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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 000-31181

America Online Latin America, Inc.

6600 N. Andrews Avenue

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Exchange Act: None

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

Class A common stock, par value $0.01 per share

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

      The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which common stock was last sold, or the average bid and asked price of the common stock, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2002, was $14,804,624.

      The number of shares of the registrant’s class A common stock outstanding as of March 25, 2003 was 135,135,137. No shares of the registrant’s class B common stock or class C common stock were outstanding as of March 25, 2003.

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PART I

      This Annual Report on Form 10-K contains forward-looking statements that are based on our current expectations. Actual results in future periods 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.”

Item 1.     Business

Overview

      America Online Latin America, Inc. (“we,” “us,” “AOLA” or the “company”) is one of the leading interactive service providers in Latin America. Our goal is to become Latin America’s leader in the development of the global interactive medium that is changing the way people communicate, stay informed, are entertained, learn, shop and conduct business. We derive our revenues principally from member subscriptions to our AOLA country services and the AOL-branded service in Puerto Rico. We also generate additional revenues from advertising and other revenue sources. Our comprehensive online services, which are available to subscribing members, and our interactive services are developed on a country-by-country and regional basis and are tailored to local interests.

      The AOLA country services provide our members with easy and reliable access to local, regional and global online communities, content and localized versions of America Online, Inc.’s (“America Online”) interactive products. Our AOLA country services seamlessly integrate the Internet, enabling members to access and explore the Internet. We believe the AOLA country services encourage members to participate in interactive communities through tools such as Spanish and Portuguese versions of AOL Instant Messenger, Buddy Lists, e-mail, public bulletin boards, online meeting rooms, conversations, chat and auditorium events. Members can also personalize their online experience through a variety of features, including customized news and parental and e-mail controls. Our AOLA country services also provide members with local and regional content organized into channels, making areas of interest easy to find, as well as providing access to the extensive global content of the AOL service.

      Our markets in Latin America are Brazil, Mexico, Argentina and Puerto Rico. In November 1999, we launched our first AOLA country service, America Online Brazil. As of February 2003, we offered our America Online Brazil service in 237 cities in Brazil. In July 2000, we launched our country service in Mexico, America Online Mexico. As of February 2003, we offered our America Online Mexico service in 58 cities in Mexico. In August 2000, we launched our country service in Argentina, America Online Argentina. As of February 2003, we offered our America Online Argentina service in 22 cities in Argentina. As part of the ongoing development of our service territory, in December 2000, we expanded into Puerto Rico under an agreement with America Online under which America Online transferred its economic interest in its existing subscriber base to us. We receive the economic benefit associated with subscribers to the AOL-branded service in Puerto Rico and include these subscribers in our member totals. Subscribers in Puerto Rico are provided with both English and Spanish language content through the AOL-branded service. As of February 2003, service in Puerto Rico was offered island-wide.

      In June 2000, we entered into a ten-year strategic alliance with Banco Itaú, one of the largest banks in Latin America. We launched a co-branded, customized version of our America Online Brazil service that Banco Itaú began marketing to its customers in December 2000 and Banco Itaú is obligated to promote the co-branded service as the principal means of accessing Banco Itaú’s interactive financial services. As of December 2002, Banco Itaú reported that it had approximately 9.2 million active customers, of which 2.6 million were registered to use online banking services, primarily through Banco Itaú’s proprietary service, as well as the AOL co-branded service. We believe that this relationship will enable us to expand our Internet presence in Brazil by allowing us to gain access to Banco Itaú’s online as well as offline customer base.

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      The co-branded service is substantially the same as our AOLA country service in terms of technology and content, except that we offer a co-branded welcome screen for Banco Itaú customers, a Banco Itaú toolbar icon, a special version of our finance channel and links that directly connect Banco Itaú’s customers to its online financial services. Subscribers to the co-branded service have access to our full line of features as provided to our general customers, including e-mail with multiple AOL screen names, instant messaging, Internet access, interaction with our worldwide online community and our 24-hour customer service.

      On December 14, 2002, we amended our strategic marketing alliance with Banco Itaú. Under the new 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 service, which are staffed by promoters trained by AOL Brazil. Potential subscribers are able to sample the co-branded service and register in the bank branch. Banco Itaú is also required to distribute, at our direction, a certain number of CD-ROMs containing the software for the co-branded 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 service and provide exclusive online banking benefits to subscribers to the co-branded service. Banco Itaú will be responsible for the cost of these marketing efforts. The modified marketing arrangements will remain in effect through March 2006, although the ten-year term of the agreement did not change. For further discussion of the revised marketing agreement with Banco Itaú, please see Item 1 — Business — Strategic Alliance with Banco Itaú.

      We consider countries in which we have launched our AOLA country services as operational segments and internally report our operations on a country-by-country basis. Each of our operating segments derives its revenues through the provision of interactive services from subscription revenues and advertising and other revenues. For further discussion derived from our operating segments, 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 AOL Time Warner Inc. (“AOLTW”), and the Cisneros Group of Companies (“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. For a further discussion of this reorganization, see Note 1 to our consolidated financial statements.

Our Services

      Our AOLA country services offer the following features:

      Access to the Internet. We provide our members with access to and use of the Internet without having to leave our online services. A simple tool bar on the AOLA country services allows members to move between the features and content on our online service and the Internet. Access to the Internet also includes newsgroups and file transfer capabilities.

      Online Community Features. We believe that our AOLA country services promote interactive online communities through features such as e-mail, public bulletin boards, Buddy Lists, AOL Instant

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      Channel Line-Up. Each AOLA country service features channels for news, finance, entertainment, Internet and computing, sports, local, lifestyles and shopping.

      Personalization and Control Features. Members are able to personalize their experience on our AOLA country services through a number of features and tools, including:

	•	Multiple screen names, or e-mail accounts, per membership, allowing up to seven members of a household to use the service at no additional charge.
	•	Parental controls to help parents guide their children’s online experience, including tools that limit access to particular areas or features on the AOLA country services and the Internet.
	•	Mail controls that allow members to limit who may send them e-mail and to block specific types of e-mail.
	•	Favorite places, which allow members to mark particular Internet sites or areas on our online services to facilitate subsequent visits to those sites or areas.
	•	Marketing preferences that enable members to elect not to receive selected marketing offers.
	•	A Web security browser that will encrypt confidential information, providing more secure online shopping.

      Online and Offline “Help.” We offer our members both online “help” and offline customer support services. Our AOLA country services’ “help” feature assists members with their inquiries online. Offline, we have call centers providing live customer service to members, currently 24 hours a day, seven days a week. The cost of such member services support is free to members subscribing to bundled pricing plans; members subscribing to unbundled plans incur per call charges and/or charges proportional to the amount of time required to service the call. The cost charged for providing call center support to members is exclusive of any potential local telephone call charges members in each country may incur.

      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. All references to the equivalent pricing in U.S. dollars reflect exchange rates for the applicable local currencies as of March 25, 2003.

	•	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.

      In Brazil, for subscribers other than those to the Banco Itaú co-branded service, as of March 25, 2003, we offered several service plans, priced in Brazilian reals, including:

	•	bundled unlimited access and live member services support for new members, currently priced at a fixed monthly fee of R$34.95, which was equal to approximately U.S.$10.39; and
	•	bundled limited access plans, providing 20 hours, 10 hours, and 5 hours of access per month, plus unlimited live member services support for a monthly fee of R$20.95 (U.S.$6.27), R$15.69

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		(U.S.$4.66) and R$10.44 (U.S.$3.11), respectively. Additional time online is billed at R$1.36 to R$3.10, or approximately U.S.$0.40 to U.S.$0.92, per hour.

      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 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, other than subscribers to our co-branded service with Banco Itaú, have chosen the unlimited service price plan. Banco Itaú customers who become subscribers to the co-branded service are currently entitled to a 20% discount off the standard price for the unlimited service plan.

      In Argentina, as of March 25, 2003, we offered both bundled and unbundled service plans, priced in Argentine pesos, including:

	•	bundled unlimited access, which includes unlimited call center support, for a fixed monthly fee of ARS$28.40 plus an additional ARS$5.96 in value added tax (“VAT”), which total approximately U.S.$11.71
	•	bundled limited access plans, providing 15 hours and 10 hours of access per month, plus unlimited live member services support for a monthly fee of ARS$17.40 and ARS$12.90, plus VAT of ARS$3.65 and ARS$2.71, respectively, which total approximately U.S.$7.17 and U.S.$5.32, respectively. Additional time online is billed at ARS$3.00 plus VAT of ARS$0.63, or approximately U.S.$1.02 per hour plus VAT of approximately U.S.$0.21; and
	•	unbundled unlimited access, where costs for access to live member services support are incremental and based on the actual level of support provided, currently priced at a fixed monthly fee of ARS$17.40, plus VAT of ARS$3.65, which total approximately U.S.$7.17. Call center services support is provided for free during a member’s trial period; afterwards, access to live member services support is provided at a cost of ARS$2.00 per support call, which total approximately U.S.$0.68.

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

      In Mexico, we offered various service plans as of March 25, 2003, priced in Mexican pesos, including:

	•	bundled unlimited access, which includes unlimited call center support, for a fixed monthly fee of MXN$219.00 plus MXN$32.85 in VAT, which total approximately U.S.$23.52;
	•	bundled 10 hours of access, which includes unlimited call center support, for a monthly fee of MXN $149.00 plus VAT of MXN $22.35, which total approximately U.S.$16.00 and additional time online billed at MXN$21.00 including VAT, or approximately U.S.$1.96, per hour. This service plan is available only to subscribers paying by credit card; and
	•	bundled 5 hours of access, which includes unlimited call center support, for a monthly fee of MXN$79.00 plus VAT of MXN$11.85, which total approximately U.S.$8.48 with additional time online billed at MXN$18.00 including VAT, or approximately U.S.$1.68, per hour. This service plan is available only to subscribers paying by credit card.

      We also offer, under certain circumstances, an unbundled unlimited access plan in Mexico, with call center support charged on a per call basis. This service plan is priced at MXN$179.00 plus VAT of MXN$26.85, which total approximately U.S.$19.22.

      The Mexico plans described above are also offered at discounts to monthly billing rates for members who prepay their AOLA country service. Prepayment plans are offered for six, nine and twelve-month periods. Additionally, discounts are offered for payments via credit cards for any price plan. The above plans exclude local telephone charges, which are borne by members.

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      In Puerto Rico, pricing 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. Service plans offered include the following:

	•	unlimited monthly access, which includes unlimited call center support, for a monthly fee of U.S.$23.90;
	•	5 hours of access per month, which includes unlimited call center support, for a monthly fee of U.S.$9.95 with additional time online billed at U.S.$2.95 per hour;
	•	3 hours of access, which includes unlimited call center support, for a monthly fee of U.S.$4.95 with additional time online billed at U.S.$2.50 per hour; and
	•	“bring your own access,” AOL usage through a third-party Internet provider, also with unlimited call center support, for a monthly fee of U.S.$14.95.

Prepaid yearly plans offering additional discounts are also available in Puerto Rico.

      We make our AOLA country services available to a broad audience of potential subscribers by offering multiple mechanisms through which our members can pay us. With the exception of Brazil, the AOLA country services and the AOL-branded service in Puerto Rico were initially launched with credit cards as the primary subscriber payment method. The Brazil country service concurrently offered credit cards and a cash payment method known as the “boleto.” The boleto is a customary form of payment in Brazil under which Brazilian banks that we designate act as conduits for collecting the related payments. In addition, customers of certain banks in Brazil, including customers of our Banco Itaú co-branded service, have the option of permitting direct debits from their accounts for purposes of paying subscriber fees. In May 2001, we began to offer cash payment options in Mexico and Argentina. Under cash payment alternatives, members can subscribe to our AOLA country services without using a credit card, thus allowing us to reach a greater number of potential members. Members in Puerto Rico may pay their subscription fees either through credit cards or direct debit to their bank accounts.

      Since its introduction, the “cash payment” alternative has accounted for a substantial majority of all new member registrations in Brazil, Mexico and Argentina and as of December 31, 2002 represented the payment mechanism selected by approximately 45% of our subscribers in Brazil (other than those to the Banco Itaú co-branded service), 41% of our members in Mexico and 50% of our members in Argentina. As of March 25, 2003, approximately 40% of our total subscriber base (excluding subscribers to the Banco Itaú co-branded service) had selected payment options other than credit card or direct debit. 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 have been lower and less timely. We are taking steps to improve further the validation of registration data provided by cash payment subscribers by requiring these subscribers to call our customer service centers to finalize their registration. In Mexico, we are also emphasizing prepaid subscription plans whereby subscribers pay in advance for service periods ranging up to one year. Initial results indicate these efforts have resulted in a reduction of the overall percentage of members who have selected the cash method as their payment option. In Mexico, prepaid plans are growing in importance and currently account for about 14% of current AOL Mexico members; however, prepaid plans are not currently actively marketed in Brazil, Argentina and Puerto Rico.

      We are taking steps to encourage conversion of subscribers selecting cash payment options to credit and direct debit payment options. For instance, we offer discounts to subscribers to our AOLA country services (other than subscribers to the Banco Itaú co-branded service) who choose the credit card payment option.

      Free Trial. We generally make our AOLA country services and the AOL-branded service in Puerto Rico, including Internet access, available for free to new subscribers for a limited period of time so they can experience our service. We currently offer most 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

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      Under a one-year agreement dated as of February 22, 2003 with America Online, we program a content area on the AOL service in the United States targeted to the fast-growing Hispanic community in the U.S. The content area is located in the AOL U.S. service at AOL keyword: Latino and includes Spanish language content from providers including Univision.com and EFE. America Online is obligated to pay us $750,000 per year for these programming services to reimburse us for our costs. We also have the potential to participate in the advertising revenue generated from this content area once certain minimums are achieved. The amount of such advertising revenue is not expected to be material.

     AOL Mobile

      In Brazil, Mexico and Argentina, we offer AOL Mobile service that allows consumers with Internet-ready mobile phones to access select content and features of the AOLA country services. In addition, subscribers to the AOLA country services can access AOL e-mail using AOL Mobile. We offer AOL Mobile services to customers of the following mobile phone providers: Telefonica Celular and Nextel.

     CompuServe

      We have the right to market the CompuServe brand in Latin America. From our inception until early 2002, we received subscription fees from users of the CompuServe service. We ceased operation of our CompuServe service in 2002.

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. We launched a co-branded, customized version of our America Online Brazil service that Banco Itaú began marketing to its customers in December 2000, and Banco Itaú is obligated to promote the co-branded service as the principal means of accessing Banco Itaú’s interactive financial services. We believe that our relationship with Banco Itaú will enable us to expand our Internet presence in Brazil by allowing us to gain access to Banco Itaú’s online as well as offline customer base.

      On December 14, 2002, we entered into an agreement that restructured our strategic marketing alliance with Banco Itaú. Under the new 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 service, which are staffed by promoters trained by AOL Brazil. The number of promoters will vary depending on the success of the marketing efforts, which are reviewed quarterly. If the marketing efforts do not meet specified goals, the number of promoters will be decreased, subject to a floor on the number of promoters. Conversely, if the marketing efforts exceed specified levels, the number of promoters will be increased, subject to a maximum number of promoters. Potential subscribers are able to sample the co-branded service and register in the bank branches. Banco Itaú also is required to distribute, at our direction, a certain number of CD-ROMs containing the software for the co-branded service, via in-branch promotions and direct mail. In addition, Banco Itaú must produce and broadcast a certain number of television commercials promoting the co-branded service and is required to provide exclusive or preferred online banking benefits to subscribers to the co-branded service. Banco Itaú will be responsible for the cost of these marketing efforts. The modified marketing arrangements will remain in effect through March 2006, although the original ten-year term of the agreement did not change.

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      Banco Itaú’s customers who register for the co-branded service after December 14, 2002 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 monthly unlimited-use plan, they are entitled to a 20% discount off the standard price. Prior to the new agreement, Banco Itaú was required to offer its subscribers at least one hour of subsidized usage per month following the expiration of their trial period, although Banco Itaú was responsible to us only for actual usage by the subscriber. Banco Itaú is no longer required to subsidize usage for new subscribers to the co-branded service who register after December 14, 2002; however, Banco Itaú, at its option, may subsidize hours for certain customers who were subscribers to the co-branded service prior to December 14, 2002. In addition, during a short transition period, Banco Itaú is required to pay us a nominal amount for subscribers who have not used the service during the previous month and who are no longer in their free trial period. As of February 2003, approximately three-fourths of the subscribers to the Banco Itaú co-branded service had not used the service during the previous month. Furthermore, substantially all of the remaining Banco Itaú subscribers who were not in their free trial periods as of that date did not exceed the time subsidized by Banco Itaú. We expect these inactive subscribers to be terminated, as discussed below.

      We are contacting subscribers to the co-branded service who do not subscribe to a paid plan to encourage them to subscribe to the 20% discounted unlimited plan or to other subscription plans. Those who fail to elect a plan will have their co-branded service discontinued. We expect that a majority of current subscribers to the Banco Itaú co-branded service who do not use the service or are not subscribers to a paid plan, approximately 375,000 to 425,000 subscribers, will be terminated during the first half of 2003 for failing to select a plan, with the majority of the terminations occurring during the first quarter of 2003. Although these terminations will decrease our membership levels, termination of these members is not expected to materially impact our revenues or costs since they were not paying us or using the service.

      Under the terms of our original agreement with Banco Itaú, Banco Itaú and we established subscriber targets for the co-branded service of 250,000 verified subscribers at December 10, 2001 and 500,000 at December 10, 2002 (subsequently moved to April 30, 2003) and a secondary target of a total of 1,000,000 verified subscribers at December 10, 2002 (subsequently moved to April 30, 2003). In addition, Banco Itaú and we had established the following additional targets: (i) for the 12-month period ending December 10, 2003, revenues generated from subscribers to the co-branded service would account for at least 39% of our aggregate revenues in Brazil, (ii) on December 10, 2004, there would be at least 2,000,000 verified subscribers, and for the twelve months ended on that date revenues generated from subscribers to the co-branded service would account for at least 46% of our aggregate revenues in Brazil, and (iii) for the 12-month period ending December 10, 2005, revenues generated from subscribers to the co-branded service would account for at least 56% of our aggregate revenues in Brazil. Verified subscribers are those subscribers who have used the co-branded service in any two of the three months preceding the applicable measurement date or who have first accessed the co-branded service in the month prior to the applicable measurement date. Under the agreement, if the verified subscriber level and revenue targets were not met, Banco Itaú was required to make a reference payment to us. Banco Itaú met the subscriber target for the co-branded service of 250,000 verified subscribers at the December 10, 2001 measurement date.

      Under the terms of the new agreement, Banco Itaú and we have eliminated the subscriber targets for the period ending April 30, 2003 (which was the second measurement period under the agreement) and have replaced the targets for the remaining three years with targets based on a combination of minimum revenue levels (in the same percentages as described above for each of the next three years) and the fulfillment of the marketing commitments described above. If these new targets are not met, Banco Itaú is required to make reference payments to us. The dates for measuring performance with these new targets were moved to March 24, 2004, 2005 and 2006. The aggregate amounts that Banco Itaú will be required to pay us if the marketing or revenue targets are not met, which are subject to annual ceilings, have been reduced from an aggregate of approximately $135.4 million to approximately $60.0 million for the balance of the initial five-year marketing period. In addition, the aggregate amount that Banco Itaú would be

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      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
	•	our breach of certain exclusivity obligations under the agreement.

Customer Service

      One of the key tenets to our strategy is to focus on customer service by offering comprehensive online and offline customer support.

      Offline Customer Service. We have established a local call center in Brazil and a regional call center in Argentina. We consolidated customer call center support for our Spanish-language members 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 recent steep devaluation of the Argentine peso. English-language support for members of the AOL-branded service in Puerto Rico is provided by America Online. We presently staff each call center with knowledgeable customer service representatives who are available 24 hours a day, seven days a week to assist our members in their local language with inquiries relating to products, technical support, billing, online security and online community monitoring. Our customer service is free of charge for subscribers enrolled in our bundled services plans and currently is provided through toll-free telephone numbers. Customers enrolled in our lower cost unbundled service plans incur per call or time-based charges for accessing live call center support.

      Our customer service representatives also proactively communicate with new members to encourage them to use our AOLA country service and their many features. We believe this improves the member’s online experience and leads to improved retention and increased loyalty.

      Online “Help.” Our AOLA country 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 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 leading 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.

      In Brazil, we have entered into agreements with over 100 content providers such as Jornal do Brasil, Banana Games, Gazeta Mercantil, Gazeta Esportiva, Editora Delta, Agência Estado and Paralela. In Mexico, we have entered into agreements with 40 content providers, including Ponchito.com, Planeta Local, Notimex and Universo Estudiantil. In Argentina, we have entered into agreements with over 100 content providers including Asatej, Cybermapa, Familia Digital, De Mujer and Revista Insider. We have

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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 we develop ourselves and participation in deals arranged by America Online. Through our relationship with America Online, we sometimes have the opportunity to participate in America Online’s global advertising arrangements. In Argentina, we also generate additional revenues from other sources such as revenue sharing agreements with telecommunications providers.

      Advertising. The country-specific and regional focus of our interactive services enables advertisers to execute advertising and marketing campaigns that take advantage of the common cultures and interests of the region while retaining the ability to tailor their campaigns to specific demographic groups. We offer our advertisers a variety of customized 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; 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, the opportunity for revenue sharing, or both. We have also entered into and will continue to 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. In the past, sometimes we chose to accept an equity interest as payment, or partial payment, for arrangements entered into with development stage companies.

      Current advertisers or sponsors of channels on our America Online Brazil service include Banco Itaú and Banco Santander. Current advertisers or sponsors of channels on our America Online Mexico service include American Express and Hewlett-Packard. Current advertisers or sponsors of channels on our America Online Argentina service include Bagovit and DeAutos.com. Current advertisers on the AOL-branded service in Puerto Rico include Centennial and Plaza Las Americas.

      Other Revenues. 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. Under 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 to date.

Marketing

      Our marketing goals are to attract new consumers to subscribe to, and to retain existing subscribers of, our AOLA country services by building brand awareness and encouraging consumers to try our interactive services. We make it convenient for consumers to experience our online services. In the past, each time we launched our online service in a new market or released a new version of the online service software, we typically distributed compact discs (“CDs”) containing the software for our localized online service. These CDs offered 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. Currently, in an effort to target higher value members, we have largely ceased the mass distribution of CDs. Instead, we promote distribution of our software CDs primarily through point-of-sale displays and kiosks located in high-traffic retail locations such as shopping malls and large retailers. We also seek to attract members through agreements with computer and computer peripheral manufacturers (OEMs). For example, we have entered into agreements for the bundling of our America Online service software with Hewlett-Packard in Mexico and Metron, Brazil’s largest personal computer manufacturer. Consumers are also able to request

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      In the first quarter of 2002, we began to implement measures designed to better target higher-value members and to increase the efficiency of our member acquisition efforts by focusing on targeted groups that have a greater likelihood of becoming members who pay on a timely basis and remain subscribers to our services for an extended period of time. We hope to achieve this by focusing acquisition efforts on marketing channels that historically have resulted in higher subscription rates and lower acquisition costs. The success of these measures will depend in part on our ability to identify members that are most likely to pay their subscription fees on a timely basis and our ability to develop software tools and support systems designed to verify billing data for new subscribers to our country services and block access to subscribers who do not pay their subscription fees on a timely basis.

      As part of these efforts to target higher value members, our revised marketing agreement with Banco Itaú requires the establishment of kiosks and point-of-sale displays in hundreds of Banco Itaú branches in Brazil. We have also entered into a marketing agreement with McDonald’s in Brazil to establish interactive kiosks in McDonald’s restaurants. We will continue to use traditional advertising campaigns, including television, radio and print publication, to maintain and increase consumer awareness of the AOLA brand and attract new members and users. However, as our brands have become more established, we have reduced our reliance on traditional advertising campaigns.

      We currently have marketing arrangements in place in Puerto Rico with Pueblo Supermarkets and Blockbuster, which are associated with the Cisneros Group. The Cisneros Group has agreed to attempt, on a commercially reasonable best efforts basis, to provide us with access to the services provided by companies associated with the Cisneros Group at rates at least as favorable as those charged to anyone else, except for their affiliates. However, we have no assurance that their efforts will be successful and it is possible that we may not receive access at favorable rates or at all.

      We have also utilized and expect to continue employing other innovative marketing strategies. For example, we were the exclusive sponsor of Rock in Rio, a rock festival held in Rio de Janeiro, Brazil in January 2001, which gave us the opportunity to promote our services to over one million concertgoers. We also have launched programs such as “sign-on-a-friend” in Brazil, Mexico and Argentina that involve paying our members a fee for each additional member they refer to our service.

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 AOLA country services through local and long distance telephone lines. These lines are owned and operated by local and regional telephone service companies. In most Latin American countries, local phone service continues to be metered, which results in incremental variable cost to subscribers of our country services. Metered phone service, however, has presented us with the opportunity to earn additional revenues or reduce our expenses through revenue sharing agreements with local phone companies, in Brazil and 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 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 current and prospective members.

      Additionally, local and long distance telephone charges have declined over time, a trend which is expected to continue as a result of increased competition spurred by deregulation. Nevertheless, because local calls in most Latin American countries are metered, the total cost of Internet access in Latin America is substantially higher than in the U.S. Proposals are currently pending in Brazil that would implement pricing methods, including flat-rate pricing options for data calls, in addition to existing

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      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. These third-party networks provide the modems that allow our members to establish a connection to our online services. They also carry our data between Latin America and the U.S. through fiber optic cable.

      In Brazil, we have contracts with Embratel, an affiliate of WorldCom, and Telefonica, and an arrangement with Brazil Telecom, to carry our data within Brazil and to provide the modems through which our members connect to our America Online Brazil service. We previously had an agreement with AT&T Brasil, which expired in December 2002. However, AT&T Brasil still provides us with modems during a transition period while these modems are migrated to the networks of other vendors. Embratel and Telefonica also carry 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, 2003 and May 25, 2005, respectively. We also have access to capacity provided by Progress Telecommunications Corporation (“Progress”) through a contract between America Online and Progress. America Online invoices us for the capacity used by us under this agreement. In Mexico, we have entered into a network contract with Avantel, an affiliate of WorldCom. Our contract with Avantel expires in January 2005. We also have an arrangement with Telefonos de Mexico (Telmex) under which we obtain additional network capacity. In Argentina, we entered into a network contract with Impsat, which expired in December 2002; however, modems are being provided to us under a transition period while we are in negotiations with Impsat regarding a possible new agreement.

      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. All of our data transmitted between the U.S. and Mexico, Brazil and Argentina is transmitted by fiber optic cable.

      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 make adjustments based on marketing projections. We believe our current suppliers can and will provide us with sufficient network capacity. However, this capacity is based on our expectations of use and growth in specific geographic areas. Our contracts usually commit us to purchase a minimum amount of network capacity. If the number of our subscribers, or their use of our online services, does not increase, our per unit network costs will not correspondingly decrease.

      Technology. Our servers are owned and maintained by America Online in three locations in Virginia in the United States. The AOLA content and the tools to operate our online services are located on these servers. We have also installed servers in Brazil to further improve the member experience.

      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.

Competition

      We operate in the highly competitive and rapidly evolving businesses of online services and Internet access, online advertising and commerce. We compete with providers of Spanish- and Portuguese-language interactive services, including Internet access services, portals, search engines and Web directories. We

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      We also compete for advertising revenues with traditional media such as newspapers, magazines, radio and television.

      Our online service subscription fees are generally higher than those offered by competing online service providers because we consider our service to be a premium service. We continually assess our pricing strategy and may make modifications as necessary. We believe that the principal competitive factors in generating advertising revenue include not only the number of visitors to an online service or Internet site, but also demographics of visitors.

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 the 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, 2002, 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 also have a non-exclusive right to sell advertising on parts of America Online’s ICQ service in Latin America. We do not have the right to offer Netscape, MapQuest, Moviefone or any other non-AOL-branded interactive service owned by America Online.

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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, upon the later of December 15, 2003 or the date on which either America Online or the Cisneros Group owns 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 owns 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.

     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, including www.aola.com. 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 believe that our exercise of our licensed rights under our agreement with America Online does not infringe 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

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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 interactive service providers 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 regulations relating to local telephone pricing are likely to be modified in Brazil, including a possible change that would permit alternative rate pricing for Internet access calls, including flat-rate pricing. We believe that this change, if enacted, could encourage Internet usage. In connection with this proposed regulation, rules governing interconnection fees between telecommunications providers may be modified. We cannot predict at this time whether or not these regulations will be enacted or, if enacted, what form of alternative rate pricing might be adopted, or what any potential effect on our business could be. These changes would also likely impact the competition for interactive services in Brazil, although 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 national 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.

      We intend to support proposals designed to enhance market access and competition in the offering of both dial-up and high-speed interactive services in our target markets and believe that the adoption of these proposals would have a beneficial effect on the development of interactive services. We are unable, at this time, to predict whether any of these proposals will be adopted.

Employees

      As of December 31, 2002, we had 1,178 full-time and contract employees, of whom 727 were located in Brazil, 274 in Mexico, 110 in Argentina, 48 in the United States and 19 in Puerto Rico.

Our Executive Officers

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

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/.

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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 call center is located in Santo Andre, Sao Paulo state, in approximately 25,866 square feet of office space under a lease expiring in August 2004 and our Brazilian headquarters are located in São Paulo in approximately 10,570 square feet of office space under a lease expiring in July 2005. Our Mexican headquarters are located in Mexico City in approximately 19,900 square feet of office space under a lease expiring in March 2005. 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 2003. Our Puerto Rico headquarters, located in San Juan, is approximately 5000 square feet of office space under a lease which expires in March 2008.

Item 3.     Legal Proceedings

      We are not a party to any material litigation in any court, and our management is not aware of any contemplated proceedings by any governmental authority against us that would have a material impact on our financial condition.

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

      On October 3, 2002, the holders of all our outstanding preferred stock voted by unanimous written consent to approve a preferred stock conversion agreement among us, America Online, AOLTW, Aspen Investments LLC (“Aspen”) and Atlantis Investments LLC (“Atlantis”), under which AOL, AOLTW, Aspen and Atlantis agreed to convert a portion of the preferred stock held by them into shares of class A common stock. This approval included amending our fourth restated certificate of incorporation, preparing a proxy statement, and issuing shares of class A common stock under the conversion agreement.

      On November 1, 2002, these preferred stockholders voted by unanimous written consent to approve the reversal of a consolidation structure which had been implemented by AOL Mexico S. de R.L. de C.V. (“AOL Mexico”), under which certain business activities which had previously been transferred to a subsidiary of AOL Mexico, would be transferred back to AOL Mexico.

      On December 4, 2002, these preferred stockholders voted by unanimous written consent to approve an amendment to the strategic interactive services and marketing agreement among us, AOL Brasil Ltda. and Banco Itaú.

      On December 20, 2002, we held a special meeting of stockholders to vote on the following proposals:

Proposal 1: To amend our fourth restated certificate of incorporation to reduce the number of shares of our series B preferred stock and series C preferred stock needed to avoid the conversion of all of the series B preferred stock and series C preferred stock.

Proposal 2: To amend the company’s fourth restated certificate of incorporation to:

          (A) effect a 1-for-2 reverse stock split.

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          (B) effect a 1-for-3 reverse stock split.

          (C) effect a 1-for-5 reverse stock split.

          (D) effect a 1-for-7 reverse stock split.