<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

                                   FORM 20-F
(MARK ONE)

[ ]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

FOR THE TRANSITION PERIOD FROM
--------------- TO
--------------- .

Commission file number 34-28367

                                 EL SITIO, INC.
             (Exact name of Registrant as specified in its charter)

                                 THE SITE, INC.
                (Translation of Registrant's name into English)

                             BRITISH VIRGIN ISLANDS
                (Jurisdiction of incorporation or organization)

                                 EL SITIO, INC.
                         AVENIDA INGENIERO HUERGO 1167
                        C1107AOL BUENOS AIRES, ARGENTINA
                              (011) 5411-4339-3700
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
               TITLE OF EACH CLASS                       NAME OF EACH EXCHANGE ON WHICH REGISTERED
               -------------------                       -----------------------------------------
<S>                                                  <C>
                  Common Shares                                   Nasdaq National Market
</TABLE>

Securities registered or to be registered pursuant to Section 12(g) of the
Act:  None

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:  None

     Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.

                                             40,157,338 Common Shares
                                             1,111,111 Series B Convertible
                                             Preferred Shares

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

                                                            [X]  Yes     [ ]  No

     Indicate by check mark which financial statement item the registrant has
elected to follow.

                                                         [ ] Item 17 [X] Item 18

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
INTRODUCTION................................................    1
PART I
  Item 1.  Identity of Directors, Senior Management and
     Advisors...............................................    2
  Item 2.  Offer Statistics and Expected Timetable..........    2
  Item 3.  Key Information..................................    3
  Item 4.  Information on the Company.......................   16
  Item 5.  Operating and Financial Review and Prospects.....   30
  Item 6.  Directors, Senior Management and Employees.......   41
  Item 7.  Major Shareholders and Related Party
     Transactions...........................................   48
  Item 8.  Financial Information............................   52
  Item 9.  The Offer and Listing............................   52
  Item 10. Additional Information...........................   52
  Item 11. Quantitative and Qualitative Disclosures about
     Market Risk............................................   59
  Item 12. Description of Securities Other than Equity
     Securities.............................................   59
PART II
  Item 13. Defaults, Dividend Arrearages and
     Delinquencies..........................................   60
  Item 14. Material Modifications to the Rights of Security
     Holders and Use of Proceeds............................   60
  Item 15. [Reserved].......................................   60
  Item 16. [Reserved].......................................   60
  Item 17. Financial Statements.............................   60
PART III
  Item 18. Financial Statements.............................   61
  Item 19. Exhibits.........................................   61
</TABLE>

                                        i
<PAGE>   3

                                  INTRODUCTION

     This annual report on Form 20-F for the year ended December 31, 1999
constitutes our initial annual report on Form 20-F as filed with the U.S.
Securities and Exchange Commission. This annual report on Form 20-F also
comprises part of our annual report to shareholders and includes our audited
consolidated financial statements as at December 31, 1998 and 1999 and for the
years ended December 31, 1997 (from inception), 1998 and 1999.

     We completed the initial public offering of our common shares in December
1999. We also listed our common shares on the Nasdaq National Market under the
symbol "LCTO" in that month.

     We were incorporated as a British Virgin Islands international business
company in July 1997. Our principal executive offices are located at Avenida
Ingeniero Huergo 1167, C1107AOL, Buenos Aires, Argentina, and our telephone
number is 011-5411-4339-3700.

     El Sitio, O Site and the medallion design are trademarks and service marks
of our company.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This annual report contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements appear throughout this
annual report, including, without limitation, under Item 3. "Key
Information -- Risk Factors", Item 4. "Information on the Company" and Item 5.
"Operating and Financial Review and Prospects". These forward-looking statements
relate to, among other things, our business model, strategy, plans and timing
for the introduction or enhancement of our services and products, proposed
acquisitions, plans for entering into strategic relationships and joint
ventures, and other expectations, intentions and plans contained in this annual
report that are not historical fact.

     When used in this annual report, the words "expects", "anticipates",
"intends", "plans", "may", "believes", "seeks", "estimates" and similar
expressions generally identify forward-looking statements. These statements
reflect our current expectations. They are subject to a number of risks and
uncertainties, including but not limited to, changes in technology and changes
in the Internet marketplace. In light of the many risks and uncertainties
surrounding our marketplace, you should understand that we cannot assure you
that the forward-looking statements contained in this annual report will be
realized.

                                        1
<PAGE>   4

                                     PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

     Not applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

                                        2
<PAGE>   5

ITEM 3.  KEY INFORMATION

SELECTED FINANCIAL DATA

     The following financial data should be read in conjunction with the
consolidated financial statements and Item 5. "Operating and Financial Review
and Prospects". The selected balance sheet data at December 31, 1997, 1998 and
1999 and the selected statement of operations data for the period from July 16,
1997 (date of inception) through December 31, 1997 and the years ended December
31, 1998 and December 31, 1999 have been derived from our audited consolidated
financial statements included elsewhere in this annual report. We prepare our
financial statements in U.S. dollars in accordance with generally accepted
accounting principles in the United States, which is commonly called "U.S.
GAAP".

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------------
                                                             1997             1998              1999
                                                         ------------    --------------    ---------------
                                                          (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                                      <C>             <C>               <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...........................................    $    267        $      780        $     6,861
Costs and expenses:
  Product, content and technology......................         221             1,556              8,074
  Marketing and sales..................................         142               674             20,554
  Corporate, general and administrative................         727             1,940              8,439
  Depreciation and amortization........................          81               107              2,100
  Share-based compensation.............................          --                --              2,042
                                                           --------        ----------        -----------
          Total costs and expenses.....................       1,171             4,277             41,209
                                                           --------        ----------        -----------
Operating loss.........................................        (904)           (3,497)           (34,348)
Total other income (expense)...........................        (110)              (20)               765
Net loss attributable to common shareholders...........      (1,014)           (3,517)            (2,744)
Basic and diluted net loss per common share............      (10.14)            (1.15)             (2.66)
Shares used in computing basic and diluted loss per
  common share.........................................     100,000         3,050,000         13,681,306
PRO FORMA STATEMENT OF OPERATIONS DATA*:
Net revenues...........................................                        15,156             15,863
Operating loss.........................................                        (7,689)           (38,108)
Net loss attributable to common shareholders...........                        (7,709)           (40,087)
</TABLE>

<TABLE>
<CAPTION>
                                                                     AT DECEMBER 31,
                                                              -----------------------------
                                                               1997       1998       1999
                                                              -------    ------    --------
<S>                                                           <C>        <C>       <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................  $    89    $  246    $160,029
Working capital (deficit)...................................   (1,146)      (42)    154,357
Total assets................................................      396     1,481     201,920
Total liabilities...........................................    1,360       712      19,281
Class B convertible shares..................................       --        --       8,967
Total shareholders' equity (deficit)........................     (964)      769     173,672
</TABLE>

---------------
* To reflect acquisitions on October 7, 1999 and November 5, 1999, respectively,
  of retail dial-up subscribers in Brazil and Argentina from IMPSAT Fiber
  Networks, Inc. (as if such acquisitions had occurred at beginning of periods)
  and to include the effect of amortization of acquired subscribers based on a
  three-year period. See Item 4. "Information on the Company -- Our Network".

                                        3
<PAGE>   6

RISK FACTORS

     An investment in our common shares involves a high degree of risk.
Investors in our common shares should carefully consider the following risk
factors and the other information in this annual report.

RISKS RELATED TO OUR COMPANY

WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, SO YOUR BASIS FOR
EVALUATING OUR COMPANY IS LIMITED.

     We have a limited operating and financial history upon which investors can
base evaluation of an investment in our common shares. We are subject to the
risks, uncertainties and problems frequently encountered by companies in early
stages of operations, particularly companies in new and rapidly developing
markets, such as the Internet industry. These risks, uncertainties and problems
include, among others, the following:

     - any inability to maintain and increase levels of traffic on our Websites;

     - any failure to continue to develop and extend the El Sitio (in Brazil, O
       Site) brand;

     - any inability to meet minimum guaranteed impressions under our
advertising agreements;

     - any failure to anticipate and adapt to developing markets;

     - any inability to upgrade and develop our systems and infrastructure and
       attract new personnel in a timely and effective manner;

     - any failure of our network to handle efficiently our Web traffic;

     - any inability to generate significant revenues from e-commerce;

     - any failure to manage rapidly expanding operations;

     - any failure to integrate newly-acquired assets or businesses into our
       operations; and

     - the level of use of the Internet and online services and consumer
       acceptance of the Internet and other online services.

     We cannot assure you that we will be successful or that we will be able to
compete effectively and achieve market acceptance or otherwise address the risk
factors disclosed in this annual report.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR INCREASING LOSSES IN
THE NEXT SEVERAL YEARS.

     We have not achieved profitability to date, and we anticipate that we will
incur substantial and increasing losses through 2002. Our business plan
contemplates that we will first become profitable in 2003 -- at the earliest.
Until that year, we will continue to incur losses and negative cash flow as we
fund operating and capital expenditures in areas such as content and service
development, marketing and brand promotion, development of our e-commerce
platform, additional personnel and network infrastructure. The extent of these
losses will depend, in part, on the amount of growth in our revenues. We cannot
assure you that our losses will not further increase in the future or that we
will ever achieve or sustain profitability.

WE MAY FAIL TO IMPLEMENT SUCCESSFULLY OUR BUSINESS STRATEGY.

     Our business strategy relies upon the creation of high quality content for
our Website for each country in which we operate. Our strategy assumes that
users will be attracted to the content and community features on our Websites,
which will, in turn, allow us to sell advertising, connectivity services and
e-commerce products and services directed to those users. Our strategy remains
unproven and may not be successful, and, if not successful, we may not be able
to modify it in a timely and successful manner in the rapidly evolving Internet
industry. In addition, we could fail to develop strategies to capitalize on
opportunities in new and unproven areas.
                                        4
<PAGE>   7

WE WILL NOT BECOME PROFITABLE IF WE DO NOT ATTRACT A SUBSTANTIAL NUMBER OF USERS
AND ADVERTISERS.

     We must continually enhance and improve our Website content and services to
attract, and to meet the expectations of, our users and advertisers. If other
Internet companies present more desirable content, features or functionality,
our user traffic could be adversely affected. We cannot assure you that we can
successfully identify new service opportunities and develop and bring new
services and products to market in a cost-efficient and timely manner. Any
failure to develop and introduce new services and service enhancements that are
compatible with industry standards and satisfy customer requirements would have
a material adverse effect on our company.

WE MUST DEVELOP OUR BRAND AND GENERATE INCREASED ADVERTISING AND OTHER REVENUES
IN ORDER TO CREATE A VIABLE BUSINESS.

     We must continue to establish and develop our El Sitio (in Brazil, O Site)
brand. Brand loyalty is critical to our ability to expand our user base and our
advertising, connectivity services and e-commerce revenues. We believe that the
importance of brand recognition will increase as the number of Spanish- and
Portuguese-language Websites targeting Latin America and the U.S.
Spanish-speaking market increases. We intend to devote considerable resources
for marketing campaigns, both online and in traditional media, to promote our
brand. If our marketing efforts are unsuccessful, we may fail to establish El
Sitio and O Site as leading brands in our markets. We cannot assure you that our
brand building initiatives and expenditures for this purpose will prove
effective.

     Our success in promoting and enhancing our brand will also depend on our
ability to provide high quality content, features and functionality. If we fail
to promote successfully our brand, or if users or advertisers do not perceive
our services to be of high quality, the value of our brand could be diminished,
which would have a material adverse effect on our company.

OUR GROWTH AND EXPANSION MAY STRAIN OUR ABILITY TO MANAGE OUR OPERATIONS AND OUR
FINANCIAL RESOURCES.

     We are undergoing rapid growth and plan to continue to grow rapidly, both
in existing markets and by means of expansion into new geographic markets. Rapid
growth places significant strain on our network infrastructure, our managerial,
technical and editorial personnel, and our financial and other resources. To
support growth, we must implement new or upgraded operating and financial
systems, procedures and controls for our existing operations in the countries in
which we now operate or into which we may expand. Any failure to expand and
integrate these areas in an efficient manner could have a material adverse
effect on our company.

     We have acquired the retail dial-up access customers of IMPSAT Fiber
Networks, Inc. in Brazil and Argentina and, in April 2000, in Colombia. Prior to
these acquisitions, our company had no experience in operating a connectivity
services business. Any failure to integrate these acquisitions or to preserve
and develop the acquired connectivity customer base could have an adverse effect
on our company. See Item 5. "Operating and Financial Review and
Prospects -- Introduction to Results of Operations".

     In early March 2000, we entered into a definitive agreement to acquire
DeCompras.com, Inc., an e-commerce company that targets Mexico and
Mexican-Americans located in the United States. See Item 4. "Information on the
Company -- E-Commerce". We expect to complete the DeCompras.com acquisition in
the second quarter of 2000. We cannot assure you, however, that we will
consummate this acquisition during this time period -- if at all. Our company
has had limited experience in operating an e-commerce business. In addition, any
failure to integrate the DeCompras.com acquisition could have an adverse effect
on our company.

                                        5
<PAGE>   8

     Our ability to achieve and to manage planned growth will depend upon, among
other factors, our success in:

     - hiring and retaining qualified management, technical and marketing
       personnel;

     - maintaining the high levels of customer service required to retain users
       while undertaking expansion;

     - expanding our network infrastructure to service a growing user base; and

     - integrating acquired assets or businesses into our company.

If we fail to achieve and manage growth, our company, as well as the market
price of our common shares, could be adversely affected.

WE MUST INCREASE OUR ADVERTISING AND OTHER REVENUES IN CASH IN ORDER TO EXPAND
OUR BUSINESS.

     As a network of Websites, our business model is predicated, in part, upon
our ability to increase significantly our advertising revenues from
multinational and local advertisers. Although we will derive subscriber-based
revenues from our acquisitions of the retail dial-up access customers of IMPSAT
Fiber Networks, Inc. in Brazil, Argentina and Colombia, our branded connectivity
services are complementary to the development of communities of users. Our
growth of advertising revenues will depend, among other factors, on:

     - the level of acceptance that Internet advertising achieves in Latin
       America and the growth of the aggregate amount spent on Internet
       advertising in our markets;

     - the market recognition and prestige of our brand and trademarks;

     - the attractiveness of our advertising pricing schedules;

     - the effectiveness of our advertising sales personnel in each of our
markets; and

     - our ability to generate and continue to grow a large community of loyal
       users in our markets.

We are not dependent on any single major advertiser. However, the loss of major
advertisers could have a material adverse effect on our company.

     We have received a significant portion of our historical net revenues from
reciprocal services arrangements, pursuant to which we exchange advertising
space on our network for advertising space on television and radio or for
telecommunications services, in lieu of cash payments. In 1999, we derived
advertising revenues valued at approximately $1.3 million, or 20% of our total
net revenues for that year, from these non-cash reciprocal services
arrangements. In 1998, we derived approximately $180,000, or 23% of our total
net revenues, from these arrangements. We expect that non-cash revenues from
reciprocal services arrangements will continue to account for a significant,
though decreasing, portion of our revenues in the foreseeable future.

     Our business model is also predicated upon a substantial growth in
revenues, particularly in the form of cash, from e-commerce. We believe our
pending acquisition of DeCompras.com will represent an important initial step in
the implementation of our e-commerce strategy. Although we believe that this
acquisition and other e-commerce initiatives on our part will, in the long term,
represent an important source of revenues for our company, we cannot assure you
that we will achieve any significant growth in e-commerce revenues or that
e-commerce activities will enhance the overall financial performance of our
company.

WE MUST MAINTAIN ACCESS TO QUALITY CONTENT PROVIDED BY THIRD PARTIES IN ORDER TO
DEVELOP OUR USER AND SUBSCRIBER BASE.

     Although we seek to produce or edit a substantial portion of the content
for our Websites, we continue to rely upon third parties, such as Reuters,
Agence France Presse and The Weather Channel, to

                                        6
<PAGE>   9

provide global content to complement our own content and thus make our Websites
more attractive to users and, by extension, advertisers. Most of our
arrangements with third-party providers of content are not exclusive, are
short-term and may be terminated at the discretion of the other party. Any
termination of a substantial number of these content-related arrangements could
have an adverse effect on our company.

OUR BUSINESS DEPENDS UPON STABLE RELATIONSHIPS WITH KEY SUPPLIERS.

     We have no long-term contracts with our suppliers. We are dependent on
third-party suppliers for our leased-line connections and bandwidth. Some of
these suppliers are or may become competitors of our company, and they are not
subject to any contractual restrictions upon their ability to compete with us.
If these suppliers change their pricing structures, we may be adversely
affected. In addition, any failure or delay on the part of our network providers
to deliver bandwidth to us or to provide operations, maintenance and other
services with respect to such bandwidth in a timely or adequate fashion could
adversely affect our company.

     In connection with our acquisitions of retail dial-up access customers from
IMPSAT Fiber Networks, Inc., we did not acquire the telecommunications
infrastructure to provide these services and will instead outsource that
infrastructure from third-party providers -- initially, under one-year services
agreements, which are renewable on an annual basis, with subsidiaries of IMPSAT
Fiber Networks, Inc. These agreements provide us with the telecommunications
infrastructure for our dial-up access customers but do not restrict IMPSAT Fiber
Networks, Inc. from competing directly with us or providing better rates to
other dial-up access providers. These agreements, however, permit us to
terminate the agreements for any reason, and without any penalty, by giving 30
days' notice. If IMPSAT Fiber Networks, Inc. competes directly with us, charges
us above-market rates for telecommunications infrastructure or offers cut-rate
telecommunications infrastructure to our competitors in the retail dial-up
access business, our business could be adversely affected.

     As we enter the e-commerce business at a meaningful level, we will need to
maintain and develop relationships with suppliers and establish satisfactory
product and service procurement and order fulfillment systems. We will also need
to manage inventory levels on an effective basis. Among other things, if
customer demand for products held in inventory falls short of expectations, we
could be required to take significant inventory markdowns. Any failure to
address these and other requirements could prevent us from creating a successful
e-commerce business and could have a material adverse effect on our company.

WE MUST FURTHER DEVELOP STRATEGIC RELATIONSHIPS TO STRENGTHEN OUR COMPETITIVE
POSITION.

     We continue to seek to establish strategic relationships with leading
content providers, dial-up access providers, e-commerce partners, and technology
and infrastructure providers. To date, many of our key strategic relationships
have been with our shareholders and their affiliates. See Item 4. "Introduction
on the Company -- Business and Strategic Relationships". We will depend, in
part, upon strategic relationships to help to further develop our business. Our
future growth will depend upon maintaining our existing strategic relationships
as well as our ability to establish new relationships.

WE COULD EXPERIENCE CAPACITY CONSTRAINTS AND UNEXPECTED SYSTEM INTERRUPTIONS,
WHICH COULD IMPEDE THE DEVELOPMENT OF OUR BUSINESS.

     We continue to seek to increase substantially the number of pages of
information transmitted over our network, commonly referred to as "page views".
As a result, our network must accommodate a high volume of traffic, often at
unexpected times. We have, to date, experienced limited capacity constraints in
terms of our ability to serve our increasing user volumes. However, we cannot
assure you that our network will not suffer from interruptions. Any break in the
continuous operations of our network could have a material adverse effect on our
company.

     We make our Websites available using servers located at the server farm
facilities of Exodus Communications in New Jersey, IMPSAT Brazil in Sao Paulo
and IMPSAT Fiber Networks, Inc. in Miami, Florida. See Item 4. "Information on
the Company -- Technology". Any failure by Exodus
                                        7
<PAGE>   10

Communications, IMPSAT Brazil or IMPSAT Fiber Networks, Inc. to protect our
systems against damage from fire, weather, power loss, telecommunications
failure, break-ins or other events could have a material adverse effect on our
company.

     We may also, from time to time, experience interruptions due to hardware
failures, unsolicited bulk e-mail and operating system failures. Because our
revenues depend on the level of traffic on our Websites and positive user
experiences with our network, we will be adversely affected if we experience
frequent or long system delays or interruptions. Any failure on our part to
minimize or prevent capacity constraints or system interruptions could have an
adverse effect on our company.

WE MAY HAVE DIFFICULTY IN OBTAINING THE ADDITIONAL FINANCING REQUIRED TO DEVELOP
OUR BUSINESS.

     As a company in an early stage of operations, and in order to develop and
expand our business, we anticipate that we will require substantial additional
equity and debt financing in future periods. Our ability to obtain required
additional financing on satisfactory terms will be subject to a number of
factors, including, without limitation, the following:

     - the stage of operations of our company;

     - our actual or anticipated results of operations, financial condition and
cash flow;

     - investor sentiment towards companies conducting business in Latin
America; and

     - generally prevailing market conditions.

     If additional funds are raised through the issuance of equity securities,
the percentage ownership of our then current shareholders will be reduced, and
the holders of new equity securities may have rights, preferences or privileges
senior to those of the holders of our common shares. If additional funds are
raised through the issuance of debt securities, these securities would have some
rights, preferences and privileges senior to those of the holders of our common
shares, and the terms of this debt could impose restrictions on our operations
and result in significant interest expense to us.

     In the event that we are unable to raise sufficient financing on
satisfactory terms and conditions in the future, our company would be adversely
affected.

WE MUST RETAIN KEY MANAGERS AND REQUIRE ADDITIONAL QUALIFIED PERSONNEL TO
DEVELOP OUR BUSINESS IN AN INDUSTRY IN WHICH IT IS DIFFICULT TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL.

     Our future performance depends, in large part, on the continued service of
our senior management, including, in particular, Roberto Vivo-Chaneton,
co-founder and chairman of our company, and Roberto Cibrian-Campoy, co-founder,
president and chief executive officer of our company. The loss, for any reason,
of the services of these individuals could have a material adverse effect on our
company.

     The growth and development of our business also requires the hiring and
retention of highly qualified personnel in each market. We cannot assure you
that we will be able to retain our key personnel or to attract and retain such
additional highly qualified personnel in the future. Any inability to attract
and retain the personnel necessary to support the growth of our business could
have an adverse effect on our company.

WE ARE CONTROLLED BY A SMALL GROUP OF EXISTING SHAREHOLDERS, WHOSE INTERESTS MAY
DIFFER FROM THOSE OF OTHER SHAREHOLDERS.

     Our directors and officers and their respective affiliates beneficially
own, in the aggregate, a significant majority of our issued and outstanding
share capital. See Item 7. "Major Shareholders and Related Party Transactions".
As a result, these shareholders will be able to control the outcome of all
matters requiring shareholder approval, including the election of directors and
approval of mergers, acquisitions and other significant corporate transactions.
There may be circumstances in which interests of these shareholders may conflict
with the interests of the other shareholders in our company.

                                        8
<PAGE>   11

     Commercial and other transactions between our company, on the one hand, and
our directors, officers and controlling shareholders and their affiliates, on
the other, create the potential for, or could result in, conflicting interests.
These relationships may give rise to conflicts of interest from time to time
relating to contracts, corporate opportunities and use of directors' time and
expertise. See Item 7. "Major Shareholders and Related Party Transactions". We
intend to enter into all related party transactions on an arm's length basis
(measured against terms that would be offered by an unaffiliated third party).
We cannot assure you, however, that all of these future transactions will be
free of conflicting interests.

WE MUST PRESERVE OUR INTELLECTUAL PROPERTY RIGHTS, WHICH ARE ESSENTIAL TO THE
DEVELOPMENT OF OUR BUSINESS.

     We consider our El Sitio, O Site and medallion design trademarks and
service marks to be important to our success. We are pursuing the registration
of our core marks in the United States and in key countries of Latin America, as
well as in Spain and Portugal. If we are unable to obtain a registration in a
particular country, we would have trademark or service mark rights to the extent
that we use the mark and common law rights apply, but the rights would not be as
strong as if they were registered.

     Any usage of trademarks or service marks by other parties that are similar
to our core marks could hinder our ability to build a unique brand identity and
may possibly lead to trademark disputes, in that we may be sued for trademark
infringement in court or we may have the validity of our applications and/or
registrations challenged at government agencies. Any judgment against us in an
intellectual property-based proceeding could result in the loss of our ability
to use one or more of our marks, as well as the imposition of monetary damages.
If we lose the right to use a trademark or service mark, we may be forced to
adopt a new mark, which would result in the loss of substantial resources and
brand identity. In any event, whether successful or not, litigating a trademark
dispute would result in the expenditure of monetary resources and the diversion
of executives' time. Any inability to protect, enforce or use our trademarks,
service marks or other intellectual property may have a material adverse effect
on our company.

     We also depend upon technology licensed from third parties for chat,
homepage creation, search and auction capabilities and related Web services. Any
dispute with the licensor of a particular technology may result in our inability
to continue to use that technology. In addition, we cannot be certain that our
technology, products, business methods or services do not or will not infringe
valid patents or other intellectual property rights held by third parties. If a
third party alleges infringement, we may be forced to take a license, which we
may not be able to obtain on commercially reasonable terms. We may also incur
substantial expenses in defending our company against third-party infringement
claims, regardless of the merit of those claims. Successful infringement claims
against us could result in substantial monetary liability and/or being prevented
by a court from conducting all or a part of our business that falls within the
scope of the asserted patent, leading to substantial expenditures to redesign
and/or license technology.

OUR RESULTS OF OPERATIONS MAY FLUCTUATE DUE TO SEASONALITY.

     The level of use of our network may be seasonal in nature. Internet usage
in Latin America may be lower during the first calendar quarter of the year
because:

     - it includes the summer months in much of Latin America;

     - affluent segments of the population tend to take extended vacations
       during these months; and

     - schools and universities are generally closed.

     Our advertising revenues may also be subject to seasonal fluctuations.
Advertisers in traditional media tend to spend less in the first and second
calendar quarters.

     We also anticipate that our e-commerce operations will experience
seasonality, reflecting a combination of traditional retail seasonality patterns
(in which sales in the fourth quarter of each year are higher because of the
holiday season) as well as the above-mentioned seasonal fluctuations in Internet
usage.

     We believe that seasonality will affect our financial performance on an
ongoing basis.
                                        9
<PAGE>   12

THE MULTI-COUNTRY NATURE OF OUR BUSINESS EXPOSES US TO ADDITIONAL
INTERNATIONAL-BASED RISKS.

     We are subject to a broad range of risks inherent in businesses with
operations in multiple countries, including, among others, the following:

     - unexpected changes in laws and governmental regulations;

     - difficulties and costs of staffing and managing international operations;

     - potentially adverse tax consequences;

     - uncertain protection for intellectual property rights;

     - trade barriers for products and services which may be sold over our
       network;

     - difficulties in maintaining and upgrading our systems;

     - export restrictions and controls;

     - currency fluctuation and exchange risks; and

     - economic, political and other conditions in the countries in which we
       currently, or may seek to, conduct business.

Any of these factors, many of which are outside our control, could have a
material adverse effect on our company.

RISKS RELATED TO OUR INDUSTRY

WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET AND FACE COMPETITION FROM MORE
DEVELOPED COMPANIES WITH GREATER RESOURCES.

     Many companies already provide Website and online destinations targeted to
Spanish- and Portuguese-speaking audiences in Latin America, the United States
and elsewhere. Competition for users and advertisers and business partners is
intense and is expected to increase significantly in the future, particularly
because there are no substantial barriers to entry in our industry.

     We face competition on both country and regional levels. Our primary
competitors include, among others, StarMedia and Terra Networks (in most of
Latin America, the United States and the Iberian peninsula), Quepasa.com and
Yupi (in the United States), Clarin Digital (in Argentina) and Universo Online
(in Brazil). We also face competition from Spanish- and/or Portuguese-language
versions of services, such as Yahoo!, America Online and T1MSN. Our competitors
may develop content that is better than ours or that achieves greater market
acceptance. New competitors also may emerge and acquire significant market
share. Some of our established competitors and potential new competitors may
have better brand recognition and significantly greater financial, marketing,
technical and other resources than our company. Any significant loss of users to
our competitors could have a material adverse effect on our company.

     As a result of our acquisitions of IMPSAT Fiber Networks, Inc.'s retail
dial-up access customers in Brazil, Argentina and Colombia, we have recently
entered the connectivity services market, which is extremely competitive and is
characterized by rapidly changing technology and evolving standards. As a result
of these acquisitions, we will be amortizing an intangible asset relating to our
customer base in subsequent periods. To the extent that we fail to retain this
customer base, this intangible asset could be deemed to be impaired, in which
case we could sustain substantially increased losses or, in later years, reduced
profits. We also do not own telecommunications assets and will, therefore,
depend upon telecommunications providers to carry our Internet traffic.
Increased competition could require us to lower our prices, increase our selling
and marketing expenses, and raise subscriber acquisition costs.

     Various cable and telephone companies have made announcements regarding the
planned deployment of broadband services for high-speed Internet access. These
services would include new technologies, such
                                       10
<PAGE>   13

as cable modems, wireless communications and digital subscriber line, commonly
known as DSL. These new technologies permitting faster connectivity may make our
newly-acquired retail dial-up access businesses obsolete. We may not be able to
retain our subscribers or, if we do, we may not be able to offset the effect of
increased costs through an increase in subscribers, subscriber revenues or
revenues from other sources.

     Recently, free Internet access services have been introduced in most of our
markets, and some Internet access providers are now offering subsidized or free
personal computers to their subscribers. If these trends accelerate, subscribers
will have cost-effective alternatives to our service, and they may have more
than one Internet account or may switch to another dial-up access provider in
their country if they are unable to gain access to our service. As a result,
usage of our services by subscribers may decrease; our customer turnover, which
is known as "churn", could increase; and we may be compelled to reduce our
prices further, all of which could have a material adverse effect on our
company.

     We also expect that the e-commerce market will be extremely competitive. We
will compete with a substantial number of other companies, including the
following:

     - traditional retailers, including retailers which are in the process of
       developing online ("click-and-mortar") capabilities;

     - local and international e-commerce companies;

     - Internet portals, including some of our existing competitors which view
       e-commerce as an integral part of their long-term business strategies;
       and

     - suppliers of products and services which primarily sell products and
       services to other merchants, but which could in the future seek to make
       sales directly to consumers and businesses.

Many of these existing or potential e-commerce competitors may have greater
financial, marketing, technical and other resources, greater brand recognition
and customer awareness, more extensive retailing experience and longer-standing
relationships with suppliers than our company.

WE WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME WIDELY ACCEPTED AS
A MEDIUM FOR ADVERTISING AND E-COMMERCE.

     Advertising revenues will continue to be a major component of our total
revenues. In order for us to generate advertising revenues, advertisers and
advertising agencies must direct a portion of their advertising budgets to the
Internet and, specifically, to our network. Many of our current or potential
advertisers have limited experience using the Internet to advertise or to sell
their products and services and have not devoted a significant portion of their
budgets to Internet-based advertising. Advertisers that have invested
substantial resources in other media forms may be reluctant to adopt a new
method that may limit or compete with their existing efforts. These businesses
may find Internet advertising to be less effective for promoting and selling
their products and services than is traditional print and broadcast media. We
will be adversely affected if Internet advertising fails to develop or develops
slowly in Latin America.

     Our future revenues and profitability will also depend on the acceptance
and use of the Internet in Latin America as an effective medium of commerce.
E-commerce is a recent phenomenon in these regions, and a sufficiently broad
base of online customers may not adopt or continue to engage in e-commerce. We
necessarily will rely on consumers and businesses that have historically used
traditional means of commerce to purchase products and services. Our future
success will depend on these customers accepting and using e-commerce as a new
method for conducting business and exchanging information.

CHANGES IN THE LEGAL AND REGULATORY ENVIRONMENT FOR OUR INDUSTRY COULD INCREASE
OUR COSTS AND LENGTHEN THE PERIOD FOR US TO BECOME PROFITABLE.

     Government regulation has not materially restricted use of the Internet in
our markets to date. However, the legal and regulatory environment pertaining to
the Internet remains relatively undeveloped and may change. New laws and
regulations could be adopted, and existing laws and regulations could be
                                       11
<PAGE>   14

applied to the Internet and, in particular, to e-commerce. New and existing laws
and regulations could cover issues, including, among others, the following:

     - sales and other taxes;

     - user privacy;

     - pricing controls;

     - characteristics and quality of products and services;

     - consumer protection;

     - cross-border commerce;

     - libel and defamation;

     - copyright, trademark and patent infringement; and

     - other claims based on the nature and content of Internet materials.

Changes in government regulation in any of the countries in which we operate
could increase our costs and prevent us from delivering our services and
products over the Internet. It could also slow the growth of the Internet, which
could, in turn, delay growth in demand for our network and adversely affect our
company.

WE MAY BECOME SUBJECT TO LEGAL LIABILITY BASED ON THE CONTENT PROVIDED THROUGH,
AND THE PRODUCTS AND SERVICES SOLD OVER, OUR NETWORK.

     The laws in the United States and in Latin American countries relating to
the liability of online content and service providers, such as our company, for
activities of their users remains unsettled. Claims have been made against other
Internet companies for defamation, negligence, copyright or trademark
infringement, obscenity or other grounds based on the nature and content of
information that was posted online by these providers or their visitors. We
could become subject to similar claims. It is also possible that, if information
provided through our services contains errors, third parties could make claims
against us for losses incurred in reliance on the information. Finally, we could
face personal injury or other product liability claims arising from the use of
products or services sold through our Websites.

     We offer e-mail services, which expose us to potential liabilities or
claims resulting from:

     - unsolicited e-mail;

     - lost or misdirected messages;

     - illegal or fraudulent use of e-mail; or

     - interruptions or delays in e-mail service.

Investigating and defending these claims may involve substantial expenses, even
if they do not result in liability.

     Although we carry general liability insurance, our insurance may not cover
all potential claims to which we are exposed or may not be adequate to indemnify
us for all liabilities that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our company.

WE WILL BE ADVERSELY AFFECTED IF WE FAIL TO RESPOND EFFECTIVELY AND ON A TIMELY
BASIS TO RAPID TECHNOLOGICAL CHANGE.

     The Internet industry is characterized by rapidly changing technology,
evolving industry standards, frequent new product and service announcements,
introductions and enhancements, and changing consumer demands. Our future
success will depend on our ongoing ability to improve the performance, features
and reliability of our Internet services and products in response to competitive
product, feature

                                       12
<PAGE>   15

and service offerings and the evolving demands of the marketplace. New services,
products and technologies may be superior to the services and technologies that
we use, and may render our services and technologies obsolete or require us to
incur substantial expenditures to modify or adapt our services, products or
technologies.

OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER
DISRUPTIONS.

     Internet usage could decline if any well-publicized compromise of security
occurs. "Hacking" involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. Hackers, if successful, could
misappropriate proprietary information or cause disruptions in our services. In
August 1999, the Microsoft Windows NT operating system employed by our servers
was subject to a disruption, which may have been caused by either unusually
heavy traffic on our network or a hacking attack. This disruption, which
occurred intermittently over a two-day period, caused a significant reduction in
the speed at which our servers could transmit data, resulting in delays for our
users in accessing our Websites and features on our Websites. To address this
particular situation, we implemented a number of general security measures,
including migrating our operating system to a Unix platform that we consider
more stable and hiring an Internet security company. We cannot assure you that
these measures will be effective. Security breaches could have a material
adverse effect on our business. In addition, the inadvertent transmission of
computer viruses could expose us to a material risk of loss or litigation and
possible liability.

DATA REGARDING USAGE OF, AND GROWTH PROSPECTS FOR, THE INTERNET MAY NOT BE
ACCURATE.

     The general market and similar data in this annual report relating to the
Internet industry in Latin America and the United States, including with respect
to projected increases in users of, and advertising and e-commerce on, the
Internet, have been based upon information published by or obtained from
independent market research firms, in each case, except as otherwise indicated.
These research firms include, among others, International Data Corporation and
Forrester Research. The market forecasts by these firms are based to a large
extent upon assumptions, including assumptions about the growing acceptance of
the Internet as a medium for commercial activity and continuing advances in
computing and telecommunications technology. We cannot assure you that these
assumptions will prove to be correct or, even if they do, that the forecasts
will prove to be accurate.

RISKS RELATED TO LATIN AMERICA

OUR FUTURE SUCCESS DEPENDS UPON SUBSTANTIAL GROWTH IN USE OF THE INTERNET IN
LATIN AMERICA.

     The timing and the degree of our future success will depend on the
continued growth of the market for online services and products in Latin
America. The market in the region for our services has only recently begun to
develop and is evolving. The commercial potential for the Internet in Latin
America also remains uncertain. Major issues concerning the use of the Internet,
such as security, intellectual property rights, reliability, cost, ease of
deployment and administration, and quality of service, remain largely unresolved
and may adversely affect our growth and market acceptance.

     Each country in Latin America has its own telephone rate tariff regime
which, if too costly, may make consumers less likely to sign up for and access
the Internet. As a result of broad privatization and deregulation of the
telecommunications industry in Latin America and increased competition, tariffs
have been reduced recently in some countries. However, we cannot assure you that
this trend will continue. Unfavorable tariff developments could have a material
adverse effect on our company.

E-COMMERCE TRANSACTIONS IN LATIN AMERICA CONTINUE TO BE IMPEDED BY THE LACK OF
SECURE PAYMENT METHODS, HIGH CUSTOMS DUTIES AND UNRELIABLE PARCEL DELIVERY
SYSTEMS.

     Unlike in the United States, consumers and merchants in Latin America can
be held fully liable for credit card and other losses due to third-party fraud.
As secure methods of payment for e-commerce
                                       13
<PAGE>   16

transactions have not been widely adopted in Latin America, both consumers and
merchants generally have a relatively low confidence level in the integrity of
e-commerce transactions. In addition, many banks and other financial
institutions have generally been reluctant to give merchants the right to
process online transactions due to these concerns about credit card fraud.
Unless consumer fraud laws in Latin American countries are modified to protect
e-commerce merchants and consumers, and until secure, integrated online payment
processing methods are fully implemented across the region, our ability to
generate revenues from e-commerce may be limited, which could have a material
adverse effect on our company.

     Heavy customs duties and taxes are imposed on deliveries of international
parcels in many countries in Latin America. Many countries also do not have
systems in place to ensure speedy and reliable delivery of parcels once they
have cleared customs. These problems may deter many merchants and consumers from
engaging in e-commerce transactions. For example, merchants who are familiar
with these barriers to the development of e-commerce may not seek to advertise
or sell their products and services until these problems are addressed. If
governmental authorities in Latin American countries fail to deregulate customs
duties, or if deregulation occurs slowly, our ability to generate meaningful
revenues from e-commerce will be reduced, which could have a material adverse
effect on our company.

ADVERSE LATIN AMERICAN POLITICAL AND ECONOMIC CONDITIONS COULD AFFECT OUR
FINANCIAL PERFORMANCE.

     We currently operate in Argentina, Brazil, Chile, Colombia, Mexico, the
United States and Uruguay. We are in the process of expanding into Venezuela and
Spain later in 2000. In addition, we are considering expanding into other
countries in Latin America. Our financial performance for our common shares may
be affected generally by inflation, exchange rates and controls, price controls,
interest rates, changes in governmental economic policy, taxation and other
political, economic or other developments in or affecting the Latin American
countries in which we operate.

LOCAL CURRENCIES USED IN THE CONDUCT OF OUR BUSINESS ARE SUBJECT TO DEPRECIATION
AND VOLATILITY.

     Historically, the currencies of many countries in Latin America have
experienced substantial depreciation and volatility, particularly against the
U.S. dollar. Currency movements, as well as higher interest rates, have
materially and adversely affected the economies of many Latin American
countries, including countries which account or are expected to account for a
significant portion of our operations.

     Our reporting currency is the U.S. dollar. However, customers of our
connectivity services and some advertisers in Latin America may be billed in
local currencies. In Brazil, for example, commercial billing is required to be
in reais, the local currency. Our accounts receivable from these subscribers and
advertisers will decline in value if the local currencies depreciate relative to
the U.S. dollar. Similarly, any decline in the value of local currencies
relative to the U.S. dollar is likely to reduce the U.S. dollar prices that we
will be able to charge our advertisers. In addition, we may be subject to
exchange control regulations which might restrict our ability to convert local
currencies into U.S. dollars. Any imposition of exchange controls could
adversely affect our company.

RISKS RELATED TO OUR COMMON SHARES

MARKET PRICES OF, AND TRADING VOLUMES IN, OUR COMMON SHARES MAY BE VOLATILE.

     We completed the initial public offering of our common shares in December
1999. We also listed our common shares on the Nasdaq National Market in the same
month. Since December 10, 1999 (the date on which trading commenced on the
Nasdaq National Market), a relatively active trading market for our common
shares has developed. However, we cannot assure you that an active trading
market will be sustained in future periods.

                                       14
<PAGE>   17

     The market price of our common shares may be significantly affected by,
among others, the following factors:

     - our actual or anticipated results of operations;

     - new services or products offered, or new contracts entered into, by our
       company or our competitors;

     - changes in, or our failure to meet, securities analysts' expectations;

     - legislative and regulatory developments affecting the Internet industry;

     - developments in the Internet industry and technological innovations;

     - investor perceptions of investments relating to Latin America; and

     - general market conditions and other factors beyond our control.

     U.S. and non-U.S. stock markets have periodically experienced significant
price and volume fluctuations that have especially affected the market prices of
common shares of Internet companies. These changes have often been unrelated to
the financial performance of particular companies. These broad market
developments may also adversely affect the market price of our common shares.

OUR SHAREHOLDERS MAY FACE DIFFICULTIES IN PROTECTING THEIR INTERESTS BECAUSE WE
ARE A BRITISH VIRGIN ISLANDS COMPANY.

     Corporate governance matters for our company are principally determined by
our memorandum of association and articles of association, in each case, as
amended, and the International Business Companies Act, 1984 (Cap. 291) of the
British Virgin Islands. The rights of shareholders and the fiduciary
responsibilities of directors, officers and controlling shareholders under
British Virgin Islands law have not been extensively developed, particularly
when compared with statutes and judicial precedents of most states and other
jurisdictions in the United States. As a result, our shareholders may have more
difficulty in protecting their interests in the case of actions by our
directors, officers or controlling shareholders than would shareholders of a
corporation incorporated in a state or other jurisdiction in the United States.

YOU MAY EXPERIENCE DIFFICULTY IN ENFORCING CIVIL LIABILITIES AGAINST OUR
COMPANY.

     We are a British Virgin Islands company, and a substantial portion of our
assets is located outside of the United States. In addition, most of our
directors and executive officers, as well as other persons controlling our
company, reside or are located outside of the United States. As a result, it may
not be possible for investors to effect service of process within the United
States upon us or these persons or to enforce judgments obtained against us or
these persons in U.S. courts predicated solely upon the civil liability
provisions of the U.S. federal or state securities laws. We have been advised by
Conyers Dill & Pearman, our British Virgin Islands counsel, that there is doubt
as to the enforceability in the British Virgin Islands in original actions or in
actions for enforcement of judgments of U.S. courts, of civil liabilities
predicated upon the U.S. federal or state securities laws. There is also doubt
as to enforceability of judgments of this nature in several of the jurisdictions
in which we operate and our assets are located.

                                       15
<PAGE>   18

ITEM 4.  INFORMATION ON THE COMPANY

OVERVIEW

     We are an Internet media company providing country-specific and global
interactive content for Spanish- and Portuguese-speaking audiences in Latin
America and the United States. We currently have, in addition to a global
Website, country-specific Websites for, and sales and content production offices
in, Argentina, Brazil, Chile, Colombia, Mexico, the United States and Uruguay.
We plan to establish sales offices in Venezuela and Spain later in 2000. We have
begun to offer branded retail dial-up Internet access ("connectivity") services
in Brazil and Argentina and, in April 2000, in Colombia. We are also undertaking
initiatives to develop an e-commerce platform targeted to Spanish- and
Portuguese-speaking audiences in Latin America and the United States -- most
notably, our pending acquisition of DeCompras.com, Inc., an e-commerce company
targeting Mexico and Mexican-Americans located in the United States.

     Our registered users (meaning users who have provided personal information
such as name, e-mail address and address) grew from 100,000 persons at December
31, 1998 to 634,000 persons at December 31, 1999 and now exceed 1 million
persons. The number of pages viewed by our users on a quarterly basis increased
from 9 million in the fourth quarter of 1998 to 270 million in the fourth
quarter of 1999. In March 1999, we also commenced measuring unique visitors
(meaning the number of different individual users in a given period). The number
of unique visitors has increased from 175,000 in the month of March 1999 to a
monthly average of 2.7 million in the fourth quarter of 1999. We cannot predict
whether the recent growth in registered users, pages viewed and unique visitors
will continue.

     For information concerning the history and development of our company, see
Item 5. "Operating and Financial Review and Prospects -- Overview".

OUR MARKET OPPORTUNITY

     We believe a large and growing market consisting of Spanish- and
Portuguese-speaking audiences exists in Latin America and the United States for
content, e-commerce and connectivity services, and that this market presents us
with a significant opportunity. Latin America had a total population of
approximately 500 million people at December 31, 1999. At that date, the United
States had a total Hispanic population of more than 31 million people. The
Spanish- and Portuguese-speaking audiences in Latin America and the United
States together represent one of the fastest growing user groups on the Web
today.

     From our inception, our philosophy has been to "Think regional, be local."
Consistent with this philosophy, we have launched a global Website and seven
country-specific Websites and have opened offices in seven countries in Latin
America and in the United States. We believe that the combination of
country-specific Websites supported by in-country management, marketing, sales
and content production personnel will enable us to implement the El Sitio vision
of building the premier Internet destination network for Spanish- and
Portuguese-speaking audiences in Latin America, the United States and, over the
long-term, Spain and Portugal.

OUR STRATEGY

     To achieve our goal of becoming the leading Internet destination network
for Spanish- and Portuguese-speaking audiences in Latin America and the United
States, and to take advantage of our market opportunity, we continue to
implement a strategy consisting of the following principal elements:

   --  BUILDING A MARKET-LEADING NETWORK

     Our strategy is driven by our views that, first, the countries in Latin
America are diverse and, second, Internet users in Latin America are driven by
interactive content in Spanish and Portuguese that fosters user loyalty. As a
result, we seek to build a leading network by:

   > Further Developing Country-Specific and Global Interactive Content. From
     our inception, we have focused on developing quality country-specific and
     global interactive content. We also provide content to our viewers under
     agreements with well-known third-party content providers and vertical

                                       16
<PAGE>   19

     Internet portals. In addition, the community features on our Websites are
     designed to encourage our users to interact with us and other users and
     contribute content to our network. As a key part of our strategy, we
     continue to expand and enhance our proprietary, user-generated and
     third-party content. At December 31, 1999, we had 83 employees dedicated to
     content development in the seven countries in which we currently operate.

   > Incorporating Additional Community-Building Features. Our experience
     indicates a strong preference on the part of users for interactive
     community-building features, such as chat, cupido net (which is an
     interactive meeting place for users), "en tu mail" (user-solicited e-mails
     containing original El Sitio content) and other interactive resources. We
     use online surveys and analysis of traffic patterns to enhance our content
     and interactive resources, to further build our community of users and to
     foster user loyalty to our network.

   > Strengthening our Brand Identity. We seek to create a leading Internet
     brand among Spanish- and Portuguese-speaking users. We have positioned our
     image as user-friendly, informative and entertaining. We believe that the
     essence of our brand is summed up in our marketing campaign theme: El
     Sitio: Tu Lugar en Internet ("El Sitio: Your Home on the Internet"). To
     strengthen our brand, we incurred approximately $15 million for branding
     and advertising activities in 1999, and we plan to spend approximately $40
     million on such activities in 2000.

   --  GENERATING REVENUES FROM OUR NETWORK

     We view substantial revenue-generation as a key to our long-term success,
and we plan to capitalize on our network to generate revenues by:

   > Forging One-on-One Relationships with Advertisers. We seek to forge
     long-term one-on-one relationships with multinational and local
     advertisers. We are working to educate companies as to the commercial
     advantages of the Internet as an advertising medium, emphasizing the
     attractive demographics of Latin American Internet users, and thereby
     attract advertisers to our network. With offices in each of our principal
     markets, at December 31, 1999, we had a total of 72 sales and marketing
     personnel dedicated to expanding our advertising revenues.

   > Developing Our E-commerce Business. With our growing community of users, we
     believe e-commerce will offer us an opportunity to generate significant
     revenue growth from our network. In December 1999, we added an e-shopping
     guide to our Websites. In early March 2000, we entered into a definitive
     agreement to acquire DeCompras.com, Inc., an e-commerce company that
     targets Mexico and Mexican-Americans located in the United States.

   > Integrating Connectivity into Our Network. We have acquired the retail
     dial-up access customers of IMPSAT Fiber Networks, Inc. in Brazil and
     Argentina and, in April 2000, in Colombia. We believe that offering El
     Sitio-branded connectivity services will foster user loyalty and will also
     encourage our users to utilize our developing e-commerce platform.

   --  LEVERAGING STRATEGIC RELATIONSHIPS

     We intend to leverage our existing relationships with shareholders and
enter into new strategic relationships to expand our network and enhance our
content, marketing and sales. Our key strategic shareholders, including Hicks,
Muse, Tate & Furst Incorporated, the Cisneros Group of Companies, IMPSAT Fiber
Networks, Inc., SLI.com Inc. and GC Companies Inc., have facilitated a number of
new commercial relationships, such as introductions to content providers,
advertising customers and e-commerce partners. Two of these shareholders are
also working with us on initiatives involving the production and distribution of
broadband content.

OUR NETWORK

     Our network consists of seven country-specific Websites and a global
Website. We currently have, country-specific Websites for, and sales and content
production offices in, Argentina, Brazil, Chile, Colombia, Mexico, the United
States and Uruguay. We plan to establish sales offices in Venezuela and Spain
later in 2000.

                                       17
<PAGE>   20

     Our offices and country-specific content afford our users the dual
advantages of, first, the size and resources of a regional network and, second,
the country-specific content and community features most useful to them.
Operationally, this structure permits us to maximize economies of scale across
multiple markets with differing content and features from a single global
platform.

     Our global content is produced by a team of programmers, designers, editors
and marketing staff. This team generates a substantial volume of proprietary
global content and acquires or develops software required to offer the features
that our market research indicates will most appeal to our users. In addition,
it incorporates generic content from well-known third-party providers such as
Reuters, Agence France Presse and The Weather Channel, as well as third-party
Internet portals that pay us a fee to be present on our network.

     The content and community features prepared by our global team provides the
starting point from which our in-country production teams adapt our global
content to their local market preferences. Our local and regional production
offices cultivate our users' preferences by adapting the content and community
features on our channels to local preferences. Local managers and their staff
have autonomy to select the stories and features that are headlined on our
channels, to add country-specific proprietary or third-party content and to add
channels or features with a local focus.

  CONTENT

     Our network of country-specific Websites provides original proprietary and
third-party content and user-friendly interactive resources that bring our own
style to our user base.

     Based on our market research, we believe that users in Latin America tend
to be impulsive and emotion-driven and use the Internet for entertainment,
leisure and services. As a result, we believe our targeted users are attracted
by the following four impulses, which we have highlighted in the design of our
homepage in each country-specific Website:

     - News -- Our staff transforms relevant daily news in each country into an
       interactive and entertaining experience for our users. News includes
       editorials, polls, forums and video clips, which allow our users to help
       shape opinions by contributing their points of view. We also provide
       global and local third-party news coverage.

     - Relationships -- We cover relationship topics that interest our users,
       such as love, family, friendship, society, sex and politics. We want our
       users to communicate and share important life experiences with our
       community of users. In addition to interactive responses that we generate
       from polls and forums, we typically receive over 500 narratives each day
       from our users from which we select responses to display on our channels.

     - Technology -- Our staff produces technology-related content with both the
       new and the experienced Internet user in mind. Tutorials, guides and news
       about technology and the Internet are provided to assist new users in
       learning how to navigate the Internet. We also cater to more experienced
       users through, among other things, sophisticated materials, software and
       application downloads and technology-related news.

     - Entertainment -- We provide our users with entertainment-related content
       in areas such as music, fashion, TV and movies. We also create an
       interactive environment for our users through interviews, polls, forums,
       video and photo productions. For example, our users participate in
       interviews with top models, noted musicians and TV stars. In addition, we
       provide our users with a variety of games, contests and prizes on a daily
       basis.

     Our user-friendly global interactive resources include:

     - Chat -- provides entry to a "virtual community" in which our users
       interact in real-time discussions about topics such as sports, politics,
       relationships and current events. Our users create special interest chat
       rooms and can also participate in moderated chat rooms.

     - e-mail -- permits users to sign up for free e-mail services in Spanish,
       Portuguese or English through an agreement with USA.Net, a leading
       provider of e-mail and messaging services. Users

                                       18
<PAGE>   21

       benefit from features that enable them to control their e-mail accounts,
       including customization of the e-mail interface.

     - El Sitio 3-D -- is described below.

     - Astrologia ("Astrology") -- includes studies and analysis on birth, early
       childhood, karma, horoscopes and compatibility.

     - Cupido net -- is an interactive meeting place on our network where users
       can search for and develop new friends or special relationships.

     - Batalla Cybernaval/Batalha Cybernaval ("Battleship") -- is an online
       version of the classic board game "Battleship" in which users compete
       with their own fleets and rockets on a monthly basis.

     - Buscador ("Search") -- provides an internal search engine to enable users
       to search our proprietary library and also allows them to use Inktomi's
       search engine and have access to its library of over 110 million sites.

     - Guia de Compras ("Shopping Guide") -- is described below under
       "-- E-Commerce".

     - En tu mail ("In your e-mail") -- where users solicit weekly e-mails of El
       Sitio's original content in various areas of interest. El Sitio sends
       over 770,000 such e-mails weekly.

     - Tu Sitio Personal/Seu Site Pessoal ("Personal Home Page") -- offers our
       users the ability to create their own content through their personalized
       home pages.

     - Auctions -- is an auction site to be operated on a regional basis under a
       strategic alliance with Lokau.com. See "-- Business and Strategic
       Relationships".

     - Bulletin Boards -- offer our users the ability to post their own views
       and opinions on a variety of topics to be shared with other users on our
       Websites.

     - Juegos/Jogos ("Games") -- offers users a variety of multimedia, action,
       arcade and promotional games, in which users compete for prizes awarded
       by many of the companies advertising on our Websites.

     - Premios/Premios ("Contests") -- uses contests with prizes, such as free
       trips, cars and CDs, as a marketing tool to attract visitors to our
       network.

     In the first quarter of 2000, we launched El Sitio 3-D, which allows a user
to simultaneously access windows for audio, video, html and three-dimensional
navigation capabilities through the user's Internet browser. El Sitio 3-D
enables the user to navigate as a character inside a virtual world in which he
or she can communicate and play games, while advertisers can transform their
marketing offerings into virtual outdoor advertising spots and e-merchants can
use three-dimensional presentations to sell their products. We believe that El
Sitio 3-D illustrates the manner in which broadband capabilities will enhance
the Internet experience in the future.

     In addition, our Websites offer a range of global and country-specific
vertical sites, including the following:

<TABLE>
<CAPTION>
                      GLOBAL                                  COUNTRY-SPECIFIC
                      ------                                  ----------------
    <S>                                          <C>
    - Deportes/Esportes (Sports)                 - Noticas/Noticias (News)
    - Finanzas (Finance)                         - Hometown (United States) (local news)
    - El Tiempo/O Tempo (Weather)                - Beleza (Brazil) (beauty)
    - Salud (Health)                             - Geosfera (Brazil) (extreme sports)
    - Turismo (Tourism)                          - Gastronomia (Uruguay)
                                                 - Vida (United States) (U.S. Hispanic
                                                 issues)
                                                 - Hard Rock (Mexico)
</TABLE>

     The global sites are mostly third-party vertical Internet portals made
available through strategic alliances. See "-- Business and Strategic
Relationships".

                                       19
<PAGE>   22

  E-COMMERCE

     We view the development of an e-commerce platform as an important part of
our business strategy. We believe that an increasing number of businesses and
consumers in Latin America and the U.S. Hispanic market will embrace the
Internet as a viable marketplace for products and services.

     In December 1999, we added a shopping guide to our network. This guide
provides links to other Websites for online sale by local and U.S.-based
e-merchants of books, flowers, music, gifts and technology products. We also
provide a shopping help center dedicated to assisting our users as they navigate
the online buying process. We do not currently receive any fees for the links to
other e-commerce Websites, but have entered into these arrangements in order to
attract users to our Websites and to provide us with useful experience in
building our own e-commerce platform.

     In early March 2000, we entered into a definitive agreement to acquire
DeCompras.com, Inc., an e-commerce company that targets Mexico and
Mexican-Americans located in the United States. "DeCompras" means "shopping" in
Spanish. DeCompras.com began operations in Monterrey, Mexico in mid-July 1999.
It sells a broad range of products to consumers and businesses in Mexico,
including technology hardware and software products, consumer electronics,
photographic and video equipment, personal care products, home appliances,
office supplies, toys, gifts and jewelry, and, through a "baby store", baby
products. DeCompras.com achieved over $1.2 million in net revenues during its
first nine months of operations, with more than one-half of that revenue coming
in the first quarter of 2000. DeCompras.com also sells products to U.S.-based
Mexican-Americans for delivery in Mexico through its Paisano program. This
program targets the 65% of U.S. Hispanics who are Mexican-Americans and who are
concentrated in major cities such as Los Angeles, Chicago, San Francisco and San
Antonio. Under the terms of the agreement, our company will issue to
shareholders of DeCompras.com an aggregate of 1.75 million of our common shares
(equivalent to less than 4% of our outstanding shares on a fully diluted basis
at March 31, 2000) and pay $7 million in cash. This acquisition is expected to
close in the second quarter of 2000, subject to completion of satisfactory due
diligence reviews and other conditions precedent.

  CONNECTIVITY

     We entered the connectivity services business in the fourth quarter of
1999, when we acquired the retail dial-up access subscribers of IMPSAT Fiber
Networks, Inc. in Brazil and Argentina. We completed the acquisition of its
retail dial-up access subscribers in Colombia in April 2000. The total purchase
price for these acquisitions was $21.5 million. As a result of these
acquisitions, we have acquired approximately 57,000 subscribers in Brazil,
13,000 subscribers in Argentina and approximately 6,000 subscribers in Colombia,
for an aggregate total of approximately 76,000 subscribers.

     A substantial majority of the subscribers acquired from IMPSAT Fiber
Networks, Inc. in Brazil and Argentina already has been incorporated as
registered users of our network. We have been using a combination of
www.osite.com.br and www.mandic.com.br as the homepages for the Brazilian
subscribers and www.elsitio.com.ar as the homepage for the Argentine subscribers
since February 2000 and March 2000, respectively.

     We did not acquire the telecommunications infrastructure, such as
points-of-presence, switches and backhaul capacity, required to provide retail
Internet dial-up access. We have entered into one-year services agreements with
subsidiaries of IMPSAT Fiber Networks, Inc. to provide us with the necessary
infrastructure for our connectivity services operations. See "-- Technology"
below.

     We are outsourcing help desk operations and technical support for our
dial-up access businesses. This approach should enable us to minimize our fixed
costs and respond more flexibly to changes in demand.

     We do not view connectivity services as a core business for our company,
but rather as a strategic tool to foster user loyalty and to support the
customer base for our developing e-commerce platform.

OUR COMMUNITY

     Users accessing our Websites are encouraged to register with us on either a
full or partial basis:

     - full registration requires users to provide us with the user's name,
       e-mail address, home address, telephone number, occupation and other
       personal information.

                                       20
<PAGE>   23

     - partial registration requires a user to provide only a name and e-mail
       address.

To encourage full registration, some of our network's most popular features
require prior registration, such as private chat rooms, cupido net, free e-mail
and participation in games and other promotions. Once a user is registered with
our network, we are able to communicate with the user by e-mail and otherwise
seek to involve the user in our community.

     We track our user traffic principally on the following basis:

     - registered users -- measures the cumulative number of users that have
       registered with our network by providing information such as name, e-mail
       address and address. Some of these registered users may no longer be
       active users. Most of our users have not yet registered with our network.

     - page views -- measures the number of pages opened by our users in a given
       period and is a useful indicator for advertisers.

     - visits -- measures the number of visits to our Websites in a given
       period.

     - unique visitors -- measures the number of individual visitors in a given
       period, such that an individual user that visits our Websites multiple
       times in the relevant period is only counted one time.

     We have generated statistics concerning our registered users. Our page view
data and unique visitor numbers are audited by I/Pro.

     The following table presents the evolution in our registered user base at
quarter-end dates and total page views on a quarterly basis over the last five
quarters ended December 31, 1999:

<TABLE>
<CAPTION>
                                                    REGISTERED USERS
                                                    ----------------
<S>                                             <C>                         <C>                         <C>
4th Q '98                                                100344                                                '4th Q '98'
1st Q '99                                                251343                                                '1st Q '99'
2nd Q '99                                                281255                                                '2nd Q '99'
3rd Q '99                                                440838                                                '3rd Q '99'
4th Q '99                                                633600                                                '4th Q '99'
</TABLE>

     We increased our registered users from 100,000 persons at December 31, 1998
to 634,000 at December 31, 1999, and our registered users now exceed 1 million
persons. From the fourth quarter of 1998 to the fourth quarter of 1999, total
pages viewed by our users increased from 9 million to 270 million. In August
1999, our number of registered users and our user traffic increased
significantly, due, in part, to the launching of our first mass media-based
branding and advertising campaign at the beginning of

                                       21
<PAGE>   24

the month. We commenced measuring unique visitors in March 1999. The number of
unique visitors has increased from 175,000 in March 1999 to a monthly average of
2.7 million in the fourth quarter of 1999.

MARKETING

     We depend upon advertising to develop our brand and to attract users to our
Websites and subscribers to our connectivity services.

     We incurred approximately $15 million in 1999 for marketing, sales and
advertising (including advertising received in barter transactions in exchange
for advertising on our network). We have budgeted approximately $40 million for
these expenses in 2000. We anticipate that our branding and advertising expenses
will continue to represent the single largest component of our expenses.

     We launched a mass media-based branding campaign, with an initial phase
commencing in August 1999 and a second phase in November 1999. We launched a new
phase in this new campaign on April 1, 2000. Our marketing seeks to build our
brand by creating brand recognition in our target markets, attracting new users
to our network and increasing our exposure and visibility to potential
advertisers. Our campaigns have emphasized the user-friendly attributes of our
network with the theme that "El Sitio se adapta a vos" ("El Sitio adapts to
you").

     Our campaign utilizes the following media:

     - broadcast media, including both television and radio;

     - print media, including newspapers and magazines;

     - online banner advertising with hyperlinks to our Websites;

     - targeted e-mail;

     - advertising and computer industry trade shows;

     - billboard and other outdoor advertising; and

     - general public relations to generate favorable free news media coverage.

The content and implementation of our branding and advertising campaign has been
coordinated by major advertising agencies in each of our markets under the
umbrella of WPP Group PLC.

     In September 1999, we entered into an agreement with Sammy Sosa, the
renowned baseball player, and Player's Choice International L.L.C. under which
we will have the exclusive right to use and display Mr. Sosa's name and likeness
on the Internet. Mr. Sosa has agreed to use his best efforts to increase
awareness of our Internet portals by wearing clothing and accessories bearing
our logo on at least four nationally televised events during the term of the
agreement and by attending three of our promotional events per year. Under the
agreement, Mr. Sosa received a total of $1 million and 25,000 common shares of
our company, with an option to purchase on or before January 31, 2001 an
additional 25,000 common shares at a 25% discount from the closing trading price
of the common shares on January 29, 2001. Mr. Sosa and Player's Choice
International L.L.C. will also receive a participation of the advertising
revenues generated and actually received as a result of the agreement.

     Our marketing strategy seeks, among other things, to build advertising
relationships and generate revenues. Our sales force is focused on major
advertisers and advertising agencies. We believe that relationships with Latin
American advertising agencies are important because they influence advertising
buying decisions by companies in the region.

     Under an agreement entered into in 1999, J. Walter Thompson S.A. has agreed
to place $3 million of advertising by its clients on our network of Websites,
with a commission of $1 million payable by El Sitio to J. Walter Thompson. We
will recognize revenues under this arrangement net of this commission. In
addition, we have agreed to obtain approximately $20 million of the advertising
that we intend to purchase during 2000, using J. Walter Thompson as our
advertising agency.

                                       22
<PAGE>   25

SALES

     Advertising.  At December 31, 1999, we had an internal marketing and sales
organization of 72 professionals, who are based at our offices in Buenos Aires
(34 persons, including both global and local Argentine personnel), Sao Paulo
(12), Mexico City (11), Miami (11) and Montevideo (4). We opened an office in
Santiago in March 2000, where marketing and sales are supported by our Chilean
partners, and in Bogota in April 2000, where we have three professionals. We
plan to open additional offices in Venezuela and Spain in 2000. A significant
portion of our sales personnel's income is commission-based. We are also seeking
representation agreements with advertising agencies for the sale of
advertisements on our Websites. Our sales personnel focus on both selling
advertisements on the Websites and developing long-term strategic relationships
with clients.

     We seek to attract corporate advertisers by educating and communicating
with them regarding the benefits of the Internet as a business tool. Advertising
on the Internet by Latin American companies is still in an early stage of
operations. Many Latin American companies have not developed a Website or an
Internet strategy and need advice on how to implement such a strategy. We help
companies to develop and implement Internet strategies and solutions.

     We offer a range of advertising options to our clients, including the
following:

- banner advertising;

- sweepstakes and promotions;

- button advertising and sponsorships;

- content development;

- contextual links to merchandise;

- opt-in direct marketing/lead generation;

- e-mail sponsorship programs;

- pre- and post-campaign market research; and

- celebrity event sponsorships.

     We offer our advertisers the option to display their advertisements on one
or more of our country-specific Websites, or on a regional or global basis. Our
advertisers also have the flexibility to specify the channels on our network and
the Website pages on which they wish their messages to appear.

     We have derived a substantial majority of our revenues to date from the
sale of advertisements and sponsorships. In 1999, we had 213 advertisers and
were not dependent upon any major advertiser for any material portion of our
total revenues. In 1998, each of four advertisers, IMPSAT S.A., Arcor, S.A.,
Compaq Corporation and Antel (Uruguay), accounted for more than 10% of our
revenues.

     Prior to November 1998, we sold advertising primarily at a fixed price per
month for a fixed banner. Currently, our markets are evolving and appear to be
developing along the lines of the U.S. Internet industry model, in which
advertising is sold on a cost-per-thousand impressions ("CPM") basis. The cost
of our advertising products varies according to the product. For example, a
banner with "click-through" or "hyper-link" capabilities is more costly than a
simple textual banner. Similarly, sponsorship of a channel or page is more
costly than acquiring a fixed number of CPMs. Our contracts with advertisers and
advertising agencies range from one to twelve months. Our advertisers have
tended to receive a guaranteed number of impressions generally for a fixed fee.
In the future, we expect that an increasing portion of our advertising contracts
will be long-term CPM-based contracts.

     We provide our advertisers with statistics related to the traffic on our
network provided and audited by I/Pro. Receipt of audited statistics enables our
advertisers to assess more accurately the market penetration of their
advertising message.

     E-Commerce.  We are working with the management of DeCompras.com to devise
a sales strategy for our developing e-commerce platform. Among other things, we
plan to integrate DeCompras.com's e-commerce Website into our network by means
of links on our Websites that will lead users to the DeCompras.com shopping
experience. We also intend to conduct targeted marketing activities, utilizing
information in El Sitio's and DeCompras.com's user databases. More generally, we
plan to develop our e-commerce platform by leveraging El Sitio's growing user
base and by taking advantage of synergies between content and e-commerce
offerings. See "-- Our Network -- E-Commerce" above.

                                       23
<PAGE>   26

     Connectivity.  In light of our acquisitions of IMPSAT Fiber Networks,
Inc.'s retail dial-up access customers in Brazil, Argentina and Colombia, we are
integrating the sales personnel in each country into our network's existing
sales team. We expect to gain economies of scale as we eliminate overlapping
functions and integrate sales strategies and resources. We are integrating our
connectivity services into the latest phase of our mass media-based branding and
advertising campaign that was launched on April 1, 2000.

     We are pricing our connectivity services in response to market conditions.
We are also likely to launch new pricing initiatives in an effort to increase
the loyalty of subscribers to our network. Initially, we anticipate maintaining
the current sales and pricing strategies for our dial-up access subscribers. We
vary our pricing and sales strategies by country, offering a range of plans
ranging from unlimited access with e-mail accounts to e-mail access only plans.
The following illustrates the principal products, each of which includes an
e-mail account, offered at December 31, 1999 in Brazil and Argentina, our two
principal markets for connectivity services:

                                     BRAZIL
- unlimited access;
- twenty hours per month;
- ten hours per month;
- five hours per month; and
- e-mail access only.
                                   ARGENTINA
- unlimited access (with three e-mail accounts);
- unlimited access;
- twelve hours per month;
- six hours per month; and
- e-mail access only.

For Internet use above the pre-paid access levels, subscribers are charged
per-minute rates. The average monthly subscription fee in December 1999 in
Brazil was $13.30 per month and in Argentina was $23.96 per month. The weighted
average monthly subscription fee in December 1999 for the subscribers
transferred to us in Brazil and Argentina was $15.32.

     We are assessing the effect on our connectivity services business of the
recent introduction of free Internet services in our markets. See Item 3. "Risk
Factors -- Risks Related to Our Industry". Free Internet services could result
in decreased usage of our services by our subscribers, increased customer
turnover and pressure on us to reduce subscriber rates. However, free services
could also spur increased Internet penetration in our markets, which could
result in more user traffic for our Websites. In addition, we believe that we
can differentiate our connectivity services from the free services by providing
higher quality content as well as broader product offerings and better user
service.

BUSINESS AND STRATEGIC RELATIONSHIPS

     In order to increase traffic at our Websites, expand our online community
and build our brand, we continue to pursue strategic relationships with business
partners that offer quality content, technology and distribution capabilities as
well as marketing and cross-promotional opportunities.

     Content.  We have entered into agreements with leading content producers
such as Reuters, Agence France Presse and The Weather Channel, among others,
under which such companies provide content to us for publication on our network
in return for a fixed fee or revenue-sharing arrangement based on minimum page
views.

     We have also entered into agreements with vertical content producers, such
as Patagon.com (financial services), PSN Multimedia International (sports
portal), Lokau.com (auctions), HogarDigital.com (real estate) and Viajo.com
(travel), among others, that will pay us a fixed fee and, in certain cases, a
share of revenues generated, to display content provided by them on our network.

     In February 2000, we entered into a strategic alliance with Grupo Sarandi
Comunicaciones S.A., which owns and operates a network of radio stations in
Uruguay under the Grupo Sarandi name. Under this five-year agreement, we have
received an exclusive royalty-free license to use proprietary content broadcast
on the radio stations owned by Grupo Sarandi. We also have the right to rename
and rebrand the radio station under the El Sitio mark and, ultimately, to
purchase it from Grupo Sarandi for $1

                                       24
<PAGE>   27

million. Grupo Sarandi has agreed to provide a fixed amount of advertising time
on its radio stations to our company, valued at $450,000, and to guarantee us a
minimum amount of advertising for our Website in Uruguay. In exchange for Grupo
Sarandi 's obligations, we will design, host and maintain Websites for its radio
stations. In addition, we have issued to Grupo Sarandi an aggregate of 62,500 of
our common shares, which have been pledged by Grupo Sarandi as security for its
payment obligations to us. Grupo Sarandi is an affiliate of Guillermo Liberman
and SLI.com Inc., as well as Roberto Vivo-Chaneton, who are major shareholders
in our company.

     In February 2000, we also signed a letter agreement with Red de Television
Chilevision S.A. and Iberoamerican Media Holdings Chile S.A. (together, "IRC").
Pursuant to this two-year agreement, we will design, host and maintain Websites
for IRC's eight radio stations and four television stations in Chile and will
receive the exclusive right to use content from IRC on our Chilean Website. IRC
will also provide us with administrative support in connection with the
development of our operations in Chile. In addition, IRC has agreed to sell
advertising for these Websites and to provide us with a portion of the revenue
received by IRC in connection with the sale of advertising. As part of these
agreements, IRC has guaranteed us a minimum of $300,000 in advertising revenues
during the first year of the agreement and $600,000 in the second year of the
agreement. In exchange for its obligations, we will issue to IRC an aggregate of
166,667 common shares. Red de Television Chilevision S.A. and Iberoamerican
Media Holdings Chile S.A. are affiliates of IAMP (El Sitio) Investments, Ltd.,
which is a major shareholder in our company.

     E-Commerce.  We are pursuing several revenue-sharing relationships and
joint venture opportunities with e-commerce merchants in the United States and
Latin America to develop electronic retail operations in the flower, gifts,
books, music and hardware and software areas. Pending the closing of our
acquisition of DeCompras.com, Inc. and the development of propriety e-commerce
services, we are offering limited e-commerce services by way of links on our
e-shopping channel to the Websites of various e-merchants.

     Connectivity.  In connection with our acquisitions of retail dial-up access
customers of IMPSAT Fiber Networks, Inc. in Brazil, Argentina and Colombia, we
did not acquire the telecommunications infrastructure, such as
telecommunications bandwidth, points-of-presence, switches and backhaul
capacity, required to provide these services. Instead, we will outsource that
infrastructure from third-party telecommunications providers -- initially, from
subsidiaries of IMPSAT Fiber Networks, Inc.

     We have entered into one-year services agreements with subsidiaries of
IMPSAT Fiber Networks, Inc. in Brazil and Argentina. Under these agreements,
IMPSAT Fiber Networks, Inc. is to provide us with the telecommunications
infrastructure and equipment installation and maintenance services to provide
connectivity services to our subscribers on a 24-hour, 365-day basis using
equipment owned by subsidiaries of IMPSAT Fiber Networks, Inc. We pay a fee per
port or "channel" made available to our customers for the transmission of data.
We currently estimate that the aggregate fee payable by us for these services in
Brazil and Argentina will be approximately $475,000 per month. The terms of the
service agreements may be extended for another period of one year upon mutual
agreement by the parties. We have the right to terminate the agreement for any
reason, and without any penalty, by giving 30 days' notice. Each service
agreement also contains quality of service standards. We entered into a
substantially similar agreement in Colombia in April 2000.

     IMPSAT Fiber Networks, Inc. uses access servers with an average
connectivity speed of 56 kbps. IMPSAT S.A. (Argentina) subscribers are able to
connect to the Internet through special dedicated phone lines at rates
significantly less expensive than connections through conventional telephone
lines.

     Applications.  We are party to several agreements relating to the provision
of third-party licenses and other applications. For example, we have entered
into an agreement with Inktomi, a leading Internet company, under which we have
use of the search engine software and access to the database of Inktomi, a
leader in search technology with a library of over 110 million sites. In
addition, through an agreement with USA.Net, a leading provider of e-mail and
messaging services, our users will have access to free e-mail services in
Spanish, Portuguese and English.

                                       25
<PAGE>   28

     Strategic Investors.  Prior to our initial public offering in December
1999, we completed private placements, or commercial transactions involving
issuances, of our convertible preferred shares with strategic investors. See
Item 5. "Operating and Financial Review and Prospects". These strategic
investors include the following:

     - Hicks, Muse, Tate & Furst Incorporated and the Cisneros Group of
       Companies (through their jointly owned IAMP (El Sitio) Investments,
       Ltd.);

     - GCC Investments, LLC, an indirect subsidiary of GC Companies, Inc., which
       owns and operates General Cinemas Theatres;

     - SLI.com Inc., a subsidiary of Sociedad Latinoamericana de Inversiones
       S.A.; and

     - IMPSAT Fiber Networks, Inc.

     We are working closely with our strategic investors in order to take
advantage of the synergies created by our relationships. See "-- Our Strategy"
above. In addition, we recently entered into strategic alliances with Sarandi
Comunicaciones S.A. in Uruguay and with IRC in Chile, which, as discussed above,
are affiliates of some of our major shareholders.

TECHNOLOGY

     Network of Websites and E-commerce.  We make our Websites available using
fifteen Sun Microsystems servers, nineteen Microsoft Windows NT servers, four
Linux servers, two Oracle database servers and two Microsoft SQL servers as our
central production servers, which servers are currently located at the server
farm facilities of Exodus Communications in New Jersey. We also have separate
servers for the Brazilian site, currently located at the server farm facilities
of IMPSAT Brazil in Sao Paulo. The site is powered by ten Microsoft NT servers
and four Linux servers. We also have a back-up production server at IMPSAT Fiber
Networks, Inc.'s server farm facilities in Miami, Florida. In each of Argentina,
Brazil, Chile, Mexico, Uruguay and the United States, we maintain a data center
for development and staging.

     We have implemented an environment in which each server can function
separately. Key components of our server architecture are served by multiple
redundant machines. As part of the Exodus server farm facilities, we have up to
100 Mbps of bandwidth access over our Internet connections, which are fully
redundant so that if a failure in the network or equipment of one service
provider occurs, traffic is automatically routed through one of several other
providers. Each of Exodus Communications, IMPSAT Brazil and IMPSAT Fiber
Networks, Inc. provides comprehensive facilities management services, including
human and technical monitoring of all production servers 24 hours per day, seven
days per week. All facilities are protected by multiple power supplies. Our
operations will depend on the ability of IMPSAT Fiber Networks, Inc., IMPSAT
Brazil and Exodus Communications to provide adequate space, air-conditioning,
telecommunication connectivity and protection of their systems against damage
from fire, hurricanes, power loss, telecommunications failure, break-ins or
other events.

     We employ in-house and third-party monitoring software for our servers,
processes and network connectivity. Reporting and tracking systems generate
daily traffic, demographic and advertising reports. All of our production
systems are copied to backup tapes each night and regularly stored in a storage
facility on Exodus's premises as well as in a storage facility at our offices in
Buenos Aires. We have implemented these various redundancies and backup systems
in order to minimize the risk associated with damage from fire, power, loss,
telecommunications failure, break-ins, computer viruses and other events beyond
our control.

     Our network of Websites must accommodate a high volume of traffic and
deliver frequently updated information. Components or features of our network
have in the past suffered outages or experienced slower response times because
of equipment or software downtime. We are in the process of migrating our
platform and our applications to a Unix platform using Sun Microsystems servers,
which we believe will increase the reliability, availability and serviceability
of our network. We anticipate that this migration

                                       26
<PAGE>   29

process, which we believe will not affect the continuous operation of our
network, will be completed by the middle of 2000.

     Connectivity.  In connection with our acquisitions of retail dial-up access
customers of IMPSAT Fiber Networks, Inc. in Brazil, Argentina and Colombia, we
did not acquire the telecommunications infrastructure, such as
telecommunications bandwidth, points-of-presence, switches and backhaul
capacity, required to provide these services. Instead, we are currently
outsourcing that infrastructure from subsidiaries of IMPSAT Fiber Networks, Inc.
See "-- Business and Strategic Relationships" above.

     IMPSAT Fiber Networks, Inc. uses access servers with an average
connectivity speed of 56 kbps. IMPSAT S.A. (Argentina) subscribers are able to
connect to the Internet through special dedicated phone lines at rates
significantly less expensive than connections through conventional telephone
lines.

COMPETITION

     Many companies provide Websites, e-commerce and connectivity services
targeted to Spanish- and Portuguese-speaking audiences. All of these companies
compete with us for user traffic, advertising dollars and e-commerce
opportunities. The market for Internet content companies in Latin America is new
and rapidly evolving. Competition for users, advertisers and e-commerce
opportunities is intense and is expected to increase significantly in the future
because there are no substantial barriers to entry in our markets.

     We compete with providers of content and services over the Internet,
including Web directories, portals, search engines, content sites, Internet
service providers and sites maintained by government and educational
institutions.

     We face competition on both a country-specific and regional level. Our
primary competitors include, among others, StarMedia and Terra Networks (in most
of Latin America, the United States and the Iberian peninsula), Quepasa.com and
Yupi (in the United States), Clarin Digital (in Argentina) and Universo Online
(in Brazil). We also face competition from Spanish- and/or Portuguese-language
versions of U.S. services, such as Yahoo!, America Online and T1MSN. Our
competitors may develop content that is better than ours or that achieves
greater market acceptance. It is also possible that new competitors may emerge
and acquire significant market share. Some of our established competitors and
potential new competitors may have better brand recognition and significantly
greater financial, technical and marketing resources than our company.

     We expect that the e-commerce market will be extremely competitive. We will
compete with a substantial number of other companies, including the following:

     - traditional retailers, including retailers which are in the process of
       developing online ("click-and-mortar") capabilities;

     - local and international e-commerce companies;

     - Internet portals, including some of our existing competitors which view
       e-commerce as an integral part of their long-term business strategies;
       and

     - suppliers of products and services which primarily sell products and
       services to other merchants, but which could in the future seek to make
       sales directly to consumers and businesses.

Many of these existing or potential e-commerce competitors may have greater
financial, technical, marketing and other resources, greater brand recognition
and customer awareness, more extensive retailing experience and longer-standing
relationships with suppliers than our company.

     We recently entered the connectivity services market, which is extremely
competitive and is characterized by rapidly changing technology and evolving
standards. We do not own telecommunications infrastructure and, therefore, will
depend upon telecommunications providers to carry our Internet traffic.
Increased competition could require us to lower our prices, increase our selling
and marketing expenses, and raise subscriber acquisition costs. New technologies
permitting faster dial-up may make our
                                       27
<PAGE>   30

connectivity services business obsolete. We may not be able to retain our users
or, if we do, to offset the effect of increased costs through an increase in
users, user revenues or revenues from other sources.

     We expect to experience increased competition from the traditional
telecommunications carriers. We believe that there is a move toward horizontal
integration by these carriers through acquisitions of, joint ventures with, or
the wholesale purchase of connectivity from, Internet service providers in order
to meet the Internet connectivity requirements of their business customers.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     We consider our El Sitio, O Site and medallion design trademarks and
service marks to be important to our success. We are pursuing the registration
of our trademarks and service marks in the United States and in key countries of
Latin America, as well as in Spain and Portugal. Although some of the countries
have registered our marks, we cannot predict with certainty whether the
trademark offices of the remaining countries will do the same. If we are unable
to obtain a registration in a particular country, we would have trademark or
service mark rights to the extent that we use the mark and common law rights
apply, but the rights would not be as strong as if they were registered.

     Some companies, including other participants in the Internet industry, use
and/or may use trademarks or service marks in English or other languages which,
when translated, are similar to certain of our core marks. This usage may hinder
our ability to build a unique brand identity and may possibly lead to trademark
disputes, in that we may be sued for trademark infringement in court, or we may
have the validity of our applications and/or registrations challenged at
government agencies. Although we do not believe that such proceedings against us
ultimately would be meritorious, we cannot predict that with certainty. If we
lose the right to use a trademark or service mark, we may be forced to adopt a
new mark which would result in the loss of substantial resources and brand
identity. In any event, whether successful or not, litigating a trademark
dispute would result in the expenditure of monetary resources and the diversion
of executives' time. Any inability to protect, enforce or use our trademarks,
service marks or other intellectual property may have a material adverse effect
on our company.

     We also depend upon technology licensed from third parties for chat,
homepage, search and related Web services. Any dispute with a licensor of the
technology may result in our inability to continue to use that particular
technology. Additionally, there may be patents issued or pending that are held
by third parties and that cover significant parts of the technology, products,
business methods or services used to conduct our business. We cannot be certain
that our technology, products, business methods or services do not or will not
infringe valid patents or other intellectual property rights held by third
parties. If a third party alleges infringement, we may be forced to take a
license, which we may not be able to obtain on commercially reasonable terms. We
may also incur substantial expenses in defending our company against third-party
infringement claims, regardless of the merit of those claims. Successful
infringement claims against us could result in substantial monetary liability
and/or being prevented by a court from conducting all or a part of our business
that falls within the scope of the asserted patent, leading to substantial
expenditures to redesign and/or license technology.

GOVERNMENT REGULATION

     There are currently few laws or regulations directly applicable to access
to or commerce on the Internet. However, due to the increasing use of the
Internet, a number of legislative and regulatory proposals are under
consideration by various governments and governmental agencies or bodies.

     Our Mexican subsidiary is registered as a provider of connectivity services
with the Mexican Federal Telecommunications Commission. We have also received
the necessary licenses from the relevant regulatory authorities to provide such
services in Argentina and are applying for a license in Colombia. Pending the
receipt by us of such a license in Colombia, we have entered into a joint
venture agreement with IMPSAT S.A., pursuant to which it provides such services
to our customers. We are not required to obtain a license to provide
connectivity services in Brazil.

                                       28
<PAGE>   31

     The adoption or application of existing or new laws or regulations may
negatively affect the growth in the use of the Internet, which could, in turn,
decrease the demand for our services and products, increase our costs of doing
business, or otherwise have a material adverse effect on our company. See Item
3. "Key Information -- Risk Factors -- Risks Related to Our Industry".

FACILITIES

     Our corporate offices are located in Buenos Aires, where we currently lease
approximately 1,600 square meters.

     We also lease office space in Bogota, Mexico City, Miami, Montevideo,
Santiago and Sao Paulo.

LEGAL PROCEEDINGS

     There are no material legal proceedings pending or, to our knowledge,
threatened against us.

SUBSIDIARIES

     We are a holding company that conducts its operations through subsidiaries
in each of the countries in which we maintain Websites and sales and production
offices. The following is a list of our subsidiaries:

<TABLE>
<CAPTION>
                            NAME                                   COUNTRY OF INCORPORATION
                            ----                                   ------------------------
<S>                                                           <C>
- El Sitio Argentina, S.A.                                      Argentina
- O Site Entertenimentos do Brasil, S.A.                        Brazil
- El Sitio Chile, S.A.                                          Chile
- El Sitio Colombia, S.A.                                       Colombia
- El Sitio Entretenimientos de Mexico, S.A. de C.V.             Mexico
- El Sitio U.S.A., Inc.                                         United States
- El Sitio Uruguay, S.A.                                        Uruguay
- El Sitio Management, S.A.                                     Argentina
- El Sitio Commerce, Inc.                                       British Virgin Islands
</TABLE>

     All of our subsidiaries are wholly-owned (except for a small number of
shares required to be issued to other persons to comply with local corporate law
requirements).

                                       29
<PAGE>   32

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     The following management's discussion and analysis should be read in
conjunction with our consolidated financial statements and the other information
appearing elsewhere in this annual report.

OVERVIEW

     We are an Internet media company providing country-specific and global
interactive content for Spanish- and Portuguese-speaking audiences in Latin
America and the United States. We currently have, in addition to a global
Website, country-specific Websites for, and sales and content production offices
in, Argentina, Brazil, Chile, Colombia, Mexico, the United States and Uruguay.
We plan to establish sales offices in Venezuela and Spain later in 2000. The
launch of each country-specific Website represents a potential new community of
users. By building substantial communities of users, we are developing a
platform for generating revenues from advertising, branded retail dial-up
Internet access, or "connectivity", service and e-commerce. We have begun to
offer connectivity services in Brazil and Argentina and, in April 2000, in
Colombia. We are also undertaking initiatives to develop a major e-commerce
platform targeted to Spanish- and Portuguese-speaking audiences in Latin America
and the United States.

     We were incorporated in the British Virgin Islands in July 1997, and we
commenced commercial operations in Argentina in 1997. For the period from
inception through October 1998, we focused our activities on developing our
network of Websites and opening content production and sales offices in Brazil,
Mexico, the United States and Uruguay. Prior to the commercial roll-out of our
network of Websites in November 1998, we did not generate meaningful revenues,
but we achieved growth in terms of registered users and monthly page views by
users. Since that time, we have focused on developing our network to incorporate
new content channels and value-added and interactive resources, recruiting sales
and marketing staff, raising capital, preparing our initial mass media-based
branding and advertising campaigns and expanding our technological
infrastructure. See Item 4. "Information on the Company -- Our Community" for
information concerning growth in our registered users, page views and unique
visitors.

     In August 1999, we entered into a framework agreement with IMPSAT Fiber
Networks, Inc., a provider of private networks of integrated data and voice
communications systems in a number of countries in Latin America, to acquire its
retail dial-up access customers in Brazil, Argentina and Colombia. Under this
agreement, we acquired these customers for an aggregate of $21.5 million, which
is based on a price of approximately $294 per subscriber. IMPSAT Fiber Networks,
Inc. also purchased a total of 3,070,615 Class A convertible preferred shares
for an aggregate purchase price of $21.5 million. The Brazilian and Argentine
acquisitions were consummated in October 1999 and November 1999, respectively,
and we closed the acquisition in Colombia in April 2000. We did not acquire the
telecommunications infrastructure required to provide connectivity services,
which we intend to outsource from third-party telecommunications
providers -- initially, under services agreements with subsidiaries of IMPSAT
Fiber Networks, Inc. These subsidiaries will provide us with telecommunications
infrastructure for a one-year terms, which are renewable on an annual basis, for
agreed-upon fees. Our connectivity customers subscribe to our dial-up operations
by paying a monthly fee to us in exchange for connectivity to the Internet.

     We consummated a series of private placements of our convertible preferred
shares in the second half of 1999 (including the sale of our Class A convertible
preferred shares to IMPSAT Fiber Networks, Inc. in connection with the above
acquisitions of retail dial-up access customers). We completed the initial
public offering of our common shares in mid-December 1999. See "-- Liquidity and
Capital Resources" below. We believe that these transactions have provided our
company with the liquidity and capital resources -- and, more generally, the
financial foundation -- to take advantage of our market opportunity and to
implement our business strategy. See Item 4. "Information on the Company -- Our
Market Opportunity" and "-- Our Strategy".

     We have a limited operating and financial history and are subject to the
risks, uncertainties and problems frequently encountered by companies in early
stages of operations, particularly companies in new and rapidly developing
markets, such as the Internet industry. Our historical results of operations are
not necessarily indicative of the results of operations to be expected in the
future.
                                       30
<PAGE>   33

INTRODUCTION TO RESULTS OF OPERATIONS

  NET REVENUES

     We expect to derive our future net revenues from three principal sources:

     - advertising on our network of Websites;

     - e-commerce; and

     - connectivity services.

     Advertising.  To date, we have derived the major portion of our net
revenues from the sale of advertisements and sponsorships on our network.
Advertising revenues are received principally from:

     - advertising arrangements under which we receive fixed fees for banners
       placed on our Websites for specified periods of time;

     - reciprocal services arrangements, under which we exchange advertising
       space on our network for advertising or services from other parties;

     - sponsorship arrangements which allow advertisers to sponsor an area on
       our network in exchange for a fixed payment; and

     - Web design and Web hosting services.

As the Latin American Internet market continues to develop, we believe that an
increasing proportion of our advertising revenues will be derived from
cost-per-thousand impression-based arrangements, under which advertisers will
pay us a specified amount for every 1,000 times their advertisements are viewed
on our network. We expect that our revenues derived from Web design or hosting
activities for other companies will decline significantly after 1999. In future
periods, we expect to outsource these activities and plan to offer these
services only to customers purchasing at least $120,000 in yearly advertising on
our Websites.

     Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, so long as no significant obligations remain and
collection of the resulting receivable is probable. To the extent that minimum
guaranteed impression levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. Payments received
from advertisers prior to displaying their advertisements on our network are
recorded as deferred revenues. Revenues from exclusive sponsorship arrangements
are also recognized ratably. Our contracts with advertisers and advertising
agencies range from one to twelve months in length.

     We have entered into reciprocal services arrangements with various
companies, such as TV Azteca, S.A. de C.V., IMPSAT Fiber Networks, Inc. and
Gramatur S.A., pursuant to which we exchange advertising on our network for
advertising or other services from these companies. We do not receive any cash
payments pursuant to these arrangements. Revenues and expenses relating to these
arrangements are recorded at the estimated fair value of the goods or services
received or the estimated fair value of the advertisements given, whichever is
more readily determinable. Expenses are recorded when services are received,
which is typically in the same period as the advertisements are run on our
network. These expenses are included in our marketing and sales expenses.

     E-Commerce.  To date, we have not derived any significant revenues from
e-commerce. In December 1999, we added an e-shopping guide to our Websites,
through which a limited offering of books, flowers, music, gifts and technology
products is made available from local and U.S.-based e-merchants. In early March
2000, we entered into a definitive agreement to acquire DeCompras.com, Inc., an
e-commerce company that targets Mexico and Mexican-Americans located in the
United States. See Item 4, "Information on the Company -- Our
Network -- E-Commerce". Despite these and other e-commerce initiatives, we do
not expect to derive meaningful revenues from e-commerce activities until at
least 2001.

                                       31
<PAGE>   34

     Connectivity.  We have taken steps to expand our revenue base through our
acquisitions of the retail dial-up access customers of IMPSAT Fiber Networks,
Inc. in Brazil and Argentina and, in April 2000, in Colombia. As a result of
these acquisitions, we acquired a total of approximately 76,000 dial-up access
customers in Brazil, Argentina and Colombia. We expect to derive revenues from
monthly access fees charged to our dial-up access subscribers. Approximately 70%
of our dial-up access subscribers are expected to be billed on a monthly basis
to subscribers' credit cards, which should result in automatic payment to us by
the relevant credit card provider of the billed amounts.

  OPERATING EXPENSES

     Our principal operating costs and expenses consist of:

     - product, content and technology expenses;

     - marketing and sales expenses;

     - corporate, general and administrative expenses;

     - depreciation and amortization expenses; and

     - share-based compensation.

     Product, Content and Technology Expenses.  Product, content and technology
expenses consist of personnel costs associated with the development, testing and
upgrading of our network of Websites and systems, purchases of content and
specific technology, particularly software, and telecommunications links and
access charges. As a result of our recent acquisitions of the retail dial-up
access customers in Brazil, Argentina and Colombia from IMPSAT Fiber Networks,
Inc., we expect to incur, in the future, significant expenses relating to
telecommunications. In connection with these acquisitions, we have entered into
services agreements with subsidiaries of IMPSAT Fiber Networks, Inc. under
which, in exchange for an access fee linked to a number of dial-up access
customers and levels of usage, IMPSAT Fiber Networks, Inc. will provide the
connections and the telecommunication infrastructure necessary for our users to
connect to the Internet. We paid approximately $2.1 million to IMPSAT Fiber
Networks, Inc. for these services in 1999. Except for hardware (which is
depreciated), we expense product, content and technology costs and
telecommunications infrastructure costs as they are incurred. We believe that
increased investment in new and enhanced features and technology is critical to
attaining our strategic objectives and remaining competitive. Accordingly, we
intend to continue recruiting and hiring experienced product, content and
technology personnel and make additional investments in product, content and
technology development. We expect that product, content and technology expenses
will continue to increase significantly in future periods.

     Marketing and Sales Expenses.  Our marketing and sales expenses consist
primarily of salaries and expenses of marketing and sales personnel, commissions
and other marketing-related expenses including, most significantly, our mass
media-based branding and advertising activities. We expect these marketing and
sales expenses to continue to increase significantly for the foreseeable future
as a result of:

     - our mass media-based branding and advertising strategy; and

     - the expansion of our sales force and marketing personnel.

     Corporate, General and Administrative Expenses.  Corporate, general and
administrative expenses consist primarily of costs related to corporate
personnel, occupancy costs, general operating costs and corporate professional
fee expenses, such as legal and accounting fees. We expect that we will incur
additional corporate, general and administrative expenses as we hire additional
personnel and incur additional costs related to the growth of our business and,
after this offering, our operation as a public company. Accordingly, we
anticipate that these expenses will continue to increase significantly in future
periods.

     Depreciation and Amortization.  Depreciation and amortization expenses
consist primarily of depreciation of servers and other computer equipment,
office furniture and leasehold improvements.
                                       32
<PAGE>   35

Investments in property, plant and equipment are recorded at cost and
depreciated using the straight-line method over the following estimated useful
lives:

<TABLE>
<S>                                                           <C>
- computers, software and other equipment                     3 years
- leasehold improvements                                      5 years (lease term)
- furniture, fixtures and other fixed assets                  5 - 10 years
</TABLE>

     As a result of our recent acquisitions of retail dial-up access customers
of IMPSAT Fiber Networks, Inc. in Brazil and Argentina and, in April 2000, in
Colombia, we expect to incur significant amortization expense related to
intangible assets, consisting primarily of the newly-acquired customer base. The
aggregate $21.5 million purchase price for the acquisitions of these retail
dial-up access customers has been or will be allocated principally to this
intangible asset. This intangible asset will be amortized on a straight-line
basis over a three-year period ending in 2002 and, as such, will be reflected as
an expense in our statement of operations in future periods. To the extent that
we fail to retain this customer base during this period, this intangible asset
could be deemed to be impaired, in which case an amount in excess of the
anticipated amortization expense would be charged to our results of operations
and could result in substantially increased losses or, in later years, reduced
profitability. As a result, our future financial performance could be materially
and adversely affected if we are not successful in preserving and developing our
newly-acquired connectivity customer base.

     Share-based Compensation.  Our share-based compensation expense relates to
share options granted in August, September, November and December 1999. These
options were granted at exercise prices below the then prevailing fair market
values for our common shares. As a result, we recorded total deferred
share-based compensation expense of $14 million, which we will amortize over the
respective three-year vesting periods for these options. See note 11 to our
consolidated financial statements. The total deferred share-based compensation
amount and the expense for future periods may increase depending upon the
exercise prices and other terms for subsequent grants of options.

  OTHER INCOME (EXPENSE)

     Other income (expenses) consists primarily of interest expense, net of
interest earned, foreign exchange losses, net of any gains, and other
miscellaneous income and expense items. As a result of the net proceeds of our
initial offering, we expect that for the foreseeable future our interest income
will exceed our interest expense. Most of our assets are in cash or cash
equivalents, which we expect to principally maintain in U.S. dollars. As our
assets in each country of operation increase, so will our exposure to foreign
exchange losses on the translation of assets into U.S. dollars.

  NET LOSSES

     We have incurred net losses and have experienced negative cash flow from
operations in each quarterly and annual period since our inception. Our overall
strategy is to develop our position as a full-service Internet network providing
country-specific content, connectivity services and e-commerce targeting
Spanish- and Portugese-speaking audiences in Latin America and the United
States. This strategy contemplates that we will make significant expenditures
for, among other things, marketing and sales, equipment, customer support and
personnel. This strategy also envisions that we may make significant investments
involving acquisitions, strategic relationships and joint ventures. Because of
this strategy, we expect that our net losses and negative cash flows from
operations on a quarterly and annual basis will increase significantly at least
through 2002.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

     Our results of operations for 1999 were characterized by substantially
increased expenses that more than offset revenue growth during the period. We
recorded a net loss of $36.3 million in 1999, compared to a net loss of $3.5
million in 1998. During 1999, in addition to the continued development of
quality

                                       33
<PAGE>   36

content and interactive resources, we expanded our operations and hired
additional personnel to support the roll-out of offices and Websites in Brazil,
Mexico and the United States and the launch of our first mass media-based
branding and advertising campaign. We established country-specific Websites for,
and sales and content production offices in, Chile and Colombia in the first
quarter of 2000, and we plan to enter Venezuela and Spain later in 2000. We
acquired a total of approximately 70,000 retail dial-up access customers from
IMPSAT Fiber Networks, Inc. in Brazil and Argentina on October 7, 1999 and
November 5, 1999, respectively. The results of operations for 1999 give effect
to these acquisitions from such dates and, accordingly, affect all year-to-year
comparisons between 1999 and 1998.

     The following table sets forth, for the periods indicated, our net revenues
by country of operation (in thousands):

<TABLE>
<CAPTION>
                                                                                       CONSOLIDATED
YEAR ENDED DECEMBER 31,            ARGENTINA    URUGUAY    MEXICO    BRAZIL    USA        TOTAL
-----------------------            ---------    -------    ------    ------    ----    ------------
<S>                                <C>          <C>        <C>       <C>       <C>     <C>
1997 (partial year)............     $  267       $ --      $   --    $   --    $ --       $  267
1998...........................     $  657       $106      $   17    $   --    $ --       $  780
1999...........................     $1,932       $762      $1,508    $2,196    $463       $6,861
</TABLE>

  NET REVENUES

     Our net revenues increased by 779.6% to $6.9 million in 1999 from $780,000
in 1998. Approximately 61% of our net revenues in 1999 was comprised of
advertising and related Web design and hosting services. We expect that our
revenues derived from Web design or hosting activities for other companies will
decline significantly after 1999. In future periods, we expect to outsource
these activities and, in any event, we plan to offer these services only to
customers who agree to purchase at least $120,000 in yearly advertising on our
Websites. Although most of our advertising revenues are currently derived from
fixed banners and page sponsorships, we believe that an increasing portion of
our advertising revenues will be derived from cost-per-thousand impression-based
arrangements. Under these arrangements advertisers pay us a specified amount for
every 1,000 times their advertisements are viewed on our network.

     We attribute the increase in advertising revenues principally to the growth
of our network in terms of registered users, page views and unique users,
together with the expansion of our marketing and sales force. Of these revenues,
35.9% was derived from Mexico, 31.1% was derived from Argentina and 18.1% from
Uruguay. In the future, we also expect to derive significant advertising
revenues from Brazil and the United States, where we have launched commercial
operations during 1999. During this period, 19.5% of our total net revenues was
derived from reciprocal services arrangements, compared to 23.1% of total net
revenues in the corresponding period in 1998. We do not receive any cash
payments from these arrangements.

     The remaining 39% of our net revenues in 1999 was attributable to
connectivity services as a result of our acquisitions of IMPSAT Fiber Networks,
Inc.'s retail dial-up access customers in Brazil and Argentina in the fourth
quarter of 1999. Net revenues relating to connectivity services on a pro forma
basis (assuming that these acquisitions had occurred at the beginning of the
relevant years) would have been $11.7 million in 1999 as compared with $14.4
million in 1998. This decrease in pro forma net revenues relating to
connectivity services was primarily attributable to declines in average gross
subscription fees per customer (in U.S. dollar terms), which more than offset
increases in paying subscribers in both Brazil and Argentina. The decrease in
average gross subscription fees (in U.S. dollar terms) was primarily due to a
51% decrease in the value of the Brazilian real to 1.80 reais per U.S. dollar at
December 31, 1999 from 1.19 reais per U.S. dollar at December 31, 1998.

     In Argentina, net revenues for the dial-up access business on a pro forma
basis increased to $3.8 million for 1999 from $3 million for 1998. This increase
resulted from the following factors:

     - a small increase in paying subscribers to 14,549 at December 31, 1999
       from 14,329 at December 31, 1998 (and a higher average number of paying
       subscribers for 1999 as a whole); and

                                       34
<PAGE>   37

     - a partially offsetting decline in the average gross subscription fee per
       customer to $23.96 for the month of December 1999 from $30.78 for the
       month of December 1998.

     In Brazil, net revenues for the dial-up access business on a pro forma
basis decreased to $7.8 million for 1999 from $11.4 million for 1998. This
decrease resulted from the following factors:

     - a decline in the average gross subscription fee per customer (in U.S.
       dollar terms) to $13.30 for the month of December 1999 from $21.31 for
       the month of December 1998, which decline was largely due to the
       substantial decline in the value of the Brazilian real in relation to the
       U.S. dollar during 1999; and

     - a partially offsetting increase in paying subscribers to 57,656 at
       December 31, 1999 from 48,603 at December 31, 1998.

     We believe that the retail dial-up access businesses did not receive
managerial focus from IMPSAT Fiber Networks, Inc. during the months leading up
to our acquisitions of these businesses. Since completing these acquisitions, we
have been focusing on integrating the connectivity services businesses into our
operations, upgrading their technology and terminating their delinquent and
lower margin subscribers. We have been seeking to attract new subscribers as
part of our overall mass-media based branding and marketing campaigns. We
believe that we will be able to increase the size of our retail dial-up
subscriber base, although we cannot predict whether such an increase will occur.
We also anticipate that the cost of telecommunications infrastructure services
provided by third parties should decrease in future periods. At the same time,
we believe that we will experience declining average subscription fees in the
future -- at a rate of decline that we cannot predict. We do not view
connectivity services as a core business, but rather as a strategic tool to
foster user loyalty and to support the customer base for our developing
e-commerce platform.

  COSTS AND EXPENSES

     Product, Content and Technology Expenses.  Our product, content and
technology expenses increased to $8.1 million in 1999 from $1.6 million in 1998.
Our product, content and technology expenses as a percentage of revenues
decreased to 117.7% in 1999 from 199.5% in 1998. The year-to-year increase was
principally attributable to:

     - an increase in personnel costs relating to the development of content and
       technological support to $3.8 million in 1999 from $1.1 million in 1998;

     - an increase in expenses for telecommunications links (other than such
       expenses relating to our newly-acquired connectivity services business)
       to $490,000 in 1999 from $284,000 in 1998; and

     - an increase of third-party content expenses to $263,000 in 1999 from no
       such expense in the corresponding period in 1998.

     In addition, $1.6 million of the increase in product, content and
technology expenses, consisting primarily of payments for telecommunications
infrastructure expenses, related to the acquisition of IMPSAT Fiber Networks,
Inc.'s retail dial-up access customers in Brazil and Argentina in the fourth
quarter of 1999.

     We believe that continued development of, and increased investment in, new
and enhanced features and technology is critical to attaining our strategic
objectives and remaining competitive. Accordingly, we intend to continue
recruiting and hiring experienced product, content and technology personnel and
to make additional investments in product, content and technology development.
We expect that product, content and technology expenses will continue to
increase significantly in future periods.

                                       35
<PAGE>   38

     Marketing and Sales Expenses.  Our marketing and sales expenses increased
to $20.6 million in 1999 from $674,000 in 1998. Our marketing and sales expenses
as a percentage of net revenues increased to 299.6% in 1999 from 86.4% in 1998.
This increase was principally attributable to:

     - $17.1 million in costs for our mass media-based branding and advertising
       campaign; and

     - an increase in marketing and sales personnel costs to $1.6 million in
       1999 from $274,000 in 1998, due mainly to opening or expanding offices in
       Mexico, Brazil and the United States.

     In addition, $320,000 of the increase in marketing and sales expenses,
consisting primarily of advertising expenses in Brazil, related to the
acquisition of IMPSAT Fiber Networks, Inc.'s retail dial-up access customers in
Brazil and Argentina in the fourth quarter of 1999.

     We expect these sales expenses to continue to increase significantly for
the foreseeable future as a result of:

     - our mass media-based branding and advertising strategy; and

     - the expansion of our sales force and marketing personnel.

     Corporate, General and Administrative Expenses.  Our corporate, general and
administrative expenses increased to $8.4 million in 1999 from $1.9 million in
1998. Our corporate, general and administrative expenses as a percentage of net
revenues decreased to 123% in 1999 from 248.7% in 1998. This year-to-year
increase was principally attributable to:

     - an increase in corporate and administrative personnel costs to $2.6
       million in 1999 from $480,000 in 1998, which resulted primarily from the
       expansion of our network and financing activities; and

     - an increase in overhead costs to support the expansion of our business
       activities.

     In addition, $377,000 of the increase in corporate, general and
administrative expenses related to the acquisition of IMPSAT Fiber Networks,
Inc.'s retail dial-up access customers in Brazil and Argentina in the fourth
quarter of 1999.

     We expect that we will incur additional corporate, general and
administrative expenses as we hire additional personnel and incur additional
costs related to the growth of our business. Accordingly, we anticipate that
these expenses will continue to increase significantly in future periods.

     Depreciation and Amortization.  Our depreciation and amortization expenses
increased to $2.1 million in 1999 from $107,000 in 1998. Our depreciation and
amortization expenses as a percentage of net revenues increased to 30.6% in 1999
from 13.7% in 1998. This increase was principally attributable to an increase of
$5.5 million in fixed assets (principally servers and personal computers).

     Approximately $878,000 of the increase in depreciation and amortization
expenses, consisting primarily of amortization of the intangible asset relating
to the newly-acquired customer base, related to the acquisition of IMPSAT Fiber
Networks, Inc.'s retail dial-up access customers in Brazil and Argentina in the
fourth quarter of 1999. We expect to incur significant amortization expense
related to intangible assets, consisting primarily of this newly-acquired
customer base.

     Share-based Compensation.  We incurred share-based compensation expense of
$2.0 million in 1999. This amount represents the amortization in this period of
our total deferred share-based compensation relating to share options granted in
August, September, November and December 1999. See note 11 to our consolidated
financial statements. We did not incur share-based compensation expense in 1998.

  OTHER INCOME (EXPENSE)

     Other income (expense), which consists of net interest income (expense),
foreign exchange gain or loss, and other income (expense), net, consisted of
income of $765,000 in 1999 compared with a loss of $20,000 in 1998. This change
resulted primarily from interest income earned on the net proceeds of the
private placements and the initial public offering in 1999. See "-- Liquidity
and Capital Resources" below.

                                       36
<PAGE>   39

We expect that for the foreseeable future our interest income will exceed our
interest expense. As our assets in each country of operation increase, so will
our exposure to foreign exchange losses on the translation of assets into U.S.
dollars.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO PARTIAL YEAR 1997 (FROM INCEPTION IN
JULY 1997 THROUGH DECEMBER 31, 1997)

     Following our inception in July 1997 until the roll-out of our network of
country-specific Websites during 1998, we concentrated on the development of
quality content and interactive resources in Spanish, and on market testing to
understand users' preferences. As a result, our results of operations for 1998
were characterized by increasing expenses and mostly flat revenues on a
quarter-to-quarter basis. We recorded a net loss of $3.5 million for 1998,
compared to a net loss of $1 million for 1997. Our results of operations for
1997 reflect a partial year consisting of six months.

  NET REVENUES

     Our net revenues increased 192% to $780,000 for 1998 from $267,000 for
partial year 1997. The increase in revenues resulted from the expansion of our
marketing efforts and sales force, as well as the increase in the number of
channels and services available on our network. For 1998, we had four customers,
Arcor S.A., Compaq Corporation, IMPSAT S.A. and Antel (Uruguay), which each
exceeded 10% of total revenues and in the aggregate represented 72% of total
revenues. By contrast, for partial year 1997, we had five customers, Miniphone,
Compaq Corporation, Arcor S.A., Telam S.A., and IMPSAT S.A., which each exceeded
10% of total revenues and in the aggregate represented 89% of total revenues.
Non-cash reciprocal services arrangements accounted for approximately 23% of our
total revenues in 1998 as compared with approximately 14% for partial year 1997.

  COST AND EXPENSES

     Product, Content and Technology Expenses.  Our product, content and
technology expenses increased to $1,556,000 for 1998 from $221,000 for partial
year 1997. Our product, content and technology expenses as a percentage of net
revenues increased to 200% for 1998 from 83% for partial year 1997. The year-to-
year increase was principally attributable to:

     - an increase in personnel costs dedicated to the development of content
       and technological support to $1.1 million in 1998 from $167,000 in
       partial year 1997; and

     - an increase in expenses for telecommunications links for our network to
       $284,000 in 1998 from $30,000 in partial year 1997.

     Marketing and Sales Expenses.  Our marketing and sales expenses increased
to $674,000 for 1998 from $142,000 for partial year 1997. Our marketing and
sales expenses as a percentage of revenues increased to 86% for 1998 from 53%
for partial year 1997. The year-to-year increase was principally attributable
to:

     - an increase in personnel costs dedicated to marketing and sales to
       $274,000 in 1998 from $7,000 in partial year 1997; and

     - an increase in advertising expenses and sales commissions to $209,000 in
       1998 from $29,000 in partial year 1997.

     Corporate, General and Administrative Expenses.  Our corporate, general and
administrative expenses increased to $1.9 million for 1998 from $727,000 for
partial year 1997. Our corporate, general and administrative expenses as a
percentage of net revenues amounted to 249% for 1998 from 272% for partial year
ended 1997. The year-to-year increase was principally attributable to:

     - an increase in personnel costs in corporate and administrative functions
       to $480,000 in 1998 from $61,000 in partial year 1997; and

                                       37
<PAGE>   40

     - increases to $627,000 from $362,000 in professional fees, to $373,000
       from $104,000 in rent and utilities and to $215,000 from $40,000 in
       travel and entertainment expenses.

     Depreciation and Amortization.  Our depreciation and amortization expenses
increased to $107,000 for 1998 from $81,000 for partial year 1997. However, our
depreciation and amortization expenses as a percentage of net revenues decreased
to 14% for 1998 from 30% for partial year 1997. The absolute increase in these
expenses was principally attributable to an increase of $508,000 in fixed assets
(principally servers and personal computers). The relative decrease in
depreciation and amortization expenses was attributable to a more substantial
increase in net revenues when compared with the absolute increase in these
expenses.

  OTHER INCOME (EXPENSE)

     Other expenses decreased to $20,000 for 1998 from $110,000 for partial year
1997. This decrease primarily reflected a decrease in interest expense in 1998
due to a decrease in the debt.

LIQUIDITY AND CAPITAL RESOURCES

     We continue to be a company in an early stage of operations. We have
substantial liquidity and capital resource requirements, but limited sources of
liquidity and capital resources. We have generated net losses and negative cash
flows from our inception and anticipate that we will experience substantial and
increasing net losses and negative cash flows for at least the next several
years. As we implement our strategy and seek to take advantage of our market
opportunity, we anticipate that our liquidity and capital resource requirements
will increase significantly.

     From our inception to date, we have relied principally upon equity
investments to support the development of our business. We expect to continue to
rely mainly on further equity offerings to provide financing.

     We received total capital contributions of approximately $1.2 million in
1997 and $4.1 million in 1998. In 1999, we received capital contributions
totalling $205.7 million, primarily consisting of the net proceeds from private
placements, and commercial transactions involving issuances, of our Class A and
Class B convertible preferred shares in July 1999 and November 1999 and the
initial public offering of our common shares in December 1999.

     In July 1999, we completed a private placement of 6,334,004 Class A
convertible preferred shares for a total purchase price of $44.4 million. This
private placement consisted of 5,477,088 shares sold for $38.4 million in cash
in July 1999 and 856,916 shares to be issued on a quarterly basis through
January 2001 in exchange for $6 million in non-cash advertising time credits.
Strategic investors in the private placement included Hicks, Muse, Tate & Furst
Incorporated and the Cisneros Group of Companies (through IAMP (El Sitio)
Investments Ltd.) and GC Companies Inc. (through GCC Investments, LLC). Some of
our founders purchased $6.5 million of our Class A convertible preferred shares
in the private placement.

     As part of the July 1999 private placement, we entered into an agreement
with Washburn Enterprises, an affiliate of one of our shareholders, under which
we also agreed to purchase at least $4 million of advertising time on the media
networks owed by Washburn's affiliate Ibero-American Media Partners II Ltd. and
its affiliates, and Washburn agreed that it and its affiliates would purchase as
least $2 million of advertising time on our network, all during the period
through January 2001.

     In August 1999, we entered into an arrangement with TV Azteca, S.A. de
C.V., the second leading television network in Mexico, under which we issued to
TV Azteca 355,478 shares of our Class A convertible preferred shares, then
valued at approximately $2.5 million, in exchange for $3.5 million in
advertising time on TV Azteca. This advertising time will be made available over
a three-year period.

     In connection with our acquisitions of retail dial-up access customers from
IMPSAT Fiber Networks, Inc. in Brazil and Argentina in October 1999 and November
1999, respectively, and Colombia in April 2000, IMPSAT Fiber Networks, Inc.
purchased approximately $21.5 million of our Class A convertible preferred
shares.

                                       38
<PAGE>   41

     In mid-November 1999, we completed a private placement of 1,111,111 Class B
convertible preferred shares for a purchase price of $10 million in cash, or
$9.00 per Class B convertible preferred share. Purchasers of the Class B
convertible preferred shares consisted of Intel Atlantic, Inc., a subsidiary of
Intel Corporation, and Latinvest Asset Management do Brasil, Ltda., an affiliate
of Globalvest Management Company, L.P. Each Class B convertible preferred share
will automatically convert into one common share on June 15, 2000 (which is six
months after the closing date of our initial public offering). The difference
between the initial public offering price per common share and the $9.00 price
per Class B convertible preferred share will be amortized as a deemed dividend
during the same six-month period.

     In mid-December 1999, we completed the initial public offering of our
common shares. We issued an aggregate of 9,430,000 common shares in the offering
and, in conjunction with the offering, listed our common shares on the Nasdaq
National Market under the symbol "LCTO". We received net proceeds from the sale
of our common shares in the initial public offering (after deduction of
underwriting discounts and transaction expenses) of approximately $137.5
million. For information concerning the use of the net proceeds of our initial
public offering, see Item 14. "Material Modifications to the Rights of Security
Holders and Use of Proceeds".

     We used net cash in operating activities totaling $22.8 million in 1999,
$3.2 million in 1998 and $875,000 in the partial year 1997. We have experienced
and expect to continue to experience significant negative cash flows from
operating activities. Net cash used in operating activities resulted primarily
from our net operating losses.

     We used net cash in investing activities totaling $23.2 million in 1999,
$733,000 in 1998 and $261,000 in the partial year 1997. Net cash used in
investing activities resulted primarily from the acquisitions of IMPSAT Fiber
Networks, Inc.'s retail dial-up customers in Brazil and Argentina and purchases
of capital assets.

     We will pay $7 million in cash and issue 1.75 million of our common shares
in connection with our acquisition of DeCompras.com, Inc., which acquisition is
expected to close in the second quarter of 2000. See Item 4. "Information on the
Company -- Our Network".

     We expect to make capital expenditures of approximately $8 million in 2000
and approximately $6 million in 2001, in each case including anticipated capital
expenditures relating to the post-acquisition development of the business of
DeCompras.com, Inc. The capital expenditures in 2000 will principally consist of
purchases of, or investments in, technical equipment. We expect that our capital
expenditures should increase modestly in the future, except to the extent
required as a result of new strategic joint ventures or acquisitions.

     We expense many of our expenditures related to improvements to our Websites
such as new channels and interactive features. These expenses are included in
the product, content and technology expenses and the marketing and sales
expenses.

     Our liquidity and capital resource requirements will depend on numerous
factors, including:

     - market acceptance of our services and products;

     - the level of resources that we devote to investments in our network;

     - marketing and sales of our services and products; and

     - our branding and advertising activities.

     We believe that our cash and cash equivalents balance of $160 million at
December 31, 1999 will be sufficient to meet our liquidity and capital resource
requirements through early 2002. We expect to require additional financing
during the period through 2003, which is the earliest year in which we may
achieve profitability. The sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in increased fixed obligations and most
likely would subject us to covenants that would restrict our operations. We
cannot assure you that financing will be available in sufficient amounts or on
satisfactory terms and conditions -- if at all.

                                       39
<PAGE>   42

YEAR 2000 COMPLIANCE

     We did not experience any problems with our computer systems and other
equipment or disruptions to our operations as a result of the turn of the
century (i.e., from 1999 to 2000). Prior to January 1, 2000, we had initiated
and conducted internal reviews, tests and assessments of our systems and
equipment in an effort to achieve Year 2000 readiness. We spent a nominal amount
on Year 2000 compliance issues, primarily related to personnel costs associated
with time spent by employees in reviewing, testing and assessing Year 2000
readiness. All of these expenditures were incurred and expensed in 1999. We do
not anticipate that any remaining Year 2000 issues will have a material adverse
effect on our company.

MARKET RISKS

     We have not had meaningful interest rate exposure because we have
maintained small debt balances to date. Our Class A convertible preferred
shares, which carried an annual dividend rate of 8%, were automatically
converted into common shares upon completion of our initial public offering. Our
Class B convertible preferred shares will also carry an annual dividend rate of
8%. We should not, however, experience significant interest rate risks until
such time as we have material balances of indebtedness.

     Our principal foreign currency exposure has related to our asset base,
which has consisted principally of monetary assets and liabilities, in the
countries in which we operate. Our foreign currency exposures are summarized as
follows:

                              AT DECEMBER 31, 1999
                         (IN THOUSANDS OF U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                                            MONETARY
                                                        MONETARY ASSETS    LIABILITIES    NET EXPOSURE
                                                        ---------------    -----------    ------------
<S>                                                     <C>                <C>            <C>
Argentina.............................................      $5,298           $ 8,653        $(3,355)
Brazil................................................       1,864             1,438            426
Mexico................................................       1,719               739            980
Uruguay...............................................         354               137            217
                                                            ------           -------        -------
                                                            $9,235           $10,967        $(1,732)
                                                            ======           =======        =======
</TABLE>

     Our subsidiaries have generally used the U.S. dollar as their functional
currency because the sale of advertising has historically been priced and billed
in U.S. dollars. As a result, the financial statements of the subsidiaries have
been remeasured, or translated into U.S. dollars. The effects of foreign
currency transactions and of remeasuring our subsidiaries' financial condition
and results of operations into U.S. dollars have been included as net gain or
loss on foreign exchange. However, our Brazilian subsidiary uses the real as its
functional currency and, as such, the effects of foreign currency transactions
and remeasuring are included as an adjustment to shareholders' equity.

     We do not currently hedge against currency exchange transaction risks, but
could in the future engage in hedging activities against specific foreign
currency transaction risks. Because of uncertainties involving exchange rate
movements, we cannot quantify the effect of exchange rate movements on our
future financial condition or results of operations.

     In June 1998, the Financial Accounting Standards Board, which is commonly
called FASB, issued Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standard for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. In June 1999, FASB issued SFAS 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133, which deferred the effective date of SFAS 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. We are currently
evaluating the effect that adoption of SFAS No. 133 will have on our financial
statements.

     To date, we have not been materially affected by inflation in any of the
countries in which we conduct business or have operations.

                                       40
<PAGE>   43

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS

     Our articles of association provide for a minimum of nine directors.

     The following table presents the names and ages of each current member of
our board of directors:

<TABLE>
<CAPTION>
NAME                                              AGE                      POSITION
----                                              ---                      --------
<S>                                               <C>    <C>
Roberto Vivo-Chaneton...........................  46     Co-founder and Chairman of the Board
Roberto Cibrian-Campoy..........................  41     Co-founder and Director
Carlos Cisneros.................................  34     Director
Michael Greeley.................................  37     Director
Michael Levitt..................................  40     Director
Guillermo Liberman..............................  31     Director
Horacio Milberg.................................  53     Director
Sofia Pescarmona................................  27     Director
Ricardo Verdaguer...............................  49     Director
</TABLE>

     All of the directors serve for a period ending at each annual meeting of
shareholders, which generally will be held in May of each year.

     Mr. Milberg was elected by the other eight directors to our board of
directors in April 2000 to fill a vacancy.

     Eric C. Neuman (age 55) has been nominated by our board of directors for
election as a director at the annual meeting of shareholders scheduled for June
15, 2000. Mr. Neuman will replace Mr. Levitt as a director. Mr. Neuman has been
a Principal with Hicks, Muse, Tate & Furst Incorporated since April 1999.
Between June 1998 and March 1999, Mr. Neuman served as Senior Vice President and
Chief Strategic Officer of Chancellor Media, a company of which Hicks, Muse,
Tate & Furst Incorporated was the founder and largest shareholder. From 1993 to
1998, Mr. Neuman was an officer with Hicks, Muse, Tate & Furst Incorporated. Mr.
Neuman serves on the boards of directors of LIN Television Corporation and
Sunrise Television Corporation, and he previously was a director of Chancellor
Media and Capstar Broadcasting Partners. Mr. Neuman holds a Bachelor of Arts
degree from the University of South Florida and a Masters of Business
Administration degree from Northwestern University.

EXECUTIVE OFFICERS

     The following table sets forth the names, ages and positions of each of our
executive officers:

<TABLE>
<CAPTION>
NAME                                                         AGE                 POSITION
----                                                         ---                 --------
<S>                                                          <C>   <C>
Roberto Vivo-Chaneton......................................  46    Co-founder and Chairman of the Board
Roberto Cibrian-Campoy.....................................  41    Co-founder, President and Chief
                                                                   Executive Officer
Walter Forwood.............................................  37    Chief Operating Officer
Horacio Milberg............................................  53    Chief Financial Officer and Secretary
Daniel Rotsztain...........................................  37    Executive Vice President, Business
                                                                   Development and Strategic Planning
Alfredo Jimenez de Arechaga................................  47    Chief Administrative Officer,
                                                                   Controller and Treasurer
Eduardo Weber..............................................  39    Chief Technology Officer
Lucia Suarez...............................................  50    Vice President -- Product Development
Mariano Varela.............................................  32    Vice President -- Marketing
Esteban Vivo-Chaneton......................................  39    Vice President -- Sales
</TABLE>

     Messrs. Roberto Vivo-Chaneton, Cibrian-Campoy, Forwood, Rotsztain and
Milberg are members of the executive committee within the management of our
company.

                                       41
<PAGE>   44

     Executive officers are appointed by, and serve at the discretion of, our
board of directors.

BIOGRAPHICAL INFORMATION

     ROBERTO VIVO-CHANETON is our co-founder and has served as Chairman of our
board of directors since our inception. Mr. Vivo was one of the founders of, and
since 1988 has served as a Director and Deputy Chief Executive Officer, of
IMPSAT Fiber Networks, Inc., a provider of private networks of integrated data
and voice communications systems in a number of countries in Latin America. Mr.
Vivo holds Licenciaturas in Business Administration from Universidad Argentina
de la Empresa and Macroeconomics from Instituto Torcuato di Tella, both in
Buenos Aires.

     ROBERTO CIBRIAN-CAMPOY is our co-founder and has served as the Chief
Executive Officer, President and a Director since our inception. In 1992, Mr.
Cibrian founded and served as President of Cibrian-Campoy Creativos, S.A., a
producer of computer animation and developer of multimedia projects. From 1989
to 1992, Mr. Cibrian served as Advisor to the Minister of Culture and Education
of Argentina. From 1982 to 1989, Mr. Cibrian practiced architecture at his own
firm and as a designer with a leading Buenos Aires architecture firm. Mr.
Cibrian holds a degree in Architecture from the Universidad de Belgrano, Buenos
Aires.

     CARLOS CISNEROS has served as a Director since June 1999. In October 1996,
Mr. Cisneros founded and became Chief Executive Officer of the Cisneros
Television Group, a member of Ibero-American Media Partners, II, Ltd. In January
1998, Mr. Cisneros was named Vice-Chairman of Ibero-American Media Partners, II,
Ltd., an investment fund jointly owned by the Cisneros Group of Companies and
Hicks, Muse, Tate & Furst Incorporated. From June 1993 to October 1996, Mr.
Cisneros was Vice-President of New Business Development at Venevision
International. Mr. Cisneros holds a Bachelor of Arts degree in Political Science
from American University in Washington, D.C.

     MICHAEL GREELEY has served as a Director since July 1999. Since 1994, Mr.
Greeley has been a Senior Vice President of GCC Investments, Inc., the private
equity investment group of GC Companies, Inc., which owns and operates General
Cinema Theatres. Prior to 1994, Mr. Greeley was a Vice President at Wasserstein
Perella & Co., Inc., an international investment bank. Mr. Greeley also
currently serves as a director of VeloCom Inc., Fuelman, Inc. and
MotherNature.com, Inc. Mr. Greeley was previously a director of Global
TeleSystems Group, Inc. and American Capital Access Holdings, LLC. Mr. Greeley
graduated from Williams College with honors and has a Master of Business
Administration degree from Harvard Business School.

     MICHAEL J. LEVITT has served as a Director since July 1999. Mr. Levitt has
been a partner of Hicks, Muse, Tate & Furst Incorporated since 1996. Mr. Levitt
serves as a director of Capstar Broadcasting Corporation, AMFM, Corp, Grupo MVS,
S.A. de C.V., International Home Foods, Inc., LIN Television Corp., Regal
Cinemas, Inc., STC Broadcasting, Inc., RCN Corporation, and Ibero-American Media
Partners, L.P. Mr. Levitt received his undergraduate and Juris Doctor degrees
from the University of Michigan.

     GUILLERMO LIBERMAN has served as a Director since July 1997. Mr. Liberman
is also a Director of Sociedad Latinoamericana de Inversiones, the parent
company of Grupo Liberman. Grupo Liberman is involved in agribusiness,
fisheries, telecommunications and hotel development. He holds a Bachelor of
Science degree in Business Administration from Babson College in Massachusetts
and a Masters of Business Administration degree from the University of Miami in
Florida.

     SOFIA PESCARMONA has served as a Director since October 10, 1999. Ms.
Pescarmona is Assistant to the Chief Executive Officer of IMPSAT Fiber Networks,
Inc., and has also been a Director of IMPSAT since February 1996. From 1994 to
January 1998, Ms. Pescarmona held various positions within IMPSAT Fiber
Networks, Inc. Ms. Pescarmona holds a Bachelor of Arts degree from Tufts
University and a Masters of Business Administration degree from IAE University
in Argentina.

     RICARDO VERDAGUER has served as a Director since July 1997. Mr. Verdaguer
has served as the President and Chief Executive Officer of IMPSAT Fiber
Networks, Inc. since 1988. In 1988, as a senior
                                       42
<PAGE>   45

executive of Corporacion IMPSA, S.A., an Argentina-based multinational company
with holdings in manufacturing, transportation and telecommunications, Mr.
Verdaguer was involved in the founding of IMPSAT Fiber Networks, Inc. From 1976
to 1988, Mr. Verdaguer occupied various operational positions at Industrias
Metalurgicas Pescarmona as an electromechanical engineer. He holds an
Engineering degree from the Universidad Juan Agustin Mazza, Mendoza, Argentina.

     WALTER FORWOOD has served as our Chief Operating Officer since November
1999. From July 1998 to October 1999, Mr. Forwood served as Managing Director
and Chief Financial Officer of Ibero-American Media Partners, II, Ltd., an
investment fund jointly owned by the Cisneros Group of Companies and Hicks,
Muse, Tate & Furst Incorporated. During the same period, Mr. Forwood also served
as Chief Financial Officer of Cisneros Television Group, a member of
Ibero-American Media Partners, II, Ltd. From September 1997 to October 1999, Mr.
Forwood was the Chief Financial Officer of Imagen Satelital, a programming
company owned by Cisneros Television Group. Mr. Forwood previously served as
Chief Financial Officer of Corporacion IMPSA S.A. in 1996 and 1997. Prior to
that time, beginning in 1993, he held various financial responsibility positions
with Industrias Metalurgicas Pescarmona S.A.I.C. y F., a subsidiary of
Corporacion IMPSA S.A., beginning in 1993. Mr. Forwood was an associate director
of Continental Bank in Buenos Aires, Argentina from 1988 through 1992. Mr.
Forwood holds a Bachelor of Science degree in Economics from the Universidad
Argentina de la Empresa and a Masters of Science in Finance from Florida
International University.

     HORACIO MILBERG has served as our Chief Financial Officer since July 1999,
and as a Director since April 2000, and served as a financial advisor to our
board of directors from September 1998 to July 1999. From April 1993 to July
1999, Mr. Milberg served as an independent financial advisor and investment
manager. Mr. Milberg previously served as: senior finance officer of Corporacion
IMPSA, S.A.; Vice President, Investment Banking, Latin America for CS First
Boston Corporation, New York; and Vice President and Director for Latin America
for The Chase Manhattan Bank, N.A., New York and London. Mr. Milberg holds an
undergraduate degree from Universidad de Buenos Aires and a Master of Business
Administration degree with honors from the J. L. Kellogg Graduate School of
Management, Northwestern University, where Mr. Milberg was a Fulbright Scholar.

     DANIEL ROTSZTAIN has served as our Executive Vice President, Business
Development and Strategic Planning since October 1999. He served as our Chief
Operating Officer from September 1998 to October 1999. From September 1998 to
July 1999, Mr. Rotsztain also served as our Country Manager for Argentina. From
1995 to 1998, Mr. Rotsztain served as the South America Regional Director and
Country Manager-Argentina of GTECH Foreign Holdings Corporation, a company
specialized in software and data processing services for the gaming industry.
From 1994 to 1995, Mr. Rotsztain served as a strategic marketing executive for
IMPSAT Fiber Networks, Inc. Mr. Rotsztain was founder, and from 1992 to 1994
served as manager of, Nexus Urbanos S.R.L., a consulting and information
services company for Argentine municipalities. From June 1990 to September 1993,
Mr. Rotsztain served as Executive Director of World Trade Center S.A.
(Argentina-Chile-Paraguay), an international commerce services and real estate
company. Mr. Rotsztain holds a Bachelor of Science degree in Computer Science
from Escuela Tecnica ORT, Buenos Aires, Argentina and a Master in Computer
Science degree from Universidad de Belgrano, Buenos Aires.

     ALFREDO JIMENEZ DE ARECHAGA has served as our Chief Administrative Officer
since July 1999 and also served as our Chief Financial Officer from November
1998 to July 1999. From 1995 until November 1998, Mr. Jimenez served in the
Corporate Treasury of Corporacion IMPSA, S.A. From 1994 to 1998, Mr. Jimenez
served as the Administration Manager for both Resis Ingenieria, S.A. and
International Satellite Communication Holding Ltd. (Switzerland), each a
subsidiary of IMPSAT Fiber Networks, Inc. From 1992 to 1994, Mr. Jimenez served
as a Financial Manager for Puentes and Construcciones Ltda. in Uruguay. Mr.
Jimenez holds an agricultural engineering degree from Universidad Republica
Oriental del Uruguay, a Masters degree in Project Evaluation and Economics, and
a Master in Business Administration degree from O.R.T. University in Uruguay.

                                       43
<PAGE>   46

     EDUARDO WEBER has served as our Chief Technology Officer since August 1999.
From October 1997 to February 1999, Mr. Weber served as vice-president of
T/Subcero S.A., a consulting company and developer of digital media projects.
From August 1995 to August 1997, Mr. Weber served as Technical Manager of Clarin
Internet, the Website for a leading Argentine daily newspaper. From January 1991
to August 1995, Mr. Weber was General Manager of Weber Terro s.r.l., a
multimedia company. Mr. Weber holds an engineering degree from Universidad de
Buenos Aires.

     LUCIA SUAREZ has served as our Vice President--Product Development since
October 1999. From 1999 until the present, Ms. Suarez has served as president of
Suarez/Kirzner S.A., an independent production company which creates television
programs for Argentina and abroad. From 1996 to 1998, Ms. Suarez served as a
Program Director for America TV-Canal Dos. During this period, Ms. Suarez was
responsible for artistic direction, the supervision of internal and external
production, design, creation of program formats and direction of production
teams. From 1995 to 1996, Ms. Suarez served as News Director for Libertad-Canal
9 where she was responsible for managing the news department and general
production of daily news programs. From 1992 to 1995, Ms. Suarez was a Producer
and Director for Telefe-Canal 11 where she was the creator and producer of the
investigative news program Edicion Plus, for which she won a Martin Fierro
award. In addition to receiving six Emmy Awards, the Associated Press
International Award and the International Film Festival Award, Ms. Suarez is a
member of the Directors Guild of America, Women in Communications and the
American Society of Composers and Publishers. Ms. Suarez holds a B.A. degree in
Journalism from New York University.

     MARIANO VARELA has served as our Vice President -- Marketing since August
1999. From August 1994 until July 1999, Mr. Varela served as Director of Client
Services at Leo Burnett Worldwide Inc. in Argentina. From 1992 until 1994 he
served as an account executive at Young and Rubicam in Argentina. From 1990
until 1992, Mr. Varela served as an account executive at Marcet, Dreyfuss and
Associates. Mr. Varela has a degree in marketing from the Universidad del
Salvador Argentina.

     ESTEBAN VIVO-CHANETON has served as our Vice President-Sales since August
1999. From April 1994 to July 1999, Mr. Vivo served as a vice president in the
Corporate Banking Department of Banco Rio de la Plata, a subsidiary of Banco
Santander Central Hispano. From 1992 to 1994, Mr. Vivo served as a vice
president of corporate banking at BankBoston in Buenos Aires, Argentina. From
1987 to 1992, Mr. Vivo served in various capacities at Banco Roberts in Buenos
Aires, Argentina. Mr. Vivo holds a Master of Business Administration degree from
the Instituto de Altos Estudios Empresariales and an undergraduate degree from
the Universidad Argentina de la Empresa.

     Messrs. Roberto Vivo-Chaneton and Esteban Vivo-Chaneton are brothers.

COMMITTEES OF THE BOARD OF DIRECTORS

     Our board of directors has standing audit and compensation committees.

     The audit committee consists of Messrs. Greeley, Levitt and Liberman. Among
other functions, the audit committee:

     - makes recommendations to the board of directors regarding the selection
       of independent auditors;

     - reviews the results and scope of the audit and other services provided by
       our independent auditors;

     - reviews our financial statements; and

     - reviews and evaluates our internal control functions.

     The compensation committee consists of Messrs. Roberto Vivo-Chaneton,
Cisneros and Greeley. The compensation committee makes recommendations to the
board of directors regarding the following matters:

     - executive compensation;

     - salaries and incentive compensation for our employees and consultants;
       and

     - the administration of our share option plans.

                                       44
<PAGE>   47

DIRECTOR COMPENSATION

     Directors currently do not receive stated compensation from our company for
their service as members of our board of directors. However, by resolution of
the board of directors, directors may receive a fixed amount and reimbursement
for expenses in connection with the attendance at board of directors and
committee meetings.

     Our directors did not receive any payments in connection with their
services as such in the year ended December 31, 1998.

     Under a shareholders' agreement entered into in connection with the July
1999 private placement of our Class A convertible preferred shares, monitoring
and directors' fees of $700,000 per year, in the aggregate, are payable to IAMP
(El Sitio) Investments Ltd., GCC Investments, LLC, Tower Plus International,
SLI.com Inc., Militello Limited and IMPSAT Fiber Networks, Inc.

     From time to time, some of our directors may be granted options to purchase
shares of common shares.

EXECUTIVE OFFICER COMPENSATION

     The aggregate amount of compensation paid by us to our executive officers
(9 persons as a group, excluding Mr. Roberto Vivo-Chaneton, who did not receive
any such compensation in 1999) was $809,000 for the year ended December 31,
1999. We did not set aside or accrue any amounts for pension, retirement or
similar benefits, as we do not provide such benefits for our executive officers.
The above amount does not include share options issued to these executive
officers under our 1999 share option plan.

     At December 31, 1999, our executive officers (including Mr. Roberto
Vivo-Chaneton) held an aggregate of 2,346,000 options in respect of our common
shares at an average exercise price of $9.03 per share. 37,200 of these options
became exercisable in 1999, and an additional 703,800 options will become
exercisable in 2000. The five members of the executive committee hold, in the
aggregate, 2,046,000 of these options.

     All of our executive officers have employment agreements with our company
for three-year terms. Each of these agreements provides for a specified monthly
salary, a minimum annual bonus and share options. Each of these agreements also
provides for one year's salary in the event of termination of employment, except
if such termination is "for cause".

1999 SHARE OPTION PLAN

     Our 1999 share option plan initially provided for the issuance of up to
1,240,000 common shares. An additional 2,000,000 common shares were reserved in
October 1999 and a further 1,572,700 common shares were reserved in December
1999. Shareholder ratification of the December 1999 increase in reserved common
shares will be sought at the next annual general meeting of shareholders, which
is currently scheduled for June 15, 2000.

     Our 1999 share option plan allows for the grant of incentive share options
qualified within the meaning of Section 422 of the U.S. Internal Revenue Code of
1986 and non-qualified share options, which do not so qualify. Each option
granted under the plan shall be evidenced by an agreement that specifies the
terms and conditions of the grant.

     Our 1999 share option plan is administered by the compensation committee of
our board of directors. Subject to the limitations in our 1999 share option
plan, the compensation committee has authority to determine to whom options may
be granted and the terms of such options, including the exercise price, the
number of shares subject to each option, the conditions for vesting, the
expiration date and the form of consideration payable upon exercise of options.
All of our directors, employees and bona-fide consultants and advisors are
eligible for non-qualified share option grants; however, incentive share options
may only be granted to our employees. No individual currently may be granted
options totaling more than 15% of the total number of options issuable under the
plan. Shareholder ratification of an increase in this percentage to 25% will be
sought at the next annual general meeting of shareholders, which is currently
scheduled for June 15, 2000.

                                       45
<PAGE>   48

     The exercise price of an incentive share option cannot be less than 100% of
the fair market value of a common share on the grant date, provided that no
person who owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of our shares, referred to below as a "Ten-Percent
Shareholder", may receive incentive stock options unless the exercise price is
at least 110% of the fair market value of a common share on the grant date.
Options granted under the 1999 share option plan are not transferable by the
optionee, other than by will or by the laws of descent and distribution. All
options issued under the 1999 share option plan will have a term no longer than
10 years from the grant date, except that in the case of incentive stock options
granted to a Ten-Percent Shareholder, the term shall not exceed five years. The
1999 share option plan terminates on December 1, 2008 but such termination will
not affect the validity of any outstanding option.

     At December 31, 1999, options to purchase 3,694,530 common shares were
outstanding under the 1999 share option plan and 1,050,930 shares remained
available for future option grants, in each case subject to the above-mentioned
shareholder ratification. The weighted average exercise price for these
outstanding options is $9.16 per share. Most of these outstanding options become
exercisable either (i) in tranches (as to 30% of the options on the first
anniversary of the grant date, as to 30% of the options on the second
anniversary of the grant date and as to the remaining 40% of the options, on the
third anniversary of the grant date) or (ii) on the third anniversary of the
grant date. These options terminate upon the earliest to occur of the following:
termination of an optionee's employment for good cause, 30 days after an
optionee's resignation, 180 days after an optionee's employment is terminated
for any other reason, including retirement, disability or death, and eight years
after the grant date. Notwithstanding the foregoing, upon a change of control
(for example, a merger or similar transaction or the removal of a majority of
the members of our current board of directors) of our company that occurs on or
after the first anniversary of the grant date, all unvested portions of options
then outstanding will vest in full on that date.

     Our board of directors may amend, alter, suspend, or terminate the 1999
share option plan at any time, provided however, that the board must first seek
the approval of stockholders, if required by law or regulation, and that of each
affected optionee if such amendment, alteration, suspension or termination would
adversely affect his or her obligations under any option granted prior to that
date.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY

     Under British Virgin Islands law, every director and officer of our
company, in performing his or her functions, is required to act honestly and in
good faith with a view to the best interests of our company and exercise the
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. No provision in our memorandum or articles of
association or in any agreement entered into by us relieves a director or
officer from the duty to act in accordance with our memorandum and articles of
association or from any personal liability arising from his or her management of
the business and affairs of our company.

     We may indemnify any director or officer against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and
reasonably incurred in connection with legal, administrative or investigative
proceedings. We may only indemnify a director or officer if the director or
officer acted honestly and in good faith with the view to the best interests of
our company and, in the case of criminal proceedings, the director or officer
had no reasonable cause to believe that his or her conduct was unlawful. The
decision of the board of directors as to whether the director or officer acted
honestly and in good faith with a view to the best interests of our company and
as to whether the director or officer had no reasonable cause to believe that
his or her conduct was unlawful, is in the absence of fraud sufficient for the
purposes of indemnification, unless a question of law is involved. The
termination of any proceedings by any judgment, order, settlement, conviction or
the entry of no plea does not, by itself, create a presumption that a director
or officer did not act honestly and in good faith and with a view to the best
interests of our company or that the director or officer had reasonable cause to
believe that his or her conduct was unlawful. If a director or officer to be
indemnified has been successful in defense of any proceedings referred to above,
the director or officer is entitled to be indemnified against all expenses,

                                       46
<PAGE>   49

including legal fees, and against all judgments, fines and amounts paid in
settlement and reasonably incurred by the director or officer in connection with
the proceedings.

     We may purchase and maintain insurance in relation to any director or
officer against any liability asserted against the director or officer and
incurred by the director or officer in that capacity, whether or not we have or
would have had the power to indemnify the director or officer against the
liability as provided in our articles of association.

EMPLOYEES

     At December 31, 1999, we had 326 full-time employees, including 149 in
production and technology, 85 in marketing and sales and 92 in corporate,
finance and administration. By contrast, we had a total of 78 full-time
employees at December 31, 1998.

     Our employee total at December 31, 1999 includes 46 persons who previously
worked for IMPSAT Fiber Networks, Inc. or its subsidiaries, following our
acquisition of its retail dial-up access customers in Brazil and Argentina.

                                       47
<PAGE>   50

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

PRINCIPAL SHAREHOLDERS

     The following table presents, as of March 31, 2000, the beneficial
ownership of our common shares by:

     - each person or entity which, to our knowledge, owns beneficially more
       than 5% of the outstanding common shares;

     - each of our directors and executive officers; and

     - all of our directors and executive officers as a group.

     Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their common shares, except to
the extent applicable law gives spouses shared authority. Each shareholder has
the same voting rights as each other shareholder.

     The table reflects the conversion of all of our outstanding Class A
convertible preferred shares into our common shares, which occurred
automatically upon the closing of our initial public offering in December 1999).
In addition, the table reflects of the conversion of our 1,111,111 outstanding
Class B convertible preferred shares, which will occur automatically on June 15,
2000 (six months after the closing of our initial public offering).

<TABLE>
<CAPTION>
                                                                            PERCENTAGE OF
                                                                NUMBER      COMMON SHARES
BENEFICIAL OWNER                                              OF SHARES        (%)(1)
----------------                                              ----------    -------------
<S>                                                           <C>           <C>
PRINCIPAL SHAREHOLDERS
IAMP (El Sitio) Investments, Ltd.(2)........................   6,798,200        16.1
SLI.com Inc.(3).............................................   4,956,676        11.8
Militello Limited(4)........................................   4,799,414        11.4
IMPSAT Fiber Networks, Inc. ................................   6,141,230        14.6
Tower Plus International....................................   2,325,324         5.5

DIRECTORS AND EXECUTIVE OFFICERS
Roberto A. Vivo-Chaneton(5).................................  10,940,644        26.0
Ricardo Verdaguer(6)........................................   8,466,554        20.1
Sofia Pescarmona(7).........................................   6,141,230        14.6
Carlos Cisneros(8)..........................................   6,799,250        16.1
Michael Levitt(9)...........................................   6,830,400        16.2
Guillermo J. Liberman(10)...................................   4,956,676        11.8
Michael Greeley(11).........................................   1,461,156         3.5
Roberto Cibrian-Campoy(12)..................................     693,756         1.6
Walter Forwood(13)..........................................       6,250           *
Horacio Milberg(14).........................................       7,800           *
Daniel Rotsztain(15)........................................      87,846           *
Alfredo Jimenez de Arechaga(16).............................      17,407           *
Eduardo Weber(17)...........................................       3,150           *
Lucia Suarez(18)............................................          --          --
Mariano Varela(19)..........................................       7,000           *
Esteban Vivo-Chaneton(20)...................................       6,250           *
All directors and executive officers as a group (16
  persons)..................................................  27,282,209        64.8
</TABLE>

---------------
  *  indicates less than 1%.

                                                  (footnotes on following pages)

                                       48
<PAGE>   51

 (1) Calculated according to Rule 13d-3(d) of the Securities Exchange Act of
     1934, except that the table includes 1,111,111 common shares issuable on
     June 15, 2000 upon automatic conversion of our outstanding Class B
     convertible preferred shares. Under Rule 13d-3(d), shares not outstanding
     which are subject to options, warrants, rights or conversion privileges
     exercisable within 60 days are deemed outstanding for the purpose of
     calculating the number and percentage owned by the holder of the options,
     warrants, rights or conversion privileges such person, but not deemed
     outstanding for the purpose of calculating the percentage owned by any
     other person listed.

 (2) Includes 514,150 common shares issued or issuable through March 31, 2000 to
     Washburn Enterprises, an affiliate of IAMP (El Sitio) Investments, Ltd. See
     "-- Related Party Transactions" below.

 (3) Includes 62,500 common shares issued to Sarandi Comunicaciones S.A., which
     is an affiliate of SLI.com Inc. and Guillermo Liberman. SLI.com Inc. and
     Mr. Liberman disclaim beneficial ownership of all shares owned by Sarandi
     Comunicaciones S.A.

 (4) Includes 62,500 common shares issued to Sarandi Comunicaciones, which is an
     affiliate of Militello Limited and Mr. Roberto Vivo-Chaneton. Militello
     Limited and Mr. Vivo disclaim beneficial ownership of all shares owned by
     Sarandi Comunicaciones S.A.

 (5) Includes 4,736,914 common shares owned by Militello Limited in respect of
     which Mr. Roberto Vivo-Chaneton has a controlling interest. Also includes
     6,141,230 shares owned by IMPSAT Fiber Networks, Inc. attributable to Mr.
     Vivo as a result of his affiliation with IMPSAT Fiber Networks, Inc. In
     addition, includes 62,500 common shares issued to Sarandi Comunicaciones
     S.A., which is also an affiliate of Mr. Vivo. Mr. Vivo disclaims beneficial
     ownership of all shares owned by IMPSAT Fiber Networks, Inc. and Sarandi
     Comunicaciones S.A. Excludes 400,000 options to purchase common shares
     granted to Mr. Vivo under our 1999 share option plan.

 (6) Includes beneficial ownership of 2,325,324 common shares attributable to
     Mr. Verdaguer as a result of his controlling interest in Tower Plus
     International. Also includes 6,141,230 shares owned by IMPSAT Fiber
     Networks, Inc. attributable to Mr. Verdaguer as a result of his affiliation
     with IMPSAT Fiber Networks, Inc. Mr. Verdaguer disclaims beneficial
     ownership of all shares owned by IMPSAT Fiber Networks, Inc.

 (7) Includes 6,141,230 common shares owned by IMPSAT Fiber Networks, Inc.
     attributable to Ms. Pescarmona as a result of her position as a director in
     IMPSAT Fiber Networks, Inc. Ms. Pescarmona disclaims beneficial ownership
     of all shares owned by IMPSAT Fiber Networks, Inc.

 (8) Includes 6,284,050 common shares owned by IAMP (El Sitio) Investments,
     Ltd., which are included as a result of Mr. Cisneros' affiliation with the
     Cisneros Group of Companies, which has an indirect joint ownership interest
     in IAMP (El Sitio) Investments, Ltd. Also includes 514,150 common shares
     issued or issuable through March 31, 2000 to Washburn Enterprises, an
     affiliate of IAMP (El Sitio) Investments, Ltd. Mr. Cisneros disclaims
     beneficial ownership of all shares owned by IAMP (El Sitio) Investments,
     Ltd. and Washburn Enterprises.

 (9) Includes 6,284,050 common shares owned by IAMP (El Sitio) Investments,
     Ltd., which are included as a result of Mr. Levitt's affiliation with Hicks
     Muse, Tate & Furst Incorporated, which has an indirect joint ownership
     interest in IAMP (El Sitio) Investments, Ltd. Also includes 32,200 common
     shares owned by Hicks Muse, Tate & Furst Incorporated. In addition,
     includes 514,150 common shares issued or issuable through March 31, 2000 to
     Washburn Enterprises, an affiliate of IAMP (El Sitio) Investments, Ltd. Mr.
     Levitt disclaims beneficial ownership of all shares owned by IAMP (El
     Sitio) Investments, Ltd., Hicks Muse, Tate & Furst Incorporated and
     Washburn Enterprises.

(10) Includes beneficial ownership of 4,894,176 common shares attributable to
     Mr. Liberman as a result of his controlling interest in SLI.com Inc. Also
     includes 62,500 common shares issued to Sarandi Comunicaciones S.A., which
     is an affiliate of Mr. Liberman. See "-- Related Party Transactions" below.

                                       49
<PAGE>   52

(11) Includes 1,456,756 common shares owned by GCC Investments, LLC, which are
     included as a result of Mr. Greeley's affiliation with GCC Investments,
     LLC. Mr. Greeley disclaims beneficial ownership of all shares owned by GCC
     Investments, LLC.

(12) Includes 693,756 common shares held through RC Limited, which is wholly
     owned by Mr. Cibrian-Campoy and his wife. Excludes options to purchase
     700,000 common shares granted to Mr. Cibrian-Campoy under our 1999 share
     option plan.

(13) Excludes options to purchase 310,000 common shares granted to Mr. Forwood
     under our 1999 share option plan.

(14) Excludes options to purchase 302,000 common shares granted to Mr. Milberg
     under our 1999 share option plan.

(15) Includes options, which are currently exercisable, to purchase 37,200
     common shares granted to Mr. Rotsztain under our 1999 share option plan.
     Excludes options to purchase 296,800 common shares granted to Mr. Rotsztain
     under such option plan.

(16) Excludes options to purchase 60,000 common shares granted to Mr. Jimenez
     under our 1999 share option plan.

(17) Excludes options to purchase 60,000 common shares granted to Mr. Weber
     under our 1999 share option plan.

(18) Excludes options to purchase 60,000 common shares granted to Ms. Suarez
     under our 1999 share option plan.

(19) Excludes options to purchase 60,000 common shares granted to Mr. Varela
     under our 1999 share option plan.

(20) Excludes options to purchase 60,000 common shares granted to Mr. Esteban
     Vivo-Chaneton under our 1999 share option plan.

     The above table does not include the following transactions or arrangements
with respect to our common shares:

     - 3,657,330 common shares reserved for issuance upon exercise of options
       granted under our 1999 share option plan, but that are not currently
       exercisable, at a weighted average exercise price of $9.16 per share;

     - 1,050,930 common shares reserved for issuance upon the exercise of
       options that we may grant under our 1999 share option plan; and

     - 1,199,682 common shares issuable to Washburn Enterprises in exchange for
       remaining non-cash advertising time credits.

     - 1,750,000 common shares issuable in connection with the acquisition of
       DeCompras.com, Inc., which acquisition is expected to close in the second
       quarter of 1999; and

     - 166,667 common shares issuable to Red de Television Chilevision S.A., an
       affiliate of IAMP (El Sitio) Investments, Ltd., in connection with the
       pending establishment of our strategic alliance with that company. See
       "-- Related Party Transactions" below.
                            ------------------------

     As of March 31, 2000, 18,461,981 common shares were held by holders in the
United States, and there were 88 record holders in the United States.

                                       50
<PAGE>   53

RELATED PARTY TRANSACTIONS

     IMPSAT Fiber Networks, Inc. is controlled largely by the Pescarmona group,
of which Sofia Pescarmona, one of our directors, is a member. The Pescarmona
group indirectly owns approximately 75% of the capital stock of IMPSAT Fiber
Networks, Inc. Roberto Vivo-Chaneton, our co-founder, and chairman, is a
director and deputy chief executive officer of IMPSAT Fiber Networks, Inc. Mr.
Vivo beneficially owns approximately 6% of the capital stock of IMPSAT Fiber
Networks, Inc. Ricardo Verdaguer, another of our directors, is the president and
chief executive officer of IMPSAT Fiber Networks, Inc. Mr. Verdaguer owns
approximately 3.5% of the capital stock of IMPSAT Fiber Networks, Inc. We
acquired the retail dial-up access customers of IMPSAT Fiber Networks, Inc. in
Brazil, Argentina and Colombia. In connection with the acquisitions, IMPSAT
Fiber Networks, Inc. purchased a total of 3,070,615 Class A convertible
preferred shares for approximately $21.5 million, and we entered or will enter,
into services agreements with subsidiaries of IMPSAT Fiber Networks, Inc., under
which they provided us with the telecommunications infrastructure to provide
connectivity services to the acquired customers for payments which amounted to
approximately $2.1 million in 1999. Under services agreements with subsidiaries
of IMPSAT Fiber Networks, Inc., IMPSAT Fiber Networks, Inc. provides us with
links to the Internet in exchange for advertising on our network. This
arrangement accounted for $38,000, $165,000 and $213,000 of our net revenues and
corresponding amounts of our operating expenses in partial year 1997, 1998 and
1999, respectively.

     Guillermo Liberman, who is one of our directors and who holds common shares
in our company through SLI.com Inc., is a director of Sociedad Latinoamericana
de Inversiones, the holding company of Grupo Liberman, which is involved in
agribusiness, fisheries, telecommunications and hotel development. An affiliate
of Grupo Liberman, Video Cable Comunicacion, or VCC, is a cable television
system operator which was sold to Tele-Communications, Inc. in 1997 in a series
of transactions for over $1 billion. Prior to the sale of VCC to
Tele-Communications, Inc., we entered into a reciprocal advertising agreement
with VCC pursuant to which each company provided the other with advertising
time. We previously leased offices from Grupo Liberman in Miami. Mr. Liberman
also is affiliated with one of our advertisers, TeleLatina, a start-up regional
telecommunications company in Latin America. TeleLatina accounted for
approximately $69,000 of our advertising revenues in 1999.

     In July 1998, we acquired 85% of the Class A shares and 100% of the Class B
shares of Cibrian-Campoy Creativos, S.A., in Argentina, from its shareholders,
who included the following directors and executive officers: Roberto
Cibrian-Campoy; Guillermo Liberman and Roberto Vivo-Chaneton. We paid $50,000
for 85% of the common shares, and issued 3,432,094 of our common shares for 100%
of the Class B shares, of Cibrian-Campoy Creativos, S.A. In October 1997, we
purchased, for an aggregate purchase price of $1,700, the majority of the shares
of Aalefranger, S.A., in Uruguay, from its shareholders, who included Roberto
Vivo-Chaneton and Roberto Cibrian-Campoy. These two companies are the
predecessors of our operating subsidiaries in Argentina and Uruguay.

     Some of our directors have from time to time guaranteed short-term
indebtedness or other obligations of our company.

     On July 7, 1999, we completed a private placement of 5,447,088 Class A
convertible preferred shares for a gross purchase price of $38.4 million in
cash. Strategic investors included Hicks, Muse, Tate & Furst Incorporated and
the Cisneros Group of Companies (through IAMP (El Sitio) Investments Ltd.) and
GC Companies, Inc. (through GCC Investments, LLC). As a part of the private
placement, we entered into an agreement with Washburn Enterprises, an affiliate
of the Cisneros Television Group, under which we also agreed to purchase at
least $4 million of advertising time on the media networks owed by Washburn's
affiliate Ibero-American Media Partners II Ltd. and its affiliates, and Washburn
agreed that it and its affiliates would purchase at least $2 million of
advertising time on our network, all during the period through January 2001.

     Under a shareholders' agreement entered into in conjunction with the July
1999 private placement and our articles of association, we pay monitoring fees
and director fees of $700,000 per year, in the

                                       51
<PAGE>   54

aggregate, to IAMP (El Sitio) Investments Ltd., GCC Investments, LLC, Tower Plus
International, SLI.com, Inc., Militello Limited and IMPSAT Fiber Networks, Inc.

     In February 2000, we entered into a strategic alliance in Uruguay with
Sarandi Comunicaciones S.A., which is an affiliate of Guillermo Liberman and
SLI.com Inc., as well as Roberto Vivo-Chaneton, who are major shareholders in
our company. See Item 4. "Information on the Company -- Business and Strategic
Relationships" for information concerning this strategic alliance.

     In February 2000, we also signed an agreement with Red de Television
Chilevision S.A. and Iberoamerican Media Holdings Chile S.A., which are
affiliates of IAMP (El Sitio) Investments, Ltd., which is a major shareholder in
our company. See Item 4. "Information on the Company -- Business and Strategic
Relationships" for information concerning this strategic alliance.

ITEM 8.  FINANCIAL INFORMATION

     See Item 18. "Financial Statements" for the consolidated financial
statements of our company filed as part of this annual report.

ITEM 9.  THE OFFER AND LISTING

     Our common shares are listed on the Nasdaq National Market under the symbol
"LCTO". Trading in our common shares on the Nasdaq National Market commenced on
December 10, 1999. The following table sets forth, for the period indicated, the
high and low sales prices of our common shares on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                              SALES PRICES
                                                              ------------
                                                              HIGH    LOW
                                                              ----    ----
<S>                                                           <C>     <C>
Year ended December 31, 1999
Fourth quarter (from December 10)...........................  $44 7/8 $22 5/8
</TABLE>

     During the first quarter of 2000 (January 1, 2000 through March 31, 2000),
the high and low prices of our common shares on the Nasdaq National Market has
ranged from $40 to $18 1/2. During the month of April 2000 (through April 30),
the high and low prices of our common shares ranged from $21 1/2 to $6 5/8.

ITEM 10.  ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

     Our authorized capital consists of 200,000,000 common shares and
100,000,000 preferred shares.

COMMON SHARES

     As of December 31, 1999 and March 31, 2000, we had 40,157,338 common shares
and 40,219,838 common shares, respectively, issued and outstanding. All
outstanding shares of common shares are fully paid and non-assessable.

     The holders of common shares are entitled to one vote for each share held
of record on all matters submitted to a vote of our shareholders. Cumulative
voting is not permitted.

     Subject to the prior rights of any series of shares that may be issued in
the future, holders of common shares are entitled to receive, ratably, such
dividends as may be declared by our board of directors from funds legally
available therefor and are entitled to share, ratably, in all our assets
available for distribution to holders of common shares upon the liquidation,
dissolution or winding up of our affairs.

     Our board of directors or our shareholders by resolution may amend our
memorandum and articles of association except as limited by British Virgin
Islands law or in limited circumstances reserved to the holders of, as the case
may be, the common shares or preferred shares.

                                       52
<PAGE>   55

PREFERRED SHARES

     Authorized preferred shares may be issued from time to time by our board of
directors, in one or more classes or series. Subject to the provisions of our
articles of association and the limitations prescribed by law, our board of
directors is authorized to adopt resolutions to issue the authorized preferred
shares, to fix the number of shares and to change the number of shares
constituting any class or series, and to provide for or change the voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, including
dividend rights (including whether dividends are cumulative), dividend rates,
terms of redemption (including sinking fund provisions), redemption prices,
conversion rights and liquidation preferences of the preferred shares of any
class or series, in each case without any further action or vote by the
shareholders.

     One of the effects of undesignated preferred shares may be to enable our
board of directors to render more difficult or to discourage an attempt to
obtain control of our company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect continuity of our management. The issuance
of preferred shares may adversely affect the rights of the holders of common
shares. For example, our preferred shares may rank prior to the common shares as
to dividend rights, liquidation preference or both, may have full or limited
voting, rights and may be convertible into common shares. Accordingly, the
issuance of preferred shares may discourage bids for the common shares at a
premium or may otherwise adversely affect the market price of the common shares.

CLASS B CONVERTIBLE PREFERRED SHARES

     General.  As of December 31, 1999 and March 31, 2000, we had 1,111,111
Class B convertible preferred shares outstanding. Each Class B convertible
preferred share will automatically convert on June 15, 2000 (being the date six
months following the closing date of our initial public offering) into one
common share, subject to specified anti-dilution adjustments.

     Dividends.  The holders of the Class B convertible preferred shares are
entitled to receive cumulative preferential dividends at an annual rate equal to
8% of the liquidation preference per Class B convertible preferred share,
payable quarterly, in arrears.

     Voting.  The holders of the Class B convertible preferred shares have the
right to vote, together with the holders of all the issued and outstanding
common shares and not by classes, except as otherwise required by British Virgin
Islands law, on all matters on which holders of common shares are entitled to
vote.

     Each holder of the Class B convertible preferred shares has the right to
cast one vote for each whole common share which would be issued to such holder
upon conversion of such holder's shares of Class B convertible preferred shares,
assuming that such conversion were to occur on the date immediately prior to the
record date for the determination of shareholders entitled to vote.

     Liquidation, Dissolution or Winding Up.  Upon any liquidation, dissolution
or winding up of our company, holders of Class B convertible preferred shares
are entitled to be paid an amount equal to the liquidation preference per
preferred share out of our assets before any distribution is made to any holders
of common or other junior shares.

     Registration Rights.  In connection with the private placement of Class B
convertible preferred shares, we entered into a registration rights agreement
with those investors. Under the registration rights agreement, the investors
have specified rights to cause us to register their holdings of common shares of
$5 million or more under the Securities Act of 1933. Each Class B convertible
preferred share will be convertible into one common share, subject to specified
anti-dilution adjustments. We will be required to bear all registration expenses
other than underwriting discounts and commissions and fees related to any
exercise of these registration rights. In addition, we have agreed to indemnify
the registration rights recipients against, and provide contribution with
respect to, liabilities under the Securities Act of 1933 in connection with
registrations.

                                       53
<PAGE>   56

SUMMARIES OF MATERIAL CONTRACTS

     Item 19. "Exhibits" includes a list of our material agreements. The terms
and conditions of these material agreements are described under Item 4.
"Information on the Company".

REGISTRAR AND TRANSFER AGENT

     The registrar and transfer agent for our common shares is The Bank of New
York. Its address is The Bank of New York, Shareholder Relations, P.O. Box
11258, New York, New York 10286-1258, and its telephone number is (800)
432-0140.

TAXATION

BRITISH VIRGIN ISLANDS TAX CONSIDERATIONS

     We are exempt from all provisions of the Income Tax Act of the British
Virgin Islands with respect to all dividends, interests, rents, royalties,
compensation and other amounts payable by our company to persons who are not
persons resident in the British Virgin Islands. Persons who are not persons
resident in the British Virgin Islands are also exempt from any capital gains
realized with respect to any shares, debt obligations or other securities,
including the common shares, of our company. No estate, inheritance, succession
or gift tax, rate, duty, levy or other charge is payable by persons who are not
persons resident in the British Virgin Islands with respect to any shares, debt
obligations or other securities, including the common shares, of our company.
There is no reciprocal tax treaty in force between the British Virgin Islands
and the United States.

U.S. FEDERAL INCOME TAXATION CONSIDERATIONS

     The following discussion describes the material U.S. federal income tax
considerations that may be relevant to a prospective purchaser of shares to a
U.S. Holder (as defined below) of the receipt of distributions on, and the
disposition of, our common shares. This discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), on the regulations
promulgated thereunder and on published administrative rulings and judicial
decisions, all as of the date hereof. We cannot assure you that future
legislation, administrative rulings or court decisions will not modify the
conclusions set forth in this summary, possibly with retroactive effect. The
discussion is of a general nature only and prospective purchasers of our common
shares are advised to consult their own tax advisors with respect to U.S.
federal, state and local tax consequences and tax consequences in other
jurisdictions, of the ownership of shares applicable in their particular
situation. Except as specifically set forth herein, this discussion deals only
with common shares held by a U.S. Holder as capital assets within the meaning of
Section 1221 of the Code, and does not address tax considerations applicable to
holders that may be subject to special tax rules, such as banks, insurance
companies, dealers in securities or currencies, tax-exempt entities, persons
that will hold shares as a position in a "straddle" or as part of a "hedging" or
"conversion" transaction for tax purposes or persons that have a "functional
currency" (as defined in Section 985 of the Code) other than the U.S. dollar.

     As used herein, a "U.S. person" is:

     - a United States citizen or resident;

     - a corporation, partnership or other entity created or organized in or
       under the laws of the United States or any political subdivision thereof;

     - an estate the income of which is subject to U.S. federal income taxation
       regardless of its source; or

     - a trust which is subject to the supervision of a court within the United
       States and the control of a United States person as described in Section
       7701(a)(30) of the Code or that has a valid election in effect under
       applicable U.S. Treasury regulations to be treated as a United States
       person.

                                       54
<PAGE>   57

A "U.S. Holder" is a beneficial owner of common shares that is a U.S. person. A
"non-U.S. Holder" is a beneficial owner of common shares that is not a U.S.
Holder.

  U.S. HOLDERS

     Dividends.  To the extent that a distribution on our common shares is paid
to a U.S. Holder out of our current or accumulated earnings and profits (as
determined for U.S. federal income tax purposes), that distribution will be
included in the U.S. Holder's gross income as foreign source dividend income in
an amount equal to the U.S. dollar value of the distribution (without reduction
for any applicable foreign withholding tax). Therefore, in the event that any
foreign tax is withheld from a distribution on the common shares, a U.S. Holder
generally will be required to report gross income in an amount greater than the
cash received (although, as discussed below, that U.S. Holder may be eligible to
claim a deduction or a foreign tax credit in respect of such foreign tax). To
the extent that the amount of any distribution on the common shares exceeds our
current and accumulated earnings and profits (as determined for U.S. federal
income tax purposes), a U.S. Holder's pro rata share of the excess amount would
be treated first as a nontaxable return of capital that would be applied against
and would reduce the U.S. Holder's tax basis in its common shares (but not below
zero), and then as capital gain. Distributions in excess of our current and
accumulated earnings and profits (as determined for U.S. federal income tax
purposes) generally will not give rise to foreign source income and a U.S.
Holder may be unable to claim a foreign tax credit in respect of any British
Virgin Islands or other foreign withholding tax imposed on those distributions
unless, subject to applicable limitations, the U.S. Holder has other foreign
source income in the appropriate category for foreign tax credit purposes. We
believe that we do not have current or accumulated earnings and profits for U.S.
federal income tax purposes. However, we cannot predict whether we will have any
such earnings and profits for future taxable years.

     Subject to certain conditions and limitations (including certain minimum
holding period requirements), the U.S. dollar value of the foreign income taxes,
if any, withheld from a distribution to a U.S. Holder on the common shares may
generally be claimed as a credit against the U.S. Holder's U.S. federal income
tax liability. Alternatively, a U.S. Holder may generally claim a deduction for
such amount of foreign income taxes withheld in a taxable year, but only if such
U.S. Holder does not elect to claim a foreign tax credit in respect of any
foreign taxes paid by it in the taxable year. Dividends on common shares
generally will constitute "passive income" or, in the case of some U.S. Holders,
"financial services income" for U.S. foreign tax credit purposes. Special rules
apply to some individuals whose foreign source income during the taxable year
consists entirely of "qualified passive income" and whose creditable foreign
taxes paid or accrued during the taxable year do not exceed $300 ($600 in the
case of a joint return).

     The rules relating to foreign tax credits are extremely complex and the
availability of a foreign tax credit depends on numerous factors. Prospective
purchasers of our common shares should consult their own tax advisors concerning
the application of the U.S. foreign tax credit rules to their particular
situations.

     The U.S. dollar value of any distribution to a U.S. Holder on shares that
is paid in a foreign currency will be calculated by reference to the exchange
rate in effect at the time the distribution is received by the U.S. Holder. If a
U.S. Holder that receives foreign currency from a distribution and does not
convert the foreign currency into U.S. dollars upon receipt, the U.S. Holder
will generally have foreign exchange gain or loss based on any appreciation or
depreciation of the value of the foreign currency against the U.S. dollar, which
will generally be U.S. source ordinary income or loss for U.S. foreign tax
credit purposes.

     A corporate U.S. Holder will not be entitled to a dividends-received
deduction with respect to distributions on our common shares.

     Sale or Exchange of Common Shares.  A U.S. Holder generally will recognize
taxable gain or loss on any sale or exchange of a common share in an amount
equal to the difference between the amount realized for that common share and
the U.S. Holder's adjusted tax basis in that share. The gain or loss should be
capital gain or loss. Capital gains of individuals derived with respect to
capital assets held for
                                       55
<PAGE>   58

more than one year are eligible for reduced rates of taxation. The deductibility
of capital losses is subject to limitations. Any gain or loss recognized by a
U.S. Holder will generally be treated as United States source gain or loss for
foreign tax credit purposes. As a result of certain limitations under the
foreign tax credit provisions of the Code, a U.S. Holder may be unable to claim
a foreign tax credit for British Virgin Islands withholding taxes, if any,
imposed on the proceeds received upon the sale, exchange, repurchase by us or
other disposition of common shares.

     Passive Foreign Investment Company Provisions.  A foreign corporation will
be classified as a passive foreign investment company (a "PFIC") for U.S.
federal income tax purposes if 75% or more of its gross income for the taxable
year is passive income or on average for the taxable year, 50% or more of its
assets, by value (or, if it so elects, by adjusted basis), produce or are held
for the production of passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce passive income. If
a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation and as
receiving directly its proportionate share of the other corporation's income. If
a foreign corporation is classified as a PFIC, in any year with respect to which
a U.S. Holder owns common shares, it generally will continue to be treated as a
PFIC, with respect to such shareholder in all succeeding years. We will notify
U.S. Holders by letter and provide them with the information as may be required
to make a "qualified electing fund" election effective.

     Based upon our current and projected income, assets and activities, we do
not expect that our common shares will be considered shares of a PFIC for our
current fiscal year or for future years. This conclusion is a factual
determination made annually and thus is subject to change. In reaching the
conclusion that we do not believe that our company is a PFIC, we have valued our
company's assets based on the price per share of the common shares. For purposes
of applying the PFIC rules to our company, this valuation method results in
substantial value being given to intangible assets, including goodwill, that are
considered neither to produce nor to be held for the production of passive
income for purposes of the PFIC rules. The U.S. Internal Revenue Service (the
"IRS") has neither approved or disapproved of this valuation method, although we
believe that it constitutes a reasonable method of valuing our company's
non-passive assets. In addition, we believe that our passive income, as defined
under Section 1297 of the Code, does not, and should not, equal or exceed 75% of
our gross income. We will notify U.S. Holders if our company becomes a PFIC in
any taxable year. We will notify U.S. Holders by letter and provide them with
the information required to make a "QEF election", as described below.

     If our company were treated as a PFIC, unless U.S. Holders make a "QEF
election" or a "mark-to-market election", each as described below:

     - distributions made by our company during a taxable year with respect to
       the common shares that are "excess distributions" (defined generally as
       the excess of the amount received with respect to the shares in any
       taxable year over 125% of the average received in the shorter of either
       the three previous years or your holding period before the taxable year)
       must be allocated ratably to each day of your holding period. The amounts
       allocated to the current taxable year and to taxable years prior to the
       first year in which our company was classified as a PFIC will be included
       as ordinary income in gross income for that year. The amount allocated to
       each other prior taxable year will be taxed as ordinary income at the
       highest rate in effect for the U.S. Holder in that prior year and the tax
       is subject to an interest charge at the rate applicable to deficiencies
       in income taxes; and

     - the entire amount of any gain realized upon the sale or other disposition
       of common shares will be treated as an excess distribution made in the
       year of sale or other disposition and as a consequence will be treated as
       ordinary income and to the extent allocated to years prior to the year of
       sale or disposition, will be subject to the interest charge described
       above.

     These special PFIC tax rules will not apply if the U.S. Holder elects to
have our company treated as a "qualified electing fund" (a "QEF election") and
our company provides certain information required for
                                       56
<PAGE>   59

the QEF election. If our company is treated as a PFIC, we intend to notify U.S.
Holders and provide them with that information as may be required to make the
QEF election effective.

     If a U.S. Holder makes a QEF election, the U.S. Holder will be currently
taxable on its pro rata share of our company's ordinary earnings and net capital
gain (at ordinary income and capital gains rates, respectively) for each taxable
year of our company, regardless of whether or not distributions were received.
The U.S. Holder's basis in the common shares will be increased to reflect taxed
but undistributed income. Distributions of income that had previously been taxed
will result in a corresponding reduction in basis in the common shares and will
not be taxed again as a distribution.

     Alternatively, if the common shares are treated as "marketable stock", a
U.S. Holder may make a mark-to-market election. If this election is made, the
U.S. Holder will not be subject to the PFIC rules described above. Instead, the
U.S. Holder generally will include in each year as ordinary income the excess,
if any, of the fair market value of the common shares at the end of the taxable
year over the U.S. Holder's adjusted basis in the shares and will be permitted
an ordinary loss in respect of the excess, if any, of the U.S. Holder's adjusted
basis in the common shares over its fair market value at the end of the taxable
year (but only to the extent of the net amount previously included in income as
a result of the mark-to-market election). Basis in the shares would be adjusted
to reflect any such income of loss amounts. The mark-to-market election is only
available with respect to stock traded on certain U.S. exchanges and other
exchanges designated by the U.S. Treasury. It is anticipated that such election
would be available to U.S. Holders.

     U.S. Holders that own common shares during any year that our company is a
PFIC, must file IRS Form 8621. U.S. Holders are urged to consult their tax
advisers concerning the U.S. federal income tax consequences of holding shares
of our company if it is considered a PFIC.

     Controlled Foreign Corporations.  If United States Shareholders in the
aggregate own more than 50% of the voting power or value of the shares of a
foreign corporation, it will be classified as a "controlled foreign corporation"
("CFC"). A "United States Shareholder" is any United States person that owns
(directly or through certain deemed ownership rules) at least 10% of the total
combined voting power of all classes of shares of a foreign corporation.

     If a foreign corporation is a CFC for an uninterrupted period of 30 days or
more during the taxable year, the United States Shareholders of the CFC will
generally be subject to current U.S. tax on certain types of income of the
foreign corporation ("Subpart F income", which includes dividends, interest,
certain rents and royalties, gain from the sale of property producing such
income and certain income from sales and services) and, in certain
circumstances, on earnings of the CFC that are invested in U.S. property,
whether or not cash is distributed by the CFC. In addition, gain on the sale of
the CFC's shares by a United States Shareholder (during the period that the
corporation is a CFC and thereafter for a five-year period) will be ordinary
income in whole or in part.

     If we are treated as a CFC, any U.S. Holder that acquires (directly or
through certain deemed ownership rules) 10% or more of the total combined voting
power of all classes of our shares will be required to include certain amounts
with respect to its investment in income currently. Our status as a CFC should
have no adverse effect on any U.S. Holder that is not a United States
Shareholder.

     Foreign Personal Holding Companies.  If five or fewer U.S. individuals own,
or are treated as owning under certain attribution rules, in the aggregate more
than 50% of the voting power or value of the shares of a foreign corporation,
and at least 60% (50% in certain circumstances) of the "gross income" of such
foreign corporation is made up of certain passive type income (for example,
dividends, interest, certain rents and royalties and gain from the sale of stock
or securities) for a taxable year, then such corporation will be a "foreign
personal holding company" ("FPHC"). If a foreign corporation is a FPHC, U.S.
persons that own shares in the FPHC (regardless of the size of their
shareholding and regardless of whether they are individuals) will generally be
subject to current U.S. tax on a pro-rata portion of the FPHC's undistributed
foreign personal holding company income ("FPHCI") for the taxable year or part
thereof, although tax-exempt U.S. investors will not be subject to tax on
amounts attributable to FPHCI.

                                       57
<PAGE>   60

In addition, U.S. persons that are required under these rules to include
undistributed taxable income for a taxable year and that own at least 5% of the
value of the FPHC's shares are required to comply with certain reporting
requirements under Code. In addition, if our company became a FPHC, U.S. persons
who acquire their shares from decedents would not receive a "stepped-up" basis
in such shares. Instead, such U.S. persons would have a tax basis equal to the
lower of fair market value or the decedent's basis.

     Based upon our current and projected income, assets and activities, we do
not expect the common shares to be considered shares of FPHC for our current
year or for future years. We will notify U.S. Holders if we become a FPHC in any
taxable year.

  NON-U.S. HOLDERS

     A non-U.S. Holder generally will not be subject to U.S. federal income tax
on dividends paid by us with respect to the common shares unless such income is
effectively connected with the conduct by the non-U.S. Holder of a trade or
business in the United States.

     A non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on the sale or other disposition of the common
shares unless that gain is effectively connected with the conduct by the
non-U.S. Holder of a trade or business within the United States, or, in the case
of gains recognized by individual non-U.S. Holders, the individual is present in
the United States for 183 days or more and certain other conditions are met.

     Effectively connected dividends and gains of a non-U.S. Holder generally
will be subject to tax in the same manner as a U.S. Holder. These dividends and
gains realized by a corporate non-U.S. Holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.

  INFORMATION REPORTING AND BACKUP WITHHOLDING

     In general, information reporting requirements will apply to dividends in
respect of the common shares or the proceeds received on the sale, exchange or
redemption of common shares paid within the U.S. (and in certain cases, outside
the United States) to U.S. Holders other than certain exempt recipients, such as
corporations, and a 31% backup withholding may apply to such amounts if the U.S.
Holder fails to provide an accurate taxpayer identification number or to report
interest and dividends required to be shown on its U.S. federal income tax
returns. The amount of any backup withholding from a payment to a U.S. Holder
will be allowed as credit against the U.S. Holder's U.S. federal income tax
liability.

     Non-U.S. Holders are generally exempt from the information reporting and
backup withholding rules but may be required to comply with certification and
identification requirements in order to prove their exemption.

     The rules for information reporting and backup withholding requirements
have been altered in certain respects with respect to payments after December
31, 2000. It is possible that we and other withholding agents may request a new
withholding certificate in order to qualify for continued exemption from backup
withholding under Treasury regulations when they become effective. Holders of
the common shares should consult their tax advisers concerning the possible
application of these alterations to any payments made with respect to the common
shares.

EXCHANGE CONTROLS

     There are currently no British Virgin Islands laws or regulations
restricting the import or export of capital or affecting the payment of
dividends or other distributions to shareholders who are non-residents of the
British Virgin Islands.

     Some of our subsidiaries may be subject from time to time to exchange
control laws and regulations that may limit or restrict the payment of dividends
or distributions or other transfers of funds by those

                                       58
<PAGE>   61

subsidiaries to our company. We do not anticipate, however, that existing
exchange control laws and regulations affecting our subsidiaries will have a
material adverse effect on our company.

DOCUMENTS ON DISPLAY

     We have filed with the Securities and Exchange Commission this annual
report on Form 20-F, including exhibits, under the Securities Exchange Act of
1934 with respect to the common shares.

     You may read and copy all or any portion of the annual report or other
information in our files in the Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can request copies of these documents upon payment of a
duplicating fee, by writing to the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. El Sitio's Commission filings, including the registration statement, will
also be available to you on the Commission's Internet site (http://www.sec.gov).

ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See Item 5. "Operating and Financial Review and Prospects -- Market Risks"
for quantitative and qualitative disclosures about market risk.

ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                       59
<PAGE>   62

                                    PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     Not applicable.

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
          PROCEEDS

USE OF PROCEEDS

     The following use of proceeds information relates to the registration
statement on Form F-1 (No. 333-91263) for the initial public offering of our
common shares, which registration statement was declared effective on December
9, 1999.

     We received net proceeds of $137.5 million from our initial public offering
(after underwriting discounts of $10.6 million and transaction expenses of $2.8
million).

     From the effective date of the Securities Act registration statement to
December 31, 1999, we did not use any of the net proceeds from the sale of our
common shares in the initial public offering. Instead, pending such use, we
invested all of these net proceeds in short-term, interest-bearing U.S. dollar-
denominated investments, mainly U.S. Treasury obligations. Since January 1,
2000, we have commenced using the net proceeds of the initial public offering in
the development of our business, including for product, content and technology
expenses, marketing and sales activities, and corporate, general and
administrative expenses. We also plan to use a portion of the net proceeds to
fund the $7 million cash component of the purchase price for our pending
DeCompras.com, Inc. acquisition.

     Credit Suisse First Boston Corporation and Lehman Brothers, Inc. were the
joint lead managing underwriters for our initial public offering.

ITEM 15.  [RESERVED]

ITEM 16.  [RESERVED]

ITEM 17.  FINANCIAL STATEMENTS

     See Item 18. "Financial Statements" for the consolidated financial
statements of our company filed as part of this annual report.

                                       60
<PAGE>   63

                                    PART III

ITEM 18.  FINANCIAL STATEMENTS

     The following consolidated financial statements of El Sitio and its
subsidiaries are included at the end of this annual report:

<TABLE>
<S>                                                           <C>
Index to Financial Statements...............................  F-1
Independent Auditors' Report................................  F-2
Consolidated Balance Sheets at December 31, 1997, December
  31, 1998 and December 31, 1999............................  F-3
Consolidated Statements of Operations and Comprehensive Loss
  for the period from July 16, 1997 (date of inception)
  through December 31, 1997, the year ended December 31,
  1998 and the year ended December 31, 1999.................  F-4
Consolidated Statements of Shareholders' Equity (Deficit)
  for the period from July 16, 1997 (date of inception)
  through December 31, 1997, the year ended December 31,
  1998 and the year ended December 31, 1999.................  F-5
Consolidated Statements of Cash Flow for the period from
  July 16, 1997 (date of inception) through December 31,
  1997, the year ended December 31, 1998 and the year ended
  December 31, 1999.........................................  F-7
Notes to Consolidated Financial Statements..................  F-8
</TABLE>

ITEM 19.  EXHIBITS

<TABLE>
<C>    <S>
 2.1   Framework Agreement, dated August 4, 1999, between IMPSAT
       Fiber Networks, Inc. and
       El Sitio, Inc. (formerly, El Sitio International
       Corporation).*
 3.1   Amended and Restated Memorandum of Association of El Sitio,
       Inc.*
 3.2   Amended and Restated Articles of Association of El Sitio,
       Inc.*
10.1   Stock Purchase Agreement, dated June 21, 1999, among El
       Sitio, Inc. (formerly, El Sitio International Corporation),
       Washburn Enterprises, Inc., Chestnut Hill (El Sitio), LLC
       and Ibero-American Media Partners II Ltd.*
10.2   Form of Internet Data Services Agreement, dated June 14,
       1999, between Exodus Communications, Inc. and El Sitio
       U.S.A., Inc.*
10.3   Form of Internet, Backbone and Co-location Service
       Agreement, dated April 29, 1999, among IMPSAT Fiber
       Networks, Inc. USA IP-Internet Backbone & Co. and El Sitio
       U.S.A., Inc.*
10.4   Letter Agreement, dated February 11, 1999, between TV
       Azteca, S.A. de C.V. and El Sitio, Inc. (formerly, El Sitio
       International Corporation).*
10.5   Subscription Agreement, dated August 31, 1999, between TV
       Azteca, S.A. de C.V. and El Sitio, Inc. (formerly, El Sitio
       International Corporation).*
10.6   Registration Rights Agreement, dated July 2, 1999, among El
       Sitio, Inc. (formerly, El Sitio International Corporation)
       and holders of its Class A Convertible Preferred Stock.*
10.7   El Sitio International Corporation 1999 Amended and Restated
       Stock Option Plan.*
10.8   Assignment Agreement, dated April 1, 2000, between El Sitio
       Colombia S.A. and IMPSAT S.A.
10.9   Form of Employment Agreement (substantially in the form
       entered into by each of Roberto Cibrian-Campoy, Walter
       Forwood, Horacio Milberg and Daniel Rotszain).
10.10  Form of Employment Agreement (substantially in the form
       entered into by each of Eduardo Weber, Mariano Varela, Lucia
       Suarez, Esteban Vivo-Chaneton and Alfredo Jimenez de
       Arechaga).
10.11  Strategic Relationship Agreement, dated February 28, 2000,
       between Grupo Sarandi and El Sitio Uruguay, S.A.
</TABLE>

                                       61
<PAGE>   64
<TABLE>
<C>    <S>
10.12  Amendment No. 1 to the Stock Purchase Agreement, dated July
       2, 1999, among El Sitio, Inc. (formerly, El Sitio
       International Corporation), Washburn Enterprises, Inc.,
       Chestnut Hill
       (El Sitio), LLC and Ibero-American Media Partners II Ltd.*
10.13  Stockholders Agreement, dated July 2, 1999, among the
       Stockholders of El Sitio International Corporation.*
10.14  Quotas Purchase Agreement, dated October 6, 1999, between
       IMPSAT Comunicacoes Ltda. and O Site Entretenimentos Ltda.*
10.15  Internet Service Agreement, dated October 6, 1999, between
       IMPSAT Comunicacoes Ltda. and Mandic Internet Ltda.*
10.16  Share Purchase Agreement, dated October 6, 1999, between El
       Sitio, Inc. and IMPSAT Fiber Networks, Inc.*
10.17  Amendment No. 1 to Registration Rights Agreement, dated
       October 6, 1999, among El Sitio, Inc. and the holders of its
       Class A Convertible Preferred Stock.*
10.18  Amendment No. 1 to Stockholders Agreement, dated October 6,
       1999, among IAMP
       (El Sitio) Investments Ltd., Washburn Enterprises Inc., GCC
       Investments, LLC, the Initial Stockholders and El Sitio,
       Inc.*
10.19  Assignment Agreement, dated November 5, 1999, between El
       Sitio Argentina S.A. and IMPSAT S.A.*
10.20  Internet Service Agreement, dated November 5, 1999, between
       El Sitio Argentina S.A. and IMPSAT S.A.*
10.21  Reseller and Management Agreement, dated November 5, 1999,
       between El Sitio Argentina S.A. and IMPSAT S.A.*
10.22  Share Purchase Agreement, dated November 9, 1999, among El
       Sitio, Inc., Intel Atlantic, Inc., Utilitivest II, L.P. and
       Utilitivest III, L.P. (investment funds managed by Latinvest
       Asset Management do Brasil).*
10.23  Amended and Restated Registration Rights Agreement, dated
       November 9, 1999, among El Sitio, Inc. and the holders of
       its Class B Convertible Preferred Stock.*
10.24  Amended and Restated Shareholders' Agreement, dated November
       9, 1999, among El Sitio, Inc. and certain of its
       shareholders.*
10.25  Warrant Acquisition Agreement, dated June 25, 1999, between
       Bear, Stearns & Co. Inc. and El Sitio, Inc. (formerly El
       Sitio International Corporation).*
10.26  Purchase Agreement, dated March 10, 2000, among El Sitio,
       Inc., Belagua B.V., Coracias, B.V., the stockholders of
       DeCompras.com, Inc. and DeCompras.com, Inc.
10.27  Letter Agreement, dated February 17, 2000, among El Sitio,
       Inc., Red de Television Chilevision S.A. and Iberoamerican
       Media Holdings Chile S.A.
10.28  Form of Noncompete Agreement (substantially in the form
       entered into by each of Roberto Cibrian-Campoy, Walter
       Forwood, Alfredo Jimenez de Arechaga, Horacio Milberg,
       Daniel Rotsztain, Lucia Suarez, Mariano Varela, Esteban
       Vivo-Chaneton and Eduardo Weber).
21.1   List of Subsidiaries of the Company (included in Item 4.
       "Information on the Company -- Subsidiaries").
</TABLE>

---------------
* Incorporated herein by reference to the Registration Statement (No. 333-91263)
  on Form F-1, as filed with the Commission and declared effective on December
  9, 1999.

                                       62
<PAGE>   65

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Independent Auditors' Report................................    F-2
Consolidated Balance Sheets at December 31, 1998 and 1999...    F-3
Consolidated Statements of Operations and Comprehensive Loss
  for the period from July 16, 1997 (date of inception)
  through December 31, 1997 and the years ended December 31,
  1998 and 1999.............................................    F-4
Consolidated Statements of Shareholders' Equity (Deficit)
  for the period from July 16, 1997 (date of inception)
  through December 31, 1997 and the years ended December 31,
  1998 and 1999.............................................    F-5
Consolidated Statements of Cash Flows for the period from
  July 16, 1997 (date of inception) through December 31,
  1997 and the years ended December 31, 1998 and 1999.......    F-7
Notes to Consolidated Financial Statements..................    F-8
</TABLE>

                                       F-1
<PAGE>   66

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of El Sitio, Inc.:

     We have audited the accompanying consolidated balance sheets of El Sitio,
Inc. and its subsidiaries (the "Company") as of December 31, 1998 and 1999 and
the related consolidated statements of operations and comprehensive loss,
shareholders' equity and cash flows for the period from July 16, 1997 (date of
inception) through December 31, 1997 and the years ended December 31, 1998 and
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1999 and the results of its operations and its cash flows for the
period from July 16, 1997 (date of inception) through December 31, 1997 and the
years ended December 31, 1998 and 1999, in conformity with generally accepted
accounting principles in the United States of America.

DELOITTE & TOUCHE, LLP
Certified Public Accountants

Miami, Florida
February 28, 2000

                                       F-2
<PAGE>   67

                        EL SITIO, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                        AS OF DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               1998        1999
                                                              -------    --------
<S>                                                           <C>        <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   246    $160,029
  Trade accounts receivable, net............................      105       3,123
  Other receivables.........................................      307         392
  Prepaid advertising and other current assets..............       12      10,094
                                                              -------    --------
          Total current assets..............................      670     173,638
PROPERTY AND EQUIPMENT, net.................................      581       5,405
LICENSES AND PERMITS, net...................................      223         360
INTANGIBLE ASSETS -- CUSTOMER BASE, net.....................       --      18,209
OTHER ASSETS................................................        7       4,308
                                                              -------    --------
TOTAL ASSETS................................................  $ 1,481    $201,920
                                                              =======    ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable-trade....................................  $   336    $ 13,499
  Accrued and other liabilities.............................      376       4,796
  Current portion of installment loan.......................       --          28
  Unearned revenues.........................................       --         958
                                                              -------    --------
          Total current liabilities.........................      712      19,281
                                                              =======    ========
COMMITMENTS AND CONTINGENCIES (Note 14)
CLASS B CONVERTIBLE PREFERRED SHARES
  Redeemable $0.01 par value, 8% cumulative
     dividend -- 1,888,889 shares authorized, 1,111,111
     shares issued and outstanding, liquidation preference
     $0.01 per share........................................       --       8,967
                                                              -------    --------
SHAREHOLDERS' EQUITY:
  Common shares, $.01 par value; 200,000,000 shares
     authorized; 6,000,000 and 40,157,338 shares issued and
     outstanding at December 31, 1998 and 1999,
     respectively...........................................       60         402
  Additional paid-in capital................................    2,940     225,860
  Liability for future shares...............................       --       6,000
  Irrevocable capital contribution..........................    2,302
  Deferred share-based compensation.........................       --     (11,950)
  Discount on Class B convertible preferred shares..........       --      (6,843)
  Accumulated other comprehensive (loss) income.............       (2)      1,061
  Accumulated deficit.......................................   (4,531)    (40,858)
                                                              -------    --------
  Total shareholders' equity................................      769     173,672
                                                              -------    --------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........  $ 1,481    $201,920
                                                              =======    ========
</TABLE>

                See notes to consolidated financial statements.
                                       F-3
<PAGE>   68

                        EL SITIO, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

    PERIOD FROM JULY 16, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
                 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                          PERIOD
                                                          ENDED         YEAR ENDED      YEAR ENDED
                                                       DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                           1997            1998            1999
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
NET REVENUES:
  Advertising and related services...................    $   267        $      780     $     4,205
  Connectivity services..............................         --                --           2,656
                                                         -------        ----------     -----------
          Total......................................        267               780           6,861
                                                         -------        ----------     -----------
COSTS AND EXPENSES:
  Product, content and technology....................        221             1,556           8,074
  Marketing and sales................................        142               674          20,554
  Corporate, general and administrative..............        727             1,940           8,439
  Depreciation and amortization......................         81               107           2,100
  Share-based compensation...........................         --                --           2,042
                                                         -------        ----------     -----------
          Total costs and expenses...................      1,171             4,277          41,209
                                                         -------        ----------     -----------
Operating loss.......................................       (904)           (3,497)        (34,348)
                                                         -------        ----------     -----------
OTHER INCOME (EXPENSES):
  Interest income (expense), net.....................        (75)              (42)            799
  Foreign exchange loss..............................         (3)              (44)             (9)
  Other income (expense), net........................        (32)               66             (25)
                                                         -------        ----------     -----------
          Total other (expenses) income, net.........       (110)              (20)            765
LOSS BEFORE DIVIDENDS ON CLASS A AND B CONVERTIBLE
  PREFERRED SHARES...................................     (1,014)           (3,517)        (33,583)
DIVIDENDS ON CLASS A AND B CONVERTIBLE PREFERRED
  SHARES.............................................         --                --          (2,744)
                                                         -------        ----------     -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS.........     (1,014)           (3,517)        (36,327)
OTHER COMPREHENSIVE LOSS, NET OF TAX:
  Foreign currency translation adjustment............         --                (2)          1,063
                                                         -------        ----------     -----------
COMPREHENSIVE LOSS...................................    $(1,014)       $   (3,519)    $   (35,264)
                                                         =======        ==========     ===========
NET LOSS PER COMMON SHARE:
  Basic and diluted..................................    $(10.14)       $    (1.15)    $     (2.66)
                                                         =======        ==========     ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
  Basic and diluted..................................    100,000         3,050,000      13,681,306
                                                         =======        ==========     ===========
</TABLE>

                See notes to consolidated financial statements.
                                       F-4
<PAGE>   69

                        EL SITIO, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

    PERIOD FROM JULY 16, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
                 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                               DISCOUNTS
                                                                    LIABILITY                                 ON CLASS B
                                                       ADDITIONAL      FOR      IRREVOCABLE      DEFERRED     CONVERTIBLE
                                   COMMON               PAID-IN      FUTURE       CAPITAL      SHARE-BASED     PREFERRED
                                   SHARES     AMOUNT    CAPITAL      SHARES     CONTRIBUTION   COMPENSATION      SHARE
                                 ----------   ------   ----------   ---------   ------------   ------------   -----------
<S>                              <C>          <C>      <C>          <C>         <C>            <C>            <C>
Initial capitalization.........     100,000    $  1     $     49
Net loss for the period........
                                 ----------    ----     --------     ------        ------        --------       ------
BALANCE, DECEMBER 31, 1997.....     100,000       1           49         --            --              --           --
Issuance of common shares in
  exchange for Class B shares
  of El Sitio Argentina........   3,432,094      34        1,682         --            --              --           --
Issuance of common shares......   2,467,906      25        1,209         --            --              --           --
Irrevocable capital
  contribution.................          --                                         2,302
Foreign currency translation
  adjustment...................          --      --           --         --            --              --           --
Net loss for the year..........          --      --           --         --            --              --           --
                                 ----------    ----     --------     ------        ------        --------       ------
BALANCE, DECEMBER 31, 1998.....   6,000,000      60        2,940         --         2,302              --           --
Issuance of common shares......     168,098       2           82         --                            --           --
Irrevocable capital
  contribution.................          --      --           --         --           898              --           --
Capitalization of irrevocable
  capital contribution.........   6,400,000      64        3,136         --        (3,200)             --           --
Issuance of common shares in
  initial public offering, net
  of transaction expenses of
  $2,849.......................   9,430,000      94      137,374         --            --              --           --
Conversion of Class A
  convertible preferred
  shares.......................  18,092,000     181       60,443         --            --              --           --
Discount on Class B convertible
  preferred shares.............          --      --        7,778         --            --              --       (7,778)
                                                                                                              (Continued)

<CAPTION>
                                  ACCUMULATED
                                     OTHER
                                 COMPREHENSIVE
                                    (LOSS)       ACCUMULATED
                                    INCOME         DEFICIT      TOTAL
                                 -------------   -----------   --------
<S>                              <C>             <C>           <C>
Initial capitalization.........                                $     50
Net loss for the period........                     (1,014)      (1,014)
                                    ------        --------     --------
BALANCE, DECEMBER 31, 1997.....         --          (1,014)        (964)
Issuance of common shares in
  exchange for Class B shares
  of El Sitio Argentina........         --              --        1,716
Issuance of common shares......         --              --        1,234
Irrevocable capital
  contribution.................                                   2,302
Foreign currency translation
  adjustment...................         (2)             --           (2)
Net loss for the year..........         --          (3,517)      (3,517)
                                    ------        --------     --------
BALANCE, DECEMBER 31, 1998.....         (2)         (4,531)         769
Issuance of common shares......                                      84
Irrevocable capital
  contribution.................         --              --          898
Capitalization of irrevocable
  capital contribution.........         --              --           --
Issuance of common shares in
  initial public offering, net
  of transaction expenses of
  $2,849.......................         --              --      137,468
Conversion of Class A
  convertible preferred
  shares.......................         --              --       60,624
Discount on Class B convertible
  preferred shares.............         --              --           --

</TABLE>

                                       F-5
<PAGE>   70
<TABLE>
<CAPTION>
                                                                                                               DISCOUNTS
                                                                    LIABILITY                                 ON CLASS B
                                                       ADDITIONAL      FOR      IRREVOCABLE      DEFERRED     CONVERTIBLE
                                   COMMON               PAID-IN      FUTURE       CAPITAL      SHARE-BASED     PREFERRED
                                   SHARES     AMOUNT    CAPITAL      SHARES     CONTRIBUTION   COMPENSATION      SHARE
                                 ----------   ------   ----------   ---------   ------------   ------------   -----------
<S>                              <C>          <C>      <C>          <C>         <C>            <C>            <C>
Amortization of discount on
  Class B convertible preferred
  shares.......................          --      --           --         --            --              --          935
Liability for future shares....                                       6,000
Exercise of share options......      67,240       1          115         --            --              --           --
Deferred share-based
  compensation related to share
  options......................          --      --       13,992         --            --         (13,992)          --
Amortizations of deferred
  share-based compensation.....          --      --           --         --            --           2,042           --
Foreign currency translation
  adjustment...................          --      --           --         --            --              --           --
Net loss for the year..........          --      --           --         --            --              --           --
                                 ----------    ----     --------     ------        ------        --------       ------
BALANCE, DECEMBER 31, 1999.....  40,157,338    $402     $225,860     $6,000            --        $(11,950)      (6,843)
                                 ==========    ====     ========     ======        ======        ========       ======

<CAPTION>
                                  ACCUMULATED
                                     OTHER
                                 COMPREHENSIVE
                                    (LOSS)       ACCUMULATED
                                    INCOME         DEFICIT      TOTAL
                                 -------------   -----------   --------
<S>                              <C>             <C>           <C>
Amortization of discount on
  Class B convertible preferred
  shares.......................         --              --          935
Liability for future shares....                                   6,000
Exercise of share options......         --              --          116
Deferred share-based
  compensation related to share
  options......................         --              --           --
Amortizations of deferred
  share-based compensation.....         --              --        2,042
Foreign currency translation
  adjustment...................      1,063              --        1,063
Net loss for the year..........         --         (36,327)     (36,327)
                                    ------        --------     --------
BALANCE, DECEMBER 31, 1999.....     $1,061        $(40,858)    $173,672
                                    ======        ========     ========
</TABLE>

                                                                     (Concluded)

                See notes to consolidated financial statements.

                                       F-6
<PAGE>   71

                        EL SITIO, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

    PERIOD FROM JULY 16, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
                 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              PERIOD ENDED    YEAR ENDED     YEAR ENDED
                                                              DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                                  1997           1998           1999
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................    $(1,014)       $(3,517)       $(36,327)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Amortization and depreciation.............................         81            107           2,100
  Amortization of deferred share-based compensation.........         --             --           2,042
  Amortization of discount on Class B convertible preferred
    shares..................................................         --             --             935
  Changes in assets and liabilities:
    Increase in trade accounts receivable, net..............        (48)           (57)         (3,018)
    Increase in prepaid advertising and other current
      assets................................................         (5)            (7)         (1,593)
    Increase in other receivables and other non-current
      assets................................................        (74)          (240)         (4,386)
    Increase in accounts payable trade......................         63            273          13,163
    Increase in accrued and other liabilities...............        122            221           3,294
    Increase in unearned revenues...........................         --             --             958
                                                                -------        -------        --------
      Net cash used in operating activities.................       (875)        (3,220)        (22,832)
                                                                -------        -------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................       (261)          (510)         (5,502)
  Purchases of licenses and permits.........................         --           (223)           (285)
  Purchases of retail dial-up access customers..............         --             --         (17,373)
                                                                -------        -------        --------
      Net cash used in investing activities.................       (261)          (733)        (23,160)
                                                                -------        -------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from short-term borrowings.......................         --             --           3,875
  Repayments of short-term borrowings.......................         --             --          (3,875)
  Shareholder loans to subsidiaries.........................      1,175             --              --
  Capital contributions.....................................         50          1,808              84
  Irrevocable capital contributions.........................                     2,302             898
  Net proceeds from issuance of Class B convertible
    preferred shares........................................         --             --           8,967
  Net proceeds from issuance of Class A convertible
    preferred shares........................................         --             --          58,135
  Net proceeds from initial public offering.................         --             --         137,468
  Exercise of share options.................................         --             --             116
                                                                -------        -------        --------
      Net cash provided by financing activities.............      1,225          4,110         205,668
                                                                -------        -------        --------
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS........         --             --             107
                                                                -------        -------        --------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................         89            157         159,783
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............         --             89             246
                                                                -------        -------        --------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................    $    89        $   246        $160,029
                                                                =======        =======        ========
SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid.............................................         --             --        $  1,732
                                                                -------        -------        ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
  ACTIVITIES:
  Capitalization of shareholder loans to subsidiaries.......                   $ 1,142
                                                                               =======
  Capitalization of irrevocable capital contributions.......         --             --        $  3,200
                                                                -------        -------        ========
  Motor vehicle acquired through installment loan...........         --             --        $     27
                                                                -------        -------        ========
  Advertising time acquired through the issuance of 355,478
    Class A convertible preferred shares....................         --             --        $  2,489
                                                                -------        -------        ========
  Advertising time acquired in exchange for obligation to
    issue shares in the future..............................         --             --        $  6,000
                                                                -------        -------        ========
</TABLE>

                See notes to consolidated financial statements.
                                       F-7
<PAGE>   72

                        EL SITIO, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

1. BACKGROUND AND EVOLUTION

     El Sitio, Inc., a British Virgin Islands international business company
(the "Company"), is an Internet media company providing country-specific and
regional content for Spanish-and Portuguese-speaking audiences in Latin America
and the United States. The Company has begun to offer connectivity services in
Argentina and Brazil, and, in April 2000, in Colombia. The Company also intends
to provide e-commerce services for audiences in Latin America and the United
States.

     The Company was formed in July 1997 under the name Blasin International
Corporation. In October 1997 and July 1998, the Company acquired ownership of
interests in subsidiaries located in Uruguay and Argentina, respectively, which
were under common ownership. These acquired entities had been established in
Argentina and Uruguay on December 30, 1996 and February 24, 1997, respectively,
under the names of Cibrian-Campoy Creativos S.A. ("El Sitio Argentina") and
Aalefranger S.A., an inactive entity ("El Sitio Uruguay"). During 1998,
operating subsidiaries have been established in Mexico ("El Sitio Mexico"), the
United States ("El Sitio USA") and Brazil ("El Sitio Brazil"). In December 1999,
an additional subsidiary was established in Colombia ("El Sitio Colombia").

     All of the Company's subsidiaries are wholly-owned (except for a small
number of shares issued to other persons to comply with local corporate law
requirements). Minority interest in subsidiaries, which is immaterial, is
included in other liabilities and other income.

     At December 31, 1999, the Company's operating subsidiaries were as follows:

<TABLE>
<CAPTION>
COUNTRY                                                     OPERATING SUBSIDIARIES
-------                                                     ----------------------
<S>                                                         <C>
Argentina                                                    El Sitio Argentina
Uruguay                                                      El Sitio Uruguay
United States                                                El Sitio USA
Brazil                                                       El Sitio Brazil
Mexico                                                       El Sitio Mexico
Colombia                                                     El Sitio Colombia
</TABLE>

     The Company's successful completion of its development program and,
ultimately, the attainment of profitable operations is dependent on future
events, including maintaining adequate financing to fulfill its development
activities and achieving a level of revenues adequate to support the Company's
cost structure. With the net proceeds of the private placement in July 1999 and
from the initial public offering in December 1999, the Company plans to fund its
sales and marketing (including branding and advertising) activities, expand its
sales force, improve its network infrastructure, develop new services and
products, make strategic investments or acquisitions and fund other corporate
purposes.

2. MERGERS AND ACQUISITIONS

     In October 1997, the Company acquired 75% of the common shares of El Sitio
Uruguay, an inactive entity, for $1.7 in cash. This acquisition was accounted
for under the purchase method of accounting.

     In July 1998, the Company acquired 85% of the Class A shares of El Sitio
Argentina for $50 and 100% of the Class B shares of El Sitio Argentina in
exchange for the issuance of 3,432,094 common shares of the Company. This
acquisition, as is generally the case for transactions among companies under

                                       F-8
<PAGE>   73
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

2. MERGERS AND ACQUISITIONS (CONTINUED)
common control, has been accounted for in a manner similar to the pooling of
interests method of accounting, whereby all assets and liabilities have been
recorded at their historical carrying amounts.

     During the year ended December 31, 1999, the Company acquired the remaining
minority interest in El Sitio Argentina and El Sitio Uruguay. These acquisitions
were accounted for under the purchase method of accounting.

     On October 7 1999, and November 5, 1999, the Company completed acquisitions
of IMPSAT Fiber Networks, Inc. ("IMPSAT") retail dial-up access customers in
Brazil and Argentina for $12,300 and $6,200, respectively. Each of these
acquisitions was accounted for as a purchase. The purchase price in excess of
the fair value of net assets acquired was approximately $18,500 and is recorded
as intangible asset-customer base and is being amortized over 3 years using the
straight line method.

     The following information presents the pro forma information for the year
ended December 31, 1998 and 1999 of the Company as if the above two IMPSAT
acquisitions had occurred at the beginning of such years (in thousands):

<TABLE>
<CAPTION>
                                                           1998        1999
                                                          -------    --------
<S>                                                       <C>        <C>
Net revenues............................................  $15,156    $ 15,863
                                                          =======    ========
Net loss attributable to common shareholders............  $(7,709)   $(40,087)
                                                          =======    ========
Net loss per common share...............................  $ (2.53)   $  (2.93)
                                                          =======    ========
</TABLE>

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION -- The financial statements are presented on a
consolidated basis and include the accounts of the Company and its subsidiaries.
All significant intercompany transactions and balances have been eliminated.

     USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

     CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are highly liquid
investments, including short-term investments and time deposits with maturities
of three months or less at the time of purchase. Cash equivalents and short-term
investments are stated at cost, which approximates market value.

     REVENUE RECOGNITION -- The Company's revenues are derived principally from
the sale of advertisement and connectivity services. The Company sells
advertising primarily at a fixed price per month. Revenues on these contracts
are recognized ratably over the period of time in which the advertisement is
displayed. The Company also sells advertising generally for a fixed fee based on
a cost-per-thousand impressions, or "CPM", basis under which such advertisers
and advertising agencies receive a guaranteed number of "impressions," or number
of times that an advertisement appears in pages viewed by users of the Company's
online properties. The Company's contracts with advertisers and advertising
agencies for these types of contracts cover periods ranging from one month to
one year. Advertising revenues are

                                       F-9
<PAGE>   74
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized ratably based on the number of impressions displayed, provided that
the Company has no obligations remaining at the end of a period and collection
of the resulting receivable is probable. The Company's obligations typically
include guarantees of minimum number of impressions. To the extent that minimum
guaranteed impressions are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved. Payments received from advertisers prior to displaying their
advertisements on the Company's network are recorded as unearned revenues.
Revenues from exclusive sponsorship arrangements are recognized ratably.

     Additional revenue is generated from Website design and Web hosting.
Website design revenues are recognized once the related activities are performed
and the customer's Website is complete and operational. Web hosting revenues are
recognized ratably over the terms of the contracts. Revenues from Website design
and Web hosting are included in advertising and related services and amounted
to: $86 in 1997; $253 in 1998; and $499 in 1999.

     Connectivity service revenues represent month-to-month subscriptions for
pre-paid and per-minute usage of access levels. Subscription revenues are
recognized over the period that services are provided.

     For the period ended December 31, 1997 and the year ended December 31,
1998, the Company had five customers which each exceeded 10% of total revenue
and, collectively, represented 89% of revenues, and four customers which each
exceeded 10% of total revenue and, collectively, represented 72% of revenues,
respectively. Three of the these customers were the same in both years. For the
year ended December 31, 1999, the Company had no customers which exceeded 10% of
total revenue.

     The Company in the ordinary course of business enters into reciprocal
services arrangements whereby the Company provides advertising service to third
parties in exchange for telecommunications services and advertising services in
other media. Revenues and expenses from these agreements are recorded at the
fair value of services provided or received, whichever is more determinable in
the circumstances. The fair value represents market prices negotiated on an
arms' length basis. Revenue from reciprocal services arrangements is recognized
as income when advertisements are delivered on the Company's Websites. Expense
from reciprocal services arrangements is recognized when telecommunication
services are received or the Company's advertisements are run in other media
which are typically in the same period when the reciprocal service revenue is
recognized. Related expenses which include telecommunication charges are
classified as product, content and technology and advertising charges are
classified as marketing and sales in the accompanying statements of operations.
During the period ended December 31, 1997 and the year ended December 31, 1998,
revenues attributable to reciprocal services totaled approximately $38 and $180,
respectively. For the year ended December 31, 1999, revenues attributable to
reciprocal services totaled approximately $1,342. No gain or loss was recognized
on these reciprocal services arrangements for the period July 16, 1997 (date of
inception) through December 31, 1997 and the years ended December 31, 1998 and
1999.

                                      F-10
<PAGE>   75
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost and
depreciated using the straight-line method over the following estimated useful
lives:

<TABLE>
<S>                                                       <C>
Computers, software and other equipment                         3 years
Furniture, fixtures and other fixed assets                     5-10 years
Vehicles                                                        5 years
Leasehold improvements                                    5 years (lease term)
</TABLE>

     LICENSES AND PERMITS -- Licenses and permits are being amortized on a
straight-line basis over periods not exceeding two years.

     ADVERTISING EXPENSES -- The Company expenses advertising costs as incurred.
Advertising expense was $17, $180 and $16,109 for the period from July 16, 1997
(date of inception) through December 31, 1997 and the years ended December 31,
1998 and 1999, respectively.

     INCOME TAXES -- Deferred income taxes result from temporary differences in
the recognition of expenses for tax and financial reporting purposes and are
accounted for in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting
for Income Taxes, which requires the liability method of computing deferred
income taxes. Under the liability method, deferred taxes are adjusted for tax
rate changes as they occur.

     SHARE SPLIT -- On October 28, 1999, the Company's Board of Directors
approved a 2-for-1 share split. Retroactive restatement has been made to all
share amounts to reflect this share split.

     NET LOSS PER COMMON SHARE -- Basic net loss per share is computed based on
the average number of common shares outstanding and diluted net loss per share
is computed based on the average number of common shares outstanding and, when
dilutive, potential common shares from share options and warrants to purchase
common shares using the treasury stock method and from convertible securities
using the if-converted basis.

     FOREIGN CURRENCY TRANSLATION -- The Company's subsidiaries generally use
the U.S. dollar as the functional currency because their primary function, the
sale of advertising, is priced and billed in U.S. dollars. Accordingly, the
financial statements of the subsidiaries have been remeasured (or translated
into U.S. dollars). The effects of foreign currency transactions and of
remeasuring the financial position and results of operations into U.S. dollars
are included as net gain or loss on foreign exchange, except for the Brazil
subsidiary which uses the local currency as its functional currency and the
effects of the translation is included in shareholders' equity.

     SHARE-BASED COMPENSATION -- SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record compensation
cost for employees under share-based compensation plans at fair value. The
Company has chosen to continue to account for share-based compensation to
employees using the intrinsic value method as prescribed by Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for share
options issued to employees are measured as the excess, if any, of the fair
value of the Company's common shares at the date of grant over the amount an
employee must pay for the common shares.

                                      F-11
<PAGE>   76
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     IRREVOCABLE CAPITAL CONTRIBUTIONS -- Irrevocable capital contributions
represented capital contributions received from existing shareholders from time
to time to fund operations and carried no obligation on the part of the Company
to issue common shares or repay such contributions. On January 29, 1999, the
Company's Board of Directors approved the issuance of 6,400,000 common shares to
capitalize the $3,200 in irrevocable capital contributions.

     LONG-LIVED ASSETS -- Long-lived assets are reviewed on an ongoing basis for
impairment based on comparison of carrying value against estimated undiscounted
future cash flows. If an impairment is identified, the assets carrying amount is
adjusted to fair value. No such adjustments were recorded for the period July
16, 1997 (date of inception) through December 31, 1997 and for the years ended
December 31, 1998 and 1999.

     FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
include accounts receivable, accounts payable, short-term debt, and convertible
redeemable preferred stock. The fair value of such financial instruments has
been determined using available market information and interest rates as of
December 31, 1998 and 1999. The fair value of these financial instruments was
not materially different than their carrying value.

     NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. Among other
provisions, SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It also requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities -- Deferral of Effective Date of SFAS No. 133. SFAS No.
137 deferred the effective date of adoption of SFAS No. 133 to financial
statements for fiscal years beginning after June 15, 2000. Management is
currently evaluating the effect that adoption of SFAS No. 133 will have on the
Company's financial statements.

4. TRADE ACCOUNTS RECEIVABLE

     Trade accounts receivable, by operating subsidiaries, are summarized as
follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,    DECEMBER 31,
                                                         1998            1999
                                                     ------------    ------------
<S>                                                  <C>             <C>
El Sitio Mexico....................................      $ --           $  762
El Sitio Argentina.................................        96            1,345
El Sitio Uruguay...................................        29               62
El Sitio USA.......................................        --              635
El Sitio Brazil....................................        --              330
                                                         ----           ------
Total..............................................       125            3,134
Less: allowance for doubtful accounts..............       (20)             (11)
                                                         ----           ------
Trade accounts receivable, net.....................      $105           $3,123
                                                         ====           ======
</TABLE>

                                      F-12
<PAGE>   77
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

4. TRADE ACCOUNTS RECEIVABLE (CONTINUED)
     The Company's subsidiaries provide trade credit to their customers in the
normal course of business. Prior to extending credit, a customer's financial
history is analyzed. The collection of a substantial portion of the trade
receivables is susceptible to changes in Latin American economic and political
conditions.

     The Company provides its allowance for doubtful accounts on a specific
identification basis. The activity for the allowance for doubtful accounts is as
follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,    DECEMBER 31,
                                                         1998            1999
                                                     ------------    ------------
<S>                                                  <C>             <C>
Beginning balances.................................      $--             $ 20
Provision for doubtful accounts....................       20               19
Write-offs, net of recoveries......................       --              (28)
                                                         ---             ----
Ending balances....................................      $20             $ 11
                                                         ===             ====
</TABLE>

5. OTHER RECEIVABLES

     Other receivables consist primarily of refunds or credits pending from
local governments for non-income taxes and other miscellaneous amounts due to
the Company and its operating subsidiaries and are summarized as follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,    DECEMBER 31,
                                                         1998            1999
                                                     ------------    ------------
<S>                                                  <C>             <C>
El Sitio Argentina.................................      $182            $141
El Sitio Uruguay...................................        48             115
El Sitio Brazil....................................        --              95
All others.........................................        77              41
                                                         ----            ----
Total..............................................      $307            $392
                                                         ====            ====
</TABLE>

6. PROPERTY AND EQUIPMENT

     Property and equipment consists of:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,    DECEMBER 31,
                                                         1998            1999
                                                     ------------    ------------
<S>                                                  <C>             <C>
Computers, software and other equipment............     $ 523           $4,140
Furniture and fixtures.............................       209              775
Motor vehicles.....................................        --               81
Leasehold improvements.............................        --            1,154
                                                        -----           ------
Total..............................................       732            6,150
Less: accumulated depreciation.....................      (151)            (868)
                                                        -----           ------
  Depreciable property, net........................       581            5,282
Construction in progress...........................        --              123
                                                        -----           ------
Property and equipment net.........................     $ 581           $5,405
                                                        =====           ======
</TABLE>

                                      F-13
<PAGE>   78
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

6. PROPERTY AND EQUIPMENT (CONTINUED)
     Accumulated depreciation is as follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,    DECEMBER 31,
                                                         1998            1999
                                                     ------------    ------------
<S>                                                  <C>             <C>
Beginning balance..................................      $ 44            $151
Depreciation expense...............................       107             717
                                                         ----            ----
Ending balance.....................................      $151            $868
                                                         ====            ====
</TABLE>

7. INCOME TAXES

     The Company has not provided for income taxes because of its operating loss
position. Statutory tax rates range from 20% to 35% depending on the particular
country. Deferred tax assets associated with the net operating loss
carryforwards amounted to $1,412 and $11,798 as of December 31, 1998 and 1999,
respectively.

     No deferred tax assets have been recognized for changes in exchange rates
for foreign subsidiaries whose functional currency is the U.S. dollar. Because
there is no assurance that the Company will generate sufficient tax earnings to
utilize its available tax assets derived from loss carryforwards, a
corresponding valuation allowance has been established to offset deferred tax
assets.

8. INSTALLMENT LOAN

     As of December 31, 1999, the Company had one installment loan, payable in
monthly installments of approximately six hundred dollars plus interest at a
rate of 2.90% and due on December 29, 2003. The installment note is
collateralized by a motor vehicle.

9. SEGMENT INFORMATION

     The Company's segment information is based on the geographic locations in
which its subsidiaries operate. Each operating subsidiary has a country manager
who reports to senior management of the Company. Each country manager is
currently responsible for managing the assets in his or her respective country,
generating revenues, and supervising results of operations.

                                      F-14
<PAGE>   79
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

9. SEGMENT INFORMATION (CONTINUED)
     The Company's segment information is as follows:
<TABLE>
<CAPTION>
                                                                                          EL SITIO, INC.
                       EL SITIO    EL SITIO   EL SITIO   EL SITIO   EL SITIO   EL SITIO      (PARENT
PERIOD OR YEAR         ARGENTINA   URUGUAY     MEXICO     BRAZIL      USA      COLOMBIA      COMPANY)      ELIMINATION
--------------         ---------   --------   --------   --------   --------   --------   --------------   -----------
<S>                    <C>         <C>        <C>        <C>        <C>        <C>        <C>              <C>
DECEMBER 31, 1997
Total assets.........  $    344     $  52     $    --    $    --    $    --      $ --        $     --       $     --
Net revenues.........  $    267     $  --     $    --    $    --    $    --      $ --        $     --       $     --
Operating loss.......  $   (897)    $  (7)    $    --    $    --    $    --      $ --        $     --       $     --
DECEMBER 31, 1998
Total assets.........  $    698     $ 121     $   243    $   317    $    31      $ --        $     80       $     (9)
Net revenues.........  $    657     $ 106     $    17    $    --    $    --      $ --        $     --       $     --
Operating loss.......  $ (2,322)    $(118)    $  (569)   $   (51)   $  (268)     $ --        $   (169)      $     --
DECEMBER 31, 1999
Total assets.........  $ 19,884     $ 429     $ 5,270    $14,867    $ 3,881      $ 41        $187,140       $(29,592)
Net revenues.........  $  1,932     $ 762     $ 1,508    $ 2,196    $   463      $ --        $     --       $     --
Operating loss.......  $(13,849)    $(587)    $(4,951)   $(6,194)   $(5,306)     $(16)       $ (3,443)      $     (2)

<CAPTION>

                       CONSOLIDATED
PERIOD OR YEAR            TOTAL
--------------         ------------
<S>                    <C>
DECEMBER 31, 1997
Total assets.........    $    396
Net revenues.........    $    267
Operating loss.......    $   (904)
DECEMBER 31, 1998
Total assets.........    $  1,481
Net revenues.........    $    780
Operating loss.......    $ (3,497)
DECEMBER 31, 1999
Total assets.........    $201,920
Net revenues.........    $  6,861
Operating loss.......    $(34,348)
</TABLE>

     The Company itself is a holding company which holds primarily cash and
incurs certain general and administrative expenses. The elimination entries
represent the elimination of intercompany balances in the normal course of
business.

10. RELATED PARTY TRANSACTIONS

     The Company, in the normal course of business, provides advertising
services to a related party in exchange for telecommunication links and
connectivity services. During 1997, 1998 and 1999, such services totaled
approximately $38, $165 and $213, respectively. In addition, during 1999, the
Company paid $1,870 to the related party for telecommunications links and
connectivity services.

11. SHARE OPTION PLAN

     In May 1999, the Company adopted the 1999 Share Option Plan (the "Plan"),
pursuant to which 1,240,000 common shares were reserved for issuance upon
exercise of options. An additional 2,000,000 common shares were reserved in
October 1999, and an additional 1,572,700 common shares were reserved in
December 1999 (subject to ratification by the Company's shareholders at the
annual general meeting currently scheduled for June 2000). Options granted under
the Plan will be either incentive share options or nonstatutory share options
and will have an exercise term of no longer than ten years from the grant date.
The Plan is designed as a means to retain and motivate key employees and
directors. The Company's Compensation Committee of the Company's Board of
Directors, or in the absence thereof, the full Board of Directors administers
and interprets the Plan and is authorized to grant options thereunder to all
eligible employees of the Company, including directors (whether or not they are
employees) and executive officers of the Company or affiliated companies. The
Plan will terminate on December 1, 2008, unless sooner terminated by the Board
of Directors.

     In August 1999 and September 1999, the Company granted nonstatutory share
options for 292,400 and 623,600 shares, respectively, at an exercise price of
$3.501. On November 1, 1999, the Company granted additional share options for
1,030,200 common shares to employees at an exercise price of $9.00

                                      F-15
<PAGE>   80
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

11. SHARE OPTION PLAN (CONTINUED)
per share. In December 1999, the Company granted additional share options for
490,550 and 1,051,120 common shares to employees at exercise prices of $9.00 and
$16.00, respectively, per share. These options vest 30% after the first year,
30% after the second year, and 40% after the third year.

     In October 1998, the Company granted nonstatutory share options for 322,400
shares at an exercise price of $1.613, the fair value of the shares at the time
of grant. These options vest 30% after the first year, 30% after the second
year, and 40% after the third year.

     A summary of the status of the option plans as of and the changes during
each of the years with activity through the year ended December 31,1999 is
presented below:

<TABLE>
<CAPTION>
                                                                                 OPTIONS EXERCISABLE
                                                  OPTION PRICE PER SHARE     ----------------------------
                                     NUMBER OF   -------------------------   NUMBER OF   WEIGHTED AVERAGE
                                      SHARES      LOW     HIGH    WEIGHTED    SHARES      EXERCISE PRICE
                                     ---------   -----   ------   --------   ---------   ----------------
<S>                                  <C>         <C>     <C>      <C>        <C>         <C>
Granted 1998.......................    322,400   $1.61   $ 1.61    $1.61          --             --
                                     ---------
Outstanding December 31,1998.......    322,400   $1.61   $ 1.61    $1.61          --             --
Granted 1999.......................  3,487,870   $3.50   $16.00    $9.67          --             --
Exercised 1999.....................    (67,240)  $1.61   $ 3.50    $1.73          --             --
Cancelled 1999.....................    (48,500)  $3.50   $ 9.00    $5.46          --             --
                                     ---------
Outstanding December 31,1999.......  3,694,530   $1.61   $16.00    $9.16      77,748          $1.61
                                     =========
</TABLE>

     The following table summarizes information concerning outstanding options
at December 31, 1999:

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING               OPTION EXERCISABLE
                               ---------------------------------   ----------------------------
                                   WEIGHTED
                                   AVERAGE           WEIGHTED                       WEIGHTED
                   NUMBER         REMAINING          AVERAGE         NUMBER         AVERAGE
EXERCISE PRICE   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   OUTSTANDING   EXERCISE PRICE
--------------   -----------   ----------------   --------------   -----------   --------------
<S>              <C>           <C>                <C>              <C>           <C>
   $ 1.613          259,160       8.75 years           1.613         77,748          $1.613
   $ 3.501          880,800       9.64 years           3.501             --              --
   $ 9.000        1,503,450       9.89 years           9.000             --              --
   $16.000        1,051,120       9.94 years          16.000             --              --
</TABLE>

     The Company applies APB No. 25 and related interpretations in accounting
for its share options plan to employees as described in Note 3. In connection
with the granting of share options in 1999, the Company recorded total deferred
share-based compensation of approximately $13,992. Total deferred share-based
compensation is being amortized for financial reporting purposes over the
respective vesting periods of the share options. The amount recognized as
expense during the year ended December 31, 1999 totaled approximately $2,042.

     For purposes of pro forma disclosures prescribed by SFAS No. 123, the fair
value of the options granted in 1999 was estimated using the minimum value
method for public entities with the following assumptions: no dividend yields;
no volatility; risk-free interest rate of 7.0%; and an expected term of 3 years.
If compensation cost had been determined based on the fair value at the date of
grant consistent with the requirement of SFAS No. 123, the Company's net loss
and comprehensive loss would have

                                      F-16
<PAGE>   81
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

11. SHARE OPTION PLAN (CONTINUED)
increased by approximately $8 ($0.002 per share basic and diluted) and $530
($0.039 per share basic and diluted) during the years ended December 31, 1998
and, 1999, respectively.

12. CLASS A CONVERTIBLE PREFERRED SHARES

     The Company previously had outstanding Class A convertible preferred
shares, each of which shares were converted into two common shares on December
15, 1999 (the date of the Company's initial public offering). The Company had
issued such Class A convertible preferred shares during 1999 as follows:

     PRIVATE PLACEMENT -- On July 7, 1999, the Company completed a private
placement of 5,477,088 Class A Convertible Preferred Shares (the "Class A
Convertible Preferred Shares") at $7.00186 per share for $35,837 (net of
offering costs of $2,513) under a stock purchase agreement. In addition, the
Company entered into an arrangement whereby it agreed to issue 856,916 Class A
Convertible Preferred Shares in return for $6,000 in advertising time credit on
media networks owned and controlled by Washburn Enterprises, Inc., an affiliate
of one of our shareholders. Such advertising must be utilized during an
eighteen-month period following the closing date of the private placement. The
Company is required to issue and deliver the number of Class A Convertible
Preferred Shares equal to the advertising time incurred on a quarterly basis
with all remaining shares being issued at the end of the eighteen-month period,
irrespective of the use of the advertising credits. The Company is recognizing
advertising expense based on the fair value of such shares at the date of the
agreement as the advertising credits are used. As of December 31, 1999, the
Company has approximately $4,800 of unused advertising credits as is reflected
in prepaid advertising and other expenses. Additionally, no shares have been
issued under the agreement with Washburn Enterprises, Inc and, accordingly, a
liability to issue those shares has been included in shareholders' equity as of
December 31, 1999. The Company has also agreed to purchase at least $4,000 of
advertising time on the media networks owned by affiliates of Washburn
Enterprises, Inc. in return for Washburn's commitment to purchase at least
$2,000 of advertising time on the websites maintained by the Company and its
subsidiaries. As agreed in connection with the private placement, the Company is
required to pay annual monitoring fees to certain investor groups and annual
directors' fees to certain directors amounting to $600 per annum in the
aggregate. In addition, the Company issued to the placement agent a warrant
exercisable for the purchase of approximately 239,936 common shares for $1.

     PREFERRED STOCK/BARTER ARRANGEMENT -- On August 31, 1999, the Company
entered into an agreement relating to a three-year investment and reciprocal
advertising arrangement with TV Azteca, S.A. de C.V. ("TV Azteca"), a major
Mexican television network. Under this agreement, the Company will receive, over
a three-year period beginning in July 1999, $3,500 of advertising time on TV
Azteca's networks (which amounts shall be based on rates actually charged to
similarly situated clients of TV Azteca at the time), in return for 355,478
shares of Class A Convertible Preferred Shares issued on August 31, 1999 at the
same price per share as in the July 1999 private placement. Prepaid advertising
was recorded in the accompanying consolidated balance sheet at the time the
shares were issued based on the fair value of the shares.

     FRAMEWORK AGREEMENT -- On August 4, 1999, the Company entered into an
agreement with IMPSAT which included the private placement of 3,070,615 Class A
Convertible Preferred Shares at $7.00186 per share for $21,500.

                                      F-17
<PAGE>   82
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

13. CLASS B CONVERTIBLE PREFERRED SHARES

     On November 16, 1999, the Company completed a private placement of
1,111,111 Class B convertible preferred shares for an aggregate purchase price
of $10.0 million in cash, or $9.00 per Class B convertible preferred share. The
Class B convertible preferred shares have an annual dividend rate of 8%. Each
Class B convertible preferred share will automatically convert, on June 15,
2000, into one common share. The discount between the initial public offering
price per common share and the $9.00 price per Class B convertible preferred
share is being amortized as a deemed dividend during a six-month period.

14. COMMITMENTS AND CONTINGENCIES

     The Company has entered into an agreement, for a term of two years with
renewal options, with a renowned baseball player whereby such baseball player
granted the Company the exclusive right to use such player's name and likeness
on the Company's websites for the development of joint marketing campaigns,
promotions, research and e-commerce operations. The Company will pay this
baseball player $1,000 cash in four installments of $250. As of December 31,
1999, $750 remained to be paid in future installments. In addition, the Company
issued this baseball player 25,000 common shares of the Company, and this
baseball player is entitled, on or before January 31, 2001, to purchase an
additional 25,000 common shares at the closing price on January 29, 2001 (or the
prior day if that one day is a holiday) less 25%. Approximately $1,458 is
included in Other Assets and $ 980 is included in Accrued and other liabilities
in the accompanying consolidated balance sheet as of December 31, 1999 to
account for all of the provisions of this agreement. The Other Asset will be
amortized on a straight-line basis over a two-year period. The initial amount of
the discount will be remeasured, on a quarterly basis, based on the fair value
of the common shares as of the end of each fiscal period.

     The Company has entered into employment agreements with various members of
management for periods extending for three years. Minimum annual compensation
approximates $3,091 in the aggregate.

     The Company leases several facilities under non-cancelable leases for
varying periods through May 2004. Some of the Company's directors have from time
to time guaranteed short-term indebtedness or other obligations of the Company.

     On August 4, 1999, the Company entered into a framework agreement with
IMPSAT for the purchase of IMPSAT's retail dial-up access customers in
Argentina, Brazil and Colombia for $21,500. The transactions for Argentina and
Brazil have been completed. The Colombia transaction was consummated in April
2000 (see Note 15).

     Rent expense for these operating leases was approximately $20, $144 and
$511 for the years ended December 31, 1997, 1998 and 1999, respectively.

                                      F-18
<PAGE>   83
                        EL SITIO, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD (CONTINUED)

        FROM JULY 16, 1997 THROUGH DECEMBER 31, 1997 AND THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1999

        (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
     Future minimum payments under the various operating leases are as follows:

<TABLE>
<CAPTION>
              YEAR ENDED DECEMBER 31,
              -----------------------
<S>                                                   <C>
2000................................................  $1,061
2001................................................   1,119
2002................................................   1,102
2003................................................   1,085
2004 and thereafter.................................     536
                                                      ------
Total minimum lease payments........................  $4,903
                                                      ======
</TABLE>

15. SUBSEQUENT EVENTS

     STRATEGIC ALLIANCES -- In February 2000, the Company entered into a
strategic alliance in Uruguay and a letter agreement to establish a strategic
alliance in Chile with entities affiliated with two different major
shareholders. These strategic alliances will include exchange of content,
services and advertising in exchange for the issuance of 62,500 shares and
166,667 shares to the Uruguay and Chile entities, respectively. These strategic
alliances will be accounted for using the fair value of the shares issued.

     ACQUISITIONS -- In early March 2000, the Company entered into a definitive
agreement to acquire DeCompras.com, Inc., an e-commerce company that targets
Mexico and Mexican-Americans located in the United States. Under the terms of
the agreement, the Company will issue to shareholders of DeCompras.com an
aggregate of 1.75 million of common shares and pay $7 million in cash. This
acquisition is expected to close in the second quarter of 2000, subject to
completion of satisfactory due diligence reviews and other conditions precedent.

     COLOMBIA IMPSAT ACQUISITION -- In April 2000, the Company completed the
acquisition of IMPSAT's retail dial-up access customers in Colombia for $2,300
(subject to purchase price adjustments).

                                      F-19
<PAGE>   84

                                   SIGNATURES

     The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

                                          EL SITIO, INC.

                                          /s/ HORACIO MILBERG
                                          --------------------------------------
                                          Horacio Milberg
                                          Chief Financial Officer

                                          Date: May 1, 2000

                                       S-1