Liquidity and Capital Resources

Factors that may influence TV Azteca’s liquidity and capital resources as discussed below include:

Liquidity

TV Azteca’s principal sources of liquidity include cash on hand, advance sales of advertising time and uncommitted sources of short-term financing. TV Azteca’s short term and mid term financing sources include a US$130.0 million Euro-commercial paper program (the “ECP Program”) and a Ps. 20 million Suppliers Credit Line. Under the ECP Program, TV Azteca periodically issues notes with maturities not exceeding 365 days. Under the Suppliers Credit Line, the TV Azteca’s suppliers may discount with a financial institution, in invoices with maturities not exceeding 120 days in advance. TV Azteca’s mid-term financing sources include a US$7.7 million Mid Term Export Credit Facility. Under this facility TV Azteca issues notes with maturities not exceeding 5 years.

Azteca Holdings

The Company has no independent business or significant sources of revenue.

Sources of Payment for the 12 1/2% Notes, the 10 3/4% Notes, and the 12 1/4% Notes

In June 1997, the Company issued US$255.0 million in aggregate principal amount of 11% Notes. In May 2001, holders of US$129.0 million in principal amount of the 11% Notes agreed to exchange their 11% Notes for an equivalent principal amount of 12 1/2% Notes.

In June 2001, the Company used US$14.2 million to pay the semi-annual interest payments on the 11% Notes and 12 1/2% Notes. In order to make the interest payments in June 2001, the Company used cash in the amount of approximately US$5.4 million, which the Company received from Mr. Salinas Pliego and Ms. Elisa Salinas Gómez, for the purchase of the Company’s Unefon rights. The Company also received approximately US$5.5 million from

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intercompany loans made to it by certain of its subsidiaries. In addition, the Company used the proceeds from a subordinated loan in the amount of approximately US$3.3 million provided by Alternativas Cotsa.

In December 2001, the Company used US$14.6 million to pay the semi-annual interest payments on the 11% Notes and 12 1/2% Notes. In order to make the interest payments in December 2001, the Company used approximately US$400,000 in cash on hand and sold 14 million TV Azteca CPOs for approximately US$4.6 million. The Company also used the proceeds from a loan in the amount of approximately US$10.0 million provided by Cine Alternativo, S.A. de C.V. (“Cine Alternativo”), the Company’s wholly-owned subsidiary. Immediately after making the interest payment, Cine Alternativo was merged into the Company and the loan was cancelled.

In January 2002, the Company issued the 10 1/2% Notes and raised US$150.0 million in proceeds. The Company used US$41.6 million of the proceeds to finance a cash tender offer for the 11% Notes and the Company used US$84.3 million of the proceeds to redeem the remaining principal amount of the 11% Notes then outstanding.

In June and December 2002, the Company used an aggregate of US$16.1 million from cash on hand and receivables and dividends payable to the Company to make the semi-annual interest payments on the 12 1/2% Notes.

In July 2002 and January 2003, the Company used an aggregate of US$15.0 million from the interest reserve account established for the 10 1/2% Notes to make the semi-annual interest payments on the 10 1/2% Notes.

In February 2004, CASA paid to Azteca Holdings Ps.17 million. The purpose of this payment was to achieve a future increase in equity.

In May 2003, holders of US$80.1 million in principal amount of the 10 1/2% Notes agreed to exchange their 10 1/2% Notes for an equivalent principal amount of 10 3/4% Notes.

In June 2003, holders of US$33.7 million in principal amount of the 10 1/2% Notes and holders of US$62.6 million in principal amount of the 10 3/4% Notes agreed to exchange their Notes for an equivalent amount of 12 1/4% Notes.

In June 2003, the Company used the proceeds of loans from its subsidiaries, US$6.0 million from Alternativas Cotsa and Ps.20.0 million from Inmobiliaria Cotsa, S.A. de C.V., to fund the semi-annual interest payment on the 12 1/2% Notes.

In 2003, the Company received in the aggregate approximately US$68.8 million in connection with TV Azteca’s shareholder distribution in the amount of US$125.0 million. However approximately US$22.0 million was required to be pledged as collateral to secure the 12 1/2% Notes. The remaining US$46.8 million in distribution proceeds, together with the cash on hand, was sufficient for the Company to make its principal and interest payments on the 10 1/2% Notes and its initial amortization on the 10 3/4% Notes in each case due on July 15, 2003.

The Company will receive in the aggregate approximately US$30.1 million in connection with TV Azteca’s recently announced shareholder distribution in the amount of US$55.0 million. It is anticipated that the US$30.1 million in distribution proceeds, together with the cash on hand, will be sufficient for the Company to make its amortizations, principal and interest payments on the 12 1/2% Notes, 10 3/4% Notes and 12 1/4% Notes.

The Company is actively pursuing additional sources of funding that will enable the Company to satisfy its payment obligations, including borrowing funds, selling its equity securities or equity securities of TV Azteca or selling the assets of its subsidiaries. However, the Company cannot assure you that that it will be able to obtain a sufficient amount of funding in a timely manner or on financially advantageous terms.

Registration Default.

On August 11, 2003, the Company filed an Exchange Offer Registration Statement (the “Registration Statement”) for the 12 1/4% Notes and the 10 3/4% Notes, but the Registration Statement was never declared

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effective by the SEC. As a result, pursuant to certain registration rights agreements governing the Indentures, Azteca Holdings has been obligated to pay additional default cash interest on the applicable notes until such time as the Registration Statement is declared effective, which interest equals 0.25% for each of the 1st 180-day period, the 1st subsequent 90-day period, the 2nd subsequent 90-day period and the 3rd subsequent 90-day period that the Company is in registration default. The Company is currently subject to an effective interest rate of 13% on the 12 1/4% Notes, 0.75% of which represents additional default interest, and an 11.75% effective interest rate on the 10 3/4% Notes, 1.00% of which represents additional default interest. As of June 30, 2004, the Company has paid US$145,041.89 in interest on the 12 1/4% Notes and US$27,757.42 in interest on the 10 3/4% Notes. Azteca Holdings cannot predict when the Registration Statement will be declared effective, but management does not believe that the default interest payments will materially impact the Company’s future operations.

Cash and marketable securities were Ps.1,491 million and Ps.2,633 million (US$234.5 million) for the years ended December 31, 2002 and 2003, respectively. The increase in Company’s cash on hand at December 31, 2003, as compared to December 31 2002, was primarily due to TV Azteca’s solid financial results experienced during the year ended December 31, 2003, which allow a strong cash generation for TV Azteca.

Resources generated from operating activities were Ps.407 million and Ps.883 million (US$78.6 million) for the years ended December 31, 2002 and 2003, respectively. The difference in net resources reflected TV Azteca’s solid financial results, experienced in 2003, together with an increase of 3% in operating profit and an increase of 5% in advertising advances for the year ended December 31, 2003. A significant portion of TV Azteca’s cash flows are generated by its television broadcast operations. Because operating results may fluctuate significantly as a result of a decline in the advertising environment or pricing structure, TV Azteca’s ability to generate positive cash flow from its television broadcast operations may be negatively impacted.

Resources used in investing activities were Ps.698 million for the year ended December 31, 2002, compared with resources used of Ps.35 million (US$3.1 million) for the year ended December 31, 2003. The difference was primarily due to Azteca International’s advances of Ps.474 million in certain Pappas affiliates made in the year ended December 31, 2002. Also, for the year ended December 31, 2003, TV Azteca received Ps.34 million (US$3.0 million) in cash for a reimbursement of the premium on the issuance of capital stock of a Todito-associated company.

Resources used in financing activities were Ps.4 million for the year ended December 31, 2002, compared with resources generated of Ps.294 million (US$26.2 million) for the years ended December 31, 2003. Resources provided by (used in) financing activities are affected by various factors including: (i) changes in indebtedness (including bank loans and senior notes) which are originated by debt paid or obtained; (ii) loans granted to Unefon; (iii) the effect from repurchase, valuations and options of shares of TV Azteca; (iv) annual dividends of subsidiaries paid to minority stockholders and (v) capital stock decreases. For the year ended December 31, 2002, there was Ps.415 million of indebtedness, compared to Ps.951 million (US$84.6 million) for the year ended December 31, 2003. For the year ended December 31, 2003, there were no loans granted to Unefon, as compared with resources used in the amount of Ps.207 million related to a loan granted to Unefon for the year ended December 31, 2002. Also, for the year ended December 31, 2002, there were resources used in the amount of Ps.186 million from repurchase, valuations and options of shares of TV Azteca, compared with resources provided of Ps.14 million (US$1.2 million) for the year ended December 31, 2003. For the year ended December 31 2002, resources in the amount of Ps.26 million were used to pay annual dividends to minority shareholders, as compared to payment of Ps.23 million (US$2.0 million) for the year ended December 31, 2003. Also, during the year ended December 31, 2003, TV Azteca reduced its capital stock for Ps.648 million (US$57.7 million), compared with no decrease for the year ended December 31, 2002.

Sources of Payment for the TV Azteca 10 1/8% Notes

At December 31, 2003, the outstanding aggregate principal amount of these notes was US$125.0 million. The 10 1/8% Notes matured and were fully paid on February 15, 2004. The sources of this payment were US$60 million from TV Azteca’s cash position and US$55 million from unsecured financing obtained from Deutsche Bank, on market terms, and US$10 million from TV Azteca’s ECP Program.

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Advertising Advances

Under TV Azteca’s Azteca Plan, advertisers generally are required to pay their advertising commitment in full within four months of the date they sign an advertising contract. TV Azteca’s Mexican Plan, on the other hand, generally allows advertisers to pay for advertising by making a cash deposit ranging from 10% to 20% of their advertising commitment, with the balance payable in installments over the term of the advertising contract, typically one year. Advertising rates are generally lower under the Azteca Plan than under the Mexican Plan.

Since pre-sales of advertising time are generally made in the last quarter of the year, TV Azteca’s cash and marketable securities are normally at their highest level in December, and at their lowest level in the third quarter. Generally, as the proceeds generated from pre-sales of advertising time are depleted (together with other sources of cash flow), TV Azteca relies upon sources of short-term financing, which are subsequently repaid, typically in the fourth quarter of a calendar year with the proceeds from the pre-sales of advertising time for the following year.

At December 31, 2003, TV Azteca had generated Ps.4,903 million (US$436.5 million) in pre-sales of advertising time to be aired in 2004, of which 66% were made under the Azteca Plan, and the remainder under the Mexican Plan. At December 31, 2002, TV Azteca had generated Ps.4,623 million in pre-sales of advertising time to be aired in 2003, of which 64% were made under the Azteca Plan, and the remainder under the Mexican Plan.

Indebtedness

The following chart sets forth the Company’s consolidated outstanding principal amount of indebtedness:

In February 1997, TV Azteca issued US$125.0 million aggregate principal amount of TV Azteca 10 1/8% Notes, and US$300.0 million aggregate principal amount of TV Azteca 10 1/2% Notes. The TV Azteca 10 1/8% Notes matured and were paid on February 15, 2004, while the TV Azteca 10 1/2% Notes mature on February 15, 2007. Interest on the TV Azteca Notes is paid semi-annually on February 15 and August 15. The TV Azteca Notes are jointly and severally guaranteed by each of TV Azteca’s material subsidiaries. TV Azteca has the option to redeem the TV Azteca 10 1/2% Notes at 101.75% of the principal amount if redeemed since February 15, 2004 and 100% of the principal amount if redeemed after February 15, 2005. In each case, interest that is accrued but unpaid will be paid on the date TV Azteca redeems the TV Azteca 10 1/2% Notes.

On September 18, 1997, TV Azteca obtained a US$25.9 million mortgage loan from Banco Bilbao Vizcaya Argentinaria, S.A. (“BBV”) for the acquisition of an office building located adjacent to its principal offices. The

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mortgage loan matured and was refinanced in part on December 18, 2003. TV Azteca obtained an equivalent in pesos to US$20 million mortgage loan from Scotiabank Inverlat to do the refinancing. The mortgage loan accrues interest at an annual interest rate of 28-day Interbank Interest Equilibrium Rate ( Tasa de Interes Interbancaria de Equilibrio ) (“TIIE”), a rate established by the Mexican Central Bank, plus 2% per year, payable monthly beginning January 8, 2004 and amortizing quarterly beginning June 18, 2004 for a lapse of 15 quarters.

In March 1999, TV Azteca entered into a US$30.2 million long-term import credit facility with Standard Chartered Bank, as lender, and the Export-Import Bank of the United States, as guarantor. Under this credit facility, TV Azteca was permitted until May 2002 to borrow all or a portion of the US$30.2 million by delivering promissory notes. The import credit facility was established to finance TV Azteca’s purchase of equipment manufactured in the United States. In October 1999, March 2000 and November 2003, TV Azteca issued promissory notes, one in the amount of US$12.2 million due in October 2004, which accrues interest at a rate of 7.6% per year, one in the amount of US$10.5 million due in March 2005, which accrues interest at a rate of 8.45% per year, and one in the amount of US$3.8 million due in November 2008, which accrues interest at a rate of 3.95% per year.

In May 1999, TV Azteca entered into the US$75.0 million ECP Program, with ABN-AMRO Bank, N.V., as the principal arranger and dealer. The size of the ECP Program was increased to US$130.0 million in July 1999 and Geronimo Capital Markets was established as dealer. Notes issued under the ECP Program are issued at a discount, and do not bear interest. There is no commitment to purchase notes to be issued under the ECP Program, and notes issued thereunder may not have a maturity exceeding 365 days. The ECP Program permits TV Azteca to issue and have outstanding up to US$130.0 million in notes at any time.

In February 2000, TV Azteca entered into a long-term credit facility for up to US$119.8 million with a Mexican subsidiary of ATC (the “ATC Long-Term Credit Facility”). The ATC Long-Term Credit Facility is comprised of a US$91.8 million unsecured term loan and a US$28.0 million term loan secured by certain of TV Azteca’s real estate properties. The interest rate on each of the loans is 13.109% per year. The initial term of the US$91.8 million unsecured term loan is 20 years, which may be extended up to an additional 50 years, so long as the Tower Agreement remains in effect. The US$28.0 million secured term loan matured in February 2004, but was renewed annually for successive one-year periods so long as the Tower Agreement remains in effect.

In May 2001, holders of US$129.0 million in principal amount of the 11% Notes agreed to exchange their 11% Notes for an equivalent principal amount of 12 1/2% Notes. The 12 1/2% Notes mature on June 15, 2005 and have a fixed annual interest rate of 12 1/2%, to be paid every six months on June 15 and December 15. The 12 1/2% Notes are secured by 536,687,783 TV Azteca CPOs and, under certain circumstances, will be secured by up to 448,514,700 Unefon Series A shares. The 12 1/2% Notes will also be secured by any net cash proceeds or securities received upon a sale of Unefon Series A shares that are part of the collateral and any securities acquired with the cash proceeds of such a sale. In addition, any dividends paid by TV Azteca in respect of the 536,687,783 CPOs will become part of the collateral securing the 12 1/2% Notes. The Company has the option to redeem the 12 1/2% Notes at any time prior to the maturity date at 100% of the principal amount, plus accrued but unpaid interest on the date the Company redeems the 12 1/2% Notes through the date of redemption and additional amounts, if any.

In January 2002, the Company issued US$150.0 million in principal amount of the 10 1/2% Notes. The 10 1/2% Notes matured and were paid on July 15, 2003.

In 2003, TV Azteca obtained three unsecured loans from Deutsche Bank: one in the amount of US$20.0 million due in July 2004, which accrues interest at a rate of 9% per year and was prepaid on June 21, 2004, one in the amount of US$20.0 million due in November 2004, which accrues interest at a rate of 5.71% per year, and one in the amount of US$35.0 million due in November 2005, which accrues interest at a rate of LIBOR (6m) plus 5.5% per year. The 9% credit was used for working capital purposes and the other two were used for refinancing the TV Azteca 10 1/8% Notes.

In February 2003, TV Azteca obtained a US$10.0 million unsecured credit line from Banco Inbursa, S.A., for working capital purposes. The credit line accrued interest at a rate of 8.87% per year and matured on November 28, 2003. This line of credit was fully prepaid in October 2003.

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In May 2003, holders of US$80.1 million in principal amount of the 10 1/2% Notes agreed to exchange their 10 1/2% Notes for an equivalent principal amount of 10 3/4% Notes. The 10 3/4% Notes mature on June 15, 2008 and have a fixed annual interest rate of 10 3/4%, which have been paid commencing on July 15, 2003, and on each December 15 and June 15 thereafter. The 10 3/4% Notes are secured by 42,370,449 TV Azteca CPOs and, under certain circumstances, will be secured by up to 112,905,614 Unefon Series A shares. Following the payment of the principal and interest on the 10 1/2% Notes at maturity, the remaining collateral securing the 10 1/2% Notes will be pledged as additional collateral to secure the 10 3/4% Notes. Each US$1,000 in principal amount of the 10 3/4% Notes will be amortized on the following schedule:

The Company has the option to redeem the 10 3/4% Notes, in whole or in part, at 110.75% of the principal amount if redeemed on or during the twelve months since June 15, 2004, at 108.06% of the principal amount if redeemed on or during the twelve months following June 15, 2005, and at 105.38% of the principal amount if redeemed on or during the twelve months following June 15, 2006 and 102.69% of the principal amount if redeemed on or during the twelve months following June 15, 2007, plus, in each case, the accrued but unpaid interest on the date the Company redeems the 10 3/4% Notes and additional amounts, if any.

In December 2003, TV Azteca entered into a US$7.7 million mid-term export credit facility with First National Bank of San Diego, as lender, and the Export-Import Bank of the United States, as guarantor. Under the credit facility, TV Azteca is permitted until December 2004 to borrow all or a portion of the US$7.7 million by delivery of promissory notes. The export facility was established to finance TV Azteca’s purchase of equipment manufactured in the U.S. In March 2004, TV Azteca issued two promissory notes in an aggregate amount of US$1 million due December 2008, which accrues interest at a rate of LIBOR 180 days plus 0.75% per year.

On May 25, 2004, TV Azteca obtained a Ps.170 million unsecured line of credit from Banco Azteca, S.A., an affiliate (for short term debt amortization purposes). The credit line accrues interest at a rate of TIIE plus 2% per year, payable monthly beginning June 23, 2004. This line is renewable every three months for a total period of one year and could be prepaid on any of the interest payment dates without a penalty. See “Item 7. Major Shareholders and Related Party Transactions” on page 83.

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The Company’s total debt at June 30, 2004 matures or is amortized as follows:

On September 7, 2004, TV Azteca obtained a peso-denominated secured line of credit from Banco Inbursa, S.A. for the equivalent of U.S.$300 million. Under the credit line, TV Azteca is permitted, until February 2005, to borrow all or a portion of the U.S.$300 million by delivery of promissory notes. The credit line was established to make payments on the 10 1/2% Notes. The credit line will have amortization payments in 2006, 2007 and 2008, with the outstanding balances accruing interest as shown below:

The credit line is secured by rights to receivables arising from service contracts and commercial revenues of Local Channel 2 (in the State of Chihuahua), Channel 7 (Red Nacional) and Channel 13 (Red Nacional), entered into by TV Azteca, Television Azteca, Red Azteca, TV Azteca Comercializadora and Grupo TV Azteca.

Recent Developments

10 3/4% Notes Exchange Offer and Consent Solicitation

On May 13, 2003, the Company completed an exchange offer in which the holders of US$80.1 million in principal amount of the 10 1/2% Notes agreed to exchange their 10 1/2% Notes for an equivalent principal amount of 10 3/4% Notes. In connection with the exchange offer the Company also received consents from approximately 53% of the holders of the 10 1/2% Notes authorizing the execution of a supplemental indenture that removed substantially all of the restrictive covenants from the 10 1/2% Notes Indenture. The supplemental indenture became effective on May 12, 2003. In addition, effective May 13, 2003, the Company reduced the collateral securing the 10 1/2% Notes from 55,246,106 TV Azteca CPOs to 44,830,578 TV Azteca CPOs. Following the payment of the principal and interest on the 12 1/4% Notes at maturity, the remaining collateral securing the 12 1/4% Notes will be pledged as additional collateral to secure the 10 3/4% Notes.

12 1/4% Notes Exchange Offer

On July 11, 2003, the Company completed an offer to exchange its new senior amortizing 12 1/4% notes for any and all outstanding 10 1/2% Notes for US$33.7 million and 10 3/4% Notes for US$62.5 million. Originally, the new senior amortizing notes offered an interest rate of 11 1/2% and matured on June 15, 2009. On June 26, 2003, the Company amended the proposed terms of its new senior amortizing notes. As amended these notes bear interest at an annual rate of 12 1/4% and mature on June 15, 2008. Initially, interest on the 12 1/4% Notes was scheduled to be paid commencing on June 15, 2004, and on each December 15 and June 15 thereafter. In addition, the Company amended the amortization schedule of its new senior amortizing notes. As amended, US$250 of each US$1,000 in principal amount of the 12 1/4% Notes will be amortized on June 15, 2005 and each June 15 thereafter, until maturity. Other than for certain tax reasons, the Company will not have the right to redeem the 12 1/4% Notes prior to June 15, 2006. On and after June 15, 2006, the Company will have the option to redeem the 12 1/4% Notes, in whole or in part, at 100% of the outstanding principal amount, plus accrued but unpaid interest through the date of redemption and additional amounts, if any. The 12 1/4% Notes will be senior unsecured obligations of the Company.

Capital Expenditures

For the years ended December 31, 2002 and 2003, capital expenditures were Ps.134 million and Ps.158 million (US$14.1 million), respectively. These capital expenditures were primarily related to the expansion of, and improvements to, TV Azteca’s broadcasting and television production facilities. For the years ended December 31, 2002 and 2003, TV Azteca paid approximately Ps.24 million and Ps.51 million (US$4.5 million), respectively, to acquire transmitters that it used to expand the national coverage of its networks and to improve the quality and operation of its transmission signal. For the years ended December 31, 2002 and 2003, TV Azteca made purchases of production equipment and expenditures related to the refurbishment of its production facilities amounting to Ps.102 million and Ps.87 million (US$7.7 million), respectively. TV Azteca’s capital expenditures are primarily made in U.S. dollars. For the years ended December 31, 2002 and 2003, TV Azteca made purchases of computer equipment and vehicles amounting to approximately Ps.115 million and Ps.81 million (US$7.2 million), respectively. For the years ended December 31, 2002 and 2003, TV Azteca paid approximately Ps.9 million and Ps.16 million (US$1.4 million), respectively, for the maintenance, remodeling and refurbishment of its buildings and office facilities. For the year ended December 31, 2002 and 2003, Grupo Costa had no capital expenditures.

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Unefon

In December 2000, Unefon’s principal shareholders, TV Azteca and Mr. Saba, agreed in a shareholders’ undertaking to provide Unefon up to US$35.0 million in the aggregate by way of either equity or subordinated debt in the event Unefon had liquidity shortfalls in 2001 or 2002. In such event, TV Azteca and Mr. Saba would be jointly and severally obligated to make additional funds available to Unefon. On December 20, 2002, Nortel notified TV Azteca and Mr. Saba of its view that Unefon’s non-payment of the August 2002 interest payment under the Nortel finance agreement triggered their joint and several obligation to make additional funds available to Unefon up to an aggregate amount of US$35.0 million as provided in the shareholders’ undertaking. TV Azteca and Mr. Saba disputed this assertion. In connection with the settlement with Nortel, Nortel has released TV Azteca and Mr. Saba from any obligation or liability in connection with this undertaking. See “Item 10. Additional Information—Legal Proceedings—Unefon” on page 98. However, as of May 31, 2003, TV Azteca and Mr. Saba had made loans to or on behalf of Unefon with an outstanding aggregate principal amount of US$35.8 million, US$19.1 million of which was paid by TV Azteca to Unefon and certain of its creditors.

In 2001, TV Azteca’s Board of Directors approved a credit guarantee for up to US$80 million to Unefon, to allow Unefon to meet its capital requirements. At that time, Unefon anticipated capital requirements of US$160 million to increase its network capacity; TV Azteca, which owned 46.5% of Unefon, granted the US$80 million credit support. Mr. Moisés Saba Masri’s family, which owns an equivalent share, provided an equal amount of credit support.

At May 31, 2003, TV Azteca had issued outstanding loans to Unefon for an aggregate principal amount of US$19.1 million. These loans carried an annual interest rate at of 20% payable on an annual basis. At April 30, 2004, the outstanding amount of those loans was an aggregate amount of US$9.6 million.

At May 31, 2003, TV Azteca had outstanding credit support obligations to Unefon in the amount of US$12.1 million, for which TV Azteca received a fee in the amount of 20% of the total amount of support less the bank annual interest rate charged to Unefon. On March 9, 2004, Unefon paid in full the credit obligation supported by TV Azteca and TV Azteca was released from the credit support obligation.

TV Azteca’s 2004 Budgeted Capital Expenditures

TV Azteca has an aggregate of approximately US$25 million budgeted for capital expenditures in 2004, of which US$5.7 million has been expended through June 30, 2004, primarily for the maintenance and expansion of, and improvements to, TV Azteca’s television production and broadcasting facilities and the acquisition of equipment. TV Azteca expects to use cash from its operations to fund these capital expenditures. As a result of TV Azteca’s operating strategy, TV Azteca will not, for the foreseeable future, make major capital expenditures outside the scope of its core television broadcasting business, which would include loans, credit support and capital investments in Unefon and affiliates in the Azteca America Network.

TV Azteca’s Distribution Policy/Debt Reduction Strategy

On February 7, 2003, TV Azteca announced that its Board of Directors had approved a six-year debt reduction plan pursuant to which TV Azteca intends to use the free cash generated from its operations to reduce its outstanding indebtedness, which was US$669.2 million as of December 31, 2003. TV Azteca also announced the Board of Directors’ intention to make scheduled distributions of approximately US$500 million to its shareholders over the next six years. On April 30, 2003, TV Azteca’s shareholders approved distributions to shareholders for an aggregate of US$140 million (of which approximately US$3 million were for preferred dividends for D-A Shares and D-L Shares and approximately US$137 million went towards a distribution to shareholders). A distribution of US$125.0 million was paid on June 30, 2003 and another distribution of US$15 million was paid on December 5, 2003. On April 15, 2004, TV Azteca received the approval of its shareholders for the payment of shareholder distributions in 2004 in an aggregate amount of approximately US$55 million (of which approximately US$3 million will be for preferred dividends for D-A Shares and D-L Shares and US$52 million will go towards capital reduction), of which US$33 million was paid on May 13, 2004 and approximately US$22 million will be paid on November 11, 2004.

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On February 7, 2003, TV Azteca announced that its Board of Directors had approved a six-year span for use of cash, whereby a substantial portion of its free cash generation would be allocated to reduce debt and make distributions to shareholders by 2008. TV Azteca expects to use approximately US$250 million of its free cash flow within the six-year span to gradually reduce its outstanding debt, following a payment schedule according to the respective maturity dates. The board also authorized an aggregate amount above US$500 million to make distributions to shareholders within the six-year period.

Within the plan, TV Azteca distributed a cash distribution to shareholders of US$125 million on June 30, 2003, and an additional US$15 million distribution on December 5, 2003. On February 9, 2004, TV Azteca fully amortized its US$125 million TV Azteca 10 1/8% Notes due February 15, 2004. The payment was composed of US$60 million from TV Azteca’s cash position and US$65 million of unsecured financing obtained from two unsecured loans from Deutsche Bank for US$20 million at an interest rate of 5.71375% and US$35 million at an interest rate of LIBOR plus 5.5%, in addition to the placement of US$9.4 million through TV Azteca’s Euro Commercial Paper program at a discounted rate of 6%.

On April 15, 2004, TV Azteca’s shareholders approved approximately US$55 million in cash distributions to be paid to shareholders during 2004. A distribution of US$33 million was paid on May 13, 2004, and another distribution of approximately US$22 million is scheduled for November 11, 2004.

TV Azteca expects to reduce a portion of its debt and to continue to make cash distributions within the next five years. These uses of TV Azteca’s cash generation may reduce TV Azteca’s cash in hand, which could limit TV Azteca’s ability to make other investments for growth or for the improvement of its current production and transmission facilities.

Section 4.06(a)(iv) of the TV Azteca Indenture prohibits TV Azteca from making “any Investment in any Person (other than Permitted Investments).” Investments are defined to be any direct or indirect loan, advance or other extension of credit or capital contribution to any other Person. Permitted Investments are defined to include any Investments in cash equivalents, investments in restricted subsidiaries by TV Azteca, and loans or advances made by TV Azteca in the ordinary course of business to the employees of non-affiliates of TV Azteca.

Additionally, Section 4.06(a)(i) of the TV Azteca Indenture prohibits TV Azteca from declaring or paying any dividend or making any distribution on or in respect of capital stock of TV Azteca or any restricted subsidiary except for (i) dividends or distributions of TV Azteca payable solely in capital stock of TV Azteca or (ii) dividends of a restricted subsidiary payable to TV Azteca or a wholly-owned restricted subsidiary. Notwithstanding these restrictions, TV Azteca or a restricted subsidiary would be permitted to pay such a dividend or make such a distribution only under certain exceptions, including a lack of an event of a default, a determination of the pro forma effect of such a “Restricted Payment” to the Indebtedness to Adjusted EBITDA Ratio of TV Azteca, and a

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determination of the effect of such a Restricted Payment on the calculation of the permissible TV Azteca Restricted Payments basket. While TV Azteca is not prohibited from paying dividends or making distributions other than in capital stock, Section 4.13 of the TV Azteca Indenture prevents TV Azteca, or any restricted subsidiary, from entering into transactions with affiliates not on market terms comparable to those that could have been obtained in a comparable arm’s length transaction with an entity that is not an Affiliate except for Permitted Investments or Restricted Payments permissible under Section 4.06.

Share Repurchase

On an annual basis, TV Azteca’s shareholders approve the amount to be allocated from the reserve in its stockholders’ equity account for the repurchase of its stock, in accordance with rules established by the CNBV, the Mexican banking and securities commission. In April 2003, the shareholders approved to increase the reserve for the repurchase of TV Azteca’s shares by Ps.239 million, which reserve is limited to a maximum amount of Ps.1,100 million (nominal). TV Azteca may purchase its CPOs on the Mexican Stock Exchange and its ADSs on The New York Stock Exchange, Inc. at prevailing prices up to the amount in this reserve account. At December 31, 2003, the Company had no CPOs in its treasury, acquired through its repurchase fund and Ps.1,379 million (US$122.8 million) in its reserve. On April 15, 2004, the shareholders approved to continue with a maximum amount of Ps.1,100 million for the reserve for the repurchase of TV Azteca’s shares, in virtue that TV Azteca did not need to increase such reserve. At September 8, 2004, TV Azteca has acquired 104,106,237 CPOs through its repurchase stock fund.

New Accounting Pronouncements

Mexican GAAP

In May 2004, MIPA issued Bulletin B-7, “Business Acquisitions,” (“Bulletin B-7”) which provides guidance for accounting of business acquisitions and investments in associated entities. Bulletin B-7 requires that all business acquisitions and investments in associates be accounted for by a single method, the purchase method, and supplements the accounting for the recognition of intangible assets as a part of a business acquisition. Upon adoption of Bulletin B-7, goodwill should not be amortized, but rather tested for impairment at least on an annual basis. Bulletin B-7 also provides guidelines for the acquisition of a minority interest, and for asset transfers and business acquisitions among entities under common control. Adoption of Bulletin B-7 is effective for periods beginning on January 1, 2005 with early adoption encouraged. We are currently evaluating the effect that the adoption of Bulletin B-7 will have on our financial statements.

In April 2004, MIPA issued Bulletin C-10, “Derivative Financial Instruments and Hedge Operations” (“Bulletin C-10”). Bulletin C-10 establishes accounting and reporting standards requiring that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or a liability measured at its fair value. Bulletin C-10 also requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria is met. Special accounting for qualifying hedges allows a derivative’s gain or loss to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Bulletin C-10 is effective for periods beginning on January 1, 2005, with early adoption recommended. We are currently evaluating the effect that the adoption of Bulletin C-10 will have on our consolidated financial statements.

U.S. GAAP

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable

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interest in a VIE make additional disclosures. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period, and it applies to nonpublic enterprises as of the end of the applicable annual period. The Company is currently evaluating the impact that the adoption of FIN 46 will have on the consolidated financial statements. In December 2003, the FASB redeliberated certain proposed modifications and revised FIN 46 (“FIN 46-R”). The revised provisions are applicable no later than the first reporting period ending after March 15, 2004.

In February 2003, the FASB issued Emerging Issues Task Force 00 21 (“EITF 00 21”), “Revenue Arrangement with Multiple Deliverables.” EITF 00 21 requires revenue arrangement with multiple deliverable to be divided into separate unite of accounting. If the deliverable in the arrangement meet certain criteria, arrangement consideration should be allocated among the separate unite based on their relative fair value. Applicable revenue recognition criteria should be considered separately for each unit. The guidance in EITF 00 21 is effective for revenue arrangement entered into in fiscal periods beginning after June 15, 2003. TV Azteca does not expect that the adoption of EITF 00 21 will have a material impact on its financial statement. In April 2003, the FASB issued SFAS No. 149 (“SFAS 149”), “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities.” SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationship designed after June 30, 2003. TV Azteca is in the process of analyzing the effect of the adoption of FIN 46 and FIN 46-R. TV Azteca believes that the Los Angeles station mentioned in Note 7 to TV Azteca’s financial statements is a VIE under the standard; however, TV Azteca has not determined if it is the primary beneficiary.

In May 2003, the FASB issued SFAS No. 150 (“SFAS 150”), “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity, and requires that these instruments be classified as liabilities in statements of financial position. SFAS 150 is effective prospectively for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 shall be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS 150 and still existing at the beginning of the interim period of adoption. The adoption of this statement did not have effect on the Company’s financial statements.

U.S. GAAP Reconciliation

Pursuant to Mexican GAAP, the Company’s financial statements recognize certain effects of inflation in accordance with Statement B-10 and Statement B-12; these effects have not been reversed in the reconciliation to U.S. GAAP.

The following chart illustrates how the difference between Mexican GAAP and U.S. GAAP affects the calculation of financial data for the majority stockholders.

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The principal differences between Mexican GAAP and U.S. GAAP that affect the Company’s net income (loss) and stockholders’ equity relate to the treatment of the following items: