UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from ____ to _______

Commission File Number 000-31181

AMERICA ONLINE LATIN AMERICA, INC.

6600 N. Andrews Avenue
Suite 400
Fort Lauderdale, FL 33309
(Address of principal executive offices, including zip code)

Securities registered pursuant to section 12(g) of the Act:

class A common stock, par value $0.01 per share
(Title of class)

     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. Yes þ No o.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

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     The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admiting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which class A common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2004, was $15,022,479.

     The number of shares of the registrant’s class A common stock outstanding as of March 18, 2005 was 135,260,715. No shares of the registrant’s class B common stock or class C common stock were outstanding as of March 18, 2005.

TABLE OF CONTENTS

Preliminary Statement

     As we have stated in previous reports filed with the Securities and Exchange Commission, America Online Latin America, Inc. (“we,” “us,” “AOLA” or the “Company”) does not expect to reach cash flow break even with available cash on hand. We only had $17.9 million of available cash as of March 16, 2005. We expect that available cash will only be sufficient to fund operations into the third quarter of 2005. To continue operations beyond such time, we would need an additional, substantial capital infusion. We will not be able to obtain additional financing, whether from Time Warner Inc. (“Time Warner”), America Online, Inc. (“America Online”), the Cisneros Group of Companies (“Cisneros Group”), Banco Itaú or any other source. We are not currently expending resources to obtain financing from any source because we believe that any efforts to obtain financing would be futile based on past experience.

     We incurred cumulative net operating losses of approximately $928.8 million from December 15, 1998, the date of our inception, through December 31, 2004. We expect to continue to incur additional losses and will not be able to continue normal operations indefinitely. Publicity surrounding our financial condition, including the likelihood that we will cease operations, may negatively impact our revenues, membership and cash balances.

     Since May 2004, we, together with our financial advisors, have explored potential strategic alternatives for AOLA and its subsidiaries, including a possible sale of our entire company, the sale of one or more of our operating businesses, the

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sale of specific assets or other comparable transactions. To date, we have not successfully completed any such transaction. We are reviewing preliminary and non-binding indications of interest from multiple parties with respect to the sale of certain assets. However, there can be no assurance that a transaction relating to any of these expressions of interest, or any other transaction, will be completed. Time Warner, the holder of $160 million of our senior convertible notes, has the right to require us to use the proceeds from any sale transaction to repay the senior convertible notes. In addition, our preferred stock has a current aggregate liquidation preference of approximately $599 million, excluding accrued but unpaid dividends.

     Even if we are successful in selling all of our businesses, the proceeds will not be sufficient to repay the senior convertible notes, and none of those proceeds will be available to our common stockholders. As a result, we do not believe that our common stock has, or will have, any value.

     If we do not consummate the disposition of our businesses in a timely manner, we expect to cease operating those businesses, although no definitive decision has been made to cease any particular operation at any particular time. At any time during the process of attempting to sell our businesses or ceasing any operation, we may conclude that it is advantageous for us to file for protection under the bankruptcy laws of the United States or the insolvency laws of one or more foreign jurisdiction in which we operate. Any such voluntary filing would require the consent of the holders of our class B and C preferred stock, in addition to the authorization of our board of directors.

     In addition, any potential sale of our businesses requires the consent of the holders of our class B and C preferred stock and the consent of Time Warner, the holder of our senior convertible notes. We do not have the right to sub-license our rights under our license agreement with America Online. Accordingly, any potential acquirer of any of our operating businesses would have to negotiate such license rights directly from America Online. There is no assurance that any such negotiations would be consummated on agreeable terms.

     The audited consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. On March 16, 2005, management concluded that AOLA is not a going concern for financial reporting purposes and eventually will not have sufficient funds to continue operations. In light of that conclusion, management reviewed current contracts in effect and determined that the recording of a full impairment of the remaining unamortized balance of unearned services recorded as a result of our strategic marketing agreement with Banco Itaú is necessary. Management estimates that the amount of this non-cash impairment is approximately $52.5 million, and will be recorded in the first quarter of 2005. Our initial estimate of this impairment was $38.9 million. However, we revised our estimate based on additional analysis. In addition, we believe we may be in default under the senior convertible notes held by Time Warner. This may have automatically accelerated our obligation to repay these notes and, therefore, the full $160 million may be immediately due and payable. We do not have sufficient funds available to repay this debt. In addition, Ernst & Young’s LLP’s audit report on our consolidated financial statements contains a “going concern qualification” because of its doubts about our ability to continue as a going concern.

     If a determination is made to liquidate the Company, or it is probable that a liquidation is imminent, we will be required to change our basis of accounting to the liquidation basis of accounting. No such adjustments have been made to the audited consolidated financial statements contained in this report.

     This Annual Report on Form 10-K, including this Preliminary Statement, contains forward-looking statements that are based on our current expectations. Actual results may differ materially from those expressed or implied by such forward-looking statements because of a number of risks and uncertainties. For a discussion of factors affecting our business and prospects, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors.”

     On December 30, 2004, our subsidiary in Argentina entered into a preliminary letter of intent to negotiate a merger of its ISP business in Argentina and certain related assets and liabilities with and into La Nación. We no longer believe that we will be able to consummate the transaction on mutually agreeable terms.

     All of the statements and other information presented in this report are qualified by this Preliminary Statement.

PART I

Item 1. Business

Overview

     We provide interactive services in Latin America. We derive our revenues principally from member subscriptions to our AOLA country services, the AOL-branded service in Puerto Rico and our web-based interactive services. We also generate additional revenues from advertising and other revenue sources. Other revenue sources include certain

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programming services provided to America Online for its Latino content area, revenue sharing agreements with certain local telecommunications providers, and limited call center support services that we provide to AOL Germany.

     Our AOLA country services and web-based interactive services provide our members access to online communities, content and localized versions of certain of America Online interactive products. Our services enable members to access and explore the Internet and encourage members to participate in interactive communities through tools such as Spanish and Portuguese versions of AOL Instant Messenger, Buddy Lists, e-mail, web logs, public bulletin boards, online meeting rooms, conversations, chat and auditorium events. Our AOLA country services require members to use a client software program on their computers, whereas our web-based services do not require this software. Members of most of our services can personalize their online experience through a variety of features, including customized news and e-mail controls. Our interactive services typically also provide members with local and regional content organized into channels, making areas of interest easy to find, and our AOLA country services also provide access to the global content of the AOL service.

     Our main markets in Latin America are Brazil, Mexico and Puerto Rico. We have no plans to expand to other markets in Latin America, and as described above in “Preliminary Statement” we are attempting to sell our businesses, and if we cannot consummate the disposition of our businesses in a timely manner, we will cease operating these businesses, although no definitive decision has been made to cease any particular operation at any particular time. We consider countries in which we have launched our AOLA country services or web-based interactive services as operational segments and internally report our operations on a country-by-country basis. Each of our operating segments, except for Puerto Rico, derives its subscription revenues through the provision of interactive services and also from advertising and other revenue sources. In Puerto Rico, we derive our subscription revenue from our arrangement with America Online whereby America Online transfers its net economic interests from members to the AOL-branded service in Puerto Rico to us. Our Puerto Rico segment also derives revenue from advertising and other revenue. Although amounts for Argentina are not material and are not expected to be material in future reporting periods, we have decided not to consolidate Argentina with our corporate and other segment in order to facilitate historical segment comparisons.

     In the table below, we provide the date on which we first launched our country service in each market and our market service coverage as of December 31, 2004.

     Subscribers in Puerto Rico are provided with both English and Spanish language content through the AOL-branded service.

     We launched our web-based content and connectivity services in Brazil, Argentina and Puerto Rico in September 2003, October 2003 and February 2004, respectively. Our web-based services are priced at lower rates than our AOLA country services and are designed to be more competitively priced. In Puerto Rico we offer a web-based product, “Conexis”, which provides basic Internet connectivity, one email address, and minimal content. A web-based service is available in Mexico, although it is not actively promoted. We are primarily responsible for the technical support, development and billing for our web-based services.

     Although at present the majority of our members in Brazil use the AOLA country service, we no longer actively promote the AOLA country service in Brazil. We no longer promote either the AOLA country service or the web-based service in Argentina, although they are still available. We do not expect our web-based product offering in Puerto Rico to become our primary product offering. We have experienced migration of membership from our AOL Brazil country services and our AOL-branded service in Puerto Rico to our web-based services. We expect that trend to continue in the near future. As of December 31, 2004, approximately 16% of active subscribers to our narrowband web-based services have migrated from our AOLA country services in Brazil, Mexico and Argentina and the AOL-branded service in Puerto Rico.

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     Approximately 21.4% of the membership totals as of December 31, 2004, were subscribers to our narrowband web-based interactive services. Results since launch of the web-based services in all four markets have been below expectations both in terms of ability to attract new members as well as to reduce membership turnover.

     We launched our broadband service in Brazil nationally in August 2003. Our broadband service offers subscribers faster Internet access through DSL and cable. Subscribers to our broadband services in Brazil can select either our AOLA country service or our web-based service. The pricing of our broadband service in Brazil varies depending upon our telecommunications partner. Approximately 11.7% of the membership totals as of December 31, 2004, were subscribers to our broadband interactive services. In Brazil, subscribers to the local broadband interactive service represented about 19.2% of the membership base as of December 31, 2004.

     In June 2000, we entered into a ten-year strategic agreement with Banco Itaú, one of the largest banks in Latin America. Banco Itaú is obligated to market and promote a co-branded version of our interactive services in Brazil as the principal means of accessing Banco Itaú’s interactive financial services. Banco Itaú customers who subscribe to our service, except broadband subscribers, receive a discount.

     In January 2003, we entered into a five-year agreement with McDonald’s in Brazil to market our service via kiosks in McDonald’s restaurants in Brazil. We paid McDonald’s an initial fee of approximately $2.1 million and are required to pay an annual fee of up to $1.0 million over the term of the agreement. In addition, we also are required to pay McDonald’s a fee for each new member who becomes a paying member of our service in Brazil. We launched the project in a limited number of restaurants in October 2003, but the implementation of this project has been subject to a number of delays and still has not been fully implemented.

     In March 2004, we modified our agreement with McDonald’s under which, among other things, McDonald’s was required to establish functioning kiosks in 550 of its restaurants by August 31, 2004. On that date, we and McDonald’s concluded that only 375 restaurants were functioning. Therefore, McDonald’s paid us a penalty of approximately $0.8 million. For accounting purposes the penalty was netted against our initial investment of $2.1 million and will reduce future amortization of the balance of our investment. The next measurement date is March 31, 2005, at which point the required target is to establish functioning kiosks in 600 McDonald’s restaurants.

     Implementation under the terms of the modified agreement remains behind schedule, and we do not expect that McDonald’s will be able to satisfy its obligations under the agreement by March 31, 2005, as required. Overall productivity has been low in McDonald’s restaurants where kiosks have been established. McDonald’s has not, and will not, become a significant member acquisition channel. We intend either to renegotiate the terms of the agreement, including the elimination of annual maintenance fees, to negotiate a termination of the agreement or to cease performing our obligations under the agreement. If the agreement is terminated, we anticipate the recording of a net impairment charge of approximately $0.8 million related to the initial fee we paid McDonald’s in 2003 which is currently being amortized over the life of the agreement. The outcome of these decisions may have a material adverse effect on our financial condition and ability to pay creditors.

     Commencing in the second quarter of 2002, we began to reduce our spending on brand and acquisition marketing activities and we began to increase our reliance on co-branded and joint marketing arrangements, where a third-party partner is responsible for implementing a significant percentage of the marketing effort. In Brazil, our principal marketing arrangement is our strategic marketing agreement with Banco Itaú. In Mexico and Puerto Rico, we have continued our reliance on existing distribution channels, focusing primarily on kiosks located at retail locations such as shopping malls and general merchandise stores. Our reliance on the marketing efforts of strategic partners has reduced the rate at which we use cash and has lowered our sales and marketing expenses, since costs incurred by our partners are not accounted for in our results. However, reliance on third-party arrangements has also increased the potential for unforeseen events and delays over which we have limited control, as has been the case with McDonald’s in Brazil. Although historically we have been

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able to decrease our marketing expenditures, we will be unable to significantly reduce these expenditures in the future. Due to our limited liquidity we will not be able to invest adequately in marketing activities and this will negatively impact our membership base and consequently the attractiveness of our business to potential purchasers.

     At December 31, 2004, our ending membership base was approximately 415,000 members, an increase from approximately 400,000 members at September 30, 2004. The membership increase resulted from growth in our broadband membership in Brazil due to a one time promotion with telecommunications providers during the fourth quarter. Membership in our Banco Itaú co-branded service was approximately 108,000 members at December 31, 2004, as compared with approximately 103,000 members at September 30, 2004, and accounted for approximately 26% of our total membership base. Strong price competition from providers of free and paid Internet services in Brazil, as well as increased competition from broadband providers in Mexico and Puerto Rico, continue to significantly impact member acquisition and retention.

     Total membership counts include members of our AOLA country services, the AOL-branded service in Puerto Rico, our web-based interactive services and broadband service, as well as members of the co-branded Banco Itaú services. Our membership totals also include members participating in free trial periods and retention programs. As of December 31, 2004, 91% of our members, including members still in their trial periods, had selected credit cards, direct debit and other non-cash payment options, which have a better rate of collection than cash-payment methods, as compared with approximately 81% at December 31, 2003. Approximately 9% of our total subscribers at December 31, 2004 were in free trial periods or member retention programs, compared with 14% at December 31, 2003.

     Despite positive membership growth in the last quarter of 2004, we anticipate that our membership will once again decline during the first quarter of 2005 to approximately 406,000 members. Due to diminishing investments in brand advertising and marketing acquisition activities, we believe our membership base will continue to decline. In addition, media coverage concerning our financial condition may result in a significant reduction in our membership levels.

     During 2004, we experienced a decrease in our subscription revenues as compared with 2003. This reduction was driven by declines in Brazil and Mexico, partially offset by a minimal increase in Puerto Rico. The losses in Brazil and Mexico were driven primarily by decreases in paying members. Positive impact on subscription revenues due to currency appreciation in Brazil year-over-year was fully offset by negative impact of currency devaluation in Mexico. To date, our web-based services have not met our expectations for attracting and retaining new members. Given our decreased investment in brand advertising and marketing acquisition activities and the other adverse factors we have referred to in this report, we expect our subscription revenues to decrease in the future, driven by the decreases in paying members and by the continued change of the subscriber mix in favor of our lower-priced web-based services, rather than our higher-priced AOLA country services.

     Advertising and other revenues also decreased in 2004, as compared to 2003, as a result of our reduced membership base, our lack of success in attracting significant commitments from traditional media advertisers and lower amounts received from America Online for programming services provided for their Latino content area.

     Cash and cash equivalents at December 31, 2004 were $22.2 million, as compared with cash and cash equivalents of $31.9 million at December 31, 2003. December 31, 2004 cash and cash equivalents do not include approximately $1.1 million that served to collateralize certain retention obligations to employees and $0.7 million to collateralize certain operational expenditures. These amounts were not, and will not be, available for general corporate use. As previously disclosed, we do not expect to reach cash flow breakeven with available cash on hand and available cash is only sufficient to fund operations into the third quarter of 2005. To continue operations beyond such time, we would need an additional, substantial capital infusion, which we will not to be able to obtain from any source. Given our current circumstances, our rate of cash use may increase significantly if we are required to cease operations or initiate bankruptcy proceedings.

     During the year ended December 31, 2004, our net loss applicable to common stockholders was $92.7 million, compared with a loss of $116.6 million for the year ended December 31, 2003.

     We consider countries in which we have launched our AOLA country services or web-based interactive services as operational segments and internally report our operations on a country-by-country basis. Although amounts for Argentina

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are not currently material and operational results are not expected to be material in future reporting periods, we have decided not to consolidate Argentina with our corporate and other segment in order to facilitate historical segment comparisons. Each of our operating segments, except for Puerto Rico, derives its subscription revenues through the provision of interactive services and also from advertising and other revenue sources. In Puerto Rico, we derive our subscription revenue from an arrangement with America Online whereby America Online transfers its net economic interests from members to the AOL-branded service in Puerto Rico to us. Our Puerto Rico segment also derives revenue from advertising and other revenue. Please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segment Results of Operations.”

     Our founders and principal stockholders are America Online, a subsidiary of Time Warner, and the Cisneros Group. The Cisneros Group is a name used to describe a group of investments, joint ventures, strategic alliances and companies that are associated with two of our directors, Ricardo and Gustavo Cisneros, and trusts established by them principally for the benefit of themselves and their families.

     Our principal executive offices are located at 6600 N. Andrews Ave., Suite 400, Ft. Lauderdale, FL 33309, and our telephone number is (954) 689-3000. We were incorporated in Delaware on November 22, 1999. Before August 7, 2000, our business was conducted by affiliates of AOL Latin America, S.L., a limited liability company incorporated under the laws of Spain in December 1998. AOL Latin America, S.L. was formed by America Online and the Cisneros Group as a joint venture. On August 7, 2000, we reorganized our corporate structure.

     Available Information

     We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet address is http://www.aola.com/investors/.

     Our Services

     The AOLA Country Services and Web-Based Services

     Our AOLA country services and web-based interactive services offer the following features:

     Access to the Internet. We provide our members with access to and use of the Internet. A tool bar allows members to move between the features and content on our online service and the Internet.

     Online Community Features. We believe that our services promote interactive online communities through features such as e-mail, web logs, Buddy Lists, AOL Instant Messenger and online community centers.

     Channel Line-Up. Our services feature several channels including news, finance, entertainment, Internet and computing, sports, local, lifestyles and shopping.

     Personalization and Control Features. Members to our AOLA country services and web-based interactive services are able to personalize their interactive experience in varying degrees through a number of features and tools, including parental and spam controls.

     Online and Offline “Help.” We offer our members both online “help” and offline customer support services. Our AOLA country services’ and web-based interactive services’ “help” feature assists members with their inquiries online. Offline, we have call centers providing live customer service to members for technical support, currently 24 hours a day seven days a week. For billing and other account and product inquiries, the call center is available during limited hours. The cost of such member services support is free to members subscribing to bundled pricing plans, although members may incur the cost of domestic telephone calls, except in Brazil where members also incur the cost of long distance calls. Members subscribing to unbundled plans incur per call charges and/or charges proportional to the amount of time required to service the call, in addition to any costs for domestic telephone calls.

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     Service Plans, Pricing and Collection Mechanisms. Service plans are priced according to usage and the level of member services support selected by the member. In general, members are able to select from one of several service plan combinations, including those that follow:

	•	unlimited use plans inclusive of live member services support (unlimited bundled plans), which offer unlimited online access and unlimited live member services support for a fixed monthly fee;
	•	limited use plans, inclusive of live member services support (limited bundled plan), which offer a combination of a fixed monthly fee for a specified number of hours of online access with the option to spend additional time online, billed at an hourly rate, plus access to unlimited live member services support; and
	•	unlimited access plans, exclusive of live member services support (unbundled plans), which offer unlimited online access at a lower price than unlimited bundled plans. Member services support, if requested by the member, is billed at a flat rate per service call or based on the duration of the call to the call center.

     Most new members are selecting unbundled plans, which do not provide free call center support.

     The following table sets forth the service plans and pricing that we offer in our markets as of March 10, 2005. All references to the equivalent pricing in U.S. dollars reflect exchange rates for the applicable local currencies as of March 10, 2005.

We offer four versions of our web-based Internet connectivity service in Brazil:

	1)	AOL Total, which provides content and email services (seven addresses) similar to our current AOL country services;
	2)	AOL Executive, which focuses on news and sports relevant to adults and provides three email addresses;
	3)	AOL Youth, which provides content and services of interest to the youth segment and provides three email addresses; and
	4)	AOL Lite, which provides basic Internet connectivity, one email address, and minimal content.

     We launched our broadband service in Brazil nationally in August 2003. The pricing of our broadband service in Brazil varies depending upon our telecommunications partner.

     The Brazil service plans described above are also offered at discounts to monthly billing rates for members who prepay their AOL service. Prepayment plans are offered for six and twelve month periods. Additional discounts are offered for payments via credit cards. The price of all Brazil service plans includes an amount equivalent to the 5.0% ICMS (Imposto

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sobre Circulação de Mercadorias e Serviços) tax levied on telecommunications services in Brazil and paid to local tax authorities. To date, the majority of our subscribers in Brazil have chosen unlimited service price plans.

     The Argentina service plans described above are also offered at discounts to monthly billing rates for members who prepay their AOL service. Prepayment plans are offered for six and twelve-month periods. Additional discounts are offered for payments via credit cards.

     The Mexico plans described above are offered at discounts to monthly billing rates for members who prepay their AOLA country service. Prepayment plans are offered for three, six and twelve-month periods. Additionally, discounts are offered for payments via credit cards for any price plan. As of December 31, 2004, approximately 41% of the membership base in Mexico were subscribers to one of these prepaid plans. At the time our Mexican segment is either sold or ceases operations, members of prepaid plans may have a claim against the Company for our failure to satisfy the full term of their contracts. Furthermore, due to our current financial condition, we may cease offering prepaid plans in the near future.

     In Puerto Rico, pricing for the AOL-branded service is based on service plans offered by America Online in the United States. All service plans offered are bundled, and therefore include unlimited call center support. We also offer “Bring your own access,” which refers to usage of the AOL-branded service through a third-party Internet access provider. Prepaid plans offering additional discounts are also available in Puerto Rico. In Puerto Rico, we also offer a web-based connectivity service known as Conexis, which provides basic Internet connectivity, one email address, and minimal content. Although we are actively promoting Conexis, we do not expect it to become our primary product offering in Puerto Rico.

     We offer multiple mechanisms through which our members can pay us, including credit cards, direct debits from bank accounts and cash payment methods (including “boletos”). Cash payment methods historically have accounted for a substantial majority of all new member registrations in Brazil, Mexico and Argentina. Cash payment methods are not available in Puerto Rico. The percentage of new registrations selecting cash payment alternatives has been declining since we no longer accept cash as a form of payment for new members in Brazil, and we no longer offer any free trial period for new members selecting cash payments in Mexico. As of December 31, 2004, cash payment mechanisms had been selected by approximately 8% of our subscribers in Brazil, 9% of our members in Mexico and 41% of our members in Argentina, or by 9% of our total subscriber base. This compares with 23% of members in Brazil, 31% of members in Mexico and 44% of members in Argentina who had selected a cash payment option at December 31, 2003, accounting for 19% of our total subscriber base.

     Although we have not experienced any significant difficulties collecting subscription fees from members using credit cards and direct debit mechanisms, collection rates from members opting for the cash payment mechanisms historically have been lower and less timely. Throughout 2004 we continued to encourage conversion of cash payment subscribers to non-cash payment options and to terminate members who do not pay on a timely basis. In Mexico we have encouraged the sale of long-term prepaid plans, which now account for 41% of current AOL Mexico members, and eliminated free trial periods for members choosing the cash payment options. In Brazil we no longer offer cash as a form of payment for new members. In addition, in Argentina and for existing members in Brazil, we either offer discounts for non-cash payment options or apply surcharges to subscribers to our AOLA country and web-based interactive services who choose cash payment options.

     Free Trial. We generally make our AOLA country services, the AOL-branded service in Puerto Rico and our web-based interactive services available for free to new subscribers for a limited period of time so they can experience our service offerings. We currently offer new subscribers to our AOLA country services, including subscribers to the Banco Itaú co-branded service, a 30-day free trial period from the date they register for the service. Subscribers to our web-based interactive services who select cash payment options do not typically receive free trial periods. In Mexico, we eliminated free trial periods entirely for members who choose cash payment options.

Strategic Alliance with Banco Itaú

     In June 2000, we entered into a ten-year strategic alliance with Banco Itaú, one of the largest banks in Latin America. Banco Itaú is obligated to market and promote a co-branded version of our AOLA country service in Brazil as the principal means of accessing Banco Itaú’s interactive financial services. We also market a version of our web-based interactive

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services in Banco Itaú branches containing the same co-branded features as the country service. Our relationship with Banco Itaú has been central to our marketing efforts in Brazil.

     On December 14, 2002, we amended our strategic marketing alliance with Banco Itaú. Under the terms of the revised agreement, we now oversee, in large part, the marketing activities for the co-branded service. Banco Itaú is obligated to establish kiosks and point-of-sale displays in hundreds of its bank branches for the promotion of the co-branded services, which are staffed by promoters trained by AOL Brazil. Potential subscribers are able to sample the co-branded services and register in the bank branches. The number of promoters varies depending on the success of the marketing efforts, which are reviewed every three months. If the marketing efforts do not meet specified goals, the number of promoters may be decreased, subject to a floor on the number of promoters. Conversely, if the marketing efforts exceed specified levels, the number of promoters may be increased, subject to a maximum number of promoters. Banco Itaú is also required to distribute, at our direction, CDs containing the software for the co-branded AOLA country service via in-branch promotions and direct mail. Banco Itaú must also produce and broadcast a certain number of television commercials promoting the co-branded services and provide exclusive online banking benefits to subscribers to the co-branded services. Banco Itaú is responsible for the cost of these marketing efforts.

     The modified marketing arrangements are scheduled to remain in effect through March 2006, although the ten-year term of the agreement did not change. Banco Itaú is obligated to make cash payments to us if minimum annual revenue targets and marketing commitments are not met through March 2006. The maximum aggregate amount that Banco Itaú will be required to pay us if these targets are not met, which we refer to as reference payments, is $21.0 million and $13.0 million in 2005 and 2006, respectively. We expect to receive no amounts from Banco Itaú for the March 24, 2005 measurement date because of payments we received from Banco Itaú in lieu of marketing as described below.

     Beginning in the second half of 2003, as a result of lower than expected productivity, we reduced the number of promoters in Banco Itaú branches. Because of this reduction and our cancellation of certain CD distributions, Banco Itaú made payments to us of $4.7 million and $4.5 million during 2004 and 2003, respectively, in lieu of marketing activities it was obligated to make under our revised marketing agreement. We expect these payments to continue in the near future but the amounts to gradually decrease over time pursuant to the terms of the revised marketing agreement. Should we cease operations, such payments may cease or differ materially from currently projected payments. We have the right to redeploy or reinstate some of the promoters in the branches in the future, in which case we would forego such payments from Banco Itaú. Such payments from Banco Itaú are accounted for as funds from financing activities and will reduce future marketing expense by lowering the amortization expense associated with the shares issued to Banco Itaú. Payments we receive from Banco Itaú in lieu of marketing activities it is obligated to make serve to offset amounts that may be owed as reference payments.

     Banco Itaú’s customers who register for the narrowband co-branded services currently are entitled to a one-month free trial period, the length of which may be changed in the future and, if they subscribe to the co-branded AOL country service on a monthly, bundled unlimited-use plan, are entitled to a 20% discount. Banco Itaú, at its option, may subsidize hours for certain customers who were subscribers to the co-branded service prior to December 14, 2002. For the years ended December 31, 2004 and 2003, the amount of subsidies paid by Banco Itaú for its members was not material.

     On March 16, 2005, the Company’s management concluded that AOLA is not a going concern for financial reporting purposes and eventually will not have sufficient funds to continue operations. In light of that conclusion, management reviewed current contracts in effect and determined that the recording of a full impairment of the remaining unamortized balance of unearned services recorded as a result of its strategic marketing agreement with Banco Itaú is necessary. Management estimates that the amount of this non-cash impairment is approximately $52.5 million, and will be recorded in the first quarter of 2005. Our initial estimate of this impairment was $38.9 million. However, we revised our estimate based on additional analysis.

     Termination. In general, if we or Banco Itaú commit a material breach of our agreement and fail to cure the breach, then the non-breaching party will have the right to terminate the agreement after an arbiter reviews the matter and confirms the uncured material breach. If the breach relates to an exclusivity provision, the non-breaching party may elect to continue the agreement with the option to be relieved of the exclusivity provisions of the agreement applicable to it. Banco Itaú may also terminate the agreement upon a change in control of AOLA. A material breach of the agreement by us includes:

•

If subscribers are unable to access the co-branded service for specified periods of time; and

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•

Our breach of certain exclusivity obligations under the agreement.

In addition, our agreement with Banco Itaú provides that if AOL Brazil becomes or is declared insolvent or bankrupt or ceases to operate its business in the normal course, the agreement automatically terminates. Our agreement with Banco Itaú also provides that if there is a change of control of AOLA (as defined in the agreement, but including the transfer of 60% or more of the fair market value of its assets), Banco Itaú would have the right to terminate the agreement.

Customer Service

     We offer online and offline customer support.

     Offline Customer Service. We have a regional customer call center in Argentina to provide support for our Spanish-language members in Argentina, Mexico and Puerto Rico. We also have a Portuguese-language call center, which has been outsourced to a third party in Brazil. Call center support was consolidated in Argentina during 2002 for the AOL-branded service in Puerto Rico and in early 2003 for the AOLA country service in Mexico to maximize operational efficiencies and benefit from lower cost opportunities afforded by the steep devaluation of the Argentine peso. America Online provides English-language support for members of the AOL-branded service in Puerto Rico. Our customer service is free of charge for subscribers enrolled in our bundled services plans. It is provided through toll-free telephone numbers in Mexico and Puerto Rico. In Brazil and Argentina, the customer incurs the cost for local and long distance calls to our call centers. Email and live chat support are also provided. Customers enrolled in our lower cost unbundled service plans incur per call, per day or time-based charges for accessing live call center support.

     Online “Help.” Our AOLA country services and web-based interactive services provide extensive “help” features to assist new users coming online for the first time. Members are able to reach customer service representatives by e-mail and AOL Instant Messenger. The AOLA country services also have the “notify AOL” feature that allows members to contact us for security assistance and the download sentry alert feature that reminds members not to download files attached to e-mails sent from strangers.

Content

     Our AOLA interactive services feature content obtained from local, regional and global content providers and member-generated content, including movie and book reviews, message board commentary and online discussions.

     Our agreements with third-party content providers range from simple links between our interactive services and the provider’s Web site to an integration of their content into our interactive services. We attempt to select our content providers based on the quality and depth of their content.

Advertising and Other Revenues

     We generate a portion of our revenues from advertising on our online services. Such advertising revenues are derived from third party relationships. Through our relationship with America Online, we sometimes have the opportunity to participate in America Online’s global advertising arrangements. We also generate additional revenues from other sources such as certain programming services provided to America Online for its Latino content area and revenue sharing agreements with certain local telecommunications providers, and limited call center support services that we provide to AOL Germany.

     Advertising. We offer our advertisers programs for the marketing of products and services, including:

	•	Advertising arrangements under which we receive fees based on the number of advertisements displayed on our interactive services or the performance of these advertisement; and
	•	Sponsorship or co-sponsorship arrangements that allow advertisers to sponsor an area on our interactive services in exchange for a fixed payment.

     In return for most advertising arrangements, we receive cash payments. We have also entered into and may seek barter arrangements, including co-marketing and cross-promotion agreements. To date, the number and effect of barter arrangements that we have entered into has not been material.

     Our advertising revenue in 2004 decreased from 2003 levels. We expect further reductions in the future as a result of our reduced membership base, our lack of success in attracting significant commitments from traditional media advertisers and the renegotiation of long-term contracts at lower rates in 2004. A portion of our deferred revenues at December 31, 2004 included deferred advertising revenues for online marketing efforts to be fulfilled in 2005. Although these amounts

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are not material, in the event the Company is required to cease operations, current advertising customers may not realize services for the full term of their contracts.

     Other Revenues. Other revenues are comprised of fees we receive from America Online for programming services we provided to America Online for use on their Latino content area, representation fees we receive from America Online for selling advertising on their interactive services, fees we receive from local telecommunications companies for routing our traffic over their networks and call center support services that we provide to AOL Germany. Other revenues also include amounts received from an advertising agreement with Google. Revenues are generated based on the volume of queries in our search tool.

     In February 2003, we entered into a one-year agreement for consulting services with America Online under which we provided programming services to America Online related to America Online’s Latino content area. This agreement expired in February 2004 and we received $750,000 pursuant to this agreement for the period. An interim contract was in place for the period March through September 2004. During that period we recognized $183,000 of revenues related to the interim contract and programming work provided to America Online in 2003. A Localization Services, Licensing and Content Programming Agreement was entered into as of September 2004. Under this agreement, as amended, we provide America Online with programmers for their Latino content area in the United States in exchange for an annual payment of $400,000. We also provide America Online with certain localization services in exchange for America Online providing us with localization engineering services. America Online may also elect to engage AOLA to provide other localization services under this agreement. We received $100,000 in 2004 under the new agreement. We expect the payments to be received by us under the Localization Services, Licensing and Content Programming Agreement to exceed $60,000 in 2005

     Because local telephone service in Latin America is often metered, the utilization of our AOLA country services by our members results in incremental revenues to local telecommunications companies. To encourage incremental traffic on their local networks by our members, local providers of network access may enter into agreements compensating us for routing our traffic on their networks. Currently, we have such agreements with telecommunications providers in Argentina and Brazil. Under certain of these agreements, we receive payments based on the number of modems we have connected to the telecommunications provider’s network. Such revenues have not been material in the past and we do not expect such revenues to be material in the future.

Marketing

     In the past, we typically distributed compact discs (“CDs”) containing the software for our country service. These CDs offered new consumers the opportunity to use our online service free of charge for a limited trial period and were distributed through a broad range of distribution vehicles. Beginning in 2002, we largely ceased the mass distribution of CDs.

     Commencing in the second quarter of 2002, we began to reduce our spending on brand advertising and acquisition marketing activities and we began to increase our reliance on co-branded and joint marketing arrangements, where a third-party partner is responsible for implementing a significant percentage of the marketing effort. In Brazil, our principal marketing arrangement is our strategic marketing agreement with Banco Itaú. In Mexico and Puerto Rico, we have continued our reliance on existing distribution channels, focusing primarily on targeted increases in the number of kiosks located at retail locations such as shopping malls and general merchandise stores. Our reliance on the marketing efforts of strategic partners has reduced the rate at which we use cash and has lowered our sales and marketing expenses, since costs incurred by our partners are not accounted for in our results. However, reliance on third-party arrangements has also increased the potential for unforeseen events and delays over which we have limited control, as has been the case with McDonald’s in Brazil. In Argentina, we no longer market our services.

Local and Long Distance Telephone Service, Telecommunications Network Capacity and Technology

     Local and Long Distance Telephone Service. In each of our Latin American target markets, our members initiate access to our AOL country services through local and long distance dial-up telephone lines or via TCP/IP through DSL or cable broadband access. The dial-up lines are owned and operated by local and regional telephone service companies. Local and regional telephone or cable companies provide the broadband connectivity. In most Latin American countries, local

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phone service continues to be metered, which results in incremental variable cost to subscribers of our country services. Metered phone service allows us to reduce expenses through revenue sharing agreements with local phone companies in Brazil and also earn additional immaterial revenues in Argentina.

     The telephone service industry in Latin America continues to undergo considerable change. Many Latin American telephone companies in recent years have undertaken significant investments in their infrastructure. These investments have resulted in an improvement in the quality of telephone service in these countries. Although the telephone service industry in Latin America is significantly less developed outside of major cities than in the U.S., we believe that the local and long distance telephone service available is of adequate quality and sufficient capacity to meet the needs of our members.

     Telecommunications Network Capacity. Third-party telecommunications network providers transmit our online services data between the local and long distance telephone services used by our members in Latin America and America Online’s servers, which run all of our interactive services, in the U.S. and Brazil, as well as the Internet. These third-party networks provide the modems that allow our members to establish a connection to our online services and the Internet. They also carry our data between Latin America and the U.S. by satellite and through fiber optic cable.

     In Brazil, we have contracts with Telefonica, Brazil Telecom and Telemar to carry our data within Brazil and to provide the modems through which our members connect to our America Online Brazil proprietary and web-based interactive services. Telefonica also carries our data from Brazil to the U.S. through their own or affiliates’ networks or through third-party suppliers. Our contracts with Telefonica and Embratel expire on December 31, 2005 and May 25, 2005, respectively. Our contracts with Brasil Telecom and Telemar expire in April 2006 and July 2006, respectively. We also have access to capacity provided by Progress Telecommunications Corporation (“Progress”) through a contract between America Online and Progress, which expires in April 2011. America Online invoices us for the capacity used by us and the maintenance under this agreement. In Mexico, we have entered into a network contract with Avantel, an affiliate of MCI. Our contract with Avantel expired in January 2005. We are currently operating under an oral arrangement with Avantel, pending negotiation of a new agreement. We also have an agreement with UNINET, a Telefonos de Mexico affiliate, (Telmex) under which UNINET is obligated to provide us with network capacity through June 30, 2005. In Argentina, we have entered into a network contract with Impsat. Our contract with Impsat expired on March 1, 2005, and we are currently operating under an undocumented extension. In Puerto Rico, our dial-up network is provided by Centennial de Puerto Rico under a contract between America Online and Centennial which expires in June 2007. Should we decide to cease operations, additional payments or early contract termination penalties under some or all of these contracts may be incurred.

     In each of our target markets we work closely with our network providers to ensure satisfactory network performance. We work with network providers that have multiple operations centers for network monitoring and we have developed quality control standards that our providers must meet. Fiber optic cable is our preferred means of transmitting data between Latin America and the U.S. because it offers greater capacity and is generally more reliable than satellite-based transmissions.

     In each country where we operate our AOLA country services, we believe that we have secured adequate network capacity. To ensure this going forward, we regularly forecast our needs and may make adjustments based on marketing projections and other considerations. We believe our current suppliers can and will provide us with sufficient network capacity. However, this capacity is based on our expectations of use in specific geographic areas. Some of our contracts commit us to purchase minimum amounts of network capacity. If the number of our subscribers, or their use of our online services, do not meet these minimums our per unit network costs could increase. In recent years, we have paid penalties to telecommunications providers to reduce network capacity as part of our efforts to size our infrastructure to members who pay on a timely basis.

     Technology. Our main servers are owned and maintained by America Online in three locations in Virginia in the United States and in São Paulo, Brazil. The AOLA content and the tools to operate our online services are located on these servers.

     Our members can access our online services only through personal computers using the Windows 95, 98, ME, 2000 and XP operating systems and our Windows-compatible online service software. In addition, users of WAP enabled phones in each country can access certain features and content of the AOLA country services. Our online services support the V.90 standards for access at 56 kilobits per second. In Brazil, our members can also access broadband services via cable and via DSL connections.

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Competition

     We operate in the highly competitive and rapidly evolving businesses of online services and Internet access, and online advertising. We compete primarily with providers of Spanish- and Portuguese-language Internet access services. Our primary local competitors in our core target countries include Universo Online (“UOL”) and Terra Lycos and free services provided by Internet Gratis (iG), iTelefonica and iBest in Brazil; Telmex in Mexico, which has an alliance with Microsoft for the development of content and offers a Prodigy-branded service; Ciudad Internet, Advance, which is owned by Telefonica Argentina, UOL-Sinectis, and Arnet, which is owned by Telecom, and free services provided by Fullzero, Tutopia and Alternativa Gratis in Argentina; and Coquinet/PRT.net service offered by Telefonica de Puerto Rico and Caribe.net in Puerto Rico. The regulatory environment in Brazil is supportive of providers of free Internet access in Brazil. As a result, free Internet access providers have continued to attract significant numbers of new users in Brazil.

     Our online service subscription fees for our country services and the co-branded service in Puerto Rico are generally higher than those offered by competing online service providers because we consider our service to be a premium service. In order to better compete with providers of low-cost and free Internet services, during 2003 we launched our web-based services interactive services in Brazil, Puerto Rico and Argentina. To date, our web-based services have not met our expectations for attracting and retaining new members.

     We also compete for advertising revenues with traditional media such as newspapers, magazines, radio and television. We believe that the principal competitive factors in generating advertising revenue include the demographics of visitors, in addition to the number of visitors to an online service or Internet site. Our lower membership levels have negatively impacted our ability to provide advertisers with viewer impressions, and as a result advertising revenue has not recovered in line with the overall market.

The AOL License Agreement, Intellectual Property and Proprietary Rights

Our license

     Under our license agreement with America Online, we have:

	•	a royalty free, exclusive license to offer AOL-branded PC-based online services in Latin America;
	•	the exclusive right to offer AOL-branded TV-based online services in Latin America;
	•	the exclusive right to offer in Latin America any AOL-branded wireless-based online services developed by America Online for commercial launch on or before August 7, 2004; and
	•	a non-exclusive license to offer a localized network of AOL-branded portals in Latin America, with an option to license exclusively any Spanish or Portuguese-language AOL-branded portals that America Online may develop for the Latin American market, subject to our payment of a license fee.

     We also have the rights to use all related America Online proprietary software and technology as well as AOL-registered domain names and principal trademarks in Latin America.

     We have interconnected our America Online Brazil, America Online Mexico and America Online Argentina country services to the services provided by America Online and its international affiliates. This interconnection provides our members with access to the AOL services and AOL international interactive services and permits AOL members worldwide to access our AOLA country services. America Online is obligated to license to us, or to use commercially reasonable efforts to obtain for us, the license rights it has in third-party software products used in operating the AOL-branded interactive services. These third-party licenses may be royalty-free or may require payments by us.

     From December 15, 1998 through December 31, 2004, we did not make any payments to America Online for services received under the license agreement. We believe that annual payments for these services will not exceed $60,000 in the future.

     We have the same rights described above to offer CompuServe-branded services, although we no longer offer the CompuServe-branded service. We only have the right to offer AOL and CompuServe-branded interactive services. We do not have the right to offer ICQ, Netscape, MapQuest, Moviefone or any other non-AOL-branded interactive service, which is owned by America Online or Time Warner.

     We do not have the right to sub-license our rights under our license agreement with America Online. Accordingly, any potential acquirer of any of our operating businesses would have to negotiate such license rights directly from America Online. There is no assurance that any such negotiations would be consummated on agreeable terms.

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Termination of our exclusive rights

     We will lose the exclusivity of our licensed rights:

	•	to AOL-branded PC-based online services on the date which either America Online or the Cisneros Group own 20% or less of the outstanding voting stock of AOLA outstanding on August 7, 2000.
	•	to AOL-branded TV-based and wireless-based online services, upon the later of August 7, 2005 or the date on which either America Online or the Cisneros Group own 20% or less of the outstanding voting stock of AOLA.

     For PC-based online services, the threshold number of shares is lowered if:

	•	an additional strategic stockholder is admitted as a stockholder of AOLA;
	•	we issue more shares of our capital stock; or
	•	America Online exercises a warrant it holds to purchase 16,541,250 shares of our voting common stock.

     For TV and wireless-based online services, the threshold number of shares is lowered if:

	•	an additional strategic stockholder is admitted as a stockholder of AOLA; or
	•	America Online exercises a warrant it holds to purchase 16,541,250 shares of our voting common stock.

     America Online may terminate our rights under the license if we materially breach its terms. We do not believe that the commencement of a proceeding under the U.S. Bankruptcy Code would give rise to a termination right under our license agreement with America Online.

Trademarks and domain names

     America Online has granted us rights to use in Latin America its registered trademarks containing the AOL brand and domain names. We believe that America Online is taking appropriate steps to protect its trademarks and domain name rights in Latin America.

     We rely on a combination of contract provisions and patent, copyright, trademark and trade secret laws to protect our rights in our online services as licensed to us by America Online. We have distributed and will continue to distribute software, licensed to us by America Online, for our online services under agreements that grant members a license to use the software. We rely on the protections afforded primarily by copyright laws to protect against the unauthorized reproduction of the software. We also rely in part on electronic licenses, which members do not manually sign, and instead agree to by clicking a button on their monitor screen. These licenses may be unenforceable under the laws of Brazil, Mexico and Argentina and other jurisdictions in Latin America. We attempt to protect our trade secrets and other confidential information through agreements with employees and consultants.

     Although we intend to protect our rights vigorously, these measures may not be successful. Policing unauthorized use of the software for our online services is difficult and the steps taken may not prevent the misappropriation of our licensed technology and intellectual property rights. Moreover, effective patent, trademark, trade secret and copyright protection may be unavailable or limited in Latin America.

     America Online has obtained U.S. federal registrations for a number of trademarks and service marks, including AOL, America Online, Buddy List, and AOL’s triangle design logo, and has trademark rights in the U.S. and abroad in many other proprietary names, including AOL Instant Messenger, You’ve Got Mail and CompuServe.

     We do not believe that our exercise of our licensed rights under our agreement with America Online infringes on the proprietary rights of third parties. However, America Online has received communications from third parties asserting that features, contents or names of some of our services may infringe their patents, copyrights, trademarks and other rights. We are not involved in any litigation of this type that would have a material adverse effect on our ability to develop, market and sell or operate our services. We cannot assure that in the future third parties will not make infringement claims against us for current or future features or the content of our services or that any claim would not result in litigation or require us to enter into royalty or other similar arrangements. Third parties may also challenge America Online’s marks and these challenges may result in limitation or loss of our licensed rights to America Online’s proprietary marks.

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Government Regulation and Legal Uncertainties

     In Brazil, there are no license or registration requirements applicable to interactive services. However, the Brazilian legislature is considering various laws that would regulate interactive service providers, including laws that would create potential liabilities for ISPs whose members offer illegal goods, services or information through their service, laws allowing telecommunication providers to provide interactive services and laws regarding taxation of interactive service providers. We cannot predict at this time whether or not these bills will be enacted or, if enacted, whether they will undergo major changes or what any potential effect on our business could be.

     We believe telephone regulations in Brazil may change. We cannot predict at this time when or whether or not these regulations will be enacted. In addition, if enacted, we cannot predict what the impact may be.

     In Mexico, the federal telecommunications law requires providers of value-added services, including Internet access services, to register with the Mexican federal telecommunications commission. We have complied with this registration requirement.

     In Argentina, Internet access providers must hold a correspondent license from the Argentine telecommunications authority. We have received this license. The Argentine federal government does not specifically regulate information available on the Internet. However, Argentine laws and regulations on consumer protection, contract, competition and advertising generally apply to portal and commerce service providers. In this respect, several judicial precedents have recognized the applicability of commercial, criminal and civil law to Internet matters.

Employees

     As of December 31, 2004, we had 669 full-time employees of whom 195 were located in Brazil, 108 in Mexico, 308 in Argentina, and 58 in the United States (of which 29 are in Puerto Rico). We also had 182 contract employees.

Our Executive Officers

Please see Item 10 of Part III of this annual report for information regarding our executive officers.

Item 2. Properties

     Our principal executive office is located in approximately 37,000 square feet of office space in Fort Lauderdale, Florida, under a lease that expires in March 2006. Our Brazilian headquarters are located in São Paulo in approximately 22,700 square feet of office space under lease, of which approximately 11,000 square feet expire in July 2005 and the balance in August 2009. Our Mexican headquarters are located in Mexico City in approximately 14,100 square feet of office space under a lease expiring in October 2007. Our Argentina headquarters and call center, located in Buenos Aires, is approximately 14,000 square feet of office space under a lease expiring in November 2005. We also lease offices for part of our customer service operations in Argentina. It has approximately 4,090 square feet under a contract expiring in March 2006. Our Puerto Rico headquarters, located in San Juan, is approximately 5,000 square feet of office space under a lease that expires in March 2008.

Item 3. Legal Proceedings

     From time to time, AOLA and its subsidiaries are involved in litigation relating to claims arising out of their operations in the normal course of business. AOLA is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, is expected to have a material adverse effect on our financial position.

Item 4. Submission of Matters to a Vote of Security Holders

     On November 11, 2004, the holders of all our outstanding preferred stock voted by unanimous written consent to approve, the transfer by AOL Mexico S. de R.L. de C.V. of its interest in AOL Servicios Professionales S. de R.L. de C.V. (“AOLSP”) to another wholly owned subsidiary, AOL S. de R.L. de C.V. and the subsequent dissolution of AOLSP following such transfer.

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     On December 20, 2004, the holders of all our outstanding series B preferred stock voted by unanimous written consent to appoint Joseph M. Redling and Neil Smit as class B directors of AOLA.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Price of Common Stock

     Our class A common stock is traded on the Nasdaq SmallCap Market under the symbol “AOLA”. We believe that our class A common stock has no value. See “Preliminary Statement” above.

     From August 8, 2000 to June 21, 2002, our class A common stock traded on the Nasdaq National Market. From November 7, 2002 to January 29, 2003, our class A common stock traded under the ticker “AOLAC” because our stock was under a conditional listing period due to non-compliance with Nasdaq’s minimum market capitalization requirement for continued listing. We regained compliance with the minimum-listing requirement through the conversion of preferred stock into class A common stock by America Online and the Cisneros Group in January 2003. On June 15, 2004, the Nasdaq staff informed us that our class A common stock failed to maintain a minimum bid price of $1.00 over the 30 consecutive trading days prior to such date, as required to remain listed on the Nasdaq SmallCap Market. In accordance with Nasdaq rules, we were given 180 calendar days, or until December 13, 2004, to regain compliance with this requirement. Since our class A common stock had an aggregate market value exceeding $50 million based on the closing bid price on December 13, 2004, we received a second 180-day grace period ending on June 13, 2005 to correct the minimum bid price deficiency. The closing bid price of our class A common stock must be above $1.00 for at least ten consecutive trading days starting no later than May 31, 2005 or our class A common stock will be delisted from the Nasdaq SmallCap Market. We expect that our class A common stock will be delisted.

     No shares of our class B common stock or class C common stock are outstanding and, accordingly, no established trading market for our class B common stock or class C common stock exists. The following table sets forth, for the periods indicated, the low and high sales prices per share of the class A common stock as reported on the Nasdaq National Market or Nasdaq SmallCap Market, as applicable, since the first quarter of 2003. The table also sets forth the closing price of our class A common stock as of the last trading day in the period indicated.

Stockholders

     There were 699 holders of record of class A common stock as of March 18, 2005.

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Dividends

     We have never declared or paid any cash dividends on our shares of class A common stock. To date we have not, and will not, accumulate any retained earnings nor do we expect to do so in the foreseeable future. Therefore, we do not anticipate paying any cash dividends on our shares of class A common stock in the future. In addition, under the terms of the senior convertibles notes (see discussion in “Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”), we are not permitted, without the consent of the holders of the notes, to declare or pay any dividends on our capital stock other than dividends on preferred stock in accordance with the terms of such preferred stock and payable only in additional shares of preferred stock.

     The special committee of our board of directors, which consists of one director appointed by each of America Online and the Cisneros Group, must unanimously approve the payment of any dividends before our full board of directors can approve a dividend payment. Further, before the payment of any dividends on our shares of class A common stock, we must pay dividends, payable in series B and series C preferred stock, as and when declared by our board of directors, on our shares of series B and series C preferred stock.

Item 6. Selected Financial Data

     The selected consolidated financial data set forth below for each of the three years in the period ended December 31, 2004 are derived from our audited consolidated balance sheets as of December 31, 2004 and 2003 and the related audited consolidated statements of operations, of stockholders’ equity and of cash flows for each of the three years ended December 31, 2004, 2003 and 2002, which are included elsewhere in this report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements.

(In thousands, except share, and per share amounts)

     For a discussion of material uncertainties with respect to the data presented that may make such data not indicative of our future financial condition or results of operations, see “Item. 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Overview.

     As noted above in our “Preliminary Statement,” we do not expect to reach cash flow break even with available cash on hand, and we do not have sufficient funds to continue operations beyond the third quarter of 2005. In addition, we will not be able to obtain additional financing from Time Warner, America Online, the Cisneros Group, Banco Itaú or any other source. While we continue our efforts to sell our businesses or specified assets, Time Warner, the holder of $160 million of our senior convertible notes, has the right to require us to use the proceeds from any sale transaction to repay the senior convertible notes. In addition, our preferred stock has a current aggregate liquidation preference of approximately $599 million, excluding accrued but unpaid dividends.

     We incurred cumulative net operating losses of approximately $928.8 million from December 15, 1998, the date of our inception, through December 31, 2004. We expect to continue to incur additional losses and will not be able to continue normal operations indefinitely. Publicity surrounding our financial condition, including the likelihood that we will cease operations, may negatively impact our revenues, membership and cash balances.

     Even if we are successful in selling all of our businesses, the proceeds will not be sufficient to repay the senior convertible notes, and none of those proceeds will be available to our common stockholders. As a result, we do not believe that our common stock has, or will have, any value.

     Any potential sale of our businesses requires the consent of our preferred stockholders and the consent of Time Warner, the holder of our senior convertible notes. We do not have the right to sub-license our rights under our license agreement with America Online. Accordingly, any potential acquirer of any of our operating businesses would have to negotiate such license rights directly from America Online. There is no assurance that any such negotiations would be consummated on agreeable terms.

     Any person considering an investment in our securities is urged to consider both the risk that we will cease operations in the near future and the risk that our securities are, and will be, worthless even assuming completion of one or more strategic transactions.

     The audited consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. On March 16, 2005, management concluded that AOLA is not a going concern for financial reporting purposes and eventually will not have sufficient funds to continue operations. In light of that conclusion, management reviewed current contracts in effect and determined that the recording of a full impairment of the remaining unamortized balance of unearned services recorded as a result of our strategic marketing agreement with Banco Itaú was necessary. Management estimates that the amount of this non-cash impairment is approximately $52.5 million and will be recorded in the first quarter of 2005. Our initial estimate of this impairment was $38.9 million. However, we revised our estimate based on additional analysis.

     In addition, we may be in default under the senior convertible notes held by Time Warner Inc. This may have automatically accelerated our obligation to repay these notes and, therefore, the full $160 million may be immediately due and payable. We do not have sufficient funds available to repay this debt. In addition, Ernst & Young’s LLP’s audit report on our consolidated financial statements contains a “going concern qualification” because of its doubts about our ability to continue as a going concern.

     If a determination is made to liquidate the Company, or it is probable that a liquidation is imminent, we will be required to change our basis of accounting to the liquidation basis of accounting. No such adjustments have been made to the audited consolidated financial statements contained in this report.

     All of the statements set forth in this report are qualified by reference to the foregoing and to the Preliminary Statement and the risk factors contained within this report.

     During 2004, we continued to focus our efforts on minimizing cash utilization. These efforts allowed us to reduce our operating losses despite continuing declines in revenues. This focus had several important impacts on our fiscal 2004 results, as compared with 2003 results:

	•	a reduction in operating loss and cash utilization;
	•	a reduction in our costs of revenues, sales and marketing expenses and other expenses; and
	•	a decrease in our total membership (from 462,000 at December 31, 2003 to 415,000 at December 31, 2004).

     We launched web-based services in Brazil and Argentina in the second half of 2003. In February 2004, we also launched a low-cost web-based service in Puerto Rico. To date, our web-based services have not met our expectations for attracting and retaining new members. Approximately 21.4% of the membership totals as of December 31, 2004, were subscribers to our narrowband web-based interactive services. Results to date indicate that membership turnover is slightly lower for our web-based offerings than for our AOLA country services, although we believe this slight improvement is not sufficient to enable us to achieve cash self-sufficiency.

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     Our rate of member acquisitions has also been affected by reduced marketing expenditures and our increased focus on marketing efficiency. Given our intention to continue to decrease our investment in brand advertising and marketing acquisition activities, we expect our subscription revenues to decrease in the future driven by the continued reductions in paying members. Additionally, registrations rates and member turnover rates, and therefore total membership, continue to be negatively impacted by competition in all segments. The decreases in our membership levels are in direct contrast to increasing Internet usage in all sectors in which we operate. The regulatory environment in Brazil, under which the cost of local Internet connection calls results in incremental revenues to local telephone companies, continues to be supportive of lower-cost and free Internet service providers. As a result, the Brazilian market has continued to experience a proliferation of new competitors.

     Despite positive membership growth in the last quarter of 2004, we anticipate that our membership will once again decline during the first quarter of 2005 to approximately 404,000 members at March 31, 2005. Due to lack of funds to invest in brand advertising and marketing acquisition activities, we believe our membership base will continue to decline.

     Membership in our Banco Itaú co-branded service increased from approximately 103,000 members at December 31, 2003 to approximately 108,000 members, or 26% of our total membership base, at December 31, 2004 primarily as a result of the introduction of broadband services in our Brazil market.

     Total membership counts include members of our AOL country services, the AOL-branded service in Puerto Rico, our web-based interactive services and broadband offerings, as well as members of the co-branded Banco Itaú service. Our membership totals also include members participating in free trial periods and retention programs. As of December 31, 2004, 90% of our members, including members still in their trial periods, had selected credit cards, direct debit and other non-cash payment options, which have a better rate of collection than cash-payment methods. Approximately 9% of our total subscribers at December 31, 2004, were in free trial periods.

     In January 2003, we entered into a five-year agreement with McDonald’s to market our service via kiosks in McDonald’s restaurants in Brazil. We paid McDonald’s an initial fee of approximately $2.1 million and are required to pay an annual fee of up to $1.0 million. In addition, we also are required to pay McDonald’s a fee for each new member who becomes a paying member of our service in Brazil. We launched the project in October 2003. The implementation of this agreement has been subject to a number of delays.

     In March 2004, we modified our agreement with McDonald’s under which, among other things, McDonald’s was required to establish functioning kiosks in 550 of its restaurants by August 31, 2004. On that date, we and McDonald’s concluded that only 375 restaurants were functioning. Therefore, McDonald’s paid us a penalty of approximately $0.8 million. For accounting purposes the amount was netted against our initial investment of $2.1 million and will reduce our amortization of the balance of our investment. The next measurement date will be March 31, 2005, at which point the required target is to establish functioning kiosks in 600 of its restaurants.

     Implementation under the terms of the modified agreement remains behind schedule, and we do not expect that McDonald’s will be able to satisfy its obligations under the agreement by March 31, 2005, as required. Overall productivity has been low in McDonald’s restaurants where kiosks have been established. McDonald’s has not become a significant member acquisition channel and we no longer expect McDonald’s to become one. While we believe that the failure to successfully implement the McDonald’s project adversely affected the acquisition of new members, it did not have a material financial impact in 2004, other than the $0.8 million penalty we received as described above. We intend either to renegotiate the terms of agreement, including the elimination of annual maintenance fees, to negotiate a termination of the agreement or to cease performing our obligations under the agreement. If the agreement is terminated, we anticipate the recording of a net impairment charge of approximately $0.8 million related to the initial fee we paid McDonald’s in 2003 which is currently being amortized over the life of the agreement. The outcome of any decisions may have an additional material adverse affect on our financial condition.

     Commencing in the second quarter of 2002, we began to reduce our spending on brand advertising and acquisition marketing activities and we began to increase our reliance on co-branded and joint marketing arrangements, where a third-party partner is responsible for implementing a significant percentage of the marketing effort. In Brazil, our principal

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marketing arrangement is our strategic marketing agreement with Banco Itaú. In Mexico and Puerto Rico, we have continued our reliance on existing distribution channels, focusing primarily on targeted increases in the number of kiosks located at retail locations such as shopping malls and general merchandise stores. Our reliance on the marketing efforts of strategic partners has reduced the rate at which we use cash and has lowered our sales and marketing expenses, since costs incurred by our partners are not accounted for in our results. However, reliance on third-party arrangements has also increased the potential for unforeseen events and delays over which we have limited control, as has been the case with McDonald’s in Brazil. Although historically we have been able to decrease our marketing expenditures, we will be unable to significantly reduce these expenditures further. Due to our limited liquidity we will not be able to invest adequately in marketing activities and this will negatively impact our membership base.

     During 2004, we experienced a decrease in our subscription revenues as compared with the prior year. This reduction was driven by the loss of paying members. The loss of paid membership occurred primarily in Brazil and Mexico, while Puerto Rico increased slightly. The loss of paying members has been the main factor driving lower subscription revenues in 2004. We expect that due to lack of funds to invest in marketing activities, and the likelihood of a sale or the cessation of operations, our membership base and subscription revenues will continue to decline.

     Advertising and other revenue continued to decrease throughout 2004, despite an improved online advertising environment in Latin America. We expect our advertising and other revenues to continue decreasing in 2005. Advertising revenues are expected to decrease due to reduced advertising sales and lower membership levels. Other revenues are expected to decrease due to the renegotiation of our agreement to provide programming services to America Online for their Latino content area at lower rates.

Consolidated Results of Operations

     Revenues. Total revenues consist of subscription revenues and advertising and other revenues. The following table presents the components of our revenues for the years ended December 31, 2004, December 31, 2003 and December 31, 2002.

(In thousands, except percentages)

     Subscription revenues. We derive our subscription revenues from members paying fees to subscribe to our AOLA country services and to our web-based interactive services, and from revenues received from America Online related to subscribers to the AOL-branded service in Puerto Rico. Subscription revenues do not include amounts paid to us by Banco Itaú on behalf of its customers for subsidies that it chooses or was required to make. Such receipts from Banco Itaú are netted against and recorded as a reduction of marketing expenses and thus are not accounted for as subscription revenues. Amounts paid directly to us by subscribers that exceed any time subsidized by Banco Itaú are included in subscription revenues. Under the terms of the revised marketing agreement, Banco Itaú is no longer required to subsidize its customers who are subscribers to the co-branded service. As a result, subsidies from Banco Itaú for its customers were not material as of the second half of 2003. We do not expect subsidies from Banco Itaú for its customers to be material in future periods. For subscribers that have elected to pay their subscription fees with credit cards, we begin to recognize subscription revenues when the fees become due and are confirmed as collectible. For subscribers that pay through means other than credit cards, we begin to recognize subscription revenues when we receive payment.

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     Advertising and other revenues. Advertising and other revenues is derived principally from:

	•	Advertising arrangements under which we receive fees for advertisements displayed on our interactive services;
	•	Advertising sponsorship or co-sponsorship arrangements that allow advertisers to sponsor an area on our interactive services in exchange for a fee;
	•	Fees we receive from America Online for programming services we provide to America Online for use on their Latino content area;
	•	Representation fees we receive from America Online for selling advertising on their interactive services; and
	•	Revenue sharing arrangements with local telecommunications providers.

     Because local telephone service in Latin America is often metered, the utilization of our AOLA country services and of our web-based interactive services by our members results in incremental revenues to local telecommunications companies. To encourage incremental traffic on their local networks by our members, some local providers of network access have entered into agreements compensating us for routing our traffic on their networks.

Subscription Revenues

Fiscal 2004 Compared to Fiscal 2003

     Subscription revenues for the year ended December 31, 2004 were $48.8 million, a decrease of $10.6 million, or 17.8%, as compared to the year ended December 31, 2003. For 2004, the decline in subscription revenues versus the prior-year period was driven by the loss of paid members in all operating segments except Puerto Rico. The loss of paying subscribers was primarily a result of increased competition, which resulted in members lost through attrition. New member registration rates were lower than necessary to replace membership attrition, and have been negatively impacted as well by the problems related to the low productivity of the McDonald’s initiative in Brazil and the lack of alternative member acquisition channels.

     On a sequential quarter basis, reported subscription revenues remained flat in the fourth quarter of 2004 as compared to the quarter ended September 30, 2004.

     We expect subscriber revenues to continue to decrease as a result of increased levels of competition and limited investment in brand advertising and marketing acquisition required to bring new registrations to offset regular membership attrition. Furthermore, the likelihood of ceasing operations may result in a significant drop in our membership and revenue levels.

     As of December 31, 2004 approximately 41% of the membership base in Mexico subscribed to prepaid plans. The Company has recorded approximately $4.5 million of deferred subscription revenue at December 31, 2004. In the event the Company ceases operations, current members on prepaid plans may have a claim against the Company for our failure to satisfy the full terms of their contracts. Furthermore, due to the Company’s current financial condition, we may decide to cease offering prepaid plans in the near future.

Fiscal 2003 Compared to Fiscal 2002

     Subscription revenues for the year ended December 31, 2003 were $59.4 million, a decrease of $3.6 million, or 5.7%, as compared to $63.0 million in the year ended December 31, 2002. For 2003, the overall decrease in subscription revenues as compared to the prior year was primarily due to currency devaluation. Currency devaluation reduced revenues by $3.7 million during the 2003 fiscal year. Excluding the impact of currency devaluation, however, subscription revenues gains in Puerto Rico were offset by subscription revenue losses in Brazil, Mexico and Argentina. Furthermore, in the second half of 2003, losses in paying subscribers began to drive decreases in total subscription revenues. Increased competition and reduced marketing expenditures resulted in a lower level of registrations, which was insufficient to replace members lost through attrition. This resulted in a lower number of paying subscribers.

Advertising and Other Revenues

Fiscal 2004 Compared to Fiscal 2003

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     For the year ended December 31, 2004, revenue from advertising and other was $3.6 million, a decrease of $2.2 million, or 37.5%, from $5.8 million in the year ended December 31, 2003. The decrease in advertising and other revenues resulted primarily from our failure to convince advertisers to redirect resources from traditional media channels to our interactive services and reduced revenues from America Online for programming services we provided for their Latino content area. Sequentially, advertising and other revenue in the fourth quarter of 2004 experienced an increase of $41,000 or 3.6%, from $1.2 million in our fiscal 2004 third quarter.

     We expect advertising and other revenue to further decrease during fiscal 2005, driven by continued weak advertising. We have not been successful in convincing advertisers in Latin America to redirect resources from traditional media channels to online advertising on our services. The reduction in membership levels we experienced in 2004 and that we expect to experience during 2005 is also expected to further restrict our ability to generate revenue from advertising by reducing our ability to generate consumer impressions. Furthermore, advertisers concern regarding our financial condition may result in a significant decline in advertising and other revenue levels.

     As of December 31, 2004, deferred advertising and other revenues amounted to $0.3 million, remaining flat as compared to December 31, 2003. Deferred revenues from advertising and other consists of payments received in advance of our delivery of the related service and are recognized as income as the services are delivered. In the event the Company ceases operations, current advertising customers may have a claim against the Company for our failure to satisfy the full term of their contracts.

     During the year ended December 31, 2004, advertising and other revenues from related parties accounted for approximately 30.3%, or $1.1 million, of the $3.6 million recorded for the period, as compared with $1.8 million in 2003. Advertising revenue from Banco Itaú amounted to $0.7 million in 2004. Other revenue from America Online in 2004 was $0.4 million, and consisted primarily of fees for certain programming services we provided to America Online for their Latino content area and of representations for advertising sold by us on the America Online service in the U.S.

Fiscal 2003 Compared to Fiscal 2002

     For the year ended December 31, 2003, revenue from advertising and other was $5.8 million, a decrease of $3.4 million, or 36.8%, from $9.1 million in the year ended December 31, 2002. The decrease in advertising and other revenue resulted primarily from our failure to convince advertisers to redirect resources from traditional media channels to our interactive services, partially offset by increased revenue from America Online for our programming services related to their Latino content area

     Costs and expenses. The following table presents the components of costs and expenses for the years ended December 31, 2004, December 31, 2003 and December 31, 2002.

(In thousands, except percentages)

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Cost of Revenues. Cost of revenues includes:

	•	network-related costs consisting primarily of fees paid to third parties to carry our data over their telecommunications networks;
	•	personnel and related costs for customer support and in-house product and content development;
	•	fees we pay to America Online for use of their servers that run our interactive services (i.e. hosting services);
	•	fees we pay to America Online for technical support and training;
	•	fees we pay to America Online for product development;
	•	fees paid to third-party content providers; and
	•	collection costs and certain miscellaneous taxes.

Fiscal 2004 Compared to Fiscal 2003

     For the year ended December 31, 2004, cost of revenues was $34.0 million, a decrease of $22.4 million, or 39.8% as compared with $56.4 million in the year ended December 31, 2003. The decrease was driven by lower network and telecommunications costs and member services costs, reflecting the renegotiation of network unit costs. These reductions were in addition to cost reduction efforts taken in 2003. Product development costs, which are primarily driven by development needs for our AOLA country services, also decreased in 2004 as a result of our strategic focus on web-based services. Costs of revenue accounted for 30.5% of our total costs in 2004, down from 37.9% in the prior-year period. Currency fluctuations had a minimal effect on cost of revenues during the 2004 fiscal year.

     Cost of revenues paid to related parties primarily consists of payments made or due to America Online and its affiliates for the costs of hosting, maintenance, product development and other technical support services for our country operations. During the years ended December 31, 2004 and 2003, the cost of these services amounted to $7.5 million and $11.7 million, respectively. The decrease was driven by a reduced average membership base which directly impacted hosting fees, as well as a reduction of approximately 40% in the cost per hour of hosting fees. As of December 31, 2003, America Online had billed us approximately $3.8 million over and above amounts we had recorded in our statements of operations. The difference related to a portion of items under dispute, primarily for support services provided by America Online. This dispute was settled in our favor in February 2004 in a manner which was consistent with our historical accounting treatment and which did not have any cash impact on our financial condition. America Online is no longer seeking payment for these amounts.

Fiscal 2003 Compared to Fiscal 2002

     For the year ended December 31, 2003, cost of revenues was $56.4 million, a decrease of $42.3 million, or 42.9% as compared with $98.7 million in the year ended December 31, 2002. The decrease was driven by lower network and telecommunications costs and member services costs, reflecting the renegotiation of network unit costs, including the impact for the full year of zero-port cost arrangements with telecommunications providers, and the consolidation and outsourcing of our member services operations. Hosting costs were also lower, reflecting lower usage, primarily as a result of our termination of members who were delinquent in their payments of fees to us. These reductions were in addition to cost reduction efforts taken in 2002. Product development costs, which are primarily driven by development needs for our AOLA country services, also decreased in 2003 as a result of our strategic focus on web-based services. Cost of revenues in fiscal 2003 also reflected lower one-time charges.

Sales and Marketing

     Sales and marketing expenses include our costs to acquire and retain our members, the operating expenses for our sales and marketing efforts and other general marketing costs. The costs to acquire and retain our members include direct marketing costs such as the costs of kiosks and related support and the costs of CDs and their distribution as well as the costs of brand advertising on television and in newspapers, magazines and other media. Also included in sales and marketing expense is amortization of unearned services related to Banco Itaú’s strategic marketing agreement (see “Strategic Alliance with Banco Itaú” in Item 1 - Business, as well as Note 4 to our audited consolidated financial statements).

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Fiscal 2004 Compared to Fiscal 2003

     The 24.3% reduction in sales and marketing expenditures, to $49.5 million from $65.4 million for the years ended December 31, 2004 and 2003, respectively, was driven by reductions in member acquisition activities, brand marketing costs and lower amortization of the value of the shares of our class A common stock issued to Banco Itaú. The reduction in member acquisition costs was achieved through a reduction in mailing of CD’s containing our software as well as fewer staffed kiosks. During 2004, we continued to evaluate the productivity of our kiosks located at Banco Itaú branches and at retail locations in Brazil, Mexico and Puerto Rico, and we closed those with lower than acceptable levels of registrations. As a result, we had 300 kiosks in operation inside the Banco Itaú branches throughout 2004 instead of a maximum of 600 kiosks in accordance with the revised contract. Excluding the kiosks located inside Banco Itaú branches and McDonald’s restaurants in Brazil, the average number of kiosks in 2004 was reduced by 46% to 102 when compared to 2003.

     In addition, we cancelled certain CD distributions Banco Itaú was obligated to make, but did not at our request. As a result of the cancellation of marketing activities Banco Itaú was obligated to make, pursuant to the terms of our revised marketing agreement, we received from Banco Itaú payments of approximately $4.7 million and $4.5 million during 2004 and 2003, respectively, in exchange for advertising on our service in lieu of the marketing activities they were obligated to undertake. We expect these payments to continue in the future but the amounts to gradually decrease pursuant to the terms of the revised marketing agreement. Should we cease operations, such payments may cease or differ materially from currently projected payments. Such payments from Banco Itaú are reflected as funds received from financing activities in our statement of cash flows and reduce future marketing expense associated with the amortization of shares issued to Banco Itaú under our strategic marketing agreement. As a consequence, total amortization of shares issued to Itaú reduced to $37.0 million in 2004 compared to $41.2 million in 2004. We have the right to choose to redeploy or reinstate some promoters in the branches in the future, in which case we would forego the corresponding payments from Banco Itaú.

     Brand marketing expense was also reduced by $4.5 million or 54.8% during 2004, from $8.2 million in 2003. The reduction is partially the result of investments of $1.9 million we made in 2003 to launch and promote our new web-based service in Brazil. In addition, in 2004 we increased reliance on third-party marketing arrangements, such as Banco Itaú’s advertisement of our services in accordance with our revised marketing agreement.

     Currency devaluation reduced sales and marketing expense in fiscal 2004 by approximately $0.6 million. For the year ended December 31, 2004, sales and marketing expenses incurred with related parties were $76,100, excluding amortization expense related to the Banco Itaú strategic marketing agreement. This expense was primarily for advertising on Time Warner properties. For the year ended December 31, 2003, sales and marketing expenses incurred with related parties were $1.0 million, and were also for advertising on Time Warner properties.

     For the year ended December 31, 2004, the amount of monies received from Banco Itaú for subsidies it pays on behalf of its members was not material, compared with $0.9 million in 2003. Subsidies paid by Banco Itaú on behalf of its members largely ceased during the third quarter of 2003 as a result of the revised marketing agreement with Banco Itaú, under which Banco Itaú is no longer required to make subsidy payments to us on behalf of its members to the co-branded service. Amortization expense of unearned services related to the Banco Itaú marketing agreement was $37.0 million in 2004 and $41.2 million in 2003. For a discussion of advertising and other relationships with Time Warner and Banco Itaú, please see “Item 13 – Certain Relationships and Related Transactions.”

Fiscal 2003 Compared to Fiscal 2002

     Sales and marketing expense was $65.4 million in the year ended December 31, 2003, a decrease of $31.8 million from $97.2 million in the year ended December 31, 2002. The 32.7% reduction in sales and marketing expenditures during fiscal 2003 was driven by reductions in both member acquisition costs and brand marketing. The reduction in member acquisition costs was achieved through our continued focus on initiatives designed to target members who have higher probabilities of becoming and remaining paying members. Specifically, we significantly reduced the mass mailing of non-solicited CD’s containing our software in favor of an increased focus on acquiring members through direct customer interaction channels, primarily through staffed kiosks at high traffic retail locations. During 2003, we also evaluated the productivity of our kiosks located at Banco Itaú branches and at retail locations in Brazil, Mexico and Puerto Rico, and closed those with lower than acceptable levels of registrations. As a result, a substantial majority of the kiosks in operation

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at the beginning of 2003 at Banco Itaú branches were closed, as were a majority of the kiosks at retail locations in Mexico, resulting in additional savings.

     In addition, we also cancelled certain CD distributions Banco Itaú was obligated to make, but did not at our request. As a result of the cancellation of marketing activities Banco Itaú was obligated to make, as per the terms of our revised marketing agreement, Banco Itaú made payments to us of approximately $4.5 million during 2003 in exchange for advertising on our service in lieu of the marketing activities they were obligated to undertake. Brand marketing expense was also reduced by $8.0 million during 2003. Currency devaluation reduced sales and marketing expense in fiscal 2003 by approximately $1.5 million.

General and Administrative.

     General and administrative expenses consist primarily of personnel-related expenses, office lease payments, legal, tax and travel-related expenses, among others.

Fiscal 2004 Compared to Fiscal 2003

     For the year ended December 31, 2004, general and administrative expenses were $23.8 million, a decrease of $3.3 million, or 12.0%, from $27.1 million in the fiscal year ended December 31, 2003. The reduction in general and administrative expense was driven primarily by lower personnel-related expenses due to resignations of employees not replaced.

     Our general and administrative costs in the quarter ended December 31, 2004, decreased by $0.2 million, or 3.5%, to $5.5 million, from $5.7 million in the fourth quarter of 2003. The decline in general and administrative expense was primarily due to lower staffing levels in the fourth quarter of 2004, as compared to the prior-year period. We believe our general and administrative expenses could increase in 2005 due to increased fees to legal and financial advisors, potential increase in Director and officer insurance premiums, key personnel retention programs and severance payments.

     Both America Online and the Cisneros Group have in the past provided us with general and administrative services. In the year ended December 31, 2004, we incurred general and administrative expenses of $227,000 to America Online and the Cisneros Group. In the year ended December 31, 2003, we incurred general and administrative expenses of $44,000 to America Online, while in the year ended December 31, 2002, we incurred fees of approximately $1.6 million and $219,000 for support services provided by America Online and for services provided by the Cisneros Group, respectively.

Fiscal 2003 Compared to Fiscal 2002

     For the year ended December 31, 2003, general and administrative expenses were $27.1 million, a decrease of $5.8 million, or 17.7%, from $32.9 million in the fiscal year ended December 31, 2002. The reduction in general and administrative expense was driven by lower personnel-related expenses due to employee work force reductions. Currency devaluations decreased reported general and administrative expense by approximately $0.6 million during our 2003 fiscal year.

     Both America Online and the Cisneros Group have in the past provided us with general and administrative services. In the year ended December 31, 2003, we incurred general and administrative expenses of $44,000 to America Online. In the year ended December 31, 2002, we incurred fees of approximately $1.6 million and $219,000 for support services provided by America Online and for services provided by the Cisneros Group, respectively.

     Argentina Value-Added Tax Allowance. We have not been successful in achieving growth in our interactive services in Argentina and do not expect future growth for this business. During the second quarter of 2004, based on projections of our taxable revenue in Argentina, we determined that it was not likely that we would be able to recover our value-added tax (“VAT”) receivable from the Argentine government with a value of approximately $4.0 million at June 30, 2004. This receivable, which arose in the normal conduct of our business, can only be recovered as we make sales in Argentina and make collections from our customers. As a result, in the quarter ended June 30, 2004, we recorded a non-cash charge to establish an allowance in order to reduce the value of this VAT asset to zero. We do not expect our interactive services in

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Argentina to form a material part of our operations in the foreseeable future. We expect that our call center operations in Argentina will continue to be the primary focus of any activities in Argentina.

     Interest Expense. Interest expense consists almost entirely of interest on our senior convertible notes. During the year ended December 31, 2004, interest expense was $17.5 million, down $0.5 million as compared with $18.0 million in the prior-year year. We expect quarterly interest expense to remain at current levels since our average balance of senior convertible notes outstanding is expected to remain constant. The decrease during fiscal 2004 was due to a one time correction, in the first quarter of 2004, of interest paid in 2003.

     Interest on our senior convertible notes for the fiscal year 2004 was paid through the issuance of 24,901,613 shares of our series B preferred stock to Time Warner. Under the terms of the senior convertible notes, we may choose to make payment of interest through the issuance of shares of our series B preferred stock, with the exception of the last payment, which must be paid in cash (approximately $3.2 million). To the extent we make payment through the issuance of shares, interest expense does not represent a cash outlay. Given our focus on cash preservation, we expect future payments of interest to be undertaken through the issuance of additional shares, except as noted. Consequently, interest expense should not have a cash impact on our financial condition, except for the final interest payment which must be paid in cash. A decision by us to pay the interest on the senior convertible notes through the issuance of additional shares of stock could result in significant additional dilution to our existing shareholders.

     Additionally, under the terms of our revised charter, on August 7, 2005, we are required to redeem approximately 88% of the then outstanding series B and C preferred stock issued to America Online and the Cisneros Group. It is not clear, however, whether such redemption would be prohibited by Delaware law in view of certain statutory restrictions on redemption of shares of a corporation’s own stock for cash or property. It also is not clear whether we would have sufficient available authorized shares of class A common stock for any such redemption. If any shares of preferred stock are redeemed, such redemption would result in significant additional dilution to our class A stockholders.

     Other Income, net. Other income, net consists primarily of foreign currency gains and losses and realized gains and losses on investments. For the year ended December 31 2004, other income, net was approximately $0.3 million, as compared with $0.9 million in the prior year.

Income taxes.

     For the year ended December 31, 2004, we had a provision of $124,000 related to income taxes. For the year ended December 31, 2003 we had a provision of $4,000 related to income taxes. Our income tax expense results from the application of gross asset taxes in Argentina and Mexico, which are used as alternative minimum tax systems by the governments of these countries and may be applied as credits for actual future income taxes. For additional information regarding income taxes, see note 9 to our audited consolidated financial statements.

Liquidity and Capital Resources

Current Liquidity

     At December 31, 2004, we had available cash and cash equivalents of $22.2 million, and debt in the form of 11% senior convertible notes due March 2007 in the amount of $160.0 million, as indicated in the table below:

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(In thousands, except percentages)

     Current assets at December 31, 2004 were $33.2 million, a decrease of $11.0 million, or 24.8%, from $44.2 million at December 31, 2003. The decrease in current assets was driven almost entirely by the decline in our cash and cash equivalents position. Current liabilities at December 31, 2004 were $186.3 million, an increase of $159.1 million, or 584.9%, from $27.2 million at December 31, 2003. Current liabilities increased as a result of the reclassification of the senior convertible notes issued to Time Warner from long-term debt to current liabilities. Our working capital deficit balance at December 31, 2004 was $(153.0) million, down from a working capital of $17.0 million at the end of the prior year, also as a result of the reclassification of the senior convertible notes issued to Time Warner from long term debt.

     The decrease in current assets at December 31, 2004 was attributable to the use of initial cash balances throughout the year to finance operating losses and other operating requirements, partially offset by the receipt of cash from Banco Itaú in lieu of marketing activities it was obligated to make under the terms of our revised strategic marketing agreement and the penalty of approximately $0.8 million paid to us by McDonald’s. The increase in current liabilities primarily reflects the reclassification of the senior convertible notes from long-term debt to current liabilities, only partially offset by a reduction in accounts payable resulting from a reduction in cost of revenues and sales and marketing expenditures. As discussed previously, our level of expenditures has been reduced in relation to the declining membership base as well as our efforts to continue reducing our cost structure.

     We had only $17.9 million of cash available as of March 16, 2005. We expect that available cash will only be sufficient to fund operations into the third quarter of 2005. To continue operations beyond such time, we would require an additional, substantial capital infusion. Additional capital will not be available to us from any source. In our previous filings we have stated that we do not expect to reach cash flow break even with available cash on hand. In prior periods we were able to reduce discretionary expenditures, including marketing activities, certain costs of revenue and personnel expenses that we felt provided us with additional financial flexibility. We will be unable to significantly reduce these discretionary expenditures in the future.

     We have not identified any sources of financing to partially or fully repay the $160.0 million senior convertible notes that will be due in March 2007, and no additional financing will be made available to us. We believe we may be default under the senior convertible notes held by Time Warner Inc. This may have automatically accelerated our obligation to repay these notes and therefore, the full $160

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million may be immediately due and payable. We do not have sufficient funds available to repay this debt. The full amount of the senior convertible notes is recorded in current liabilities in the consolidated balance sheet as of December 31, 2004 included herein.

     Since May 2004 we, together, with our financial advisors, have explored potential strategic alternatives for AOLA and its subsidiaries, including a possible sale of sale of our entire company, the sale of one or more of our operating businesses, sale of specific assets or other comparable transactions. To date we have not successfully completed any such transaction. In the event we are unsuccessful in completing any strategic transaction in a timely manner, we will be required to cease operations.

     Even if we are successful in selling all of our businesses, the proceeds will not be sufficient to repay the senior convertible notes, and none of those proceeds will be available to our common stockholders. As a result, we do not believe that our common stock has, or will have, any value. If we do not consummate the disposition of our businesses in a timely manner, we expect to cease operating those businesses.

     Additionally, under the terms of our revised charter, on August 7, 2005, we are required to redeem 87.8% of the then outstanding series B and C preferred stock. The exact percentage to be redeemed is subject to adjustment based on the number of shares we will issue in payment of interest on our senior convertible notes through August 7, 2005, which is in turn dependent on the price of our class A common stock. The series B and series C preferred stock may be redeemed, at our option, in cash, by delivery of shares of class A common stock or by any combination of cash and shares of class A common stock. Due to our limited cash position, we expect to redeem these shares of preferred stock through the issuance of shares of class A common stock. It is not clear, however, whether such redemption would be prohibited by Delaware law in view of certain statutory restrictions on redemption of shares of a corporation’s own stock for cash or property. It also is not clear whether we would have sufficient available shares of class A common stock for any such redemption. If any shares of preferred stock are redeemed, such redemption would result in significant additional dilution to our class A common stockholders. As noted elsewhere in this report, in addition to dilution, we believe our common stock has, and will have, no value.

     An additional restriction on our ability to obtain additional funding is that the holders of the senior convertible notes can require that the proceeds of any financing or the sale of assets be used to repay the senior convertible notes. We will not be able to obtain any financing from Time Warner, America Online, the Cisneros Group, Banco Itaú or any other source.

     The audited consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. On March 16, 2005, management concluded that AOLA is not a going concern for financial reporting purposes and eventually will not have sufficient funds to continue operations. In addition, Ernst & Young LLP’s audit report on our consolidated financial statements contains a “going concern qualification” because of its doubts about our ability to continue as a going concern.

Contractual Obligations

     At December 31, 2004, our material firm operating commitments for the next five years were approximately $36.1 million, compared to approximately $35.0 million at December 31, 2003. Material firm operating commitments represent our minimum obligations to third-parties under telecommunications network contracts, obligations under leases for office space, autos and office equipment used in the normal course of operations. However we do not expect to continue operations under the normal course, and therefore the amounts owed may be materially different from the ones shown in the table below

     The following table summarizes our contractual firm operating obligations at December 31, 2004, and the timing and effect that such obligations are expected to have on our liquidity and cash flows in future periods:

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(in thousands)

     Our network agreements do not extend beyond 2007; therefore the foregoing table does not reflect any amounts in 2007 and beyond. We do not expect to replace expiring contracts at future dates.

(In thousands, except percentages)

Cash Flow

     In the year ended December 31, 2004, we utilized $14.8 million of cash to fund our operating losses and working capital activities. Cash capital expenditures during 2004 were an additional $0.3 million. This was financed through a reduction in the amount of cash on hand at the beginning of the year, through $4.7 million received from Banco Itaú in lieu of marketing activities it was obligated to undertake under the terms of our revised strategic marketing agreement, as well as the penalty of $0.8 million received from McDonald’s, as described in Item 1. Monies received from Banco Itaú in lieu of marketing activities are recorded as financing activities. Furthermore, monies received from Banco Itaú in lieu of marketing activities serve to offset amounts Banco Itaú may owe as a result of not meeting the targets contained in our strategic marketing agreement. As a result, we do not expect to receive any amounts from Banco Itaú for the March 2005 measurement date. We also received in 2004 a penalty payment of approximately $0.8 million from McDonald’s for its failure to comply with the terms of the agreement. The McDonald’s penalty payment was applied against our initial investment of $2.1 million.

     Cash used in operating activities in the fourth quarter of 2004 was $3.5 million, a decrease of 53.7% from $7.5 million used in the fourth quarter of 2003 and an increase of 11.6% from $3.1 million, in the third quarter of 2004. Our ending cash and cash equivalents position of $22.2 million at December 31, 2004 benefited from a payment from Banco Itaú to the Company in lieu of certain marketing activities. We received $1.2 million from Banco Itaú in the 2004 fourth quarter, compared to $1.8 million received in the same period of the prior year. We expect these payments to continue in the near future but the amounts to gradually decrease over time pursuant to the terms of the revised marketing agreement. Should we cease operations, such payments may cease or differ materially from currently projected payments. The Company expects cash utilization to increase in the first quarter of 2005, primarily as a result of seasonal working capital fluctuations including payment of annual bonus, and the payment of approximately $700,000 for differences in historical tax rates over collected revenues we were contesting in Brazil. This amount has been reflected

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in the 2004 consolidated statements of operations. Throughout the year, we also expect cash utilization to increase significantly when compared to fiscal 2004 driven by incremental legal and financial advisory fees, Director and Officer’s liability insurance premiums and severance and retention obligations.

     In the year ended December 31, 2003, our operations required $47.2 million to fund operating losses and activities and capital expenditures of $1.6 million. This was financed through the use of initial cash and cash equivalent balances on hand and through the issuance of $160.0 million in senior convertible notes to Time Warner in 2002.

Senior Convertible Notes

     On March 8, 2002, we entered into a note purchase agreement with Time Warner under which Time Warner made available to us $160.0 million in exchange for our senior convertible notes due in March 2007. We completed the draw down of the funds available to us under the note purchase agreement on December 30, 2002. The senior convertible notes bear an annual coupon of 11%, payable quarterly. The initial conversion price, subject to adjustment, is $3.624 per share (a premium of 20% to the closing trading price of our class A common stock of $3.020 on March 8, 2002). The senior convertible notes are convertible at any time at the option of the holder and are redeemable by us at any time, subject to the holder’s right to convert the senior convertible notes into preferred stock. In addition, the senior convertible notes are required to be repaid prior to maturity, at the option of the holder, in the event of significant asset sales or if we raise additional debt or equity funds.

     Interest is payable either in cash or preferred stock, at our option. If interest is paid in shares, the price per share is determined based on the average closing price of the class A common stock for the twenty trading dates ending two days prior to the date of payment. On December 31, 2004, we made our quarterly payment of interest on the Time Warner notes, which covered the period from October 1 through December 31, 2004. The interest payment of approximately $4.4 million was made through the issuance of 5,772,497 shares of series B preferred stock to Time Warner, based on an average price of $0.7685 per share. For the year ended December 31, 2004, we incurred $17.3 million related to interest payable to Time Warner on the senior convertible notes, as compared with $17.8 million for the year ended December 31, 2003. We expect to incur approximately $17.6 million in annual interest expense as long as the full amount of $160.0 million in senior convertible notes is outstanding. Under the terms of the senior convertible notes, we may choose to make payment of interest through the issuance of shares of our series B preferred stock, with the exception of the last payment, which must be paid in cash (approximately $3.2 million). To the extent we make payment through the issuance of shares, interest expense does not represent a cash outlay. Given our focus on cash preservation, we expect future payments of interest to be undertaken through the issuance of additional shares, except as noted. Consequently, interest expense should not have a cash impact on our financial condition, except for the final interest payment which must be paid in cash. However, depending on market conditions at the time, a decision by us to pay the interest on the senior convertible notes through the issuance of additional shares of stock could result in significant additional dilution to our existing shareholders.

     In the event the $160.0 million in senior convertible notes were to be converted by Time Warner, an additional 44,150,105 shares of preferred stock would be issued to Time Warner, increasing the economic ownership by America Online and its affiliates in AOLA to 62.5% and their relative voting strength to 74.1%, assuming conversion of the warrant granted to America Online at the date of our initial public offering and the options granted to its employees who are members of our Board of Directors. Interest payments on the senior convertible notes over the remaining life of the notes will total approximately $38.4 million, assuming the notes are not converted to stock prior to their maturity. Because we intend to pay interest through the issuance of additional shares of preferred stock, we expect America Online’s relative ownership and voting strength to continue to increase over the foreseeable future.

     Time Warner has granted us a waiver for fiscal 2002, 2003 and 2004 related to our non-compliance with an affirmative covenant in the senior convertible notes requiring our auditors to certify annually that we have not defaulted under the notes. Our auditors were unable to provide the certification because it required them to certify non-quantitative matters. There can be no assurance that we will receive any future waivers from Time Warner or any other holder of the senior convertible notes for any non-compliance by us under this covenant or any other covenant. If we do not obtain this waiver, we will be in default under the notes and may be obligated to repay them immediately. We may be in default under the notes and Time Warner might request us to repay them immediately. We do not, and will not, have sufficient funds to repay the notes.

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Historical Financing

     From inception through December 31, 2004, our operations have been financed through the issuance of senior convertible debt and through capital raised in several rounds of financing, including our initial public offering on August 8, 2000. Funds raised through December 31, 2004 have totaled $711.5 million, net of issuance-related expenses, as shown in the following table in millions:

     Prior to the initial public offering, contributions by joint venture partners totaled $200.1 million, corresponding to $150.1 million by the Cisneros Group and $50.0 million by America Online. Subsequently, our initial public offering in August 2000 generated total net proceeds of $203.1 million, including exercise of the over-allotment option by the underwriters. An additional round of financing took place in March 2001, pursuant to which we raised $150.0 million (net $148.8 million) through the sale of stock to America Online, the Cisneros Group and Banco Itaú. Our last financing took place in March 2002, through the sale of senior convertible notes due March 2007 to Time Warner.

Segment Results of Operations

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we disclose information based on the way we organize financial information for making operating decisions and assessing performance. We consider markets in which we have launched our AOLA country services or web-based interactive services as operational segments and report our operations on a country-by-country basis. In determining reporting segments, we internally reviewed the current management structure that reports to the chief operating decision-maker and analyzed the reports received by that decision-maker in order to allocate resources and measure performance. Each of our operating segments derives its revenues from subscriptions to our interactive services, and to a lesser extent from advertising and other revenues. The accounting policies of the reportable segments are the same as those described in “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations– Critical Accounting Policies” and in the summary of significant accounting policies contained in Note 2 of our audited consolidated financial statements.

     As of December 31, 2004, we internally reported our results of operations in four geographic segments — Brazil, Mexico, Argentina and Puerto Rico — in addition to our corporate and other group. Although amounts for Argentina are not currently material and are not expected to be material in future reporting periods, we have decided not to consolidate Argentina with our corporate and other segment in order to facilitate historical segment comparisons. No single customer accounted for 10% or more of our total revenues for any of the periods presented. See Note 6 to our audited consolidated financial statements for a discussion of segments.

Revenues by Segment

Our revenues by type on a segment basis are shown in the table below:

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