues for the year ended December 31,2005 was U.S.$10.4 million, as compared to U.S.$8 million for the sameperiod in 2004, an increase of 29.7%. This increase was due primarily to anincrease in advertising revenue of 97%, from U.S.$ 1.8 million in 2004 to U.S.$3.6 million in 2005 due to a new segmented approach in the market.Additionally, other revenues increased 10% from U.S.$6.2 million in 2004to U.S.$6.8 million in 2005, principally due to the increase in theinternet subscriber base and related cable modem rental and new contracts forthe wholesale segment.

 

Taxeson revenue consist of a 3.65% tax on advertising revenue and a 15.15% tax onrevenues other than advertising revenue. Taxes on revenue for the year ended December 31,2005 were U.S.$20 million, as compared to U.S.$14.4 million for thesame period in the prior year, an increase of 39%. The increase in taxes onrevenue is attributable to our increase in revenues and a new valued added tax(ICMS) applied to adverting revenue. Taxes on revenue as a percentage of grossrevenues were 14.36% in 2005, as compared to 13.96% in 2004.

 

Netrevenue for the year ended December 31, 2005 was U.S.$119.2 million,as compared to U.S.$88.7 million for the same period in 2004, an increaseof U.S.$30.5 million or 34.4%.

 

*Direct operating expenses*. Directoperating expenses include expenses in connection with payroll and benefits fornon-administrative employees, programming, technical assistance, TVA magazine,pole rental, network and other operations. These expenses are variable andrelated to the subscriber base evolution and are also dependent on the type ofservice subscribers select. Direct operating expenses for the year ended December 31,

 

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2005 were U.S.$46.1 million,as compared to U.S.$37.1 million for the same period in 2004, an increaseof U.S.$9 million, or 24%. As a percentage of net revenues, directoperating expenses represented 39% in 2005, as compared to 42% in 2004. Thisrelative decrease in direct operating expenses demonstrates the positiveresults of our restructuring efforts with gains in productivity beingincorporated into our cost structure.

 

*Selling, general and administrative expenses*.Selling, general and administrative expenses include payroll and benefits foradministrative and selling employees, advertising and promotion expense, rent,and other general and administrative expenses. Selling, general andadministrative expenses for the year ended December 31, 2005 were U.S.$45.9 million,as compared to U.S.$24.9 million for the same period in 2004, an increaseof U.S.$20.9 million or 84%, primarily due to a non recurrent provisionfor contingencies (U.S.$12 million and due to higher sales commissionexpenses attributed to an increase in the subscriber base level, resulting in7,027 new net pay television connections in 2005 as compared to 9,358 in 2004and 13,938 new net Internet connections in 2005 as compared to 9,935 in 2004.With the migration of our MMDS customers from analog to digital service in2005, we encouraged the cancellation of approximately 5,000 relativelyunprofitable customers. Marketing expenses also increased in 2005 due to thelaunching of new digital products for our São Paulo MMDS operation and newcommunication and institutional strategies. As a percentage of net revenues,selling, general and administrative expenses represented 38.5% in 2005, ascompared to 28% in 2004. Fixed costs were practically the same in 2005 ascompared to 2004 (in real terms), an impact of the continuous cost controlprogram that we have implemented since 2002.

 

*Depreciation and amortization*. Depreciationand amortization includes depreciation of systems, equipment and installationmaterials and amortization of concessions. Depreciation and amortization forthe year ended December 31, 2005 was U.S.$29.5 million, as comparedto U.S.$24.9 million for the same period in 2004, an increase of U.S.$5.2 milliondue primarily to new capital expenditures of U.S.$26.6 million during 2005which were partially offset by the fact that certain items of property, plantand equipment were fully depreciated in 2005. In addition, this increasereflects the investment made to digitize our cable operations in São Paulo in2004.

 

*Operating gain/(loss)*. Operating lossesfor the year ended December 31, 2005 were U.S.$9.2 million comparedto U.S.$1.0 million for the same period in 2004, an increase in loss ofU.S.$8.2 million. The loss in 2005 was primarily due to a provisioning offiscal contingencies in the amount of approximately $12.4 million.

 

*Interest income*. Interest income for theyear ended December 31, 2005 was U.S.$1.0 million, as compared toU.S.$0.7 million for the same period in 2004, an increase ofU.S.$0.3 million, or 44%.

 

*Interest Expense*. Interest expense for theyear ended December 31, 2005 was U.S.$33.2 million, as compared toU.S.$21.4 million for the same period in 2004, an increase ofU.S.$11.8 million, principally attributable to fluctuations in primeinterest rates in Brazil (19.12% in 2005 and 16.24% in 2004) and appreciationof the *real*. In 2005 and 2004 ourinterest expense includes U.S.$23.2 million and U.S.$16.5 million,respectively, of interest accrued but not paid to our affiliate Editora Abril.

 

*Other nonoperating expenses (income), net.*Othernonoperating expenses (income), net for the year ended December 31, 2004was an income of U.S.$8,443, principally attributable to the sale transactionof Canbras**,**Paraná Participaçõesand Zerelda. We recorded no other nonoperating expenses (income), net in 2005.

 

*Currency fluctuation expense (income), net*.Currency fluctuation income, net increased from U.S.$3.6 million in 2004to U.S.$6.4 million in 2005 as a result of the appreciation of the *real* against the U.S. dollar of 11.8% in2005 compared to an appreciation of 8.1% in 2004.

 

*Minority interest*. Minority interest was U.S.$0.2 millionand U.S.$0.3 million for the year ended December 31, 2005 and 2004due to the operational performance of our Camboriú operation.

 

*Income taxes*. Income tax expense in 2005 wasU.S.$28 million compared to U.S.$9.2 million in 2004. Income taxexpense is principally related to the impact of the appreciation of the *real* against the U.S. dollar, whichreduced our U.S. dollar-denominated indebtedness.

 

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*Equity in losses (income) of affiliates, net.*Forthe year ended December 31, 2004 equity in income of affiliates wasU.S.$0.5 million due to the impact of the appreciation of *real* against the U.S. dollar in Canbras’results. We recorded no equity in losses (income) of affiliates, net in 2005.

 

*Net income (loss).*Net loss for the yearended December 31, 2005 was U.S.$63.3 million, as compared to a netloss of U.S.$19.6 million for the same period in 2004, an increase ofU.S.$43.7 million. The increase in net loss is primarily due to theprovisioning of fiscal contingencies and income tax expense (the latterresulting from the impact of the *real*appreciation on our payment obligations under our dollar-denominated seniornotes).

 

**YearEnded December 31, 2004 Compared to Year Ended December 31, 2003**

 

Thetable below sets forth the number of our cable and MMDS subscribers at December 31,2004 and December 31, 2003.

 
| **Cable/MMDS Subscribers**        | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| MMDS(1)                                |       | 102,966                     |       | 104,755                     |       |
| Cable                                  |       | 190,582                     |       | 179,435                     |       |
|                                   |       | 293,548                     |       | 284,190                     |       |
| Paid Subscribers Awaiting Installation |       | 406                         |       | 765                         |       |
| Total                                  |       | 293,954                     |       | 284,955                     |       |

 

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(1)           Includes UHF subscribers

 

Thetable below sets forth the number of TVA’s internet subscribers at December 31,2004 and December 31, 2003.

 
| **Internet Subscribers**          | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Ajato(1)                               |       | 30,190                      |       | 20,183                      |       |
| Paid Subscribers Awaiting Installation |       | 248                         |       | 320                         |       |
| Total internet Subscribers             |       | 30,438                      |       | 20,503                      |       |

 

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(1)           Excludes subscribers that formerly subscribedseparately to Acesso for internet access, and who now receive both internetaccess and internet service through Ajato.

 

*Gross revenues*. Monthly subscriptionrevenue for the year ended December 31, 2004 was U.S.$94.1 million, an increaseof 12.3%, as compared to U.S.$83.8 million for the same period in 2003. Theincrease in revenue was due to the large growth in our internet subscriber baseof 49.6%, a growth of 3.3% in the pay television subscriber base and anincrease in ARPUs in both areas. Average monthly fees for existing paytelevision subscribers increased 16.0%, from U.S.$25.50 to U.S.$29.57, largelydue to the upgrade in our programming offerings and higher ARPUs for digitalsubscribers. The average monthly subscription price for the year ended December 31,2004 was U.S.$27.74 for MMDS service, U.S.$30.56 for cable service, U.S.$28.31for residential internet service and U.S.$167.56 for corporate internetservice, as compared to U.S.$24.20, U.S.$26.27, U.S.$27.39 and U.S.$161.12,respectively, for the same period of 2003. ARPU for digital cable subscribersin São Paulo was U.S.$47.48 as of December 31, 2004. The slight decreasein internet ARPU (0.7%) was due to market competition conditions.

 

Installationrevenue for the year ended December 31, 2004 was U.S.$1.0 million, ascompared to U.S.$1.2 million for the same period in 2003, a decrease ofU.S.$0.2 million or 18.3%. This decrease was primarily due to our strategyof slightly reducing installation fees for MMDS and internet services in orderto attract more analog subscribers. For digital subscribers our strategy was toreduce subsidies, as a result of which we charged an average of U.S.$73.93 in2004. The average installation fee in 2004 was U.S.$19.95 for MMDS service andU.S.$15.42 for cable service, as compared to U.S.$25.91 and U.S.$14.50,respectively, for 2003. The average installation fee for internet sales wasU.S.$7.19 in 2004, as compared to U.S.$11.97 in 2003.

 

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Advertising,additional services and other revenues for the year ended December 31,2004 was U.S.$8 million, as compared to U.S.$6.4 million for the sameperiod in 2003, an increase of 26.4% as a result of an increase in otherrevenues from U.S.$3.8 million to U.S.$6.2 million in 2004, principallydue to the increase in the internet subscriber base, new contracts for thewholesale segment and leasing of frequencies. The increase was slightly offsetby a decrease in advertising revenue from U.S.$2.6 million toU.S.$1.8 million in 2004.

 

Taxeson revenue for the year ended December 31, 2004 wereU.S.$14.4 million, as compared to U.S.$13.0 million for the sameperiod in the prior year, an increase of 10.4%. The increase in taxes onrevenue is attributable to our increase in revenues. Taxes on revenue as apercentage of gross revenues were 13.96% in 2004, as compared to 14.3% in 2003.

 

Netrevenue for the year ended December 31, 2004 was U.S.$88.7 million,as compared to U.S.$78.3 million for the same period in 2003, an increaseof U.S.$10.4 million or 13.2%.

 

*Direct operating expenses*. Directoperating expenses for the year ended December 31, 2004 were U.S.$37.1 million,as compared to U.S.$37.2 million for the same period in 2003, an decreaseof U.S.$0.1 million, or 0.3%. As a percentage of net revenues, directoperating expenses represented 41.8% in 2004, as compared to 47.5% in 2003. Thisrelative decrease in direct operating expenses demonstrates the positiveresults of our restructuring efforts with gains in productivity beingincorporated into our cost structure.

 

*Selling, general and administrative expenses*.Selling, general and administrative expenses for the year ended December 31,2004 were U.S.$24.9 million, as compared to U.S.$21.4 million for thesame period in 2003, an increase of U.S.$3.5 million or 16.8%, due tohigher sales commission expenses attributed to an increase in the subscriberbase level, resulting in 9,358 new net connections in 2004 as compared to16,431 (negative) in 2003. Marketing expenses also increased in 2004 due to thelaunching of new digital products for our São Paulo cable operation and newcommunication and institutional strategies. Fixed costs were practically thesame in 2004 as compared to 2003 (in real terms), an impact of the continuouscost cutting program that we implemented since 2002.

 

*Depreciation and amortization*. Depreciationand amortization for the year ended December 31, 2004 wasU.S.$24.4 million, as compared to U.S.$23.7 million for the sameperiod in 2003, an increase of U.S.$0.7 million due primarily to capitalexpenditures of U.S.$13.1 million during 2004 which were partially offsetby the fact that certain items of property, plant and equipment were fullydepreciated in 2004.

 

*Operating loss*. Operating loss for theyear ended December 31, 2004 was U.S.$1.0 million compared to anU.S.$12.6 million operating loss for the same period in 2003, an increaseof U.S.$11.6 million.

 

*Interest income*. Interest income for theyear ended December 31, 2004 was U.S.$0.7 million, as compared toU.S.$1.5 million for the same period in 2003, a decrease ofU.S.$0.8 million, or 53.6%.

 

*Interest Expense*. Interest expense for theyear ended December 31, 2004 was U.S.$21.4 million, as compared toU.S.$18.1 million for the same period in 2003, an increase ofU.S.$3.3 million, principally attributable to fluctuations in primeinterest rates in Brazil (16% in 2003 and 18% in 2004) and appreciation of the *real*.

 

*Other nonoperating expenses (income), net.*Othernonoperating expenses (income), net for the year ended December 31, 2004was an income of U.S.$8.4 million as compared to an expense of U.S.$5.9 millionfor the same period in 2003, an increase of U.S.$14.3 million due to saletransaction of Canbras, Paraná Participações and Zerelda.

 

*Currency fluctuation expense (income), net*.Currency fluctuation income, net decreased from U.S.$11.0 million in 2003to U.S.$3.6 million in 2004 as a result of the appreciation of the *real* against the dollar of 8.1% in 2004compared to an appreciation of 18.2% in 2003.

 

*Minority interest*. Minority interest wasU.S.$0.3 million in 2004, as compared to U.S.$0.08 million in 2003due to the operational performance in our Camboriú operation.

 

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*Income taxes*. Income tax expense in 2003was U.S.$19.4 million compared to U.S.$9.2 million in 2004. Incometax expense is principally related to the impact of the appreciation of the *real* against the dollar, which reduced ourU.S. dollar-denominated indebtedness.

 

*Equity in losses (income) of affiliates, net.*Forthe year ended December 31, 2003 equity in income of affiliates wasU.S.$3.6 million due to the impact of the appreciation of *real* against the U.S. dollar in Canbras’results as compared to U.S.$(0.5) million in 2004.

 

*Net income (loss).*Net loss for the yearended December 31, 2004 was U.S.$19.6 million, as compared to a netloss of U.S.$40.0 million for the same period in 2003, an improvement ofU.S.$20.4 million or 51%.

 

**B.Liquidity and Capital Resources**

 

Sinceour inception, we have sustained losses primarily due to insufficient revenueto fund start-up costs, interest expense and charges for depreciation andamortization arising from the development of our pay television and broadbandinternet systems. As of December 31, 2005, we had cumulative net losses ofU.S.$627.3 million and cumulative tax losses of U.S.$351 million. Duringthe periods under review, we required external funds to finance our capitalexpenditures and operating activities and make payments of principal andinterest on our indebtedness. The sources of such funds have been asfollows:  (i) borrowings fromEditora Abril under the Abril Credit Facility, of which U.S.$68.2 million wasoutstanding as of December 31, 2005, (ii) borrowings under short/long-termrevolving credit facilities, of which U.S.$32.8 million was outstanding as of December 31,2005, (iii) net capital contributions of approximately U.S.$446 millionfrom shareholders and (iv) an aggregate principal amount of U.S.$48.3million in senior notes outstanding to unaffiliated parties as of December 31,2005.

 

As of December 31,2005, we had U.S.$149.3 million of indebtedness outstanding, consisting ofsenior notes held by third parties in the aggregate principal amount ofU.S.$48.3 million, U.S.$68.2 million outstanding under the Abril CreditFacility, and short/long-term revolving credit facilities in an aggregateprincipal amount of U.S.$32.8 million. We will likely require capital for (i) thecontinued funding of losses and working capital requirements, (ii) theinstallation of equipment at subscribers’ locations, (iii) theconstruction/maintenance of additional/existing transmission and head endfacilities and related equipment purchases, (iv) the launching of digitalservices for analog MMDS customers and related expenses, (v) thedevelopment of our internet businesses and (vi) the payment of theprincipal amount of our indebtedness.

 

Wemade purchases of fixed assets in the aggregate amount of U.S.$26.6 million andU.S.$13.1 million in 2005 and 2004, respectively. Management estimates thatapproximately U.S.$48 million (assuming an exchange rate of U.S.$1.00 = R$2.2)of capital expenditures will be required in 2006, principally related to thelaunching of digital MMDS services in Rio de Janeiro, sustaining the growth ofdigital cable and MMDS services in São Paulo, the maintenance of cable and MMDSnetworks and our subscriber base, the purchase of reception equipment (spareparts), which includes hardware, materials and labor used for new subscriberinstallations and decoders, and the development of our internet operations.

 

Ourprincipal sources of liquidity are borrowings under the Abril Credit Facilityand our short-term revolving credit facility, together with net cash providedby operating activities. Our liquidity needs arise primarily from capitalexpenditures, debt service requirements and, during certain periods, thefunding of our working capital requirements. Until sufficient cash flow isgenerated from operations to satisfy our liquidity needs, we will be requiredto utilize our current sources of debt funding to supplement our cash flow. Wehad approximately U.S.$9.8 million of cash and cash equivalents as of December 31,2005.

 

Forthe year ended December 31, 2005, net cash provided by operatingactivities was U.S.$24.7 million. For the year ended December 31, 2005,net cash used in investing activities was U.S.$26.6 million, as the result ofcapital expenditures for the purchase of fixed assets. The purchases of fixedassets were principally related to the digitalization of our MMDS operation inSão Paulo, our subscriber base growth, the maintenance of cable and MMDSnetworks and the subscriber base, the purchase of reception equipment (spareparts), which includes hardware, materials and labor used for new subscriberinstallations, and the development of our internet operations. For the yearended December 31, 2005, net cash provided by financing activities wasU.S.$8.9 million.

 

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Ourliquidity may also be adversely affected by statutory minimum dividendrequirements, which are 25% of profits under applicable Brazilian law.

 

**C.Research and Development**

 

We areengaged in research and development activities with respect to thedigitalization of our cable and MMDS systems and the introduction of newtechnologies, such as DVR, pay-per-view and WiMAX technologies through ourdistribution networks. For the years ended December 31, 2003, 2004 and2005, we incurred expenses of approximately U.S.$0, U.S.$1.5 million and U.S.$12.0million, respectively, in connection with these activities.

 

**D.Trend Information**

 

Ourresults of operations for the year ended December 31, 2005 have beenaffected by Brazilian economic conditions. In 2005, the *real* appreciated by 11.8% to R$2.3407 perU.S.$1.00. During 2005, the Brazilian economy performed favorably, withindustrial production increasing by 2.5% (compared with the same period of2004) and an increase in GDP of 2.3% (over the same period of 2004). Ourresults of operations for the year ending December 31, 2006 will beinfluenced generally by Brazilian economic conditions, including the effectsarising from policies implemented by the administration of Luiz Inácio Lula daSilva, the performance of the Brazilian *real*against other major currencies, and the roll-out of our new digital services. SeeItem 3, “Key Information—Risk Factors—Factors Relating to Brazil.”

 

Inaddition, we have invested substantial amounts in the development of “triple-play”digital technology through which we can offer to our customers a single sourceof video, data and voice services through our cable and MMDS systems, as wellas the deployment of digital video recorders, or DVRs and HDTV. In addition, weexpect to launch new MMDS services incorporating wireless and worldwideinteroperability for microwave access, or WiMAX, technologies. As a result, ourresults of operations for the year ending December 31, 2006 and thereafterwill be significantly affected by the development and marketability of “triple-play”and other new technologies in our principal markets.

 

**E.Off-Balance Sheet Arrangements**

 

We donot have any off-balance sheet arrangements.

 

**F.Contractual Obligations**

 

Thefollowing table sets forth our principal contractual obligations during theperiods indicated.

 
| ** **                                               | ** ** | ** ** | ** ** | **Payment due by Period  (thousands of dollars)** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|
| **Contractual Obligations**                         | ** ** | **Total**  | ** ** | **Less than 1  year**                                            | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **Over 5  years** | ** ** |
| Debt obligations(1)                                      |       | 81,145     |       | 24,622                                                                     |       | 56,523 |   |   |   | — |   |
| Operating lease obligations                              |       | 12,255     |       | 2,761                                                                      |       | 8,180 |   | 1,314 |   | — |   |
| Purchase obligations (including programming  agreements) |       | 87,135     |       | 34,220                                                                     |       | 52,915 |   | — |   | — |   |
| Other liabilities                                        |       | 9,917      |       | 4,166                                                                      |       | 5,751 |   | — |   | — |   |
| Total                                                    |       | 190,452    |       | 65,769                                                                     |       | 123,369 |   | 1,314 |   | — |   |

 

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(1)           Not including interest payments on debtobligations. We are not able to determine such future interest payments becausewe cannot accurately predict future interest rates nor our future cashgeneration and future business decisions that could significantly affect ourdebt levels and consequently this estimate. For an understanding of the impactof a change in interest rates applicable to our debt obligations, see Item 11, “Quantitativeand Qualitative Disclosures About Market Risk.”

 

Thefigures set forth above represent estimates made by us using variousassumptions for the years indicated, including (i) that our presentprogramming and supply contracts will remain in effect at the current rates setforth in such contracts during such years, (ii) that our subscriber basewill not fall below its present level during such years and (iii) that the*real*/U.S. dollar exchange ratewill remain stable during such years. As a result, our 

 

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actual contractual obligationsduring the years indicated above could vary materially based upon, among otherthings, changes in our programming line-up, capital expenditure needs,subscriber base and the *real*/U.S.dollar exchange rate.

 

**ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

 

**A.Directors and Senior Management**

 

We aremanaged by our board of directors (*Conselhode Administração*) and committee of officers (*Diretoria*). Our day-to-day operations aremanaged by our executive officers (*Executivos*).See Item 10, “Additional Information—Estatuto Social.”

 

**Board of Directors**

 
| **Member**                            | ** ** | **Position** | ** ** | **Current Position Held Since** |
|---------------------------------------|------------|--------------|------------|------------------------------------------------|
| Roberto Civita                        |       | President    |       | 2006                                           |
| Eliane Aleixo Lustosa Thompson Flores |       | Member       |       | 2006                                           |
| Leila Abraham Loria                   |       | Member       |       | 2004                                           |
| Arnaldo Figueiredo Tibyriçá |       | Member       |       | 2003                                           |
| Deborah Patricia Wright               |       | Member       |       | 2003                                           |
| Francisco Sávio Couto Pinheiro   |       | Member       |       | 1995                                           |
| Marcelo Vaz Bonini                    |       | Member       |       | 2004                                           |
| Mitchell R. Cohen                     |       | Member       |       | 2001                                           |
| Joe Delgado                           |       | Member       |       | 2005                                           |

 

**Committee of Officers**

 
| **Member**                              | ** ** | **Position** | ** ** | **Current Position Held Since** |
|-----------------------------------------|------------|--------------|------------|------------------------------------------------|
| Carlos Eduardo Malagoni                 |       | Member       |       | 2004                                           |
| Virgílio José Carreira Amaral |       | Member       |       | 2004                                           |
| Marcelo Vaz Bonini                      |       | Member       |       | 2001                                           |

 

**Executive Officers**

 
| **Member**                              | ** ** | **Position**                                   | ** ** | **Current Position Held Since** |
|-----------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|
| Leila Abraham Loria                     |       | Chief Executive Officer                        |       | 1999                                           |
| Carlos Eduardo Malagoni                 |       | Chief Financial Officer                        |       | 2002                                           |
| Vito Chiarella Neto                     |       | Customer Relationship & Sales Officer |       | 2001                                           |
| Amilton Lucca                           |       | New Business Development Officer               |       | 2001                                           |
| Virgílio José Carreira Amaral |       | Strategy & Technology Officer         |       | 1999                                           |
| Maria Fatima Oliveira                   |       | Executive Programming Manager                  |       | 2004                                           |
| Leila Cocito                            |       | Marketing and Advertisement Officer            |       | 2004                                           |

 

*Roberto Civita* Mr. Civita wasappointed as president of our board of directors in 2006 and has been a memberof the board of directors of the Abril Group since 2001. He has been presidentand editor-in-chief of Editora Abril since 1990. He was the first publisher of *Veja*, which he created and launched in1968. He was born in Italy in 1936, and holds a bachelor’s degree in journalismand economics from Wharton School of the University of Pennsylvania and apostgraduate degree in sociology from Columbia University.

 

*Eliane Aleixo Lustosa Thompson Flores.*Mrs. Lustosa  was appointed to our board of directors in2006 and has been the financial and control vice-president of the Abril Groupsince 2005. She served as an officer for investor relations, as financial andmanagement officer of Ponto Frio, as investment officer of Petros –*Fundação Petrobras*, as the protection andeconomic defense officer for the Secretariat of Economic Law Enforcement in theMinistry of Justice and as Technical Coordinator in the Ministries of EconomicAffairs, Finance and Planning. She has also been a member of the board ofdirectors of several Brazilian companies, such as Perdigão, CPFL, Tele NorteCelular Participações and Coteminas. Mrs. Lustosa holds a postgraduatedegree in economics and a doctorate 

 

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degree in finance from *Pontifícia Universidade Católica do Rio de Janeiro -*PUC/RJ(Pontifical Catholic University of Rio de Janeiro).

 

*Leila Abraham Loria* has been our ChiefExecutive Officer since June 1999 and a member of our board of directorssince 2004. Previously, Ms. Loria was Business Director at the retailoperation of Mesbla Lojas de Departamentos S.A. Ms. Loria also heldmanaging positions at Wal-Mart Brasil and Galaxy Brasil and was responsible forthe development and implementation of these operations in Brazil. Ms. Loriahas also been the President of the Brazilian Association of Pay TelevisionOperators (ABTA) and currently presides over Neo TV (an association dedicatedto matters of programming and content) and Neotec (an association of MMDSsystems operators). She is also in charge of the Abril Group’s ElectronicDistribution Division, which includes us, Abril Sem Fio and the coordination ofthe Abril Group’s internet activities. Ms. Loria graduated with a degreein business administration from the Fundação Getulio Vargas and received amaster’s degree in business administration from the Universidade Federal do Riode Janeiro.

 

*Arnaldo Figueiredo Tibyriçá*****has been a member of our board ofdirectors since March 2003. Mr. Tibiryçá previously served as VicePresident of Legal, Regulatory, and Institutional Affairs of BCP S.A. He hasalso been associated with Grupo C & A and Banco Itaú. Mr. Tibyriçareceived his law degree from Pontifícia Universidade Católica de São Paulo.

 

*Deborah Patricia Wright*****has been a member of our board ofdirectors since March 2003. Ms. Wright has previously served as adirector of Amelia.com (an internet division of the Pão de Açúcar Group) since2000. Ms. Wright has also been the General Director of Parmalat BrasilLtda., and has twenty years experience in consumer products with largecompanies such as ICI (Tintas Coral), Philip Morris (Kibon e Suchard) andUnilever.

 

*Francisco Sávio Couto Pinheiro* has been amember of our board of directors since 1995. Mr. Pinheiro is a formerSecretary of Communications who has also held posts at Embratel and Radiobrás,the Brazilian government-owned broadcasting company. He has also been appointedtwice as a member of the ANATEL Consulting Committee, acting as its chairmanfor two terms. Mr. Pinheiro was elected chairman of the WorldTelecommunication Standardization Conference (WTSA), a sector of the UnitedNations’ International Telecommunication Union. He is currently a consultantand General Manager of SP Communications. Mr. Pinheiro is an engineer andholds a masters of science in telecommunications.

 

*Marcelo Vaz Bonini* has been a member ofour board of directors since 2004 and a member of our committee of officerssince 2001. Mr. Bonini joined TVA in 1993 and has since then participatedin joint ventures with strategic partners, the launching of bond offerings in theU.S. market, and various corporate reorganizations (mergers, acquisitions andtakeovers). Prior to his involvement with TVA, he was an auditor at Cooper &Lybrand. Mr. Bonini received a degree in accounting sciences from thePontifícia Universidade Católica de São Paulo.

 

*Mitchell R. Cohen* has been a member of ourboard of directors since 2001. Mr. Cohen is a Managing Director at Hellman &Friedman LLC. Mr. Cohen’s primary areas of focus are the media andtelecommunications industries. Prior to joining the firm in 1989, Mr. Cohenwas an associate in the Merchant Banking Department and the Office of theChairman at Shearson Lehman Hutton Inc. Mr. Cohen is a director of WesternWireless Corporation and Falcon International Communications L.P., and a formerdirector of VoiceStream Wireless Corporation and Advanstar, Inc. Mr. Cohenreceived a master’s degree from the McIntire School of Commerce at theUniversity of Virginia.

 

*Joe Delgado* is a Principal in the New Yorkoffice of CCMP Capital. Mr. Delgado focuses on making investments in theindustrials sector and has been responsible for CCMP’s investments in HispanicTeleservices Corporation Convermex, and Pacific Star Holdings. Prior to joiningCCMP in 2001, Mr. Delgado was with J.P. Morgan Capital for four years,having worked in the Latin America Mergers & Acquisitions group andthe Latin America Structured Finance group, as well as in the firm’s Santiagooffice. Mr. Delgado holds a B.A. from Duke University. He currently serveson the board of directors of several companies in Latin America, includingConvermex, Empresas Cines Unidos, MetroNet, MercadoLibre.com, Pacific StarHoldings and San Luis Rassini Brakes.

 

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*Carlos Eduardo Malagoni* has been our ChiefFinancial Officer since November 2002 and a member of our committee ofofficers in 2004. Mr. Malagoni joined TVA in 1993 and has participated inour new businesses development, bond offerings, and mergers and acquisitions. Priorto his involvement with TVA, Mr. Malagoni was associated with Unibanco andSamsung. Mr. Malagoni received a degree in economics from the FundaçãoArmando Álvares Penteado, or FAAP, and a master’s degree in businessadministration from IBMEC.

 

*Virgílio José Carreira Amaral* has been withTVA since 1995, and has served as our Strategy and Technology Officer since1999 and as a member of our committee of officers since 2004. Mr. Amaralhas participated in the implementation of DirecTV (Galaxy Brasil), AjatoBroadband and the expansion of MMDS and cable infrastructure. Prior to joiningTVA, Mr. Amaral worked for 18 years at TV Globo, holding managementpositions. Mr. Amaral received a degree in electric engineering from theUniversidade de São Paulo.

 

*Vito Chiarella Neto*****has been our Customer Relationship andSales Officer since March 2002. Mr. Neto joined the Abril Group in1992 and worked in the audit department until 1999 when he became GeneralManager of operations at TVA Sul. In 2000 and 2001, he was the Director of ouroperations in São Paulo. Since 2002, Mr. Neto has been the Commercial andClient Relationship Director and the head of the TVA Rio de Janeiro and TVA Sulbranches. Mr. Neto received a degree in accounting from the FaculdadesTibiriçá and has an executive master’s degree in business administration fromIBMEC.

 

*Amilton Lucca,* who joined TVA in 1997, hasbeen our New Business Development Officer since January 2004. Mr. Luccawas responsible for the broadband (1999) and VoIP (2005) projects, completingthe MSO triple play concept. Mr. Lucca also developed internet projectsfor the corporate market and wholesale for the telecommunications market. Mr. Luccais a member of the board of directors of the Brazilian Association ofCompetitive Telecommunications Companies (Telcomp) and is an officer of theunion of paid-television service companies. Prior to his association with TVA, Mr. Luccawas responsible for Telecom Operations at Electronic Data Systems of Brasil(EDS) and was associated with Embratel. Mr. Lucca received a degree inelectric engineering from the Universidade Santa Cecília dos Bandeirantes and amaster’s degree in telecommunications from FAAP.

 

*Maria Fatima Oliveira* has been ourExecutive Programming Manager since 2004. Ms. Oliveira is responsible forthe Programming area, including programming negotiation and pay televisionproduct format. Prior to her involvement with TVA, Ms. Oliveira wasassociated with Unibanco and the Abril Group. Ms. Oliveira received adegree in languages and foreign trade from the Pontifícia Universidade Católicade São Paulo and a masters degree in business administration and marketing fromIBMEC.

 

*Leila Cocito*has been our Marketing andAdvertisement Officer since April 2004. Ms. Cocito has participatedin marketing and communication development and advertisement sales. Prior toher involvement with TVA, Mrs. Cocito was associated with Louis DreyfusGroup and worked for eight years at the Abril Group. Ms. Cocito received amaster’s degree in business administration from the Pontifícia UniversidadeCatólica de São Paulo and post-graduate degree from the Escola Superior dePropaganda e Marketing.

 

**B.Compensation**

 

Forthe year ended December 31, 2005, the aggregate compensation, includingbonuses, of all our directors, officers and executive officers was U.S.$1.4 million.Members of our board of directors and our committee of officers do not receivea salary from us.

 

Forthe year ended December 31, 2005, the aggregate amount set aside by us toprovide pension, retirement or similar benefits to our directors, officers andexecutive officers was U.S.$0.

 

**C.Board Practices**

 

Membersof our board of directors and committee of officers are elected for a two-yearperiod, currently expiring on April 2008. Executive officers are appointedand removed by the board of directors and do not have a stated term of office. Directors,officers and executive officers do not enter into service contracts with us. SeeItem 

 

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7, “Major Shareholdersand Related Party Transactions—Major Shareholders—Board of Directors” and Item10, “Additional Information—Estatuto Social.”

 

**D.Employees**

 

Thefollowing table sets forth the number of our officers, managers and otherpermanent employees as of the dates indicated.

 
| ** **              | ** ** | **As of December 31,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **City**                | ** ** | **Officers**                          | ** ** | **Management** | ** ** | **Others** | ** ** | **Officers** | ** ** | **Management** | ** ** | **Others** | ** ** | **Officers** | ** ** | **Management** | ** ** | **Others** | ** ** |
| São Paulo          |       | 11                                    |       | 21 |   | 359 |   | 7 |   | 17 |   | 363 |   | 7 |   | 14 |   | 366 |   |
| Rio de Janeiro          |       | —                                |       | 1 |   | 78 |   | — |   | 2 |   | 78 |   | — |   | 2 |   | 73 |   |
| Curitiba                |       | —                                |       | 1 |   | 60 |   | — |   | 1 |   | 60 |   | — |   | 1 |   | 64 |   |
| Camboriú           |       | —                                |       | 1 |   | 10 |   | — |   | 1 |   | 11 |   | — |   | 1 |   | 10 |   |
| Florianópolis      |       | —                                |       | 1 |   | 9 |   | — |   | 1 |   | 10 |   | — |   | 1 |   | 9 |   |
| Foz do Iguaçú |       | —                                |       | 1 |   | 8 |   | — |   | 1 |   | 12 |   | — |   | 1 |   | 12 |   |
| Total                   |       | 11                                    |       | 26 |   | 524 |   | 7 |   | 23 |   | 534 |   | 7 |   | 20 |   | 534 |   |

 

As of December 31,2005, we also employed 18 interns and 5 temporary employees, as compared to 21interns and 12 temporary employees as of December 31, 2004 and 21 internsand 17 temporary employees as of December 31, 2003, most of whom werelocated in São Paulo and Rio de Janeiro.

 

**E.Share Ownership**

 

Nodirector, officer or executive officer listed above owns more than 1% of thecommon shares of Tevecap. See Item 7, “Major Shareholders and Related PartyTransactions.”

 

**ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

 

**A.Major Shareholders**

 

Tevecaphas one class of capital stock, common shares, authorized and outstanding.As of December 31, 2005, 485,220,440 common shares were outstanding,representing authorized social capital of R$837,601,700 (equivalent toU.S.$446.0 million). The following table sets forth, as of December 31,2005, information regarding the beneficial ownership of Tevecap’s commonshares:

 
| **Shareholder**                                        | ** ** | **Number of  Common  Shares  Owned** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|
|                                                   |       |                                      |       |           |       |
| Abril Comunicações S.A.                      |       | 438,925,482                               |       | 90.4           | %          |
| Falcon International Communications (Bermuda)  L.P.(1) |       | 27,930,827                                |       | 5.7            | %          |
| JP Morgan Partners LLC (2)                             |       | 18,364,122                                |       | 3.7            | %          |
| All directors and executive officers as a group        |       | 9                                         |       | —         | (3)        |
| Total                                                  |       | 485,220,440                               |       | 100.0          | %          |

 

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(1)           A subsidiary of Falcon InternationalCommunications L.L.C.

(2)           11,496,328 and 6,867,794 of the sharesbeneficially owned by JP Morgan Partners LLC, or JPM, are held of record by twowholly-owned subsidiaries of JPM, or the JPMorgan Parties.

(3)           Less than 1%.

 

In December 2003,Abril Comunicações purchased from Hearst/ABC Video Services II, or HABC II, allof HABC II’s equity interest in Tevecap (thereby increasing its ownershipinterest from 82.3% to 90.4%).

 

In thefirst half of 2004, the board of directors of Abril Comunicações approved acapital increase in TVA. This amount corresponds to existing indebtednessbetween us and Editora Abril which will be cancelled once the 

 

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capital increase iseffected. Accordingly, it will not be available for our use in futureinvestments. Our management intends to submit the capital increase to our boardof directors for decision in 2006.

 

On April 20,2005, Editora Abril restructured a significant portion of its financialindebtedness with certain of its financial creditors, including the terms ofthe non-convertible debentures issued by Editora Abril on October 19,2001, referred to as the Restructuring. The total amount of the Restructuringis approximately R$485.9 million (equivalent to U.S.$ 228.8 million). TheRestructuring provides for certain restrictions and covenants, including inrelation to sale of assets, granting of guarantees and financial transactions. Asa guarantee of certain obligations of Editora Abril in connection with thenon-convertible debentures, Abril Comunicações granted in favor of thedebenture holders a pledge (*caução*)of its shares in Tevecap, which represents 90.45% of our outstanding commonshares. The debentures of Editora Abril will mature on December 31, 2008. Underthe terms of the Restructuring, in the event Abril Comunicações becomes theowner, directly or indirectly, of all the capital stock of TVA Sistema, AbrilComunicações is obligated to grant a pledge (*caução*)of all of its TVA Sistema shares in favor of the debenture holders.

 

Therelations among our equity holders are governed by a stockholders agreementdated December 6, 1995 (as amended, referred to as the StockholdersAgreement), among us, Robert Civita, Abril Comunicações, the JPMorgan Partiesand Falcon International (collectively, referred to as the Stockholders). Thefollowing describes certain terms of the Stockholders Agreement, as amended.

 

*Transfer of shares.*Any Stockholderdesiring to transfer shares of capital stock to any third party, includinganother Stockholder, must first offer such shares to us and all of the otherStockholders. We have the right to determine first whether to purchase suchshares; if we elect not to exercise our right to purchase the shares, the otherStockholders may elect to purchase such shares. If we or the otherStockholders decide to purchase the offered shares, all of such shares must bepurchased. If neither we nor the other Stockholders offer to purchase all ofthe offered shares, the Stockholder desiring to sell such shares may sellthe shares to any person, provided that (i) all of the shares are soldsimultaneously within six months after the decision by us and the Stockholdersnot to purchase the shares, (ii) we have not determined that the personmaking such purchase is a stockholder of undesirable character, lacks necessaryfinancial capacity or competes with us, and (iii) the price for sale tosuch third party is at least 90% of the price offered to us and the otherStockholders. The provisions regarding transfers of shares do not apply totransfers to certain affiliates of the Stockholders. In addition, theStockholders have preference over all other persons or entities to subscribefor new issuances of our capital stock in proportion to their existingownership of capital stock.

 

*Event Put options.*Upon the occurrence ofcertain defined “triggering events” each of the Stockholders, other than AbrilComunicações, may demand that we buy all or a portion of the shares of ourcapital stock held by such Stockholder, unless the shares of capital stock heldby such Stockholder are publicly registered, listed or traded (collectivelyreferred to as an Event Put). The triggering events are: (i) the amount ofcapital stock held by such Stockholder exceeds the amount allowed under anylegal restriction to which such Stockholder may be subject, or aRegulatory Put; (ii) a breach without cure within a designated period byRobert Civita, Abril Comunicações, any of the respective affiliates of RobertCivita or Abril Comunicações or us of any representation, warranty, covenant orduty made or owed pursuant to the Stockholders Agreement, the stock purchaseagreement dated August 25, 1995, among Robert Civita, Abril Comunicações,the JPMorgan Parties, and certain other parties, or the stock purchaseagreement, dated December 6, 1995, among us, Robert Civita, AbrilComunicações, the JPMorgan Parties, Falcon International and certain otherparties; (iii) a breach without cure within a designated period by EditoraAbril of the Abril Credit Facility; (iv) Robert Civita ceases to directlyor indirectly hold without the approval of the Stockholders 31.258% of ourcapital stock and our voting capital stock or he ceases to control the votingcapital stock held by his affiliates representing 50% or more of our votingcapital stock; (v) the service agreement, dated July 22, 1994, asamended, among us, Televisão Show Time Ltda., or TV Show Time, TVA BrasilRadioenlaces Ltda., or TVA Brasil, and Abril Comunicações, each of which holdscertain licenses covering certain of our operations, ceases to be valid oreffective or TV Show Time, TVA Brasil or Abril Comunicações is liquidated ordissolved or files voluntarily, or has filed against it involuntarily, anypetition in bankruptcy or (vi) another Stockholder exercises an Event Put,other than a Regulatory Put. The price to be paid in connection with an EventPut is set at fair market value determined by appraisal or by a multiple of ourmost recent quarterly earnings. However, in the event we do not have the fundsto satisfy our payment obligations under an Event Put, then, subject to anumber of conditions, exercising Stockholders may elect to receive ourspecial voting or non-voting preferred shares. These preferred

 

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shares will have priority with respect to the distribution of dividendsand repurchases of shares by us. The carrying value of the redeemable sharessubject to an Event Put reflect the capital contributions made by theStockholders (other than Falcon shares also subject to a Time Put, as describedbelow, the carrying value of which is adjusted to fair value in accordance withthe probability of redemption). The shares formerly held by HABC II, which weresold to Abril Comunicações as described above, are no longer deemed redeemableshares. See Note 17 to our Financial Statements.

 

*TimePut options.*In addition, pursuant to the StockholdersAgreement, Falcon International may demand that we buy all or any portion ofour shares of capital stock held by Falcon International on or prior toSeptember 22, 2006. We refer to this put as the Falcon Time Put. The price tobe paid in connection with the Falcon Time Put is fair market value determinedin the same manner as an Event Put. However, in the event we do not have thefunds to satisfy our payment obligations under the Falcon Time Put, then,subject to a number of conditions, we may deliver to Falcon promissory notespayable three years from the issue date thereof. In the event we are unable tosatisfy our payment obligations under these promissory notes, Falcon may beentitled, subject to a number of conditions, to sell its shares of Tevecap to athird party. As of the date of the filing of this Annual Report, Falcon has notexercised the Falcon Time Put. In addition, pursuant to an amended and restatedoption agreement dated December 5, 1995, as amended, the JPMorgan Parties havethe right to put their shares in TVA to Abril Comunicações at any time.

 

*Registrationrights.*The JPMorgan Parties, considered together, or FalconInternational may request that we effect the registration of any or all of thecapital stock held by such Stockholder. However, we are not obligated to effectmore than one registration requested by a Stockholder in any 12-month period ormore than three registrations requested by a Stockholder in total. The capitalstock that is the subject of the registration demand must be of a certainminimum amount. In addition, we must offer each Stockholder other than AbrilComunicações the opportunity to register capital stock held by suchStockholder, subject to standard reductions in amount such Stockholder mayregister as recommended by the managing underwriter. We are obligated to payall registration expenses other than underwriting discounts and commissions ortransfer taxes, and we are only obligated to pay for the fees and expenses ofour counsel and accountants.

 

*Boardof directors.*We are governed by a board of directors withnine members. Under the Stockholders Agreement, Abril Comunicações designatessix members, Falcon International designates one member and the JPMorganParties together designate one member. The final member is an independentmember nominated by Abril Comunicações and designated by an affirmative vote ofall shareholders entitled to designate a director. The affirmative vote ofmembers of the board representing the JPMorgan Parties and Falcon Internationalis required for: acquisition of ownership interests in other companies;acquisition or liens on equity in other companies or liens on assets other thanin ordinary course and in aggregate less than U.S.$500,000; incurrence ofindebtedness of less than one year maturity and in an amount greater thanU.S.$1,000,000; incurrence of indebtedness of greater than one year maturity excepttrade debt and in an aggregate amount of less than U.S.$500,000; asset salesand acquisitions (whether one transaction or a series of related transactionsinvolving assets, including restructuring, mergers, consolidations of assets)with an aggregate value in excess of U.S.$5,000,000; loans on advance payments;non-financial guarantees in aggregate totaling more than U.S.$100,000;transactions with affiliates; and modifications to the service agreement. Wemust obtain the approval of Falcon International before entering into contractsin excess of U.S.$1,000,000. We must obtain the approval of each of theJPMorgan Parties and Falcon International before any corporate restructuring orany public offering of our securities.

 

Notwithstanding theforegoing: (i) our expenditures or projects that are included in approvedBusiness Plans do not require any additional board of director or shareholderapproval and (ii) we are allowed to incur indebtedness of up to U.S.$10,000,000(or the *reais* equivalent) orguarantee loans in such amounts, without the need to obtain specific approvalfrom our board of directors or shareholders; *provided*such loans or guarantees are within the limits of approved Business Plans andare in the ordinary course of business.

 

*Requireddividend.*We are required by the terms of the StockholdersAgreement to pay annual dividends equal to our net cash flow or 25% of our netconsolidated profit (as defined by Brazilian law). Since inception, we havenever declared a dividend.

 

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**B. RelatedParty Transactions**

 

**Overview**

 

We are engaged in asignificant number and variety of related party transactions, including,without limitation, the transactions described below. Although we believe suchtransactions are conducted on an arm’s-length basis, we have not performed anystudies or analyses to determine whether the terms of past transactions withrelated parties have been equivalent to arm’s-length transactions and cannotstate with any certainty the extent to which such transactions are comparableto those which might have been obtained from a non-affiliated third party.

 

**TransactionsAmong Related Parties**

 

*EditoraAbril service agreement*

 

In January 2002, pursuantto a service agreement with our affiliate Editora Abril, we outsourced a numberof administrative services, including payroll, human resources, accounting,tax, finance and legal services, to Editora Abril. Under this serviceagreement, we pay to Editora Abril a monthly fee of approximately U.S.$184,000as of December 31, 2005 (compared to U.S.$130,000 and U.S.$77,000 as ofDecember 31, 2004 and 2003, respectively).

 

*Publishingand advertising*

 

We publish a monthlyprogramming guide detailing our programming options in a given month. In connectionwith this magazine, TVA Sistema has entered into an agreement with EditoraAbril, dated September 1992, pursuant to which Editora Abril publishesapproximately 180,000 copies of our monthly programming guide in return for amonthly payment of approximately U.S.$173,000 as of December 31, 2005 (comparedto U.S.$127,000 and U.S.$94,000 as of December 31, 2004 and 2003,respectively).

 

TVA Sistema and EditoraAbril also have a reciprocal advertising agreement in which we publishadvertisements for Editora Abril in our monthly magazine in exchange foradvertisements for us (and third parties through us) in the magazines publishedby Editora Abril.

 

*AbrilCredit Facility*

 

We have entered, asborrower, into a revolving credit facility with Editora Abril as lender. TheAbril Credit Facility, effective December 6, 1995, allows us to draw downamounts not to exceed a maximum aggregate principal amount ofU.S.$60.0 million. Since June 1996, we have from time to timerequested, and Editora Abril has provided, funding in excess of the aggregatemaximum principal amount. The loans provided under the Abril Credit Facilityare denominated in *reais*, unlessthe loan is a pass-through loan that Editora Abril has funded in U.S. dollars,in which case the loan is funded in a *real*-equivalentamount. Editora Abril has agreed to use its reasonable commercial efforts toobtain the lowest possible interest rates for its loans to us under the AbrilCredit Facility. In 2006 we intend to capitalize our indebtedness under the AbrilCredit Facility, which will significantly reduce our total outstandingindebtedness. The aggregate principal amount outstanding under the Abril CreditFacility was U.S.$68.2 million as of December 31, 2005 (compared toU.S.$49.6 million as of December 31, 2004).

 

*Otherintercompany/shareholder loans*

 

We have used the proceedsfrom loans under the Abril Credit Facility to make capital contributions to TVASistema and TVA Sul, as well as to extend loans to various interrelatedcompanies. The aggregate outstanding amount under these loans as ofDecember 31, 2005 was U.S.$36.2 million (compared toU.S.$28.4 million as of December 31, 2004), including U.S.$22.6 million toTVA Sistema, U.S.$4.9 million to TVA Sul and U.S.$7.5 million to TVA CommunicationsLtd. The effect of these loans is eliminated in our consolidated financialstatements.

 

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*Serviceagreement with Licenseholders*

 

Pursuant to a serviceagreement dated July 22, 1994, as amended, Abril Comunicações, TVA Brasiland TV Show Time (referred to as the Licenseholders) agreed to transfer to usall the rights and benefits associated with their current and futurepay-television licenses, with the exception of licenses operated by companiesin which we have minority interests. While the Licenseholders retained thetitle to such licenses, the Licenseholders promised to take all steps necessaryto transfer the title of such licenses to us. Such steps included theappropriate procedures required by the Ministry of Communications and any othergovernmental authority regulating the transfers. The transfer of the title tosuch licenses is currently either pending, subject to approval by the Ministryof Communications, or waiting for the passage of certain statutory orregulatory waiting periods.

 

**ITEM8. FINANCIAL INFORMATION**

 

Item 19 contains allfinancial statements required to be filed as part of this Annual Report.

 

**ITEM9. THE OFFER AND LISTING**

 

**A. OfferListing and Details**

 

We have one class ofcapital stock, common shares, authorized and outstanding. Our common stock isnot listed on any exchange and is not publicly traded. See Item 7, “MajorShareholders and Related Party Transactions—Major Shareholders.”

 

**B. Planof Distribution**

 

Not applicable.

 

**C. Markets**

 

Our outstandingregistered securities consist of our senior notes that were originallyregistered under the Securities Act pursuant to exchange offers which expiredin May 1997, December 1997, December 2004 and December 2005. There is noformal trading market for such securities.

 

We do not have anypublicly traded class of equity securities. See Item 9(A) above, “The Offer andListing – Offer Listing and Detail”.

 

**D. SellingShareholders**

 

Not applicable.

 

**E. Dilution**

 

Not applicable.

 

**F. Expensesof the Issue**

 

Not applicable.

 

**ITEM10. ADDITIONAL INFORMATION**

 

**A. ShareCapital**

 

Not applicable.

 

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**B. EstatutoSocial**

 

1.             Ourcorporate purpose, as set forth in Subsection 3 of Chapter I of our *Estatuto Social,*is as follows: (i) theproduction, acquisition, licensing, distribution, import and export oftelevision programs; (ii) the rendering of telecommunication services, inparticular pay television services, as well as other services relating tosignal transmission, reception and distribution systems and televisionprograms; (iii) advertisement and publicity exploitation; and (iv)investment in other companies, especially those in the telecommunication field.

 

2.             Weare managed by our board of directors and our committee of officers. Day-to-daymanagement, however, is carried out by our executive officers. See Item 6, “Directors,Senior Management and Employees.”

 

Our board of directors iscomposed of nine regular members, and can include up to nine alternates, eachelected by the general shareholders meeting. Our board of directors meetswhenever necessary and at least every three months, upon the request in writingby any of its regular or alternate directors (such request to be delivered atleast ten business days before the date of the meeting and upon presentation ofthe agenda to be discussed). The meeting of our board of directors shall beconvened only with the attendance of at least six of its regular members, inperson or as represented by their respective alternates. The resolutions shallbe taken by the favorable vote of the majority of the directors present at themeeting.

 

Our committee of officerscomprises a minimum of two and a maximum of five members. The committee ofofficers manages the our business in general and practices any and all actsnecessary or advisable, except those which, pursuant to applicable law, the *Estatuto Social* or the StockholdersAgreement, are the responsibility of the shareholders or our board ofdirectors.

 

(a)           Thereare no provisions in the *Estatuto Social*relating to the power of directors or officers to vote on a proposal in which aconflict of interest exists or may exist.

 

(b)           Theaggregate compensation of the board of directors and the committee of officersis fixed pursuant to a general shareholders meeting and is distributed amongthe directors and officers as determined by our board of directors at a dulyconvened meeting.

 

(c)           Pursuantto Subsection 20 of Chapter V of the *EstatutoSocial* and the Stockholders Agreement, the incurrence of thefollowing indebtedness must be approved by all directors appointed by minorityshareholders:  (i) indebtedness with amaturity of less than one year and in an amount greater than U.S.$1,000,000;and (ii) indebtedness with a maturity of more than one year (except trade debtin an aggregate amount lower than U.S.$500,000). Any other incurrence ofindebtedness can be approved by a majority of the directors present at ameeting of the board of directors or by any two officers in the ordinary courseof business. Notwithstanding the foregoing: (i) our expenditures or projectsthat are included in approved Business Plans do not require any additionalboard of directors or shareholder approval and (ii) we are allowed to incurindebtedness of up to U.S.$10,000,000 (or the *reais*equivalent) or guarantee loans in such amounts, without the need toobtain specific approval from the board of directors or shareholders, *provided*such loans or guarantees arewithin the limits of approved Business Plans and are in the ordinary course ofbusiness.

 

(d)           Thereare no provisions in the *Estatuto Social*setting forth age limits or retirement requirements for directors and officers.Directors are elected for a period of two years (with the opportunity of reelection)by a shareholders meeting and remain as directors until the appointment oftheir respective successors. In case of a vacancy, a general shareholdersmeeting shall be called to elect a substitute.

 

Officers are elected bythe board of directors for a period of two years and can be reelected. In caseof a vacancy, a meeting of the board of directors shall be immediately calledto elect the substitute, who shall complete the term of the officer soreplaced.

 

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(e)           Alldirectors, whether regular or alternates, must be shareholders of Tevecap,although the *Estatuto Social* doesnot require ownership of a minimum number of shares to qualify as a director. Officersdo not need to be shareholders of Tevecap.

 

3.             Ourcapital is divided into and represented by 485,220,440 shares, all of which arecommon shares entitled to one vote in shareholders meetings.

 

(a)           Thereare no provisions in the *Estatuto Social*setting forth a time limit for dividend entitlements to lapse. All shares areentitled to the same dividend payments. Under Brazilian law, we are required topay dividends in an amount equal to 25% of our net consolidated profit (asdefined by Brazilian law). In addition, upon resolution of the board ofdirectors, interim dividends may be distributed out of net profits declared inannual or semiannual financial statements.

 

(b)           Thereare no provisions in the *Estatuto Social*concerning staggered intervals for the reelection of directors or permitting orrequiring cumulative voting.

 

(c)           Allshares have the right to share in our net profits. At the end of any fiscalyear, from the net profits earned, 5% shall be deducted to from the legalreserve (which shall not exceed 20% of outstanding social capital).

 

(d)           Allshares have the same right to share any surplus in case of our liquidationafter settlement of all outstanding debts. In the event of liquidation, ageneral shareholders meeting shall determine the form of liquidation, appointthe liquidator and an audit committee to operate during the liquidation period.

 

(e)           Theresolutions of a general shareholders meeting authorizing the purchase orredemption of our shares shall comply with the provisions in the StockholdersAgreement governing resolutions at general shareholders meetings.

 

(f)            Thereare no sinking fund provisions in the *EstatutoSocial*.

 

(g)           Allof our shares are issued and fully paid. Consequently, the shareholders are notsubject to further capital calls.

 

(h)           Thereare no provisions in the *Estatuto Social*discriminatingagainst any existing or prospective holder of such securities as a result ofsuch shareholder owning a substantial number of shares.

 

4.             Inorder to modify the rights of shareholders, the *Estatuto Social* must be amended to reflect such modification.The *Estatuto Social* can beamended only through a resolution passed at a general shareholders meeting.

 

5.             Generalshareholders meetings can be ordinary or extraordinary. Ordinary generalshareholders meetings shall be held within four months following the closing ofthe fiscal year, whereas the extraordinary general shareholders meetings areheld whenever necessary. All general shareholders meetings shall be called bythe board of directors. Only the shareholders whose shares are subscribed to intheir respective names, in the applicable register, up to three days before thedate fixed for the general shareholders meeting, may participate and vote insuch meeting.

 

6.             UnderBrazilian law, non-Brazilians are not entitled to own on a combined basis morethan 49% of our voting stock.

 

7.             Thereare no provisions in the *Estatuto Social*that would have the effect of delaying, deferring or preventing our change incontrol. However, pursuant to the Stockholders Agreement, any existingshareholder desiring to sell its shares must first offer its shares to theremaining shareholders. The 

 

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Stockholders Agreementalso contains other transfer restrictions relating to our shares. See Item 7, “MajorShareholders and Related Party Transactions—Major Shareholders.”

 

8.             Thereare no provisions in the *Estatuto Social*governing the ownership threshold above which shareholders ownership must bedisclosed.

 

9.             Braziliancorporate law is significantly different from U.S. corporate law in a number ofareas. The Brazilian form of articles of incorporation (*Estatuto Social*) includes both theAnglo-Saxon concept of articles of incorporation and the concept of “by-laws.”  We, like other large Brazilian companies,have a two-tier governance system, which typically involves a management orexecutive board (committee of officers) and a supervisory board (board ofdirectors). The committee of officers is the executive body. Its members areappointed by the board of directors and are employed by Tevecap. The board ofdirectors has supervising and advising functions only. Its members arerepresentatives of shareholders and cannot be employed by us. The board ofdirectors’ duties include supervision of the committee of officers and thegeneral course of our business. The board of directors also performs advisoryfunctions vis-à-vis the committee of officers.

 

10.           Thereare no provisions in the *Estatuto Social*imposing more stringent conditions than those required by law to change ourcapital. However, pursuant to the Stockholders Agreement, any existingshareholder desiring to sell its shares must first offer its shares to theremaining shareholders. The Stockholders Agreement also contains other transferrestrictions relating to our shares. See Item 7, “Major Shareholders andRelated Party Transactions—Major Shareholders.”

 

**C. MaterialContracts**

 

None.

 

**D. ExchangeControls**

 

Brazilian law providesthat, whenever there is, or is a serious risk of, a material imbalance inBrazil’s balance of payments, the Brazilian government may, for a limitedperiod of time, impose restrictions on the remittance to foreign investors ofthe proceeds of their investments in Brazil, as it did for approximately sixmonths in 1989 and early 1990, as well as on the conversion of the Braziliancurrency into foreign currencies.

 

The Brazilian governmentcurrently restricts the ability of Brazilian or foreign persons or entities toconvert *reais* into foreigncurrencies other than in connection with certain authorized transactions. Therecan be no assurance that the Brazilian government will not in the future imposemore restrictive foreign exchange regulations that would have the effect ofeliminating or restricting our access to foreign currency that would be requiredto meet its foreign currency obligations, including payments under our seniornotes. The likelihood of the imposition of such restrictions by the Braziliangovernment may be affected by, among other factors, the extent of Brazil’sforeign currency reserves, the availability of sufficient foreign currency onthe date a payment is due, the size of Brazil’s debt service burden relative tothe economy as a whole, Brazil’s policy towards the International Monetary Fundand political constraints to which Brazil may be subject.

 

For a description of theforeign exchange markets in Brazil, see Item 3, “Key Information—SelectedFinancial Data—Exchange Rates.”  See also“Risk Factors—Factors Relating to Brazil.”

 

**E. Taxation**

 

**Brazil**

 

The following is a summaryof our material Brazilian income tax consequences in connection with the saleand repayment of our senior notes including any interest thereon and tobeneficial owners of our senior notes that are non-residents of Brazil inconnection with the purchase, ownership and disposition of such senior notes. Thissummary is limited to us and to non-residents of Brazil which acquire oursenior notes at the original issue price, and does not address investors whopurchase our senior notes at a premium or market discount. In addition, this 

 

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summary is based on the Brazilian tax regulations as presently ineffect and does not take into account possible future changes in such tax laws.

 

Individuals domiciled inBrazil and Brazilian companies are taxed in Brazil on the basis of theirworldwide income (which includes earnings of Brazilian companies’ foreignsubsidiaries, branches and affiliates). The earnings of branches of foreigncompanies and non-Brazilian residents in general are taxed in Brazil only whenderived from Brazilian sources. Interest, fees, commissions and any otherincome (which for the purposes of this paragraph includes any deemed income onthe difference between the issue price of our senior notes and the price atwhich our senior notes are redeemed) payable by a Brazilian obligor to anindividual, company, entity, trust or organization domiciled outside Brazil isconsidered derived from Brazilian sources and is therefore subject to incometax withheld at the source. Brazilian tax laws expressly authorize the payingsource to pay the income or earnings net of taxes and, therefore, to assume thecost of the applicable tax. The rate of withholding is 15% or such other lowerrate as is provided for in an applicable tax treaty between Brazil and suchother country where the recipient of the payment has its domicile. If thebeneficiary of the payment is located in a country in which the effective taxrate on net income is lower than 20%, the withholding rate is 25%. Notwithstandingthe foregoing, the applicable withholding tax rate for negotiable instrumentssuch as our senior notes was reduced to zero, pursuant to Resolutions 1853 ofJuly 31, 1991 and 644 of October 22, 1980 of the Central Bank,subject to Central Bank Circular 2661 of February 8, 1996, which restrictssuch withholding tax reductions to negotiable instruments having a minimummaturity of 96 months. As a result, since our senior notes have an originalmaturity of 96 months, such reduction will apply to payments of interest andother income with respect to our senior notes.

 

Any earnings or capitalgains resulting from the sale (whether inside or outside Brazil) of any seniornotes by a non-resident of Brazil to another non-resident of Brazil are notsubject to tax in Brazil. Earnings or capital gains resulting from the sale(whether inside or outside Brazil) of any senior notes by a non-resident ofBrazil to a resident of Brazil should not be subject to tax in Brazil, althoughthe matter is not free from doubt.

 

On February 8, 1996,the Brazilian federal government issued Decree No. 1,815, which imposed a taxon Brazilian issuers with respect to foreign exchange transactions, or IOF tax,related to the entering into Brazil of proceeds resulting from foreign loans(including the issue of securities such as our senior notes). The rate of IOFtax paid by us with respect to the issuance of our senior notes was 0%. DecreeNo. 1,815 was revoked by Decree No. 2,219 of May 2, 1997 which currentlyregulates the IOF tax. The IOF tax rate was reduced to zero upon the adoptionof Ordinance No. 85 on April 24, 1997. However, under Law No. 8.894 datedJune 21, 1994, such tax rate may be increased up to 25%.

 

On August 15, 1996,the Brazilian Congress approved Constitutional Amendment No. 12 creating a newtemporary tax, the*Contribuição Provisóriasobre Movimentação Financeira* or CPMF. Based on such amendment, LawNo. 9,311 of October 24, 1996, or Law 9,311, was enacted, creating theCPMF tax. Under Law No. 9,311, as amended, all financial debit and moneytransfers through Brazilian bank accounts effected as from January 23,1997 until December 31, 1998, including payments made by us with respectto our senior notes, will be subject to the assessment of the CPMF tax at therate of 0.2%. Funds arising from the collection of CPMF tax will be appliedonly in the public health system. Since January 23, 1999, CPMF wasextinguished and Congress approved Constitutional Amendment No. 21, onMarch 19, 1999, in order to reestablish CPMF at the rate of 0.38%,starting on June 19, 1999, for a period of one year, and subsequently atthe rate of 0.38%, for a period of two years. The Constitutional Amendment No.37 of June 2001 extended the CPMF leviance until December 31, 2004 at 0.38%. Thisrate is still in effect as of the date hereof.

 

There is no stamp,transfer or other similar tax in Brazil with respect to the transfer,assignment or sale of any debt instrument outside Brazil (including our seniornotes).

 

**UnitedStates**

 

The following is asummary of the material U.S. federal income tax consequences to a beneficialowner of our senior notes that is a citizen or resident of the United States ora corporation created or organized in or under the laws of the United States,any state thereof or the District of Columbia, as well as other persons subjectto U.S. federal income taxation on a net income basis in respect of thepurchase, ownership and disposition of a senior note, or U.S. Holders. Such taxtreatment may vary depending upon the particular situation of a U.S. Holder. This

 

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summary does not discuss all of the tax consequences that may berelevant to certain types of investors subject to special treatment under theU.S. federal income tax laws (such as individual retirement accounts and othertax deferred accounts, banks, securities broker-dealers, life insurancecompanies, tax-exempt organizations, non-U.S. persons, persons whose “functionalcurrency” is other than the U.S. dollar or persons that hold senior notes aspart of a “straddle” or “conversion transaction” or otherwise as part of a “syntheticsecurity” or other integrated transaction) and is limited to investors thathold senior notes as capital assets. In addition, this summary is limited toU.S. Holders that acquire our senior notes at their issue price and does notaddress investors that purchase senior notes at a premium or market discount. Thissummary is based on the Internal Revenue Code of 1986, as amended, or the Code,final, temporary and proposed U.S. Treasury regulations thereunder, or theRegulations, revenue rulings, court cases, and other legal authorities as nowin effect (or proposed) and as currently interpreted, and does not take intoaccount possible changes in such tax laws or other legal authorities or suchinterpretations, which changes may have retroactive effect. No rulings on anyof the issues discussed below will be sought from the United States InternalRevenue Service, or the IRS.

 

PROSPECTIVE PURCHASERS OFTHE SENIOR NOTES ARE ADVISED TO CONSULT THEIR TAX ADVISERS AS TO THECONSEQUENCES OF A PURCHASE AND SALE OF SENIOR NOTES, INCLUDING, WITHOUTLIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-U.S.TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE ORADMINISTRATIVE CHANGES IN LAW, (II) THE U.S. FEDERAL INCOME TAX CONSEQUENCES OFOUR POSSIBLE DEDUCTION OF BRAZILIAN TAXES (AND OF THE PAYMENT BY US OFADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM PAYMENTS ON THE SENIOR NOTES,(III) THE AVAILABILITY, FOR U.S. FEDERAL INCOME TAX PURPOSES, OF A CREDIT ORDEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND (IV) THE CONSEQUENCES OFPURCHASING THE SENIOR NOTES AT A PRICE OTHER THAN THEIR ISSUE PRICE.

 

*Intereston our senior notes*

 

Interest on our seniornotes will be taxable to a U.S. Holder as ordinary income at the time itaccrues or is received in accordance with the U.S. Holder’s method ofaccounting for U.S. federal income tax purposes. The amount includible in theincome of a U.S. Holder will be the gross amount of interest, including anyAdditional Amounts, if any, payable to holders of senior notes (*i.e.*, the amount before deduction of anyBrazilian withholding taxes).

 

*Dispositionof a senior note*

 

Generally, any sale,redemption or other taxable disposition of a senior note by a U.S. Holder willresult in taxable gain or loss equal to the difference between (1) the sumof the amount of cash and the fair market value of other property received withrespect to such taxable sale, redemption or other taxable disposition (otherthan consideration attributable to accrued interest not previously taken intoaccount, which consideration would be treated as interest received) and(2) the U.S. Holder’s tax basis in the senior note. Any gain or loss upona sale, redemption or other taxable disposition of a senior note will becapital gain or loss (which will be long-term if the senior note is held formore than one year).

 

*Effectof Brazilian withholding taxes*

 

Any Brazilian taxwithheld generally will be treated as a foreign income tax that U.S. Holdersmay elect to deduct in computing their taxable income or, subject to thelimitations on foreign tax credits generally, to credit against their U.S.federal income tax liability. No such deduction or credit will be available tothe extent Brazil pays a subsidy to a U.S. Holder, a related person or us, theamount of which is determined (directly or indirectly) by reference to theamount of the withholding tax. While Brazil does not have a program or policyof paying such subsidies at present, it has had programs of that nature in thepast and could implement such programs again in the future.

 

For purposes ofdetermining a U.S. Holder’s U.S. foreign tax credit, the gain or loss on thesale, redemption or other taxable disposition of a senior note will generallyconstitute U.S. source income. Interest (including any 

 

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Additional Amounts payable by us) will generally constitute foreignsource passive income or financial services income for U.S. foreign tax creditpurposes.

 

In any event, because theamount of foreign taxes for which the foreign tax credit may be taken for thetaxable year is generally limited to an amount equal to the U.S. Holder’s U.S.federal income tax rate multiplied by its foreign source income for the taxableyear, a U.S. Holder may have insufficient foreign source income to utilizefully any foreign tax credit attributable to such Brazilian withholding taxes(but such U.S. Holder may be entitled to utilize the foreign tax creditattributable to such withholding taxes for the holder’s previous two orsucceeding five taxable years, or such withholding taxes may instead bedeductible by the U.S. Holder). A U.S. Holder may be required to provide theIRS with a certified copy of the receipt evidencing payment of withholding taximposed in respect of payments on our senior notes in order to claim a foreigntax credit in respect of such withholding tax.

 

*Informationreporting and backup withholding*

 

For each calendar year inwhich our senior notes are outstanding, each Depository Trust Corporation, orDTC, participant or indirect participant holding an interest in a senior noteon behalf of a U.S. Holder and each paying agent making payments in respect ofa senior note will generally be required to provide the IRS with certaininformation, including such U.S. Holder’s name, address and taxpayeridentification number (either such U.S. Holder’s social security number or itsemployer identification number, as the case may be), and the aggregate amountof interest and principal paid to such U.S. Holder during the calendar year. Thesereporting requirements, however, do not apply with respect to certain U.S.Holders, including corporations, securities dealers, other financialinstitutions, tax-exempt organizations, qualified pension and profit sharingtrusts, and individual retirement accounts.

 

In the event that a U.S.Holder fails to establish its exemption from such information reportingrequirements or is subject to the reporting requirements described above andfails to supply its correct taxpayer identification number in the mannerrequired by applicable law, or underreports its tax liability, the direct orindirect DTC participant holding such interest on behalf of such U.S. Holder orpaying agent making payments in respect of a senior note may be required to “backup”withhold a tax (currently at a rate of 28%) from each payment of interest andprincipal with respect to our senior notes. This backup withholding tax is notan additional tax and may be credited against the U.S. Holder’s U.S. federalincome tax liability if the required information is furnished to the IRS.

 

**F. Dividendsand Paying Agents**

 

Not applicable.

 

**G. Statementby Experts**

 

Not applicable.

 

**H. Documentson Display**

 

We are a foreign issuersubject to the reporting requirements of the Exchange Act and the rules andregulations thereunder. We file reports with the Securities and ExchangeCommission, or the Commission, in electronic format via EDGAR. These reportscan be accessed through the Commission’s website (www.sec.gov) and can also beinspected at the public reference facilities maintained by the Commission at100 F Street, N.E., Washington, DC 20549. You may call the Commission at (800)SEC-0330 for further information on its public reference facilities. Copies ofsuch materials may be obtained at prescribed rates. Other information regardingus can be accessed through our website (www.tevecap.com.br). All informationobtained through our website is expressly not incorporated by reference herein.

 

**I. SubsidiaryInformation**

 

Not applicable.

 

55

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**ITEM11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are subject to foreigncurrency exchange rate risk and interest rate risk. As of December 31,2005, we had dollar-denominated debt of U.S.$47.7 million, which is due inthree equal annual installments commencing November 26, 2007 and endingNovember 26, 2009.

 

During January 1999,the Brazilian *real* experienced asignificant devaluation after the Central Bank abandoned the exchange bandwithin which the *real* waspermitted to trade. Since that time, the exchange rate has been volatile, rangingup to R$3.9552 per U.S. dollar in 2002 but appreciating to R$2.3407 as ofDecember 31, 2005. See Item 3, “Key Information—Selected FinancialData—Exchange Rates.”

 

Although our reportingcurrency is the U.S. dollar, the cash flow required to service our indebtednessis generated in local currency, Brazilian *reais*(R$). Using the year end 2005 exchange rate (R$2.34 per U.S.$1.00), the cashflow in *reais* to pay the interestdue in 2006 would be R$28.8 million. A 28% devaluation of the *real* to R$3.00 per U.S. dollar wouldrequire cash flow of R$32.8 million. If the *real* devalued 50% to R$3.50 per U.S. dollar, the cash flowin *reais* to pay the interest duein 2006 would be R$35.8 million.

 

We are also subject tointerest rate risk on our loans in local currency. As of December 31,2005, we had U.S.$68.2 million of loans from an affiliate denominated inBrazilian *reais*, which bearsinterest at the average cost of funds of the affiliate. The majority of theaffiliate’s debt is in *reais* andbears interest at the CDI rate (the interbank certificate of deposit rate inBrazil).

 

During 2005, the CDI rateranged from 17.74% to 19.77%. The average rate for the year was 19.12%, and therate at December 31, 2005 was 18.24%. If the CDI rate rose to 20%, interestpayments on the U.S.$71.4 million would be approximately U.S.$12.8 millionannually. If the CDI rate rose to 25%, the annual interest payments would beU.S.$14 million. Most of the interest due on these loans in the past hasbeen added to principal rather than paid in cash.

 

We do not hedge any ofour market risks (other than entering into certain programming agreements thatplace ceilings on the U.S. dollar/*real*exchange rate used to calculate monthly programming costs) and do not utilizederivative financial instruments.

 

**ITEM12. DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES**

 

Not applicable.

 

**PARTII**

 

**ITEM13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**

 

In October 2004 welaunched an exchange offer for our 12 5/8% Senior Notes due 2004 in theaggregate principal amount of U.S.$48.0 million that were held by thirdparties. On November 26, 2004, the original maturity date of such senior notes,the exchange offer was still outstanding, as a result of which we did not paythe outstanding principal amount of such notes (although we paid interestaccrued until such date). The exchange offer was consummated in December 2004,as a result of which approximately U.S.$40.7 million of the senior notesdue 2004 were exchanged for senior notes due 2009. We subsequently conducted asecond exchange offer, launched in March 2005 and consummated in May 2005,under which an additional U.S.$7.0 million in senior notes due 2004 wereexchanged for senior notes due 2009. We subsequently repaid theU.S.$0.3 million in outstanding senior notes due 2004. As of December 31,2005, we were not in default under the terms of our senior notes due 2009.

 

**ITEM 14. MATERIAL MODIFICATIONS TOTHE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

 

Not applicable.

 

56

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**ITEM15. CONTROLS AND PROCEDURES**

 

As of December 31,2005, we carried out an evaluation under the supervision and with theparticipation of our management, including the Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures. There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, includingthe possibility of human error and the circumvention or overriding of thecontrols and procedures. Accordingly, even effective disclosure controls andprocedures can only provide reasonable assurance of achieving their controlobjectives. Based upon and as of the date of our evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed in the reports we file and submit underthe Exchange Act is recorded, processed, summarized and reported as and whenrequired.

 

There has been no changein our internal control over financial reporting during 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**ITEM16. [RESERVED]**

 

**ITEM16A. AUDIT COMMITTEE FINANCIAL EXPERT.**

 

We do not presently have,and are not required to have, an audit committee.

 

**ITEM16B. CODE OF ETHICS**

 

We do not presently havea code of ethics applicable to our senior executive officers. We are presentlyconsidering the adoption of a code of ethics, and will, upon its adoption,either: (i) provide a copy thereof to the Commission, (ii) post the textthereof on our website (www.tevecap.com.br) or (iii) provide a copy thereof toany person upon request.

 

**ITEM16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Auditand Non-Audit Fees**

 

The following tablesummarizes the aggregate fees billed to us by Deloitte Touche Tohmatsu, or DTT,during the fiscal years ended December 31, 2005 and 2004:

 
| ** **          | ** ** | **Year ended December 31,**   | ** ** |
|---------------------|------------|----------------------------------------------|------------|
| ** **          | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **          | ** ** | **(in thousands of dollars)** | ** ** |
| Audit fees          |       | 385.0                                        |       | 248.8 |   |
| Audit-related  fees |       | 0                                            |       | 0 |   |
| Tax fees            |       | 0                                            |       | 0 |   |
| All other fees      |       | 0                                            |       | 0 |   |
| Total               |       | 385.0                                        |       | 248.8 |   |

 

Audit fees**are the aggregate fees billed by DTT forthe audit of our consolidated annual financial statements that are provided inconnection with regulatory filings.

 

**Pre-ApprovalPolicies and Procedures**

 

We have adoptedpre-approval policies and procedures under which all audit and non-auditservices provided by our external auditors must be pre-approved by our board ofdirectors. Any service proposals submitted by external auditors need to bediscussed and approved by our board of directors during its meetings, whichtake place at least four times a year. Once the proposed service is approved,we or our subsidiaries formalize the engagement of services. The approval ofany audit and non-audit services to be provided by our external auditors isspecified in the minutes of our board of directors meetings.

 

57

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**ITEM16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

 

Not applicable.

 

**ITEM16E. PURCHASE OF EQUITY BY THE ISSUER AND AFFILIATED PURCHASERS**

 

Not applicable.

 

**PARTIII**

 

**ITEM17. FINANCIAL STATEMENTS**

 

We are furnishingfinancial statements pursuant to the instructions in Item 18 of Form 20-F.

 

**ITEM18. FINANCIAL STATEMENTS**

 

See Item 19(a) (Exhibits– Financial Statements) for a list of financial statements filed as part ofthis Form 20-F.

 

**ITEM19. EXHIBITS**

 

(a)           **Financial Statements.**The followingfinancial statements and schedules are filed as part of this Annual Report,together with the report of the independent registered accounting firm.

 

58

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**INDEXTO THE FINANCIAL STATEMENTS**

 

**TEVECAPS.A. AND SUBSIDIARIES - Consolidated Financial Statements for the Years EndedDecember 31, 2005, 2004 and 2003 and Report of Independent RegisteredAccounting Firm**

 

**CCS—CAMBORIÚCABLE SYSTEM DE TELECOMUNICAÇÕES LTDA. -**

**FinancialStatements for the Years Ended December 31, 2005, 2004 and 2003 and Reportof Independent Registered Accounting Firm**

 

(b)**           Other Exhibits**

 
| Exhibit 12. |       | Sarbanes-Oxley Act  Section 302 Certifications |
|-------------|------------|------------------------------------------------|
| ** **  | ** ** | ** **                                     |
| Exhibit 13. |       | Sarbanes-Oxley Act  Section 906 Certifications |

 

59

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**SIGNATURES**

 

Pursuant to therequirements of Section 12 of the Securities Exchange Act of 1934, theregistrant certifies that it meets all of the requirements for filing on Form20-F and has duly caused this annual report to be signed on its behalf by theundersigned, thereunto duly authorized.

** **
| **TEVECAP S.A.** |
|------------------|
|             |
| By:              | /s/ Leila Abraham Loria |   |
| Name:            | Leila Abraham Lória |
| Title:           | Chief Executive Officer |
|             |
|             |
| By:              | /s/ Carlos Eduardo  Malagoni |   |
| Name:            | Carlos Eduardo Malagoni |
| Title:           | Chief Financial Officer |
|             |
|             |
| Date:            | July  17, 2006 |
|                  |  |  |  |

 

 

60

 

----

 

**Tevecap S.A. and Subsidiaries**

 

Consolidated Financial Statements for the Years Ended 

December 31, 2005, 2004 and 2003 and 

Report of Independent Registered Public Accounting Firm

 

Deloitte Touche Tohmatsu Auditores Independentes

 

61

 

----

 

**TEVECAP S.A.**

**ANDSUBSIDIARIES**

 

**Indexto Consolidated Financial Statements**

 

**Contents**

 
| Report of Independent  Registered Public Accounting Firm                                                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                |   |
| Consolidated Balance Sheets as of  December 31, 2005 and 2004                                                                                                       |   |
|                                                                                                                                                                |   |
| Consolidated Statements of  Operations for each of the three years in the period ended December 31, 2005                                                            |   |
|                                                                                                                                                                |   |
| Consolidated Statements of  Changes in Shareholders’ Deficiency and Redeemable Common Stock for each of  the three years in the period ended December 31, 2005 |   |
|                                                                                                                                                                |   |
| Consolidated Statements of  Cash Flows for each of the three years in the period ended December 31, 2005                                                            |   |
|                                                                                                                                                                |   |
| Notes to The Consolidated  Financial Statements                                                                                                                     |   |

 

F-1

----

 

**TEVECAP S.A.**

**AND SUBSIDIARIES**

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Shareholders of

TEVECAP S.A.

São Paulo – SP - Brazil

 

We have audited theaccompanying consolidated balance sheets of TEVECAP S.A. and subsidiaries (the“Company”) as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, change in shareholders’ deficiency and redeemablecommon stock and cash flows for each of the three years in the period endedDecember 31, 2005, all expressed in United States dollars. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company and subsidiaries as of December 31, 2005 and2004, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2005, in conformity withaccounting principles generally accepted in the United States of America.

 

 
| /s/ Deloitte Touche Tohmatsu Auditores Independentes |   |
|------------------------------------------------------|--------|
|                                                 |
| Sao Paulo, Brazil,                                   |
|                                                 |
|                                                 |
| July 10, 2006                                   |

 

F-2

----

 

**TEVECAP S.A.**

**AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

 

*December 31, 2005 and 2004in thousands of U.S. dollars*

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                        |       |                  |       |   |   |
|                                              |       |                  |       |   |   |
| Current assets                                    |       |                  |       |   |   |
| Cash and cash  equivalents                        |       | $                     | 9,753      |   | $ | 1,368 |   |
| Accounts  receivable, net (Note 3)                |       | 3,846                 |       | 1,695 |   |
| Inventories, net  (Note 4)                        |       | 8,478                 |       | 9,472 |   |
| Recoverable  taxes                                |       | 552                   |       | 427 |   |
| Prepaid and  other assets (Note 5)                |       | 984                   |       | 1,323 |   |
| Other accounts  receivable                        |       | 82                    |       | 150 |   |
|                                              |       |                  |       |   |   |
| Total current  assets                             |       | 23,695                |       | 14,435 |   |
|                                              |       |                  |       |   |   |
| Property, plant  and equipment, net (Note 8)      |       | 71,898                |       | 68,220 |   |
| Recoverable  taxes                                |       | 81                    |       | 138 |   |
| Intangible  assets, net (Note 9)                  |       | 3,165                 |       | 4,531 |   |
| Loans receivable  from related companies (Note 6) |       | 8,127                 |       | 6,480 |   |
| Judicial deposits  (Note 19)                      |       | 11,887                |       | 8,760 |   |
|                                              |       |                  |       |   |   |
| Total assets                                      |       | $                     | 118,853    |   | $ | 102,564 |   |

 

The accompanying notes are an integralpart of the consolidated financial statements

 

F-3

----

 
| ** **                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**                                                                                       |       |                  |       |   |   |
| ** **                                                                                                                              |       |                  |       |   |   |
| Current  liabilities                                                                                                                    |       |                  |       |   |   |
| Loans (Note 10)                                                                                                                         |       | $                     | 26,836     |   | $ | 19,474 |   |
| Film suppliers                                                                                                                          |       | 5,322                 |       | 4,996 |   |
| Other suppliers                                                                                                                         |       | 8,027                 |       | 5,687 |   |
| Tax recovery  program – PAES/REFIS (Note 12)                                                                                       |       | 1,963                 |       | 1,581 |   |
| Taxes payable  other than income taxes (Note 11)                                                                                        |       | 4,434                 |       | 3,462 |   |
| Income tax  payable                                                                                                                     |       | 589                   |       | 328 |   |
| Accrued payroll  and related liabilities                                                                                                |       | 2,553                 |       | 1,352 |   |
| Advances from  customers (Note 2.12)                                                                                                    |       | 5,411                 |       | 3,939 |   |
| Other accounts  payable                                                                                                                 |       | 882                   |       | 1,500 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Total current  liabilities                                                                                                              |       | 56,017                |       | 42,319 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Long-term  liabilities                                                                                                                  |       |                  |       |   |   |
| Loans (Note 10)                                                                                                                         |       | 54,309                |       | 41,060 |   |
| Loans payable to  related companies (Note 6)                                                                                            |       | 68,196                |       | 49,634 |   |
| Taxes payable  other than income taxes (Note 11)                                                                                        |       | 3,906                 |       | 3,714 |   |
| Accrual for  contingencies (Note 19)                                                                                                    |       | 43,190                |       | 14,544 |   |
| Tax recovery  program – PAES/REFIS (Note 12)                                                                                       |       | 15,697                |       | 14,080 |   |
| Deferred income  tax (Note 7.2)                                                                                                         |       | 45,877                |       | 29,052 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Total long-term  liabilities                                                                                                            |       | $                     | 231,175    |   | $ | 152,084 |   |
| Commitments  (Note 16)                                                                                                                  |       |                  |       |   |   |
| Minority  interest                                                                                                                      |       | 936                   |       | 879 |   |
| Redeemable  common stock, no par value 46,294,949 shares authorized, issued and  outstanding as of December 31, 2005 and 2004 (Note 17) |       | 30,380                |       | 27,599 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Shareholders’  deficiency                                                                                                          |       |                  |       |   |   |
| Common stock, no  par value, 438,925,488 shares authorized, issued and outstanding as of  December 31, 2005 and 2004. (Note 18)         |       | 446,026               |       | 446,026 |   |
| Accumulated  other comprehensive income                                                                                                 |       | (18,360               | )          | (5,129 | ) |
| Accumulated  deficit                                                                                                                    |       | (627,321              | )          | (561,214 | ) |
|                                                                                                                                    |       |                  |       |   |   |
| Total  shareholders’ deficiency                                                                                                    |       | (199,655              | )          | (120,317 | ) |
|                                                                                                                                    |       |                  |       |   |   |
| Total  liabilities and shareholders’ deficiency                                                                                    |       | $                     | 118,853    |   | $ | 102,564 |   |

 

**The accompanying notesare an integral part of the consolidated financial statements**

 

F-4

----

 

**TEVECAP S.A.**

**AND SUBSIDIARIES**

 

**Consolidated Statements ofOperations**

** **

*for the years ended December31, 2005, 2004 and 2003in thousands of U.S. dollars*

 
| ** **                                                                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross revenues                                                                                    |       |                                       |       |   |   |   |   |
| Monthly  subscriptions                                                                            |       | $                                          | 126,641    |   | $ | 94,063 |   | $ | 83,794 |   |
| Installation                                                                                      |       | 2,086                                      |       | 989 |   | 1,211 |   |
| Advertising                                                                                       |       | 3,644                                      |       | 1,848 |   | 2,586 |   |
| Additional  services                                                                              |       | 6,793                                      |       | 6,197 |   | 3,781 |   |
| Taxes on  revenues                                                                                |       | (19,985                                    | )          | (14,392 | ) | (13,038 | ) |
|                                                                                              |       | 119,179                                    |       | 88,705 |   | 78,334 |   |
| Direct operating  expenses (excluding depreciation and and amortization stated separately  below) |       |                                       |       |   |   |   |   |
| Payroll and  benefits                                                                             |       | 3,775                                      |       | 2,020 |   | 2,455 |   |
| Programming                                                                                       |       | 30,520                                     |       | 26,317 |   | 24,786 |   |
| Technical  assistance                                                                             |       | 1,484                                      |       | 1,249 |   | 1,533 |   |
| TVA magazine                                                                                      |       | 319                                        |       | 1,293 |   | 1,239 |   |
| Pole rental                                                                                       |       | 2,125                                      |       | 1,444 |   | 1,254 |   |
| Other costs  (Note 14)                                                                            |       | 7,864                                      |       | 4,799 |   | 5,950 |   |
|                                                                                              |       | 46,087                                     |       | 37,122 |   | 37,217 |   |
| Selling, general  and administrative expenses                                                     |       |                                       |       |   |   |   |   |
| Payroll and  benefits                                                                             |       | 6,481                                      |       | 5,551 |   | 6,322 |   |
| Advertising and  promotion                                                                        |       | 5,143                                      |       | 1,481 |   | 1,331 |   |
| Rent                                                                                              |       | 1,175                                      |       | 1,360 |   | 1,074 |   |
| Other selling,  general and administrative expenses                                               |       | 33,074                                     |       | 16,556 |   | 12,625 |   |
|                                                                                              |       | 45,873                                     |       | 24,948 |   | 21,352 |   |
| Depreciation                                                                                      |       | 28,457                                     |       | 23,379 |   | 22,748 |   |
| Amortization                                                                                      |       | 1,079                                      |       | 977 |   | 935 |   |
| Tax recovery  program (Note 12)                                                                   |       | —                                     |       | — |   | 5,029 |   |
| Other operating  expense, net (Note 13)                                                           |       | 6,929                                      |       | 3,315 |   | 3,671 |   |
| Loss from  operations                                                                             |       | (9,246                                     | )          | (1,036 | ) | (12,618 | ) |
|                                                                                              |       |                                       |       |   |   |   |   |
| Interest income                                                                                   |       | (1,010                                     | )          | (701 | ) | (1,511 | ) |
| Interest expense                                                                                  |       | 33,182                                     |       | 21,418 |   | 18,135 |   |
| Foreign currency  transaction (income) loss, net                                                  |       | (6,379                                     | )          | (3,561 | ) | (11,019 | ) |
| Other  nonoperating (income) expense, net (Note 15)                                               |       | —                                     |       | (8,443 | ) | 5,897 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Loss before  income taxes, equity in affiliates and minority interest                             |       | (35,039                                    | )          | (9,749 | ) | (24,120 | ) |
|                                                                                              |       |                                       |       |   |   |   |   |
| Income tax  expense – current (Note 7.1)                                                     |       | 609                                        |       | 304 |   | 328 |   |
| Income tax  expense – deferred (Note 7.1)                                                    |       | 27,437                                     |       | 8,867 |   | 19,054 |   |
| Loss before  equity in affiliates and minority interest                                           |       | (63,085                                    | )          | (18,920 | ) | (43,502 | ) |
| Equity in income  (losses) of affiliates, net                                                     |       | —                                     |       | (468 | ) | 3,585 |   |
| Loss before  minority interest                                                                    |       | (63,085                                    | )          | (19,388 | ) | (39,917 | ) |
| Minority  interest                                                                                |       | 241                                        |       | 255 |   | 82 |   |
| Net loss                                                                                          |       | (63,326                                    | )          | (19,643 | ) | (39,999 | ) |
| Other  comprehensive loss - Foreign currency translation adjustment                               |       | (13,231                                    | )          | (7,845 | ) | (4,814 | ) |
| Comprehensive  (loss)                                                                             |       | $                                          | (76,557    | ) | $ | (27,488 | ) | $ | (44,813 | ) |

 

F-5

----

 

**TEVECAP S.A.**

**AND SUBSIDIARIES**

 

**Consolidated Statementsof Changes in Shareholders’ Deficit and Redeemable Common Stock**

 

*for the years ended December31, 2005, 2004 and 2003in thousands of U.S. dollars*

 
| ** **                                                                    | ** ** | ** ** | ** ** | ** **      | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** **     | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|------------------------|------------|------------------------|------------|----------------|------------|
| ** **                                                                    | ** ** | ** ** | ** ** | ** **      | ** ** | **Other**              | ** ** | **Total**              | ** ** | **Redeemable** | ** ** |
| ** **                                                                    | ** ** | **Common** | ** ** | **Accumulated** | ** ** | **Comprehensive**      | ** ** | **Shareholders’** | ** ** | **Common**     | ** ** |
| ** **                                                                    | ** ** | **Stock**  | ** ** | **Deficit**     | ** ** | **Income (Loss)** | ** ** | **Deficit**            | ** ** | **Stock**      | ** ** |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Balance as of  December 31, 2002                                              |       | 371,026    |       | (498,174        | )          | 7,530                  |       | (119,618               | )          | 99,365         |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Foreign currency  translation adjustments, net of tax of $0                   |       |       |       |            |       | (4,814                 | )          | (4,814                 | )          |           |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Net loss                                                                      |       |       |       | (39,999         | )          |                   |       | (39,999                | )          |           |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Reversal of  redeemable common stock Hearst/ABC (46,294,952 shares) (Note 17) |       | 75,000     |       |            |       |                   |       | 75,000                 |       | (75,000        | )          |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Adjustment of  redeemable common stock to redemption price                    |       |       |       |            |       |                   |       |                   |       | (164           | )          |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Balance as of  December 31, 2003                                              |       | 446,026    |       | (538,173        | )          | 2,716                  |       | (89,431                | )          | 24,201         |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Foreign currency  translation adjustments, net of tax of $0                   |       |       |       |            |       | (7,845                 | )          | (7,845                 | )          |           |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Net loss                                                                      |       |       |       | (19,643         | )          |                   |       | (19,643                | )          |           |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Adjustment of  redeemable common stock to redemption price                    |       |       |       | (3,398          | )          |                   |       | (3,398                 | )          | 3,398          |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Balance as of  December 31, 2004                                              |       | 446,026    |       | (561,214        | )          | (5,129                 | )          | (120,317               | )          | 27,599         |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Foreign currency  translation adjustments, net of tax of $0                   |       |       |       |            |       | (13,231                | )          | (13,231                | )          |           |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Net loss                                                                      |       |       |       | (63,326         | )          |                   |       | (63,326                | )          |           |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Adjustment of  redeemable common stock to redemption price                    |       |       |       | (2,781          | )          |                   |       | (2,781                 | )          | 2,781          |       |
|                                                                          |       |       |       |            |       |                   |       |                   |       |           |       |
| Balance as of  December 31, 2005                                              |       | $          | 446,026    |            | $          | (627,321               | )          | $                      | (18,360    | )              | $          | (199,655 | ) | $ | 30,380 |   |
|                                                                               |            |            |            |                 |            |                        |            |                        |            |                |            |  |  |  |  |  |

 

**The accompanying notesare an integral part of the consolidated financial statements**

 

F-6

----

**TEVECAP S.A.**

**AND SUBSIDIARIES**

 

***Consolidated Statements of Cash Flows***

 

*for the years ended December31, 2005, 2004 and 2003in thousands of U.S. dollars*
| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                    |       |                                       |       |   |   |   |   |
| **Cash  flows from operating activities:**                    |       |                                       |       |   |   |   |   |
| Net loss                                                      |       | $                                          | (63,326    | ) | $ | (19,643 | ) | $ | (39,999 | ) |
| Adjustments to  reconcile net loss to net cash                |       |                                       |       |   |   |   |   |
| Provided by  operating activities:                            |       |                                       |       |   |   |   |   |
| Depreciation                                                  |       | 28,457                                     |       | 23,379 |   | 22,748 |   |
| Amortization                                                  |       | 1,079                                      |       | 977 |   | 935 |   |
| Amortization of  debt issuance cost                           |       | —                                     |       | — |   | 260 |   |
| Redeemable stock                                              |       | —                                     |       | — |   | (164 | ) |
| Net gain on sale  of equity method investments                |       | —                                     |       | (8,443 | ) | — |   |
| Provision for  doubtful accounts                              |       | 385                                        |       | 1,414 |   | 1,360 |   |
| Loss on sale of  obsolete inventories                         |       | 1,172                                      |       | 480 |   | 359 |   |
| Provision for  inventory obsolescence                         |       | 1,947                                      |       | 49 |   | 111 |   |
| Write-off of  assets related to cancellation of subscriptions |       | 3,519                                      |       | 2,117 |   | 2,790 |   |
| Minority  interest                                            |       | 241                                        |       | 255 |   | 82 |   |
| Disposal and  write-off of property, plant and equipment      |       | 771                                        |       | 384 |   | 1,363 |   |
| Permanent  impairment loss on equity method investments       |       | —                                     |       | — |   | 5,897 |   |
| Equity in  (income) losses of affiliates                      |       | —                                     |       | 468 |   | (3,585 | ) |
| Foreign currency  transaction loss, net                       |       | (6,379                                     | )          | (3,561 | ) | (11,019 | ) |
| Deferred income  taxes                                        |       | 27,437                                     |       | 8,867 |   | 19,054 |   |
| Accrued interest                                              |       | 23,549                                     |       | 16,486 |   | 13,933 |   |
|                                                          |       |                                       |       |   |   |   |   |
| Changes in  operating assets and liabilities:                 |       |                                       |       |   |   |   |   |
| Accounts  receivable                                          |       | (2,582                                     | )          | 1,419 |   | (1,959 | ) |
| Prepaid and  other assets                                     |       | 496                                        |       | 265 |   | 235 |   |
| Inventories                                                   |       | 228                                        |       | (280 | ) | (57 | ) |
| Suppliers                                                     |       | 1,186                                      |       | (1,129 | ) | (12,433 | ) |
| Accrual for  contingencies                                    |       | 11,453                                     |       | 2,063 |   | (6,076 | ) |
| Taxes payable  other than income taxes                        |       | 195                                        |       | 799 |   | 649 |   |
| Tax recovery  program – PAES/REFIS                       |       | —                                     |       | — |   | 7,621 |   |
| Current income  taxes                                         |       | 609                                        |       | 304 |   | 328 |   |
| Accrued payroll  and related liabilities                      |       | 980                                        |       | (195 | ) | 410 |   |
| Advances  received from subscribers                           |       | 907                                        |       | 766 |   | 2,666 |   |
| Judicial  deposits                                            |       | (1,877                                     | )          | (1,404 | ) | 4,241 |   |
| Other                                                         |       | 712                                        |       | (1,428 | ) | 877 |   |
| Net cash provided  by operating activities                    |       | 31,159                                     |       | 24,409 |   | 10,627 |   |
|                                                          |       |                                       |       |   |   |   |   |
| **Cash  flows from investing activities:**                    |       |                                       |       |   |   |   |   |
| Purchases of  property, plant and equipment                   |       | (26,577                                    | )          | (13,085 | ) | (11,223 | ) |
| Repayment of  loans made to related companies                 |       | —                                     |       | — |   | 141 |   |
| Net cash used in  investing activities                        |       | $                                          | (26,577    | ) | $ | (13,085 | ) | $ | (11,082 | ) |
|                                                          |       |                                       |       |   |   |   |   |
| **Cash  flows from financing activities:**                    |       |                                       |       |   |   |   |   |
| Proceeds from  bank loans                                     |       | 48,661                                     |       | 44,685 |   | 24,560 |   |
| Repayment of  loans from banks                                |       | (39,198                                    | )          | (49,270 | ) | (42,978 | ) |
| Repayments of  program PAES/REFIS                             |       | (4,090                                     | )          | (4,233 | ) | (1,394 | ) |
| Proceeds from  loans from related parties                     |       | 10,569                                     |       | 45,654 |   | 63,654 |   |
| Repayments of  loans from related parties                     |       | (11,090                                    | )          | (46,894 | ) | (44,309 | ) |
| Net cash  provided by (used in) financing activities          |       | 4,852                                      |       | (10,058 | ) | (467 | ) |
|                                                          |       |                                       |       |   |   |   |   |
| Effect of  exchange rate changes                              |       | (1,049                                     | )          | (190 | ) | 969 |   |
|                                                          |       |                                       |       |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents         |       | 8,385                                      |       | 1,076 |   | 47 |   |
| Cash and cash  equivalents at beginning of the period         |       | 1,368                                      |       | 292 |   | 245 |   |
| Cash and cash  equivalents at end of the period               |       | $                                          | 9,753      |   | $ | 1,368 |   | $ | 292 |   |

* *

*The accompanying notes are an integral part of theconsolidated financial statements*

 

F-7

----

 
| ** **                                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Supplemental  cash disclosure:**                                                                   |       |                                       |       |   |   |   |   |
| Cash paid for  interest                                                                              |       | $                                          | 8,342      |   | $ | 7,041 |   | $ | 10,125 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |
| **Supplemental  non-cash financing and investing activities:**                                       |       |                                       |       |   |   |   |   |
| Accrued interest  on related company loans refinanced as as principal balance                        |       | $                                          | 15,624     |   | $ | 7,649 |   | $ | 12,291 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |
| Recognition of  loans receivable to shareholder in connection with the sale of investments  (Note 8) |       | $                                          | —     |   | 5,482 |   | — |   |

 

*The accompanying notes are an integral part of theconsolidated financial statements*

 

F-8

----

 

**TEVECAP S.A.**

**AND SUBSIDIARIES**

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Amountsexpressed in thousands of U.S. dollars,**

 

**Unlessotherwise indicated)**

 

**1.**         TheCompany and its principal operations

** **

**1.1.****     ****General**

 

The consolidated financial statements have been prepared toreflect the consolidated results of Tevecap S.A. (“Tevecap”) and itssubsidiaries (the “Company”).

 

Tevecap is a holding company, the subsidiaries of whichrender services related to wireless cable, cable and high-speed internet,including marketing and advertising, production, distribution and licensing ofdomestic and foreign television programs. The Company has wireless cablechannel rights primarily in major urban markets in Brazil.

 

As of December 31, 2005, Abril Comunicações S.A.(“Abrilcom”), a printing and distribution company, was the majority shareholderof the Company.

 

**2.**         Summaryof significant accounting policies

** **

Significant policies followed in the preparation of theconsolidated financial statements are described below:

 

**2.1.**      Basis of presentation and consolidation

** **

**a) Basis of presentation**

** **

The consolidated financial statements are presented in UnitedStates dollars and have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”), which differin certain respects from accounting principles applied by the Company in itslocal currency financial statements, which are prepared in accordance withaccounting principles generally accepted in Brazil (“Brazilian GAAP”).

 

The preparation of financial statements in accordance withU.S. GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosures of contingent assetsand liabilities as of the financial statement dates and the reported amount ofrevenues and expenses during the reporting periods. Since management’s judgmentinvolves making estimates concerning the likelihood of future events, theactual results could differ from these estimates.

 

F-9

----

 

**b) Principles of consolidation**

** **

The consolidated financial statements include the accounts ofTevecap and all majority-owned subsidiaries.

 

Investments in affiliated companies of from,  20% to 50%, are accounted for using theequity method of accouting. Intercompany transactions and accounts areeliminated in consolidation.

 

**2.2.**      Accounting records

** **

As required by Brazilian Law and in accordance with localaccounting practices, the accounting records of the Company are maintained inBrazilian currency (real). In order to present the consolidated financialstatements in conformity with U.S. GAAP, the Company maintains additionalaccounting records that are used solely for this purpose.

 

**2.3.**      Currency remeasurement

** **

As of January 1, 2000, based on changes in the Company’s capital andoperational structure and a move to using the Brazilian real for a substantialportion of the Company’s business, the Company changed its functional currencyfrom the United States dollar to the Brazilian real (R$). This change was madein accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52,“Foreign Currency Translation.”

 

**Assetsand liabilities are translated into U.S. dollars at the exchange rate in effectat the end of the reporting period, and revenues, expenses, gains and lossesare translated into U.S. dollars at the average rates prevailing in the period.The resulting net translation gains and losses are reported in accumulatedother comprehensive income (loss) in shareholders’ deficit.**

** **

**2.4.**      Consolidated financial statements

** **

The Company’s operating subsidiaries included in theconsolidated financial statements are:

 

F-10

----

 
| ** **                                                           | ** ** | **Ownership Interest as of  December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
|                                                                 |       |                                       |       |   |   |
| Owned  Systems                                                       |       |                                       |       |   |   |
| TVA Sistema de Televisão S.A.                                   |       | 100.00                                     | %          | 100.00 | % |
| TVA Sul Paraná Ltda.                                            |       | 100.00                                     | %          | 100.00 | % |
| CCS Camboriú Cable Systems de  Telecomunicações Ltda. |       | 60.00                                      | %          | 60.00 | % |
| Rede Ajato S.A.                                                      |       | 100.00                                     | %          | 100.00 | % |
|                                                                 |       |                                       |       |   |   |
| License  Subsidiary                                                  |       |                                       |       |   |   |
| Comercial Cabo TV São Paulo Ltda. (a)                           |       | 99.99                                      | %          | 99.99 | % |
|                                                                 |       |                                       |       |   |   |
| Programming  Ventures                                                |       |                                       |       |   |   |
| TVA Inc.                                                             |       | 100.00                                     | %          | 100.00 | % |
| TVA Overseas Ltd.                                                    |       | 100.00                                     | %          | 100.00 | % |
| TVA Communications Ltd.                                              |       | 100.00                                     | %          | 100.00 | % |
| TVA Continental S.A.                                                 |       | 100.00                                     | %          | 100.00 | % |
| TVA Pelicano S.A.                                                    |       | 100.00                                     | %          | 100.00 | % |
| TVA Network Participações S.A.                             |       | 100.00                                     | %          | 100.00 | % |

 

----

**(a.)****      **0.00149% of the common shares in this entityis owned by the controlling shareholder of the parent company Roberto Civita.pursuant to local legislative requirements.

 

**2.5.****                 ****Cash and cash equivalents**

 

Cash and cash equivalentsare defined as cash and cash in banks and short-term investments ininterest-bearing securities. Such short-term investments have originalmaturities of three months or less at the time of purchase and are readilyconvertible to cash.

 

**2.6.****                 ****Financial instruments**

 

In accordance with SFAS No.107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”),information is provided about the fair value of certain financial instrumentsfor which it is practicable to estimate that value.

 

For the purposes of SFAS107, the estimated fair value of a financial instrument is the amount at whichthe instrument could be exchanged in a current transaction between willingparties, other than in a forced or liquidation sale. The following methods andassumptions were used to estimate the fair value of each class of financialinstrument for which it is practicable to estimate that value:

 

F-11

----

 

•              The fair value of certain financial assetscarried at cost, including cash and cash equivalents, accounts receivable,other accounts receivable and certain other short-term assets, is considered toapproximate their respective carrying value due to their short-term nature.

 

•              The fair value of payables to film suppliersand other suppliers, other accounts payable and certain other short-termliabilities are considered to approximate their respective carrying value dueto their short-term nature.

 

•              The fair value of loans receivable from andloans payable to related companies approximates the carrying value, as intereston these loans is variable and based on market rates.

 

•              The fair value of third party loans, exceptfor Senior Notes, approximates the carrying value as the interest rates onthese loans are either fixed at a rate comparable with the current market rateor variable based on market rates.

 

•              The fair value of Senior Notes represents****105% of its carrying value as of December31, 2005 (92% of its carrying value as of December 31, 2004). Fair value isestimated based on quoted market prices.

 

**2.7.****                 ****Accounts receivable**

 

Allowance for doubtfulaccounts is recorded based on an analysis of historical losses, on theknowledge and monitoring of the individual situation of its customers and ofthe canceling of pay TV subscribers, and is considered sufficient to coverpossible losses on the realization of credits.

 

**2.8.****                 ****Inventories**

 

Inventories consist ofmaterials and supplies and imports in transit. Materials and supplies are usedto provide service to new customers, and to ensure continuity of service toexisting customers. Imports in transit represent materials purchased fromforeign countries that have not yet been received.

 

Inventories are stated atthe lower of cost or market. Cost is determined principally under the averagecost method.

 

A provision for obsolescencehas been established on the basis of an analysis of slow-moving materials andsupplies.

 

F-12

----

 

**2.9.****                 ****Property, plant andequipment**

 

Property, plant andequipment are stated at cost and depreciated using the straight-line method,over the remaining useful lives of the assets, as described in Note 8.

 

The Company evaluates itslong-lived assets and identifiable intangible assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of suchassets may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of the asset to futureundiscounted net cash flows expected to be generated by the asset. Inestimating future undiscounted net cash flows, assets are grouped at the levelof each cable television system. If an asset is considered to be impaired, theimpairment to be recognized is measured as the amount by which the carryingamount of the asset exceeds the fair value of the asset. The Company has notrecognized any impairment as a result of the application of this policy.

 

**2.10.****          ****Advertising and promotionexpenses**

 

Costs of advertising andpromotion are expensed as incurred.

 

**2.11.****          ****Revenue recognition**

 

Subscription revenues arerecognized monthly at the amount billed to subscribers for service subscribedto and earned during the month.

 

Installation fees arerecognized as revenue on the equipment installation date to the extent ofdirect selling costs incurred, which are higher than the revenue.

 

Advertising revenues arerecognized, and the production cost of commercials and programming are chargedto expense, when the commercial is telecast.

 

Others revenues arerecognized as services are rendered.

 

**2.12.****          ****Licenses**

 

Televisão Show Time Ltda. (“TVShow Time”) and TVA Brasil Radioenlaces Ltda. (“TVA Brasil”) hold licensescovering certain operations of the Company. The use of such licenses isprovided to the Company, for a nominal fee, under a Service Agreement datedJuly 22, 1994, as amended, among Tevecap, TV Show Time, TVA Brasil and AbrilS.A. Since TV Show Time and TVA Brasil are under common control with theCompany, the financials statements of these companies have been combined withthe Company’s financial statements for all periods presented.

 

F-13

----

 

On December 17, 2003, theCompany signed an agreement of intent to sell the licenses of Televisão ShowTime Ltda., TVA Brasil Radioenlaces Ltda. and TV Delta Curitiba Ltda. relatingto the “Pay TV Special Service” to an unrelated party. The Company received anadvance of $2,723 which is recorded as advances from customers. This balancehas been monetarily restated using the IGPM + CDI and amounted to $5,375 as ofDecember 31, 2005 ($3,939 as of December 31, 2004). The consummation of thetransaction is still subject to the approval of ANATEL (BrazilianTelecommunications Agency).

 

**2.13**.           **Intangible assets**

 

Concessions represent theright to engage in various telecommunications services in defined areas orcities in Brazil. The cost of these concessions is being amortized on thestraight-line basis over 10 years.

 

Software is stated at costand amortized on a straight-line basis over its estimated useful life, which is5 years.

 

**2.14.****          ****Deferred income taxes**

 

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases as well as operating loss andtax credit carryforwards. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date. Valuation allowancesare established when it is more likely than not that some or all of thedeferred tax assets will not be realized.

 

**2.15.****          ****Debt issuance costs**

 

Debt issuance costs are amortizedover the term of the underlying debt on a straight-line basis. The results ofamortization on a straight-line basis do not differ materially from thoseobtained by using the interest method.

 

F-14

----

 

**2.16.****          ****Comprehensive income (loss)**

 

SFAS no. 130 “ReportingComprehensive Income” establishes standards for reporting and disclosingcomprehensive income and its components in a full set of financial statements.Comprehensive income/loss is being presented together with the statements ofoperations.

 

**2.17.****          ****Barter transactions**

 

The Company enters intotransactions that exchange advertising for advertising and for products andservices. Such transactions are recorded at the estimated fair value of theadvertising received or given in accordance with the provisions of the EITFIssue No. 99-17, “Accounting for Advertising Barter Transactions”.****Revenue from barter transactions isrecognized when advertising is provided, and services received are charged toexpense when used. For the years ended December 31, 2005, 2004 and 2003,revenue from barter transactions amounted to $600, $1,608 and $264,respectively and expenses to $632 $1,298 and $389, respectively.

 

**2.18.****          ****Reclassifications**

 

During theyear ended December 31, 2005, the Company changed the classification of certainitems included in direct operating expenses and selling, general andadministrative expenses to better reflect the nature of these items. The prioryear income statements were reclassified to be consistent with the current yearclassification. The impact of these reclassifications was a decrease in directoperating expenses and an increase in selling, general and administrativeexpense of $5,176 and $4,244 for the years ended December 31, 2004 and 2003,respectively. These reclassifications did not have any impact on the Company’snet loss or shareholders’ deficit for the periods presented.

 

Additionally,during the year ended December 31, 2005, the Company began to classify cashpayments on REFIS and PAES as cash flows from financing activities since thisclassification better reflects the nature of these agreements with thegovernment. The cash flow statements for the years ended December 31, 2004 and2003 were reclassified to be consistent with the current year classification inthe amount of $4,233 and $1,394, respectively.

 

F-15

----

 

**3.****                           ****Accounts receivable, net**

 

As of December 31, 2005 and2004, accounts receivable were comprised of:

 
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Subscriptions  and installation fees | ** ** | $        | 9,498      |     | $          | 6,384 |   |
| Advertising                          |       | 512      |       | 396      |       |
| Barter  transactions                 |       | 13       |       | 9        |       |
| Provision  for doubtful accounts     |       | (6,177   | )          | (5,094   | )          |
|                                 |       | $        | 3,846      |     | $          | 1,695 |   |

 

No single customer accountedfor more than 10% of total accounts receivable as of December 31, 2005 and2004.

 

**4.****                           ****Inventories, net**

 

As of December 31, 2005 and2004, inventories were comprised of:

 
| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Materials  and supplies     |       | $        | 11,289     |     | $          | 8,463 |   |
| Imports in  transit         |       | —   |       | 1,701    |       |
| Provision  for obsolescence |       | (2,811   | )          | (692     | )          |
|                        |       | $        | 8,478      |     | $          | 9,472 |   |

 

**5.****                           ****Prepaid and other assets**

 

As of December 31, 2005 and2004, prepaid expenses were comprised of:

 
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Advances to  employes             |       | $        | 581        |     | $          | 1.229 |   |
| Prepaid  meals and transportation |       | —   |       | 24       |       |
| Other                             |       | 403      |       | 70       |       |
|                              |       | $        | 984        |     | $          | 1.323 |   |

 

F-16

----

 

**6.****                           ****Related party transactions**

 

The following tablessummarize the transactions between the Company and its related parties as ofDecember 31, 2005 and 2004 and for the three years ended December 31, 2005:

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2005**         | ** ** | **2004** | ** ** |
|                               |       |             |       |   |   |
| Editora  Abril S.A.                |       |             |       |   |   |
| Accounts receivable                |       | $                | 181        |   | $ | 303 |   |
| Accounts payable                   |       | 1,223            |       | 1,119 |   |
| Loans payable                      |       | 59,500           |       | 41,692 |   |
|                               |       |             |       |   |   |
| Abril  Comunicações S.A. |       |             |       |   |   |
| Accounts receivable                |       | 57               |       | 42 |   |
| Loans receivable                   |       | 8,070            |       | 6,436 |   |
| Loans payable                      |       | 1,282            |       | 1,131 |   |
|                               |       |             |       |   |   |
| Abril  Investments Corporation     |       |             |       |   |   |
| Loans payable                      |       | 7,414            |       | 6,811 |   |
|                               |       |             |       |   |   |
| Others                             |       |             |       |   |   |
| Accounts receivable                |       | 52               |       | 219 |   |
| Accounts payable                   |       | 5                |       | 46 |   |
| Loans receivable                   |       | 57               |       | 44 |   |
|                               |       |             |       |   |   |
| Accounts receivable                |       | $                | 290        |   | $ | 564 |   |
| Accounts payable                   |       | $                | 1,228      |   | $ | 1,165 |   |
| Loans receivable                   |       | $                | 8,127      |   | $ | 6,480 |   |
| Loans payable                      |       | $                | 68,196     |   | $ | 49,634 |   |

 

F-17

----

 
| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Editora  Abril S.A.                            |       |     |       |     |       |     |       |
| Net interest expense                           |       | $        | 12,443     |     | $          | 7,330    |       | $ | 5,009 |   |
| Administrative services                        |       | 551      |       | 1,564    |       | 923      |       |
| Printing costs and distribution                |       | 1,267    |       | 1,399    |       | 853      |       |
| Advertising                                    |       | 194      |       | 128      |       | 269      |       |
|                                           |       |     |       |     |       |     |       |
| Paraná  Participações S/C Ltda. |       |     |       |     |       |     |       |
| Interest income                                |       | (395     | )          | (175     | )          | (1,360   | )          |
|                                           |       |     |       |     |       |     |       |
| Abril  Investments Corporation                 |       |     |       |     |       |     |       |
| Interest expense (income)                      |       | (288     | )          | 55       |       | (637     | )          |
|                                                |            |          |            |          |            |          |            |  |  |  |

 

The Company and its relatedparties maintain a cash management system centralized at Editora Abril S.A.(affiliated company). The centralized cash management system results inaccounts receivable from and payable to related parties depending on the cashneeds of the companies.

 

Loans granted to or obtainedfrom related companies, under loan agreements, are denominated in Reais andsubject to variable interest of 2.04% per month as of December 31, 2005 (2.03%per month as of December 31, 2004 and 1.96% per month as of December 31, 2003).These loans do not have defined maturity dates.

 

*RelatedParty Transactions*

 

*EditoraAbril Service Agreement*

 

In January 2002, pursuant toa Service Agreement with its affiliate Editora Abril, the Company outsourced anumber of administrative services, including payroll, human resources,accounting, tax, finance and legal services, to Editora Abril.  Under thisService Agreement, the Company pays to Editora Abril a monthly fee ofapproximately $184 as of December 31, 2005 ($130 and $77 as of December 31,2004 and 2003).

 

*Publishingand Advertising*

 

The Company publishes a monthlyprogramming guide detailing the Company’s programming options in a given month.In connection with this magazine, TVA Sistema has entered into an agreementwith Abril, dated September 1992, pursuant to which Abril publishesapproximately 180,000 copies of the Company’s monthly programming guide inreturn for a monthly payment of approximately $173 as of December 31, 2005($127 and $94 as of December 31, 2004 and 2003) to printing costs,distribuition and advertising. TVA Sistema and Abril also have a reciprocaladvertising agreement in which the Company publishes advertisements for Abrilin the Company’s monthly magazine in exchange for

 

F-18

----

 

advertisements for theCompany (and third parties through the Company) in the magazines published byAbril.

 

*AbrilCredit Facility*

 

Tevecap has entered, as theborrower, into a revolving credit facility (the “Abril Credit Facility”) withEditora Abril S.A., as the lender. The Abril Credit Facility, effectiveDecember 6, 1995, allows the Company to draw down amounts not to exceed amaximum aggregate principal amount of $60,000. Since June 1996, Tevecaphas from time to time requested, and Abril has provided, funding in excess ofthe aggregate maximum principal amount. The loans provided under the AbrilCredit Facility are denominated in reais, unless the loan is a pass-throughloan that Abril has funded in U.S. dollars, in which case the loan is funded ina real-equivalent amount. Abril has agreed to use its reasonable commercialefforts to obtain the lowest possible interest rates for its loans to Tevecapunder the Abril Credit Facility. In 2006, Tevecap intends to capitalize itsindebtedness under the Abril Credit Facility, which will significantly reduceits total outstanding indebtedness. The aggregate principal amount outstandingunder the Abril Credit Facility was $68,196 as of December 31, 2005, ($49,634as of December 31, 2004).

 

*ServiceAgreement with License holders*

 

Pursuant to a ServiceAgreement, dated July 22, 1994, as amended, Abril Comunicações S.A., TVABrasil and TV Show Time (the “License holders”) agreed to transfer to TVA allthe rights and benefits associated with their current and future pay-televisionlicenses, with the exception of licenses operated by companies in which TVA hasminority interests. While the License holders retained the title to suchlicenses, the License holders promised to take all steps necessary to transferthe title of such licenses to the Company. Such steps included the appropriateprocedures required by the Ministry of Communications and any othergovernmental authority regulating the transfers. The transfer of the title tosuch licenses is currently either pending, subject to approval by the Ministryof Communications, or waiting for the passage of certain statutory orregulatory waiting periods.

 

**7.****                           ****Income taxes**

 

7.1.                     The amounts charged to the provision forincome tax in results for the year ended December 31, 2005, 2004 and 2003, arecomprised as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Current  income tax provision |       | 609      |       | 304      |       | 328      |       |
| Deferred  income taxes        |       | 27,437   |       | 8,867    |       | 19,054   |       |
|                          |       |     |       |     |       |     |       |
|                          |       | 28,046   |       | 9,171    |       | 19,382   |       |

 

F-19

----

 

7.2.              The tax effects of temporary differences thatgive rise to deferred tax assets as of December 31, 2005 and 2004 are asfollows:

 
| ** **                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                         |       |     |       |     |       |
| Deferred tax  assets:                                                        |       |     |       |     |       |
| Net operating loss carryforwards                                             |       | $        | 119,268    |     | $          | 99,952 |   |
| Provision for obsolescence                                                   |       | 3,185    |       | 2,512    |       |
| Provision for claims                                                         |       | 9,342    |       | 5,225    |       |
| Other                                                                        |       | 8,185    |       | 7,079    |       |
|                                                                         |       |     |       |     |       |
| Total gross deferred tax asset                                               |       | 139,980  |       | 114,768  |       |
|                                                                         |       |     |       |     |       |
| Less valuation allowance                                                     |       | (139,869 | )          | (114,649 | )          |
|                                                                         |       |     |       |     |       |
| Deferred tax asset                                                           |       | $        | 111        |     | $          | 119 |   |
|                                                                         |       |     |       |     |       |
| Deferred tax  liability:                                                     |       |     |       |     |       |
| Foreign currency exchange gains on Senior  Notes taxable on final settlement |       | (45,988  | )          | (29,171  | )          |
| Deferred tax liability                                                       |       | $        | (45,988    | )        | $          | (29,171 | ) |

 

7.3.                    Management has established a full valuationallowance against the deferred tax assets as it is more likely than not thatthe deferred tax assets will not be realized, with exception of the deferredtax assets recorded on CCS Camboriú Cable Systems de Telecomunicações Ltda.

 

As of December 31, 2005 theCompany and its subsidiaries have accumulated tax losses of $350,788 ($ 293,976in 2004) that do not expire.

 

7.4.                    The consolidated income taxes are differentfrom the amount computed using the Brazilian statutory income tax rate for thereasons set forth in the following table:

 

F-20

----

 
| ** **                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |     |       |
| Income  (loss) before income taxes                                             |       | $        | (35,039    | )        | $          | (9,749   | )          | $ | (24,120 | ) |
| Statutory  income tax rate                                                     |       | 34       | %          | 34       | %          | 34       | %          |
| Computed  income tax benefit                                                   |       | (11,913  | )          | (3,314   | )          | (8,201   | )          |
| Amortization  of deferred charges                                              |       | 367      |       | (1,620   | )          | (1,534   | )          |
| Translation  (gain) loss on tax losses                                         |       | (12,578  | )          | (6,950   | )          | (12,720  | )          |
| (Earnings)  losses in foreign affiliates                                       |       | 12,419   |       | 2,023    |       | 12,955   |       |
| Capital gain  on sale of investments                                           |       | —   |       | (2,577   | )          | —   |       |
| Provision  for income tax contingencies (note 19 c)                            |       | 14,431   |       | —   |       | —   |       |
| (Deductible) taxable devaluation gain  (loss) for Brazilian statutory purposes |       | (378     | )          | (196     | )          | 1,710    |       |
| Adjustment  to accumulated tax losses                                          |       | 250      |       | —   |       | 77       |       |
| Other                                                                          |       | 228      |       | (37      | )          | 1,454    |       |
| Increase  (decrease) in valuation allowance                                    |       | 25,220   |       | 21,842   |       | 25,641   |       |
| Total income tax expense per consolidated statements  of operations            |       | $        | 28,046     |     | $          | 9,171    |       | $ | 19,382 |   |

 

Incometax expense represents amounts owed by subsidiaries calculated on a stand-alonebasis, as Brazilian income tax law does not allow consolidated tax returns.

 

**8.****                           ****Property, plant andequipment, net**

 

As of December 31, 2005 and2004, property, plant and equipment were comprised of:

 
| ** **                | ** ** | **Annual**            | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                | ** ** | **Depreciation Rate** | ** ** | **2005**         | ** ** | **2004** | ** ** |
| ** **                | ** ** | **%**                 | ** ** | ** **       | ** ** | ** ** | ** ** |
|                      |       |                  |       |             |       |   |   |
| Reception  equipment      |       | 20                    |       | 137,035          |       | 109,377 |   |
| Cable plant               |       | 10                    |       | 64,406           |       | 56,141 |   |
| Machinery  and equipment  |       | 10                    |       | 54,465           |       | 47,363 |   |
| Decoders                  |       | 10                    |       | 79,419           |       | 60,629 |   |
| Leasehold  improvements   |       | 25                    |       | 2,208            |       | 1,757 |   |
| Furniture  and fixtures   |       | 10                    |       | 1,515            |       | 1,289 |   |
| Premises                  |       | 10                    |       | 1,376            |       | 1,177 |   |
| Vehicles                  |       | 20                    |       | 797              |       | 1,083 |   |
| Building                  |       | 4                     |       | 2,901            |       | 2,622 |   |
| Other                     |       | 0                     |       | 1,148            |       | 1,501 |   |
| Accumulated  depreciation |       |                  |       | (273,372         | )          | (214,719 | ) |
|                      |       |                  |       |             |       |   |   |
|                      |       |                  |       | $                | 71,898     |   | $ | 68,220 |   |
|                           |            |                       |            |                  |            |  |  |  |  |

 

F-21

----

 

**9.**                            Intangibleassets subject to amortization

** **

Following is a summary of the Company’s intangible assets subject toamortization

 
| ** **                       | ** ** | **2005**     | ** ** | **2004**       | ** ** |
|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                       | ** ** | **Software** | ** ** | **Concession** | ** ** | **Total** | ** ** | **Software** | ** ** | **Concession** | ** ** | **Total** | ** ** |
| Gross                            |       | $            | 17,161     |           | 12,977     |   | $ | 30,138 |   | $ | 14,267 |   | $ | 11,444 |   | $ | 25,711 |   |
| Accumulated amortization         |       | (14,545      | )          | (12,435        | )          | (26,980 | ) | (11,221 | ) | (9,959 | ) | (21,180 | ) |
| Net                              |       | $            | 2,616      |           | $          | 542 |   | $ | 3,158 |   | $ | 3,046 |   | $ | 1,485 |   | $ | 4,531 |   |
|                             |       |         |       |           |       |   |   |   |   |   |   |   |   |
| **Net subject to amortization:** |       |         |       |           |       |   |   |   |   |   |   |   |   |
| Trademarks and patents           |       | —       |       | —         |       | 7 |   | — |   | — |   | — |   |
|                             | ** ** | **$**        | **2,616**  | ** **     | **$**      | **542** | ** ** | **$** | **3,165** | ** ** | **$** | **3,046** | ** ** | **$** | **1,485** | ** ** | **$** | **4,531** | ** ** |

 

Aggregate amortization expense for the above intangible assets amountedto $2,782, $2,380 and $2,596 for the years ended December 31, 2005, 2004and 2003, respectively.

 

The estimated aggregate amortization expense for the next five years isas follows:

 
| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2006       |       | $          | 1,213      |   |
| 2007       |       | 671        |       |
| 2008       |       | 671        |       |
| 2009       |       | 408        |       |
| 2010       |       | 195        |       |
|            |            |            |            |  |

 

**10.**                     Loans

** **

As of December 31, 2005 and 2004, loans werecomprised of:

 
| ** **                | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **Short-term**             | ** ** | **Long-term**              | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
|                      |       |                       |       |                       |       |   |   |   |   |
| Senior Notes due 2005 (a) |       | $                          | 569        |                       | $          | 47,764 |   | $ | 7,846 |   | $ | 40,749 |   |
| Bank loans (b)            |       | 26,002                     |       | 6,545                      |       | 11,321 |   | — |   |
| Accrued interest          |       | 265                        |       | —                     |       | 307 |   | 311 |   |
|                      |       |                       |       |                       |       |   |   |   |   |
|                      |       | $                          | 26,836     |                       | $          | 54,309 |   | $ | 19,474 |   | $ | 41,060 |   |

 

----

a)                            On November 26, 1996, Tevecap raised funds in theforeign market through a private placement of Senior Notes amounting to$250,000. These Senior Notes matured on November 26, 2004 and wereguaranteed by certain subsidiaries of Tevecap (see Note 25). Interest accruesat 12.625% per annum and is payable on May 25 and November 25 of eachyear commencing on May 25, 1997.

 

F-22

----

 

On July 28, 1999, the subsidiary TVACommunications Ltd. repurchased in the foreign market $201,978 aggregateprincipal amount of Tevecap’s Senior Notes. At the time the Senior Notes wererepurchased, Tevecap obtained consent from the remaining note holders to eliminatesignificant restrictive covenants of the Senior Notes agreements.

 

On October 13, 2004, Tevecap filed a registrationstatement with the United States Securities and Exchange Commission to exchangethe original Senior Notes due November 26, 1996, amounting to $48,022, fornew 12.625% Senior Notes due 2009. On November 26, 2004, the originalmaturity date of the senior notes, the exchange offer was still outstanding, asa result of which the Company did not pay the outstanding principal amount ofsuch notes, although the Company paid interest accrued until such date. The newNotes are payable in three annual installments commencing November 26,2007. The new Senior Notes are denominated in U.S. dollars and accrue interestat a rate of 12.625% per year, with interest payable on May 26 and November 26.

 

On December 21, 2004, the Company completed theexchange offer with the participation of 85% of the Note holders, which heldNotes amounting to $40,749 as of December 31, 2005 and 2004. The new Notesare jointly and severally guaranteed by certain subsidiaries of Tevecap (seeNote 25). One of the conditions for the exchange of the notes was that thematurity of the $201,978 in Notes held by the subsidiary TVA CommunicationsLtd., should be modified on terms less favorable than the terms offered to theother noteholders. On March 3, 2005, the renegotiation of the Notes heldby TVA Communications Ltd. was registered with the SEC, retroactive to November 26,2004, changing the maturity to November 26, 2011, with annual interestbased on LIBOR plus 3%, limited to 12.625% per year, above exchange variation,to be paid upon the payment of the principal of the debt.

 

**On November 7,2005, an exchange offer proposal was filed with SEC (US- Securities andExchange Comission) for the residual balance in the amount of $ 7,008. Theconditions for this renegotiation were similar to those determined on October 13,2004.**

** **

**On September 13,2005, the Company paid $ 265 to the creditors for which renegotiation had notbeen made. This amount is available to the creditors in an account of thedepositary bank, JP Morgan Trust Bank.**

** **

**Short-termfinancing in local currency is collateralized by 76.54% of receivables of theCompany’s subsidiaries as of December 31, 2005.**

** **

**F-23**

----

** **

b)                           Bank loans are comprised of the following:

 
| ** **                                                                                                                                                         | ** ** | **2005**       | ** ** | **2004**      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|---------------|------------|
| ** **                                                                                                                                                         | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** |
|                                                                                                                                                               |       |           |       |          |       |   |   |   |   |
| Banco  Daycoval – revolving credit facility, interest of per month 1.00% plus CDI  rate per month as of December 31, 2004.                               |       | $              | —     |          | —     |   | $ | 755 |   | — |   |
| Banco ABC do  Brasil S.A. - interest of 0.53% L-T and 0.60%  S-T. plus CDI rate per month 1.39% as of December 31, 2005 (1.97% as of December 31,  2004) |       | 5,222          |       | 2,563         |       | 2,858 |   | — |   |
| Banco Safra –  annual interest 0.37% per month plus CDI rate per month 1.39% as of December 31,  2005. (2.15% as of December 31, 2004)              |       | 6,418          |       | —        |       | 3,649 |   | — |   |
| Banco  J.Safra – interest of 0.57% plus CDI rate per month 1.39% as of December 31,2005  (2.17% as of December 31, 2004)                            |       | 8,233          |       | —        |       | 3,416 |   | — |   |
| Banco Bic –  interest of 0.60% plus CDI rate per month 1.39% as of December 31,2005                                                                      |       | 2,138          |       | —        |       | — |   | — |   |
| Banco HSBC–interest  of 0.64% plus CDI rate per month 1.39% as of December 31, 2005 (2.01% as  of December 31, 2004)                                |       | 2,176          |       | —        |       | 604 |   | — |   |
| Banco GM –  interest of 1.77% per month                                                                                                                       |       | 34             |       | 15            |       | — |   | — |   |
| Banco Pine –  interest of 1.10% per month                                                                                                                     |       | 823            |       | 2,198         |       | — |   | — |   |
| Banco ABC do  Brasil S.A. interest of 1.14% per month                                                                                                              |       | 958            |       | 1,769         |       | — |   | — |   |
| Banco  Santander - (Secured account)                                                                                                                               |       | —         |       | —        |       | 6 |   | — |   |
| Banco  Bradesco – (Secured account)                                                                                                                           |       | —         |       | —        |       | 33 |   | — |   |
|                                                                                                                                                               |       |           |       |          |       |   |   |   |   |
| Total                                                                                                                                                              |       | $              | 26,002     |          | 6,545      |   | $ | 11,321 |   | — |   |

 

**11.**                     Taxes payable other thanincome taxes

** **

As of December 31, 2005 and 2004, taxes payableother than income taxes were comprised of:

 

F-24

----

 
| ** **              | ** ** | **2005**       | ** ** | **2004**      | ** ** |
|-------------------------|------------|----------------|------------|---------------|------------|
| ** **              | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** |
|                    |       |           |       |          |       |   |   |   |   |
| Tax on revenue (COFINS) |       | $              | 458        |          | —     |   | $ | 311 |   | — |   |
| VAT state tax (ICMS)    |       | 3,473          |       | 3,906         |       | 2,722 |   | 3,714 |   |
| Tax on revenue (PIS)    |       | 101            |       | —        |       | 49 |   | — |   |
| Other                   |       | 402            |       | —        |       | 380 |   | — |   |
|                    |       |           |       |          |       |   |   |   |   |
|                    |       | $              | 4,434      |          | 3,906      |   | $ | 3,462 |   | 3,714 |   |

 

On July 28, 1999, as a result of the agreementfor sale of 100% in Galaxy Brasil Ltda. and TVA Banda C Ltda., the Companyassumed liabilities referring to taxes that were accrued as a charge on thegain recognized on the sale of these companies. The balance related to thesetaxes as of December 31, 2005 is $4,728 classified as ICMS ($4,786 as of December 31,2004). The payment terms of these taxes were approved in 2004 under which thebalance will be settled in 54 monthly payments commencing in May, 2004. Thebalance classified as long-term amounted to $3,143 at December 31, 2005.

 

**12. Tax recovery program (REFIS) and specialinstallment program (PAES)**

 

**On April 5, 2000, Tevecap S.A. and its subsidiariesopted for the Government’s Tax Recovery Program (REFIS), implemented by Decree No. 3,342of January 25, 2000, later converted into Law No. 9,964 of April 10,2000. In addition, the indirect subsidiary TVA Sistema de Televisão S.A. usedits credits for tax loss carryforwards amounting to $6,497 for amortization ofinterest and fines.**

** **

In guarantee of the payment of the debtsincluded in the program, the subsidiary pledged property items as collateral inthe amount of $15,016.

 

On July 31, 2003, certain subsidiariesof the Company, including TVA Sistema de Televisão S.A., through a protocolfiled with the Federal Revenue Service, opted for the Federal Tax FinancingProgram (PAES), established by Law No. 10,684 of May 30, 2003.

 

The main reasons for this option were theextension of maturity dates, refinancing through PAES (Special InstallmentProgram), inclusion of new taxes, and the use of TJLP (long-term interest rate)for monetary restatement.

 

Management believes that this payment will bemade in approximately 111 monthly installments, adjusted by TJLP.

 

F-25

----

 

As of December 31, 2005 and 2004, thisaccounts payable is segregated between short and long-term as follows:

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Short-term |       | 1,963    |       | 1,581    |       |
| Long-term  |       | 15,697   |       | 14,080   |       |
|       |       |     |       |     |       |
| Total      |       | 17,660   |       | 15,661   |       |

 

The net effect of the amounts recognized inresults for the year period ended December 31, 2003, arising from theoption for the PAES (Special Installment Program), is $5,029 and was recordedas operating expenses. (tax recovery program).

 

**13.**                     Other operating (income)expense, net

** **
| ** **                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |     |       |
| Write-off of assets related to cancellation  of subscriptions |       | $        | 3,519      |     | $          | 2,117    |       | $ | 2,790 |   |
| Loss on disposal of property and equipment                    |       | 771      |       | 384      |       | 1,363    |       |
| Loss on sale of obsolete inventories                          |       | 1,172    |       | 480      |       | 359      |       |
| Provision for inventory obsolescence                          |       | 1,947    |       | 49       |       | 111      |       |
| Other                                                         |       | (480     | )          | 285      |       | (952     | )          |
|                                                          |       | $        | 6,929      |     | $          | 3,315    |       | $ | 3,671 |   |

 

**14.**                     Other costs

** **
| ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |     |       |
| Telephone and internet                 |       | $        | 2,211      |     | $          | 1,110    |       | $ | 1,170 |   |
| Collection charges                     |       | —   |       | —   |       | —   |       |
| Outside services – legal entities |       | 2,420    |       | 669      |       | 1,075    |       |
| Power sources                          |       | 1,012    |       | 855      |       | 870      |       |
| External network maintenance           |       | 1,414    |       | 1,169    |       | 802      |       |
| Rentals                                |       | —   |       | —   |       | 326      |       |
| Ancillary and consumable materials     |       | 196      |       | 460      |       | 154      |       |
| Outsourced telemarketing services      |       | —   |       | —   |       | —   |       |
| Advertising and promotion costs        |       | —   |       | —   |       | —   |       |
| Other                                  |       | 611      |       | 536      |       | 1,553    |       |
|                                   |       |     |       |     |       |     |       |
|                                   |       | $        | 7,864      |     | $          | 4,799    |       | $ | 5,950 |   |

 

F-26

----

 

**15.**                     Other nonoperating(income) expense, net

** **
| ** **                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |     |       |
| Net gain on sale of equity method  investments          |       | —   |       | (8,443   | )          | —   |       |
|                                                    |       |     |       |     |       |     |       |
| Permanent impairment loss on equity method  investments |       | —   |       | —   |       | 5,897    |       |
|                                                    |       |     |       |     |       |     |       |
|                                                    |       | $        | —     |     | $          | (8,443   | )          | $ | 5,897 |   |
|                                                         |            |          |            |          |            |          |            |  |  |  |

 

On December 1, 2003, the Company receivedadditional shares in Paraná Participações Ltda., TV a Cabo Guarapuava Ltda. andTV Jacarandá Ltda. in exchange for accounts receivables from these entitieswhich increasing its ownership interest to 65,44%, 24,71% and 16,44%,respectively. The Company subsequently recognized impairment losses relating tothese investments amounting to $5,897.

 

As of December 31, 2003**,** TVA also held a minority interest in each of Canbras TVACabo Ltda., TV Cabo Santa Branca Comércio Ltda. and Canbras Paraná Ltda.(collectively, “Canbras TVA”), which together provide cable television servicesto an additional 19 cities with a total population of 2.9 million. In October 2003,the Company entered into an agreement to sell its entire equity interest inCanbras TVA to Horizon Cablevision do Brasil S.A. Anatel approval was receivedon June 16, 2004, at which time the sale was recognized. The proceeds fromthe sale were paid directly to Abril Comunicações S.A. in 2003, the Company’sprincipal shareholder for which the Company recognized a receivable from itsshareholder. In connection with the sale, the Company recognized a gain ofapproximately $8,811 during 2004.

 

On September 27, 2004, ANATEL – Agência Nacionalde Telecomunicações approved the contract dated October 08, 2003 for thesale of the Company’s investments in Paraná Participações Ltda, ZereldaParticipações S/C Ltda and its wholly subsidiary TVA Cabo Guarapuava Ltda, andTV Jacarandá Ltda. The net loss on sale of these investment recorded in 2005amounted to $244.

 

**16.**                     Commitments

** **

As of December 31, 2005, the Company had purchaseobligations for programming costs through the year 2009 and minimum paymentsdue under operating leases as follows:

 

F-27

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| ** ** | ** ** | **Programming  costs** | ** ** | **Operating  leases** | ** ** |
|------------|------------|------------------------|------------|-----------------------|------------|
| 2006       |       | 34,220                 |       | 6,928                 |       |
| 2007       |       | 25,519                 |       | 6,319                 |       |
| 2008       |       | 19,254                 |       | 4,918                 |       |
| 2009       |       | 8,142                  |       | 2,694                 |       |
| 2010       |       | —                 |       | 1,314                 |       |
| Total      |       | $87,135                |       | $22,173               |       |

 

**17.**                     Redeemable Stock

** **

As of December 31, 2005 and 2004, 9.5%of the common stock of Tevecap was subject to an Event Put, i.e., “triggeringevent” under the Stockholders’ Agreement pursuant to which each of thestockholders (other than Abril) may, in certain circumstances, demand thatTevecap purchase all or a portion of its shares, unless the shares of capitalstock held by such stockholders becomes publicly registered, listed or traded.In addition, as of December 31, 2005 and 2004, 5.8% of the common stock ofTevecap (27,930 thousand stocks) are also subject to a Time Put whereby,pursuant to the Stockholders’ Agreement, the Company’s shareholder FalconInternational Communications (“Falcon”) may demand that Tevecap buy all ora portion of Falcon’s shares of capital stock held in Tevecap if such sharesare not publicly registered, listed or traded by September 22, 2002. On July 15,2005, the Stockholders Agreement was amended to change the term of the time putto September 22, 2006.

 

For purposes of the Event Put, triggeringevents are: (i) the amount of the capital stock held by a stockholder withan Event Put exceeds the amount allowed under any legal restriction to whichsuch stockholder may be subject (“Regulatory Put”); (ii) a breachwithout cure within a designated period by certain specifiedentities/individuals of any representation, warranty, covenant or duty made orowed pursuant to certain agreements; (iii) a breach without cure within adesignated period by Abril of the Abril Credit Facility; (iv) thecontrolling shareholder of Abril ceases to directly or indirectly hold aspecified percentage of Tevecap without the approval of the stockholders orceases to control the voting capital stock held by its affiliates representing50% or more of the voting capital stock of Tevecap; (v) the ServiceAgreement as amended, among Tevecap, TV Show Time, TVA Brasil and Abril ceasesto be valid or effective or TV Show Time, TVA Brasil and Abril is liquidated ordissolved or files voluntarily, or has filed against it involuntarily, anypetition in bankruptcy; or (vi) another stockholder exercise an Event Putother than a Regulatory Put.

 

The Company’s management believes that theprobability of occurrence of the triggering events, which would permit any ofits shareholders to exercise their Event Put, is remote.

 

F-28

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However, Tevecap has public debt in theUnited States of America, and which therefore is required to register itssecurities with the United States Securities and Exchange Commission, isrequired for accounting purposes to present redeemable equity securitiesseparately from shareholders’ equity, if redemption of such securities isbeyond the control of the registrant. That presentation is required even if thelikelihood of redemption is remote.

 

The common stock subject to the Time Put isredeemable at fair value as determined by appraisal. In the event Tevecap doesnot have the funds to satisfy its payment obligations under the Time Put, then,subject to a number of conditions, Tevecap may deliver to Falconpromissory notes payable three years from the issue date thereof. In the eventTevecap is unable to satisfy its payment obligations under these promissorynotes, Falcon may be entitled, subject to a number of conditions, to sellits shares of Tevecap to a third party.

 

On December 19, 2003 Abril ComunicaçõesS.A. acquired the common stock of the Company held by Hearst ABC Video Servicesrepresenting 8.1%, these ownership interest in the Company. As a result of thisacquisition, the redemption features related to these shares were removed.Therefore, the amount related to the redeemable common stock that was held byHearst was reclassified back to shareholders equity.

 

**18.**                     Capital Stock

** **

The capital stock of the Company as of December 31,2005 and 2004, held entirely by Brazilian stockholders, is comprised of485,220,440 common shares.

 

On April 20, 2005, Editora Abril S.A.restructured a significant portion of its financial indebtedness with certainof its financial creditors, including the terms of the non-convertibledebentures issued by Editora Abril S.A. on October 19, 2001, referred toas the Restructuring. The total amount of the Restructuring is approximatelyR$485.9 million (equivalent to U.S.$ 228.8 million, using the exchange rate of R$2.1236/US$ 1.00 as in effect on April 20, 2005). The Restructuring provides forcertain restrictions and covenants, including in relation to sale of assets,granting of guarantees and financial transactions. As a guarantee of certainobligations of Editora Abril S.A. in connection with the non-convertibledebentures, Abril Comunicações S.A. granted in favor of the debenture holders apledge (caução) of its shares in Tevecap, which represents 90.45% of ouroutstanding common shares. The debentures of Editora Abril S.A. will mature on December 31,2008. Under the terms of the Restructuring, in the event Abril ComunicaçõesS.A. becomes the owner, directly or indirectly, of all the capital stock ofTevecap, Abril Comunicações S.A. is obligated to grant a pledge (caução) of allof its Tevecap shares in favor of the debenture holders.

 

F-29

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The Company’s bylaws provide that stockholdersare entitled to a minimum dividend of 25% of annual net income in accordancewith Brazilian Corporate Law, after deduction of the allocation to the legalreserve.

 

Additionally, Law No. 9,249/95introduced the option of paying interest on capital, calculated based on theTJLP in effect for the period, which may also be considered as part ofthe minimum mandatory dividend.

 

**19.**                     Accrual forcontingencies

** **

The Company records provisions for contingences for probable estimablelosses based on the opinion of management and external legal counsel.

 

19.1.                                  The accrued amountsof the contingencies under litigation, as of December 31, 2005 and 2004,are as follows:

 
| ** **                                | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **Long-term** | ** ** | **Long-term** | ** ** |
| ** **                                | ** ** | ** **    | ** ** | ** **    | ** ** |
| Labor lawsuits                            |       | 2,740         |       | 4,662         |       |
| Civil lawsuits                            |       | 199           |       | 174           |       |
| Income tax                                |       | 10,566        |       | —        |       |
| Social contribution tax                   |       | 3,865         |       | —        |       |
| VAT state tax (ICMS)                      |       | 23,246        |       | 9,370         |       |
| Social security compulsory deposit (FGTS) |       | 19            |       | —        |       |
| Other                                     |       | 2,555         |       | 338           |       |
|                                      |       |          |       |          |       |
|                                      |       | $             | 43,190     |          | $          | 14,544 |   |
|                                           |            |               |            |               |            |  |  |

 

a)                            Laborlawsuits

 

These are part of various labor claimsagainst certain subsidiaries, especially due to terminations occurred in thenormal course of their businesses. The most frequent claims refer toproportional vacation pay, salary differences, night shift premiums, overtime,social charges, among others. There are no individual claims of significantamounts.

 

F-30

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b)                           Civil lawsuits

** **

Certain subsidiaries are defendants in civilclaims at various legal levels, there are no individual claims of significantamounts.

 

**c)**                            Income tax

** **

On December 18, 2003 for the year 1998 and onMarch 11, 2004 for the years 1999 and 2001, the Company was served a taxassessment notice demanding the payment of income tax ($10,566 in 2005, $8,667in 2004) and the social contribution tax ($3,865 in 2005, $3,160 in 2004) forthe years ended December 31, 1998, 1999 and 2001, relating to thedeductibility of financial expenses arising from exchange variation ondividends receivable, profits of foreign subsidiaries and uncollected intereston loans granted to its subsidiaries. During 2005, the Company recorded aprovision for this contingency in the amount of $ 14,431, since the likelihoodof loss was changed from possible to probable based on the opinion of the Company’sexternal legal counsel.

 

**d)**                           ICMS

** **

**d.1)**         OnNovember 5, 1998, in response to a fiscal inquiry, the Company filed a lawsuitchallenging the constitutionality of ICMS on cable television services. Theamount of the contingency, which was fully provisioned as of December 31, 2005,is $11,191 ($8,611 in 2004), and the Company has made fiscal deposits amountingto $8,264 in 2005 ($6,251 in 2004) related to this contingency as described inNote 19.2.

** **

d.2)         On January 23, 2001, TVASistema de Televisão S.A. consulted with the Brazilian tax authorities as towhether ICMS should be applied to advertising revenues in response to a fiscalinquiry. Prior to 2005, the probability of loss relating to this matter wasremote. During the year ended December 31, 2005, the Company recorded aprovision amounting to $12,055 based on the opinion of its external legalcounsel, which determined that the likelihood of loss relating to this itemchanged from remote to probable.

 

F-31

----

 

 

19.2.               Withrespect to certain claims for which provisions have been recorded. TheCompany’s subsidiaries have judicial deposits as of December 31, 2005 and 2004,as follows:

 
| ** **               | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------|------------|---------------|------------|---------------|------------|
| ** **               | ** ** | **Long-term** | ** ** | **Long-term** | ** ** |
|                     |       |          |       |          |       |
| Labor  lawsuits          |       | 1,510         |       | 1,191         |       |
| Civil  lawsuits          |       | 737           |       | 633           |       |
| Income tax               |       | 119           |       | 0             |       |
| Social  security (INSS)  |       | 335           |       | 97            |       |
| Tax on  revenue (PIS)    |       | 32            |       | 23            |       |
| Tax on  revenue (COFINS) |       | 59            |       | 39            |       |
| VAT state  tax (ICMS)    |       | 8,264         |       | 6,251         |       |
| Other                    |       | 831           |       | 526           |       |
|                     |       | $             | 11,887     |          | $          | 8,760 |   |
|                          |            |               |            |               |            |  |  |

 

19.3.               Additionally,fixed assets in the amount of $10,028 as of December 31, 2005 ($14,248 in2004), consolidated amounts, were offered as collateral in connection with thejudicial proceedings described above.

 

19.4.               Followingare the contingencies for which the Company has not recorded a provision sincethe likelihood of loss is possible:

 
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Civil  contingency (a) |       | 6,267    |       | 2,041    |       |
| Labor  contingency (b) |       | 4,952    |       | 26,802   |       |
|                   |       |     |       |     |       |
|                   |       | 11,219   |       | 28,843   |       |

 

----

a)         Civilcontingencies

Certain subsidiaries are defendants in civil claims at various legallevels refers to the sum of many requests for indemnities for pain andsuffering and/or material damages and claim for occupational damages. There areno individual claims of significant amounts needing specific disclosure.

 

F-32

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b)        Taxcontingencies - 

Tax contingencies for which no provisions have been recordedprincipally related to VAT state tax (ICMS). In 2004, the amount includes a balance relating to a taxassessment notice on income tax and the social contribution in the amount of$13,412 as described in Note c, the Company recorded a provision for this itembased on a change in the probability of loss during the year ended December 31,2005.

 

c)         ECAD

The Company’s operating companies are currently defending a lawsuitbrought by the Escritório Central de Arrecadação e Distribuição (CentralCollection and Distribution Office, or “ECAD”), entity authorized to enforcecopyright laws relating to musical works. ECAD filed a lawsuit in 1993 againstall pay-television operators in Brazil seeking to collect royalty payments inconnection with musical works broadcast by the operators. ECAD is seeking ajudgment award of 2.55% of all past and present revenues generated by theoperators. The suits are currently being submitted to the Superior Tribunal deJustiça in order to determine whether ECAD is entitled to benefit from thecopyrights relating to musical works broadcast on pay television. Suits werefiled against TVA in the 1 Vara Cível Forum Central de Curitiba (against TVASul) and the 14 Vara Cível Forum Central de São Paulo (against TVA Brasil). Thesuit against TVA Sul has been initially ruled in TVA’s favor, while the suitagainst TVA Brasil is currently awaiting judgment. The maximum potential lossrelating to this lawsuit amounted to $471 and $377 at December 31, 2005 and2004, respectively. Based on the opinion of its attorneys, management of TVAbelieves that the likelihood of loss is possible related to these lawsuits. Inthe event the Company does not prevail in connection with these proceedings,however, the consolidated financial position of the Company may be materiallyadversely affected.

 

**20.**                     Pensionplan

 

In April 1996, the Company became a co-sponsor of the privatepension entity named Abrilprev Sociedade de Previdência Privada (“Abrilprev”),the primary objective of which is to grant employees benefits other than thoseprovided by Social Security. The plan is optional to all employees of thesponsoring entities. Abrilprev operates as a Defined Contribution Plan. Companycontributions are made based on a fixed percentage applied to the payroll ofthe sponsoring entities based on actuarial calculations. Contribution expensesamounted to $45 for the year ended December 31, 2005 ($33 in 2004 and $32 in2003).

 

F-33

----

 

**21.**                     AbrilHealth Care Plan

 

In February 1996, the Abril Health Care Plan, AssociaçãoAbril de Benefícios (the “Health Care Plan”), was created to provide healthcare to Abril companies’ employees and their dependents. Both the companiesforming part of the Abril Group and the employees thereof contribute monthly toAssociação Abril de Benefícios, the company responsible for management of theplan.

 

In 2005, contributions made by Tevecap and certain affiliatesof Associação Abril de Benefícios amounted to $589 ($461 in 2004 and $487 in2003).

 

**22.**                     Valuationand qualifying accounts and reserves

 
| ** **                       | ** ** | **Provision** | ** ** | **Provision**    | ** ** | **Deferred**  | ** ** | ** **        | ** ** | **Provision**    | ** ** |
|----------------------------------|------------|---------------|------------|------------------|------------|---------------|------------|-------------------|------------|------------------|------------|
| ** **                       | ** ** | **for**       | ** ** | **for**          | ** ** | **taxation**  | ** ** | **Accrual**       | ** ** | **for**          | ** ** |
| ** **                       | ** ** | **doubtful**  | ** ** | **inventory**    | ** ** | **valuation** | ** ** | **For**           | ** ** | **equipment**    | ** ** |
| ** **                       | ** ** | **accounts**  | ** ** | **obsolescence** | ** ** | **allowance** | ** ** | **contingencies** | ** ** | **obsolescence** | ** ** |
|                             |       |          |       |             |       |          |       |              |       |             |       |
| Balance as  of December 31, 2002 |       | $             | 3,346      |             | $          | 237           |       | $                 | 67,166     |             | $          | 14,781 |   | $ | 2,184 |   |
| Additions                        |       | 1,360         |       | —           |       | 25,641        |       | —            |       | 2,790            |       |
| Deductions                       |       | —        |       | —           |       | —        |       | (6,076            | )          | —           |       |
| Effect of  exchange rate         |       | (1,458        | )          | 26               |       | —        |       | 2,567             |       | 651              |       |
| Balance as  of December 31, 2003 |       | 3,248         |       | 263              |       | 92,807        |       | 11,272            |       | 5,625            |       |
| Additions                        |       | 1,414         |       | 368              |       | 21,842        |       | 5,432             |       | 2,117            |       |
| Effect of  exchange rate         |       | 432           |       | 61               |       | —        |       | 1,554             |       | 691              |       |
| Balance as  of December 31, 2004 |       | 5,094         |       | 692              |       | 114,649       |       | 18,258            |       | 8,433            |       |
| Additions                        |       | 385           |       | 1,947            |       | 25,220        |       | 25,362            |       | 3,519            |       |
| Deductions                       |       | —        |       | —           |       | —        |       | —            |       | —           |       |
| Effect of  exchange rate         |       | 698           |       | 172              |       | —        |       | 3,476             |       | 2,281            |       |
| Balance as  of December 31, 2005 |       | $             | 6,177      |             | $          | 2,811         |       | $                 | 139,869    |             | $          | 47,096 |   | $ | 14,233 |   |

 

**23.**                     Recentaccounting pronouncements

 

In November 2004, the FASB issued SFAS 151“Inventory Costs – an Amendment of ARB No.43, Chapter 4”. This statementclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). This Statementrequires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, this Statementrequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. TheCompany will apply this statement, if applicable, from fiscal periods beginningafter June 15, 2005.

 

F-34

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In December 2004, the FASB issued SFAS 153“Exchange of Nonmonetary Assets – an Amendment of APB Opinion No.29”. Thisstatement addresses the measurement of exchanges of nonmonetary assets byeliminating the exception from fair value measurement for nonmonetary exchangesof similar productive assets and replacing it with an exception for exchangesthat do not have commercial substance. The Company will apply this statement,if applicable, from fiscal periods beginning after June 15, 2005.

 

In March 2005, the FASB issued FASBInterpretation No. 47 “Accounting for Conditional Asset RetirementObligations”, which refers to legal obligations to perform an asset retirementactivities. The Company does not expect FASB Interpretation No. 47 to have asignificant impact on the financial position, results of operations or cashflows.

 

In March 2006, the FASB issued SFAS No. 156Accounting for Servicing of Financial Assets. SFAS 156 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities, which establishes, among other things, the accounting for allseparately recognized servicing assets and servicing liabilities. SFAS 156amends Statement 140 to require that all separately recognized servicing assetsand servicing liabilities be initially measured at fair value, if practicable.SFAS 156 permits, but does not require, the subsequent measurement ofseparately recognized servicing assets and servicing liabilities at fair value.An entity that uses derivative instruments to mitigate the risks inherent inservicing assets and servicing liabilities is required to account for thosederivative instruments at fair value. Under this Statement, an entity can electsubsequent fair value measurement to account for its separately recognizedservicing assets and servicing liabilities. By electing that option, an entitymay simplify its accounting because this Statement permits income statementrecognition of the potential offsetting changes in fair value of thoseservicing assets and servicing liabilities and derivative instruments in thesame accounting period. An entity shall adopt this Statement as of thebeginning of its first fiscal year that begins after September 15, 2006.Earlier adoption is permitted as of the beginning of an entity’s fiscal year,provided the entity has not yet issued financial statements, including interimfinancial statements, for any period of that fiscal year.

 

**24.**                     Segments

 

Segment information has been prepared inaccordance with SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information.”  The Company’sreportable segments are determined based on products and services provided byeach segment:

 

a.               PayTv – programming packages consisting of 15 to 107 television channels;

 

b.              Internet– high speed broadband internet access; and

 

The Company evaluates segment performance andallocates resources based on several factors, of which gross revenues, directoperating and SG&A expenses and depreciation and

 

F-35

----

 

amortization are the primary financial measures. Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies.

 

F-36

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| **2005**                                                              | ** ** | **Pay Tv** | ** ** | **Internet** | ** ** | **TOTAL** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------|------------|-----------|------------|
|                                                                  |       |       |       |         |       |      |       |
| Gross revenues                                                        |       | 121,178    |       | 17,986       |       | 139,164   |       |
| Taxes on revenue                                                      |       |       |       |         |       |      |       |
| Direct operating expenses and SG&A expenses                       |       | 93,288     |       | 6,313        |       | 111,945   |       |
| Depreciation and amortization                                         |       | 26,522     |       | 3,014        |       | 29,536    |       |
| Other operating expense, net                                          |       | —     |       | —       |       | 6,929     |       |
| Loss from operations                                                  |       | —     |       | —       |       | (9,246    | )          |
| Interest income                                                       |       | —     |       | —       |       | (1,010    | )          |
| Interest expense                                                      |       | —     |       | —       |       | 33,182    |       |
| Foreign currency transaction (income) loss, net                       |       | —     |       | —       |       | (6,379    | )          |
| Loss before income taxes, equity in affiliates and minority  interest |       | —     |       | —       |       | (35,039   | )          |
| Capital expenditures                                                  |       | 23,919     |       | 2,658        |       | 26,577    |       |
| Total assets                                                          |       | 116,602    |       | 2,380        |       | 118,853   |       |

 
| **2004**                                                              | ** ** | **Pay Tv** | ** ** | **Internet** | ** ** | **TOTAL** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------|------------|-----------|------------|
|                                                                  |       |       |       |         |       |      |       |
| Gross revenues                                                        |       | 91,784     |       | 11,313       |       | 103,097   |       |
| Taxes on revenue                                                      |       |       |       |         |       |      |       |
| Direct operating expenses and SG&A expenses                       |       | 72,373     |       | 4,089        |       | 76,462    |       |
| Depreciation and amortization                                         |       | 22,319     |       | 2,037        |       | 24,356    |       |
| Other operating expense, net                                          |       | —     |       | —       |       | 3,315     |       |
| Loss from operations                                                  |       | —     |       | —       |       | (1,036    | )          |
| Interest income                                                       |       | —     |       | —       |       | (701      | )          |
| Interest expense                                                      |       | —     |       | —       |       | 21,418    |       |
| Foreign currency transaction (income) loss, net                       |       | —     |       | —       |       | (3,561    | )          |
| Loss before income taxes, equity in affiliates and minority  interest |       | —     |       | —       |       | (9,749    | )          |
| Capital expenditures                                                  |       | 11,073     |       | 2,012        |       | 13,085    |       |
| Total assets                                                          |       | 101,040    |       | 1,643        |       | 102,564   |       |

 
| **2003**                                                              | ** ** | **Pay Tv** | ** ** | **Internet** | ** ** | **TOTAL** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------|------------|-----------|------------|
|                                                                  |       |       |       |         |       |      |       |
| Gross revenues                                                        |       | 83,975     |       | 7,397        |       | 91,372    |       |
| Taxes on revenue                                                      |       |       |       |         |       |      |       |
| Direct operating expenses and SG&A expenses                       |       | 63,755     |       | 7,852        |       | 71,607    |       |
| Depreciation and amortization                                         |       | 22,143     |       | 1,540        |       | 23,683    |       |
| Other operating expense, net                                          |       | —     |       | —       |       | 3,671     |       |
| Loss from operations                                                  |       | —     |       | —       |       | (12,618   | )          |
| Interest income                                                       |       | —     |       | —       |       | (1,511    | )          |
| Interest expense                                                      |       | —     |       | —       |       | 18,135    |       |
| Foreign currency transaction (income) loss, net                       |       | —     |       | —       |       | (11,019   | )          |
| Loss before income taxes, equity in affiliates and minority  interest |       | —     |       | —       |       | (24,120   | )          |
| Capital expenditures                                                  |       | 11,208     |       | 15           |       | 11,223    |       |
| Total assets                                                          |       | 106,438    |       | 1,493        |       | 107,931   |       |

 

F-37

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**25.       Financial information for subsidiary guarantors and non-guarantorsubsidiaries**

 

Tevecap conducts a significant portion of its businessthrough subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutionalbuyers in November 1996 are jointly and severally, irrevocably and fully andunconditionally guaranteed on a senior basis by all of Tevecap’s direct andindirect subsidiaries except for TVA Communications Aruba N.V., TVA ChannelsLtda., Rede Ajato Ltda., Ypê Radio and Televisão Ltda., TVA Inc, TVA OverseasLtd. and TVA TCG Sistema de Televisão Porto Alegre.

 

Presented below is condensed consolidating financialinformation for: i) Tevecap on a parent company only basis; ii) the WhollyOwned Guarantor Subsidiaries; iii) the Majority-Owned Guarantor Subsidiaries;iv) Non-guarantor Subsidiaries; v) Eliminations; and vi) Consolidated TevecapS.A. and subsidiaries.

 

The equity method has been used by Tevecap, the Wholly OwnedGuarantor Subsidiaries and the Majority-Owned Guarantor Subsidiaries withrespect to investments in their subsidiaries.

 

The following sets forth theWholly Owned Guarantor Subsidiaries, the Majority-Owned Guarantor Subsidiariesand the Non-Guarantor Subsidiaries:

 

**a)     Wholly-Owned Guarantor Subsidiaries**

 

•                  TVACommunications Ltd.

 

•                  Comercial Cabo TV São PauloLtda.

 

•                  TVA Sistema de Televisão S.A.

 

•                  TVASul Paraná Ltda.

 

**b)     Majority-Owned Guarantor Subsidiaries**

 

•                  CCS Camboriú Cable System deTelecomunicações Ltda.

 

**c)     Non-Guarantor Subsidiaries**

 

**•**                  TVACommunications Aruba N.V.

 

**•**                  Rede Ajato Ltda.

 

•                  TVAOverseas Ltd.

 

•                  TVA Inc

 

•                  TVA Continental S.A.

 

•                  TVA Pelicano S.A.

 

F-38

----

 

•                  TVA Network Participações S.A.

 

Separate financial statements have been presented for CCSCamboriú Cable System Telecomunicações Ltda. as of December 31, 2005 and 2004 andfor each of the three years in the period ended December 31, 2005.

 

F-39

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**Consolidated Balance Sheetsas of December 31, 2005**

 
| ** **                          | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                          | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Current assets                      |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents          |       | $           | 5          |             | $          | 8,937            |       | $                | 810        |             | $          | —           |       | $ | 1 |   | $ | 9,753 |   |
| Accounts  receivable, net           |       | 280         |       | 4,033            |       | 25               |       | 1,917            |       | (2,409           | )          | 3,846            |       |
| Inventories, net                    |       | —      |       | 8,381            |       | 97               |       | —           |       | —           |       | 8,478            |       |
| Recoverable  taxes                  |       | —      |       | 299              |       | 250              |       | 3                |       | —           |       | 552              |       |
| Prepaid and  other assets           |       | 8           |       | 1,090            |       | 681              |       | —           |       | (795             | )          | 984              |       |
| Other accounts  receivable          |       | —      |       | 82               |       | —           |       | —           |       | —           |       | 82               |       |
| Total current  assets               |       | 293         |       | 22,822           |       | 1,863            |       | 1,920            |       | (3,203           | )          | 23,695           |       |
|                                |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Property, plant  and equipment, net |       | —      |       | 69,562           |       | 2,077            |       | —           |       | 259              |       | 71,898           |       |
| Investments                         |       | (6,254      | )          | 1,404            |       | —           |       |             |       | 4,850            |       | —           |       |
| Intangible  assets, net             |       | 222         |       | 2,943            |       | —           |       | —           |       | —           |       | 3,165            |       |
| Recoverable taxes                   |       | —      |       | 35               |       | 6                |       | 40               |       | —           |       | 81               |       |
| Loans to related companies          |       | 67,738      |       | 31,420           |       | 187              |       | 54,260           |       | (145,478         | )          | 8,127            |       |
| Long-term investments               |       | —      |       | 355,434          |       | —           |       | —           |       | (355,434         | )          | —           |       |
| Prepaid expenses and other          |       | 407,807     |       | —           |       | —           |       | —           |       | (407,807         | )          | —           |       |
| Judicial deposits                   |       | —      |       | 11,473           |       | 414              |       | —           |       | —           |       | 11,887           |       |
| Total assets                        |       | $           | 469,806    |             | $          | 495,093          |       | $                | 4,547      |             | $          | 56,220           |       | $ | (906,813 | ) | $ | 118,853 |   |

 

F-40

----

 
| ** **                                       | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities and Shareholders’**           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Equity**                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Current Liabilities                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Loans                                            |       | $           | 569        |             | $          | 26,267           |       | $                | —     |             | $          | —           |       | $ |   |   | $ | 26,836 |   |
| Suppliers                                        |       | 0           |       | 10,184           |       | 40               |       | —           |       | (2,197           | )          | 8,027            |       |
| Film suppliers                                   |       | —      |       | 5,183            |       | 139              |       | —           |       | —           |       | 5,322            |       |
| Tax recovery  program                            |       | 541         |       | 1,328            |       | 94               |       | —           |       | —           |       | 1,963            |       |
| Taxes payable  other than income                 |       |        |       |             |       |             |       |             |       |             |       |             |       |
| taxes                                            |       | 1,759       |       | 2,617            |       | 57               |       | 1                |       | —           |       | 4,434            |       |
| Income tax  payable                              |       | —      |       | 279              |       | 307              |       | 3                |       | —           |       | 589              |       |
| Accrued payroll  and related                     |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Liabilities                                      |       | —      |       | 2,530            |       | 23               |       | —           |       | —           |       | 2,553            |       |
| Advances from  customers                         |       | —      |       | 5,815            |       | —           |       | —           |       | (404             | )          | 5,411            |       |
| Other accounts  payable                          |       | —      |       | 600              |       | 885              |       | —           |       | (603             | )          | 882              |       |
| Total current  liabilities                       |       | 2,869       |       | 54,803           |       | 1,545            |       | 4                |       | (3,204           | )          | 56,017           |       |
|                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Long-term liabilities                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Loans from  related companies                    |       | 57,698      |       | 130,282          |       | —           |       | 25,694           |       | (145,478         | )          | 68,196           |       |
| Loans and  financing                             |       | 403,191     |       | 6,552            |       | —           |       | —           |       | (355,434         | )          | 54,309           |       |
| Accrual for  contingencies                       |       | 14,476      |       | 28,571           |       | 143              |       | —           |       | —           |       | 43,190           |       |
| Taxes payable  other than income                 |       |        |       |             |       |             |       |             |       |             |       |             |       |
| taxes -  Parcelamento                            |       | 3,143       |       | 763              |       | —           |       | —           |       | —           |       | 3,906            |       |
| Tax recovery  program - PAES/REFIS               |       | 6,222       |       | 8,842            |       | 633              |       | —           |       | —           |       | 15,697           |       |
| Liability to  fund equity investee               |       | 93,076      |       | —           |       | —           |       | —           |       | (93,076          | )          | —           |       |
| Deferred income  tax                             |       | 45,988      |       | —           |       | (111             | )          | —           |       | —           |       | 45,877           |       |
| Other accounts  payable                          |       | —      |       | 348,140          |       | —           |       | 59,667           |       | (407,807         | )          | —           |       |
| Total long-term  liabilities                     |       | 623,794     |       | 523,150          |       | 665              |       | 85,361           |       | (1,001,795       | )          | 231,175          |       |
|                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Minority interest                                |       | —      |       | —           |       | —           |       | —           |       | 936              |       | 936              |       |
| Redeemable common stock                          |       | 30,380      |       | —           |       | —           |       | —           |       | —           |       | 30,380           |       |
|                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Shareholders’ deficit                       |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Common stock                                     |       | 445,313     |       | 284,076          |       | 1,860            |       | 15,068           |       | (300,291         | )          | 446,026          |       |
| Accumulated  other comprehensive income (loss)   |       | (23,020     | )          | 198,233          |       | (157             | )          | 1,179            |       | (194,595         | )          | (18,360          | )          |
| Accumulated  deficit                             |       | (609,530    | )          | (565,169         | )          | 634              |       | (45,392          | )          | 592,136          |       | (627,321         | )          |
| Total  shareholders’ deficit                |       | (187,237    | )          | (82,860          | )          | 2,337            |       | (29,145          | )          | 97,250           |       | (199,655         | )          |
| Total  liabilities and shareholders’ defict |       | $           | 469,806    |             | $          | 495,093          |       | $                | 4,547      |             | $          | 56,220           |       | $ | (906,813 | ) | $ | 118,853 |   |
|                                                  |            |             |            |                  |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

F-41

----

 

**Consolidated Statements of Operationsfor the year ended December 31, 2005**

 
| ** **                                                       | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                       | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Majority-** | ** ** | **Non -**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Owned**     | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Description**                                                  | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Guarantor** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                             |       |        |       |             |       |          |       |             |       |             |       |             |       |
| Gross revenues                                                   |       |        |       |             |       |          |       |             |       |             |       |             |       |
| Monthly  subscriptions                                           |       | $           | —     |             | $          | 123,085       |       | $                | 3,556      |             | $          | —           |       | $ | — |   | $ | 126,641 |   |
| Installation                                                     |       | —      |       | 2,054            |       | 32            |       | —           |       | —           |       | 2,086            |       |
| Advertising                                                      |       | —      |       | 3,644            |       | —        |       | —           |       | —           |       | 3,644            |       |
| Addtional  services                                              |       | —      |       | 6,851            |       | 69            |       | —           |       | (127             | )          | 6,793            |       |
| Taxes on  revenues                                               |       | —      |       | (19,458          | )          | (527          | )          | —           |       | —           |       | (19,985          | )          |
| Net revenue                                                      |       | —      |       | 116,176          |       | 3,130         |       | —           |       | (127             | )          | 119,179          |       |
| Direct operating expenses                                        |       |        |       |             |       |          |       |             |       |             |       |             |       |
| Payroll and  benefits                                            |       | —      |       | 3,710            |       | 65            |       | —           |       | —           |       | 3,775            |       |
| Programming                                                      |       | —      |       | 29,462           |       | 1,058         |       | —           |       | —           |       | 30,520           |       |
| Technical  assistance                                            |       | —      |       | 1,470            |       | 14            |       | —           |       | —           |       | 1,484            |       |
| TVA magazine                                                     |       | —      |       | 314              |       | 5             |       | —           |       | —           |       | 319              |       |
| Pole rentals                                                     |       | —      |       | 2,089            |       | 36            |       | —           |       | —           |       | 2,125            |       |
| Other costs                                                      |       | —      |       | 7,722            |       | 142           |       | —           |       | —           |       | 7,864            |       |
|                                                             |       | —      |       | 44,767           |       | 1,320         |       | —           |       | —           |       | 46,087           |       |
| Selling, general  and administrative expenses                    |       |        |       |             |       |          |       |             |       |             |       |             |       |
| Payroll and  benefits                                            |       | —      |       | 6,410            |       | 71            |       | —           |       | —           |       | 6,481            |       |
| Advertising and  promotion                                       |       | —      |       | 5,123            |       | 20            |       | —           |       | —           |       | 5,143            |       |
| Rent                                                             |       | —      |       | 1,169            |       | 6             |       | —           |       | —           |       | 1,175            |       |
| Other general  and administrative expenses                       |       | 454         |       | 32,592           |       | 150           |       | 5                |       | (127             | )          | 33,074           |       |
|                                                             |       | 454         |       | 45,294           |       | 247           |       | 5                |       | (127             | )          | 45,873           |       |
| Depreciation and amortization                                    |       | 430         |       | 29,175           |       | 308           |       | —           |       | (376             | )          | 29,537           |       |
| Other operating expense, net                                     |       | 301         |       | 6,589            |       | 40            |       | —           |       | —           |       | 6,930            |       |
| Operating loss                                                   |       | (1,185      | )          | (9,649           | )          | 1,215         |       | (5               | )          | 376              |       | (9,248           | )          |
|                                                             |       |        |       |             |       |          |       |             |       |             |       |             |       |
| Interest income                                                  |       | (1,549      | )          | (12,289          | )          | (51           | )          | (20              | )          | 12,899           |       | (1,010           | )          |
| Interest expense                                                 |       | 27,881      |       | 16,684           |       | 343           |       | 1,173            |       | (12,899          | )          | 33,182           |       |
| Foreign currency transaction, net                                |       | (51,573     | )          | 40,610           |       | 9             |       | 4,574            |       | —           |       | (6,380           | )          |
| Income (loss)  before income taxes, equity and minority interest |       | 24,056      |       | (54,654          | )          | 914           |       | (5,732           | )          | 376              |       | (35,040          | )          |
| Income taxes                                                     |       | 27,416      |       | 314              |       | 313           |       | 3                |       | —           |       | 28,046           |       |
| Income (loss)  before equity and minority interest               |       | (3,360      | )          | (54,968          | )          | 601           |       | (5,735           | )          | 376              |       | (63,086          | )          |
| Equity in (losses) of affiliates                                 |       | 59,999      |       | (360             | )          | —        |       | 1,580            |       | (61,219          | )          | —           |       |
| Income (loss)  before minority Interest                          |       | (63,359     | )          | (54,608          | )          | 601           |       | (7,315           | )          | 61,595           |       | (63,086          | )          |
| Minority interest                                                |       | —      |       | —           |       | —        |       | —           |       | 240              |       | 240              |       |
| Net income (loss)                                                |       | $           | (63,359    | )                | $          | (54,608       | )          | $                | 601        |             | $          | (7,315           | )          | $ | 61,355 |   | $ | (63,326 | ) |

 

F-42

----

 

**Consolidated Statement’s of Cash Flowsfor the year ended December 31, 2005**

 
| ** **                                                                                     | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | **Non -**        | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                     | ** ** | **Parent**  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                     | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash  flows from operating activities:**                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net loss                                                                                       |       | $           | (63,359    | )                | $          | (54,607          | )          | $                | 601        |             | $          | (7,315           | )          | $ | 61,354 |   | $ | (63,326 | ) |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Adjustments  to reconcile net loss to net cash (used in) provided by operating activities:** | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Depreciation                                                                                   |       | —      |       | 28,525           |       | 308              |       | —           |       | (376             | )          | 28,457           |       |
| Amortization                                                                                   |       | 429         |       | 650              |       | —           |       | —           |       | —           |       | 1,079            |       |
| Net Gain on sale  of equity method investments                                                 |       | —      |       | —           |       | —           |       | —           |       | —           |       | —           |       |
| Provision for  doubtful accounts                                                               |       | —      |       | 366              |       | 19               |       | —           |       | —           |       | 385              |       |
| Write-off of  assets related to cancellation of subscriptions                                  |       | —      |       | 3,519            |       | —           |       | —           |       | —           |       | 3,519            |       |
| Loss on sale of  obsolete inventories                                                          |       | —      |       | 1,172            |       | —           |       | —           |       | —           |       | 1,172            |       |
| Disposal and  write-off of property, plant and equipment                                       |       | —      |       | 771              |       | —           |       | —           |       | —           |       | 771              |       |
| Minority  interest                                                                             |       | —      |       | —           |       | —           |       | —           |       | 241              |       | 241              |       |
| Allowance for  loss receivable from related companies                                          |       | 51,020      |       | —           |       | —           |       | 1,567            |       | (52,587          | )          | —           |       |
| Equity in  (income) losses of affiliates                                                       |       | 7,902       |       | (395             | )          | —           |       | —           |       | (7,507           | )          | —           |       |
| Foreign currency  transaction loss, net                                                        |       | (51,573     | )          | 40,610           |       | 10               |       | 4,574            |       | —           |       | (6,379           | )          |
| Deferred income  taxes                                                                         |       | 27,445      |       | —           |       | (8               | )          | —           |       | —           |       | 27,437           |       |
| Accrued interest                                                                               |       | 22,322      |       | (119             | )          | 232              |       | 1,114            |       | —           |       | 23,549           |       |
| **Changes  in operating assets and liabilities:**                                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Accounts  receivable                                                                           |       | (17         | )          | (3,041           | )          | (59              | )          | 28               |       | 507              |       | (2,582           | )          |
| Prepaid and  other assets                                                                      |       | —      |       | 409              |       | (677             | )          | —           |       | 764              |       | 496              |       |
| Inventories                                                                                    |       | —      |       | 2,177            |       | (2               | )          | —           |       | —           |       | 2,175            |       |
| Suppliers                                                                                      |       | (110        | )          | 1,721            |       | (122             | )          | —           |       | (303             | )          | 1,186            |       |
| Accrual for  contingencies                                                                     |       | 6,061       |       | 5,547            |       | (155             | )          | —           |       | —           |       | 11,453           |       |
| Taxes payable  other than income taxes                                                         |       | (165        | )          | 429              |       | (69              | )          | —           |       | —           |       | 195              |       |
| Current income  taxes                                                                          |       | —      |       | 300              |       | 305              |       | 4                |       | —           |       | 609              |       |
| Accrued payroll  and related liabilities                                                       |       | —      |       | 972              |       | 8                |       | —           |       | —           |       | 980              |       |
| Advances  received from subscribers                                                            |       | —      |       | 1,296            |       | —           |       | —           |       | (389             | )          | 907              |       |
| Judicial  deposits                                                                             |       | —      |       | (1,765           | )          | (112             | )          | —           |       | —           |       | (1,877           | )          |
| Other                                                                                          |       | 315         |       | 532              |       | 116              |       | (47              | )          | (204             | )          | 712              |       |
| Net cash (used  in) provided by operating activities                                           |       | 270         |       | 29,069           |       | 395              |       | (75              | )          | 1,500            |       | 31,159           |       |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchases of  property, plant and equipment                                                    |       | —      |       | (26,452          | )          | (125             | )          | —           |       | —           |       | (26,577          | )          |
| Net cash used in  investing activities                                                         |       | —      |       | (26,452          | )          | (125             | )          | —           |       | —           |       | (26,577          | )          |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Cash  flows from financing activities:**                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Proceeds from bank  loans                                                                      |       | —      |       | 48,661           |       | —           |       | —           |       | —           |       | 48,661           |       |
| Repayment o f  loans from banks                                                                |       | (5,972      | )          | (33,226          | )          | —           |       | —           |       | —           |       | (39,198          | )          |
| Repayment o f  program P A ES/REFIS                                                            |       | —      |       | (4,090           | )          | —           |       | —           |       | —           |       | (4,090           | )          |
| Proceeds from  loans from share holders                                                        |       | 12,949      |       | (2,407           | )          | —           |       | 27               |       | —           |       | 10,569           |       |
| Repayments o f  loans from s hare holders                                                      |       | (2,035      | )          | (9,055           | )          | —           |       | —           |       | —           |       | (11,090          | )          |
| Capital  Distribution                                                                          |       | —      |       | —           |       | —           |       | —           |       | —           |       | —           |       |
| Dividends                                                                                      |       | —      |       | 375              |       | —           |       | —           |       | (375             | )          | —           |       |
| Net cash  provided by financing activities                                                     |       | 4,942       |       | 258              |       | —           |       | 27               |       | (375             | )          | 4,852            |       |
| Effect of  exchange rate changes                                                               |       | (3,667      | )          | 6,217            |       | (172             | )          | 42               |       | (1,125           | )          | 1,295            |       |
| Net increase  (decrease) in cash and cash equivalents                                          |       | 2           |       | 8,269            |       | 121              |       | (7               | )          | —           |       | 8,385            |       |
| Cash and cash  equivalents at beginning of the period                                          |       | 3           |       | 668              |       | 689              |       | 8                |       | —           |       | 1,368            |       |
| **Cash  and cash equivalents at end of the period**                                            |       | $           | 5          |             | $          | 8,937            |       | $                | 810        |             | $          | 1                |       | $ | — |   | $ | 9,753 |   |

 

F-43

----

 

**Consolidated Balance Sheetsas of December 31, 2004**

 
| ** **                          | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                          | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Current assets                      |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents          |       | $           | 3          |             | $          | 668              |       | $                | 689        |             | $          | 8                |       | $ | — |   | $ | 1,368 |   |
| Accounts  receivable, net           |       | 234         |       | 1,270            |       | (16              | )          | 1,713            |       | (1,506           | )          | 1,695            |       |
| Inventories, net                    |       | —      |       | 9,510            |       | 86               |       | —           |       | (124             | )          | 9,472            |       |
| Prepaid and  other assets           |       | 8           |       | 1,312            |       | 3                |       | —           |       | —           |       | 1,323            |       |
| Other accounts  receivable          |       | 49          |       | 247              |       | 281              |       | —           |       | —           |       | 577              |       |
| Total current  assets               |       | 294         |       | 13,007           |       | 1,043            |       | 1,721            |       | (1,630           | )          | 14,435           |       |
|                                |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Property, plant  and equipment, net |       | —      |       | 67,012           |       | 2,083            |       | —           |       | (875             | )          | 68,220           |       |
| Investments                         |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Equity basis                        |       | 16,066      |       | 1,319            |       | —           |       | —           |       | (17,385          | )          | —           |       |
| Intangible  assets, net             |       | 598         |       | 3,933            |       | —           |       | —           |       | —           |       | 4,531            |       |
| Deferred income  taxes              |       | —      |       | —           |       | —           |       | —           |       | —           |       | —           |       |
| Recoverable  taxes                  |       | —      |       | 102              |       | —           |       | 35               |       | 1                |       | 138              |       |
| Loans to related  companies         |       | 55,504      |       | 18,314           |       | 146              |       | 54,258           |       | (121,742         | )          | 6,480            |       |
| Prepaid expenses  and other         |       | 362,063     |       | —           |       | —           |       | —           |       | (362,063         | )          | —           |       |
| Judicial  deposits                  |       | —      |       | 8,497            |       | 263              |       | —           |       | —           |       | 8,760            |       |
| Total assets                        |       | $           | 434,525    |             | $          | 112,184          |       | $                | 3,535      |             | $          | 56,014           |       | $ | (503,694 | ) | $ | 102,564 |   |

 

F-44

----

 
| ** **                                                   | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities and Shareholders’ Equity** | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                         |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Current Liabilities                                          |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Loans                                                        |       | $           | 7,846      |             | $          | 11,628           |       | $                | —     |             | $          | —           |       | $ | — |   | $ | 19,474 |   |
| Film suppliers                                               |       | —      |       | 4,766            |       | 230              |       | —           |       | —           |       | 4,996            |       |
| Other suppliers                                              |       | 102         |       | 7,174            |       | 40               |       | —           |       | (1,629           | )          | 5,687            |       |
| Tax recovery  program                                        |       | 439         |       | 1,082            |       | 60               |       | —           |       | —           |       | 1,581            |       |
| Taxes payable  other than income taxes                       |       | 1,427       |       | 1,988            |       | 45               |       | 2                |       | —           |       | 3,462            |       |
| Income tax  payable                                          |       | —      |       | —           |       | 328              |       | —           |       | —           |       | 328              |       |
| Accrued payroll  and related liabilities                     |       | —      |       | 1,339            |       | 13               |       | —           |       | —           |       | 1,352            |       |
| Advance payments  received from subscribers                  |       | —      |       | 3,939            |       | —           |       | —           |       | —           |       | 3,939            |       |
| Other accounts  payable                                      |       | —      |       | 1,288            |       | 172              |       | 40               |       | —           |       | 1,500            |       |
| Total current  liabilities                                   |       | 9,814       |       | 33,204           |       | 888              |       | 42               |       | (1,629           | )          | 42,319           |       |
|                                                         |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Long-term  liabilities                                       |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Loans from  related companies                                |       | 34,595      |       | 113,027          |       | —           |       | 23,753           |       | (121,741         | )          | 49,634           |       |
| Loans and  financing                                         |       | 385,384     |       | (344,324         | )          | —           |       | —           |       | —           |       | 41,060           |       |
| Tax recovery  program                                        |       | 5,530       |       | 8,248            |       | 302              |       | —           |       | —           |       | 14,080           |       |
| Accrual for  contingencies                                   |       | —      |       | 14,277           |       | 267              |       | —           |       | —           |       | 14,544           |       |
| Taxes payable  other than income taxes                       |       | 3,390       |       | 324              |       | —           |       | —           |       | —           |       | 3,714            |       |
| Liability to  fund equity investee                           |       | 47,497      |       | —           |       | —           |       | —           |       | (47,497          | )          | —           |       |
| Deferred income  tax                                         |       | 29,171      |       | —           |       | (119             | )          | —           |       | —           |       | 29,052           |       |
| Other accounts  payable                                      |       | —      |       | 309,448          |       | —           |       | 52,615           |       | (362,063         | )          | —           |       |
| Total long-term  liabilities                                 |       | 505,567     |       | 101,000          |       | 450              |       | 76,368           |       | (531,301         | )          | 152,084          |       |
|                                                         |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Minority  interest                                           |       | —      |       | —           |       | —           |       | —           |       | 879              |       | 879              |       |
| Redeemable  common stock                                     |       | 27,599      |       | —           |       | —           |       | —           |       | —           |       | 27,599           |       |
|                                                         |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Shareholders’ deficit                                   |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Common stock                                                 |       | 445,313     |       | 284,076          |       | 1,860            |       | 15,068           |       | (300,291         | )          | 446,026          |       |
| Accumulated  other comprehensive income (loss)               |       | (10,380     | )          | 204,466          |       | (298             | )          | 4,194            |       | (203,111         | )          | (5,129           | )          |
| Accumulated  deficit                                         |       | (543,388    | )          | (510,562         | )          | 635              |       | (39,658          | )          | 531,759          |       | (561,214         | )          |
| Total  shareholders’ deficit                            |       | (108,455    | )          | (22,020          | )          | 2,197            |       | (20,396          | )          | 28,357           |       | (120,317         | )          |
| Total  liabilities and shareholders’ defict             |       | $           | 434,525    |             | $          | 112,184          |       | $                | 3,535      |             | $          | 56,014           |       | $ | (503,694 | ) | $ | 102,564 |   |

 

F-45

----

 

**Consolidated Statements of Operationsfor the year ended December 31, 2004**

 
| ** **                                                       | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                       | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non-**         | ** ** | ** **      | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **      | ** ** | ** **       | ** ** |
| **Description**                                                  | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
| ** **                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** |
| Gross revenues                                                   |       |        |       |             |       |             |       |             |       |            |       |             |       |
| Monthly  subscriptions                                           |       | $           | —     |             | $          | 91,816           |       | $                | 2,447      |            | $          | —           |       | $ | — |   | $ | 94,263 |   |
| Installation                                                     |       | —      |       | 957              |       | 26               |       | —           |       | —          |       | 983              |       |
| Advertising                                                      |       | —      |       | 1,826            |       | —           |       | —           |       | —          |       | 1,826            |       |
| Other                                                            |       | —      |       | 6,146            |       | 45               |       | —           |       | (164            | )          | 6,027            |       |
| Taxes on revenue                                                 |       | —      |       | (14,037          | )          | (357             | )          | —           |       | —          |       | (14,394          | )          |
| Net revenue                                                      |       | —      |       | 86,708           |       | 2,161            |       | —           |       | (164            | )          | 88,705           |       |
|                                                             |       |        |       |             |       |             |       |             |       |            |       |             |       |
| Direct operating  expenses                                       |       |        |       |             |       |             |       |             |       |            |       |             |       |
| Payroll and  benefits                                            |       | —      |       | 1,988            |       | 32               |       | —           |       | —          |       | 2,020            |       |
| Programming                                                      |       | —      |       | 25,483           |       | 834              |       | —           |       | —          |       | 26,317           |       |
| Technical  assistance                                            |       | —      |       | 1,246            |       | 3                |       | —           |       | —          |       | 1,249            |       |
| TVA Magazine                                                     |       | —      |       | 1,263            |       | 30               |       | —           |       | —          |       | 1,293            |       |
| Pole rental                                                      |       | —      |       | 1,419            |       | 25               |       | —           |       | —          |       | 1,444            |       |
| Other costs                                                      |       | —      |       | 4,715            |       | 84               |       | —           |       | —          |       | 4,799            |       |
|                                                             |       | —      |       | 36,114           |       | 1,008            |       | —           |       | —          |       | 37,122           |       |
| Selling, general  and administrative expenses                    |       |        |       |             |       |             |       |             |       |            |       |             |       |
| Payroll and  benefits                                            |       | —      |       | 5,499            |       | 52               |       | —           |       | —          |       | 5,551            |       |
| Advertising and  promotion                                       |       | —      |       | 1,449            |       | 32               |       | —           |       | —          |       | 1,481            |       |
| Rent                                                             |       | —      |       | 1,355            |       | 5                |       | —           |       | —          |       | 1,360            |       |
| Other general  and administrative expenses                       |       | 608         |       | 15,967           |       | 173              |       | 5                |       | (197            | )          | 16,556           |       |
|                                                             |       | 608         |       | 24,270           |       | 262              |       | 5                |       | (197            | )          | 24,948           |       |
| Depreciation and  amortization                                   |       | 428         |       | 23,999           |       | 261              |       | —           |       | (332            | )          | 24,356           |       |
| Other operating  expense, net                                    |       | 409         |       | 2,948            |       | —           |       | (42              | )          | —          |       | 3,315            |       |
| Operating loss                                                   |       | (1,445      | )          | (623             | )          | 630              |       | 37               |       | 365             |       | (1,036           | )          |
|                                                             |       |        |       |             |       |             |       |             |       |            |       |             |       |
| Interest income                                                  |       | (1,032      | )          | (26,226          | )          | (223             | )          | —           |       | 26,780          |       | (701             | )          |
| Interest expense                                                 |       | 36,834      |       | 10,616           |       | 63               |       | 685              |       | (26,780         | )          | 21,418           |       |
| Transaction                                                      |       | (35,007     | )          | 27,930           |       | (63              | )          | 3,579            |       | —          |       | (3,561           | )          |
| Other  nonoperating income                                       |       | (8,443      | )          | —           |       | —           |       | —           |       | —          |       | (8,443           | )          |
| Income (loss)  before income taxes, equity and minority interest |       | 6,203       |       | (12,943          | )          | 853              |       | (4,227           | )          | 365             |       | (9,749           | )          |
| Income taxes                                                     |       | 8,986       |       | —           |       | 185              |       | —           |       | —          |       | 9,171            |       |
| Income (loss)  before equity and minority interest               |       | (2,783      | )          | (12,943          | )          | 668              |       | (4,227           | )          | 365             |       | (18,920          | )          |
| Equity in  (losses) of affiliates                                |       | 17,039      |       | (382             | )          | —           |       | 874              |       | (17,063         | )          | 468              |       |
| Income (loss)  before minority Interest                          |       | (19,822     | )          | (12,561          | )          | 668              |       | (5,101           | )          | 17,428          |       | (19,388          | )          |
| Minority  interest                                               |       | —      |       | —           |       | —           |       | —           |       | 255             |       | 255              |       |
| Net income  (loss)                                               |       | $           | (19,822    | )                | $          | (12,561          | )          | $                | 668        |            | $          | (5,101           | )          | $ | 17,173 |   | $ | (19,643 | ) |

 

F-46

----

 

**Consolidated Statement’s of Cash Flows****for the year ended December 31, 2004**

 
| ** **                                                                                      | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                      | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                      | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                      | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash  flows from operating activities:**                                                      |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Net loss                                                                                        |       | $           | (19,721    | )                | $          | (12,597          | )          | $                | 635        |             | $          | (5,100           | )          | $ | 17,140 |   | $ | (19,643 | ) |
|                                                                                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Adjustments  to reconcile net loss to net cash  (used in) provided by operating activities:** |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Depreciation                                                                                    |       | —      |       | 23,450           |       | 261              |       | —           |       | (332             | )          | 23,379           |       |
| Amortization                                                                                    |       | 428         |       | 549              |       | —           |       | —           |       | —           |       | 977              |       |
| Net Gain on sale  of equity method investments                                                  |       | (8,409      | )          | 1,465            |       | —           |       | (35              | )          | (1,464           | )          | (8,443           | )          |
| Provision for  doubtful accounts                                                                |       | —      |       | 1,393            |       | 21               |       | —           |       | —           |       | 1,414            |       |
| Write-off of  assets related to cancellation of subscriptions                                   |       | —      |       | 2,117            |       | —           |       | —           |       | —           |       | 2,117            |       |
| Loss on sale of  obsolete inventories                                                           |       | —      |       | 480              |       | —           |       | —           |       | —           |       | 480              |       |
| Disposal and  write-off of property, plant and equipment                                        |       | —      |       | 384              |       | —           |       | —           |       | —           |       | 384              |       |
| Minority  interest                                                                              |       | —      |       | —           |       | —           |       | —           |       | 255              |       | 255              |       |
| Equity in  (income) losses of affiliates                                                        |       | 17,039      |       | (382             | )          | —           |       | 874              |       | (17,063          | )          | 468              |       |
| Foreign currency  transaction loss, net                                                         |       | (35,006     | )          | 27,929           |       | (63              | )          | 3,579            |       | —           |       | (3,561           | )          |
| Accrued interest                                                                                |       | 35,479      |       | 6,551            |       | (364             | )          | 710              |       | (25,890          | )          | 16,486           |       |
| Deferred income  taxes                                                                          |       | 8,986       |       | —           |       | (119             | )          | —           |       | —           |       | 8,867            |       |
| **Changes  in operating assets and liabilities:**                                               |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Accounts  receivable                                                                            |       | (212        | )          | 1,576            |       | (4               | )          | (81              | )          | 140              |       | 1,419            |       |
| Prepaid and  other assets                                                                       |       | (9,848      | )          | 946              |       | 15               |       | 123              |       | 9,029            |       | 265              |       |
| Inventories                                                                                     |       | —      |       | (334             | )          | (9               | )          | —           |       | 112              |       | (231             | )          |
| Suppliers                                                                                       |       | 79          |       | (1,325           | )          | 83               |       | —           |       | 34               |       | (1,129           | )          |
| Accrual fpr  contingencies                                                                      |       | —      |       | 1,961            |       | 102              |       | —           |       | —           |       | 2,063            |       |
| Taxes payable  other than income taxes                                                          |       | (146        | )          | 967              |       | (25              | )          | 3                |       | —           |       | 799              |       |
| Current income  taxes                                                                           |       | —      |       | —           |       | 304              |       | —           |       | —           |       | 304              |       |
| Accrued payroll  and related liabilities                                                        |       | —      |       | (194             | )          | (1               | )          | —           |       | —           |       | (195             | )          |
| Advances  received from subscribers                                                             |       | —      |       | 766              |       | —           |       | —           |       | —           |       | 766              |       |
| Judicial  deposits                                                                              |       | —      |       | (1,382           | )          | (22              | )          | —           |       | —           |       | (1,404           | )          |
| Other                                                                                           |       | 2,464       |       | 8,038            |       | (66              | )          | (41              | )          | (11,823          | )          | (1,428           | )          |
| Net cash (used  in) provided by operating activities                                            |       | (8,867      | )          | 62,358           |       | 748              |       | 32               |       | (29,862          | )          | 24,409           |       |
|                                                                                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                      |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Purchases of  property, plant and equipment                                                     |       | —      |       | (12,998          | )          | (87              | )          |             |       |             |       | (13,085          | )          |
| Loans receivable  from related companies                                                        |       |        |       |             |       | (7               | )          |             |       | 7                |       | —           |       |
| Repayments of  loans to related companies                                                       |       |        |       |             |       | 1,302            |       |             |       | (1,302           | )          | —           |       |
| Short-term  investments                                                                         |       | —      |       | 2,477            |       | —           |       | —           |       | (2,477           | )          | —           |       |
| Net cash used in  investing activities                                                          |       | —      |       | (10,521          | )          | 1,208            |       | —           |       | (3,772           | )          | (13,085          | )          |
|                                                                                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Cash  flows from financing activities:**                                                      |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Proceeds from  bank loans                                                                       |       | 25,988      |       | 44,655           |       | —           |       | —           |       | (25,958          | )          | 44,685           |       |
| Repayment of  loans from banks                                                                  |       | (32,144     | )          | (43,084          | )          | —           |       | —           |       | 25,958           |       | (49,270          | )          |
| Repayment of  program PAES/REFIS                                                                |       | —      |       | (4,233           | )          | —           |       | —           |       | —           |       | (4,233           | )          |
| Proceeds from  loans from shareholders                                                          |       | 9,136       |       | 36,965           |       | —           |       | 29               |       | (476             | )          | 45,654           |       |
| Repayments of  loans from shareholders                                                          |       | 175         |       | (50,864          | )          | —           |       | (15              | )          | 3,810            |       | (46,894          | )          |
| Capital  Distribution                                                                           |       | —      |       | —           |       | (940             | )          | —           |       | 940              |       | —           |       |
| Dividends                                                                                       |       | —      |       | —           |       | (576             | )          | —           |       | 576              |       | —           |       |
| Net cash  provided by financing activities                                                      |       | 3,155       |       | (16,561          | )          | (1,516           | )          | 14               |       | 4,850            |       | (10,058          | )          |
|                                                                                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Effect of  exchange rate changes                                                                |       | 5,619       |       | (34,735          | )          | 188              |       | (46              | )          | 28,784           |       | (190             | )          |
|                                                                                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents                                           |       | (93         | )          | 541              |       | 628              |       | —           |       | —           |       | 1,076            |       |
| Cash and cash  equivalents at beginning o f the period                                          |       | 96          |       | 127              |       | 61               |       | 8                |       | —           |       | 292              |       |
| **Cash  and cash equivalents at end of the period**                                             |       | $           | 3          |             | $          | 668              |       | $                | 689        |             | $          | 8                |       | $ | — |   | $ | 1,368 |   |

 

F-47

----

 

**Consolidated Balance Sheets**

**as of December 31, 2003**

 
| ** **                         | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non -**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                         | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                         | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Current assets                     |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents         |       | $           | 95         |             | $          | 128              |       | $                | 61         |             | $          | 8                |       | $ | — |   | $ | 292 |   |
| Accounts  receivable, net          |       | —      |       | 4,432            |       | (4               | )          | 1,493            |       | (1,495           | )          | 4,426            |       |
| Inventories, net                   |       | —      |       | 8,400            |       | 70               |       | —           |       | —           |       | 8,470            |       |
| Prepaid and  other assets          |       | 278         |       | 397              |       | 2                |       | —           |       | —           |       | 677              |       |
| Other accounts  receivable         |       | 142         |       | 320,289          |       | 271              |       | 64               |       | (319,188         | )          | 1,578            |       |
|                               |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Total current  assets              |       | 515         |       | 333,646          |       | 400              |       | 1,565            |       | (320,683         | )          | 15,443           |       |
|                               |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Property, plant and equipment, net |       | —      |       | 75,327           |       | 2,099            |       | —           |       | (1,109           | )          | 76,317           |       |
| Investments                        |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Equity basis                       |       | 25,626      |       | 1,710            |       | —           |       | 549              |       | (27,336          | )          | 549              |       |
| Intangible assets,  net            |       | 986         |       | 4,739            |       | —           |       | —           |       | —           |       | 5,725            |       |
| Loans to related companies         |       | 49,305      |       | 18,677           |       | 1,452            |       | 54,258           |       | (120,421         | )          | 3,271            |       |
| Dividends receivable               |       | 322,332     |       | —           |       | —           |       | —           |       | (322,332         | )          | —           |       |
| Judicial deposits                  |       | —      |       | 6,407            |       | 219              |       | —           |       | —           |       | 6,626            |       |
|                               |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Total assets                       |       | $           | 398,764    |             | $          | 440,506          |       | $                | 4,170      |             | $          | 56,372           |       | $ | (791,881 | ) | $ | 107,931 |   |

 

F-48

----

 
| ** **                                        | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non -**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities and Shareholders’ Equity**     | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Current  Liabilities                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Loans                                             |       | $           | 367,730    |             | $          | 7,486            |       | $                | —     |             | $          | —           |       | $ | (319,135 | ) | $ | 56,081 |   |
| Film suppliers                                    |       | —      |       | 6,474            |       | 145              |       | —           |       | —           |       | 6,619            |       |
| Other suppliers                                   |       | 14          |       | 5,798            |       | 19               |       | —           |       | (1,498           | )          | 4,333            |       |
| Tax recovery  program                             |       | 563         |       | 934              |       | —           |       | —           |       | —           |       | 1,497            |       |
| Taxes payable  other than income taxes            |       | 3,802       |       | 3,974            |       | 91               |       | —           |       | —           |       | 7,867            |       |
| Income tax  payable                               |       | —      |       | 1                |       | 277              |       | —           |       | —           |       | 278              |       |
| Accrued payroll  and related liabilities          |       | —      |       | 1,424            |       | 13               |       | —           |       | —           |       | 1,437            |       |
| Advance payments  received from subscribers       |       | —      |       | 2,844            |       | (5               | )          | —           |       | —           |       | 2,839            |       |
| Deferred income  tax                              |       | 19,292      |       | —           |       | —           |       | —           |       | —           |       | 19,292           |       |
| Other accounts  payable                           |       | 97          |       | 2,106            |       | 230              |       | 15               |       | (50              | )          | 2,398            |       |
|                                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Total current  liabilities                        |       | 391,498     |       | 31,041           |       | 770              |       | 15               |       | (320,683         | )          | 102,641          |       |
|                                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Long-term  liabilities                            |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Loans from  related companies                     |       | 21,415      |       | 116,129          |       | —           |       | 22,588           |       | (120,420         | )          | 39,712           |       |
| Tax recovery  program                             |       | 4,783       |       | 8,053            |       | —           |       | —           |       | —           |       | 12,836           |       |
| Accrual for  contingencies                        |       | —      |       | 10,723           |       | 549              |       | —           |       | —           |       | 11,272           |       |
| Dividends  payable                                |       | —      |       | 273,992          |       | —           |       | 48,340           |       | (322,332         | )          | —           |       |
| Liability to  fund equity investee                |       | 35,524      |       | —           |       | —           |       | 154              |       | (30,329          | )          | 5,349            |       |
| Other accounts  payable                           |       | —      |       | 211              |       | —           |       | —           |       | —           |       | 211              |       |
|                                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Total long-term  liabilities                      |       | 61,722      |       | 409,108          |       | 549              |       | 71,082           |       | (473,081         | )          | 69,380           |       |
|                                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Minority  interest                                |       | —      |       | —           |       | —           |       | —           |       | 1,140            |       | 1,140            |       |
| Redeemable  common stock                          |       | 24,201      |       | —           |       | —           |       | —           |       | —           |       | 24,201           |       |
| Shareholders’  deficit                       |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Common stock                                      |       | 445,313     |       | 284,076          |       | 4,012            |       | 15,068           |       | (302,443         | )          | 446,026          |       |
| Accumulated  other comprehensive income (loss)    |       | (3,703      | )          | 214,247          |       | (1,449           | )          | 5,633            |       | (212,012         | )          | 2,716            |       |
| Accumulated  deficit                              |       | (520,267    | )          | (497,966         | )          | 288              |       | (35,426          | )          | 515,198          |       | (538,173         | )          |
|                                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Total  shareholders’ deficit                 |       | (78,657     | )          | 357              |       | 2,851            |       | (14,725          | )          | 743              |       | (89,431          | )          |
|                                              |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Total  liabilities and shareholders’ deficit |       | 398,764     |       | 440,506          |       | 4,170            |       | 56,372           |       | (791,881         | )          | 107,931          |       |
|                                                   |            |             |            |                  |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |

 

F-49

----

 

**Consolidated Statements ofOperations**

**for the year ended December 31,2003**

 
| ** **                                                       | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                       | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non -**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Gross revenues                                                   |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Monthly  subscriptions                                           |       | $           | —     |             | $          | 80,553           |       | $                | 2,069      |             | $          | 1,172            |       | $ | — |   | $ | 83,794 |   |
| Installation                                                     |       | —      |       | 1,160            |       | 42               |       | 9                |       | —           |       | 1,211            |       |
| Advertising                                                      |       | —      |       | 2,554            |       | —           |       | 32               |       | —           |       | 2,586            |       |
| Other                                                            |       | —      |       | 3,493            |       | 15               |       | 276              |       | (3               | )          | 3,781            |       |
| Taxes on revenue                                                 |       | —      |       | (12,578          | )          | (314             | )          | (147             | )          | 1                |       | (13,038          | )          |
| Net revenue                                                      |       | —      |       | 75,182           |       | 1,812            |       | 1,342            |       | (2               | )          | 78,334           |       |
|                                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Direct operating expenses                                        |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Payroll and  benefits                                            |       | —      |       | 2,148            |       | 38               |       | 269              |       | —           |       | 2,455            |       |
| Programming                                                      |       | —      |       | 24,172           |       | 614              |       | —           |       | —           |       | 24,786           |       |
| Technical  assistance                                            |       | —      |       | 1,535            |       | (2               | )          | —           |       | —           |       | 1,533            |       |
| TVA Magazine                                                     |       | —      |       | 1,216            |       | 23               |       | —           |       | —           |       | 1,239            |       |
| Pole rental                                                      |       | —      |       | 1,228            |       | 26               |       | —           |       | —           |       | 1,254            |       |
| Other costs                                                      |       | —      |       | 5,431            |       | 150              |       | 369              |       | —           |       | 5,950            |       |
|                                                             |       | —      |       | 35,730           |       | 849              |       | 638              |       | —           |       | 37,217           |       |
| Selling, general  and administrative expenses                    |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Payroll and benefits                                             |       | —      |       | 6,126            |       | 174              |       | 22               |       | —           |       | 6,322            |       |
| Advertising and  promotion                                       |       | —      |       | 1,318            |       | 12               |       | 1                |       | —           |       | 1,331            |       |
| Rent                                                             |       | —      |       | 1,070            |       | 4                |       | —           |       | —           |       | 1,074            |       |
| Other general  and administrative expenses                       |       | 718         |       | 11,559           |       | 201              |       | 151              |       | (4               | )          | 12,625           |       |
|                                                             |       | 718         |       | 20,073           |       | 391              |       | 174              |       | (4               | )          | 21,352           |       |
|                                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Depreciation and amortization                                    |       | 411         |       | 22,837           |       | 276              |       | 446              |       | (287             | )          | 23,683           |       |
| Tax recovery program                                             |       | 1,431       |       | 3,598            |       | —           |       | —           |       | —           |       | 5,029            |       |
| Other operating expense, net                                     |       | 243         |       | 3,482            |       | —           |       | (54              | )          | —           |       | 3,671            |       |
| Operating loss                                                   |       | (2,803      | )          | (10,538          | )          | 296              |       | 138              |       | 289              |       | (12,618          | )          |
|                                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Interest income                                                  |       | (2,294      | )          | (24,590          | )          | (257             | )          | (12              | )          | 25,642           |       | (1,511           | )          |
| Interest expense                                                 |       | 27,774      |       | 15,164           |       | 39               |       | 800              |       | (25,642          | )          | 18,135           |       |
| Transaction                                                      |       | (70,942     | )          | 52,739           |       | (65              | )          | 7,249            |       | —           |       | (11,019          | )          |
| Other nonoperating expense                                       |       | 5,897       |       | —           |       | —           |       | —           |       | —           |       | 5,897            |       |
| Income (loss)  before income taxes, equity and minority interest |       | 36,762      |       | (53,851          | )          | 579              |       | (7,899           | )          | 289              |       | (24,120          | )          |
| Income taxes                                                     |       | 19,054      |       | —           |       | 328              |       | —           |       | —           |       | 19,382           |       |
| Income (loss)  before equity and minority interest               |       | 17,708      |       | (53,851          | )          | 251              |       | (7,899           | )          | 289              |       | (43,502          | )          |
|                                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Equity in (losses) of affiliates                                 |       | 57,396      |       | (123             | )          | —           |       | (10              | )          | (60,848          | )          | (3,585           | )          |
| Income (loss)  before minority Interest                          |       | (39,688     | )          | (53,728          | )          | 251              |       | (7,889           | )          | 61,138           |       | (39,917          | )          |
| Minority interest                                                |       | —      |       | —           |       | —           |       | —           |       | 82               |       | 82               |       |
|                                                             |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Net income (loss)                                                |       | $           | (39,688    | )                | $          | (53,728          | )          | $                | 251        |             | $          | (7,889           | )          | $ | 61,056 |   | $ | (39,999 | ) |

 

F-50

----

 

**Consolidated Statement’s of CashFlows**

**for the year ended December 31,2003**

 
| ** **                                                                                     | ** ** | ** **  | ** ** | **Wholly-**      | ** ** | **Majority-**    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                     | ** ** | ** **  | ** ** | **Owned**        | ** ** | **Owned**        | ** ** | **Non -**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                     | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Description**                                                                                | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  flows from operating activities:**                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net loss                                                                                       |       | $           | (39,446    | )                | $          | (53,692          | )          | $                | 205        |             | $          | (8,119           | )          | $ | 61,053 |   | $ | (39,999 | ) |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Adjustments  to reconcile net loss to net cash (used in) provided by operating activities:** | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Depreciation                                                                                   |       | —      |       | 22,313           |       | 276              |       | 446              |       | (287             | )          | 22,748           |       |
| Amortization                                                                                   |       | 411         |       | 524              |       | —           |       | —           |       | —           |       | 935              |       |
| Amortization of  debt issuance cost                                                            |       | 260         |       | —           |       | —           |       | —           |       | —           |       | 260              |       |
| Redeemable stock                                                                               |       | (164        | )          | —           |       | —           |       | —           |       | —           |       | (164             | )          |
| Provision for doubtful  accounts                                                               |       | —      |       | 1,226            |       | 43               |       | 91               |       | —           |       | 1,360            |       |
| Provision for  equipment and inventory obsolescence                                            |       | —      |       | 2,790            |       | —           |       | —           |       | —           |       | 2,790            |       |
| Loss on sale of  obsolete inventories                                                          |       | —      |       | 359              |       | —           |       | —           |       | —           |       | 359              |       |
| Minority  interest                                                                             |       | —      |       | —           |       | —           |       | —           |       | 82               |       | 82               |       |
| Disposal and  write-off of property, plant and equipment                                       |       | —      |       | 80               |       | —           |       | 1,283            |       | —           |       | 1,363            |       |
| Permanent  impairment loss on equity method investments                                        |       | 5,949       |       | —           |       | —           |       | (52              | )          | —           |       | 5,897            |       |
| Equity in losses  of affiliates                                                                |       | 57,396      |       | (123             | )          | —           |       | (10              | )          | (60,848          | )          | (3,585           | )          |
| Foreign currency  transaction loss, net                                                        |       | (70,942     | )          | 52,739           |       | (65              | )          | 7,249            |       | —           |       | (11,019          | )          |
| Deferred income  taxes                                                                         |       | 19,054      |       | —           |       | —           |       | —           |       | —           |       | 19,054           |       |
| **Changes  in operating assets and liabilities:**                                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Accounts  receivable                                                                           |       | —      |       | (1,954           | )          | (38              | )          | (1,308           | )          | 1,341            |       | (1,959           | )          |
| Prepaid and  other assets                                                                      |       | 24          |       | 204              |       | (1               | )          | 8                |       | —           |       | 235              |       |
| Accrued interest                                                                               |       | 27,983      |       | (14,600          | )          | (228             | )          | 778              |       | —           |       | 13,933           |       |
| Inventories                                                                                    |       | —      |       | 67               |       | (13              | )          | —           |       | —           |       | 54               |       |
| Suppliers                                                                                      |       | 13          |       | (10,709          | )          | (302             | )          | (34              | )          | (1,401           | )          | (12,433          | )          |
| Accrual for  contingencies                                                                     |       | (6,873      | )          | 674              |       | 141              |       | (18              | )          | —           |       | (6,076           | )          |
| Taxes payable  other than income taxes                                                         |       | 3,878       |       | (3,343           | )          | 244              |       | (130             | )          | —           |       | 649              |       |
| Tax recovery  program – PAES/REFIS                                                        |       | 3,922       |       | 3,699            |       | —           |       | —           |       | —           |       | 7,621            |       |
| Current income  taxes                                                                          |       | —      |       | —           |       | 328              |       | —           |       | —           |       | 328              |       |
| Accrued payroll  and related liabilities                                                       |       | —      |       | 469              |       | 6                |       | (65              | )          | —           |       | 410              |       |
| Advances  received from subscribers                                                            |       | —      |       | 2,670            |       | (4               | )          | —           |       | —           |       | 2,666            |       |
| Judicial  deposits                                                                             |       | —      |       | 4,269            |       | (29              | )          | 1                |       | —           |       | 4,241            |       |
| Other                                                                                          |       | (60         | )          | 1,163            |       | (132             | )          | (5               | )          | (89              | )          | 877              |       |
| Net cash (used  in) provided by operating activities                                           |       | 1,405       |       | 8,825            |       | 431              |       | 115              |       | (149             | )          | 10,627           |       |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchase of  property, plant and equipment                                                     |       | —      |       | (11,152          | )          | (56              | )          | (15              | )          | —           |       | (11,223          | )          |
| Split-off                                                                                      |       | —      |       | 14               |       | —           |       | (14              | )          | —           |       | —           |       |
| Loans to related  companies                                                                    |       | (19,467     | )          | —           |       | (1,267           | )          | —           |       | 20,734           |       | —           |       |
| Repayment of  loans to related                                                                 |       | 133,973     |       | 230              |       | 1,198            |       | (50              | )          | (135,210         | )          | 141              |       |
| Net cash used in investing activities                                                          |       | 114,506     |       | (10,908          | )          | (125             | )          | (79              | )          | (114,476         | )          | (11,082          | )          |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| **Cash  flows from financing activities:**                                                     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Bank loans                                                                                     |       | —      |       | 24,560           |       | —           |       | —           |       | —           |       | 24,560           |       |
| Loans from  shareholders                                                                       |       | 15,904      |       | 68,258           |       | —           |       | 18               |       | (20,526          | )          | 63,654           |       |
| Repayment of  program PAES/REFIS                                                               |       | —      |       | (1,394           | )          | —           |       | —           |       | —           |       | (1,394           | )          |
| Repayments of  loans from shareholders                                                         |       | (14,708     | )          | (164,716         | )          | —           |       | (53              | )          | 135,168          |       | (44,309          | )          |
| Repayments of  loans from banks                                                                |       | (5,784      | )          | (37,109          | )          | —           |       | (85              | )          | —           |       | (42,978          | )          |
| Net cash  provided by financing activities                                                     |       | (4,588      | )          | (110,401         | )          | —           |       | (120             | )          | 114,642          |       | 467              |       |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Effect of exchange rate changes                                                                |       | (111,254    | )          | 112,502          |       | (269             | )          | 7                |       | (17              | )          | 969              |       |
|                                                                                           |       |        |       |             |       |             |       |             |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents                                          |       | 69          |       | 18               |       | 37               |       | (77              | )          | —           |       | 47               |       |
| Cash and cash  equivalents at beginning of the period                                          |       | 26          |       | 110              |       | 24               |       | 85               |       | —           |       | 245              |       |
| **Cash  and cash equivalents at end of the period**                                            |       | $           | 95         |             | $          | 128              |       | $                | 61         |             | $          | 8                |       | $ | — |   | $ | 292 | ** ** |

 

F-51

----

 

********

 

F-52

----

 

**CCS – CAMBORIÚ CABLE SYSTEM**

**TELECOMUNICAÇÕESLTDA.**

 

**FinancialStatements for the Years Ended**

**December31, 2005, 2004 and 2003 and**

**Reportof Independent Registered Public Accounting Firm**

 

 

**DeloitteTouche Tohmatsu Independentes**

 

----

 

**CCS - CAMBORIÚ CABLE SYSTEMTELECOMUNICAÇÕES LTDA.**

 

**INDEX TO FINANCIAL STATEMENTS**

 

**Contents**

 
| Report of Independent  Registered Public Accounting Firm                                                               |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |   |
| Balance Sheets as of December 31, 2005 and 2004                                                                        |   |
|                                                                                                                   |   |
| Statements of Operations for each of  the three years in the period ended December 31, 2005                            |   |
|                                                                                                                   |   |
| Statements of Changes in  Shareholders’ Equity for each of the three years in the period ended December  31, 2005 |   |
|                                                                                                                   |   |
| Statements of Cash Flows for each of the  three years in the period ended December 31, 2005                            |   |
|                                                                                                                   |   |
| Notes to Financial Statements                                                                                          |   |

 

F-53

----

 

**CCS -CAMBORIÚ CABLE SYSTEM TELECOMUNICAÇÕES LTDA.**

 

#### **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andShareholders of

**CCS - CAMBORIÚ****CABLE SYSTEMTELECOMUNICAÇÕES LTDA.**

São Paulo – SP- Brasil

 

We have audited theaccompanying balance sheets of CCS – CAMBORIÚ CABLE SYSTEM TELECOMUNICAÇÕESLTDA. (the “Company”) as of December 31, 2005 and 2004, and the relatedstatements of operations, change in shareholders’ equity and cash flows foreach of the three years in the period ended December 31, 2005, all expressed inUnited States dollars. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, suchfinancial statements present fairly, in all material respects, the financialposition of the Company as of December 31, 2005 and 2004, and the results ofits operations and its cash flows for each of the three years in the periodended December 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America.

 
| /s/ Deloitte Touche  Tohmatsu Auditores Independentes |   |
|-------------------------------------------------------|--------|
|                                                  |
| Sao Paulo, Brazil                                     |
|                                                  |
| July 10, 2006                                    |

 

**The accompanying notes are an integral part of thefinancial statements**

 

F-54

----

 

**CCS - CAMBORIÚ CABLE SYSTEMTELECOMUNICAÇÕES LTDA.**

 

**Balance Sheets**

** **

*December 31, 2005 and 2004(in thousands of U.S. dollars)*

 
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                   |       |                  |       |   |   |
| Current assets                               |       |                  |       |   |   |
| Cash and cash  equivalents                   |       | $                     | 810        |   | $ | 689 |   |
| Accounts  receivable                         |       | 25                    |       | — |   |
| Inventories                                  |       | 97                    |       | 86 |   |
| Prepaid and  other assets                    |       | 681                   |       | 3 |   |
| Recoverable  taxes                           |       | 256                   |       | 265 |   |
|                                         |       |                  |       |   |   |
| Total current  assets                        |       | 1,869                 |       | 1,043 |   |
|                                         |       |                  |       |   |   |
| Property, plant  and equipment, net (Note 5) |       | 2,077                 |       | 2,083 |   |
| Deferred income  taxes (Note 4)              |       | 111                   |       | 119 |   |
| Loans to related  companies (Note 3)         |       | 187                   |       | 146 |   |
| Judicial  deposits                           |       | 414                   |       | 263 |   |
|                                         |       |                  |       |   |   |
| Total assets                                 |       | $                     | 4,658      |   | $ | 3,654 |   |

 

**The accompanying notes are an integral part of thefinancial statements**

 

F-55

----

 
| ** **                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                                                      |       |                  |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                            |       |                  |       |   |   |
|                                                                                      |       |                  |       |   |   |
| Current  liabilities                                                                      |       |                  |       |   |   |
| Film suppliers                                                                            |       | $                     | 139        |   | $ | 230 |   |
| Other suppliers                                                                           |       | 40                    |       | 40 |   |
| Taxes payable  other than income taxes                                                    |       | 149                   |       | 105 |   |
| Accrued payroll  and related liabilities                                                  |       | 23                    |       | 13 |   |
| Income taxes  payable                                                                     |       | 307                   |       | 328 |   |
| Other accounts  payable                                                                   |       | 887                   |       | 172 |   |
|                                                                                      |       |                  |       |   |   |
| Total current  liabilities                                                                |       | 1,545                 |       | 888 |   |
|                                                                                      |       |                  |       |   |   |
| Long-term  liabilities                                                                    |       |                  |       |   |   |
| Taxes payable  other than income taxes                                                    |       | 633                   |       | 302 |   |
| Provision for  claims (Note 10)                                                           |       | 142                   |       | 267 |   |
|                                                                                      |       |                  |       |   |   |
| Total long-term  liabilities                                                              |       | 775                   |       | 569 |   |
|                                                                                      |       |                  |       |   |   |
| Shareholders’  equity                                                                |       |                  |       |   |   |
| Common stock, no  par value, 2,248,712 shares authorized, issued and outstanding (Note 6) |       | 1,860                 |       | 1,860 |   |
| Accumulated  other comprehensive loss                                                     |       | (157                  | )          | (298 | ) |
| Accumulated  income                                                                       |       | 635                   |       | 635 |   |
|                                                                                      |       |                  |       |   |   |
| Total  shareholders’ equity                                                          |       | 2,338                 |       | 2,197 |   |
|                                                                                      |       |                  |       |   |   |
| Total  liabilities and shareholders’ equity                                          |       | $                     | 4,658      |   | $ | 3,654 |   |

 

**The accompanying notes are anintegral part of the financial statements**

 

F-56

----

 

**CCS - CAMBORIÚ CABLE SYSTEMTELECOMUNICAÇÕES LTDA.**

 

**Statements of Operations**

** **

**for the years ended December 31, 2005 , 2004 and 2003(in thousands of U.S. dollars)**

 
| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross revenues                                                               |       |                                       |       |   |   |   |   |
| Monthly  subscriptions                                                       |       | $                                          | 3,556      |   | $ | 2,447 |   | $ | 2,069 |   |
| Installation                                                                 |       | 32                                         |       | 26 |   | 42 |   |
| Additional  services                                                         |       | 69                                         |       | 45 |   | 15 |   |
| Taxes on  revenues                                                           |       | (527                                       | )          | (357 | ) | (314 | ) |
|                                                                         |       |                                       |       |   |   |   |   |
|                                                                         |       | 3,130                                      |       | 2,161 |   | 1,812 |   |
| Direct operating  expenses (excluding depreciation stated separately below)  |       |                                       |       |   |   |   |   |
| Payroll and  benefits                                                        |       | 65                                         |       | 32 |   | 38 |   |
| Programming                                                                  |       | 1,058                                      |       | 834 |   | 614 |   |
| Other costs                                                                  |       | 206                                        |       | 224 |   | 311 |   |
|                                                                         |       |                                       |       |   |   |   |   |
|                                                                         |       | 1,329                                      |       | 1,090 |   | 963 |   |
| Selling, general  and administrative expenses                                |       |                                       |       |   |   |   |   |
| Payroll and  benefits                                                        |       | 70                                         |       | 52 |   | 174 |   |
| Advertising and  promotion                                                   |       | 20                                         |       | 12 |   | 12 |   |
| Other selling,  general and administrative expenses                          |       | 147                                        |       | 149 |   | 137 |   |
|                                                                         |       |                                       |       |   |   |   |   |
|                                                                         |       | 237                                        |       | 213 |   | 323 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Depreciation                                                                 |       | 308                                        |       | 261 |   | 276 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Operating income                                                             |       | 1,256                                      |       | 597 |   | 250 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Interest income                                                              |       | (51                                        | )          | (223 | ) | (257 | ) |
| Interest expense                                                             |       | 343                                        |       | 63 |   | 39 |   |
| Foreign currency  transaction (gain) loss, net                               |       | 10                                         |       | (63 | ) | (65 | ) |
| Other  nonoperating expense, net                                             |       | 40                                         |       | — |   | — |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Income before  income taxes                                                  |       | 914                                        |       | 820 |   | 533 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Income tax  expense – current (Note 4)                                  |       | 305                                        |       | 304 |   | 328 |   |
| Income tax  (benefit)– deferred (Note 4)                                |       | 8                                          |       | (119 | ) | — |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Net income                                                                   |       | $                                          | 601        |   | $ | 635 |   | $ | 205 |   |
| Other  comprehensive income (loss) - Foreign currency translation adjustment |       | (141                                       | )          | (1,151 | ) | (509 | ) |
| Comprehensive  income                                                        |       | $                                          | 742        |   | $ | 1,786 |   | $ | 714 |   |

 

**Theaccompanying notes are an integral part of the financial statements**

 

F-57

----

 

**CCS - CAMBORIÚ CABLE SYSTEMTELECOMUNICAÇÕES LTDA.**

 

**Statements of Changes in Shareholders’ Equity**

** **

*for the years ended December31, 2005, 2004 and 2003*

* *

*(in thousands of U.S. dollars)*

* *
| ** **                                                 | ** ** | ** ** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Common** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Stock**  | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Total**  | ** ** |
| ** **                                                 | ** ** | ** ** | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** |
| Balance as of  December 31, 2002                           |       | $          | 4,012      |            | $          | 83                |       | $          | (1,958     | ) | $ | 2,137 |   |
|                                                       |       |       |       |            |       |              |       |       |       |
| Foreign currency  translation adjustment, net of tax of $0 |       | —     |       | —          |       | 509               |       | 509        |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Net income                                                 |       | —     |       | 205             |       | —            |       | 205        |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Balance as of  December 31, 2003                           |       | 4,012      |       | 288             |       | (1,449            | )          | 2,851      |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Foreign currency  translation adjustment, net of tax of $0 |       | —     |       | **—**      |       | 1,151             |       | 1,151      |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Capital  distribution                                      |       | (2,152     | )          | (288            | )          | —            |       | (2,440     | )          |
|                                                       |       |       |       |            |       |              |       |       |       |
| Net income                                                 |       | —     |       | 635             |       | —            |       | 635        |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Balance as of  December 31, 2004                           |       | 1,860      |       | 635             |       | (298              | )          | 2,197      |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Foreign currency  translation adjustment, net of tax of $0 |       | —     |       | —          |       | 141               |       | 141        |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Dividends                                                  |       | —     |       | (601            | )          | —            |       | (601       | )          |
|                                                       |       |       |       |            |       |              |       |       |       |
| Net income                                                 |       | —     |       | 601             |       | —            |       | 601        |       |
|                                                       |       |       |       |            |       |              |       |       |       |
| Balance as of  December 31, 2005                           |       | $          | 1,860      |            | $          | 635               |       | $          | (157       | ) | $ | 2,338 |   |

 

**Theaccompanying notes are an integral part of the financial statements**

 

F-58

----

 

**CCS - CAMBORIÚ CABLE SYSTEMTELECOMUNICAÇÕES LTDA.**

 

**Statements of Cash Flows**

** **

*for the years ended December31, 2005, 2004 and 2003(in thousands of U.S. dollars)*

 
| ** **                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash  flows from operating activities:**                                             |       |                                       |       |   |   |   |   |
| Net income                                                                             |       | $                                          | 601        |   | $ | 635 |   | $ | 205 |   |
|                                                                                   |       |                                       |       |   |   |   |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:** |       |                                       |       |   |   |   |   |
| Depreciation                                                                           |       | 308                                        |       | 261 |   | 276 |   |
| Provision for  doubtful accounts (Note 10)                                             |       | 19                                         |       | 21 |   | 43 |   |
| Provision for  claims (Note 10)                                                        |       | (155                                       | )          | 102 |   | 153 |   |
| Foreign currency  transaction (gain) loss, net                                         |       | 10                                         |       | (63 | ) | (65 | ) |
| Deferred income  taxes                                                                 |       | (8                                         | )          | (119 | ) | — |   |
| Accrued interest                                                                       |       | 232                                        |       | (364 | ) | (228 | ) |
| **Changes  in operating assets and liabilities:**                                      |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                   |       | (59                                        | )          | (4 | ) | (38 | ) |
| Prepaid and  other assets                                                              |       | (3                                         | )          | 15 |   | (1 | ) |
| Inventories                                                                            |       | (2                                         | )          | (9 | ) | (13 | ) |
| Suppliers                                                                              |       | (122                                       | )          | 83 |   | (302 | ) |
| Current income  taxes                                                                  |       | 305                                        |       | 304 |   | 328 |   |
| Taxes payable  other than income taxes                                                 |       | (69                                        | )          | (25 | ) | 232 |   |
| Judicial deposits                                                                      |       | (112                                       | )          | (22 | ) | — |   |
| Accrued payroll  and related liabilities                                               |       | 8                                          |       | (1 | ) | 6 |   |
| Other                                                                                  |       | 195                                        |       | (66 | ) | (165 | ) |
| Net cash  provided by operating activities                                             |       | 1,148                                      |       | 748 |   | 431 |   |
| **Cash  flows from investing activities:**                                             |       |                                       |       |   |   |   |   |
| Purchases of  property, plant and equipment                                            |       | (131                                       | )          | (87 | ) | (56 | ) |
| Loans to related  companies                                                            |       | 6                                          |       | (7 | ) | (1,267 | ) |
| Repayments of  loans to related companies                                              |       | —                                     |       | 1,302 |   | 1,198 |   |
| Net cash  provided by (used in) investing activities                                   |       | (125                                       | )          | 1,208 |   | (125 | ) |
| **Cash  flows from financing activities:**                                             |       |                                       |       |   |   |   |   |
| Repayment of  program PAES/REFIS                                                       |       | (56                                        | )          | (73 | ) | — |   |
| Capital  Distribution                                                                  |       | —                                     |       | (940 | ) | — |   |
| Dividends paid                                                                         |       | (674                                       | )          | (576 | ) | — |   |
| Net cash (used  in) financing activities                                               |       | (730                                       | )          | (1,589 | ) | — |   |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | (172                                       | )          | 261 |   | (269 | ) |
| Net increase in  cash and cash equivalents                                             |       | 121                                        |       | 628 |   | 37 |   |
| Cash and cash  equivalents at beginning of year                                        |       | 689                                        |       | 61 |   | 24 |   |
| Cash and cash  equivalents at end of the year                                          |       | $                                          | 810        |   | $ | 689 |   | $ | 61 |   |

 

**Theaccompanying notes are an integral part of the financial statements**

 

F-59

----

 

**CCS -CAMBORIÚ CABLE SYSTEM TELECOMUNICAÇÕES LTDA.**

 

**Notes to Financial Statements**

** **

**(in thousands of U.S. dollars)**

 

**1.**                                      The Company and itsprincipal operations

** **

CCS – Camboriú Cable System Telecomunicações Ltda. (the “Company”) renders services related to wireless cableand cable television systems, including marketing and advertising, production,distribution and licensing of domestic and foreign television programs. TheCompany has wireless cable channel rights primarily in the city of Camboriú.The Company’s operations are substantially dependent on the Tevecap Groupregarding programming, marketing, financial and administrative systems.

 

**2.**                                      Summary of significant accountingpolicies

** **

Significant policies followed in the preparation of the financialstatements are described below:

 

**2.1.**                            Basisof presentation

** **

The financial statements arepresented in United States dollars and have been prepared in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”), which differ in certain respects from accounting principles applied bythe Company in its local currency financial statements, which are prepared inaccordance with accounting principles generally accepted in Brazil (“BrazilianGAAP”).

 

The preparation of financialstatements in accordance with U.S. GAAP requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities as of the financial statementdates and the reported amount of revenues and expenses during the reportingperiods. Since management’s judgment involves making estimates concerning thelikelihood of future events, the actual results could differ from theseestimates.

 

**2.2.**                            Accountingrecords

** **

As required by BrazilianLaw, and in accordance with local accounting practices, the accounting recordsof the Company are maintained in Brazilian currency (*“real”*). In order to present the financial statements inconformity with U.S. GAAP, the Company maintains additional accounting recordsthat are used solely for this purpose.

 

F-60

----

 

**2.3.**                            Currencyremeasurement

** **

On January 1, 2000, Tevecap S.A. (“Tevecap”), parent companyof the Company’s major shareholder TVA Sul Paraná Ltda., changed its functionalcurrency from the United States dollar to the Brazilian real. As the Companyuses the functional currency of Tevecap, the Company also changed itsfunctional currency from the United States dollar to the Brazilian real onJanuary 1, 2000. This change was performed in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”.

 

**2.4.**                            Cashand cash equivalents

** **

Cash andcash equivalents are defined as cash and cash in banks and short-terminvestments in interest-bearing securities. Such short-term investments haveoriginal maturities of three months or less at the time of purchase and arereadily convertible to cash.

 

**2.5.**                            Financialinstruments

** **

Inaccordance with SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments” (“SFAS 107”), information is provided about the fair value ofcertain financial instruments for which it is practicable to estimate thatvalue.

 

For thepurposes of SFAS 107, the estimated fair value of a financial instrument is theamount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale. Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instrument for which it is practicable to estimate thatvalue:

 

•                  The fair value of current financial assets and liabilities,including cash and cash equivalents, accounts receivable, other accountsreceivable, accounts receivable from related parties, film suppliers, and otheraccounts payable approximates their respective carrying value due to theirshort-term nature.

 

•                  The fair value of loans to and from related companiesapproximates their respective carrying value as interest on these loans is atmarket rates.

 

F-61

----

 

**2.6.**                            Accountsreceivable

** **

Allowance for doubtfulaccounts is recorded based on an analysis of historical losses, on theknowledge and monitoring of the individual situation of its customers and ofthe canceling of pay TV subscribers, and is considered sufficient to coverpossible losses on the realization of credits.

 

**2.7.**                            Inventories

** **

Inventories consist ofmaterials and supplies and imports in transit. Materials and supplies are usedto provide service to new customers, and to ensure continuity of service toexisting customers. Imports in transit represent materials purchased fromforeign countries that have not yet been received.

 

Inventories are stated atthe lower of cost or market. Cost is determined principally under the averagecost method.

 

**2.8.**                            Property,plant and equipment

** **

Property, plant andequipment are stated at cost and depreciated using the straight-line method,over the remaining useful lives, as described in Note 5.

 

**2.9.**                            Recoverabilityof long-lived assets to be held and used

** **

The Company evaluates itslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of the asset to future undiscounted net cash flows expected tobe generated by the asset. In estimating future undiscounted net cash flows,assets are grouped at the level of each cable television system. If an asset isconsidered to be impaired, the impairment to be recognized is measured as theamount by which the carrying amount of the asset exceeds the fair value of theasset. There were no impairment write-downs made during the years endedDecember 31, 2005, 2004 and 2003.

 

F-62

----

 

**2.10.**                     Revenue recognition

** **

Subscription revenues arerecognized monthly at the amount billed to subscribers for service subscribedto and earned during the month.

 

Installation fees arerecognized as revenue on the equipment installation date to the extent ofdirect selling costs incurred which are higher than the revenue.

 

Other revenues arerecognized as services are rendered.

 

**2.11.**                     Advertising and promotion costs

** **

**Costs of advertising and promotion are expensed as incurred**

** **

**2.12.****                    ****Deferred income taxes**

 

**Deferred income tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases as well as operating loss and tax creditcarryforwards. Deferred income tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred income tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Valuationallowances are established when it is more likely than not that some or all ofthe deferred tax assets will not be realized.**

** **

**2.13**                        Comprehensive income (loss)

** **

**SFAS no. 130 “Reporting Comprehensive Income” establishesstandards for reporting and disclosing comprehensive income and its componentsin a full set of financial statements. Comprehensive income/loss is beingpresented together with the statements of operation.**

 

**2.14****                        Reclassifications**

 

Certain prior years’amounts have been reclassified for comparative purposes.

 

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**3.**                                      Related partytransactions

** **

The following tablessummarize the transactions between the Company and related parties as ofDecember 31, 2005 and 2004:

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| TVA Sul Paraná  Ltda. (parent company)  Loans receivable |       | $                     | 187        |   | $ | 146 |   |
|                                                               |            |                       |            |  |  |  |  |

 

**The Company and its related parties maintain a cashmanagement system centralized at TVA Sul Paraná Ltda. The centralized cashmanagement system results in accounts receivable from and payable to relatedparties depending on the cash needs of the companies.**

** **

Loans granted to or obtainedfrom related companies, under loan agreements, are denominated in Reais andsubject to variable interest of 2.04% per month as of December 31, 2005 (2.02%per month as of December 31, 2004 and 1.96% per month as of December 31, 2003).These loans do not have defined maturity dates.

 

**4.**                                      Income taxes

** **

Deferred income taxesreflect the future tax consequences of net operating loss carryforwards anddifferences between the tax basis and the financial reporting basis of assetsand liabilities. A valuation allowance has not been established against the netdeferred tax asset (primarily consisting of provisions) as management believesit is more likely than not that the deferred tax assets will be realized. Accordingly,a benefit has been recognized for the Company’s net operating income and otherdeferred tax assets. As of December 31, 2005 and 2004, the Company had no netoperating loss carryforwards.

 

The tax effects of temporarydifferences that give rise to deferred tax assets as of December 31, 2005 and2004 are as follows:

 

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| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:           |       |     |       |     |       |
| Provision for  claims           |       | 4        |       | 59       |       |
| Other                           |       | 107      |       | 60       |       |
|                            |       |     |       |     |       |
| Total gross  deferred tax asset |       | 111      |       | 119      |       |

 

The income tax expense wasdifferent from the amount computed using the Brazilian statutory income tax forthe reasons set forth in the following table:

 
| ** **                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |     |       |
| Income (loss)  before income taxes                            |       | $        | 914        |     | $          | 820      |       | $ | 533 |   |
| Statutory income  tax rate                                    |       | 34       | %          | 34       | %          | 34       | %          |
| Computed income  tax expense (benefit)                        |       | 311      |       | 278      |       | 181      |       |
| Deductible  devaluation loss for Brazilian statutory purposes |       | (4       | )          | 1        |       | 13       |       |
| Other                                                         |       | 6        |       | (17      | )          | 57       |       |
| Change in  valuation allowance                                |       | —   |       | (77      | )          | 77       |       |
|                                                          |       |     |       |     |       |     |       |
| Income tax  expense per statements of operations              |       | $        | 313        |     | $          | 185      |       | $ | 328 |   |

 

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**5.**                                      Property, plant andequipment, net

** **

As of December 31, 2005 and2004, property, plant and equipment were comprised of:

 
| ** **                | ** ** | **Annual**       | ** ** | ** **            | ** ** | ** ** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|------------|------------|
| ** **                | ** ** | **Depreciation** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **Rate**         | ** ** | **2005**              | ** ** | **2004**   | ** ** |
| ** **                | ** ** | **%**            | ** ** | ** **            | ** ** | ** ** | ** ** |
| Reception equipment       |       | 20               |       | $                     | 965        |       | $          | 662 |   |
| Cable plant               |       | 10               |       | 906                   |       | 769        |       |
| Machinery and  equipment  |       | 10               |       | 253                   |       | 325        |       |
| Decoders                  |       | 10               |       | 137                   |       | 115        |       |
| Leasehold  improvements   |       | 25               |       | 6                     |       | 5          |       |
| Building                  |       | 4                |       | 2,517                 |       | 2,220      |       |
| Furniture and  fixtures   |       | 10               |       | 54                    |       | 47         |       |
| Vehicles                  |       | 20               |       | 49                    |       | 43         |       |
| Software                  |       | 20               |       | 12                    |       | 10         |       |
| Other                     |       |             |       | 8                     |       | 6          |       |
| Accumulated  depreciation |       |             |       | (2,830                | )          | (2,119     | )          |
|                      |       |             |       | $                     | 2,077      |       | $          | 2,083 |   |

 

**6.****                                     ****Shareholder’s equity**

 

Common stock as of December31, 2005 and 2004 was comprised of:

 
| ** **                  | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-----------------------------|------------|----------|------------|------------|------------|
| ** **                  | ** ** | **$**    | ** ** | **Shares** | ** ** | **$** | ** ** | **Shares** | ** ** |
|                        |       |     |       |       |       |   |   |   |   |
| Construtora ENE  ESSE Ltda. |       | $        | 744        |       | 899,485    |   | $ | 744 |   | 899,485 |   |
| TVA Sul Paraná  Ltda.  |       | 1,116    |       | 1,349,227  |       | 1,116 |   | 1,349,227 |   |
|                        |       |     |       |       |       |   |   |   |   |
|                        |       | $        | 1,860      |       | 2,248,712  |   | $ | 1,860 |   | 2,248,712 |   |

 

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**7.****                                     ****Loan guarantees**

 

In November 1996, Tevecap,the Company’s parent company, issued $250,000 12-5/8% Senior Notes toinstitutional buyers in a private placement. The Notes, which mature inNovember 2004, were subsequently registered with the Securities and ExchangeCommission in May 1997. These Notes are jointly and severally, irrevocably andfully unconditionally guaranteed, on a senior basis, by Tevecap’s direct andindirect subsidiaries, including the Company. On July 28, 1999 the relatedcompany TVA Communications Ltd. repurchased 80.79% of these Notes.

 

On October 13, 2004, Tevecapfiled a registration statement with the United States Securities and ExchangeCommission to exchange the original Senior Notes due November 26, 1996,amounting to $48,022, for new 12.625% Senior Notes due 2009. On December 21,2004, Tevecap completed the exchange offer with the participation of 85% of theNote holders, which held Notes amounting to $40,749. On November 7, 2005, anexchange offer proposal was filed with SEC (US-Securities and ExchangeCommission) for the residual balance in the amount of $ 7,008 the conditionsfor this renegotiation were similar to those determined on October 13, 2004. OnSeptember 13, 2005, Tevecap paid $ 265 to the creditors for which renegotiationhad not been made. This amount is available to the creditors in an account ofthe depositary bank, JP Morgan Trust Bank. The new Notes are jointly andseverally guaranteed by certain subsidiaries of Tevecap, including the Company.

 

**8.****                                     ****Litigation contingencies**

 

Certain claims and lawsuitsarising in the ordinary course of business have been filed or are pendingagainst the Company which were not recognized in the financial statements. TheCompany has provided for losses on all cases where, based on opinion ofmanagement and external legal counsel, the likelihood of loss is probable.Management believes that such legal matters will not have a material adverseeffect on the Company’s results of operations, financial condition or cashflows.

 

**9.**                                      Abril Health Care Plan

** **

In February 1996, the AbrilHealth Care Plan, Associação Abril de Benefícios (the “Health Care Plan”), wascreated to provide health care to Abril S.A. Group employees and theirdependents. Both the companies forming part of the Abril Group and theemployees thereof contribute monthly to the Health Care Plan, which isresponsible for the

 

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management of the plan. In2005, contributions made by the Company to the Health Care Plan amounted to $10($7 in 2004 and $7 in 2003).

 

**10.**                               Supplementaryinformation - valuation and qualifying accounts and reserves

 
| ** **                           | ** ** | **Deferred**  | ** ** | **Provision** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                           | ** ** | **Taxation**  | ** ** | **for**       | ** ** | **Provision** | ** ** |
| ** **                           | ** ** | **Valuation** | ** ** | **Doubtful**  | ** ** | **for**       | ** ** |
| ** **                           | ** ** | **Allowance** | ** ** | **Accounts**  | ** ** | **Claims**    | ** ** |
| **Balance  as of December 31, 2002** | ** ** | **$**         | **—** | ** **    | **$**      | **62**        | ** ** | **$** | **12** | ** ** |
| Additions                            |       | 77            |       | —        |       | 153           |       |
| Deductions                           |       | —        |       | 35            |       | —        |       |
| **Balance  as of December 31, 2003** | ** ** | **77**        | ** ** | **97**        | ** ** | **165**       | ** ** |
| Additions                            |       | —        |       | 21            |       | 102           |       |
| Deductions                           |       | (77           | )          | —        |       | —        |       |
| **Balance  as of December 31, 2004** | ** ** | **—**    | ** ** | **118**       | ** ** | **267**       | ** ** |
| Additions                            |       | —        |       | 19            |       | —        |       |
| Deductions                           |       | —        |       | —        |       | (155          | )          |
| Effect of  exchange rate             |       | —        |       | 17            |       | 30            |       |
| **Balance  as of December 31, 2005** | ** ** | **$**         | **—** | ** **    | **$**      | **154**       | ** ** | **$** | **142** | ** ** |

 

**11.**                               Recent accountingpronouncements

** **

In November 2004, the FASBissued SFAS 151 “Inventory Costs – an Amendment of ARB No.43, Chapter 4”. Thisstatement clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). ThisStatement requires that those items be recognized as current-period chargesregardless of whether they meet the criterion of “so abnormal.” In addition,this Statement requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. The Company will apply this statement, if applicable, from fiscalperiods beginning after June 15, 2005.

 

In December 2004, the FASBissued SFAS 153 “Exchange of Nonmonetary Assets – an Amendment of APB OpinionNo.29”. This statement addresses the measurement of exchanges of nonmonetary assetsby eliminating the exception from fair value

 

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measurement for nonmonetaryexchanges of similar productive assets and replacing it with an exception forexchanges that do not have commercial substance. The Company will apply thisstatement, if applicable, from fiscal periods beginning after June 15, 2005.

 

In March 2005, the FASBissued FASB Interpretation No. 47 “Accounting for Conditional Asset RetirementObligations”, which refers to legal obligations to perform an asset retirementactivities. The Company does not expect FASB Interpretation No. 47 to have asignificant impact on the financial position, results of operations or cashflows.

 

In March 2006, the FASBissued SFAS No. 156 Accounting for Servicing of Financial Assets. SFAS 156amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities, that establishes, among other things, theaccounting for all separately recognized servicing assets and servicingliabilities. SFAS 156 amends Statement 140 to require that all separatelyrecognized servicing assets and servicing liabilities be initially measured atfair value, if practicable. SFAS 156 permits, but does not require, thesubsequent measurement of separately recognized servicing assets and servicingliabilities at fair value. An entity that uses derivative instruments tomitigate the risks inherent in servicing assets and servicing liabilities isrequired to account for those derivative instruments at fair value. Under thisStatement, an entity can elect subsequent fair value measurement to account forits separately recognized servicing assets and servicing liabilities. Byelecting that option, an entity may simplify its accounting because thisStatement permits income statement recognition of the potential offsettingchanges in fair value of those servicing assets and servicing liabilities andderivative instruments in the same accounting period. An entity shall adoptthis Statement as of the beginning of its first fiscal year that begins afterSeptember 15, 2006. Earlier adoption is permitted as of the beginning of anentity’s fiscal year, provided the entity has not yet issued financialstatements, including interim financial statements, for any period of thatfiscal year.

 

* * * * * * *

 

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**GLOSSARY**

 

*AbrilComunicações:*  Abril Comunicações S.A.

 

*Abril Credit Facility:*  A revolving credit facility, datedDecember 6, 1995, between us, as the borrower, and Editora Abril, as thelender.

 

*ADSL: *Asymmetrical DigitalSubscriber Line.

 

*ANATEL:*  National Telecommunications Agency (*Agência Nacional de Telecomunicações*), anindependent Brazilian federal agency authorized to regulate the Brazilian subscriptiontelevision industry.

 

*Average Revenue per User (ARPU):*  Total revenue derived from a subscribertelevision system divided by the average number of subscribers for that period.

 

*BBC:*  British Broadcasting Corporation.

 

*C-Band:*  A satellite transmission system whichprovides a signal on the “c” bandwidth.

 

*Cable:*  A cable network employs electromagnetictransmission over coaxial and/or fiber optic cable to transmit multiplechannels carrying images, sound and data between a central facility and individualcustomers’ television sets. Networks may allow one-way (from a head end to aresidence and/or business) or two-way transmission from a head end to aresidence and/or business with a data return path for the head end.

 

*Cable License:*  A license that is granted by the applicablegoverning body pursuant to its authority under the communications laws of aparticular country for the purpose of providing cable services for a specificfranchise/license area.

 

*Cable Modem:*  A type of modem designed to operate overcable television infrasturcture.

 

*CADE:* Conselho Administrativo de Defesa Econômica (Brazilian AntitrustAuthority).

 

*Carriers:*  Companies offering telephone and datacommuncations between points in a state or country.

 

*Celesc: *Centrais Elétricas de Santa Catarina.

 

*Central Bank:* Central Bank of Brazil (Banco Central do Brasil).

 

*Churn:*  With respect to a pay television system for agiven period, the quotient expressed as a percentage of (i) the number ofsubscribers disconnected from such system less the number of formerlydisconnected subscribers reconnected to the system divided by (ii) thenumber of subscribers to the system as of the beginning of the period plus thenumber of subscribers added to the system.

 

*CMTS: *Cable Modem Termination System.

 

*Coaxial Cable:*  Cable consisting of a central conductorsurrounded by and insulated from another conductor. It is the standard materialused in traditional cable systems. Signals are transmitted through it atdifferent frequencies, giving greater channel capacity than is possible withtwisted pair cable, but less than is allowed by optical fiber.

 

*Company:*  Tevecap, together with our consolidatedsubsidiaries.

 

*Copel: *Companhia Paranaense de Energia Elétrica.

 

*CPCT:*  *CentraisPrivadas de Comutação Telefônica*, certain private telephone networkscomparable to private branch exchanges, or PBX, found in larger apartmentcomplexes, hotels and businesses in the United States.

 

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*CVM:* Comissão de Valores Mobiliários (Brazilian Securities Commission)

 

*DBS:*  Direct broadcast satellite service, operatingin C-Band or Ku-Band width, by which television programming is transmitted toindividual dwellings, each served by a single satellite dish.

 

*Decoder:*  A device or program that translates encodedmessages so that the original information can be retrieved.

 

*DHCP:* Dynamic Host Configuration Protocol, used forassigning dynamic IP addresses to devices on a network.

 

*DirecTV:*  Brazil’s first digital Ku-Band service, whichis operated by Galaxy Brasil and Galaxy Latin America.

 

*DISTV:*  The distribution of television signals byphysical means (i.e., by cable) to end users, generally limited to signalswithout interference by a DISTV operator with the signal content.

 

*DOCSIS:*  Data Over Cable Services InterfaceSpecification; a technology that defines interface requirements for cablemodems involved in high-speed data distribution over cable television systemnetworks.

 

*DTH:*  Direct To Home.

 

*ECAD:*  Escritório Central de Arrecadação eDistribuição (Central Collection and Distribution Office), an entity authorizedto enforce copyright laws relating to musical works.

 

*Editora Abril*:  Editora Abril S.A., a Brazilian corporationcontrolled by Robert Civita.

 

*ESPN Brasil:*  Programming provided by ESPN Brasil Ltda., anindirect subsidiary of ESPN, Inc., with equity provided by ABC, Hearst andGlobo.

 

*Ethernet Technology:*  A local area network technology whichsupports high data transfer rates.

 

*Event Put:*  A triggering event under the StockholdersAgreement pursuant to which each of the Stockholders (other than AbrilComunicações) may, in certain circumstances, demand that we purchase all or aportion of our shares.

 

*Falcon International:*  Falcon International Communications (BermudaL.P.), a subsidiary of Falcon International Communications, L.L.C., a Delawarelimited liability company.

 

*Falcon Time Put:*  A provision of the Stockholders Agreementpursuant to which Falcon International may, in certain circumstances, demand thatwe purchase all or a portion of the shares held by Falcon International.

 

*Fiber Optic Cable:*  Cable made of glass fibers through whichsignals are transmitted as pulses of light. Fiber optic cable has the capacityfor a large number of channels.

 

*Financial Statements:*  The audited financial statements of Tevecapand our subsidiaries and the notes thereto included herein.

 

*Galaxy Brasil:*  Galaxy Brasil S.A., a former wholly-ownedsubsidiary of Tevecap that was sold to Galaxy Latin America in July 1999.

 

*Galaxy Latin America:*Galaxy Latin America, LLC.

 

*Globo:*  Globopar and TV Globo, the owners of a numberof Brazil’s over the air channels.

 

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*Globopar:* Globo Comunicações e Participações Ltda.

 

*Guarantors:* TVA Sistema de Televisão S.A., TVA Communications Ltd., Comercial CaboTV São Paulo Ltda., TVA Sul Paraná Ltda. and CCS Camboriú Cable System deTelecomunicações Ltda.

 

*HABC II:*  Hearst/ABC Video Services II, a Delawaregeneral partnership jointly owned by Hearst and ABC, which partnership held a15.3% equity interest in Tevecap until December 2003.

 

*Head End:*  A collection of hardware, typically includingsatellite receivers, modulators, amplifiers and videocassette playbackmachines. Signals, when processed, are then combined for distribution withinthe Cable network.

 

*Hearst:*  The Hearst Corporation.

 

*Homes Passed:*  Homes that can be connected to a Cabledistribution system without further extension of the distribution network.

 

*IBGE:* Instituto Brasileiro de Geografia e Estatística.

 

*ICMS:* Imposto sobre Circulação de Mercadorias e Serviços (State Value-addedTax).

 

*IDC:* Internet Data Center.

 

*IGP-M:* Índice Geral de Preços de Mercado (General Market Price Index).

 

*INPC: * ÍndiceNacional de Preços ao Comsumidor (National Consumer Price Index).

 

*Interactive Services:*  Services commonly referred to aspay-on-demand, shop-at-home, video games, ATM services, or such otherinteractive services as video phone and telephony which can be more easilyprovided with the development of high-capacity hybrid fiber optic/coaxialdistribution networks.

 

*IP:*  * *Internet protocol.

 

*ISS:*  Imposto sobre Serviços (Sales tax onoperations relating to the provision of goods and services).

 

*JPM:*  JPMorgan Partners LLC, an affiliate ofJPMorgan Chase Bank which holds a 3.7% interest in us through two wholly ownedsubsidiaries.

 

*JPMorgan Parties:*  Two wholly owned subsidiaries of JPM throughwhich JPM holds its equity interest in Tevecap.

 

*Ku-Band:*  A satellite transmission system whichprovides a signal over the “ku” bandwidth.

 

*MMDS (multi-channel multi-pointdistribution system):* A one-way radio transmission of television channels over microwavefrequencies from a fixed station transmitting to multiple receiving facilitieslocated at fixed points.

 

*MMDS license:*  A license that is granted by the applicablegoverning body pursuant to its authority under the communications laws of aparticular country for the purpose of providing MMDS services for a specificfranchise/license area.

 

*MSO:*  Multiple Service Operator.

 

*News Corporation:*  News Corporation plc.

 

*NLOS*:  Non-line of sight.

 

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*NOC:*  Network Operations Center, the command andcontrol center for our network.

 

*OSS:*  Operating Support System.

 

*PAES:*  Federal Tax Financing Program (Specialinstallment program).

 

*Pay-per-view:*  Payment made for individual programs ratherthan a monthly subscription for a whole channel or group of channels.Pay-per-view channels currently provide certain popular sporting events ormajor motion pictures for which customers may be prepared to make a specialpayment.

 

*Penetration Rate:*  The measurement of the take-up of cableservices. The penetration rate as of a given date is calculated by dividing thenumber of subscribers connected to a system on such date by the total number ofhomes passed in such system.

 

*POP:*  Point of Presence.

 

*QoS:*  Quality of Service.

 

*Real Plan:*  A Brazilian government stabilization program,announced in December 1993, aimed at curtailing inflation and building afoundation for sustained economic growth.

 

*REFIS:*  Government’s Tax Recovery Program.

 

*Regulatory Put:*  A provision in the Stockholders Agreementpursuant to which an Event Put is triggered if the amount of capital stock heldby a Stockholder (other than Abril Comunicações) exceeds the amount allowedunder an appropriate legal restriction.

 

*SAP:*  Second Audio Programming, which provides theoption of audio in a second language for the programming on channels for whichit is offered.

 

*SCM*: Serviço de Comunicação Multimídia.

 

*Securities Act:*  United States Securities Act of 1933, asamended.

 

*Senior Notes:* our12 5/8% Senior Notes due 2009.

 

*Si@:*  Sistema Integrado de Assinaturas (IntegratedSubscription System).

 

*SLA:*  Service Level Agreement.

 

*STFC:*  Serviço Telefônico Fixo Comutado.

 

*Stockholders:*  Tevecap, Robert Civita, Abril Comunicações,the JPMorgan Parties and Falcon International.

 

*Stockholders Agreement:*  Stockholders Agreement, datedDecember 6, 1995, among the Stockholders.

 

*Telecommunications Code:*  The Brazilian Telecommunications Code of1962, as amended.

 

*Tevecap:*  Tevecap S.A.

 

*TJLP:* Taxa dejuros de longo prazo (Long term interest rate).

 

*TV Homes:*  The number of households in a given areapossessing at least one television set.

 

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*TV Show Time:*  Televisão Show Time Ltda., a Brazilian *limitada* in which the estate of MatiasMachline and an associate currently hold a 53% equity interest and in which theremaining 47% is currently held by various Abril Comunicações shareholders.

 

*TVA:*  Tevecap S.A. and its consolidatedsubsidiaries and affiliates.

 

*TVA Brasil:*  TVA Brasil Radioenlaces S.A., a Brazilian *limitada* in which the estate of MatiasMachline currently holds a 50% equity interest and in which the remaining 50%is currently held by various Abril Comunicações shareholders.

 

*TVA Sistema:*  TVA Sistema de Televisão S.A., a Braziliancorporation in which we hold a 100% equity interest.

 

*TVA Sul:*  The operations of TVA Sul Paraná Ltda., aBrazilian *limitada* in which wehold a 100% equity interest, and CCS-Camboriú Cable System de TelecomunicaçõesLtda., a Brazilian *limitada*inwhich TVA Sul Paraná Ltda. holds a 60% equity interest and an unaffiliatedthird party holds the remaining 40% equity interest.

 

*UHF:*  Broadcast of a television signal at anultra-high frequency over a given geographical area.

 

*VOD:* Video onDemand.

 

*VoIP:* Voice over Internet Protocol.

 

*WiMAX*:  Worldwide Interoperability for Microwave Access.

 

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