Institutional |

Brazil has undergone significant structural changes over the last decade as the government has pursued responsible fiscal and monetary policies. These changes have increased the purchasing power of the Brazilian population, and we believe the outlook continues to be positive. According to a Goldman Sachs Global Economics Group report entitled "The World and the BRICs Study" (Brazil, Russia, India and China), Brazil has significant growth potential, with an expected GDP per capita compound annual growth rate of approximately 6.5% until 2010.

The e-commerce industry in Brazil is evolving rapidly as an increasing number of people seek to purchase products and services via the Internet. According to Forrester Research, online sales of general merchandise reached R$2.8 billion in 2005 and are expected to grow to R$12.8 billion by 2010 representing a compound annual growth rate of approximately 38%. Online sales of services are also increasing. According to Jupiter Research, online sales of travel services in Brazil were R$2.6 billion in 2005 and are expected to reach R$10.2 billion by 2010 representing a compound annual growth rate of approximately 31%. We believe continued growth of e-commerce is driven by:

• Growth of Internet users. According to a report by Unibanco, the number of Internet users in Brazil reached 37 million in 2005 (approximately 20% of the total population), having grown at a compound annual rate of 21 % since 2001, and is expected to reached 55 million by 2010.
• Increased adoption of e-commerce among Internet users. We believe that the relatively high penetration of online banking and the large number of income tax returns filed online, as well as the popularity of online communities illustrate the willingness of Brazilians to adopt new technologies. E-commerce in Brazil is growing from its current low penetration of approximately 14% of Internet users, compared to 85 % of internet users in the United States. We believe that e-commerce penetration in Brazil will likely increase as more people have positive experiences buying online.
• Rising broadband penetration. According to a report by Credit Suisse, Brazil had 8.8 million broadband subscribers (approximately 4.7% of the Brazilian population) having grown at a compound annual rate of approximately 88% since 2003, and is expected to reach 21 million broadband subscribers by 2010. Broadband penetration will increase as the cost of service is reduced and greater awareness of the benefits of broadband develops; this increase in broadband penetration is expected to yield higher average expenditures per online shopper.
• Lack of assortment in traditional stores. Retail stores in Brazil offer a limited selection of products, and the Brazilian retail sector lacks "category killers" and "megastores." These factors favor online retailers as they are able to offer a wide assortment of products because there is no need to replicate inventory in numerous stores and also there is no physical store space limitation.