MERCADOLIBRE INC - Annual Report: 2008 (Form 10-K)

Our direct competitors include various online sales and auction services, including MasOportunidades.com in Argentina, and a number of other small services, including those that serve specialty markets. We also compete with business-to-consumer online e-commerce services, such as pure play Internet retailer Submarino (a website of B2W Inc), and a growing number of bricks and mortar retailers who have launched on line offerings such as Americanas (a website of B2W Inc), Casas Bahia and Falabella, and with shopping comparison sites located throughout Latin America such as Buscape and Bondfaro, located throughout Latin America. In addition, we compete with online communities that specialize in classified advertisements. And although no regional competitor exists in the classified market, local players such as Webmotors, VivaStreet and Zap have important positions in certain markets.

We face competition from a number of large online communities and services that have expertise in developing online commerce and facilitating online interaction. Certain of these competitors, including Google, Amazon.com, Microsoft and Yahoo! currently offer a variety of business-to-consumer commerce services, searching services and classified advertising services, and certain of these companies may introduce broader online commerce to their large user populations. Other large companies with strong brand recognition and experience in online commerce, such as large newspaper or media companies also compete in the online listing market. Companies with experience in online commerce, such as Amazon, may also seek to compete in the online listing market in Latin America. We also compete with traditional brick-and-mortar retailers to the extent buyers choose to purchase products in a physical establishment as opposed to on our platform. In connection with our payment business, our direct competitors include international online payments services such as Paypal and Google Checkout, and local online payment services such as DineroMail in Argentina, Chile, Colombia and Mexico, and Pagamento Digital and PagSeguro in Brazil; money remitters such as Western Union. Any or all of these companies could create competitive pressures, which could have a material adverse effect on our business, results of operations and financial condition.

We no longer have a non-competition arrangement with eBay. If eBay were to compete directly with us by launching a competing platform in Latin America, it would have a material adverse effect on our results of operations and prospects. Similarly, eBay or other larger, well-established and well-financed companies may acquire, invest in or enter into other commercial relationships with competing online commerce services. Therefore, some of our competitors and potential competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to web site and systems development than us, which could adversely affect us.

In many cases, companies that directly or indirectly compete with us provide Internet access. These competitors include incumbent telephone companies, cable companies, mobile communications companies and large Internet service providers. Some of these providers may take measures that could degrade, disrupt, or increase the cost of customers’ use of our services. For example, they could restrict or prohibit the use of their lines for our services, filter, block or delay the packets containing the data associated with our products, charge increased fees to us or our users for use of their lines to provide our services, or seek to charge us for our customers’ use of our services or receipt of our e-mails. These activities are technically feasible. Although we have not identified any providers who intend to take these actions, any interference with our services or higher charges for access to the Internet, could cause us to lose existing users, impair our ability to attract new users, limit our potential expansion and harm our revenue and growth.

Risks related to doing business in Latin America

We face the risk of political and economic crises, instability, terrorism, civil strife, expropriation and other risks of doing business in emerging markets.

We conduct our operations in emerging market countries in Latin America. Economic and political developments in these countries, including future economic changes or crises (such as inflation, currency devaluation or recession), government deadlock, political instability, terrorism, civil strife, changes in laws and regulations, expropriation or nationalization of property, and exchange controls could impact our operations or the market value of our common stock and have a material adverse effect on our business, financial condition and results of operations.

In the past, the performance of the economies of Latin American countries has been affected by each country’s political situation. For example, during its crisis in 2001 and 2002, Argentina experienced social and political turmoil, including civil unrest, riots, looting, protests, strikes and street demonstrations which have resulted in significant changes in its general economic policies and regulations. More recently, the Venezuelan and Bolivian administrations have nationalized or announced plans to nationalize certain industries and expropriate certain companies and property, and, in Venezuela, the administration has imposed exchange controls.

Although economic conditions in one country may differ significantly from another country, we cannot assure that events in one country alone will not adversely affect the market value of, or market for, our common stock.

Latin American governments have exercised and continue to exercise significant influence over the economies of the countries where we operate. This involvement, as well as political and economic conditions, could adversely affect our business.

Governments in Latin America frequently intervene in the economies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions to control inflation and other policies and regulations have often involved, among other measures, price controls, currency devaluations, capital controls and limits on imports. Our business, financial condition, results of operations and prospects may be adversely affected by changes in government policies or regulations, including such factors as: exchange rates and exchange control policies; inflation rates; interest rates; tariff and inflation control policies; import duties on information technology equipment; liquidity of domestic capital and lending markets; electricity rationing; tax policies, including royalty, tax increases and retroactive tax claims; and other political, diplomatic, social and economic developments in or affecting the countries where we operate. An eventual reduction of foreign investment in any of the countries where we operate may have a negative impact on such country’s economy, affecting interest rates and the ability of companies such as ourselves to access financial markets. In addition, our employees in Brazil are currently represented by a labor union and employees in other Latin American countries may eventually become unionized. We may incur increased payroll costs and reduced flexibility under labor regulations if unionization in other countries were to occur, any of which may negatively impact our business.

Latin America has experienced adverse economic conditions.

Latin American countries have historically experienced uneven periods of economic growth, as well as recession, periods of high inflation and economic instability. Currently, as a consequence of adverse economic conditions in global marteks and diminishing commodity prices, many of the economies of Latin American countries have slowed their rates of growth, and some have entered mild recessions. The duration and severity of this slowdown is hard to predict and could adversely affect our business, financial condition, and results of operations. Additionally, certain countries have experienced severe economic crises, which may still have future effects. For example, in 2001 Argentina defaulted on its sovereign debt due to severe economic turmoil. In the first half of 2005, Argentina restructured part of this sovereign debt. Certain creditors did not agree to the restructuring. Argentina’s past default and its failure to restructure completely its remaining sovereign debt and fully negotiate with the holdout creditors may prevent Argentina from obtaining favorable terms or interest rates when accessing the international capital markets. Litigation initiated by holdout creditors or other parties may result in material judgments against the Argentine government and could result in attachments of or injunctions relating to assets of Argentina that the government intended for other uses. As a result, the government may not have the financial resources necessary to implement reforms and foster growth, which could have a material adverse effect on the country’s economy. Any of these adverse economic conditions may occur again in the future, which would adversely affect our business, financial condition and results of operations.

Local currencies used in the conduct of our business are subject to depreciation, volatility and exchange controls.

The currencies of many countries in Latin America, including Brasil, Argentina, Mexico and Venezuela, which together accounted for 94.9% of our revenues for 2006, 95.4% for 2007 and 95.3% for 2008, have experienced substantial depreciation in 2008 and volatility, particularly against the U.S. dollar, in the past. Currency movements, as well as higher interest rates, have materially and adversely affected the economies of many Latin American countries, including countries which account or are expected to account for a significant portion of our revenues. The depreciation of local currencies creates inflationary pressures that may have an adverse effect on us and generally restricts access to the international capital markets. For example, the devaluation of the Argentine peso has had a negative impact on the ability of Argentine businesses to honor their foreign currency denominated debt, led to very high inflation initially, significantly reduced real wages, had a negative impact on businesses whose success is dependent on domestic market demand, and adversely affected the government’s ability to honor its foreign debt obligations. On the other hand, the appreciation of local currencies against the U.S. dollar may lead to the deterioration of the public accounts and balance of payments of the countries where we operate, as well as to a lower economic growth related to exports.

We may be subject to exchange control regulations which might restrict our ability to convert local currencies into U.S. dollars. For example, in 2001 and 2002, Argentina imposed exchange controls and transfer restrictions substantially limiting the ability of companies to retain foreign currency or make payments abroad. In addition, Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. Currently, Venezuela has exchange control regulations in place that restrict our ability to convert local currency into U.S. dollars. Any additional imposition of exchange controls could adversely affect our company.

Our reporting currency is the U.S. dollar but our revenues are paid in foreign currencies. Therefore, if the U.S. dollar strengthens relative to these foreign currencies (i.e. the foreign currencies devaluate against the U.S. dollar), the economic value of our revenues in U.S. dollar terms will decline.

We are subject to increased risks relating to foreign currency exchange rate fluctuations. Because we conduct our business outside the United States and receive almost all of our revenues in currencies other than the U.S. dollar, but report our results in U.S. dollars, we face exposure to adverse movements in currency exchange rates. The currencies of certain countries where we operate, including most notably Brazil, Argentina and Mexico, have historically experienced significant devaluations. The results of operations in the countries where we operate are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against foreign currencies, as occurred in previous years, the translation of these foreign-currency-denominated transactions will result in increased net revenues, operating expenses, and net income. Similarly, our net revenues, operating expenses, and net income will decrease if the U.S. dollar strengthens against foreign currencies. For 2008, 53.8% of our revenues were denominated in Brazilian Reais, 16.9% in Venezuelan “Bolivares Fuertes”,14.5% in Argentine “Pesos”, and 10.1% in Mexican “Pesos”. The foreign currency exchange rates for the full year 2008 relative to 2007 resulted in higher net revenues of approximately $4.2 million and an increase in aggregate cost of net revenues and operating expenses of approximately $3.6 million. However, local currency devaluations during the fourth quarter of 2008 resulted in a decrease in net revenues of approximately $5.6 million and a decrease in the aggregate cost of net revenues and operating expenses of approximately $3.9 million as compared to the fourth quarter of 2007. While we have entered in the past into transactions to hedge portions of our foreign currency translation exposure, these are expensive, and in addition it is very difficult to perfectly predict or completely eliminate the effects of this exposure.

Inflation and certain government measures to curb inflation may have adverse effects on the economies of the countries where we operate, our business and our operations.

Most Latin American countries have historically experienced high rates of inflation. Inflation and some measures implemented to curb inflation have had significant negative effects on the economies of Latin American countries. Governmental actions taken in an effort to curb inflation, coupled with speculation about possible future actions, have contributed to economic uncertainty over the years in most Latin American countries. The Latin American countries where we operate may experience high levels of inflation in the future that could lead to further government intervention in the economy, including the introduction of government policies that could adversely affect our results of operations. In addition, if any of these countries experience high rates of inflation, we may not be able to adjust the price of our services sufficiently to offset the effects of inflation on our cost structures. A return to a high inflation environment would also have negative effects on the level of economic activity and employment and adversely affect our business and results of operations.

Political and economic conditions in Venezuela may have an adverse impact on our operations.

We conduct significant operations in Venezuela, offering both our MercadoLibre marketplace and MercadoPago online payments solution, and have 126 employees who work in the country. Additionally, with the acquisition of CMG, we now have more significant operations in Venezuela. In 2008, our Venezuelan net revenues represented 16.9% of our consolidated net revenues. The political and economic conditions are very unstable, and we cannot predict the impact of any future political and economic events on our business. We cannot predict the economic and regulatory impact of President Chávez’s initiatives, or whether the Venezuelan government will extend nationalization to e-commerce or other businesses that could impact our business and results of operations. Nationalization of telecommunications, electrical or other companies could reduce our or our customers’ access to our web site or our services or increase the costs of providing or accessing our services.

In addition, the Venezuelan government has imposed foreign exchange and price controls on the local currency. These foreign exchange controls increase our costs to, and also limit our ability to, convert local currency into U.S. dollars and transfer funds out of Venezuela, and may have an adverse effect on our Venezuelan customers. We cannot predict the long-term effects of exchange controls on our ability to process payments from Venezuelan customers or on the Venezuelan economy in general. Certain political events have also resulted in significant civil unrest in the country. Continuation or worsening of the political and economic conditions in Venezuela could materially and adversely impact our future business, financial condition and results of operations.

We may incur losses in the event we are unable to distribute dividends from our Venezuelan subsidiaries at the official exchange rate, or as a result of changes in the political, economic or regulatory environment changes in Venezuela.

Venezuela has a dual exchange rate system that includes an official exchange rate which was $2.15 “Bolivares Fuertes” per U.S. dollar at December 31, 2008, and a parallel exchange rate that was $5.4 “Bolivares Fuertes” per U.S. dollar at December 31, 2008. During 2008, we re-measured the fair value of our assets and liabilities in our Venezuelan subsidiaries at the parallel exchange rate (5.4 “Bolivares Fuertes” per US dollar as of December 31, 2008) resulting in a foreign currency gain of $5.0 million in the fourth quarter of 2008 and $3.6 million for all of 2008. The after tax positive effect on Net Income of the re-measurement was $3.3 million in the fourth quarter of 2008 and $ 2.4 million for all of 2008. This re-measurement was included as non-current other assets of $7.8 million in our Consolidated Balance Sheets. The re-measurement of the liabilities amounting to $4.2 million was included in Accounts Payable and accrued expenses. At the same time, according to SFAS 52 “Foreign Currency Translation”, we translated the financial statements from our Venezuelan subsidiaries at the official exchange rate (2.15 “Bolivares Fuertes” per US dollar) which is the exchange rate applicable to dividend remittances. As 2008 was the first year in which we recorded positive retained earnings in our Venezuelan subsidiaries, in 2009 we will be requesting U.S. dollars at the official exchange rate for the first time to distribute dividends, through a process that includes obtaining approval from the Venezuelan Commission of Foreign Exchange Administration (“CADIVI”). We cannot predict if we will obtain approval of the CADIVI to distribute dividends using the official Venezuelan exchange rate, and therefore we may have to recognize losses in the future. See “ITEM 7. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Year ended December 31, 2008 compared to year ended December 31, 2007 — Other income (expenses)” for further information.

In addition, due to unstable political and economic conditions in Venezuela, the official and parallel exchange rates could devalue significantly, and we cannot provide any assurances that the official exchange rate will continue to be the rate applicable to translate foreign currency financial statements. Strong devaluations or changes in accounting rules could impact our results materially and we may have to recognize losses in the future.

Developments in other markets may affect the Latin American countries where we operate, our financial condition and results of operations.

The market value of securities of companies such as ourselves, may be, to varying degrees, affected by economic and market conditions in other global markets. Although economic conditions vary from country to country, investors’ perception of the events occurring in one country may substantially affect capital flows into and securities from issuers in other countries, including Latin American countries. Various Latin American economies have been adversely impacted by the political and economic events that occurred in several emerging economies in recent times, including Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998, the Brazilian devaluations in January of 1999 and in 2002, the Argentine crisis of 2001 and the market decline after September 11, 2001. Furthermore, Latin American economies may be affected by events in developed economies which are trading partners or that impact the global economy.

Developments of a similar magnitude to the international markets in the future can be expected to adversely affect the economies of Latin American countries and therefore us.

E-commerce transactions in Latin America may be impeded by the lack of secure payment methods.

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

Argentina and other countries in Latin America have experienced adverse economic conditions.

Latin American countries have historically experienced uneven periods of economic growth, as well as recession, periods of high inflation and economic instability. Certain countries have experienced severe economic crises, which may still have future effects. For example, in 2001 Argentina defaulted on its sovereign debt due to severe economic turmoil. In the first half of 2005, Argentina restructured part of this sovereign debt. Certain creditors did not agree to the restructuring. Argentina’s past default and its failure to restructure completely its remaining sovereign debt and fully negotiate with the holdout creditors may prevent Argentina obtaining favorable terms or interest rates when accessing the international capital markets. Litigation initiated by holdout creditors or other parties may result in material judgments against the Argentine government and could result in attachments of or injunctions relating to assets of Argentina that the government intended for other uses. As a result, the government may not have the financial resources necessary to implement reforms and foster growth, which could have a material adverse effect on the country’s economy. In addition, as a result of this economic instability, the Argentine peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. In August 2008, Standard & Poor’s Inc. downgraded Argentina’s foreign debt rating based upon renewed concerns regarding economic conditions and rising fears of increased inflationary pressures. Such economic turmoil has given rise to significant uncertainties about Argentina’s economic and political future. It is currently unclear whether the economic and political instability experienced over the past several years will continue and it is possible, that despite recent economic growth, Argentina may return to a deeper recession, higher inflation and unemployment and greater social unrest. We conduct significant operations in Argentina, offering both our MercadoLibre marketplace and MercadoPago online payments solution in Argentina and have our corporate headquarters in that country. Argentina is our third leading revenue producing country. As a result, our business is to a very large extent dependent upon the economic additions prevalent in Argentina and adverse economic conditions in that country could have a material adverse affect on our business, financial condition and results of operations.

Internet regulation in the countries where we operate is limited, many legal issues related to e-commerce and the Internet are unresolved and existing and new laws and regulations related to our business could have a material adverse effect on us.

Unlike the United States, none of the countries where we operate have specific laws governing the liability of Internet service providers, such as ourselves, for fraud, intellectual property infringement, other illegal activities committed by individual users or third-party infringing content hosted on a provider’s servers. This legal uncertainty allows for different judges or courts to decide very similar claims in different ways and establish contradictory jurisprudence. Certain judges may decide that Internet service providers are liable to an intellectual property owner for a user’s sale of counterfeit items using our platform, while others may decide that the responsibility lies solely with the offending user. This legal uncertainty allows for rulings against us and could set adverse precedents, which individually or in the aggregate could have a material adverse effect on our business, results of operations and financial condition. In addition, legal uncertainty may negatively affect our clients’ perception and use of our services.

We are not currently subject to direct government regulation in most of the countries where we operate, other than those regulations applicable to businesses and commerce in general. It is not clear how existing laws governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation, libel and defamation, obscenity, and personal privacy apply to online businesses. The majority of these laws were adopted before the Internet was available and, as a result, do not contemplate or address the unique issues of the Internet. Due to these areas of legal uncertainty, and the increasing popularity and use of the Internet and other online services, it is possible that new laws and regulations will be adopted with respect to the Internet or other online services. These laws and regulations could cover issues such as online commerce, Internet service providers’ responsibility for third party content hosted in their servers, user privacy, freedom of expression, pricing, content and quality of products and services, taxation (including imposition of value added or sales taxes collection obligations), advertising, intellectual property rights, consumer protection, information storage obligations and information security. If these laws are enacted, they may have negative effects on our business, results of operations and financial condition.

As our activities and the types of goods listed on our web site grow, regulatory agencies or courts may argue or rule that we or our users must either obtain licenses or not be allowed to conduct business in their jurisdiction, either with respect to our services in general or only relating to certain items, such as auctions, real estate and motor vehicles. For example, numerous jurisdictions, including Brazil and Argentina, have regulations regarding “auctions” and “auctioneers” and the handling of property by “secondhand dealers” or “pawnbrokers.” A bill has been proposed in the Brazilian legislature that would specifically apply the auctioneer regulations to on-line auctions. Passage of this law or attempted enforcement of existing laws against us or our users and other regulatory and licensing claims could result in expensive litigation or could require us to change the way we or our users do business. Any changes in our or our users’ business methods could increase costs or reduce revenues or force us to prohibit listings of items in some countries and substantially limit our operations in major markets. We could also be subject to fines or other penalties, and any of these outcomes would harm our business.

In addition, because our services are accessible worldwide and we facilitate sales of goods to users worldwide, other foreign jurisdictions may claim that we are required to comply with their laws. As we expand and localize our international activities, we have to comply with the laws of the countries in which we operate. Laws regulating Internet companies outside of the Latin American jurisdictions where we operate may be more restrictive to us than those in Latin America. In order to comply with these laws we may have to change our business practices or restrict our services. We could be subject to penalties ranging from criminal prosecution to bans on our services for failure to comply with foreign laws.

We are also subject to laws relating to the use, storage and transfer of personally identifiable information about our users, especially financial information. Several jurisdictions have passed new laws in this area, and other jurisdictions are considering imposing additional restrictions. If we violate these laws, which in many cases apply not only to third-party transactions but also to transfers of information among ourselves, our subsidiaries, and other parties with which we have commercial relations, we could be subject to significant penalties and negative publicity, which would adversely affect us.

Risks related to our shares

Our common stock has limited trading history, and the price of our shares may fluctuate substantially, and our stockholders’ investment may decline in value.

Our common stock commenced trading on the Nasdaq Global Market on August 10, 2007. The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to factors, many of which are beyond our control, including those described above under “—Risks related to our business.”

Further, the stock markets in general, and the Nasdaq Global Market and the market for Internet-related and technology companies in particular, have especially recently, experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. We cannot assure you that trading prices and valuations will be sustained. These broad market and industry factors may materially and adversely affect the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the countries where we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, that company is often subject to securities class-action litigation. This kind of litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

We continue to be significantly influenced by a group of stockholders that control a significant percentage of our common shares and the value of our common stock could be negatively effected by any significant disposition of our shares by any of these stockholders.

Several stockholders own a significant percentage of our common stock. As of December 31, 2008, eBay owned approximately 8.1 million shares of our common stock (which represents 18.4% of our outstanding common stock as of December 31, 2008). Certain members of our management also hold a significant percentage of our common stock. Investment entities affiliated with General Atlantic LLC, collectively, General Atlantic, and investment entities affiliated with Tiger Global, L.P., collectively, Tiger, beneficially own approximately 3.9 million and 4.3 million shares of our common stock, respectively as of December 31, 2008 (which represent 8.9% and 9.8%, respectively of our outstanding common stock as of December 31, 2008). These stockholders retain the power to influence the outcome of important corporate decisions or matters submitted to a vote of our stockholders. The interests of these stockholders may conflict with, or differ from, the interests of other holders of our common shares. For example, these stockholders could cause us to make acquisitions that increase the amount of our indebtedness or outstanding shares of common stock, sell revenue-generating assets or inhibit change of control transactions that benefit other stockholders. They may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as these stockholders continue to own a substantial number of shares of our common stock, they will significantly influence all our corporate decisions and together with other stockholders may be able to effect or inhibit changes in control of our company.

Additionally, the actual sale, communication of an intention to sell or perceptions that any of the above mentioned stockholders may sell any significant amount of our common stock could negatively impact the market value of our common stock.

Provisions of our certificate of incorporation and Delaware law could inhibit others from acquiring us, prevent a change of control, and may prevent efforts by our stockholders to change our management.

Certain provisions of our certificate of incorporation and by-laws may inhibit a change of control that our board of directors does not approve or changes in the composition of our board of directors, which could result in the entrenchment of current management. These provisions include:

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advance notice requirements for stockholder proposals and director nominations;

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a staggered board of directors;

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limitations on the ability of stockholders to remove directors other than for cause;

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limitations on the ability of stockholders to own and/or exercise voting power over 20% of our common stock;

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limitations on the ability of stockholders to amend, alter or repeal our by-laws;

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the inability of stockholders to act by written consent;

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the authority of the board of directors to adopt a stockholder rights plan;

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the authority of the board of directors to issue, without stockholder approval, preferred stock with any terms that the board of directors determines and additional shares of our common stock; and

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limitations on the ability of certain stockholders to enter into certain business combinations with us, as provided under Section 203 of the Delaware General Corporation Law.

These provisions of our certificate of incorporation and by-laws may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders. See “Description of capital stock” for more information.

We may require additional capital in the future, and this additional capital may not be available on acceptable terms or at all.

We may need to raise additional funds in order to fund more rapid expansion (organically or through strategic acquisitions), to develop new or enhanced services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and the securities that we issue may have rights, preferences and privileges senior to those of our common stock. Additional financing may not be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to fund our expansion, take advantage of unanticipated acquisition opportunities, develop or enhance services or products or respond to competitive pressures. These inabilities could have a material adverse effect on our business, results of operations and financial condition.

Shares eligible for future sale may cause the market price of our common stock to drop significantly, even if our business is doing well.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market in the future or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Certain stockholders or entities controlled by them or their permitted transferees will,be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the Securities and Exchange Commission, or the SEC. Holders of restricted stock will also have the right to cause us to register the resale of shares of common stock beneficially owned by them.

Each of General Atlantic and Tiger agreed that, in respect of the shares each purchased in our initial public offering, neither of them would, without our prior written consent, transfer or dispose of directly or indirectly, any of its shares of our common stock or securities convertible into or exchangeable into or exercisable for our shares, for a period of 18 months following the closing of our initial public offering that closed in August 2007. These agreements expired on January 31, 2009 and, accordingly, there are no further contractual restrictions precluding General Atlantic and Tiger from selling the shares purchased in our initial public offering. If any of these stockholders, the affiliated entities controlled by them or their respective permitted transferees were to sell a large number of their shares, the market price of our common stock could decline significantly. In addition, the perception in the public markets that sales by them might occur could also adversely affect the market price of our common stock.

In the future, we may issue securities in connection with investments and acquisitions. The amount of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding common stock.

It is unlikely that we will declare any dividends on our capital stock.

We have not declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. Instead, we intend to retain earnings, if any, for future operations and expansion and debt repayments. In addition, the terms of certain of our credit agreements prohibit the payment of cash dividends on our capital stock. Any decision to declare and pay dividends in the future will be made at the discretion of the board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

Our stock repurchase program may not result in a positive return of capital to our stockholders.

In November 2008, we announced that our board of directors approved a share repurchase plan authorizing us to repurchase, from available capital, up to $20 million of our outstanding common stock from time to time through November 13, 2009. Our share repurchases may not return value to stockholders because the market price of our common stock may decline significantly below the levels at which we repurchased shares of stock. Our share repurchase plan is intended to deliver stockholder value over the long-term, but stock price fluctuations can reduce the plan’s effectiveness.

As part of our share repurchase plan, we may sell put options or engage in structured derivative transactions designed to reduce our cost of repurchasing stock. In the event of a significant and unexpected drop in our stock price, these arrangements may require us to repurchase shares at price levels that are significantly above the then-prevailing market prices of our stock. These overpayments may have an adverse effect on the effectiveness of our overall share repurchase plan and may reduce value for our stockholders.

Requirements associated with being a public company require significant company resources and management attention.

In connection with our initial public offering, we became subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other rules and regulations of the SEC and the Nasdaq Global Market. We are also subject to various other regulatory requirements, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting. If we have a material weakness or significant deficiency in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. As a result, our stockholders could lose confidence in our financial reporting, which could harm the trading price of our stock. In addition, in connection with our initial public offering in August 2007, we became subject to the rules of the Nasdaq Global Market. Our compliance with these rules and regulations have increased our legal and financial compliance costs and to make some activities more time-consuming and costly.

It may be difficult to enforce judgments against us in U.S. courts.

Although we are a Delaware corporation, our subsidiaries and most of our assets are located outside of the United States. Furthermore, most of our directors and officers and some experts named in this report reside outside the United States. As a result, you may not be able to enforce judgments against us or our directors or officers in U.S. courts judgments based on the civil liability provisions of U.S. federal securities laws. It is unclear if original actions of civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States. It is equally unclear if judgments entered by U.S. courts based on the civil liability provisions of U.S. federal securities laws are enforceable in courts outside the United States. Any enforcement action in a court outside the United States will be subject to compliance with procedural requirements under applicable local law, including the condition that the judgment does not violate the public policy of the applicable jurisdiction.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our principal administrative, marketing and product development facilities are located in our offices in Bogotá, Colombia; Buenos Aires, Argentina; Santana do Parnaíba and São Paulo, Brazil; Caracas, Venezuela; Mexico City, Mexico; Santiago, Chile and Zona America, Uruguay. Currently, all of our offices are occupied under lease agreements. Other than Chilean, Colombian, Uruguayan and Venezuelan office leases, the leases for the rest of our facilities do not provide for renewal options. After expiration of these leases, we can renegotiate the leases with our current landlords, or move to another location. The following table shows the location of our offices and centers, and the expiration date of the leases under which they operate.

City and						Approximate
Country		Facility		Address		Square Meters				Lease Term
Bogotá, Colombia		Colombia operation		Calle 93 B # 17-25 Ofc.406, Bogotá, Colombia			107			April 2009
Bogotá, Colombia		TuCarro Colombia operation		Calle 93 B # 17-25 Ofc.210 and 211, Bogotá, Colombia			132			April and October 2009
Buenos Aires, Argentina		Corporate headquarters, Argentina operation & Customer service center		Tronador 4890—floors 6th, 8th and 2nd, Buenos Aires, 1430—Argentina			2,282.5			March 2010, March 2010 and May 2011
Buenos Aires, Argentina		Customer service center		Av. Costanera Rafael Obligado y Geronimo Salguero, Buenos Aires, Argentina			1,740			January 2012
Caracas, Venezuela		Venezuela operation		Piso 7° Edificio Torre Country, Francisco de Miranda, Urbanización El Rosal, Municipio de Chacao, Estado de Miranda			436			April 2011
Lithia Springs, Georgia, U.S.A.		SAVVIS Data Center		375 Riverside Parkway Lithia Springs, Georgia 30122,			9.7			April 2009
Mexico City, Mexico		Mexico operation		Ibsen 43-101, Colonia Polanco, Miguel Hidalgo, Código Postal 11650, Mexico D.F. Mexico			147			December 2008 In process of renewal
Sterling, Virginia, U.S.A.		SAVVIS Data Center		45901 Nokes Blvd. Sterling, Virginia 20166			356			April 2009
San Luis, Argentina		Technology Development center		Av. Universitaria s/n, Ciudad de la Punta, San Luis, Argentina			207			no end date
Santana do Parnaíba, Brazil		Brazilian Customer service center		Rua Yojiro Takaoka, 4350 Cep 06541-038—Santana do Parnaíba, São Paulo, Brazil			1,032			October 2009 and March 2013
Santiago, Chile		Chile operation		Coronel Pereira 72, oficina 301, Las Condes, Santiago, Chile			131			April 2009
São Paulo, Brazil		Brazil operation		Rua Gomes de Carvalho, 1306 Vila Olimpia, Cep 04547-005—São Paulo, Brazil			598			November 2009
Zona America, Uruguay		Uruguay Staff		Ruta 8, km 17.5 Edificio 200, local 108 Zona America, Uruguay			37			December 2009

All of our properties are leased. We do not own any properties. From time to time we consider various alternatives related to our long-term facility needs. While we believe our existing facilities are adequate to meet our immediate needs, it may become necessary to lease or acquire additional or alternative space to accommodate any future growth.

On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate trust for the construction of an office building located in the City of Buenos Aires, where we plan to move our headquarters and Argentine offices once construction is complete. See “ITEM 7. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Recent Acquisitions” for further information regarding this investment.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in disputes that arise in the ordinary course of our business. The number and significance of these disputes is increasing as our business expands and our company grows. Any claims against us, whether meritorious or not, may be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources and require expensive implementations of changes to our business methods to respond to these claims. See “Item 1A—Risk Factors” for additional discussion of the litigation and regulatory risks facing our company.

As of December 31, 2008, our total reserves for proceeding-related contingencies were approximately $0.9 million for 313 legal actions against us where we have determined that a loss is probable. We do not reserve for losses we determine to be possible or remote.

As of December 31, 2008, there were 281 lawsuits pending against our Brazilian subsidiary in the Brazilian ordinary courts. In addition, as of December 31, 2008, there were more than 1,940 lawsuits pending against our Brazilian subsidiary in the Brazilian consumer courts, where a lawyer is not required to file or pursue a claim. In most of these cases, the plaintiffs asserted that we were responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on our website, when using MercadoPago, or when we invoiced them. We believe we have meritorious defenses to these claims and intend to continue defending them.

We do not believe that any single pending lawsuit or administrative proceeding, if adversely decided, would have a material adverse effect on our financial condition results of operations and cash flows. Set forth below is a description of the legal proceedings that we have determined to be material to our business. We have excluded ordinary routine legal proceedings incidental to our business. In each of these proceedings we also believe we have meritorious defenses, and intend to continue defending these actions. We have established a reserve for these proceedings.

Litigation

On March 28, 2003, Qix Skateboards Indústria e Comercio Ltda., or Qix, sued MercadoLivre.com Atividades de Internet Ltda., our Brazilian subsidiary, in the 3rd Civil Court, County of Novo Hamburgo, State of Rio Grande do Sul, Brazil. Qix alleged that our Brazilian subsidiary was infringing Qix’s trademarks as a result of users selling allegedly counterfeit Qix shoes through the Brazilian page of our website, based on Brazilian Industrial Property Law (Law 9,279/96). Qix sought an order enjoining the sale of Qix-branded shoes on the MercadoLibre marketplace with a $50,000 daily non-compliance penalty. On April 25, 2003 we were summoned of an injunction granted to prohibit the offer of Qix products on our platform, but the penalty was established at $500. On May 5, 2003 we appealed the decision, but the injunction was not lifted. To date, we have not received the summons for the original action because we filed an appeal challenging the jurisdiction of the court, which appeal is still pending.

On November 5, 2003, Editora COC Empreendimentos Culturais Ltda., or Editora COC, sued our Brazilian subsidiary in the 3rd Civil Court of the County of Bauru, State of São Paulo, Brazil. Editora COC alleged that our Brazilian subsidiary and an identified user were both infringing Editora COC’s trademarks as a result of our users selling allegedly pirate copies of Editora’s COC CD-ROMs through the Brazilian page of our website, based on Brazilian Industrial Property Law (Law 9,279/96) and the Brazilian Copyright Law (Law 9,610/98). Editora COC sought an order for the search and seizure of products held by the user and enjoining the sale of Editora COC-branded products on our platform. An injunction was granted to prohibit the offer of Editora COC’s products on our platform. On September 8, 2005, the court ruled against us and held that we had to pay $3,000 and our co-defendant had to pay $900 in moral damages, plus an amount of material damages to be defined at judgment execution, plus attorneys’ fees in the amount of 10% of the total damages paid by each defendant. On January 13, 2006 we appealed the ruling to the relevant court of appeals, which appeal is still pending.

On March 17, 2006, Vintage Denim Ltda., or Vintage, sued our Brazilian subsidiaries MercadoLivre.com Atividades de Internet Ltda. and eBazar.com.br Ltda. in the 29th Civil Court of the County of São Paulo, State of São Paulo, Brazil. Vintage requested a preliminary injunction alleging that these subsidiaries were infringing Diesel trademarks and their right of exclusive distribution as a result of sellers listing allegedly counterfeit and original imported Diesel branded clothing through the Brazilian page of our website, based on Brazilian Industrial Property Law (Law 9,279/96). Vintage sought an order enjoining the sale of Diesel-branded clothing on our platform. A preliminary injunction was granted on April 11, 2006 to prohibit the offer of Diesel-branded products, and a fine for non-compliance was imposed in the approximate amount of $5,300 per defendant per day of non-compliance. We appealed the decision, but the preliminary injunction was not lifted. On August 16, 2007 we presented another appeal to the Superior Court of Justice, in Brasilia. Vintage filed an action requesting a permanent injunction on May 12, 2006, alleging the same facts as alleged in the preliminary injunction request. In September of 2006, a fine of $157,000 was imposed on our Brazilian subsidiaries due to the alleged non-compliance of the preliminary injunction. We filed an appeal to the fine and requested its suspension pending a final adjudication on the merits. In October of 2006, the fine was suspended and on January 23, 2007, the fine was declared null and void. However, because our appeal of the preliminary injunction failed, in March of 2007, Vintage presented new petitions alleging non-compliance of the preliminary injunction granted to Vintage and requested a fine of approximately $3.3 million against us, which represents approximately $5,300 per defendant per day of alleged non-compliance since April 13, 2006. On July 4, 2007, the judge ordered the payment of the fine mandated in the preliminary injunction, without specifying the amount. When we are officially notified of the amount of the fine, we will present a new appeal against the application of the fine. On July 18, 2007 the judge set a conciliatory hearing for August 1, 2007. We attended the hearing but could not reach an agreement. On September 14, 2007, the judge decided that (i) our Brazilian subsidiaries were not responsible for alleged infringement of intellectual property rights by its users; and that (ii) the plaintiffs did not prove the alleged infringement of its intellectual property rights. The decision maintained the injunction until such ruling is non-appealable. We presented a request that the injunction should be revoked, but it was rejected. Plaintiff presented appeal against the decision on the September 14, 2007 ruling, which appeal was published on December 11, 2007. On January 8, 2008, we presented an appeal to the Court of the State of São Paulo against the decision that maintained the injunction, and, on January 14, 2008, we presented a reply to the appeal filed by the plaintiff. On June 30, 2008, our appeal against the decision that maintained the injunction was rejected and we presented another appeal to the Superior Court of Justice in Brasilia on July 7, 2008. This appeal was denied on January 23, 2009. We presented another appeal to that decision on February 2, 2009.

On April 6, 2006, Fallms Distribuiăo de Fitas Ltda., or Fallms, and 100% Nacional Distribuidora de Fitas Ltda., or 100% Nacional, sued our Brazilian subsidiary in the Second Civil Court of Santo Amaro, County of São Paulo, State of São Paulo, Brazil. Fallms and 100% Nacional alleged that our Brazilian subsidiary was infringing their intellectual property rights as a result of users selling unauthorized copies of their copyrighted movies through the Brazilian page of our website and by using their trademark “Brasileirinhas” on such copies. Fallms and 100% Nacional sought an order enjoining the sale of Fallms, 100% Nacional and “Brasileirinhas” branded movies on our platform. An injunction was granted to prohibit the offer of Fallms, 100% Nacional and “Brasileirinhas” branded movies. We were summoned in March of 2007 and presented our defense on March 14, 2007. In June of 2007, Fallms filed a petition to increase the fine imposed in the preliminary injunction, from approximately $200, to approximately $530 per day of noncompliance, based on alleged non-compliance by our Brazilian subsidiary. On July 2, 2007, we presented a petition requesting the judge to revoke the preliminary injunction. On July 25, 2007, the judge revoked the preliminary injunction. On the same date, the judge decided that (i) our Brazilian subsidiary was not responsible for alleged infringement of intellectual property rights by its users; and that (ii) the plaintiffs did not prove that (a) they own the trademark “Brasileirinhas” and copyrights of “Brasileirinhas” branded movies and (b) the alleged infringement of intellectual property rights resulted in an effective copyright violation. The plaintiffs presented a request asking for clarification of the decision, but it was rejected. On November 6, 2007, plaintiffs appealed the July 25, 2007 decision that dismissed the case, and we presented our reply to that appeal on February 1, 2008.

On March 7, 2007, Xuxa Promoções e Produções Artísticas Ltda., or Xuxa, sued our Brazilian subsidiary in the Court of Barra da Tijuca, Rio de Janeiro, State of Rio de Janeiro, Brazil. Xuxa, a popular television personality in Brazil, alleged that counterfeit copies of one of her CDs and of a movie with her participation as an actress (for which she owns the copyright and distribution rights) are being sold on our platform, and as such our Brazilian subsidiary is infringing her intellectual and property rights. Xuxa seeks an injunction, the establishment of preventive measures, fines, and compensatory and statutory damages. An injunction ordering the removal of any offers of copies of this CD and movie was granted to Xuxa. We appealed the injunction on July 2, 2007 and presented our defense on July 6, 2007. On December 17, 2007, both parties filed a joint petition requesting suspension of the process for 60 days until March 10, 2008, due to negotiation of a settlement of the case. On March 10, 2008, both parties presented a joint petition requesting the extension of the suspension term for 30 more days, however, did not reach an agreement to settle the case. Our appeal against the injunction was rejected on July 14, 2008 and we presented another appeal against that decision to the same court on July 18, 2008.

On June 11, 2007, Praetorium Instituto de Ensino, Pesquisas e Atividades de Extensăo e Direito Ltda., or Praetorium, sued our Brazilian subsidiary in the Fourth Civil Court of the County of Belo Horizonte, State of Minas Gerais, Brazil. Praetorium alleged that our Brazilian subsidiary was infringing Praetorium’s copyrights as a result of our users selling allegedly counterfeit copies of Praetorium’s courses through the Brazilian page of our website. Praetorium seeks an injunction, fines, and compensatory and statutory damages. An injunction ordering the removal of any offers containing the name of Praetorium was granted to Praetorium on July 11, 2007 giving us 48 hours to comply. In addition to the preliminary injunction, a fine of approximately $5,300 per day of noncompliance was imposed up to a maximum of approximately $131,000 and a fine of approximately $530 was also imposed for each new product posted after July 13, 2007 containing the name of Praetorium and listed in the Brazilian page of our website. On August 3, 2007, we appealed the preliminary injunction to the State Court of Minas Gerais and presented our defense on August 8, 2007. On November 20, 2007, the State Court of Minas Gerais rejected our request that the injunction should be suspended until judgment of the appeal. Notwithstanding, the appeal against the decision that granted the preliminary injunction is still pending.

On August 23, 2007, Serasa S.A., or Serasa, sued our Brazilian subsidiary in the Sixth Civil Court of Santo Amaro, City of São Paulo, State of São Paulo, Brazil. Serasa, a company which provides credit-related analysis, information services and data bank and payment habits related to individuals and corporations, alleged that our Brazilian subsidiary should be responsible for the sale by its users of allegedly unlawful content and unfair uses of its services and Serasa’s trade name and trademarks. Serasa seeks an injunction, fines, and compensatory damages. On November 5, 2007 a preliminary injunction was granted to Serasa, ordering our Brazilian subsidiary (a) to remove any content offering: (i) consultation of Serasa’s database; and (ii) passwords, texts or any material that promises to consult, remove or teach how to remove someone name from Serasa’s database; (b) the prohibition to allow in its website any content similar to the aforementioned; and (c) to provide certain personal data of certain users who have offered such products. In addition to the preliminary injunction, a fine of approximately $5,500 per day of noncompliance was imposed. On December 17, 2007, our Brazilian subsidiary presented the information requested. We appealed the preliminary injunction to the State Court of São Paulo and presented our defense on January 7, 2008. Serasa replied to our appeal on January 30, 2008. On March 26, 2008, we were summoned with a petition presented by Serasa alleging non-compliance with the injunction. We presented our response on March 31, 2008, arguing that we are in full compliance with the injunction. On August 26, 2008 the State Court of São Paulo lifted the prohibition to allow in the Brazilian website any content related to Serasa as established in the injunction but it was not appealed by the plaintiff. The judge set a conciliatory hearing for March 13, 2009.

On November 23, 2007 Botelho Indústria e Distribuição Cinematográfica Ltda., or Botelho, sued our Brazilian subsidiary in the Third Civil Court of the City of Rio de Janeiro, State of Rio de Janeiro, Brazil. Botelho alleged that our Brazilian subsidiary was infringing its intellectual property rights as a result of users selling unauthorized copies of Botelho’s courses through the Brazilian website. Botelho seeks an injunction, fines, and compensatory and statutory damages, which was not yet analyzed by the judge. On February 25, 2008 we presented arguments to give the judge support and background to analyze the requested injunction. We presented our defense on March 5, 2008.

On October 25, 2007, Iglesia Mesianica Mundial Sekai Kyusei Kio en la Argentina, or Iglesia Mesianica, filed suit against our Argentine subsidiary, MercadoLibre S.A., in the Thirteenth Civil Court of the City of Buenos Aires, Argentina. The complaint was officially notified on April 17, 2008. Iglesia Mesianica alleged in the complaint that our Argentine subsidiary should be held liable as a result of our users selling books that allegedly plagiarized certain Iglesia Mesianica’s books through the Argentine page of our website. Iglesia Mesianica seeks monetary damages in the amount of approximately $95,000. We presented our defense on May 9, 2008.

On February 29, 2008, Mr. Eduardo Paoletti presented a claim against our Brazilian subsidiary and Banco do Brasil S.A. and Banco Nossa Caixa S.A., in the Forty Second Civil Court of the Central Court of the City of São Paulo. Plaintiff alleges that his personal information was used by third parties to (i) register in our Brazilian website and (ii) open bank accounts in the aforementioned banks in order to commit fraud against users of our Brazilian website. Plaintiff alleges that our Brazilian shall be held joint and severally responsible with the other defendants for damages. Mr. Paoletti seeks compensatory and statutory damages estimated for approximately $1.8 million. We were summoned on June 19, 2008 and presented our defense on July 28, 2008.

On July 25, 2008, Nike International Ltd. or Nike requested a preliminary injunction against our Argentine subsidiary in the First Civil and Commercial Federal Court, Argentina. We were officially notified on August 14, 2008. Nike requested the injunction alleging that this subsidiary was infringing Nike trademarks as a result of sellers listing allegedly counterfeit Nike branded products through the Argentine page of our website. A preliminary injunction was granted on August 11, 2008 to suspend the offer of Nike-branded products until sellers could be properly identified. We appealed the decision on August 22, 2008.

State of São Paulo Fraud Claim

On June 12, 2007, a state prosecutor of the State of São Paulo, Brazil presented a claim against our Brazilian subsidiary. The state prosecutor alleges that our Brazilian subsidiary should be held liable for any fraud committed by sellers on the Brazilian version of our website, or responsible for damages suffered by buyers when purchasing an item on the Brazilian version of the MercadoLibre website. We were summoned on December 12, 2007 and presented our defense on January 4, 2008.

State of Minas Gerais Fraud Claim

On October 5, 2007, a state prosecutor of the State of Minas Gerais, city of Uberlandia, Brazil presented a claim against our Brazilian subsidiary. The state prosecutor alleges that our Brazilian subsidiary should be held liable for any fraud committed by sellers on the Brazilian version of our website, or responsible for damages suffered by buyers when purchasing an item on the Brazilian version of the MercadoLibre website. We were summoned on June 30, 2008 and presented our defense on July 25, 2008, which was replied on November 14, 2008.

City of São Paulo Tax Claim

On September 13, 2007, we paid to tax authorities in São Paulo, Brazil approximately $1.1 million, consisting of $1.0 million in accrued taxes and $0.1 million in fines, related to our Brazilian subsidiary’s activities in São Paulo for the period 2002 through 2004. We had reserved approximately $1.1 million against these taxes as of December 31, 2006 so no additional provision was recorded for the payment. São Paulo tax authorities have also asserted taxes and fines against us relating to the period from 2005 to 2007 in an approximate additional amount of $5.9 million. In January 2005, we had moved our operations to Santana de Parnaíba City, Brazil and began paying taxes to that jurisdiction, therefore we believe we have strong defenses to the claims of the São Paulo authorities with respect to this period. We believe the risk of loss for this period is remote, and as a result, have not reserved provisions for this claim. On August 31, 2007, we presented administrative defenses against the authorities’ claim; however, their response is still pending.

Brazilian National Public Treasury Tax Claim

On March 17, 2008, our Brazilian subsidiary received a tax claim for approximately $198,000 presented by the National Public Treasury of Brazil. The notice claims non-payment of income taxes that we believe we paid, and accordingly, we consider the risk of loss for this claim to be remote. On March 28, 2008, we presented our defense requesting a declaration that no such taxes are due.

Trademark Claim

We filed our first three applications to register the name “MercadoLivre” in Brazil with the Instituto Nacional da Propriedade Industrial (the National Institute of Industrial Property, or INPI) on October 7, 1999. Editora Livre Mercado Ltda., a publishing company, challenged these three applications based on their trademark “Livre Mercado,” a trade magazine. These challenges are currently pending with INPI. However, we cannot assure you that we will succeed in obtaining these trademarks or in our challenges to existing or future applications by other parties. If we are not successful, we could face claims by any future trademark owners. Any past or future claims relating to these issues, whether meritorious or not, could cause us to enter into costly royalty and/or licensing agreements. We may also have to modify our brand name in Brazil (or other jurisdictions) if any successful demands against us are too expensive. Any of these circumstances could adversely affect our business, results of operations and financial condition.

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We have been notified of several potential third-party claims for intellectual property infringement through our website. These claims, whether meritorious or not, are time consuming, can be costly to resolve, could cause service upgrade delays, and could require expensive implementations of changes to our business methods to respond to these claims. See “Item 1A Risk factors—Risks related to our business—We could potentially face legal and financial liability for the sale of items that infringe on the intellectual property rights of others and for information disseminated on the MercadoLibre marketplace”.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2008.

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of and Dividends on the Registrant’s Common Equity

Shares of our common stock, par value $0.001 per share, or our common stock, trade on the Nasdaq Global Market (“NASDAQ”) under the symbol “MELI.” As of December 31, 2008, the closing price of our common stock was $16.41 per share. As of February 17, 2009, we had approximately 40 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name. The following table sets forth, for the indicated periods, the high and low closing sale prices for our common stock on the Nasdaq Global Market and the cash distributions declared per share:

										Cash
										dividends
		Closing stock price								declared
		High				Low				per share
2007:
3rd quarter		$	41.06			$	18.00				—
4th quarter		$	78.81			$	35.18				—
2008:
1st quarter		$	70.01			$	31.72				—
2nd quarter		$	56.05			$	37.11				—
3rd quarter		$	36.98			$	20.10				—
4th quarter		$	21.58			$	8.28				—

Recent Sales of Unregistered Securities

There were no sales of unregistered securities by us during the three-month period ending December 31, 2008.

Use of Proceeds from IPO

Our registration statement on Form S-1, as amended (Registration No. 333-142880) (the “Registration Statement”), with respect to our initial public offering (the “Offering”) of common stock, par value $0.001 per share, was declared effective on August 9, 2007. We sold a total of 3,000,000 shares of common stock in the Offering and the selling shareholders sold a total of 15,488,762 shares of common stock in the Offering. The net proceeds to us of the Offering were approximately $49.6 million. These proceeds have been used to repay a $9.5 million outstanding loan (including interest) with eBay Inc., $19.4 million for our acquisition of CMG, and the remainder for our acquisition of the DeRemate Operations and general corporate purposes. See our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2007 for a further discussion of our use of proceeds from the Offering.

Dividend Policy

We have never paid cash dividends on our stock and do not anticipate paying cash dividends in the foreseeable future.

Equity Compensation Plan Information

Information regarding securities authorized for issuance under the Company’s equity compensation plan as of December 31, 2008 is set forth in Item 12, “Security Ownership of Certain Beneficial Owners and Management.”

Performance Graph

The graph below shows the total stockholder return of an investment of $100 on August 10, 2007 (the first day of trading of our common stock on the Nasdaq Stock Exchange) through December 31, 2008 for (i) our common stock (ii) The Nasdaq Composite Index (iii) The S&P 500 Index and (iv) the Dow Jones Ecommerce Index. The Dow Jones Ecommerce Index is a weighted index of stocks of companies in the e-commerce industry. Stock price performance show in the graph below is not indicative of future stock price performance.

We cannot assure you that our share performance will continue into the future with the same or similar trends depicted in the graph above. We will not make or endorse any predictions as to our future stock performance.

The foregoing graph and chart shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those acts.

Issuer Purchases of Equity Securities

The following table describes common stock repurchases made by the Company during the fourth quarter of 2008:

Total Number of

Approximate

Shares

Dollar Value of

Total

Purchased as

Shares that May

Number of

Average

Part of Publicly

Yet Be

Shares

Price Paid

Announced

Purchased

Period

Purchased

Per Share

Plans(1)

Under the Plans

November 1, 2008 – November 30, 2008

249,700

$

10.38

249,700

$         17.4 million

(2)

December 1, 2008 – December 31, 2008

—

n/a

—

$         17.4 million

(2)

ITEM 6. SELECTED FINANCIAL DATA

The following summary financial data is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this report.

		Year ended December 31,
(in millions)		2004				2005				2006				2007				2008
Statement of income data:
Net revenues		$	12.7			$	28.2			$	52.1			$	85.1			$	137.0
Cost of net revenues			(2.5	)			(6.1	)			(12.1	)			(18.3	)			(27.5	)
Gross profit			10.2				22.1				40				66.9				109.5
Operating expenses:
Product and technology development			(1.3	)			(2.2	)			(3.1	)			(4.4	)			(7.3	)
Sales and marketing			(9.1	)			(14.7	)			(23.4	)			(27.6	)			(40.0	)
General and administrative			(3.1	)			(4.4	)			(8.2	)			(13.2	)			(22.8	)
Compensation Cost related to CMG acquisition			—				—				—				—				(1.9	)
Total operating expenses			(13.5	)			(21.3	)			(34.6	)			(45.2	)			(72.0	)
Income (loss) from operations			(3.3	)			0.8				5.4				21.7				37.5
Other income (expenses):
Interest income and other financial gains			1.2				0.4				0.5				1.6				1.8
Interest expense and other financial charges			(0.3	)			(0.5	)			(1.7	)			(2.7	)			(8.4	)
Foreign currency (loss) gain			0.2				0.3				(0.4	)			(3.1	)			(1.5	)
Other expenses, net			—				(0.3	)			(1.5	)			(3.0	)			0.1
Net income (loss) before income and asset tax and cumulative effect of change in accounting principle			(2.2	)			0.7				2.3				14.4				29.4
Income and asset tax (expense) benefit			—				1.4				(1.2	)			(4.7	)			(10.6	)
Net income (loss) before cumulative effect of change in accounting principle and gain from discontinued operations			(2.2	)			2.0				1.1				9.7				18.8
Cumulative effect of change in accounting principle			—				0.3				—				—				—
Net income (loss)			(2.2	)			2.4				1.1				9.7				18.8
Accretion of preferred stock			(0.5	)			(0.5	)			(0.5	)			(0.3	)			—
Net income (loss) available to common stockholders		$	(2.7	)		$	1.9			$	0.6			$	9.4			$	18.8

		At December 31,
(in millions)		2004				2005				2006				2007				2008
Balance sheet data:
Total assets		$	24.1			$	44.4			$	53.8			$	134.5			$	156.7
Long term debt			—				12.0				9.0				—				3.1
Total liabilities			5.1				23.2				30.5				42.8				63.3
Net assets			19.0				21.2				23.3				91.7				93.4
Mandatorily redeemable convertible preferred stock			63.1				63.6				64.1				—				—
Common stock			0.1				0.1				0.1				0.1				0.1
Stockholders’ equity (deficit)		$	(44.1	)		$	(42.4	)		$	(40.7	)			91.7				93.4

		Year Ended December 31,
		2004				2005				2006				2007				2008
Earnings (loss) per share data:
Basic net income (loss) available to common stockholders per common share		$	(0.21	)		$	0.05			$	0.01			$	0.22			$	0.43
Diluted net income per common share		$	—			$	0.05			$	—			$	0.22			$	0.42
Weighted average shares (2):
Basic			12,739,980				13,065,496				13,149,139				25,149,405	(1)			44,239,443
Diluted			—				13,671,359				—				25,478,336				44,348,950

		Year ended December 31,
(in millions)		2004				2005				2006				2007				2008
Other data:
Number of confirmed registered users at end of period (1)			6.5				12.2				18.2				24.9				33.7
Number of confirmed new registered users during period (2)			2.5				5.7				6.0				6.7				8.8
Gross merchandise volume (3)		$	299.3			$	607.7			$	1,075.1			$	1,511.5			$	2,078.9
Number of successful items sold (4)			5.1				8.4				13.8				17.5				21.1
Total payment volume (5)		$	8.9			$	38.5			$	89.0			$	158.0			$	255.9
Total payment transactions (6)			—				—				—				1.3				1.9
Capital expenditures		$	2.1			$	2.0			$	2.4			$	3.1			$	61.6
Depreciation and amortization		$	1.1			$	1.6			$	2.0			$	2.3			$	3.3

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our “Selected Financial Data” and our audited consolidated financial statements and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this report.

The discussion and analysis of our financial condition and results of operations has been organized to present the following:

	•		a brief overview of our company;
	•		a review of our financial presentation and accounting policies, including our critical accounting policies;
	•		a discussion of our principal trends and results of operations for the years ended December 31, 2006, 2007, and 2008;
	•		a discussion of the principal factors that influence our results of operations, financial condition and liquidity;
	•		a discussion of our liquidity and capital resources, a discussion of our capital expenditures and a description of our contractual obligations; and
	•		a discussion of the market risks that we face.

Overview

We host the largest online commerce platform in Latin America focused on enabling e-commerce and its related services. Our services are designed to provide our users with mechanisms to buy, sell, pay for and collect on e-commerce transactions effectively and efficiently. With a population of over 550 million people and a region with one of the fastest-growing Internet penetration rates, we provide buyers and sellers with a robust online commerce environment that fosters the development of a large and growing e-commerce community. We offer technological and commercial solutions that seek to address the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.

We were incorporated in Delaware in October 1999 and introduced web sites in Argentina, Brazil, Mexico, Colombia, Chile, Uruguay and Venezuela by April 2000. In order to build a critical mass of customers, we initially offered our services free of charge in all of these markets.

In May 2000, we obtained significant financing and reached gross merchandise volume of $14.3 million. In 2001, we launched a new version of our site and brand and launched our operations in Ecuador. Our gross merchandise volume for the year ending December 31, 2001 grew to $21.3 million. Our gross merchandise volume reached $55.4 million for 2002, $164.3 million for 2003 and $299.3 million for 2004. In November of 2005, we acquired certain operations of DeRemate.com, Inc. and our gross merchandise volume reached $607.7 million. During 2006, we launched sites in Costa Rica, the Dominican Republic and Panama, and our gross merchandise volume reached $1,075.1 million. Our gross merchandise volume was $1,511.5 million for 2007.

In August 2007, we successfully completed our initial public offering through which 16,077,185 shares of our common stock were sold at a initial public offering price of $18.00 per share less an underwriting discount of 4.5%. Out of that total, 2,608,696 shares of common stock were sold by us and 13,468,489 were sold by selling shareholders. We, along with certain shareholders, granted to the underwriters an option, exercisable for 30 days from August 9, 2007, to purchase up to 2,411,577 additional shares at the public offering price less the underwriting discount. The option was exercised in full, and of that total, an additional 391,304 shares were sold by us and 2,020,273 were sold by the selling shareholders.

In January 2008, we acquired 100% of the issued and outstanding shares of capital stock of Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its subsidiaries operate an online classified advertisements platform primarily dedicated to the sale of automobiles at www.tucarro.com in Venezuela, Colombia and Puerto Rico and real estate at www.tuinmueble.com in Venezuela, Colombia, Panama, the United States, Costa Rica and the Canary Islands. The purchase price for the shares of CMG and its subsidiaries was $19 million, subject to certain escrows and working capital adjustment. On January 22, 2009, we released the escrow balance of $1.1 million to the Sellers.

In September 2008, we completed the acquisition of DeRemate.com de Argentina S.A., DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de C.V. and Compañía de Negocios Interactiva de Colombia E.U. for an aggregate purchase price of $ 37.6 million. We also purchased of certain URLs, domains, trademarks, databases and intellectual property rights related to those businesses for $ 2.4 million. On February 12, 2009, the purchase price allocation period finished and the Company agreed with the Sellers to a working capital adjustment of $480,912 to be paid by the Sellers to the Company.

We offer our users two principal services:

	•		The MercadoLibre marketplace: The MercadoLibre marketplace, which we sometimes refer to as our Marketplace business, is a fully-automated, topically-arranged and user-friendly online commerce service. This service permits both businesses and individuals to list items and conduct their sales and purchases online in either a fixed-price or auction-based format. Additionally, through online classified advertisements, our registered users can list and purchase motor vehicles, vessels, aircraft, real estate and services. Any Internet user can browse through the various products and services that are listed on our website and register with MercadoLibre to list, bid for and purchase items and services.
	•		The MercadoPago online payments solution: To complement the MercadoLibre marketplace, we developed MercadoPago, an integrated online payments solution, which we sometimes refer to as our Payments business, an integrated online payments solution. MercadoPago is designed to facilitate transactions on the MercadoLibre marketplace and off our marketplace in certain markets, by providing a mechanism that allows our users to securely, easily and promptly send and receive payments online

We operate in six reporting segments, five of which related to our Marketplace business and the remainder which relates to our Payment business. Within our Marketplace business, we separately report our operations in each of Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru and Uruguay). The operations of our Payments business, which is available in each of Brazil, Argentina, Mexico and Chile, Colombia, and Venezuela, are reported in one segment.

During 2008, our gross merchandise volume reached $ 2,078.9 million and visitors to our web site were able to browse an average of over 2.5 million listings on any given day, organized by country, in over 2,000 different product categories. We believe that we have achieved a critical mass of active buyers, sellers and product listings in most of the countries where we operate and that our business can be readily scaled to handle increases in our user base and transaction volume. At December 31, 2008, we had 33.7 million confirmed registered MercadoLibre users. For 2008, we had 2.4 million unique sellers, 6.5 million unique buyers and 21.1 million successful items sold.

For 2008, our net revenues were $137.0 million. Of those $137.0 million in revenues approximately 80.0% were attributable to MercadoLibre marketplace listing, optional feature, final value and advertisement fees. The remaining 20.0% of revenues were attributable to MercadoPago fees. Although we discuss long-term trends in our business, it is our policy to not provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. We, therefore, encourage potential investors to consider this strategy before making an investment in our common stock. A long-term focus may make it more difficult for industry analysts and the market to evaluate the value of our company, which could reduce the value of our common stock or permit competitors with short term tactics to grow stronger than us.

Description of line items

Net revenues

We recognize revenues in each of our reporting segments. The MercadoLibre marketplace segments include Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru and Uruguay). The MercadoPago segment includes our regional payments platform consisting of our MercadoPago business.

We generate revenues from the MercadoLibre marketplace segments from:

•

listing fees;

•

optional feature fees;

•

final value fees; and

•

online advertising fees.

The MercadoLibre marketplace business generated 85.9% of our net revenues for 2006, 81.7% for 2007 and 80.0% for 2008. Of these revenues, during 2008, 46.1% were generated in Brazil, 16.7% in Argentina, 11.4% in Mexico, 20.1% in Venezuela and the remainder, or 5.7%, in Colombia, Chile, Peru, Ecuador, Uruguay, Panama, Costa Rica and the Dominican Republic.

The following table sets forth the percentage of consolidated net revenues by country from our MercadoLibre marketplace for each of 2006, 2007 and 2008:

		Year ended December 31,
(% of total MercadoLibre marketplace net revenues)		2006				2007				2008
Brazil			57.2	%			54.0	%			46.1	%
Argentina			15.7				16.3				16.7
Mexico			13.9				13.8				11.4
Venezuela			7.4				10.2				20.1
Other countries			5.8				5.7				5.7

Revenues generated by our MercadoPago business represented 14.1% our total net revenues for 2006, 18.3% for 2007 and 20.0% for 2008. These revenues were attributable to commissions charged to buyers and sellers for the use of MercadoPago. We generate revenues from our MercadoPago payments segment by charging users a commission and a financial charge when the user elects to pay in installments, which in both cases we recognize once the transaction is completed. For the transactions where we finance the extended payment terms internally rather than by discounting receivables, incurring financial debt or selling credit card coupons the financial charge is recognized over the life of the installment financing. During the year ended December 31, 2008, commission and installment-related financial charges averaged 6.6% and 4.2%, respectively, of the payment amounts made by the user through MercadoPago.

We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For 2006, 2007 and 2008, no single customer accounted for more than 10.0% of our net revenues in our MercadoLibre marketplace business or our MercadoPago payments business.

Our MercadoLibre marketplace is available in 12 countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay and Venezuela), and MercadoPago is available in six countries (Argentina, Brazil, Chile, Colombia, Mexico and Venezuela). The functional currency in each country’s operations is the local currency. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.

The following table sets forth the percentage of consolidated net revenues by country from both our MercadoLibre marketplace and MercadoPago businesses.

		Year ended December 31,
(% of total consolidated net revenues)		2006				2007				2008
Brazil			59.1	%			59.0	%			53.8	%
Argentina			15.1				14.8				14.5
Mexico			13.8				12.6				10.1
Venezuela			7.0				9.0				16.9
Other countries			5.0				4.6				4.7

Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as costs of net revenues. These taxes represented 5.6%, 5.9% and 6.0% of net revenues for 2006, for 2007 and 2008, respectively.

Cost of net revenues

Cost of net revenues primarily represents bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, certain taxes on revenues, compensation for customer support personnel, ISP connectivity charges, depreciation and amortization and hosting and site operations fees.

Product and technology development

Our product and technology development related expenses consist primarily of depreciation and amortization costs related to product and technology development, compensation for our engineering and web-development staff, telecommunications costs and payments to third-party suppliers who provide technology maintenance services to our company.

Sales and marketing

Our sales and marketing expenses consist primarily of marketing costs for our platforms through online and offline advertising, bad debt charges, the salaries of employees involved in these activities, public relations costs, marketing activities for our users and depreciation and amortization costs.

We carry out the vast majority of our marketing efforts on the Internet. In that context, we enter in agreements with portals, search engines, ad networks and other sites in order to attract Internet users to the MercadoLibre marketplace and convert them into confirmed registered users and active traders on our platform. Additionally, we invest a portion of our marketing budget on cable television advertising in order to improve our brand awareness and to complement our online efforts.

We also work intensively on attracting, developing and growing sellers through our supply efforts. We have dedicated professionals in most of our operations that work with sellers, through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform.

General and administrative

Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation for outside directors, long term retention plan compensation and expenses for legal, accounting and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. General and administrative expenses include the costs of the following areas of our company: general management, finance, administration, accounting, legal and human resources.

Compensation Cost related to acquisitions

As part of our acquisition of CMG which closed in the first quarter of 2008, we entered into a management escrow agreement to secure the obligations of the CMG shareholders that remained as managers. We accrued those compensation expenses as operating expenses, instead of considering them part of the purchase price, following EITF 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” (See note 6 to our audited consolidated financial statements included in this report).

Other income (expenses)

Other income (expenses) consists of interest expense (interest expense relating to the working capital requirements for our MercadoPago operations are recorded as interest expense and not as cost of net revenues) and other financial charges, interest income derived primarily from our short-term investments and cash equivalents, foreign currency gains or losses, the effect of changes in the fair value of derivative instruments and outstanding warrants, and other non-operating results.

Income and asset tax

We are subject to federal and state taxes in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes and asset taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change during the period in our deferred tax assets and liabilities.

The following table summarizes the composition of our income/asset taxes for the years ending December 31, 2006, 2007 and 2008.

		Year ended December 31,
(in millions)		2006				2007				2008
Current:
Federal		$	—			$	—			$	—
Foreign			1.9				5.0				8.1
			1.9				5.0				8.1
Deferred:
Federal			—				—				—
Foreign			(0.7	)			(0.1	)			1.6
			(0.7	)			(0.1	)			1.6
			1.2				4.9				9.8
Asset Tax:
Federal			—				—				—
Foreign			0.1				(0.2	)			0.8
			0.1				(0.2	)			0.8
Income / asset tax expense		$	1.2			$	4.7			$	10.6

Seasonality

The following table presents certain unaudited quarterly financial information for each of the twelve quarters set forth below:

		Quarter ended
		March 31,				June 30,				September 30,				December 31,
2008
Net Revenues			28,840,730				34,471,508				40,260,643				33,449,739
Gross profit			22,822,449				27,570,005				32,106,781				26,986,812
Net Income			2,067,677				2,947,095				5,875,792				7,921,097
Net Income per share-basic			0.05				0.07				0.13				0.18
Net Income per share-diluted			0.05				0.07				0.13				0.17
Weighted average shares
Basic			44,227,460				44,238,166				44,290,540				44,264,906
Diluted			44,368,011				44,369,317				44,379,682				44,369,635
2007
Net Revenues			16,459,337				18,973,288				22,800,130				26,893,586
Gross profit			12,971,998				14,973,366				17,918,082				20,989,955
Net Income			994,187				590,886				2,785,474				5,322,393
Net Income per share-basic			0.02				0.01				0.07				0.13
Net Income per share-diluted			0.02				0.01				0.07				0.13
Weighted average shares
Basic			13,375,482				13,575,158				27,538,652				41,226,563
Diluted			13,375,482				13,987,128				27,685,028				41,375,907
2006
Net Revenues			10,989,133				12,382,750				13,224,610				15,462,397
Gross profit			8,472,837				9,633,122				10,058,051				11,809,232
Net Income / (Loss)			110,342				(920,886	)			37,541				1,845,086
Net Income per share-basic			—				(0.08	)			(0.01	)			0.04
Net Income per share-diluted			(*	)			(*	)			(*	)			0.04
Weighted average shares
Basic			13,114,575				13,140,100				13,141,676				13,141,728
Diluted			13,114,575				13,140,100				13,141,676				13,141,728

Seasonal fluctuations in Internet usage and retail seasonality have affected, and are likely to continue to affect, our business. Typically, the fourth quarter of the year is the strongest in every country where we operate due to the significant increase in transactions before the Christmas season. However, the result of our operations in the fourth quarter of 2008 have been impacted by the global economic crisis and, for that reason, our 2008 fourth quarter revenues were lower when measured in U.S. dollars than the third quarter revenues, as a result of local currencies depreciating versus the U.S. dollar during the period.. At this time, we cannot accurately predict the impact of this global crisis on our operations for 2009 and beyond. Our slowest period is typically the first quarter of the year. The months of January, February and March normally correspond to summer vacation time in Argentina, Brazil, Chile, Peru and Uruguay. Additionally, the Easter holiday falls in March or April, and Brazil celebrates Carnival for one week in February or March. This is partially mitigated by the countries located in the northern hemisphere, such as Colombia, Mexico and Venezuela for which the slowest months are their summer months of July, August and September.

Critical accounting policies and estimates

The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our audit committee and board of directors. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and the notes thereto and other disclosures included in with this report.

Impairment of long-lived assets and goodwill

We review long-lived assets for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired on this basis, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Goodwill is reviewed at least annually for impairment. Impairment of goodwill is tested at the reporting unit level (considering each segment of the Company as a reporting unit) by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. Cash flow projections used are based on financial budgets approved by management. The growth rates applied do not exceed the long-term average growth rate for the business in which the reporting unit operates. The average discount rate used is 22.6% which reflects the Company’s real weighted average cost of capital. Key drivers in the analysis include Gross Merchandise Volume (“GMV”) which represents a measure of the total U.S. dollar amount of all transactions completed through the MercadoLibre marketplace, excluding motor vehicles, vessels, aircraft, real estate, and services and take rate defined as marketplace revenues as a percentage of gross merchandise volume. In addition, market share in the analysis include a business to e-commerce rate, which represents growth of e-commerce as a percentage of GDP, internet penetration rates as well as trends in the Company’s market share. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. No impairments were recognized during the reporting periods and, management’s assessment of each reporting unit value in use materially exceeds its carrying value.

We believe that the accounting estimate related to impairment of long lived assets and goodwill is a critical accounting estimate because it is highly susceptible to change from period to period because: (i) it requires management to make assumptions about future interest rates, sales and costs; and (ii) the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as our net income would be material. Our management’s assumptions about future sales and future costs require significant judgment.

Provision for doubtful accounts

We are exposed to losses due to uncollectible accounts and credits to sellers. Provisions for these items represent our estimate of future losses based on our historical experience. Our provision for doubtful accounts amounted to $4.6 million at December 31, 2006, $7.2 million at December 31, 2007 and $8.7 million at December 31, 2008. The provision for doubtful accounts is recorded as a charge to sales and marketing expenses.

The following table illustrates our bad debt charges as a percentage of net revenues for 2006, 2007 and 2008:

		Year ended December 31,
(in millions, except percentages)		2006				2007				2008
Net revenues		$	52.1			$	85.1			$	137.0
Bad debt charges			6.2				6.2				8.7
Bad debt charges as a percentage of net revenues			11.9	%			7.3	%			6.3	%

Historically, our actual losses have been consistent with our charges. However, future changes in trends could result in a material impact to future consolidated statements of income and cash flows.

We believe that the accounting estimate related to provision for doubtful accounts is a critical accounting estimate because it requires management to make assumptions about future collections and credit analysis. Our management’s assumptions about future collections requires significant judgment.

Legal Contingencies

In connection with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through charges to our consolidated statement of income. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based upon new information and future events.

From time to time, we are involved in disputes that arise in the ordinary course of business. We are currently involved in certain legal proceedings as discussed in “Business—Legal Proceedings,” and in Note 16 to our audited consolidated financial statements. We believe that we have meritorious defenses to the claims against us, and we will defend ourselves vigorously. However, even if successful, our defense could be costly and could divert management’s time. If the plaintiffs were to prevail on certain claims, we might be forced to pay damages or modify our business practices. Any of these results could materially harm our business and could have a material adverse impact on our financial position, results of operations or cash flows.

Income taxes

We are required to recognize a provision for income taxes based upon taxable income and temporary differences between the book and tax bases of our assets and liabilities for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable under currently enacted tax laws in each jurisdiction and an analysis of temporary differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences and the estimated tax benefit from our tax net operating losses are reported as deferred tax assets and liabilities in our consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that some portion or all of deferred tax asset will not be realized, we establish a valuation allowance. At December 31, 2008, we had a valuation allowance on certain foreign and domestic net operating losses based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our tax provision in our consolidated statement of income.

As of December 31, 2008, our deferred tax assets amounts to $ 16.1 million of which 30.1% correspond to our 2005 DeRemate.com acquisition, 21.7% correspond to our Brazilian operation, 11.4% correspond to our 2008 DeRemate.com acquisition, 11.2% correspond to our Venezuelan operation, 8.9% correspond to our holding company in the United States, 6.4% correspond to our Argentine operation, 5.9% correspond to our Mexican operation and 4.4% correspond to our operations in other countries. At December 31, 2008, our deferred tax assets are comprised mainly by loss carry forwards representing 67.0% of the total deferred tax assets. As of December 31, 2008, 43.1% of these loss carry forwards correspond to our 2005 DeRemate.com acquisition, 16.4% correspond to our 2008 DeRemate.com acquisition, 8.9% correspond to our holding company in the United States, 20.7% correspond to our Brazilian operation, 5.2% correspond to our Mexican operation, 4.6% correspond to our Chilean operation and 1.1% correspond to our operations in other countries. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that some portion or all of deferred tax asset will not be realized, we establish a valuation allowance. At December 31, 2008, our valuation allowance amounted to $ 11.7 million of which 41.6% correspond to our 2005 DeRemate.com acquisition, 15.8% correspond to our 2008 DeRemate.com acquisition, 19.1% correspond to our Brazilian operation, 12.2% correspond to our holding company in the United States and 11.3% correspond to our operations in other countries. Our valuation allowance is based on our assessment that it is more likely than not that the deferred tax asset will not be realized. The fluctuations in the valuation allowance will depend on the capacity of each country operation to generate taxable income or our execution of future tax planning strategies that allow us to use the aforementioned deferred tax assets. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our tax provision in our consolidated statement of income. Upon adoption of FAS 141 (R), any release related to the acquired operations of DeRemate valuation allowance will be allocated to net income.

As of December 31, 2007, our deferred tax assets amounts to $ 18.8 million of which 33.2% correspond to our DeRemate.com acquisition, 24.7% correspond to our Brazilian operation, 25.6% correspond to our holding company in the United States, 9.0% correspond to our Mexican operation, 3.8% correspond to our Argentine operation and 3.8% correspond to our operations in other countries. At December 31, 2007, our deferred tax assets are comprised mainly by loss carry forwards represented 85.2% of the total deferred tax assets. As of December 31, 2007, 37.6% of these loss carry forwards correspond to our DeRemate.com acquisition, 27.8% correspond to our holding company in the United States, 22.6% correspond to our Brazilian operation, 8.4% correspond to our Mexican operation and 3.6% correspond to our operations in other countries. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that some portion or all of deferred tax asset will not be realized, we establish a valuation allowance. At December 31, 2007, our valuation allowance amounted to $ 15.0 millions of which 41.5% correspond to our DeRemate.com acquisition, 19.6% correspond to our Brazilian operation, 31.8% correspond to our holding company in the United States and 7.0% correspond to our operations in other countries. The 2007 blended tax rate was reduced due to a reverse of the valuation allowance related to our Mexican operations for $2.0 millions. Our blended tax without including the reverse of the Mexican valuation allowance would have been 44.6%.

The following table sets forth the effective tax rates for 2006, 2007 and 2008:

		Year ended December 31,
(in millions, except percentages)		2006				2007				2008
Income and asset tax expense		$	(1.2	)		$	(4.7	)		$	(10.6	)
As a percentage of income before income and asset tax			(53.7	)%			(32.8	)%			(36.1	)%

Historically, these provisions have adequately provided for our actual income tax liabilities. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuations of our deferred tax assets or liabilities, or by changes or interpretations in tax laws, regulations or accounting principles.

Stock-based compensation

During 2007 and 2008, we granted our outside directors restricted shares of our common stock as part of their compensation, as described in the following table:

		Number of restricted
Grant date		shares
September 17, 2007			2,000
January 24, 2008			600
June 9, 2008			1,348

In accordance with SFAS 123(R) these restricted share awards are measured at the grant-date fair value of our shares as if these shares were vested and issued on the grant date. Based on the fair value of our shares at the grant date, total compensation cost for the 3,948 restricted shares awarded amounted to $149,470. For the periods ended December 31, 2008 and 2007, we recognized $105,561 and $15,966 of compensation expense related to these awards, respectively, which are included in operating expenses in the accompanying consolidated statements of income. Regarding the additional grants for fixed amounts of $30,000 and $40,000, in accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150) and SFAS 123(R), they are classified as liabilities in the accompanying consolidated balance sheet. For the periods ended December 31, 2008 and 2007, the Company recognized $115,566 and $16,283 of compensation expense related to these awards, respectively, which are included in operating expenses in the accompanying consolidated statement of income.

In addition, on August 8, 2008 the Board of Directors approved a four year employee retention program which will be payable 50% in cash and 50% in shares. The vesting schedule will be the following:

	•		Year One — Paid on or before March 31, 2009: 17% (8.5% in cash and 8.5% in common stock);
	•		Year Two — Paid on or before March 31, 2010: 22% (11% in cash and 11% in common stock);
	•		Year Three — Paid on or before March 31, 2011: 27% (13.5% in cash and 13.5% in common stock); and
	•		Year Four — Paid on or before March 31, 2012: 34% (17% in cash and 17% in common stock).

In addition, the Long Term Retention Plan (“LTRP”) has a performance condition which has been achieved at the date of these report and also requires the employee to remain in the Company at the payment date. The compensation cost is recognized in accordance with the graded-vesting attribution method and is accrued up to each payment date.

The total compensation cost of the LTRP amounts to approximately $2.1 million ($ 1.3 million related to cash compensaton and social securities expenses and $0.8 million related to shares compensation) considering that the shares granted were valued at the grant date fair value of the shares. As of December 31, 2008, the related accrued compensation expense was $0.8 million. The accrued compensation expense includes $0.3 million related to 21,591 shares granted under the LTRP.

During 2008, we granted 3,082 restricted shares to an employee in connection with his hiring. These restricted shares vest in four equal amounts over a four year period. The related compensation cost is recognized in accordance with the straight-line vesting attribution method. The total compensation cost of this contract amounts to approximately $0.1 million. For purposes of determining compensation cost, the shares granted were valued at the grant date fair value of the shares.

On January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment” (SFAS 123(R)), which requires the measurement and recognition of compensation expense for all share-based payment awards based on estimated fair values. No stock option equity grants were made during 2007 and 2008.

The following table summarizes information with respect to our stock option equity grants during 2006.

										Fair				Estimated
										value of				fair value
Grant		Options				Exercise				common				of stock
date		granted				price				stock				options
January 1, 2006			17,000			$	1.50			$	2.93			$	2.04
July 1, 2006			2,000			$	6.00			$	8.34			$	5.03
October 1, 2006			4,500			$	6.00			$	9.64			$	6.21

We calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The Black-Scholes model requires the input of highly subjective assumptions, including the fair value of our common stock, volatility, risk-free interest rate and dividend yield. Since we have no history of volatility, the expected volatility is based on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is based on the “simplified” method allowed by SEC-issued Staff Accounting Bulletin No. 107 (SAB No. 107), which provides supplemental implementation guidance for SFAS No. 123(R), whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury zero coupon issues with maturities consistent with the estimated expected term of the awards. We have not paid any dividends and do not anticipate paying any dividends in the foreseeable future and accordingly, use an expected dividend yield of zero.

The weighted-average grant-date fair value of stock options granted during 2006 was $4.68 per share, using the Black-Scholes model with the following weighted-average assumptions:

Risk-free interest rates			6	%
Expected term		7 years
Dividend yield			0	%
Expected volatility			36	%

We recognize stock-based compensation expense based on the estimated portion of the awards that are expected to vest. Stock-based compensation expense recognized for the years ended December 31, 2008, 2007 and 2006 were $4,719, $15,477 and $33,233, respectively which consisted of stock-based compensation expense related to stock options. See Note 13 to our audited consolidated financial statements included elsewhere in this report for additional information.

As of December 31, 2008, total stock-based compensation expense related to non-vested stock options not yet recognized amounts to $1,997 and the weighted-average period in which it is expected to be recognized is 2 years.

The fair value of our common stock at each grant date prior to our initial public offering in August 2007, was based on internally developed valuations. We did not engaged an independent third-party valuation specialist and cannot assure you that an independent valuation firm would not determine different valuations for our common stock. We have based our internally developed valuations on our analysis of valuations of our significant subsidiaries completed by an unrelated third-party valuation specialist as of December 31, 2006, complemented by internally prepared projections and analyses of our company. The valuations of the subsidiaries were prepared to perform impairment tests as required by Statement of Financial Accounting Standard No. 142 — “Goodwill and Other Intangible Assets”. We believe that a combination of these independent valuations and the experience of our internal accounting staff produced reasonable valuations of the fair value of our common stock.

The difference between our estimate of the fair value of our common stock as of October 2006 and our $18.00 initial public offering price in August 2007 related to improvements in our financial performance, improved prospects as we increase in size and scope, appreciation of the currencies in the countries in which we operate versus the U.S. dollar resulting in increased revenues and profits measured in U.S. dollars, and other factors that were relevant in setting initial our public offering price in August 2007 but that were not necessarily considered in the determination of the fair value of our common stock pursuant to SFAS 123(R), such as improved multiples of comparable publicly-traded companies and then prevailing market conditions for public offerings of equity securities. The fair value of our common stock at the October 1, 2006 grant date, was $9.64 per share. Factors affecting our October 2006 estimate of the fair value of our common stock pursuant to SFAS 123(R) that we had not considered in setting our initial public offering price in August 2007 include: (1) a discount rate of 19.2% applied in October 2006—versus a rate of 16.0% that we would have applied if we were to perform the same analysis as of the date of the initial public offering prospectus (the reduced applicable rate resulting primarily from lower current interest rates in the countries in which we operate and the lower estimated risk associated with our company given our increased profitability and scale of operations since October 2006), (2) the fact that the October 2006 discounted cash flow model had a starting date nine months or more prior to the one that would be applied if we were to have performed the same analysis as of the date of the initial public offering prospectus, which starting dates have a substantial impact on valuation in a business with significantly increasing profitability like ours, (3) a 10.0% discount related to the lack of liquidity of our shares of common stock in October 2006 and (4) an approximately 8.0% discount related to the negative effect of preferred stock liquidation preferences (upon completion of our initial public offering in August 2007, all of our outstanding shares of preferred stock were converted into shares of common stock).

Recent accounting pronouncements

Business Combinations

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141 R”). This Statement replaces SFAS 141, “Business Combinations”. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this Statement. This Statement’s scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration.

This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). This Statement amends ARB Nº 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.

Determination of the useful life of intangible assets

In April 2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful Life of Intangible” (“FSP 142-3”). Under FSP 142-3, for renewable intangible assets acquired in fiscal years beginning after December 15, 2008, an entity should consider its own historical experience in renewing or extending similar arrangements when developing its assumptions about renewals or extensions used to determine the useful life of an intangible asset; however, these assumptions should be adjusted for the entity specific factors in paragraph 11 of FAS 142. In the absence of that experience, an entity should consider the assumptions that market participants would use about renewals or extensions (consistent with the highest and best use of the asset by market participants), adjusted for the entity specific factors in paragraph 11 of FAS 142. The Company will evaluate the impact of FSP 142-3 on its consolidated financial statements.

Determination of the fair value of financial assets

In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of FAS 157. FSP 157-3 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have an impact on the Company’s consolidated financial statements.

Hierarchy of Generally Accepted Accounting Principles

In May 2008, the FASB issued Statement of Financial Accounting Standards No.162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Board believes that the GAAP hierarchy should be directed to entities because it is the entity that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the Board concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

In June 2008, the FASB issued Financial Standard Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. Issue 03-6 provides guidance on share-based payment awards that contain a right to receive dividends declared on the common stock of the issuer that are fully vested. However, in Issue 2(a) the Task Force declined to provide guidance on share-based payment awards that were not fully vested (that is, awards for which the requisite service had not yet been rendered). This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. Early application is not permitted.

Recent acquisitions

On January 22, 2008, we acquired 100% of the issued and outstanding shares of capital stock of CMG and its subsidiaries. CMG and its subsidiaries operate an online classified advertisements platform primarily dedicated to the sale of automobiles at www.tucarro.com in Venezuela, Colombia and Puerto Rico and real estate at www.tuinmueble.com in Venezuela, Colombia, Panama, the United States, Costa Rica and the Canary Islands. The purchase price for the shares of CMG and its subsidiaries was $19 million, subject to certain escrows and a working capital adjustment. On January 22, 2009, we released the escrow balance of $1.1 million to the Sellers.

On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate trust for the construction of an office building located in the City of Buenos Aires, entitling us to 5,340 square meters of office space divided in five floors and 70 parking spaces, where we plan to move our headquarters and Argentine operation offices. Our total estimated contractual obligation to the real estate trust is $10,109,398 which will be paid over 20 months. As of December 31, 2008, our Argentine subsidiary has invested $3,287,823 in the aforementioned trust representing an undivided interest of 26.3% of the total amount of the real estate trust. This investment is accounted for under the equity method and it is classified as Long-Term Investments in our consolidated balance sheet. We expect this investment to decrease our aggregate rental space over time.

On September 5, 2008, we completed, through one of our wholly-owned subsidiary, Hammer.com LLC, our previously announced acquisition of all of the issued and outstanding shares of capital stock of DeRemate.com de Argentina S.A., a company organized under the laws of Argentina (“DR Argentina”), DeRemate.com Chile S.A., a company organized under the laws of Chile (“DR Chile”), Interactivos y Digitales México S.A. de C.V., a company organized under the laws of Mexico (“ID Mexico”) and Compañía de Negocios Interactiva de Colombia E.U., a company organized under the laws of Colombia (“CNI Colombia” and together with DR Argentina, DR Chile, ID Mexico and CNI Colombia, the “Acquired Entities”). We completed the stock purchase from Hispanoamerican Educational Investments BV, a corporation organized under the laws of Holland (“HEI”) and S.A. La Nación, a company organized under the laws of Argentina (“SALN” and together with HEI, the “Sellers”). The Acquired Entities operate online commerce platforms in Argentina (www.deremate.com.ar), Chile (www.deremate.cl), Mexico (www.dereto.com.mx) and Colombia (www.dereto.com.co).

The aggregate purchase price paid by us to the Sellers for the shares of capital stock of the Acquired Entities was $37.6 million. On the closing date, we paid the Sellers $19.6 million in cash. In addition, we issued to HEI ten (10) unsecured promissory notes having an aggregate principal amount of $18.0 million, $8.0 million of which was subject to set-off rights in our favor for working capital adjustments and liabilities relating to the assumption of certain contracts by us, $4.0 million of which is subject to set-off rights in our favor for indemnification obligations of the Sellers and the remaining $6.0 million without set-off rights. Each of the promissory notes has a one-year term, bears interest at 3.17875% plus 1.5% for the first four months, 2.0% for the second four months and 2.5% for the third four months and can be prepaid by us without penalty. Pursuant to the terms of each promissory note, until the principal amount plus interest is repaid, we may not incur indebtedness in excess of $55.0 million in the aggregate.

We also completed the purchase of certain URLs, domain names, trademarks, databases and intellectual property rights that are used or useful in connection with the online platforms of the Acquired Entities. The aggregate purchase price paid by us to Intangible Assets LLC, a Delaware limited liability company (“IA”), an affiliate of the Sellers, pursuant to the asset purchase agreement was $2.4 million in cash. The set-off rights in our favor for indemnification obligations of the Sellers under the stock purchase agreement also secure the indemnification obligations of IA under the asset purchase agreement.

On February 12, 2009 we agreed to modify the maturity conditions of the promissory notes as follows: (i) $3,000,000 on June 5, 2009 (ii) $9,000,000 on September 5, 2009, (iii) $3,000,000 on December 5, 2009 and, (iv) $3,000,000 on March 5, 2010. The promissory notes bear interest at 3.17875% plus 1.5% for the first four months, 2.0% for the second four months and 2.5% for the remaining period up to its maturity. In addition, on that date we finished the purchase price allocation period and the Company agreed with the Sellers a working capital adjustment for $480,912 to be paid by the Sellers to the Company.

Results of operations

The following table sets forth, for the periods presented, certain data from our consolidated statement of income. This information should be read in conjunction with our audited consolidated financial statements and the notes to those statements included elsewhere in this report.

		Year Ended December 31,
		2006				2007				2008
Net revenues		$	52.1			$	85.1			$	137.0
Cost of net revenues			(12.1	)			(18.3	)			(27.5	)
Gross profit			40.0				66.9				109.5
Operating expenses:
Product and technology development			(3.1	)			(4.4	)			(7.3	)
Sales and marketing			(23.4	)			(27.6	)			(40.0	)
General and administrative			(8.2	)			(13.2	)			(22.8	)
Compensation Cost related to acquisitions			—				—				(1.9	)
Total operating expenses			(34.6	)			(45.2	)			(72.0	)
Income from operations			5.4				21.7				37.5
Other income (expenses):
Interest income and other financial gains			0.5				1.6				1.8
Interest expense and other financial charges			(1.7	)			(2.7	)			(8.5	)
Foreign currency loss			(0.4	)			(3.1	)			(1.5	)
Other expenses, net			(1.5	)			(3.0	)			0.1
Net income before income / asset tax expense			2.3				14.4				29.4
Income / asset tax expense			(1.2	)			(4.7	)			(10.6	)
Net income		$	1.1			$	9.7			$	18.8
Accretion of preferred stock			(0.5	)			(0.3	)			—
Net income available to common shareholders		$	0.6			$	9.4			$	18.8

		Year Ended December 31,
(% of net revenues)		2006				2007				2008
Net revenues			100	%			100	%			100	%
Cost of net revenues			(23.2	)			(21.7	)			(20.1	)
Gross profit			76.8				78.3				79.9
Operating expenses:
Product and technology development			(5.9	)			(5.1	)			(5.3	)
Sales and marketing			(44.9	)			(32.4	)			(29.2	)
General and administrative			(15.7	)			(15.5	)			(16.6	)
Compensation Cost related to acquisitions			—				—				(1.4	)
Total operating expenses			(66.4	)			(53.1	)			(52.5	)
Income from operations			10.4				25.4				27.4
Other income (expenses):
Interest income and other financial gains			1.0				1.9				1.3
Interest expense and other financial charges			(3.3	)			(3.2	)			(6.2	)
Foreign currency loss			(0.8	)			(3.6	)			(1.1	)
Other expenses, net			(2.8	)			(3.5	)			—
Net income before income / asset tax expense			4.4				16.9				21.5
Income / asset tax expense			(2.4	)			(5.6	)			(7.8	)
Net income			2.1				11.4				13.7
Accretion of preferred stock			(1.0	)			(0.4	)			—
Net income available to common shareholders			1.1	%			11.0	%			13.7	%

Principal trends in results of operations

Growth in net revenues from year to year

Since our inception, we have consistently generated revenue growth from our MercadoLibre marketplace and from MercadoPago, driven by the strong growth of our key operational metrics. From 2006 to 2007, our gross merchandise volume increased by 40.6%, our successful items increased by 26.8% and MercadoPago total payment volume increased by 77.5%. From 2007 to 2008, those growth rates were 37.5%, 20.6% and 62.0%, respectively. Our growth in net revenues was 63.5% from 2006 to 2007 and 61.0% from 2007 to 2008. As our business grows, we expect that this year-to-year rate of increase of net revenues and the related operational metrics, will decline. Additionally, currently weak global macro-economic growth, coupled with possible devaluations of local currencies in Latin America versus the U.S. dollar, and high interest rates, could even lead to declining year-to-year net revenues and related operational metrics.

Diversification of revenues from year to year

We have been growing revenues from our payments business at a faster rate than our revenues from our marketplace business, and anticipate this trend to continue. For the year 2006, revenues from our payments business represented 14.1% of net revenues. For the year 2007 and 2008, payments revenues represented 18.3% and 20.0% of our net revenues, respectively. This trend is sensitive to macroeconomic fluctuations, primarily in interest rates for consumer credit, and might be interrupted during periods of higher costs of lending as the one we are currently in.

Gross profit margins

Our business has generated sustained high gross profit margins over time, as defined by total net revenues minus total cost of net revenues, as a percentage of net revenues. These gross margins were 76.8% for 2006, 78.5% for 2007 and 79.9% for 2008. Variations in gross profit margins are mainly attributable to increased economies of scale in customer service, Internet Service Provider (“ISP”) connectivity and site operations, improved economic terms obtained from payment processors as well as increases in interest fees that we charge our MercadoPago buyers, that more than offset a faster rate of increase of our lower gross profit margin Payments business. We expect that gross profit margins could decline in the future if cost of net revenues increase as a percentage of net revenues as our payments business grows faster relative to our marketplace business, if we cannot sustain the economies of scale that we have achieved, or if we decrease the interest fees charged.

Improving Operating income margins

We have generated economies of scale in operating expenses. For the past three years, our income from operations as a percentage of net revenues has improved from 10.4% for 2006, to 25.4% for 2007, and to 27.4% for 2008, mostly as a result of the impact of economies of scale and from improvements in gross profit margins. We anticipate, however, that as a result of the high operating income margin achieved in 2008, and as we continue to invest in product development, sales and marketing, general and administrative expenses and in human resources in order to promote our services and capture the long term business opportunity offered by the Internet in Latin America, it will become increasingly difficult to sustain growth in operating income margins, and at some point in the future we could experience decreasing operating income margins.

Growth in Net Income

We have generated growth in our net income as a consequence of the above mentioned trends. For 2006 net income was $1.1 million. In 2007 our net income grew by 804.1% to $9.7 million. For 2008 our net income grew 94.1% to $18.8 million. However, as mentioned above, if any of these trends were to revert, our net income growth could be affected, or could even become negative on a year-to-year basis.

Year ended December 31, 2008 compared to year ended December 31, 2007

Net revenues

Net revenues were $137.0 million for 2008, an increase of $51.9 million, or 61.0%, from net revenues of $85.1 million for 2007. This increase was attributable to a 57.6% increase in revenues derived from our MercadoLibre marketplace, from $69.5 million for 2007 to $109.6 million for 2008, and to a 75.8% increase in revenues derived from MercadoPago, from $15.6 million to $27.4 million.

Growth in the MercadoLibre marketplace revenues from 2007 to 2008 resulted principally from a 37.5% increase in the gross merchandise volume transacted through our platform and from an increase in our marketplace take rate, defined as marketplace revenues as a percentage of gross merchandise volume, from 4.6% to 5.3%. In the same periods, our payments take rate, defined as payments revenues as a percentage of total payment volume, increased from 9.9% to 10.7% (see “Description of Line items: Net Revenue” section for an explanation on how revenues are recorded for MercadoPago installments).

The growth in MercadoPago revenues from 2007 to 2008 resulted principally from a 62.0% increase in the total payments volume completed on our MercadoPago payments platform. The use of MercadoPago increased to 12.3% of our gross merchandise volume for 2008 from 10.5% for 2007.

On a segment basis, for the year ended December 31, 2008 net revenue increased by $51.9 million compared to the same period in 2007, primarily due to increases of $ 14.9 million, or 210.1% in our marketplace in Venezuela, mainly due to the CMG acquisition, $12.9 million, or 34.5% in our Marketplace segment in Brazil, $6.9 million, or 60.9% in our Marketplace in Argentina, $2.8 million, or 29.6% in our Marketplace in Mexico, and $2.5 million or 63.3% from our Marketplace in all other countries and $11.8 million, or 75.8% from our MercadoPago payments platform.

Based on geography, net revenue increase, by country, was primarily a result of an increase of $23.4 million, or 46.6% in net revenues in Brazil, an increase of $15.4 million, or 395.5% in net revenues in Venezuela, mainly due to the CMG acquisition, an increase of $7.3 million, or 57.9% in Argentina and $3.2 million, or 29.9% in Mexico. All other countries combined grew by $2.5 million or 3.0% for 2008 as compared to 2007.

Cost of net revenues

Cost of net revenues was $27.5 million for 2008, an increase of $9.3 million, or 50.7%, from cost of net revenues of $18.3 million for 2007. Cost of net revenues represented 20.1% of net revenues for 2008 and 21.7% of net revenues for 2007.

This increase was primarily attributable to additional billing and collections costs, sales taxes, and customer support expenditures. The billing and collections fees increased by $3.9 million, or 56.7% for 2008 compared to 2007. Billing and collections charges tend to increase at about the same pace as net revenues, since most of the associated costs grow with our transaction volume. Taxes on our net revenues increased by $3.1 million, or 61.5%. These taxes represented 6.0% of net revenues in 2008. We also increased expenditures in our in-house customer support operations in the amount of $1.6 million, an increase of 36.0% compared to 2007, as we invested in improved service, initiatives to combat fraud, illegal items and fee evasion, and increases in compensation costs. The cost of net revenues margin decrease 1.4% from 21.5% in 2007 to 20.1% in 2008 due to increased economies of scale in customer service, Internet Service Provider (“ISP”) connectivity and site operations, as well as improved economic terms obtained from payment processors.

Product and technology development

Product and technology development expenses were $7.3 million for 2008, an increase of $2.9 million, or 67.2%, from $4.4 million for 2007. Product and technology development expenses were 5.3% of net revenues for 2008 and 5.1% for 2007.

The growth in product and technology development expenses was primarily attributable to an increase in compensation costs in the amount of $2.0million, an increase of 109.1% from 2007. These added compensation expenses, were primarily related to the addition of engineers, in both our Buenos Aires and San Luis development centers, to implement planned upgrades and new features to our platform and to a lesser extent related to increases in salaries, as we continue to invest in top quality talent to develop enhancements and new features across our commerce platforms. We believe product development is one of our key competitive advantages and intend to continue to invest in additional engineering personnel to meet the increasingly sophisticated product expectations of our customer base.

Product and technology development expenses also grew as a consequence of an increase in maintenance expenses of $ 0.4 million or 72.5% compared to 2007 and an increase in depreciation and amortization expenses related to product and technology development of $0.4 million, or 18.9% compared to 2007.

Sales and marketing

Sales and marketing expenses were $ 40.0 million for 2008, an increase of $12.4 million, or 44.8%, from $27.6 million for 2007. Sales and marketing expenses represented 29.2% of our net revenues for 2008 and 32.4% of net revenues for 2007.

The growth in sales and marketing expenses resulted primarily from our increased expenditures on online advertising programs in the amount of $5.3 million, an increase of 35.1% from 2007. Online advertising fees represented 14.8% of our net revenues in 2008 down from 17.7% for the same period in 2007. In addition, these expenses also grew due to an increase in compensation costs in the amount of $3.1 million, or 97.1%, driven by employees hired, the incorporation of CMG employees, and higher salaries to retain talent. Bad debt charges for the year ended December 31, 2008, represented 6.3% of net revenues, versus 7.3% for the same period in 2007.

General and administrative

Our general and administrative expenses were $ 22.8 million for 2008, an increase of $9.5 million, or 72.1%, from general and administrative expenses of $13.2 million for 2007. As a percentage of net revenues, our general and administrative expenses were 16.6% for 2008 and 15.5% for 2007.

The primary reason for the increase in general and administrative expenses in 2008 was a $4.5 million, or 74.7%, increase in compensation costs. These added compensation costs primarily went into hiring additional employees to support our growing business and public company requirements, increases in salaries to retain talent, long term retention plan compensation costs, compensation for outside directors and the incorporation of CMG employees. Additionally, outside service fees grew $2.8 million, or 75.6%, for the year ended December 31, 2008, due to increased legal expenses and other costs associated with being a publicly traded company, and expenses related to the follow-on offering that was withdrawn in March, 2008.

Compensation Cost related to acquisitions

As part of the $19.0 million acquisition of CMG, which closed in the first quarter of 2008, $2.0 million of the purchase price was placed into an escrow account for twelve months in order to secure the obligations of the shareholders that remained as managers. On June 27, 2008, we released to the former shareholders $ 1.9 million of the total Management Escrow Agreement, in exchange for a discount. These compensation cost were fully accrued in the first half of 2008. The compensation expense was recorded as operating expenses, instead of considering them part of the purchase price, following EITF 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” (See Note 6 to our audited consolidated financial statements included in this report). There is no expense related to compensation cost in the second half of 2008.

Other income (expenses)

Our other expenses were $8.1 million for 2008, an increase of $0.9 million from other expenses of $7.2 million for 2007. The increase during the year ended December 31, 2008 was primarily a result of an increase in interest expense and other financial charges from $2.7 million in 2007 to $8.5 million in 2008. The increase of interest expense and other financial charges was mainly attributable to an increase of $6.4 million in interest expenses from $0.8 million for 2007 to $7.2 million for 2008, as a result of financing incurred to fund working capital needs in our Payments operations in Brazil and $0.3 related to the seller financing of the DeRemate acquisition. In the fourth quarter of 2008, we decided to sell all the credit card coupons at that time related to “Funds Receivable from Customers” in our MercadoPago business, for $51.2 million, which resulted in our incurrence of an expense of $4.6 million. As of December 31, 2008, total interest expense relating to the working capital requirements for our MercadoPago operations have been recorded as interest expense and not as cost of net revenues. In the year ended December 31, 2007, interest expenses of $0.7 million, have been reclassified for comparison purposes to current year’s presentation.

The increase in interest expenses was partially offset by a $1.6 million decrease in foreign currency losses from $3.1 million in 2007, to $1.5 million in 2008. This decrease was primarily due to a foreign currency gain of $4.2 million recorded in the fourth quarter of 2008, which was mainly a result of a positive impact of the net assets denominated in U.S. dollars position of our Venezuelan subsidiaries. Venezuela has a dual exchange rate system that comprises an official exchange rate which was $2.15 “Bolivares Fuertes” per U.S. dollar at December 31, 2008, and a parallel exchange rate that was $5.4 “Bolivares Fuertes” per U.S. dollar at December 31, 2008. Based on a change in the accounting standards to International Financial Reporting Standard (“IFRS”) implemented by Venezuela in 2008, which establishes that the parallel exchange rate should be used to account for assets and liabilities in U.S. dollars in the statutory local Financial Statements, we will be recording positive retained earnings in our two main subsidiaries in Venezuela, MercadoLibre Venezuela S.A. and Grupo Veneclasificados C.A., as of December 31, 2008. We anticipated that this positive result will allow us to access U.S. dollars at the official exchange rate, after a process that includes obtaining approval from the Venezuelan Commission of Exchange Administration (“CADIVI”), to distribute dividends. If the CADIVI approves the transaction, the Venezuelan subsidiaries could then sell U.S. dollars held in the United States at the parallel exchange rate, buy “Bolivares Fuertes”, and then distribute dividends buying the U.S. dollars at the official exchange rate. Therefore, based on paragraph 27a of FAS 52 “Foreign Currency Translation”, the Venezuelan subsidiaries have re-measured the asset and liabilities in U.S. dollar balances outstanding at the December 31, 2008 parallel exchange rate. Further, in accordance with paragraph 27b of FAS 52, the Venezuelan subsidiaries assets, liabilities, income and expense accounts were translated at the rate applicable for dividend remittances, which at December 31, 2008 is the official exchange rate. According to the International Practices Task Force Joint Meeting with SEC Staff of June 2, 2008, the existence of a parallel market does not constitute unusual circumstances potentially justifying the use of an exchange rate other than the official rate for purposes of foreign currency translation. Before the fourth quarter of 2008, this asset position ,which is mainly comprised of cash and short-term investments held in US bank accounts, had been historically re-measured at the official exchange rate of 2.15 “Bolivares Fuertes” per US dollar, because (a) the subsidiaries used the US bank account balances to pay foreign suppliers, (b) there was no management intention to return those funds to Venezuela and (c) MercadoLibre Venezuela had no accumulated profits to make a dividend distribution for statutory purposes. That re-measurement of the net asset position contributed a positive $5.0 million foreign currency gain in the fourth quarter of 2008 in our Consolidated Statements of Income and $3.6 million for the full year. The after tax positive effect on Net Income of the re-measurement was $3.3 million in the fourth quarter 2008, and $ 2.4 million for the full year. This re-measurement was included as non-current other assets for $7.8 million in our Consolidated Balance Sheets. The re-measurement of the liabilities amounting to $4.2 million was included in Accounts Payable and accrued expenses. We could have to record foreign currency losses in the future to reverse these gains, or for other factors. Given the risks in Venezuela (see Risk Factors “We may incur losses in the event we are unable to distribute dividends from our Venezuelan subsidiaries at the official exchange rate, or as a result of changes in the political, economic or regulatory environment in Venezuela”, and “Political and economic conditions in Venezuela may have an adverse impact on our operations”) Additionally, we had foreign currency losses of $0.8 million in the fourth quarter of 2008, and of $5.1 million in for the full year, in all the other countries combined.

In addition, we had no impact from the accrual of expenses related to the fair value of warrants in 2008, versus $3.0 million of that were recorded for the year ended December 31, 2007, and we had a $0.2 million increase of interest income and other financial charges, that included accrued gains related to changes in the fair value of put options, from $1.6 million in 2007 to $1.8 million in 2008.

Income and asset tax

Our reported income and asset tax expense for 2008 was $10.6 million compared to a reported expense of $4.7 million for 2007. Our blended tax rate as a percentage of income before income and asset tax was 36.1% for 2008 and 32.8% for 2007. The increase of our blended tax rate is consequence of certain factors including the impact of a new $ 0.8 million Mexican tax called “Impuesto Empresarial a Tasa Única (“IETU”)”, which affects our Mexican operations, the impact of $0.5 million of foreign exchange losses in Venezuela that were not deductible, and by the impact of $ 1.9 million of accrued compensation expenses because this charge reduced pre-tax income, but the related tax credit had a full valuation allowance. With regards to these compensation expenses, we followed the guidance in EITF 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” (See “Compensation Cost related to acquisitions” above). In addition, the 2007 blended tax rate was reduced due to a reverse of the valuation allowance related to our Mexican operations for $2.0 millions. Our blended tax rate in 2007, without including the reverse of the Mexican valuation allowance, would have been 44.6%.

As a result of the effect of permanent differences, our effective tax rate was approximately 27.7% for 2008 and 33.2% for 2007. The variation in the effective tax rate for these periods reflects the taxes payable plus the change during the period in our deferred tax assets and liabilities. The effective income tax rate excludes the effects of the deferred income tax, and of the above mentioned Mexican tax.

Year ended December 31, 2007 compared to year ended December 31, 2006

Net revenues

Net revenues were $85.1 million for 2007, an increase of $33.1 million, or 63.5%, from net revenues of $52.1 million for 2006. This increase was attributable to a 55.4% increase in revenues derived from our MercadoLibre marketplace, from $44.7 million for 2006 to $69.5 million for 2007, and to a 112.9% increase in revenues derived from MercadoPago, from $7.3 million to $ 15.6 million. Growth in the MercadoLibre marketplace revenues resulted principally from a 40.6% increase in the gross merchandise volume transacted through our platform. The growth in MercadoPago revenues resulted principally from a 77.5% increase in the total payments completed on our MercadoPago payments platform. The use of MercadoPago increased to 10.5% of our gross merchandise volume for 2007 from 8.3% for 2006.

The $33.1 million growth in net revenues for 2007, by country, was primarily a result of an increase of $19.5 million, or 63.3% in net revenues in Brazil, of $3.5 million, or 49.2% in Mexico, and $4.7 million, or 60.5% in Argentina. All other countries combined grew by $5.3 million or 84.6% for 2007 as compared to 2006.

Cost of net revenues

Cost of net revenues was $18.3 million for 2007, an increase of $6.2 million, or 51.2%, from cost of net revenues of $12.1 million for 2006. Cost of net revenues represented 21.5% of net revenues for 2007 and 23.2% of net revenues for 2006.

This increase was primarily attributable to additional billing and collections costs, sales taxes, and customer support expenditures. The billing and collections fees increased by $2.1 million, or 43.8% for 2007 compared to 2006. Billing and collections charges tend to increase at about the same pace as net revenues, since most of the associated costs grow with our transaction volume. Taxes on our net revenues increased by $2.1 million, or 73.1%. These taxes represented 5.9% of net revenues in 2007. We also increased expenditures in our in-house customer support operations in the amount of $1.5 million, an increase of 47.3% compared to 2006, as we invested in improved service, initiatives to combat fraud, illegal items and fee evasion, and upgraded the pay scale of customer service personnel in order to retain and attract top-level customer service representatives.

Product and technology development

Product and technology development expenses were $ 4.4 million for 2007, an increase of $1.3 million, or 42.5%, from $3.1 million for 2006. Product and technology development expenses were 5.1% of net revenues for 2007 and 5.9% for 2006.

The growth in product and technology development expenses was primarily attributable to an increase in compensation costs in the amount of $0.7 million, 66.9% higher than 2006, for additional engineers, in both our Buenos Aires and San Luis development centers, to implement planned upgrades and new features to our platform, as well as increased compensation to retain staff, an increase in maintenance expenses of $ 0.4 million or 140.9% compared to 2006 and an increase in depreciation and amortization expenses related to product and technology development of $0.2 million, or 12.4% compared to 2006.

Sales and marketing

Sales and marketing expenses were $ 27.6 million for 2007, an increase of $4.2 million, or 18.2%, from $23.4 million for 2006. Sales and marketing expenses represented 32.4% of our net revenues for 2007 and 44.9% of net revenues for 2006.

The growth in sales and marketing expenses resulted primarily from our increased expenditures in online advertising programs in the amount of $3.2 million, a 27.2% increase over 2006. Online advertising represented 17.7% of our net revenues in 2007. In addition, these expenses also grew due to an increase in compensation costs in the amount of $1.4 million, or 54.1%, driven by additional headcount, higher salaries to retain talent and options expenses.

General and administrative

Our general and administrative expenses were $ 13.2 million for 2007, an increase of $5.1 million, or 62.2%, from general and administrative expenses of $8.2 million for 2006. As a percentage of net revenues, our general and administrative expenses were 15.5% for 2007 and 15.7% for 2006. The major components that drove our growth over the comparable period were $4.4 million in increased compensation costs, a 111.8% rate of growth over 2006, attributable to additional employees to support our growing business and public company requirements, higher salaries to retain talent, and fees and expenses for legal, audit and other professional services that grew $1.8 million, or 93.1%, in part due to additional costs incurred as a public company.

Other income (expenses)

Our other expenses were $7.2 million for 2007, an increase of $4.1 million from other expenses of $3.1 million for 2006. This increase in other expenses was primarily attributable to $3.1 million in foreign currency loss, an increase of $2.7 million from $0.4 million for the same period in 2006 primarily due to the costs of transferring cash from Venezuela to the United States, and $3.0 million in expenses accrued to account for the increase in the fair value of warrants, up 136.9% from $1.3 million for the same period in 2006. In addition these expenses also grew due to an increase in interest expense and other financial charges from $1.7 million in 2006 to $2.7 million in 2007. These interest expenses included $1.1 million, which was obtained to fund payments working capital needs in Brazil. The related liability was structured as a loan backed with credit card receivables, and was therefore recorded as interest expense and not as cost of net revenues.

Other expenses in 2007 were partially offset by $1.6 million in interest income, an increase of $1.1 million, up 209.2% from $0.5 million in 2006.

Income and asset tax

Our reported income and asset tax expense for 2007 was $4.7 million compared to a reported expense of $1.2 million for 2006. Our blended tax rate as a percentage of income before income and asset tax was 32.8% for 2007 and 38.0% for 2006. However, as a result of the effect of permanent differences, our effective tax rate was approximately 33.2% for 2007 and 53.7% for 2006. The variation in the effective tax rate for these periods reflects the taxes payable plus the change during the period in our deferred tax assets and liabilities. During 2007, we recognized a deferred income tax benefit of $0.1 million, and of $0.7 million during 2006, mainly as a result of the utility of the loss carryforwards.

Factors affecting results of operations and financial condition

Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as online commerce and emerging markets like Latin America. To address these risks and uncertainties, we must, among other things, maintain and increase the number of our confirmed registered users, items listed on our service and completed transactions, maintain and enhance our brand, implement and execute our business and marketing strategy successfully, continue to develop and upgrade our technology and information-processing systems, continue to enhance the MercadoLibre and MercadoPago services to meet the needs of a changing market, provide superior customer service, respond to competitive developments, and attract, integrate, retain and motivate qualified personnel. Accordingly, we intend to invest heavily in marketing and promotion, site development, technology and operating infrastructure development and personnel. We cannot, however, assure you that we will be successful in accomplishing all of these goals, and the failure to do so could have a material adverse effect on our business, results of operations and financial condition.

Although we have experienced significant revenue growth and significant growth in the number of our confirmed registered users and items listed by our users in recent periods, such growth rates are not sustainable and will decrease in the future. In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

Our operating results have varied on an annual basis during our short operating history and may fluctuate significantly as a result of a variety of factors, many of which are outside our control. The following list includes factors that may affect our operating results:

	•		continued growth of online commerce and Internet usage in Latin America;
	•		our ability to expand our operations and adapt to rapidly changing technologies;
	•		governmental regulation in the countries where we operate, including exchange controls;
	•		litigation, legal liability and intellectual property rights enforcement;
	•		system interruptions or failures;
	•		our ability to attract and retain qualified personnel;
	•		the announcement or introduction of new sites, services and products by us or our competitors, and price competition;
	•		Reliance on third-party service providers;
	•		increasing consumer confidence in and acceptance of the Internet and other online services for commerce and, in particular, the trading of products such as those listed on our web site;
	•		Security breaches and consumer confidence in the security of transactions over the Internet;
	•		consumer trends and popularity of certain categories of items;
	•		our ability to attract new customers, retain existing customers and increase revenues;
	•		seasonal fluctuations; and
	•		political, social and economic conditions in Latin America, particularly Venezuela, including foreign exchange rate fluctuations.