20-F 1 y10303e20vf.htm FORM 20-F FORM 20-F
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
Form 20-F
 
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
    OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2004
     
    OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from            to

Commission File Number 333-11910

 
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)

MAXCOM TELECOMMUNICATIONS, INC.
(Translation of Registrant’s name into English)

UNITED MEXICAN STATES
(Jurisdiction of incorporation or organization)

 

Guillermo Gonzalez Camarena No. 2000
Colonia Centro de Ciudad Santa Fe
Mexico, D.F. 01210

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None

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

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Senior Step – Up Notes Due 2009
Senior Notes due 2007
133/4% Series B Senior Notes Due 2007
Series N-2 Ordinary Participation Certificates

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

         
Series A shares, no par value, common voting stock
    4,508,644  
Series A-1 shares, no par value, common voting stock with preferred liquidation rights
    6,088,896  
Series B-1 shares, no par value, common voting stock with preferred liquidation rights
    10,181,950  
Series N shares, no par value, without voting rights
    10,331,670  
Series N-1 shares, no par value, preferred stock with limited voting rights
    219,245,038  
Series N-2 shares, no par value, preferred stock with limited voting rights
    26,867,820  

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

Yes þ No o
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 þ
 
 

 


TABLE OF CONTENTS

             
        Page  
        1  
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS     1  
  OFFER STATISTICS AND EXPECTED TIMETABLE     1  
  KEY INFORMATION     1  
  INFORMATION ON THE COMPANY     13  
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS     37  
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     60  
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     66  
  FINANCIAL INFORMATION     71  
  THE OFFER AND LISTING     72  
  ADDITIONAL INFORMATION     73  
        103  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     103  
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     104  
        104  
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES     104  
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS     104  
  CONTROLS AND PROCEDURES     104  
        105  
        106  
  FINANCIAL STATEMENTS     106  
  FINANCIAL STATEMENTS     1  
  EXHIBITS     1  
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
  S-II  
    G-1  
 EX-2.B.4: AMENDED AND RESTATED INDENTURE
 EX-2.B.5: INDENTURE
 EX-4.X: CREDIT AGREEMENT
 EX-4.Y: CREDIT AGREEMENT
 EX-4.X: AMENDMENT TO MASTER AGREEMENT
 EX-12.1: CERTIFICATION
 EX-12.2: CERTIFICATION
 EX-13.1: CERTIFICATION
 EX-13.1: CERTIFICATION
 EX-99.1: COMPUTATION OF EARNINGS PER SHARE
 EX-99.2: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

 

     Unless otherwise specified, all references to “U.S. dollars,” “dollars,” “U.S.$” or “$” are to United States dollars, and references to “Ps.” and “pesos” are to Mexican pesos. We publish our financial statements in pesos that

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are adjusted to reflect changes in purchasing power due to inflation. Thus, unless otherwise specified, our financial data is presented in constant pesos of December 31, 2004 purchasing power. Amounts presented in this annual report may not add up or may be slightly inconsistent due to rounding.

     Unless otherwise provided, this annual report contains translations of peso amounts into U.S. dollars solely for the convenience of the reader based on the exchange rate reported by the Federal Reserve Bank of New York as its noon buying rate for pesos at December 31, 2004, which was Ps.11.15 per U.S.$1.00. The currency conversions should not be construed as representations that the peso amounts actually represent such dollar amounts. Additionally, these conversions should not be construed as representations that these peso amounts have been or could have been converted into U.S. dollars at those or any other rates of exchange.

     This annual report contains forward-looking statements. Statements that are not statements of historical fact, including statements about our beliefs and expectations are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,” “targets” and similar words are intended to identify these statements, which necessarily involve known and unknown risks and uncertainties. Accordingly, our actual results of operations may be different from our current expectations, and the reader should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments.

     These statements are based on management’s assumptions and beliefs in light of the information currently available to it. These assumptions also involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Potential risks and uncertainties include, without limitation:

    competition in local services, data, Internet and VoIP services;
 
    our ability to service our debt;
 
    limitations on our access to sources of financing on competitive terms;
 
    significant economic or political developments in Mexico and the U.S.;
 
    changes in our regulatory environment, particularly developments affecting the regulation of the telecommunications industry;
 
    our need for substantial capital;
 
    general economic conditions, including the economic slow-down in the U.S.;
 
    the global telecommunications downturn;
 
    performance of financial markets and thus our ability to refinance our financial obligations when they come due;
 
    our history of operating losses;
 
    the risks associated with our ability to implement our growth strategy;
 
    customer attrition;
 
    technological innovations;
 
    currency exchange rates, including the Mexican Peso – U.S. dollar exchange rate;
 
    changes in the policies of central banks and/or foreign governments.

     As used in this Form 20-F, unless the context otherwise indicates, the terms “we,” “us,” “our,” or similar expressions, as well as references to “Maxcom”, mean Maxcom Telecomunicaciones, S.A. de C.V. and its consolidated subsidiaries. Please refer to page G-1 of this Form 20-F for a glossary of telecommunications terms.

     We will provide without charge to each person to whom this report is delivered, upon written or oral request, a copy of any or all of the documents incorporated by reference into this annual report (other than exhibits, unless such exhibits are specifically incorporated by reference in such documents). Written requests for such copies

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should be directed to Maxcom Telecomunicaciones, S.A. de C.V., Guillermo González Camarena No. 2000, Colonia Centro de Ciudad Santa Fe, México, D.F. 01210, attention: Director, Investor Relations. Telephone requests may be directed to 011-52-55-5147-1125.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

A. Selected financial data

     The following tables present selected consolidated financial information of Maxcom and its consolidated subsidiaries. We have derived this information from our audited consolidated financial statements for the years ended December 31, 2000, 2001, 2002, 2003 and 2004, including the audited consolidated financial statements as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003, and 2004 and accompanying notes appearing elsewhere in this annual report. This data is qualified in its entirety by reference to, and should be read in conjunction with, such consolidated financial statements.

     The consolidated financial statements have been prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Pursuant to Mexican GAAP, we have prepared the financial statements and the selected financial data presented below in accordance with Bulletin B-10 of the Mexican Institute of Public Accountants (“MIPA”), which provides for the recognition of certain effects of inflation. See note 23 to the consolidated financial statements for a description of the principal differences, other than inflation accounting, between Mexican GAAP and U.S. GAAP applicable to us and for a reconciliation of our net income and stockholders’ equity to U.S. GAAP.

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    As of the year ended December 31,  
    2000     2001     2002     2003     2004     2004(3)  
    Thousands of constant December 31, 2004 pesos  
    and thousands of U.S. dollars, except for shares and per share data(2)  
Statement of Operations Data:
                                               
Mexican GAAP
                                               
Net revenues
  Ps. 321,137     Ps. 363,459     Ps. 586,176     Ps. 805,371     Ps. 868,214     $ 77,867  
Operating costs and expenses:
                                               
Network operating costs
    130,072       173,920       227,590       289,343       306,395       27,479  
Selling, general and administrative
    399,715       497,055       468,916       405,504       374,393       33,578  
Depreciation and amortization
    242,656       310,379       347,330       353,626       334,886       30,034  
Total operating costs and expenses
    772,443       981,354       1,043,836       1,048,473       1,015,672       91,093  
Operating loss
    (451,306 )     (617,895 )     (457,660 )     (243,102 )     (147,458 )     (13,225 )
Integral cost (income) of financing:
                                               
Interest expense
    482,773       493,598       227,105       31,794       37,483       2,510  
Interest income
    (118,228 )     (88,748 )     (4,891 )     (4,397 )     9,501       852  
Gain on repurchase of debt
            (140,175 )                                
Exchange loss (gain), net
    12,921       (104,957 )     225,980       182,117       1,404       127  
Gain on net monetary position
    (108,751 )     (95,558 )     (110,050 )     (80,111 )     (86,168 )     (7,728 )
Total integral cost of financing
    268,715       64,160       338,144       129,403       (47,281 )     (4,240 )
Nonrecurring charges
            71,925                                  
Other income (expense), net
    (569 )     (206 )     2,891       156       792       (71 )
Asset tax and income tax
                    8,474       13,581       28,035       2,514  
Net (loss) gain
    (720,590 )     (755,052 )     (801,387 )     (386,243 )     (129,004 )     (11,570 )
 
                                               
Net (loss) gain per share, basic
    (62.86 )     (54.92 )     (57.72 )     (26.36 )     (8.71 )     (0.78 )
Weighted-average shares outstanding
    11,463,667       13,748,445       13,885,006       14,654,063       14,806,980       14,806,980  
 
                                               
U.S. GAAP
                                               
Net (loss) gain
    (672,749 )     (752,229 )     (381,390 )     (398,376 )     1,182,481       106,556  
Net (loss) gain per share
    (58.69 )     (54.71 )     (27.47 )     (27.19 )     79.86       7.16  
 
                                               
Balance Sheet Data:
                                               
Mexican GAAP
                                               
Cash and cash equivalents
  Ps. 1,294,212     Ps. 199,521     Ps. 126,577     Ps. 43,903     Ps. 60,183     $ 5,398  
Restricted cash
    686,632       215,961                       5,555       498  
Working capital(4)
    (76,950 )     (43,720 )     (19,681 )     13,984       (194,253 )     (17,422 )
Restricted cash to long term
                                    12,682       1,137  
Frequency rights, net
    128,192       121,198       114,207       101,269       94,277       8,455  
Telephone network systems and equipment, net
    1,311,715       1,582,531       1,737,057       1,617,231       1,726,300       154,825  
Preoperating expenses, net
    291,398       256,480       223,536       188,950       153,492       13,766  
Intangible assets, net
    390,925       346,281       465,848       411,156       366,128       32,837  
Rent deposits and other assets
    9,479       36,197       32,366       29,620       20,915       1,876  
Total assets
    4,204,198       2,900,135       2,896,252       2,600,979       2,666,766       239,172  
Total liabilities
    3,671,026       3,120,954       2,239,525       2,329,410       1,082,409       97,077  
Capital stock
    1,391,126       1,128,451       1,843,571       1,843,571       2,420,295       217,067  
 
                                               
Additional paid-in capital
    148,255       118,278       459       1,544       866,612       77,723  
Accumulated deficit
    (1,006,209 )     (1,467,548 )     (1,187,303 )     (1,573,546 )     (1,702,550 )     (152,695 )
Shareholders’ equity (deficit)
    533,172       (220,819 )     656,727       271,569       1,584,357       142,095  
 
                                               
U.S. GAAP
                                               
Shareholders equity (deficit)
  Ps. 285,811     Ps. (465,355 )   Ps. (3,030 )   Ps. (400,322 )   Ps. 978,144     $ 86,659  
 
                                               
Other Financial Data:
                                               
Mexican GAAP
                                               
 
                                               
Capital expenditures(5)
    817,607       597,517       577,651       131,872       347,768       31,190  
Ratio of earnings to fixed charges(6)
    (0.39 )     (0.48 )     (2.25 )     (10.03 )     (3.20 )     (3.20 )
Cash flow (used in) provided by operating activities
    (938,441 )     (389,102 )     (372,026 )     (49,560 )     267,790       24,016  

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    As of the year ended December 31,  
    2000     2001     2002     2003     2004     2004(3)  
    Thousands of constant December 31, 2004 pesos  
    and thousands of U.S. dollars, except for shares and per share data(2)  
Cash flow provided (used in) by financing activities
    2,848,175       (108,074 )     876,731       98,760       96,259       8,633  
Cash used in investing activities
    (817,607 )     (597,517 )     (577,651 )     (131,872 )     (347,768 )     (31,190 )
 
                                               
U.S. GAAP
                                               
Cash (used in) provided by operating activities
  Ps. (858,422 )   Ps. (420,368 )   Ps. (206,767 )   Ps. 17,986     Ps. 119,417     $ 10,710  
Cash provided (used in) by financing activities
    2,973,954       (42,865 )     667,170               173,377       15,549  
Cash used in investing activities
    (908,588 )     (578,039 )     (443,674 )     (68,429 )     (239,563 )     (21,485 )

Notes to Selected Historical Consolidated Financial Information

(1)   We commenced commercial operations on May 1, 1999. In accordance with Mexican GAAP, our financial statements for that year reflect only eight months of operations.

(2)   Pursuant to Mexican GAAP, financial data for all periods in the financial statements have, unless otherwise indicated, been restated in constant pesos as of December 31, 2004. Restatement into December 31, 2004 pesos is made by multiplying the relevant nominal peso amount by the inflation index for the period between the end of the period to which such nominal peso amount relates and December 31, 2004. The inflation index used in this annual report for 2000 figures is 1.2070 for 2001 figures is 1.1561 for 2002 figures is 1.0937 and for 2003 figures is 1.0519.

(3)   Peso amounts were converted to U.S. dollars at the exchange rate of Ps.11.15 per U.S.$1.00 reported by the Federal Reserve Bank of New York as its noon buying rate for pesos on December 31, 2004. Such conversions are for the convenience of the reader and should not be construed as representations that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all.

(4)   Working capital is defined as current assets (excluding cash and cash equivalents and restricted cash) less current liabilities (excluding current maturities of long-term debt, which includes interest payable).

(5)   Capital expenditures include frequency rights, telephone network systems and equipment, intangible assets and other assets. Investing activities in the consolidated statements of changes in financial position are net of dispositions.

(6)   Our earnings have been insufficient to cover fixed charges since we started incurring debt in 1998. Fixed charges include interest expense, capitalized interest and the portion of operating lease rental expense that represents the interest factor. The fixed charge coverage deficiency for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 amounted to Ps.819.8 million, Ps.760.7 million, Ps.793.8 million, Ps.372.7 million, and Ps.117.5 million, respectively.

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EXCHANGE RATES

     The following table sets forth, for the periods indicated, the period-end, average, high and low noon buying rates, in each case for the purchase of U.S. dollars, all expressed in nominal pesos per U.S. dollar. The noon buying rate at June 29, 2005 was Ps.10.75 per U.S.$1.00.

                                 
    Noon Buying Rate(1)  
    Period End     Average(2)     High     Low  
2000
    9.62       9.470       10.09       9.18  
2001
    9.16       9.326       9.97       8.95  
2002
    10.43       9.745       10.43       9.00  
2003
    11.24       10.846       11.41       10.11  
2004
    11.15       11.309       11.63       10.80  
December 2004
                    11.33       11.11  
January 2005
                    11.41       11.17  
February 2005
                    11.21       11.04  
March 2005
                    11.33       10.98  
April 2005
                    11.23       11.04  
May 2005
                    11.03       10.89  
 
(1)   Source: Federal Reserve Bank of New York.
 
(2)   Represents the average rates for each period indicated, calculated by using the average of the exchange rates on the last day of each month during the period.

B.   Capitalization and indebtedness
 
    Not applicable.
 
C.   Reasons for offer and use of proceeds
 
    Not applicable.
 
D.   Risk factors

Factors relating to Maxcom

We anticipate that we will have negative operating cash flow until we develop a sufficiently large customer base

     The development of our business and the installation and expansion of our network, services and customer base require significant expenditures. These expenditures, together with operating expenses, will adversely impact our cash flow and profitability until an adequate customer base is established. We have generated negative cash flows from operating activities since our incorporation in 1996 and until 2003 and expect to generate insufficient cash flows to cover our fixed charges through 2005. This is so even though our fixed charges have decreased significantly as we restructured our financial indebtedness in April 2002 and October 2004. We cannot assure you that we will be able to establish an adequate customer base to generate sufficient positive cash flows from our core operations.

     If we cannot generate significant revenues, achieve and sustain profitability or generate positive cash flows from operating activities in the future, we will not be able to meet our debt service or working capital requirements, and the value of our securities, as a result, would be materially reduced.

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We expect to incur net losses through at least 2005

     Our cash flow from operations for the year 2004 was insufficient to cover our fixed charges. We expect to continue to incur net losses through at least 2005.

We may need additional financing

     We may require additional financing in the future to service our indebtedness and fund our operations. Our budgeted capital expenditures for 2005 of U.S.$35.8 million are premised on our ability to obtain financing for the majority of such amount. We cannot assure you that we will have sufficient resources and that, if needed, any financing will be available in the future or on terms acceptable to us. In addition, our ability to incur additional indebtedness is restricted by the terms of the indenture governing the Senior Notes due 2007, which we refer to in this report as the “old notes” and the terms of the indenture governing the Step-Up Notes due 2009, which we refer to in this report as the “new notes.”

We may be unable to build out our network in a timely manner or without undue cost

     Our ability to achieve our strategic objectives will depend, in large part, upon the successful, timely and cost-effective buildout of our network. Factors that could affect such buildout include, among other things:

    our inability to obtain permits to use public rights of way;
 
    our inability to obtain future financing necessary for such buildout;
 
    unforeseen delays, costs or impediments relating to the granting of state and municipal permits for our buildout;
 
    delays or disruptions resulting from physical damage, power loss, defective equipment or the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner; and
 
    regulatory and political risks relating to Mexico, such as the temporary seizure or permanent expropriation of assets, import and export controls, political instability, changes in the regulation of telecommunications and any future restrictions on the repatriation of profits or on foreign investment.

     Although we believe that our cost estimates and buildout schedule are reasonable, we cannot assure you that the actual construction costs or time required to complete the buildout will not substantially exceed current estimates. Any significant cost overrun or delay could materially affect our cash flow and our ability to repay our debt.

We have experienced significant turnover in our executive ranks, which has affected our ability to develop and execute our business strategies

     Our operations are managed by a small number of key management personnel, the loss of whom could materially affect our operations. In June and July 2000, our then chief executive, chief operations and chief marketing officers resigned. In April 2001, our then chief financial officer also resigned. We appointed new officers to all these positions during 2001, 2002 and 2003.

     However, between January and September 2003, our then chief executive officer, chief marketing officer, chief commercial operations officer and vice president of corporate communications and public relations and chief financial officer also resigned. We have since appointed a new chief executive officer who was our former chief operating officer a new chief financial officer who was our former treasurer and director of investor relations. As part of our cost-reduction efforts and more efficient operations, we have split the commercial operations areas into two main segments, one for business and other for residential customers, we have eliminated the office of vice

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presidency of corporate communications and public relations and consolidated the vice presidencies of operations and information systems into a single vice presidency of operations.

     In February 2004 our Chief Engineering Officer resigned. We have subsequently consolidated the responsibilities of this position within the responsibilities of the Chief Operating Officer. In November 2004 our Human Resources Vicepresident resigned. Ms. Veronica Macias, then head of our recruiting area, has taken the responsibilities of the director of human resources.

     The significant turnover we have experienced in our management has affected our ability to develop and execute our business strategies. The success of our company depends in part upon our ability to hire and retain highly skilled and qualified management personnel. The competition for highly qualified management personnel in the telecommunications industry is intense and, accordingly, we cannot assure you that we will be able to hire or retain the management personnel necessary for our success.

We may not have sufficient administrative, operational or financial resources to grow as rapidly as we would like

     Our expected growth will place a significant strain on our administrative, operational and financial resources. We anticipate that continued growth will require us to recruit and hire a significant number of new managerial, finance, sales and marketing, accounting and support personnel. If we are unable to attract and retain personnel who can manage our growth effectively, our growth may be limited and the quality of our service may be impaired. This occurrence could adversely affect our results of operations and financial condition.

We depend on Telmex for interconnection

     Telmex exerts significant influence on all aspects of the telecommunications market in Mexico, including interconnection agreements. We use Telmex’s network to service virtually all of our customers. In November 2003, we signed an amendment to our interconnection agreement with Telmex that reduces from 70% to 30% the allowed percentage of imbalance of traffic for the “bill and keep” procedure. A new amendment was executed in August 2004 reducing furthermore the allowed percentage of imbalanced traffic for the “bill and keep” procedure to 15%. This amendment will be effective temporarily until we can reach a definitive agreement with Telmex. We cannot assure what percentage of imbalance of traffic we will finally agree to with Telmex. The interconnection rate remained at U.S.$0.00975 per minute. If allowed percentage for imbalance of traffic for “bill and keep” procedure is exceeded, we cannot assure you that we will be able to offer services at profitable and competitive rates.

Our high leverage could affect our ability to service our debt

     We are highly leveraged. In 2004, our earnings were insufficient to cover fixed charges by an amount equal to Ps.117.5 million (U.S.$10.5 million).

     Our ability to meet our debt service requirements will depend on our future performance, which is subject to a number of factors, many of which are outside our control. We cannot assure you that we will generate sufficient cash flows from operating activities to meet our debt service and working capital requirements. In addition, our high leverage could affect our access to credit or our ability to pursue business opportunities.

     The indenture governing the old notes and the new notes limits but does not prohibit our incurrence of additional indebtedness. We expect to incur additional indebtedness in the future. However, our significant level of indebtedness may impair our ability to raise additional indebtedness on commercially reasonable terms when required or with terms that will not limit our ability to develop our business.

     Furthermore, our significant leverage could adversely affect:

    our ability to fund capital expenditures, acquisitions or operating losses or to refinance existing indebtedness;
 
    our flexibility in planning for, or reacting to, changes in our business and market conditions; and

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    our ability to compete in our markets.

We are and will be subject to restrictive covenants

     The terms of the old notes and the new notes, impose significant operating and financial restrictions. These restrictions affect, and in many respects significantly limit or prohibit, our ability to, among other things:

    borrow money;
 
    pay dividends on our capital stock;
 
    purchase stock or repay subordinated indebtedness;
 
    make investments;
 
    restrict the ability of our subsidiaries to pay dividends;
 
    use assets as security in other transactions;
 
    sell assets; and
 
    consolidate or merge into other companies.

     If we do not comply with these restrictions, we could be in default even if we are able to service our debt. If there were a default, holders of the notes could demand immediate payment of the aggregate principal amount and accrued interest on the notes outstanding. This could lead to our bankruptcy or reorganization for the benefit of our creditors or to our inability to pay our obligations.

We may not be able to finance an exit transaction repurchase

     We will be required to offer to repurchase all of the old notes and the new notes if an exit transaction, as such term is defined in the indentures governing the old notes and the new notes occurs (unless certain conditions set forth therein are satisfied). However, it is possible that we will not have sufficient funds at the time of the exit transaction to make the required repurchase.

If we do not successfully upgrade and operate accounting, billing, customer service and management information systems, we may not be able to achieve desired operating efficiencies

     Sophisticated information and processing systems are vital to our operations and growth and our ability to monitor costs, render monthly invoices for services, process customer orders, provide customer service and achieve operating efficiencies. We intend to upgrade the accounting, information and processing systems necessary to provide services efficiently. However, we cannot assure you that we will be able to successfully upgrade or operate such systems or that they will perform as expected.

Our operations are dependent upon our ability to protect and maintain our network infrastructure

     Our operations are dependent upon our ability to protect our network infrastructure against damage from fire, earthquakes, floods, power loss, and similar events and to construct networks that are not vulnerable to the effects of such events. The occurrence of a natural disaster or other unanticipated problem at our facilities or at the sites of our switches could cause interruptions in the services we provide. The failure of a switch would result in the interruption of service to the customers served by that switch until necessary repairs are effected or replacement equipment is installed. The successful operation of our network and its components is highly dependent upon our ability to maintain the network and its components in reliable enough working order to provide sufficient quality of service to attract and maintain customers.

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     Any damage or failure that causes interruptions in our operations or lack of adequate maintenance of our network could have a material adverse effect on our business, financial condition and results of operations.

We could be negatively affected by the “by-pass” traffic

     Pursuant to regulations of the Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones), which we refer to as “COFETEL,” the only legal way to transport international long distance calls in Mexico is through an authorized international gateway. However, alternative ways to route and terminate international long distance calls at a lower cost in countries that exchange a significant amount of traffic with Mexico exist. Some estimates show that, given the disparity between international settlement rates and domestic interconnection rates that would be payable under an alternative arrangement, an increasing portion of the long distance market between Mexico and the United States is being served by entities that “by-pass” the international settlement rate system. This practice is deemed illegal by COFETEL.

     Maxcom complies with all relevant regulations relating to local and long distance services and cannot confirm whether any of its high-volume customers is engaging in “by-pass” activities. Under Mexican legislation, Maxcom is not required to investigate whether any such high-volume customers are engaged in “by-pass” activity. Maxcom is required, however, to obey any COFETEL formal order to disconnect a customer deemed to be engaged in “by-pass” activity by COFETEL.

     Mexican regulatory authorities have announced their intention to conduct more rigorous audits of persons or companies engaging in “by-pass” activity. In December 2000, some of the major Mexican long distance carriers signed a cooperation agreement to combat “by-pass” in Mexico. If, as a consequence of such actions, the regulatory authorities determine that any of our high-volume customers are engaged in “by-pass” activity, Maxcom’s revenues could be negatively affected.

Our telecommunications network infrastructure has several vulnerabilities and limitations

     Our telecommunications network is the source of all our revenues. Any problem with or limitation of our network may result in a reduction in the number of our customers and our revenues. The development and operation of our network is subject to problems and technological risks, including:

    physical damage;
 
    power loss;
 
    capacity limitations;
 
    software defects as well as hardware and software obsolescence;
 
    breaches of security, whether by computer virus, break-in or otherwise;
 
    denial of access to our sites for failure to obtain required municipal or other regulatory approvals; and
 
    other factors which may cause interruptions in service or reduced capacity for our customers.

     A failure to achieve current specifications for, or future upgrades of, our network may materially and adversely affect our results of operations and financial condition.

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Our results are negatively impacted by high levels of churn

     We experience a high rate of residential and business customer lines attrition, or “churn.” Churn may be impacted by:

    our customer delinquency;
 
    our limited coverage area that restricts our ability to continue providing service when a customer moves;
 
    our failure to meet service levels required by our customers;
 
    promotional and pricing strategies of our competitors; and
 
    economic conditions in Mexico.

     During 2004, we churned 33,410 voice lines (residential and business customer lines). This resulted in an average monthly churn rate of 2.0%. See “Item 5. Operating and Financial Review and Prospects” for a fuller description of voice and wholesale lines.

     A high rate of churn increases our cost of operations and reduces our revenues.

Factors relating to the Mexican telecommunications industry

We face significant increasing competition, which may negatively affect our operating margins

     The telecommunications industry in Mexico is becoming highly competitive. We compete with our rivals primarily on the basis of features, pricing and customer service. We face significant competition from Telmex in all of the areas where we operate. In particular, as the former state-owned telecommunications monopoly, Telmex has significantly greater financial and other resources than those available to us, a nationwide network and concession wireless spectrum, and an established customer base.

     We also face significant competition from recent entrants, particularly in Mexico City. Some of these recent entrants may have significantly greater financial and other resources than us. In addition, we are facing increased competition due to the fact that the Mexican government is granting local concessions to most of the long distance carriers; or if new, competing technologies are developed. Competition may limit our ability to grow or maintain our customer base or to implement price increases to keep pace with inflation.

     New competition from cable operators as well as from terrestrial microwave TV providers, who have been recently authorized by the Mexican government to provide bi – directional data and Internet broadband services and to provide the transport of voice services, including VoIP services, acting as “carriers of carriers,” pose a high risk to us. As these cable operators and terrestrial microwave TV providers have a substantial coverage of the cities we are already servicing, and as the cable operators and terrestrial microwave TV providers’ telephony income may be seen as incremental revenue, the price reduction and the vast coverage may prevent us from continue growing.

     Additionally, the Mexican government has granted licenses to new companies for the provision of VoIP telephony services. It is still uncertain how these entrants will affect the local and long distance telephony services in Mexico.

If the Mexican government grants more concessions, the value of our concessions could be severely impaired

     The telecommunications industry is regulated by the Mexican government. Our concessions are not exclusive and the Mexican government is granting concessions covering the same geographic regions and frequency

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bands to other entrants. We cannot assure you that additional concessions to provide services similar to those we plan to provide will not be granted and that the value of our concessions will not be adversely affected as a result.

We could lose our concessions if we do not comply fully with their terms

     The terms of our concessions require us to satisfy a number of technical, buildout and financial conditions. In September 2002 and November 2003, we notified COFETEL of our failure to provide coverage in certain towns and cities by such date as required by our local and long distance concessions. In addition, we believe we will not be able to meet certain buildout obligations in certain towns and cities along the Mexico City— City of Toluca City of Querétaro– City of San Luis Potosi and City of Puebla – City of Veracruz corridors by September 2004. We are in the process of preparing a request for a modification to the buildout requirements of the concessions from COFETEL. If granted, this modification would allow us to be once again in compliance. However, we cannot assure you that COFETEL will agree to such modification.

     A failure to comply with any of the terms of our concessions or to obtain a waiver or modification could result in the termination of any of our concessions and the loss of up to Ps.48.2 million in performance bonds that we previously issued to the Mexican Ministry of Communications and Transportation, or SCT (Secretaría de Comunicaciones y Transportes). The Mexican government would not be required to compensate us in case of such termination. If any of our concessions were to be terminated, we could be unable to engage in our core business and we would likely be unable to repay our indebtedness. We failed to provide the SCT with the performance bonds renewal for 2004, and such failure could be construed as a default on the terms of our concessions. We are currently negotiating with the SCT new terms to secure the performance of our concessions. However, we cannot assure you what will be the outcome of such negotiations.

Fraud increases our expenses

     The fraudulent use of telecommunications networks imposes a significant cost upon service providers, who must bear the cost of services provided to fraudulent users. We suffer loss of revenue as a result of fraudulent use, and also cash costs due to our obligation to reimburse carriers for the cost of services provided to fraudulent users. Although technology has been developed to combat this fraudulent use and we are installing it in our operations, this technology does not eliminate fraud entirely. In addition, since we rely on other long-distance carriers for interconnection, some of which do not have anti-fraud technology in their network, we are particularly exposed to this risk in our long distance service and in traffic originated in our network to mobile users under the mode of “calling party pays”. In 2004, our expenses for the prevention and detection of fraud were not significant.

     Because of cost reduction measures, we may elect not to upgrade our licenses relating to anti-fraud software or to cover maintenance fees. We have also reduced our fraud monitoring personnel. This has reduced our ability to detect fraudulent use of our services. See “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings—Significant unpaid receivable.”

The technology we use may be made obsolete by the technology used by our competitors

     All companies in the global telecommunications industry must adapt to rapid and significant changes in technology. While we have been installing what we believe to be a technologically advanced fiber optic network with a microwave overlay, we cannot assure you that this technology will not be challenged by competition from new or improved digital or other technologies in the near future. Technological changes may adversely affect our competitive position, cause an increase in customer churn, require substantial new capital expenditures and/or require write-downs of obsolete technology.

The Mexican government could temporarily seize or permanently expropriate our assets under certain circumstances

     The Mexican government has the authority to temporarily seize all assets related to a telecommunications concession in the event of natural disaster, war, significant public disturbance, threats to internal peace, economic events, and for other reasons related to national security. In addition, the Mexican government has the statutory

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right to permanently expropriate any telecommunications concession and claim any related assets for reasons of public interest. Mexican law provides for compensation in connection with losses and damages related to temporary seizure or expropriation. However, we cannot assure you that the actual compensation paid would be adequate or that such payment would be timely.

Factors relating to Mexico

If Mexico experiences future political and economic crises, our business could be affected negatively

     We are a Mexican company with all of our operations in Mexico. Accordingly, the political and economic environment within Mexico can have a significant impact on our financial condition and results of operations.

     The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities in general and on us in particular, and on market conditions, prices and returns on Mexican securities, including our securities. In July 2000, Mexico held national elections, which were won by Vicente Fox, the candidate of the National Action Party (Partido Acción Nacional). This represents the first time in over 70 years that the Institutional Revolutionary Party (Partido Revolucionario Institucional) has not won the Presidency and has not secured the absolute majority of the Mexican Congress.

     Additionally, the Mexican national elections will be held in July 2006. We cannot predict the impact that this new political landscape will have on the Mexican 2006 elections, the economy and particularly on the growth and deregulation of the telecommunications industry.

     In the past, Mexico has experienced economic crisis, caused by internal and external factors, characterized by exchange rate instability, high inflation, high domestic interest rates, economic contraction, a reduction of international capital flows, a reduction of liquidity in the banking sector and high unemployment. These economic conditions substantially reduced the purchasing power of the Mexican population and, as a result, the demand for telecommunications services.

     Crisis such as these could have a material adverse effect on our financial condition and results of operations and on the market value of our securities.

Changes in tax or other regulations could have an adverse impact on our financial condition

     Effective January 1, 2002, the Mexican Congress expanded the scope of the Special Production and Services Tax Law (Ley del Impuesto Especial Sobre Producción y Servicios), whereby, among other things, a new 10% tax was imposed on the rendering of certain telecommunications and supplementary services an amendment to this law, effective January 1, 2003 confirmed that our core business (the offering of local and long distances services) is not subject to this special tax. Although we believe, based on the advice of our tax and regulatory advisors, that certain other services that are part of our local service offerings, are also not subject to such special tax, we cannot assure you that the tax authorities may not interpret the law otherwise. In 2002 and 2003 tax years Maxcom accrued the tax corresponding to the services that might be claimed by the Mexican tax authorities. As of January 1, 2004, telecommunications and supplementary services are no longer subject to this tax.

     The operation of telecommunications systems in Mexico is subject to laws and regulations administered by the Mexican Ministry of Communications and Transportation, or SCT (Secretaría de Comunicaciones y Transportes) and the Mexican Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones). These governmental agencies may take regulatory actions that could damage our business.

Foreign ownership restrictions limit our ability to raise equity capital

     Mexican law currently provides that no more than 49% of the full voting stock of a Mexican corporation holding a concession to provide telecommunications services, other than cellular services, may be held by non-Mexicans. Non-Mexicans represent 49% of our full voting stock. In addition, Mexican authorities have mandated

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that our limited voting shares, which are also referred to as neutral investment shares, may not represent more than 95% of our capital stock.

     Under our current capital structure, we have limited flexibility to raise equity capital from non-Mexican investors. As a result, any future sales of equity securities, may require substantial participation by Mexicans or a waiver or modification of Mexican foreign investment laws and regulations. We cannot assure you that such a waiver or modification could be obtained.

We may lose money because of peso devaluations

     While our revenues are almost entirely denominated in pesos, the majority of our obligations, and all of our long-term debt, are denominated in U.S. dollars. In addition, substantially all of our capital expenditures are denominated in U.S. dollars. We are, and will be, exposed to peso devaluation risk. The peso has devalued substantially against the U.S. dollar in the past and may devalue significantly in the future. For example, the noon buying rate rose from Ps.3.45 per U.S.$1.00 on December 19, 1994 to Ps.5.00 per U.S.$1.00 on December 31, 1994 and Ps.7.74 per U.S.$1.00 on December 31, 1995, representing a 124.6% devaluation of the peso relative to the U.S. dollar. In 2003, the peso devalued 7.84% relative to the U.S. dollar, and in 2004, the peso revalued 0.8%, relative to the U.S. dollar. In the first five months of 2005, the peso revalued 2.2% relative to the U.S. dollar.

     Further declines in the value of the peso relative to the U.S. dollar could adversely affect our ability to meet our U.S. dollar-denominated obligations, including the old notes the new notes and the 133/4% Series B Senior Notes due 2007, which we refer to in this report as the “133/4% notes”. In addition, any further decrease in the value of the peso may negatively affect the value of Mexican securities such as ours. The peso-to-dollar exchange rate may experience significant devaluations in the future.

Developments in other countries may impact the price of our securities

     We cannot assure you that the price of our securities will not be adversely affected by events elsewhere, especially in the United States and in emerging market countries. Mexican financial and securities markets are, to varying degrees, influenced by economic and market conditions in other countries. Although economic conditions are different in each country, investor reaction to developments in one country has had and can have significant effects on the prices of securities of issuers in other countries, including Mexico. Currently, the economic slow down in the United States, the military conflict in Iraq, the threat of terrorism as well as political and financial crisis in certain emerging markets have had a significant negative impact on the financial and securities markets in many emerging market countries, including Mexico. The effects of these crises may worsen, or new crises may occur, which may negatively affect the price of our new notes, the old notes, the 133/4% notes and CPOs or our financial condition and results of operations.

Our financial statements do not give you the same information as financial statements prepared under United States accounting principles

     We prepare our financial statements in accordance with Mexican GAAP and are reconciled to U.S. GAAP. Mexican GAAP differs in significant respects from U.S. GAAP, including in the treatment of the amortization of frequency rights, the capitalization of preoperating expenses, the capitalization of interest, the extinguishment of debt, the restructuring of troubled debt and deferred income taxes and employees’ profit sharing, and in the presentation of cash flow information. In particular, all Mexican companies must incorporate the effects of inflation directly in their accounting records and in published financial statements. We cannot assure you that these will be the only differences in the future. See note 23 to the consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us.

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You may suffer a U.S. dollar shortfall if you obtain a judgment against us or a distribution in bankruptcy

     In the event you are awarded a judgment from a court enforcing our U.S. dollar-denominated obligations under either our old or new notes or the liquidation preference under our series N-2 preferred shares, we will have the right to discharge our obligations by paying you in pesos at the exchange rate in effect on the date of payment of such judgment. Likewise, if we are declared bankrupt, we will have the right to discharge our obligations by paying our creditors in pesos at the exchange rate in effect on the date of the declaration of such bankruptcy.

     The exchange rate is currently determined by the Mexican Central Bank (Banco de México) every banking day in Mexico and published the following banking day in the Official Gazette of the Federation (Diario Oficial de la Federación). As a result of such currency conversion, you could face a shortfall in U.S. dollars. No separate actions exist or are enforceable in Mexico for compensation for any such shortfall.

     You should also be aware that in the event we are declared bankrupt by a Mexican court or if we are subject to a bankruptcy reorganization proceeding (concurso mercantil) in such court, our debt obligations, including the new notes, the old notes and the 133/4% notes, if any, will cease to accrue interest and payment of any of our debt obligations would depend on the outcome of the bankruptcy reorganization proceedings, which are often very lengthy.

We may not be able to make payments in U.S. dollars

     In the past, the Mexican economy has experienced balance of payment deficits and shortages in foreign exchange reserves. While the Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert pesos to foreign currencies generally, and U.S. dollars in particular, it has done so in the past and could do so again in the future. We cannot assure you that the Mexican government will not institute a restrictive exchange control policy in the future. Any such restrictive exchange control policy could prevent or restrict our access to U.S. dollars to meet our U.S. dollar obligations and could also have a material adverse effect on our business, financial condition and results of operations. We cannot predict the impact of any such measures on the Mexican economy.

High inflation rates in Mexico may decrease demand for our services while increasing our costs

     In recent years, Mexico has experienced high levels of inflation. The annual rate of inflation, was 9.0%, 4.4%, 5.7%, 4.0% and 5.2% in 2000, 2001, 2002, 2003 and 2004, respectively. High inflation rates can adversely affect our business and results of operations in the following ways:

    inflation can adversely affect consumer purchasing power, thereby adversely affecting consumer demand for our services and products; and
 
    to the extent inflation exceeds our price increases, our prices and revenues will be adversely affected in real terms.

High interest rates in Mexico could increase our financing costs

     Mexico also has, and is expected to continue to have, high real and nominal interest rates. The interest rates on 28-day Mexican government treasury securities averaged, 15.2%, 11.3%, 7.1%, 6.2% and 6.8% for 2000, 2001, 2002, 2003 and 2004, respectively. Although we do not currently have any peso-denominated debt, if we need to incur such debt in the future, it will likely be at high interest rates.

ITEM 4. INFORMATION ON THE COMPANY

A.   History and development of the Company

     Maxcom Telecomunicaciones, S.A. de C.V. is a limited liability company (sociedad anónima de capital variable) with indefinite life, organized under the laws of Mexico on February 28, 1996. We were originally

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organized under the name “Amaritel, S.A. de C.V.” We changed our legal name to “Maxcom Telecomunicaciones, S.A. de C.V.” on February 9, 1999. Our legal name is also our commercial name.

     Our principal offices are located at Guillermo Gonzalez Camarena No. 2000, Colonia Centro de Ciudad Santa Fe, Mexico, D.F. 01210 and our general phone number is (52) 55-5147-1111. Our website address, the contents of which are not part of, or incorporated into, this annual report, is www.maxcom.com. Our agent in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715.

     In February 1997, we were awarded Mexico’s first competitive wireline local and long distance telephony concession, covering the Federal District of Mexico and over 100 cities and towns in the Gulf region for local service and the whole nation for long distance service. This concession has a term of 30 years. The local telephony portion of our concession was expanded in September 1999 to cover most of the Greater Mexico City area and a wider area within the Gulf region. In September 2001, our concession was further expanded to allow us to provide nationwide wireline local telephony service.

     In October 1997, we were awarded seven nationwide point-to-point and three regional point-to-multipoint microwave concessions. Each of these concessions has a term of 20 years.

     We commenced commercial operations on May 1, 1999. We are currently offering local, long distance Internet, VoIP services, public telephony, other value-added services and data services in Mexico City and the cities of Puebla and Querétaro.

     For the five years ended December 31, 2004, we invested approximately Ps.2,160.6 million in capital expenditures, primarily for the buildout of our infrastructure.

     For 2005, we plan to invest approximately U.S.$35.8 million in capital expenditures, mainly to continue to build out our network. Of this amount, we had already spent approximately Ps.84.1 million (approximately U.S. $7.4 million) by March 31, 2005.

B.   Business overview

     We are a growing facilities-based telecommunications company operating in the competitive local exchange carrier market in Mexico. We are focused on developing our network and support infrastructure required to provide local as well as long distance, data, Internet, public telephony, VoIP telephony and other value-added services to targeted niched markets, as well as small and medium-sized businesses and residential customers within our concession areas. In particular, we believe that the cities of Mexico, Puebla and Querétaro, where we currently operate, offer opportunities for growth in telecommunications use as a result of the combination of a relatively large population, low subscriber line penetration by international standards and economic growth. We anticipate a large and growing demand for telephony services in these regions. We plan to expand our operations areas to Toluca, Guadalajara and Monterrey during 2005, where we intend to replicate our business model through our own sales force or through other distribution channels. We believe that extending our commercial footprint will have a positive effect also in Mexico City, enabling us to compete in new segments with companies that have several facilities throughout Mexico. See below “—Our markets—Concession areas” for a fuller description of the nationwide concession.

     The construction of our telecommunications network is based on a smart-build, customer-driven, modular platform that utilizes a combination of fiber optic, copper wire and microwave transmission technology. This methodology enables us to provide fast service to our target markets, reduces the time lag between the incurrence of capital expenditures and the generation of revenues and increases flexibility to accommodate a changing market environment. To operate our network, we have constructed three central switching offices located in Mexico City, the City of Puebla and the City of Querétaro. We have a 170-kilometer fiber optic link connecting the cities of Puebla and Mexico and a 266-kilometer fiber optic link connecting the cities of Querétaro and Mexico, which is part of our new 2,011-kilometer long fiber optic backbone connecting Mexico City and Laredo, Texas.

     As of December 31, 2004, we had in service three state-of-the-art Lucent Technologies 5ESS switches.

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     In August 2002, we acquired from Bestel, S.A. de C.V. two strands in a 2,011-kilometer fiber optic backbone covering the cities located between the cities of Toluca, Puebla, Mexico City, Queretaro, Celaya, Irapuato, Guadalajara, Leon, Aguascalientes, San Luis Potosi, Saltillo, Monterrey, Nuevo Laredo and Laredo, Texas. This fiber optic backbone includes a border crossing with the United States.

     We believe that the combination of our smart-build network construction strategy, our position as a customer service-oriented provider, our focus on quality and reliability and our state-of-the-art network and systems will allow us to benefit from the expected growth of the Mexican telecommunications industry.

     We position ourselves as a fully integrated telecommunications provider for our customers. In addition to our existing local, long distance, VoIP and data services, we offer value-added products such as broadband (xDSL), high-speed dedicated and dial-up Internet access, domestic and international dedicated lines and VPN. We are currently expanding our product portfolio by adding other services, such as web-hosting and network-managed security services (firewalls) through strategic alliances with third parties.

     In January 2005 we acquired a platform to deliver VoIP services that will allow us to deliver significant value-added services to our existing and new customers, such as hosted PBX functionalities as well as voice virtual private networks.

     On December 23, 2004 we made a strategic alliance with Telemedia to provide “triple play” services in the City of Querétaro, Qro., in which we will provide with Telemedia cable TV, voice and Internet services using the currently installed infrastructure, including last-mile coaxial cable access of Telemedia. “Triple – play” services are provided in conjunction with Telemedia under Maxcom’s trademark.

     According to our market research, our target customers value highly, among other things, quality service, accurate billing and competitive pricing. Our marketing strategy focuses on these key elements:

    prices that are between 5% to 15% below current market levels;
 
    “one-stop-shopping” service, such as our “all-in-one-bill” feature (which allows our customers to receive a single invoice containing all local, long distance, data and Internet services together); and
 
    state-of-the-art call center equipped with Customer Relationship Management Program (also known as CRM) application software to receive all customer inquiries including around-the-clock customer care availability.

Strategy

     We intend to capitalize on our competitive strengths to become a leading telecommunications provider in Mexico. We have been focused on executing a strategy of growth in our existing markets and expansion in accordance with our nationwide concession. This strategy includes the following components:

Capture unmet demand for telephony services

     We seek to capture unmet demand by targeting small and medium-sized businesses and residential customers that are looking to expand their telecommunications capacity or that do not currently receive the types of products and services we offer. We believe that the potential for expansion in the Mexican telecommunications market is significant given the low teledensity rate, which was 17.1 telephone lines per 100 inhabitants as of December 31, 2004 the increasing level of competition and the development of the Mexican economy.

Build our network on a demand-driven, modular basis

     We build our network based on customer demand. We first identify city areas with the largest potential for new lines, which we refer to as “clusters,” in the markets that we serve through various market research techniques.

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We then carry out the network buildout in tandem with increased sales and promotional efforts targeted at customers within the cluster. This parallel track minimizes the time lag between the incurrence of capital expenditures and the generation of revenues, and allows a choice of technology and construction method based on the particular needs of the cluster. We refer to this approach as our “smart-build” strategy.

     We also build our network on a customer demand basis to support small and medium-sized enterprises in buildings or locations other than “clusters.” We refer to these locations as “single sites.” When our corporate sales people identify a potential opportunity we analyze its technical feasibility, the costs associated with providing the service within such locations and the potential revenues, in order to establish whether it is convenient to offer our services there.

     From these “single sites”, in some cases, we are able to deploy cooper wire into an area of two or three blocks, expanding our coverage with practically the same cost.

Differentiate product offerings based on features and price

     We believe that we can differentiate ourselves from competitors by offering a variety of quality products that meet the specific needs of our customers. To that end, we seek to develop customer loyalty and brand awareness by informing consumers about the telecommunications services that we offer and by helping them to differentiate between the various telecommunications services available in the market. We also seek to offer our services at prices that are between 5% and 15% lower than the prevailing market price in order to build our customer base. See “—Pricing.”

Deploy cost-efficient technology

     We use a cost-efficient technology to deploy our network and serve our customers. Our current network consists of optical fiber, copper lines and microwave technology which we deploy to particular customers based on deployment cost, time to market, time to revenue, time to profitability, quality and reliability in our service.

     Our technology platform allows us to provide xDSL services, dedicated Internet access lines, POTS and ISDN services, among others. In addition, due to additional duct capacity in our current facilities we are able to deploy fiber-to-the-home (FTTH) services whenever customer premises equipment technology is available at reasonable prices. Our microwave rings allow us to reach customers throughout our market in a cost efficient manner and allow us to build network clusters that can reach from 1,500 to 6,000 lines.

Capitalize on our nationwide local telephony concession

     In September 2001, our local telephony concession was expanded, allowing us to provide service to all of Mexico. This provides us with an opportunity to target small and medium-sized businesses and residential customers within our new concession areas who we believe are willing to evaluate other alternatives as they look for better service, higher reliability and lower tariffs. In September 2002, we acquired two strands in a 2,011-kilometer fiber optic backbone from Mexico City to the city of Laredo, Texas. We believe this acquisition is a key element for our nationwide expansion using our own independent network. As part of this strategy, we have already expanded our coverage area to the City of Querétaro, one of Mexico’s fastest growing cities.

     In addition, we believe that the quality of our product and services offerings gives us a competitive advantage in many regions within our nationwide concession area, as experienced in the City of Puebla, where in December 2004 our number of lines in service grew by 18.3% and where we installed 14.5% of net additions in the whole state of Puebla according to COFETEL.

     In February 2004, we incorporated a wholly owned subsidiary in the State of Delaware, U.S.A., under the name of Maxcom U.S.A., Inc. Also in February 2004 Maxcom U.S.A., Inc. applied before the Federal Communications Commission (FCC) to obtain a license under section 214 of the Communication Act of 1934, to provide international telecommunications services between the United States and international points, mainly

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Mexico (also known as a “214 License”). The U.S. Federal Communication Commission granted the license in March 2004. Maxcom U.S.A., Inc. has not yet initiated significant operations in the U.S.

     In February 2005, we incorporated Maxcom SF, S.A. de C.V., a wholly owned subsidiary, under the laws of Mexico. This subsidiary will be used as a special purpose vehicle to finance the securitization of Maxcom’s accounts receivable in the future. Maxcom SF has not yet initiated operations in Mexico.

     In May 2005, we incorporated Maxcom TV, S.A. de C.V., a wholly owned subsidiary, under the laws of Mexico. Also in May, 2005, this subsidiary has requested a license from the Mexican government to provide cable television services for the City of Puebla, Pue.

Our markets

Concession areas

     In February 1997, we were awarded Mexico’s first competitive local and long distance telephony concession, covering the Federal District of Mexico and over 100 cities and towns in the Gulf region for local service and nationwide for long distance service. In September 1999, we received the approval of the SCT and COFETEL to provide local telephony services in several municipalities contiguous to the Federal District, which are part of Mexico City, as well as in selected additional cities in the Gulf region. In September 2001, our local service concession was expanded to cover all of Mexico. Under our concession, we are required to provide services to the cities of Toluca, Edo. Mex.; Celaya, Gto.; Irapuato, Gto.; Leon, Gto.; Guadalajara, Jal.; Aguascalientes, Ags.; San Luis Potosi, SLP; Saltillo, Coah.; Monterrey, N.L.; and Nuevo Laredo, Tamps. by the end of 2014. We started operations in the City of Querétaro in November, 2002.

     We commenced commercial operations in Mexico City in May 1999. Mexico City has the nation’s greatest concentration of service and manufacturing industries and is also the center of Mexico’s public and financial services sectors. In 2000, Mexico City had a population of approximately 16.5 million people, according to INEGI. Although the Federal District, which covers most of Mexico City, has the highest teledensity rate in Mexico at approximately 39.9 telephone lines per 100 inhabitants as of December 31, 2004, we believe that significant unmet demand for high-quality local telephony services in Mexico City remains. As of December 31, 2004, we had 87,739 lines in service in Mexico City.

     We commenced commercial operations in the City of Puebla in May 1999. Puebla is the fifth largest city in Mexico, with a population of approximately 1.6 million people in 2000 according to INEGI. In the City of Puebla we have expanded our market share in local telephony service from 2.5% in 2000 to 7.2% in 2001, to 9.5%, in 2002, and 9.7% in 2003. As of December 31, 2004, we had 70,777 lines in service, as compared to 59,832 lines in service as of December 31, 2003. According to COFETEL, these new lines represented 11.9% of all the new lines installed in the whole state of Puebla as of December 31, 2003 and 14.5% of all of the new lines installed in the whole state of Puebla as of December 31, 2004.

     We also commenced commercial operations in the City of Querétaro in November 2002. Queretaro is the seventeenth largest city in Mexico, with a population an estimated population of 787,341 people in 2004 according to the CONAPO or Consejo Nacional de Población (Mexican National Population Council). As of December 31, 2004 we had 5,887 lines in service as compared to 2,878 lines in service as of December 31, 2003. According to COFETEL, we installed in 2004, 8.0% of all new lines installed in the whole state of Queretaro.

Clusters and single sites

     We have developed a comprehensive marketing strategy that starts by identifying city areas with the largest potential for new lines, which we refer to as “clusters.” We use a variety of techniques to identify potential clusters, including canvassing, plotting of potential clusters and database marketing. Once a cluster is identified, a map of the geographic area is produced and the cluster is defined. A cluster becomes the basis for network design and deployment and for the launching of focused field sales and marketing one-on-one efforts.

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     Our cluster strategy is divided into three stages:

    Identify clusters through market research. Our market research is designed to identify small- and medium-sized businesses and residential customers. Once we identify potential customers within the clusters, according to the marketing sales forecast we design the deployment of the access network to cover them. We perform a return on investment analysis for each cluster to assure that the investment made in such cluster meets our return benchmarks.
 
    Deploy clusters through the implementation of a sales plan for each cluster based on our network deployment schedule. We promote our services at the same time that we build our network.
 
    Fill in clusters by offering our services to all customers within the cluster.

     We also build our network on a customer demand basis to support small and medium-sized enterprises in buildings or locations other than clusters. We refer to these locations as “single sites.” When our corporate sales people identify a potential opportunity we analyze its technical feasibility, the costs associated with providing the service within such locations and the potential revenues, in order to establish whether it is convenient to offer our services there.

Our network

Buildout strategy

     We build out our network on a modular basis. Once a cluster has been identified in a joint effort by our marketing, engineering and sales departments, we build our network in clusters varying from 1,500 to 6,000 lines. To ensure the highest quality service to our customer, we install 24-gauge copper wire and limit the distance between our backbone network and the customer premises to four kilometers. These attributes also allow us to provide to our customers voice (including VoIP services) and data services, such as xDSL services with bandwidth of up to 4Mbps.

     We standardize all our Lucent and Advanced Fiber Communications (also known as AFC) equipment to assure consistent, cost efficient, high quality service and also to enable us to use the same access equipment for all of our services.

Network backbone

     At December 31, 2004, our network backbone consisted of one owned 170-kilometer 24 strand fiber optic link between Mexico City and the City of Puebla with three optical regenerators at halfway points and two strands in a 2,011-kilometer fiber optic link covering cities between Mexico City and Laredo, Texas. This fiber optic backbone includes 13 cities (Laredo, Nuevo Laredo, Monterrey, Saltillo, San Luis Potosi, Aguascalientes, Leon, Irapuato, Guadalajara, Celaya, Queretaro, Mexico and Toluca) and six optical regenerators. We have installed Digital Wavelength Division Multiplexing (also known as DWDM) equipment, with a maximum growth capacity of 32 Lambdas, each with 2.5 Gbps capacity. We have three Lambdas already installed and we will install more Lambdas as needed to meet our customers’ requirements. We have the capability with this link to transmit synchrony links, LAN network links, long distance links and dedicated links. We have also installed three Lucent Technologies 5ESS digital switches in Mexico City and the cities of Puebla and Queretaro with a total capacity of 141,000 trunks. Our switch in Mexico City is connected to four different nodes in the city’s public switched telephone network, some by our own fiber ring and some by leased fiber capacity. Our switch in Puebla is connected to four different nodes in the city’s public switched telephone network by our own fiber ring. Our switch in Queretaro is connected to two different nodes in the city’s public switched telephone network by our own fiber. We also lease capacity to connect to long distance networks.

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     In June 2000, we finished constructing a lighted 144-strand, 57-kilometer fiber optic ring in the City of Puebla. We also acquired six strands of dark fiber for approximately 175 kilometers in metropolitan rings in Mexico City and obtained an option for additional capacity in future fiber optic rings also in Mexico City. In addition, the infrastructure is in place to provide local telephony service to five towns located along our Mexico City-City of Puebla fiber optic link.

     We use our own fiber optic rings to connect our microwave nodes to the fiber rings in order to transport the telephone and data communications from our customers to the telephone switch and from there back to our customers or to the public switched telephone network. We also use this fiber to provide to our customers dedicated links and dedicated Internet links that we connect through our fiber and also by leased capacity to the Internet backbone.

Last-mile connectivity

     The last-mile connectivity portion of our network is comprised of a mix of wireline and wireless access technologies. We use point-to-point microwave transmission technology for fast deployment to clusters and single site locations. We have point-to-point frequencies in the 15 and 23 GHz band forming a complex microwave network throughout Mexico City and the cities of Puebla and Queretaro. We use microwave links to connect customers that cannot be immediately connected to our own fiber network, provided the yield on the capital expenditures required is in accordance to our investment parameters. We also have a point-to-multipoint concession for the 10.5 GHz band, covering a portion of the Gulf region.

     We also use wireline access to provide service to clusters. Clusters generally have an area ranging between one and four kilometers in diameter. An average of 50 kilometers of cable plant is required to provide last-mile connectivity within the clusters.

     We use copper wire feeder and distribution facilities placed from the host or remote site along rights of way with a mix of aerial and underground construction. Aerial is our preferred and most used method because of its cost of construction advantage. Underground cable is placed using either the open trench or directional boring methods of construction. The size of the cable is based on the anticipated number of customers in each cluster’s influence area as forecasted by our marketing research. We also integrate fiber optic and Digital Subscriber Line Access Multiplexer (also known as DSLAM) facilities in the distribution plant to allow us to provide broadband services.

Switching

     We have a Lucent Technologies 5ESS digital switch in Mexico City, and in the cities of Puebla and Querétaro. Our switch in Mexico City is currently equipped for 86,000 trunks, and new switches will be installed as the maximum capacity of the existing switches is reached. Our switch in the City of Puebla is equipped for 37,000 trunks. Our switch in the City of Querétaro is equipped for 18,000 trunks. Each trunk can generally carry between one and three lines, depending on whether it serves a residential or a business customer. Our equipment capacity is scaleable at incremental costs according to customer demand.

     The switches are capable of providing analog lines, E1 digital lines, digital high-speed data services, centrex services and operator-assisted services. In addition, they can provide private analog lines, private clear-channel digital lines, data transmission and value-added services.

     Our switches also have a synchrony network that is designed to assure a proper synchronization of every call that is made in the cities we serve and to assure proper synchronization with the public switched telephone network as well as any other carriers with whom we connect. We also have two STPs (Signaling Transfer Point) in Puebla, four in Mexico City and two in the City of Querétaro, to assure the proper signaling in our interconnection with all other carriers.

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Operational support systems

     We have a network operations and control center in Mexico City which oversees, administers and provides technical support to all service areas. Our center, which uses Hewlett Packard , Sun Microsystems hardware and Lucent Technologies software controls and monitors, among other systems, all of our network, microwave, fiber, access equipment, data equipment, synchrony, signaling and energy systems. Our center allows us to manage a multi-vendor network with the greatest efficiency possible, and to identify problems early in order to utilize available redundancy and repair the damaged part of the network.

     Our operational support systems are designed to allow us to differentiate ourselves in the marketplace by being able to:

    offer a flexible, large selection of services;
 
    provide tailored service packages;
 
    quickly introduce products and services;
 
    deliver near real-time activation and disconnection;
 
    deliver a high quality of service;
 
    minimize activation errors; and
 
    provide accurate and timely billing services.

     Our information technology strategy is to implement operational support systems possessing a high level of functionality and flexibility from the service order to the delivery of customer invoices. The systems include the following functional features:

    Spanish language support for invoices and documentation;
 
    a high degree of integration between all operational support systems components;
 
    flow-through of information, provisioning and service activation;
 
    capabilities to monitor, manage and resolve network problems;
 
    allowance for growth on a modular scalable basis; and
 
    support of administrative operations for financial controls.

Our services

     Our primary focus of service is local telephony, particularly the provision of high-quality, flexible last-mile connectivity to small and medium-sized businesses and residential customers. We offer long distance service as an integrated value-added service for our local telephony customers. We do not offer our long distance service separately from our local telephony service.

     We currently provide value-added services such as: voice mail, speed dialing, call waiting, call forwarding, three-way calling, call blocking, caller identification and multi-line hunting. We also provide digital high-speed connectivity, dial-up Internet access, dedicated Internet access and Service Level Agreements (also known as SLA) for both voice and data services.

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Service products

     We seek to offer high-quality telephony service products combining (1) prices that are between 5% and 15% below current market levels, (2) a wide range of value-added solutions and (3) superior customer service. The following are the service products we currently offer to our customers.

    LineaMax Residencial. This is a service for residential customers that provides a high-quality telephone line. The features offered under this product include voice mail, call waiting, call forwarding, three-way calling, call blocking, speed dialing and unlisted numbers.
 
    LineaMax Comercial. This service, which is offered to business customers, is identical to LineaMax Residencial, except that it also includes multi-line hunting.
 
    CentralMax. This service provides business customers with all the functions of a private branch exchange using centrex technology, without having to acquire and maintain equipment. The features offered under this product include call waiting, call forwarding, three-way calling, direct inward dialing, direct outward dialing, intercom dialing, call transfer, speed dialing, call hold, call pick up, outgoing call blocking, single digit access to attendant and distinctive ringing. Optional solutions include voice mail, music-on-hold, multi-line hunting and attendant services.
 
    Larga Distancia Max. This service provides domestic and international long distance. We do not offer our long distance service separately from our local telephony service. See “Supervision and Regulation of the Mexican Telecommunication Industry—Our concessions—Long distance” for a description of significant special charges we would have to pay Telmex if we decide to provide long distance service to customers other than our local telephony customers.
 
    TroncalMax Digital. This service provides digital trunks for business customers that need highly reliable access to and from the public telephone network through their existing Private Branch Exchange (also known as PBX). This service is sold in groups of 10, 20 or 30 trunks. The groups can be configured with direct inward dial (DID), direct outward dial (DOD), caller identification or main telephone number assignments.
 
    TroncalMax Analógica. This service, which is offered to business customers, provides connectivity to analog PBX or key systems. The features available with this product are multi-line hunting, caller identification and call barring.
 
    Internet Max. This service uses a traditional POTs line and modem to provide dial-up Internet access allowing users to navigate on the Internet at speeds of up to 56 Kbps, depending on the number of users accessing the Internet at the same time, since it is a shared service. We provide this service to customers, regardless of whether they have a Maxcom line or not.
 
    SpeediMax (ADSL (128, 256 and 512 Kbps and 1 and 2 Mbps)). Asymmetric Digital Subscriber Line (also known as ADSL) is a transmission service that turns ordinary telephone lines into high-speed data connections. It is a digital data service that provides telecommuting capabilities at speeds much faster than standard modems. With ADSL it is possible to have secure, dedicated links to the Internet or a company’s LAN at a high-speed transmission.
 
    AsistelMax. This service, which we launched in April 2002, provides basic telephone medical and home assistance to our residential customers in case of emergency.

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    1-800 Numbers. This service is available for our customers interested in receiving toll-free calls into their call centers or businesses.
 
    Dedicated Internet Access. This service offers Internet access at high speed within a clear channel access to the Internet backbone.
 
    Digital private lines. This service provides highly reliable dedicated circuits between two or more physical locations. Digital private lines are designed to integrate voice, data and video private networks over a single physical link. Digital private lines are, in effect, leased lines for exclusive/private use with no limitations in usage, available 365 days a year, with no restrictions in amount of traffic.
 
    Hosted PBX. This service provides our business customers with all the functions of an Internet Protocol PBX (or IP/PBX) using VoIP technology, without having to acquire and maintain high cost equipment. The features offered under this product include CentralMax as well as other Internet Protocol enhanced services such as web portal setup, “click to dial”, hosted directory, MS Outlook © integration, etc.

     As part of our product portfolio strategy, we are developing strategic alliances with third parties in order to provide new services. These new services include web services such as hosting web applications, managed network security (firewalls) and domain name administration for small and medium-sized business.

     We believe that our products will help us capitalize on the significant data applications growth expected in Mexico and help us increase our participation in the small and medium-sized business market. In particular, we believe that the combination of voice and data services constitutes an attractive set of product services for those customers enabling us to compete more effectively in such market.

Pricing

     We generally seek to maintain our prices between 5% and 15% below current market levels. We offer pricing plans that are simple in order to assure customers of the integrity of the billing process. Our pricing structure rewards long-term commitments by increasing discounts in relation to the length of the commitment. We also provide discounts to high-usage customers that are likely to generate a significant outflow of calls.

     We pay interconnection charges to other carriers on a per minute basis. However, the common practice in the Mexican market is to charge customers on a per-call basis for local service. We seek to minimize the risk associated with this mismatch between our revenues and costs; for long holding time customers, we have, in some cases, implemented a per minute charge plan to be consistent with our interconnection fees that are on a per minute basis.

     During the second half of 2002, we introduced voice line and ADSL service that for a fixed monthly charge includes the rental of the lines, unlimited local calling, a specified amount of long distance and mobile minutes, and high-speed Internet access. This offering is mainly targeted to small- and medium-sized businesses.

Marketing and sales

General

     We seek to develop brand name recognition by using our corporate name, logo and product names consistently to portray a unified image. We conduct publicity drives within target clusters to small-and medium-sized businesses and to residential customers. We seek to differentiate ourselves from our competitors by our pricing, consistent quality and reliability of first-to-market technology, one-stop shopping, comprehensive billing and speed of line activation.

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Sales and distribution channels

     We focus our sales efforts within clusters using door-to-door sales and telemarketing promotions. We promote our services primarily through advertisements on radio, billboards, in-building promotions, press and magazines. As we commence the deployment of our network within a cluster, we intensify our promotion efforts through our direct sales force in such cluster.

Our direct sales approach is to assign sales representatives or teams to locations within a cluster or to single sites.

     At December 31, 2004, we employed 16 internal salespeople supervisors and 233 external sales agents. We assign our sales force based on territory, product or market segment, depending on their background and experience. The compensation structure for our sales force is tailored to attract and retain high achievers by providing a base salary and a bonus component. Sales commissions are paid only after the new line is installed.

     Our sales force is recruited from other telecommunications providers and systems integrators. Candidates for our sales force undergo extensive training that covers the industry of telecommunications, our products, our internal procedures and markets and sales. In its sales effort, our sales force uses, among other things, multimedia presentation, corporate videos and corporate and product brochures.

     In addition to our sales force, we are developing other distribution channels, including store fronts, agents, distributors, outsourcing and telemarketing.

Customer service

     We seek to differentiate ourselves by providing superior and consistent customer service. Our customer service group is divided into three areas:

    centralized answering point. This area responds to calls to our customer care telephone numbers in Mexico City and the cities of Puebla and Querétaro 24 hours a day, seven days a week. Many prospective and existing customers use our centralized answering point for all types of queries, including queries regarding area codes, rates, billing and line installation and changes.
 
    walk-in center. We have three walk-in centers in Mexico City, three in the City of Puebla and one in the City of Querétaro for prospective and existing customers who wish to make inquires in person regarding our services. Our hours of operation are 9:00 a.m. to 6:00 p.m. on Mondays through Fridays and from 9:00 a.m. to 2:00 p.m. on Saturdays.
 
    centralized trouble-shooting center. This area responds to calls in Mexico City and the cities of Puebla and Querétaro. This center is available 24 hours a day, seven days a week and handles technical problems, inquiries and complaints.

     Customers may access their billing statements through our website and link to the websites of two major Mexican banks to effect payment. In addition, customers may pay their bills through automatic credit card monthly charges, cash payments at three of the largest Mexican banks, or at our walk – in centers located in Mexico City and Puebla. We also assist our customers with new service requests and product information.

Credit, billing and collection

     We carry out credit checks on all our potential business customers that request more than two lines using a leading Mexican credit bureau. Depending on the result of the credit check, we may request a deposit, promissory note, bond or standby letter of credit.

     For business customers with an imperfect credit history we require a one to three-month deposit, which is calculated based on the number of lines contracted. For call centers and other high-usage customers we may require

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higher deposits, collect on a prepaid or weekly basis and undertake a closer monitoring of call activity. We do not perform credit checks for business customers with one or two lines.

     In addition, we do not perform credit checks for residential customers. Our sales representatives are required to verify the identity and address of our residential customers.

     For our billing process, we use state-of-the-art technology including an Ericsson/Hewlett-Packard billing mediation platform and a Kenan Systems/CSG product billing platform interfaced with our customer service system.

     We perform seven billing cycles per month for our business customers and five billing cycles per month for our residential customers. We invoice customers monthly on a staggered basis, except in instances that customers represent a greater credit risk in which case we may invoice weekly. For regular customers we process and print our bills within four days after the close of each cycle. Customers then have twenty-one days to pay the bill after the cut off date.

     For customers with one to six lines, if a bill is past-due for more than two days, we leave a reminder message on their phone. If the bill remains unpaid for five additional days, we restrict service allowing incoming calls only. If the bill remains unpaid for 7 additional days, we suspend the service. If the bill remains unpaid for another 7 days, we again allow incoming calls but only in order to contact our customer through the telephone lien, negotiate and collect the payment. After 30 days past-due we visit our customers of unpaid and uncollected accounts in their addresses in order to pursue payment. If no payment is received after 90 days, we disconnect the line and the receivables are assigned to collection agencies. If the bill remains unpaid past such period, we may assign the receivables to another collection or legal agency.

     For our customers with a history of 12 months or more of services we have more flexible terms and we restrict and suspend their service if their accounts are unpaid 15 days later than for our newer customers. For customers with more than six lines we use the same process to the one described above, except that we use a personalized approach where we try to negotiate payment terms before imposing any restriction, suspension or disconnection of the service. We may suspend service when an invoice is at least 30 days past due. However, in the case of high-usage customers, we may suspend service when an invoice is at least one day past due.

     We have a CRM/Siebel system to support our business growth, which is focused on customer service, collection, training sales force and enhance marketing. Our initial investment for this program was U.S.$3.3 million and our strategic partner in this program is Siebel a software company. Our CRM strategy during 2005 will be to add new business processes related directly with customer’s information, within our current architecture.

Competition

     We primarily compete in the local telephony market on the basis of customer service, value-added products and price. Our direct competitors are wireline and fixed wireless local telephony operators, although we also face competition indirectly from mobile wireless operators.

     We do not compete directly in the long distance retail market (offering presubscription). Although we provide long distance service, we position such service as an integrated value-added service for our local telephony customers. As a result, in the retail market we do not offer our long distance service separately from our local telephony service. See “—Supervision and Regulation of the Mexican Telecommunications Industry—Our concessions—Long distance” for a description of significant special charges we would have to pay Telmex if we decide to provide long distance service to customers other than our local telephony customers.

     However, we will compete directly in the wholesale long distance market in the cities where we have our fiber optic network, once we have long distance interconnection with Telmex for such purpose.

     Our core strategy is to service underserved markets by targeting new customers that do not currently receive the type of products and services that we offer. In particular, our intention is to service markets with lower teledensity rates that are also underserved by Telmex.

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Telmex

     Our main local telephony competitor is Telmex, the incumbent carrier and former government-owned telecommunications monopoly. Telmex has significantly greater financial and other resources than those available to us. In addition, Telmex has an established customer base, which represents substantially all of the wireline local telephony lines in Mexico. Telmex customers still represent the main destination of outgoing calls from our network, therefore local interconnection with Telmex is critical to our operations.

Other Competitors

     We also face competition in local telephony from companies that were awarded concessions in recent years. The more significant of these competitors are Alestra, Avantel Servicios Locales S.A. (“Avantel”), Axtel, S.A. de C.V. (“Axtel”), Megacable Comunicaciones de México, S.A. de C.V. (“Megacable”) and Unefon.

     Avantel, in which MCI International Telecommunications Corp. is a shareholder, was awarded a long distance service concession in September 1995 and a local telephony concession in April 1999. Avantel offers nationwide long distance services and local services in several cities, including Mexico City, Monterrey and Guadalajara.

     Alestra, in which AT&T Corp. is a shareholder, was awarded a long distance service concession in December 1995 and a local telephony concession in June 2000. In addition, Alestra has a point-to-point microwave frequency concession in the 15 and 23 GHz band range, a point-to-multipoint microwave frequency concession in the 10.5 GHz band range and a point-to-point national wireless telecommunications concession in the 7 GHz band range. Alestra offers nationwide long distance services and local service in Mexico City, Puebla, Monterrey and Guadalajara.

     Alestra and Avantel are using their local telephony concessions to service primarily the corporate business segment. We believe they have recently started to target the small-and medium-sized business agreement.

     Axtel, in which Telinor Telefonía, S. de R.L. de C.V., AIG – GE Capital Latin America Infrastructure Fund, L.P. The Blackstone Group and a group of other financial and technological investors, including Nortel Networks, are shareholders, was awarded a nationwide local telephony and long distance concession in June 1996, and wireless frequencies in the 60 MHz at 10.5 GHz for point-to-multipoint access, 112 MHz at 15 GHz for point-to-point backhaul access, 100 MHz at 23 GHz for point-to-point last-mile access and 50 MHz at 3.4 GHz for fixed wireless access. Axtel commenced commercial services in the northern city of Monterrey in July 1999, in Mexico City in May 2000, and in Guadalajara, Puebla, Toluca and Leon during 2001. It currently serves 12 cities. Axtel targets the high-end residential and the small-and medium-sized business segments. Axtel strategy includes packages with unlimited local calls at a fixed rate.

     Other competitors such as Megacable, Marcatel and MetroRed that have local telephony concessions have a market approach that is not massive but rather seeks to offer services to specific customers within specified coverage areas. We believe that Megacable, Marcatel and MetroRed do not represent strong competition in the short term.

     Unefon won nationwide concessions for fixed wireless local loop frequencies in the 3.4 to 3.7 GHz band and in the PCS 1.9 GHz band in May 1998. Unefon began commercial operations using the 1.9 GHz band in Toluca in early 2000 and has initiated operations in Mexico City, Puebla, Monterrey and Guadalajara, among other cities, but it has focused mainly on mobile telephoning. We believe that Unefon will begin to focus on the fixed wireless telephony market in the near future.

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Overview of the Mexican telecommunications industry

General

     The telecommunications industry involves the transmission of voice, data and video communications from point of origination to point of termination. The Mexican telecommunications industry has been undergoing rapid change in the last decade due to the introduction of new technologies and the construction of additional infrastructure, as well as market liberalization, which together have resulted in increased competition and demand for telecommunications services.

     The modernization of the Mexican telecommunications infrastructure began in 1990 with the privatization of Telmex, the former government—controlled telecommunications monopoly. Since privatization, Telmex and several concessionaires have begun deploying modern fiber and wireless networks throughout Mexico. To meet the demand for higher volume and higher quality wireline services, new copper cables are being installed and backbones are being replaced largely by fiber optic transmission systems that provide greater capacity at lower cost with higher quality and reliability.

Market liberalization

     Historically, Telmex has dominated the Mexican telecommunications industry. In December 1990, the Mexican government initiated the privatization and deregulation of Telmex by selling a controlling portion of Telmex’s equity to a private consortium led by Grupo Carso, S.A. de C.V., a Mexican conglomerate, as well as to subsidiaries of Southwestern Bell Corporation and France Telecom S.A. Subsequently, the Mexican government opened the wireless market by granting nine regional cellular concessions in Band “A” in order to allow concessionaires to compete with Telmex and its mobile service provider affiliate, Radiomóvil Dipsa, S.A. de C.V. (also known as Telcel).

     Local telephony market. In connection with the privatization of Telmex in 1990, the Mexican government amended Telmex’s nationwide concession, which expires in March 2026, and granted Telmex a six-year implied monopoly over local telephony services. The amended Telmex concession obligated Telmex to expand and increase local telephony service at a rate of 12% per year beginning in 1992 and to provide basic telephone service to all population centers of 500 or more inhabitants by 1995. The implied local service monopoly was eliminated in mid-1996 when the Mexican Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes), or SCT, published regulations governing the licensing of local services on a competitive basis.

     In order to promote competition in the local telephony market, the Mexican government granted several concessions beginning in 1997, including first the regional concession awarded to us for wireline local telephony service and later expanded to a nationwide concession. Each wireline local telephony concession granted by the Mexican government generally has a 30-year term, and authorizes, among other things, the provision of local telephony services and value-added services in a specified region of the country.

     In addition, the Mexican government does not permit the unbundling of local loop frequencies, requiring all telephone companies wishing to offer local telephony service to build their own last-mile connectivity in order to reach their targeted customers.

     The Mexican government has also been conducting auctions of spectrum frequencies in the:

    450 MHz, 1.9 GHz (PCS) and 3.4-3.7 GHz (fixed wireless local loop) frequency bands;
 
    7, 15, 23 and 38 GHz frequency band for nationwide point-to-point microwave transmission links; and
 
    10.5 GHz frequency band for regional point-to-multipoint microwave transmission service.

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     Four companies won nationwide concessions for fixed wireless local loop frequencies, although one later forfeited its right for failure to pay concession fees. In addition, six companies won concessions in the 1.9 GHz (PCS) frequencies on either a nationwide or regional basis, although one also forfeited its right for failure to pay concession fees. See “—Competition.”

     Long distance telephony market. In connection with the privatization of Telmex in 1990, the Mexican government granted Telmex an exclusivity period for long distance telephony services of six years. In August 1996, the exclusivity period expired and competition commenced in January 1997. According to Pyramid Research, measured in terms of traffic, since the expiration of the exclusivity period and the subsequent beginning of competition, Telmex has lost 26% and 31% of the domestic and international long distance telephony market, respectively, to new competitors.

     In order to promote competition among domestic and international long distance providers, the Mexican government granted several concessions, including the national concession awarded to us, for domestic and international long distance services, as well as value-added services. Each concession generally has a nationwide scope and a 30-year term, and authorizes the provision of domestic and international long distance services and value-added services.

     The long distance concessionaires include among others:

    Alestra, S. de R.L. de C.V.;
 
    Avantel, S.A. de C.V.;
 
    Axtel, S.A. de C.V.; and,
 
    Iusatel, S.A. de C.V.

     International liberalization trends will likely impact the flow of long distance telephone traffic to and from Mexico. In particular, demand for long distance services may be stimulated by reforms of domestic access/interconnection charges and international settlement rates and recent international trade negotiations. As such charges decline, overall demand for international and local services increases.

Mexican market characteristics

     Population and economic growth. According to the Economic Commission for Latin America and the Caribbean-CEPAL (Comisión Económica para América Latina y el Caribe), Mexico is the second largest country in Latin America in terms of population. In 2004, Mexico had an estimated population of 104.7 million and a population growth rate of approximately 1.3% for the period from 1995 to 2000. In 2005, the projected population by age groups will be 30.8% under the age of 15, 61.5% between the ages of 15 and 59 and only 7.7% over 60. After a decline in 1995, Mexico’s real gross domestic product grew for five straight years, rising by 5.1% in 1996, 6.8% in 1997, 4.8% in 1998, 3.7% in 1999 and 6.6% in 2000. However in 2001, the real gross domestic product decreased by 0.3%. In 2002, the growth of the real gross domestic product resumed as it increased by 0.9%, 1.2% in 2003, and in 2004 it increased in 4.4%, according to the Bank of Mexico.

     Underserved telephony market. In 2003, The World Bank ranked Mexico as the 10th largest economy in the world. However, in terms of network readiness, Mexico was ranked 60th in the world according to the World Economic Forum. This relatively low level of wireline penetration evidences substantial unmet demand for fixed telephony service.

     According to Pyramid Research, the wireline local telephony market represents approximately 33.75% of Mexico’s total telecommunications market, when measured by revenues, and generated approximately U.S.$18.6 billion of revenue in 2004.

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     Projected growth trends. With the introduction of competition in the Mexican telecommunications market, teledensity rates and line usage increased substantially. According to Pyramid Research, between 2004 and 2009 fixed line penetration in service in Mexico is expected to increase by 25.65%.

     According to Pyramid Research, local services revenues (including data services) are expected to experience an annual growth rate of 2.0% from 2004 until 2009. International long distance services revenues are expected to experience strong price pressure, due to recent changes in the long distance rules affecting incoming traffic from the U.S., Mexico’s main source of international long distance traffic inflows. Overall volume from the U.S. to Mexico will increase making revenues from call termination an important component of Mexico’s voice services’ market. In spite of the sustained growth in switched traffic, revenues from long distance services have fallen. A drop in tariffs resulting from intense competition has not been compensated by a sufficient increase in traffic. In the international long distance market, the reduction in termination rates and the growing proportion of bypass traffic have played a major role in inhibiting growth in revenues.

     Total local wireline telephony revenues in Mexico are expected to surpass U.S.$11.0 billion by 2009. In contrast, international long distance services revenues are expected to experience a 3.8% decrease from 2004 until 2009.

Supervision and regulation of the Mexican telecommunications industry

General

     The telecommunications industry in Mexico is subject to the Federal Telecommunications Law (Ley Federal de Telecomunicaciones) which was enacted in 1995. However, certain rules set forth under the General Means of Communications Law (Ley de Vías Generales de Comunicación), the Telecommunications Regulation (Reglamento de Telecomunicaciones) and the rules promulgated thereunder, generally remain effective and are referred to as the Old Telecommunications Law.

     Under the Federal Telecommunications Law, the Mexican telecommunications industry is regulated for administrative and operational matters by COFETEL (Comisión Federal de Telecomunicaciones). COFETEL was created in 1996 as an autonomous entity from the SCT to regulate and promote the efficient development of the telecommunications industry in Mexico. COFETEL is responsible for, among other things:

    enacting regulations and technical standards for the telecommunications industry;
 
    ensuring that holders fulfill the terms of their concessions and permits;
 
    suspending operators without concessions;
 
    resolving interconnection controversies between competitors; and
 
    maintaining a registry of applicable rates.

     The SCT retains the authority to grant all concessions and permits. COFETEL makes recommendations to the SCT on major issues, such as amending existing telecommunications laws, allocating spectrum frequencies, granting, transferring, renewing or revoking concessions and applying penalties for concession violations. The SCT has final decision making power on these issues. Once a final decision is made, COFETEL implements the related regulations.

Concessions and permits

     General. To provide public telephony services in Mexico through a public network, a service provider must first obtain a concession from the SCT. Pursuant to the Federal Telecommunications Law, concessions for public networks may not exceed a term of 30 years, and concessions for spectrum frequencies may not exceed a term of 20 years. Generally, concessions for public networks may be extended for a term equivalent to the term for

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which the concession was originally granted. Concessions for spectrum frequencies will be re-auctioned at least three years prior to their expiration date. Concessions specify, among other things:

    the type and technical specifications of the network, system or services that may be provided;
 
    the allocated spectrum frequencies, if applicable;
 
    the geographical region in which the holder of the concession may provide the service;
 
    the required capital expenditure program;
 
    the term during which such service may be provided;
 
    the payment, where applicable, required to be made to acquire the concession, including, where applicable, the participation of the Mexican government in the revenues of the holder of the concession; and
 
    any other rights and obligations affecting the concession holder.

     In addition to concessions, the SCT may also grant permits for the following:

    installing, operating or exploiting transmission-ground stations; and
 
    providing telecommunications services as a reseller.

     There is no legally mandated maximum term for these permits unless specifically stated in the permit. Under the Federal Telecommunications Law, a company needs to register with COFETEL the rates for the telecommunications services that it wishes to provide in order to be able to provide them to the public.

     In addition, the Mexican Congress modified the Special Production and Services Tax Law effective January 1, 2002 establishing in it a new tax to services provided by telecommunications companies, at a rate of 10%. An amendment to this law, effective January 1, 2003, confirmed that our core business (the offering of local and long distance services) is not subject to the tax. Although we believe, based on the advice of our tax and regulatory advisors, that certain other services that are part of our local service offerings are also not subject to such tax, we cannot assure you that the tax authorities may not interpret the law otherwise. In 2002 and 2003 tax years Maxcom accrued the tax corresponding to the services that might be claimed by the Mexican tax authorities. As of January 1, 2004, telecommunications and supplementary services are no longer subject to this tax.

     Ownership restrictions. Under the Federal Telecommunications Law and the Mexican Foreign Investment Law (Ley Federal de Inversión Extranjera), concessions may be granted only to:

    Mexican individuals; and
 
    Mexican corporations in which non-Mexicans own 49% or less of the full voting stock and that are not otherwise controlled by non-Mexicans.

     However, in the case of concessions for cellular communications services, foreign investment participation may exceed 49% of the voting stock with the prior approval of the Mexican Foreign Investment Bureau of the Mexican Ministry of Economy (Secretaría de Economía).

     Pursuant to the Foreign Investment Law, the Mexican Ministry of Economy may also authorize the issuance of non-voting or limited-voting stock (also known as “neutral shares”) that are not counted for purposes of determining the foreign investment percentage of a Mexican corporation under the Mexican Foreign Investment

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Law. Any share transfers resulting in a violation of these foreign ownership requirements are invalid under Mexican law.

     Transfer. Concessions are transferable after the first three-year period of the concession, if the SCT approves the transfer of the concession title, the assignee agrees to comply with the terms of the concession and such a transfer does not violate the foreign ownership requirements of the Federal Telecommunications Law and the Mexican Foreign Investment Law.

     Termination. A concession or a permit may be terminated pursuant to the Federal Telecommunications Law upon the following events:

    expiration of its term;
 
    resignation by the concession holder or the permit holder;
 
    revocation. A concession or a permit may be revoked prior to the end of its term under certain circumstances, such as:

  <   failure to exercise the rights of the concession within 180 days of the grant;
 
  <   failure to provide interconnection services with other holders of telecommunications concessions and permits without just cause;
 
  <   loss of the concession or permit holder’s Mexican nationality;
 
  <   unauthorized assignment, transfer or encumbrance of the concession or permit;
 
  <   unauthorized interruption of service;
 
  <   taking any action that impairs the rights of other concessionaires or permit holders;
 
  <   failure to comply with the obligations or conditions specified in the concession or permit; and
 
  <   failure to pay to the Mexican government its fee for the concession or, where applicable, its participation in the revenues of the holder of the concession.

      The SCT may revoke a concession for violations in any of the circumstances referred to in the first four instances above. Under the last four instances above, the SCT would have to fine the concessionaire at least three times for the same failure before moving to revoke a concession.

    expropriation. The Mexican government has the statutory right to permanently expropriate any telecommunications concession and claim any related assets for reasons of public interest. Under Mexican law, the Mexican government is obligated to compensate the owner of such assets in the case of a statutory expropriation. The amount of the compensation is to be determined by appraisers. If the party affected by the expropriation disagrees with the appraisal amount, such party may initiate judicial action against the government. In such a case, the relevant judicial authority will determine the appropriate amount of compensation to be paid. We are not aware of any instance in which the SCT has exercised its expropriation rights in connection with a telecommunications company; and
 
    dissolution or bankruptcy of the concession holder or the permit holder.

     Temporary seizure. The Mexican government, through the SCT, may also temporarily seize all assets related to a telecommunications concession or permit in the event of a natural disaster, war, significant public disturbance, threats to internal peace or for economic reasons or for other reasons related to national security. If the Mexican government temporarily seizes such assets, except in the event of war, it must indemnify the concession holder for all losses and damages, including lost revenues. We are not aware of any instance in which the SCT has exercised its temporary seizure powers in connection with a telecommunications company.

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Rates for telecommunications services

     Before the Federal Telecommunications Law was amended, the SCT’s approval was required for setting the rates charged for all basic local, long distance and certain value-added local and long distance telecommunications services. Historically, the SCT permitted rate increases based on the cost of service, the level of competition, the financial situation of the carrier and certain macroeconomic factors. Carriers were not allowed to discount the rates authorized by the SCT, although operators occasionally waived activation fees on a promotional basis. Interconnection rates also required SCT approval. Rates for private dedicated circuit services through microwave networks and private networks through satellites were not regulated before the Federal Telecommunications Law was amended.

     Under the Federal Telecommunications Law, rates for telecommunications services (including local, cellular and long distance services) are now freely determined by the providers of such services, except that such rates may not be set below a service provider’s long-term incremental cost.

     In addition, COFETEL is authorized to impose specific rate, quality and service requirements on those companies determined by the Mexican Federal Antitrust Commission (Comisión Federal de Competencia) to have substantial market power pursuant to the provisions of Mexico’s antitrust statute. All rates for telecommunications services (other than value-added services) must be registered with COFETEL prior to becoming effective. The Federal Telecommunications Law prohibits telecommunications providers from cross-subsidizing among their services and requires that they keep separate accounting for each of their services.

     The Mexican Antitrust Commission has found that Telmex has substantial market power on the local, long distance and Internet and data transmission markets, as defined under Mexico’s antitrust statute. Based on this finding, COFETEL issued a resolution in September 2000 regulating Telmex as a dominant carrier, imposing special obligations regarding, among other things, quality of services, tariffs and disclosure of information. Telmex has obtained an injunction against potential COFETEL actions that intend to regulate Telmex by imposing special obligations on Telmex regarding, among other things, quality of services, tariffs and disclosure information. As a result of this injunction, the Mexican Antitrust Commission must restart the administrative procedures and prove again that Telmex has substantial power market on certain services.

Our concessions

     Local telephony. We obtained our regional wireline local telephony concession in February 1997. In September 2001, this concession was expanded to a nationwide concession. The concession, which is not exclusive, grants us the right to provide business, residential and public wireline local telephony services all over Mexico. Our wireline local telephony concession has a term of 30 years and may be renewable for up to an equivalent period provided we have complied with all its terms.

     The concession expressly permits us to provide the following services:

    basic local telephony;
 
    the sale or lease of network capacity for the generation, transmission or reception of signs, signals, writings, images, voice, sounds or other information of any nature;
 
    the purchase and lease of network capacity from other carriers, including the lease of digital circuits;
 
    value-added services;
 
    operator services;
 
    data, video, audio and video conference services, except for cable or other restricted television, continuous music or digital audio;

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    credit or debit telephone cards; and
 
    public telephony.

     The concession does not impose any limitations on the setting of our rates other than the requirement that we file with COFETEL a notification of any rate change prior to having it take effect.

     The concession requires us to comply with service quality specifications and, starting in September 2001, to install infrastructure on the basis of a yearly schedule. According to this schedule, we must install at least an aggregate of 376,000 lines in at least 394 cities and towns in Mexico by the end of 2006.

     Although we are currently in compliance with the requirement in our concession for the number of lines installed, we are currently in default with respect to the coverage obligations in certain cities and towns required by our concession. In addition, we believe we will not be able to meet certain buildout obligations in certain towns and cities along the City of Querétaro – City of San Luis Potosí, City of Puebla – City of Veracruz and Mexico City – City of Toluca corridors by December 2004. We are in the process of preparing a request for a modification to the buildout requirement of the concession from COFETEL. If granted, this modification would allow us to be once again in compliance. However, we cannot assure you that COFETEL will agree to such modification. See “Item 3. Key Information—D. Risk Factors—Factors relating to the Mexican telecommunications industry—We could lose our concessions if we do not comply fully with their terms.”

     Failure to comply with the terms of the concession or to obtain a waiver or modification could result in its revocation and the loss of the Ps.14.8 million performance bond that we previously issued to the SCT. The Mexican government would not be required to compensate us for such revocation. See “—Concessions and permits—Termination.” We failed to provide the SCT with the performance bonds renewal for 2004, and such failure could be construed as a default on the terms of our concessions. We are currently negotiating with the SCT new terms to secure the performance of our concessions. However, we cannot assure you what will be the outcome of such negotiations.

     As of January 1, 2005, the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps.93,600 to Ps.4.7 million, depending on the nature of the infraction. In the case of multiple recurring infractions, these fines may be doubled.

     Long distance. We obtained our nationwide long distance concession in February 1997, concurrently with our local telephony concession. Our nationwide long distance concession has a term of 30 years and may be renewable for up to an equivalent period, provided that we have complied with all its terms.

     The concession expressly permits us to provide the following services:

    the carrying of switched traffic between two different local calling areas that requires the use of a dialing prefix for its routing;
 
    the sale or lease of network capacity for the generation, transmission or reception of signs, signals, writings, images, voice, sounds or other information of any nature;
 
    the purchase and lease of network capacity from other carriers; and
 
    nationwide and international long distance telephony.

     The concession expressly prohibits the following services:

    those which require a concession for frequency bands of the radio electric spectrum for specific uses;

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    those which require a concession to occupy and exploit geostationary orbital positions and satellite orbits assigned to Mexico;
 
    those which require a concession to operate radio or television broadcasting systems; and
 
    cable or other restricted television.

     The concession does not impose any limitations on our ability to set rates other than the requirement that we file with COFETEL a notification of any rate change prior to having it take effect.

     The concession requires us to comply with service quality specifications and to install infrastructure on the basis of the schedule for our local telephony concession. According to this schedule, we must provide nationwide long distance service in the same locations and at the same time in geographic areas where we provide local telephony services. Of these areas, we must provide service in 394 cities and towns in Mexico using our own or leased infrastructure by the end of 2006.

     Although we are currently in compliance with the requirement in our concession for the number of lines installed, we are currently in default with respect to the coverage obligations in certain cities and towns required by our concession. In addition, we believe we will not be able to meet certain buildout obligations in certain towns and cities along the City of Querétaro – City of San Luis Potosí, City of Puebla – City of Veracruz and Mexico City – City of Toluca corridors by December 2004. We are in the process of preparing a request for a modification to the buildout requirement of the concession from COFETEL. If granted, this modification would allow us to be once again in compliance. However, we cannot assure you that COFETEL will agree to such modification. See “Item 3. Key Information—D. Risk Factors—Factors relating to the Mexican telecommunications industry—We could lose our concessions if we do not comply fully with their terms.”

     The failure to comply with the terms of the concession or to obtain a waiver or modification could result in its revocation and the loss of the Ps.14.8 million performance bond that we previously issued to the SCT. The Mexican government would not be required to compensate us for such revocation.

     As of January 1, 2005, the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps.93,600 to Ps.4.7 million, depending on the nature of the infraction. In the case of multiple recurring infractions, these fines may be doubled.

     We service our long distance concession by reselling our long distance traffic to other carriers with such capability. We currently do not intend to provide long distance service to anyone other than our local telephony customers (who use our own infrastructure for call origination) to avoid having to pay significant special charges to Telmex. According to COFETEL regulations, any long distance carrier that wishes to interconnect to Telmex’s local network must make a payment to Telmex on account of Telmex’s investment to upgrade its local infrastructure to allow long distance competition. In December 2000, Avantel and Alestra negotiated with Telmex a one-time payment of U.S.$13.6 million as an infrastructure development charge and an interconnection fee of U.S.$0.0053 per minute. Telmex adjusts the infrastructure development charge at a 10% annual rate. COFETEL has implicitly accepted that Telmex may require other long distance carriers to make similar payments.

     However, since most of COFETEL’s regulation on special charges to Telmex expired in December 2003, we have long distance interconnection with Telmex by September 2004 in 13 cities where we have long distance fiber optic cable capacity.

     According to the Mexican telecommunications regulations, all local carriers must offer their customers the option to select the long distance carrier of their preference; this practice is known as pre-subscription. However, local carriers may request a waiver of this obligation from COFETEL.

     On May 27, 2002, COFETEL granted us a waiver of the pre-subscription requirement. With this waiver, our local telephony customers who are currently using other long distance carriers may only change, if they wish to do so, to our long distance service. New local telephony customers must use our long distance service. This waiver

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is valid through May 2004 for Mexico City and the City of Puebla, and for five years (calculated from the date we begin to provide service) for anywhere else in Mexico including the City of Querétaro.

     Microwave transmissions. Point-to-point. In October 1997, we were awarded seven nationwide point-to-point microwave concessions. These concessions cover:

    two consecutive frequency segments in the 15 GHz band, with a 56 MHz bandwidth;
 
    three consecutive frequency segments in the 23 GHz band, with a 56 MHz bandwidth; and
 
    two consecutive frequency segments in the 23 GHz band, with a 100 MHz bandwidth.

     These concessions, which were issued in June 1998, have a term of 20 years. COFETEL will re-auction the frequencies covered by the concessions at least three years before the expiration date of the concessions. The concessions require us to provide available capacity to the general public.

     We are currently in compliance with all the material terms of the concessions.

     The failure to comply with the terms of the concessions could result in their revocation and the loss of up to Ps.13.4 million in performance bonds that we previously issued to the SCT for all of our seven point-to-point concessions. The Mexican government would not be required to compensate us for such revocation. As of January 1, 2005, the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps. 93,600 to Ps.4.7 million, depending on the nature of the infraction. In the case of multiple recurring infractions, these fines may be doubled. We failed to provide the SCT with the performance bonds renewal for 2004, and such failure could be construed as a default on the terms of our concessions. We are currently negotiating with the SCT new terms to secure the performance of our concessions. However, we cannot assure you what will be the outcome of such negotiations.

     These concessions do not impose any limitations on the setting of our rates other than the requirement that we file with COFETEL a notification of any rate change prior to having it take effect.

     Point-to-multipoint. In October 1997, we were awarded three regional point-to-multipoint microwave concessions covering Regions 3, 5 and 8, which include states in the north and southeast of Mexico’s Gulf region in the 10.5 GHz with a 60 MHz bandwidth.

     These concessions, which were issued in April 1998, have a term of 20 years. COFETEL will re-auction the frequencies covered by the concessions at least three years before the expiration date of the concessions. These concessions require us to install a network and offer service to at least 30% of the population in each region covered by the concessions by the end of the second year after the issuance of the concession.

     Until December 2003 we, together with 14 other concessionaires, were unable to start operations in some of our Regions because of lack of commercially viable technological solutions and equipment for those frequencies. COFETEL initially granted extensions until April 2000 and later extended them to October 2001. In November 2001 and again in December 2002, we requested that COFETEL amend our point-to-multipoint concessions in order to postpone the installation of our network and the offering of our services until one year after the granting of such request. We have knowledge that other concessionaires have made similar requests.

     The COFETEL granted an extension until February 2004. On March 31, 2004, we notified the COFETEL that we started operation in Puebla, and thus we comply with our initial coverage obligations for Region 8. We, however, have been unable to start operations in Regions 3 and 5. We are on the process of testing commercial operations in such Regions in order to fulfill the terms of our point-to-point concessions. The failure to comply with the terms of the concessions or to obtain a waiver or modification could result in its revocation and the loss of the Ps.5.2 million performance bond that we previously issued to the SCT for all of our three point-to-multipoint concessions. The Mexican government would not be required to compensate us for such revocation. As of January 1, 2005 the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps. 93,600 to Ps.4.7

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million, depending on the nature of the infraction. In the case of multiple recurring infractions, these fines may be doubled. We failed to provide the SCT with the performance bonds renewal for 2004, and such failure could be construed as a default on the terms of our concessions. We are currently negotiating with the SCT new terms to secure the performance of our concessions. However, we cannot assure you what will be the outcome of such negotiations.

     These concessions do not impose any limitations on the setting of our rates other than the requirement that we file with COFETEL a notification of any rate change prior to having it take effect.

Interconnection

     In accordance with the Mexican telecommunications laws, all local telecommunications carriers are required to provide interconnection to each local, long distance and cellular carrier operating in Mexico.

     All terms of interconnection (such as point of interconnection) are negotiated between telecommunications carriers under COFETEL’s supervision. Should telecommunications carriers be unable to agree on the terms of interconnection (including rates) after a certain period of negotiation, either carrier may request COFETEL to resolve any interconnection term at issue. Telecommunications carriers are prohibited from adopting discriminatory practices in the application of rates or any other terms of interconnection.

     Local interconnection. In November 1998, we entered into an interconnection agreement with Telmex. This agreement calls for reciprocal interconnection rates for local-to-local services. The interconnection rate was Ps.0.3220, Ps.0.1159, Ps.0.0990, Ps.0.1111, and Ps.0.1096 per minute for the months of December 2000, 2001, 2002, 2003, and 2004, respectively.

     This agreement was amended in February 1999 to incorporate a “bill and keep” feature through September 15, 2002, provided we maintain a significant percentage of residential users, and again in November 2000, retroactive to March 2000, to exempt Internet service provider traffic from interconnection fees. In December 2003, the agreement was once again amended in order to reduce the percentage of imbalance from 70% to 30% for “bill and keep” purposes. A new amendment was executed in August 2004 reducing furthermore the allowed percentage of imbalanced traffic for the imbalanced traffic for the “bill and keep” procedure to 15%. This amendment will be effective temporarily until we can reach a definitive agreement with Telmex. Additionally, the amendments exempts call centers’ and new customers’ traffic from calculation of imbalance. Under the new “bill and keep” arrangement, if the imbalance between calls originated by Telmex and terminated by Maxcom and calls originated by Maxcom and terminated by Telmex during a month does not exceed 15%, then no interconnection fee amounts are payable by the net user of interconnection services. If the imbalance exceeds 15% in any given month, the “bill and keep” feature will not apply for that month.

     If we fail to maintain a significant percentage of residential users, then the “bill and keep” arrangement will be terminated and asymmetrical interconnection rates may apply. COFETEL has not yet defined what constitutes a “significant percentage of residential users” in this case, although in our local concession and in those granted to Alestra and Avantel it defines it to mean that at least 50% of the customers are residential.

     Through December 31, 2004, no material interconnection fees have been paid.

     Mobile interconnection. We have also signed reciprocal interconnection agreements with Telcel, a wholly-owned subsidiary of América Móvil, which is a spin-off of Telmex; with several subsidiaries of Iusacell and with Operadora Unefon, S.A. de C.V. (“Unefon”) and Pegaso Comunicaciones y Sistemas, S.A. de C.V., (now owned by Telefónica Móviles “Telefonica Moviles”). Telcel and Telefonica Moviles are the first and second largest mobile telephony service providers in Mexico, respectively. Telcel and Telefonica Moviles are nationwide cellular operators. Iusacell provides cellular mobile services in seven of the nine regions covering central Mexico. Unefon is a nationwide PCS mobile operator.

     The mobile to wireline interconnection fees with these carriers were Ps.0.3220, Ps.0.1159 Ps.0.0990, Ps.0.1111, and Ps.0.1096 per minute for the months of December 2000, 2001 2002, 2003 and 2004 respectively.

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The wireline to mobile interconnection fees under the “calling party pays” mode was Ps.1.90 per minute for December 2000, 2001, 2002, 2003 and 2004. There is no interconnection fee for wireline to mobile interconnection outside of the “calling party pays” mode. The interconnection agreements provide that transit from Telmex may be used at a rate per minute which was Ps.0.0626 for the month of December 2000, Ps.0.0278 for the month of December, 2001 Ps.0.0304 for the month of December 2002, Ps. 0.1111 for the month of December 2003 and Ps.0.0337 for the month of December 2004.

     Long distance interconnection. Long distance carriers are required to ensure call termination by providing transit and direct or indirect interconnection. Since we view long distance services as a complement to our core local telephony business, we started our operations giving our customers the option to use our long distance services or those of other providers. As a result, we granted long distance carriers the option to pick up calls at our facilities. However, in May 2002, we obtained a waiver from COFETEL of the obligation to offer such option to our customers See “—Our concessions—Long distance.”

     We currently provide our long distance service only to our local telephony customers through our own network and leased facilities on a reselling basis.

Municipal and other regulatory approvals

     Our transmission antennas and telecommunication sites are located in sites that may require municipal and federal approvals to operate. See “Item 3. Key Information—D. Risk factors relating to Maxcom—Our telecommunications network infrastructure has several vulnerabilities and limitations.”

C.   Organizational structure

     Maxcom has four Mexican subsidiaries, Corporativo en Telecomunicaciones, S.A. de C.V., Maxcom Servicios Administrativos, S.A. de C.V., Maxcom SF, S.A. de C.V. and Maxcom TV, S.A. de C.V., each a Mexican limited liability company (sociedad anónima de capital variable), that provide corporate services to Maxcom. Maxcom owns all of the capital stock of the subsidiaries, except for one share of each, which share is owned by Corporativo en Telecomunicaciones, S.A. de C.V. in the case of Maxcom Servicios Administrativos, S.A. de C.V. and of Maxcom Servicios Administrativos, S.A. de C.V. for the cases of Corporativo en Telecomunicaciones, S.A. de C.V., Maxcom SF, S.A. de C.V. and Maxcom TV, S.A. de C.V. This organizational structure is due to the fact that Mexican law requires that limited liability companies have a minimum of two stockholders.

     In February 2004, we incorporated a wholly owned subsidiary in the State of Delaware, U.S.A., under the name of Maxcom U.S.A., Inc. Also in February 2004 Maxcom U.S.A., Inc. applied before the U.S. Federal Communications Commission to obtain a license under section 214 of the Communication Act of 1934, to provide international telecommunications services between the United States and international points, mainly Mexico (also known as a “214 License”). The U.S. Federal Communication Commission granted the license in March 2004. Maxcom U.S.A., Inc. has not yet initiated significant operations in the U.S.

     In February 2005, we incorporated Maxcom SF, S.A. de C.V., a wholly owned subsidiary, under the laws of Mexico. This subsidiary will be used as a special purpose vehicle to finance the securitization of Maxcom’s accounts receivable in the future. Maxcom SF has not yet initiated operations in Mexico.

     In May 2005, we incorporated Maxcom TV, S.A. de C.V., a wholly owned subsidiary, under the laws of Mexico. Also in May, 2005, this subsidiary has requested a license from the Mexican government to provide cable television services for the City of Puebla, Pue.

D.   Property, plant and equipment

     We currently lease the buildings and/or the land where our operations are carried out and our microwave transmission equipment and switching centers are located.

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     We lease space for administrative offices in Mexico City and in the cities of Puebla and Querétaro. Our main headquarters are located in Santa Fe, Mexico City in a building leased for a 5-year term that expires on February 26, 2007 and that is renewable for two additional 5-year terms. This building is comprised of l15,110 square feet. In November 2003, we sub-leased 29,870 square feet of our main headquarters until February 26, 2007. This sub – lease agreement is renewable for two 5 – year terms, provided we decide to renew our lease agreement. The price per square feet on our sub – lease agreement is exactly the same as the one we have for our lease agreement, therefore we accounted the rent of our sub – lease agreement as a reduction of the rent rather than as income.

     In May 2003, we reached an agreement with our landlord at our former headquarters in Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May 2013 on the first floor, where one of our Lucent 5ESS switches is located, and a portion of the roof-top, where we have microwave transmission antennas. We were also released from lease obligation on approximately 35,887 square feet plus parking space of the building originally running through September 30, 2013. In exchange, we agreed to prepay the full, ten-year lease obligations on the first floor and a portion of the roof-top, which amount to U.S.$2.7 million and was payable in installments through May 2004.

     Our offices in the City of Puebla are leased for a 10-year renewable term that expires on March 25, 2008. These offices in Puebla are comprised of 14,100 square feet and hold one of our Lucent Technologies 5ESS switch. We have a branch office in Puebla that is leased for a 5-year term that expires on June 1, 2004, renewable for one similar additional term. This building is comprised of 1,350 square feet. We cancelled in June 2004, the lease agreement for the parking of our vehicular fleet in the City of Puebla. This parking space was comprised of 13,185 square feet.

     Our offices in the City of Queretaro are leased for a 15-year renewable term that expires on August 1, 2017. These offices in Queretaro are comprised of 12,012 square feet. We have a branch office in Querétaro that is leased for a 15-year term that expires on June 23, 2017. This branch office is comprised of 33,947 square feet and holds one of our other Lucent Technologies 5ESS switch.

     On August 1, 2003, we leased a warehouse comprised of 28,620 square feet for a 2-year term that expires on July 31, 2005. In addition we lease approximately 130 other sites that are used as hosts or single-site buildings and are located throughout Mexico City and the cities of Puebla. Additionally, we are the owners of five portions of land in the City of Puebla that are used as part of our infrastructure. We believe that our facilities are adequate for our present needs and are suitable for their intended purposes.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     All peso amounts discussed in this annual report are presented in constant December 31, 2004 pesos in accordance with Mexican GAAP, except as otherwise indicated. You should read the following discussion and analysis in conjunction with the consolidated financial statements included elsewhere in this annual report. Unless otherwise indicated, all financial information in this annual report is presented in constant pesos as of December 31, 2004. The U.S. dollar translations provided in this annual report are solely for the convenience of the reader and are, unless otherwise indicated, calculated utilizing the noon buying rate at December 31, 2004, which was Ps.11.15 per U.S.$1.00 as reported by the Federal Reserve Bank of New York. Sums may not add due to rounding.

     The following discussion and analysis is intended to facilitate an understanding and assessment of significant changes and trends in our historical consolidated results of operations and financial condition and factors affecting our financial resources. It should be read in conjunction with the audited consolidated financial statements as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004 and related notes.

     These consolidated financial statements, which appear elsewhere in this annual report, have been prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. See note 23 to our consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us. Note 23 to our financial statements also provides a reconciliation to U.S. GAAP of our net losses for the years ended December 31, 2002, 2003 and 2004 and of stockholders’ equity as of December 31, 2003 and 2004.

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     Our financial statements have been prepared in accordance with Bulletin B-10, “Recognition of the Effects of Inflation on Financial Information,” as amended, issued by the Mexican Institute of Public Accountants (“MIPA”), which provides guidance for the recognition of the effects of inflation and translation of foreign currency transactions.

     We restate our income statement to reflect the purchasing power of the peso as of the most recent reporting date (December 31, 2004), using a restatement factor derived from the change in the national consumer price index from the month in which the transaction occurred to the most recent year-end. Except where otherwise indicated, financial data for all periods in the consolidated financial statements and throughout this annual report have been restated in constant pesos as of December 31, 2004. References in this annual report to “real” amounts are to inflation-adjusted pesos and references to “nominal” amounts are to unadjusted historical pesos. In calendar years 2002, 2003 and 2004, the rates of inflation in Mexico, as measured by changes in the Mexican national consumer price index, were 5.7%, 4.0% and 5.2%, respectively.

     Bulletin B-12, issued by the MIPA, specifies the appropriate presentation of the statement of changes in financial position when the financial statements have been restated in constant monetary units. Bulletin B-12 identifies the sources and applications of resources as the differences between beginning and ending financial statement balances in constant monetary units. The Bulletin also requires that monetary and foreign exchange gains and losses not be treated as non-cash items in the determination of resources provided by operations.

Recent developments

     On June 20, 2005 we filed before the Banking and Securities Commission of Mexico (“Comisión Nacional Bancaria y de Valores”) a petition to issue a program of securities in Mexican markets for up to Ps.150,000,000 (approximately U.S.$14 million dollars) in the form of unsecured “certificados bursátiles”. These notes will be issued, if authorized, on short term tranches. We have retained IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero to serve as our financial agent and lead manager in connection with this program. We are still negotiating the final terms of this local securities program.

A.   Results of operations

Overview of Maxcom

     We are a growing facilities-based telecommunications company operating in the competitive local exchange carrier market in Mexico. We are focused on developing our network and support infrastructure required to provide local as well as long distance and other value-added services to targeted small and medium-sized business and residential customers within our concession areas. We position ourselves as a single-source provider of telecommunications services to our customers.

     We commenced commercial operations on May 1, 1999 and currently provide last-mile connectivity to small and medium-sized business and residential customers in Mexico City and the cities of Puebla and Querétaro. In addition to our existing local and long distance services, we offer value-added services such as digital high-speed data connectivity, dial-up Internet access and other broadband services.

     We were incorporated in February 1996 to take advantage of business opportunities arising out of the liberalization of Mexico’s telecommunications industry. In February 1997, we were awarded Mexico’s first competitive wireline local and long distance telephony concession, covering the Federal District of Mexico and over 100 cities and towns in the Gulf region for local service and the whole nation for long distance service. This concession has a term of 30 years. Our concession was expanded in September 1999 to cover most of the greater Mexico City area, and a wider area within the Gulf region. In September 2001, our wireline local telephony concession was expanded to cover all of Mexico.

     We were also awarded seven nationwide point-to-point and three regional point-to-multipoint microwave concessions in October 1997, each for 20 years.

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Devaluation and inflation

     On December 20, 1994, the Mexican government responded to exchange rate pressures by increasing the upper limit of the then existing free market peso/U.S. dollar exchange rate band by 15% and, two days later, by eliminating the band to allow the peso to fluctuate freely against the U.S. dollar. This resulted in a major devaluation of the peso relative to the U.S. dollar. Where the noon buying rate had been Ps.3.45 per U.S.$1.00 on December 19, 1994, by December 31, 1994 the noon buying rate had fallen to Ps.5.00 per U.S.$1.00, representing a 44.9% devaluation. The peso continued to decline against the U.S. dollar during 1995, closing at a noon buying rate of Ps.7.74 per U.S.$1.00 on December 31, 1995, which represented a 54.8% devaluation relative to the U.S. dollar for the year.

     The Mexican economy began to recover in 1996 and 1997, as exchange rates stabilized, inflation decreased and real gross domestic product grew by 5.3% and 6.8%, respectively. However, the financial crises in Asia and Russia, together with the weakness in the price of oil in 1998, which is a significant source of revenue for the Mexican government, contributed to renewed weakness in the peso, which devalued 22.7% relative to the U.S. dollar. From 1999 to 2000, the peso-to-dollar exchange rate remained relatively stable. In 2001, the peso-to-dollar exchange rate showed a slight recovery of 4.8% from Ps.9.62 on December 31, 2000 to Ps.9.16 on December 31, 2001. However, in 2002 and 2003, the peso devalued 13.9% and 7.8% relative to the U.S. dollar, and in 2004 the peso revalued 0.8% relative to the U.S. dollar. In the first five months of 2005, the peso reevaluated 2.2% relative to the U.S. dollar.

     Peso devaluations contributed to sharp increases in inflation. Inflation, which had been 7.1% in 1994, increased to 52.0% and 27.7% in 1995 and 1996, respectively. After a reduction to 15.7% in 1997, inflation was 18.6% in 1998. In 1999, 2000, 2001, 2002 and 2003, the inflation rate decreased to 12.3%, 9.0%, 4.4%, 5.7% and 4.0%, respectively. In 2004, the inflation rate was 5.2%.

     The general economic conditions in Mexico resulting from a devaluation of the peso and the resulting inflation may have a negative impact on our results of operations, primarily as a result of:

    the increase in the peso-carrying costs of our U.S. dollar-denominated debt and capital expenditure requirements;
 
    the ensuing decrease in the purchasing power of Mexican consumers, which results in a decrease in the demand for telephony services; and
 
    our inability, due to competitive pressures, to increase our prices in line with inflation.

Capitalization of pre-operating expenses

     We commenced commercial operations on May 1, 1999. As permitted under Mexican GAAP, during our pre-operating stage, we capitalized all of our general and administrative expenses and our net integral cost of financing.

     We were required to begin to amortize all previously capitalized pre-operating costs. These capitalized pre-operating expenses, net, which balance amounted to Ps.256.5 million at December 31, 2001, Ps.223.5 million at December 31, 2002, Ps.188.9 million at December 31, 2003 and Ps.153.5 million at December 31, 2004, are amortized on a straight-line basis for a period not exceeding ten years.

Voice, data and wholesale revenues

     In July 2002 we began reporting revenues from data services separately from voice and data revenue began to grow in significance. Prior to that date, revenues from data services were included with voice revenues.

     Voice services are our core business. Revenues from voice services include:

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    installation charges of voice lines;
 
    monthly fees for the rental of voice lines, which include, depending on the product, a certain number of free local calls;
 
    usage charges of voice lines, which can be local calls above those already included in the monthly fees, long distance minutes, as well as minutes to mobile numbers under the Calling Party Pays modality;
 
    charges relating to value-added services such as voice mail, call waiting, call forwarding, three-way calling and caller identification;
 
    interconnection fees; and
 
    the sale of telephone sets.

     We began to offer data services on a full basis in July 2002. Revenues from data services include: Internet dial-up access, ADSL, dedicated Internet access, digital private lines and lease of backbone capacity. We charge for these services on a bandwidth basis.

     Wholesale service revenues are related basically to the sale of bulk minutes where the cost per minute depends on the volume of traffic. Customers include high-usage customers, Internet service providers and carriers with whom we do not have “bill & keep” agreements (such as long distance and mobile carriers). We also include in this group other miscellaneous revenues.

Results of operations

     The following table sets forth, for the periods indicated, selected statement of operations data calculated in accordance with Mexican GAAP and expressed as a percentage of net revenue:

                         
    Year ended December 31  
    2004     2003     2002  
Net revenues
    100 %     100 %     100 %
Operating cost and expenses:
                       
Network operating costs
    35 %     36 %     39 %
Selling, general and administrative expenses
    43 %     50 %     80 %
Depreciation and amortization
    39 %     44 %     59 %
 
                 
Total operating cost and expenses
    117 %     130 %     178 %
Operating loss
    17 %     30 %     78 %
Integral cost of financing
    5 %     16 %     58 %
Nonrecurring charges
    0 %     0 %     0 %
 
                 
Other expense, net
    0 %     0 %     0 %
 
                 
Taxes
    3 %     2 %     1 %
 
                 
Net loss
    15 %     48 %     137 %
 
                 

Year ended December 31, 2004 compared to year ended December 31, 2003

Net revenues

     Our net revenues primarily include monthly fees, usage fees, installation charges, interconnection fees and the sale of telephone sets. See note 3.n to the consolidated financial statements included in this annual report for an explanation of how we recognize revenues.

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     Our net revenues increased 7.8% in 2004 as compared to 2003, from Ps. 805.4 million in 2003 to Ps.868.2 million in 2004.

     Voice revenues increased by 7.0%, from Ps.668.9 million in 2003 to Ps.715.5 million in 2004. This increase was primarily due to 13.3% increase of the number of average voice lines in service from 125,723 in 2003 to 142,439 in 2004, as we continued the buildout of our network infrastructure and had more voice lines available. The increase in the number of average voice lines was partially offset by a 1% decrease in Company ARPU. The increase in voice lines produced a 0.7% increase in monthly fee revenues (from Ps.309.8 million in 2003 to Ps.312.0 million in 2004) and a 9.0% increase in overall usage fees (from Ps.333.0 million in 2003 to Ps.363.1 million in 2004).

     Wholesale revenues increased by 24.0%, from Ps.89.4 million in 2003 to Ps.110.9 million in 2004. This increase was primarily due to a 54.5% increase in traffic from 634.6 thousand minutes in 2003 to 980.7 thousand minutes in 2004, partially offset by a 13.0% decrease in the average cost per minute.

     The following table presents a breakdown of our revenues by source for 2003 and 2004:

                 
    Year ended December 31  
    2004     2003  
    (in millions)  
Voice
  Ps. 715.5     Ps. 668.9  
Data
    41.8       47.1  
Wholesale
    110.9       89.4  
 
           
Total revenues
  Ps. 868.2     Ps. 805.4  
 
           

     The following table presents a breakdown of our average revenue per line (also known as ARPU) for 2003 and 2004.

                         
    ARPU  
    2004     2003     %  
    (in U.S. dollars)  
Business
                       
Monthly charges
  $ 21.1     $ 24.5       (14 )%
Usage
    51.0       52.1       (2 )%
Subtotal
    72.1       76.6       (6 )%
Non-recurring
    3.3       3.0       10 %
 
                 
Total business
  $ 75.4     $ 79.6       (5 )%
 
                 
 
                       
Residential
                       
Monthly charges
  $ 16.2     $ 16.9       (4 )%
Usage
    12.5       12.3       2 %
Subtotal
    28.7       29.2       (2 )%
Non-recurring
    1.9       1.2       (58 )%
 
                 
Total residential
  $ 30.6     $ 30.4       1 %
 
                 
 
                       
Company
                       
Monthly charges
  $ 17.1     $ 18.3       (7 )%
Usage
    20.1       19.7       2 %
Subtotal
    37.2       38.0       (2 )%
Non-recurring
    2.1       1.6       31 %
 
                 
Total company
  $ 39.1     $ 39.6       (1 )%
 
                 

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     We calculate ARPU by dividing the total voice revenues for a given period of times by the average number of voice lines in service during such period. ARPU is a widely utilized standard measure in the telecommunications industry and is used to evaluate the performance of the voice business. Revenues from data and wholesale services are reported separately and are not the factor in calculating ARPU.

     We calculate voice lines ARPU for our residential and business lines. Overall ARPU is affected by our business/residential line mix as business lines tend to generate higher ARPU than residential lines. Total Company ARPU includes Public Telephony revenues and lines.

     Business ARPU decreased 5% to U.S.$75.4 in 2004 from U.S.$79.6 in 2003, as a result of (i) a 14% decrease in installation charges as we continued waiving installation fees in many cases during 2004 due to competitive pressures; and (ii) a 2% decrease in usage charges as a result of a slightly lower number of local outbound calls per line. This decrease was partially offset by a 10% increase in monthly fees related to a change in the product mix, given that each product generates different rates.

     Residential ARPU increased 1% to U.S.$30.6 in 2004 from U.S.$30.4 in 2003. The increase was mainly due to a 2% increase in usage charges.

     The following table presents a breakdown of our lines by type of customer at December 31, 2003 and 2004 and the percentage variation:

                         
    At December 31  
    2004     2003     %  
Voice lines:
                       
Business lines
    28,249       24,305       16 %
Residential lines
    125,934       106,389       18 %
Public Telephony
    492             N/A
Wholesale lines
    10,220       6,850       49 %
 
                 
Total lines
    164,895       137,544       20 %
 
                 

Operating costs and expenses

     Our operating costs and expenses include:

    network operating costs which, include technical expenses (comprised of electric power, site leases and maintenance of telecommunications equipment), installation expenses, when applicable and disconnection expenses;
 
    selling, general and administrative expenses, which primarily included salaries, wages and benefits; consulting fees, which primarily related to consulting services and general legal and accounting fees; leasing costs which primarily related to our headquarters, warehouses, and other facilities; marketing expenses which primarily related to the implementation of our branding campaign, general advertising and promotions; and provisioning for bad debt; and
 
    depreciation and amortization mainly related to pre-operating expenses, frequency rights, telephone network systems and equipment and intangibles.

     Our operating costs and expenses were Ps.1,015.7 million in 2004, a 3.1% decrease as compared to Ps.1,048.5 million in 2003. This decrease was primarily due to:

    a Ps.15.2 million, or 7.6%, increase in network operating services resulting mainly from (i) a Ps.14.0 million increase in local-to-mobile interconnection costs associated with a significant increase in local-to-mobile traffic, partially offset by a Ps4.4 million decrease in long distance interconnection as a result of lower per-minute rates obtained from several carriers and improved

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      routing of our long distance traffic, (ii) Ps.6.4 million increase in costs related to the lease of circuits required for our backbone and last mile connectivity as a result of the growth of our network, and, (iii) Ps.0.8 million lower other costs, primarily the reduction of internet service costs as a result of lower rates obtained from new suppliers of internet access.
 
    a Ps17.0 million, or 26.7% increase in technical expenses primarily due to (i) a 46.9% increase, or Ps$10.9 million in maintenance as a result of our larger telephone network, and (i) a Ps$6.1 million, or 15.1% increase in leases of sites and expenses related to the operation of our telephone network;
 
    a Ps.18.7 million, or 5.2%, decrease in depreciation and amortization related to the termination of the depreciation of some assets with short expected life period such as electronic and computing equipment and software; and
 
    a Ps.15.2 million, or 57.4%, decrease in installation expenses due to waivers of installation charges granted as a result of competitive pressures (we record installation expense at the time of installation only when we bill are customers for installation fees, and during 2003 and 2004 we waived installation fees in many instances due to competitive pressures). Through December 31, 2002, when we waived installation costs to our customers, the related installation costs were capitalized and amortized on a straight-line basis over a period of 20 years. Beginning in 2003, when we waive installation costs, we capitalize and amortize the installation costs on a straight-line basis over a period equal to the remaining original term of our microwave concessions, which expires in October 2017.

     Selling, general and administrative expenses decreased Ps.31.1 million, or 7.7% primarily due to (i) Ps.20.4 lower provision for executive bonuses in 2004, (ii) a Ps.10.9 million pesos decrease in severance expenses as a result of the headcount reduction in 2003, (iii) a Ps.12.9 million decrease in bad debt provisioning coming mainly from the provision in 2003 of a fraud detected from a business customer, see “Item 8. Financial Information-A. Consolidated statements and other financial information, Legal proceedings” and customer retention plans that have allowed us to improve collections and hence to reduce bad debt provisioning, (iv) a Ps. 3.1 million or 9.9% decrease in leases of offices buildings, as we reached an agreement with our landlord at our former headquarters in 2003 together with sub-leases of office space in our current headquarters to other companies, (v) a Ps. 2.4 million, or 6.4% reduction in fees paid to external advisors; and, (vi) a Ps. 2.3 million or 51.8% reduction in insurance expenses.

     These savings were offset in part by (i) a Ps.10.1 million, or 244.1% increase in advertising expenses, as we initiated advertising campaigns in new clusters, (ii) a Ps.2.8 million, or 11.0% increase in sales commissions, as a result of a 16.6% increase in gross installed lines from 53,655 in 2003 to 62,579 in 2004, (iii) Ps. 2.6 million, or .8% increase in reserve for obsolete equipment as we sold obsolete equipment in 2004, (iv) Ps. 2.6 million, or 8.8% increase in general selling and administrative expenses, (v) Ps. 1.6 million or 453.1% in market research expenses; and, (iii) a Ps.1.2 million increase in maintenance expenses.

Integral cost of financing

     Under Mexican GAAP and in accordance with Bulletin B-10, we are required to quantify all financial effects of operating and financing the business under inflationary conditions. For presentation purposes, “integral cost of financing” refers to the combined financial effects of:

    net interest expense and interest income;
 
    net foreign exchange gains or losses; and
 
    net gains or losses on monetary position.

     Net foreign exchange gains or losses reflect the impact of changes in foreign exchange rates on assets and liabilities denominated in currencies other than pesos. A foreign exchange loss arises if a liability is denominated in

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a foreign currency which appreciates relative to the peso between the time the liability is incurred and the date it is repaid, as the appreciation of the foreign currency results in an increase in the amount of pesos which must be exchanged to repay the specified amount of the foreign currency liability.

     The gain or loss on monetary position refers to the gains and losses realized from holding net monetary assets or liabilities and reflects the impact of inflation on monetary assets and liabilities. For example, a gain on monetary position results from holding net monetary liabilities in pesos during periods of inflation, as the purchasing power of the peso declines over time.

     Our integral cost of financing was a negative Ps.47.3 million in 2004, a 136.5% decrease as compared to positive Ps.129.4 million in 2003. The decrease in integral cost of financing was primarily due to:

     (i) a Ps.180.7 million, or 99.2% reduction in exchange loses, as a consequence of the effect on our dollar-denominated debt of a lower devaluation of the peso as compared to the dollar during 2004, when compared to the devaluation of the peso during 2003, as well as lower debt lever due to our October 2004 restructuring; and

     (ii) a Ps.6.1 million, or 7.6% increase in gain on net monetary position, as a result of the effect of a higher inflation on our liabilities monetary position in 2004 when compared to the inflation during 2003.

     These factors of financing costs were partially offset by (i) a Ps.4.5 million increase in interest expense associated with financing from vendors and, (ii) a Ps.5.5 million higher bank commissions, net of interest on cash balances.

Asset tax

     We recorded Ps.26.9 million in asset taxes in 2004 as compared to Ps.12.9 million in asset taxes in 2003. The difference is primarily due to a significant increase in our asset base in 2000, when we increased the buildout of our network, as compared to 1999, which are the respective years considered for purposes of computation of the asset tax. Asset taxes are computed on the asset base existing four years before the current tax year.

Year ended December 31, 2003 compared to year ended December 31, 2002

Net revenues

     Our net revenues increased 37.4% in 2003 as compared to 2002, from Ps.586.2 million in 2002 to Ps.805.3 million in 2003. This increase was primarily due to 36.1% increase of the average number of lines in service from 96,521 in 2002 to 125,723 in 2003, as we continued the buildout of our network infrastructure. The increase in voice lines produced a 33.4% increase in monthly fee revenues (from Ps.231.5 million in 2002 to Ps.309.8 million in 2003) and a 31.3% increase in overall usage fees (from Ps.253.6 million in 2002 to Ps.333.0 million in 2003).

     Wholesale revenues increased by 79.3%, from Ps.49.9 million in 2002 to Ps.89.4 million in 2003. This increase was primarily due to a 138.6% increase in traffic from 266.0 thousand minutes in 2002 to 634.6 thousand minutes in 2003, partially offset by a 8.6% decrease in the average cost per minute.

     The following table presents a breakdown of our revenues by source for 2002 and 2003.

                 
    Year ended December 31  
    2003     2002  
    (in millions)  
Voice(1)
  Ps. 668.9     Ps. 525.7  
Data
    47.1       10.6  
Wholesale
    89.4       49.9  
 
           
Total revenues
  Ps. 805.4     Ps. 586.2  
 
           

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(1)   Data service revenues were minimal prior to July 2002 and were included with voice revenues.

     The following table presents a breakdown of our average revenue per line (also known as ARPU) for 2002 and 2003.

                         
    ARPU  
    2003     2002     %  
    (in U.S. dollars)  
Business
                       
Monthly charges
  $ 24.5     $ 23.8       3 %
Usage
    52.1       52.5       (1 )%
Subtotal
    76.6       76.3       0 %
Non-recurring
    3.0       4.3       (31 )%
 
                 
Total business
  $ 79.6     $ 80.6       (1 )%
 
                 
 
                       
Residential
                       
Monthly charges
  $ 16.9     $ 18.0       (6 )%
Usage
    12.3       12.6       (2 )%
Subtotal
    29.2       30.6       (4 )%
Non-recurring
    1.2       2.9       (58 )%
 
                 
Total residential
  $ 30.4     $ 33.5       (9 )%
 
                 
 
                       
Company
                       
Monthly charges
  $ 18.3     $ 19.2       (5 )%
Usage
    19.7       21.0       (6 )%
Subtotal
    38.0       40.2       (5 )%
Non-recurring
    1.6       3.3       (52 )%
 
                 
Total company
  $ 39.6     $ 43.5       (9 )%
 
                 

     Business ARPU decreased 1.6% to U.S.$79.6 in 2003 from U.S.$80.6 in 2002, as a result of (i) a 31.7% decrease in installation charges as we waived installation fees in many cases during 2003 due to competitive pressures and, (ii) a 1.1% reduction in usage charges as a result of a slightly lower number of local, long distance and mobile outbound calls per line. This decrease was partially offset by a 2.7% increase in monthly fees related to a change in the product mix, given that each product generates different rates.

     Residential ARPU decreased 9.1% to U.S.$30.4 in 2003 from U.S.$33.5 in 2002. The decrease was mainly the result of a 58.5% decrease in installation fees due to waivers of such fees granted to customers as a result of competitive pressures.

     The following table presents a breakdown of our lines by type of customer at December 31, 2002 and 2003 and the percentage variation:

                         
    At December 31  
    2003     2002     %  
Voice lines:
                       
Business lines
    24,305       22,194       10 %
Residential lines
    106,389       98,557       8 %
Wholesale lines
    6,850       4,480       53 %
 
                 
Total lines
    137,544       125,231       10 %
 
                 

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Operating costs and expenses

     Our operating costs and expenses were Ps.1,048.4 million in 2003, a 0.4% increase as compared to Ps.1,043.8 million in 2002. This increase was primarily due to:

    a Ps.49.0 million, or 32.7% increase in network operating costs resulting mainly from (i) a Ps.45.2 million increase in interconnection costs associated with significant increases in local-to-mobile and long distance traffic and (ii) Ps.3.8 million in costs related to new services launched during 2002 such as AsistelMax and Internet access, that gave a full year effect in 2003 on a higher line count basis, when compared to its partial effect in 2002;
 
    a Ps. 17.5 million or 37.7% increase in technical expenses primarily due to (i) a 84.3% increase, or Ps.10.2 million in maintenance as a result of our larger telephone network, and (ii) a Ps. 6.7 million, or 20.2% increase in leases of sites and expenses related to the operation of our network;
 
    a Ps.6.3 million, or 1.8% increase in depreciation and amortization related to a higher fixed asset base in 2003; and.
 
    a Ps.4.7 million, or 15.2% reduction in installation expenses (we record installation expense at the time of installation only when we bill our customers for installation fees, and during 2002 and 2003 we waived installation fees in many instances due to competitive pressures). Through December 31,2002, when we waived installation costs to our customers, installation costs were capitalized and amortized on a straight-line basis ever a period of 20 years. Beginning in 2003, when we waive installation costs, we capitalize and amortize them on a straight-line basis over a period equal to the remaining original term of the microwave concessions, which expires in October 2017.

     The increases were offset in part by a Ps.63.4 million, or 13.5% decrease in selling, general and administrative expenses primarily due to the implementation of cost-reduction measures such as (i) a Ps.28.9 million decrease in severance expenses as a result of the headcount reduction in late 2002, (ii) a Ps.24.6 million, or 10.7% reduction in salaries, wages and benefits as a result of the above-mentioned headcount reduction, (iii) a Ps. 18.5 million decrease in leases of offices buildings, as we reached an agreement with our landlord at our former headquarters, (iv) a Ps.14.0 million, or 77.2% reduction in advertising expenses, as we have been selective with our advertising campaigns; and, (v) a Ps.7.5 million, or 22.8% reduction in sales commissions, as a result of a 35.2% reduction in gross installed lines from 77,411 in 2002 to 53,655 in 2003.

     These savings were offset in part by (i) a Ps.20.5 million, or 74.4% increase in our bad debt provision mainly due to our increasing residential customer base and the provision for fraud detected from a business customer, see “Item 8. Financial Information-A, Consolidated statements and other financial information, Legal proceedings”, (ii) a Ps.8.4 million, or 28.8% increase in fees paid to external advisors, and, (iii) a Ps.1.1 million increase in general, selling and administrative expenses.

Integral cost of financing

     Our integral cost of financing was Ps.129.4 million in 2003, a 61.7% decrease as compared to Ps.338.2 million in 2002. The increase in integral cost of financing was primarily due to:

     (i) a Ps.195.3 million, or 86.0% decrease in interest expense as a result of the coupon reduction in 95.8% of our outstanding debt, from 13 3/4% to 0%, and

     (ii) a Ps.43.9 million, or 19.4% reduction in exchange loses, as a consequence of the effect on our dollar-denominated debt of a lower devaluation of the peso during 2002.

     These factors of financing costs were partially offset by: (i) a Ps.30.0 million reduction of gain in net monetary position; and, (ii) a Ps.8.7 million higher bank commissions, net of interest on cash balances.

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Asset tax

     We recorded Ps.12.9 million in asset taxes in 2003 as compared to Ps.7.5 million in asset taxes in 2002. The difference is primarily due to a significant increase in our asset base in 1999, when we increased the buildout of our network, as compared to 1998, which are the respective years considered for purposes of computation of the asset tax. Asset taxes are computed on the asset base existing four years before the current tax year.

Principal differences between Mexican GAAP and U.S. GAAP

     The financial information included in this annual report is prepared and presented in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. See note 23 to the consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us; for a reconciliation of our net income and stockholders’ equity to U.S. GAAP as of December 31, 2003 and 2004 and for each of the two years then ended; and for a description of the principal differences in classification between the statements of changes in financial position under Mexican GAAP and the requirements under U.S. GAAP for statements of cash flows.

Recent United States accounting pronouncements

     In December 2004, and as amended in April 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), which replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. SFAS 123R is effective for fiscal years beginning after June 15, 2005. Early application of SFAS 123R is encouraged, but not required.

     Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method. Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method. Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes. Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, “TOPIC 14: Share-based payment” (SAB 107). SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the valuation of share-based payment arrangements for public companies. This bulletin is effective immediately. We have not yet determined the method of adoption to be used and have not completed our evaluation of the effects of adopting SFAS 123R.

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets” (An amendment to APB Opinion No. 29) (SFAS 153). This statement addresses the measurement of exchanges of nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, and replaces it with an exception for exchanges that do not have commercial substance. This statement specifies that a monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted. We are currently evaluating the potential impact of this statement.

     In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143”. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement

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activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We have not quantified the impact of adopting FIN 47, but we do not expect the adoption to have a material impact on our financial position or results of operations.

Recent Mexican accounting pronouncements

     The following accounting standards, which were issued by the Mexican Institute of Public Accountants (IMCP), went into effect on January 1, 2005. Management considers that the adoption of these standards will not have a significant effect on the financial information:

     Statement B-7, “Acquisitions of Businesses”, which establish, among other things, the purchase method as the only method of accounting for the acquisition of a business, changes to the accounting treatment of goodwill, eliminating the amortization of goodwill as from the date on which that statement went into effect and making it subject instead to annual impairment tests. The statement also provides specific rules for the acquisition of minority interests and the transfer of assets or the exchange of shares between entities under common control.

     The amendments to Statement C-2, “Financial Instruments”. Its provisions require that the effects of valuing investments available for sale be recorded in stockholders equity and not in income for the year, and include rules for determining the effects of impairment of financial instruments.

     Statement C-10 “Derivative Financial Instruments and Coverage Operations”. This Statement, besides detailing recording, valuation and disclosure criteria applicable to all derivative financial instruments, requires that the effectiveness of hedges of cash flows and of net investment in subsidiaries located abroad be evaluated and that the effective portion of the gains or losses on hedging instruments be recognized within comprehensive income.

     The amendments to Statement D-3, Labor Obligations. These amendments provide additional valuation and disclosure rules for recognizing severance payments due to causes other than restructuring.

B. Liquidity and capital resources

Financing sources and liquidity

     We financed our start-up costs through capital contributions and vendor financing, as described below:

    U.S.$100.0 million vendor financing facility from Nissho Iwai American Corporation, bearing an annual interest rate of three-month LIBOR plus 4.15% due August 12, 2005. Funds from this facility were used to purchase Lucent Technologies equipment. We used U.S.$72.3 million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all amounts outstanding in full and terminated this facility.
 
    U.S.$20.0 million vendor financing facility from Nissho Iwai American Corporation, bearing an annual interest rate of three-month LIBOR plus 4.15% due August 12, 2005. Funds from this facility were used to purchase NEC equipment. We used U.S.$13.9 million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all amounts outstanding in full and terminated this facility.
 
    U.S.$18.7 million vendor financing from Hewlett Packard de México, bearing an annual interest rate of three-month LIBOR plus 4.15% due November 25, 2005. We used U.S.$16.3 million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all amounts outstanding in full and terminated this facility.
 
    U.S.$70.0 million raised from private equity investors since inception through May 1998.

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     On March 17, 2000, we sold 133/4% notes due 2007 bearing an annual interest rate of 133/4% due April 1, 2007 in an aggregate principal amount of U.S.$300.0 million (the “133/4% notes”). Our debt service relating to the 133/4% notes for the first two years was paid with U.S.$77.9 million of the net proceeds of the offering of the 133/4% notes that was deposited in an interest escrow account.

     In September 2000, our principal shareholders invested an aggregate of U.S.$35.0 million of new capital. This capital contribution was used primarily to fund capital expenditures and working capital related to the buildout of our network infrastructure.

     During 2001, we financed our operations and capital expenditures with remaining funds from the issuance and sale of the 133/4% notes and with the remaining funds from the U.S.$35.0 million capital contribution completed in September 2000.

     On April 29, 2002, we consummated a debt restructuring and recapitalization of Maxcom. The purpose was to reduce our debt service burden, improve our liquidity and attract additional investment, in order to continue the buildout of our infrastructure and the growth of our business. The following actions were taken pursuant to the debt restructuring and recapitalization:

    Holders tendered an aggregate of U.S.$259,410,000 in principal amount of 133/4% notes in exchange for an aggregate of (i) U.S.$165,078,150 in principal amount of old notes, and (ii) 26,459,820 series N-2 convertible preferred shares, with an initial liquidation preference of U.S.$0.4927 per share and limited voting rights, represented by ordinary participation certificates or “CPOs,” which represented in the aggregate 15.2% of our then total capital stock;
 
    Existing and new shareholders invested U.S.$66.2 million and received preferred shares (more fully described in “Principal Shareholders”), which represented in the aggregate 77.0% of our then total capital stock; and
 
    Our capital structure was restructured as more fully described in “Item 7. Major Shareholders and Related Party Transactions-A. Major shareholders and share ownership-The capital restructuring.”

     In April 2002, we cancelled U.S.$25,000,000 in principal amount of 133/4% notes that we had purchased in the secondary market prior to the 2002 debt restructuring. In addition, on July 25, 2002, we completed an additional exchange of U.S.$4,000,000 in aggregate principal amount of 133/4% notes under the same terms and conditions of the exchange offer consummated on April 29, 2002. 95.8% of the total 133/4% notes were exchanged and or cancelled, and old notes of an aggregate principal amount of U.S.$167,623,590 remained outstanding. An aggregate principal amount of U.S.$11,590,000 of 133/4% notes remained outstanding.

     On December 17, 2003, we were advised by Bank of America/Nexus that it had purchased an aggregate amount of old notes with a face value of approximately U.S.$126.4 million, representing approximately 75% of the principal amount of the then outstanding of the old notes.

     On April 28, 2004, we executed a working capital credit facility with Banco Santander Mexicano, S.A. (which we refer to as Banco Santander) for U.S.$2.0 million. We serve interests on a monthly basis on any outstanding balance, at a rate of LIBOR (London Inter-bank Offered Rate) plus 190 basis points. The original term of the facility was 5 months. Additionally, on August 17, 2004, we executed a working capital credit facility with Banco Santander for Ps.55.9 million. We serve interests on a monthly basis on any outstanding balance, at a rate of TIIE (Inter-bank Equilibrium Interest Rate or Tasa de Interés Interbancaria de Equilibrio) plus 100 basis points. The original term of the facility was 2 months. Both credit facilities are guaranteed by one of our shareholders. Before both facilities expired, we negotiated new terms until October 2004.

     On October 8, 2004, we consummated an exchange offer and consent solicitation. The purpose was to improve our leverage and capital structure, in order to attract additional investments and access multiple

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opportunities for future growth. The following actions were taken pursuant to the debt restructuring and recapitalization:

    Holders tendered an aggregate of U.S.$162,505,711 in principal amount of old notes in exchange for an aggregate of (i) U.S.$36,117,789 in principal amount of new notes due 2009, bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009, and (ii) 101,110,338 of our Series N-1 Preferred shares;
 
    Maxcom received consents to the amendment of certain restrictive covenants of the indenture governing the old notes representing 92.0% of the total principal amount of outstanding old notes (other than old notes held by Maxcom or any affiliate of Maxcom), therefore fulfilling the condition for the adoption of the proposed amendments.

     As a result of the October 8, 2004 debt restructuring, debt maturity dates of our debt will be as follows:

                                 
    DEBT MATURITY DATES  
    (Thousands of U.S. Dollars)  
    March-07     April-07     October-09     Total  
Before the October 8, 2004 debt restructuring
                               
133/4% notes
            11,590               11,590  
old notes
    167,624                       167,624  
 
                       
Total
    167,624       11,590               179,214  
 
                       
 
                               
After the October 8, 2004 debt restructuring
                               
133/4% notes
            11,590               11,590  
old notes
    5,118                       5,118  
new notes
                    36,118       36,118  
 
                       
Total
    5,118       11,590       36,118       52,826  
 
                       

     On November 5, 2004 we obtained a line of credit from Banco Santander of Ps.100,000 million with a monthly interest rate of TIIE plus 1.2 additional percentage points. The terms require average monthly principle payments of Ps.5.5 million in accordance with the amortization table set forth in the contract plus accrued interest. The term of the contract is for 18 months and the due date is May 10, 2006. There are guarantees in place for payment to Banco Santander under this contract as follows:

    we must maintain an average monthly cash balance in an operating account, until of Ps.5.5 million to guarantee the monthly payment under the credit line, and
 
    we created a trust fund whereby Maxcom deposited Ps.12.7 million (equivalent to the payment of two months of the credit plus a portion of the interest) to guarantee the payment of two months of principle payments plus accrued interest through the maturity date of the credit line.
 
    We estimate that funds from operating activities may not be sufficient to meet our new debt service and our working capital and capital expenditure needs through 2006 and that we may need additional financing to meet these requirements. We are currently looking for new sources of funds, including commercial bank lending, asset-backed financing, development banks financing and private equity. However, we cannot assure you that we will have sufficient resources and that, if needed, any financing will be available in the future or on terms acceptable to us, in which case we will be unable to service our debt and operate as a viable company. In addition, our ability to

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incur additional indebtedness is restricted by the terms of the Indentures governing the old notes and the new notes.

     Our future operating performance and ability to service and repay the new notes, the old notes and the outstanding 133/4% notes will be subject to future economic and competitive conditions and to financial, business and other factors, many of which are beyond our control.

     On June 20, 2005 we filed before the Banking and Securities Commission of Mexico (Comisión Nacional Bancaria y de Valores) a petition to issue a program of securities in Mexican markets for up to Ps.150,000,000 (approximately U.S.$14 million dollars) in the form of unsecured “certificados bursátiles”. These notes will be issued, if authorized, on short term trenches. We have retained IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero to serve as our financial agent and lead manager in connection with this program. We are still negotiating the final terms of this securities program.

Indebtedness

     Our consolidated debt at December 31, 2004 was Ps.768.4 million (including Ps.1.6 million of debt discount related to the issuance of detachable warrants), of which Ps.622.9 million was long-term debt. Ps.595.1 million of our consolidated debt outstanding at December 31, 2004 was denominated in U.S. dollars and Ps.173.3 million was denominated in Mexican pesos.

     The U.S.$300 million aggregate principal amount 133/4% notes accrued interest at an annual rate of 133/4%, representing an interest expense of U.S.$39.8 million per year. In May and June 2001, Maxcom purchased U.S.$25 million aggregate principal amount of 133/4% notes in the secondary market, which Maxcom cancelled in April 2002. Pursuant to the April 29, 2002 debt restructuring, 133/4% notes in an aggregate principal amount of U.S.$259,410,000 were exchanged for old notes in an aggregate principal amount of U.S.$165,078,150, as well as for certain equity. The old notes bear 0% interest through March 1, 2006 and 10% annual interest in the last year. On July 25, 2002, we completed an additional exchange of U.S.$4,000,000 of 133/4% notes under the same terms and conditions of the exchange offer consummated on April 29, 2002. On December 17, 2003, we were advised by Bank of America/Nexus that it had purchased an aggregate amount of old notes with a face value of approximately U.S.$126.4 million, representing approximately 75% of the principal amount of outstanding of the old notes. Pursuant to the October 8, 2004 debt restructuring, old notes in an aggregate principal amount of U.S.$162,505,711 were exchanged for an aggregate of (i) U.S.$36,117,789 in principal amount of new notes, bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009, and (ii) 101,110,338 of our Series N-1 Preferred Shares. As of December 31, 2004, new notes in an aggregate principal amount of U.S.$36,117,789 remained outstanding, old notes in an aggregate principal amount of U.S.$5,117,879 remained outstanding, and 133/4% notes in an aggregate principal amount of U.S.$11,590,000 remained outstanding.

     As a result of the October 8, 2004 debt restructuring, debt maturity dates of our debt will be as follows:

                                 
    DEBT MATURITY DATES  
    (Thousands of U.S. Dollars)  
    March-07     April-07     October-09     Total  
Before the October 8, 2004 debt restructuring
                               
133/4% notes
            11,590               11,590  
new notes
    167,624                       167,624  
 
                       
Total
    167,624       11,590               179,214  
 
                       
 
                               
After the October 8, 2004 debt restructuring
                               
133/4% notes
            11,590               11,590  
old notes
    5,118                       5,118  
new notes
                    36,118       36,118  
 
                       
Total
    5,118       11,590       36,118       52,826  
 
                       

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     The indenture governing the old notes (the “Old Indenture”) and the indenture governing the new notes (the “New Indenture”) restrict our ability to incur indebtedness. In particular, in order to be able to incur additional indebtedness, we must comply with a minimum consolidated leverage ratio of less than 3.75 to 1.00 and a minimum fixed charge coverage ratio of 2.00 to 1.00, in each case after giving effect to the proposed incurrence of indebtedness. We do not, and are unlikely in the near future to, meet these ratios. However, pursuant to certain exemptions, we are still able to incur up to U.S.$100.0 million of indebtedness to finance the cost of acquiring or constructing or installing telecommunication assets, and up to U.S.$20.0 million for working capital purposes, in each case at any one time outstanding. However, pursuant to the amendments to the old indenture, we only have the ability to incur up to an aggregate of $150 million of certain types of permitted indebtedness outstanding at any one time (including the new notes, old notes and the 133/4% notes) prior to the consummation of a merger, consolidation or sale of all or substantially all of our assets. Additionally, pursuant to the amendments to the Old Indenture the covenants restricting our ability to pledge our assets as security for financings were amended to allow us to secure up to an additional U.S.$50 million of liens on our assets. The covenant limiting our restricted payments, permitted investments and affiliate transactions was amended to allow us to securitize our assets, including our accounts receivable. The covenant restricting our ability to enter into sale/leaseback transactions was deleted.

     The Old Indenture and the New Indenture also provide that if certain events of bankruptcy, insolvency or reorganization of Maxcom occur, the principal and interest on all of the old notes will become immediately due and payable. In addition, if certain other events of default occur and are continuing, the trustee appointed under the Old Indenture or our holders representing at least 25.0% in principal amount of the then outstanding old notes may declare all the old notes to be due and payable immediately. These other events of default include, among others, (i) a failure to pay interest or any gross-up amount when due for thirty days; (ii) a failure to pay principal when due; (iii) a failure to comply with certain covenants (including financial, reporting, control, merger and other covenants), representations, warranties and other agreements in the old indenture; (iv) a default under other indebtedness or a judgment or decree for the payment of money, in each case in excess of U.S.$5.0 million; (v) the unenforceability or disaffirmation of any subsidiary guarantee; and (vi) a failure to disclose an event of default. In some of these events of default, a limited grace period applies before the trustee or the holders can proceed to accelerate the old notes. The indenture governing the 133/4% notes provides that the trustee appointed under the indenture or our holders representing at least 25.0% in principal amount of the then outstanding 133/4% notes, may declare all the old notes to be due and payable immediately if we fail to (i) pay interest or any gross-up amount when due for thirty days, (ii) pay principal when due, (iii) comply with certain conditions in the event of a merger or (iv) observe any covenant, representation or agreement in the indenture for 60 days after notice by the trustee.

Changes in financial position

     Historically, our cash generated from operating activities has not been sufficient to meet our debt service, working capital and capital expenditure requirements. We have relied on the capital markets for private equity, public debt and vendor financing. For the years ended December 31, 2002, 2003 and 2004, our earnings were insufficient to cover our fixed charges by Ps.793.8 million (U.S.$71.2 million), Ps.372.7 million (U.S.$33.4 million) and Ps.117.5 million (U.S.$10.5 million), respectively.

Resources used for operating activities

     For the year ended December 31, 2004, net resources used in operating activities amounted to Ps.267.8 million compared to a negative Ps.49.6 million for the year ended December 31, 2003. The increase in 2004 from 2003 was mainly attributable to a Ps.238.5 million decrease in losses from operations, a Ps.72.5 million increase in restricted cash, liabilities and other assets, mainly attributable to:

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     (i) Ps.18.2 increase in restricted cash under our new Banco Santander financing. See “Item 5. Operating and Financial Review and Prospects — B Liquidity and Capital Resources — Financing Resources and Liquidity”, and

     (ii) Ps.90.7 increase in short term liabilities, and

     A Ps.6.6 million decrease in inventory as we improved our inventory management; and, a Ps.7.0 million reduction in prepaid expenses primarily related to the recognition in 2003 of the agreement with the landlord at our former headquarters in Magdalena to retain a leasehold interest through 2013. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Advertising.” and “Item 10. Additional Information-C Material contracts- Lease termination agreement”

     All of these factors were partially offset by a Ps.7.2 million increase in accounts receivable as a result of the growth of our operations in 2003.

     For the year ended December 31, 2003, net resources used in operating activities amounted to Ps.49.5 million compared to Ps.372.0 million for the year ended December 31, 2002. The decrease in 2003 from 2002 was mainly attributable to a Ps.421.3 million decrease in losses from operations, a Ps.38.3 million reduction in accounts receivable as a result of a tighter strategy for collections and allowance for doubtful accounts receivable; and, a Ps$9.6 million reduction in prepaid expenses primarily related to the advanced purchase of radio advertising time from Operadora Plusgamma in 2002 and the recognition in 2003 of the agreement with the landlord at our former headquarters in Magdalena to retain a leasehold interest through 2013. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Advertising.” and “Item 10. Additional Information-C Material contracts- Lease termination agreement”. All these factors were partially offset by a Ps.10.5 million increase in inventory as we reduced the speed of deployment of network infrastructure during 2003 and a Ps.152.8 million decrease in restricted cash, liabilities and other assets, mainly attributable to:

     (i) Ps.205.3 decrease related to the release in 2002 of the escrow account;

     (ii) Ps.66.4 decrease in short term liabilities, and

     (iii) Ps.104.7 increase in interest payable basically as a result of the payment in 2002 of the interest on the old notes.

Resources provided by financing activities

For the year ended December 31, 2004, net resources generated by financing activities amounted to Ps.96.3 million, driven by a Ps. 173.4 million increase in bank financing as a result of the financing obtained from Banco Santander. See “Item 5. Operating and Financial Review and Prospects - B Liquidity and Capital Resources — Financing Resources and Liquidity”, partially offset by the non-cash effect of the October 8 restructure See “Item 5. Operating and Financial Review and Prospects – B Liquidity and Capital resources – Financing Resources and Liquidity” comprised by i) a Ps. 1,923.5 million decrease in old notes, ii) a Ps.406.9 million increase in new notes; and, iii) a Ps. 576.7 million and Ps. 865.1 million increase on issuance of capital stock and additional paid-in capital from the exchange U.S.$ 126.4 million old notes for 96.8 million N-1 and 4.3 million B-1 series shares. This increase in resources generated by financing activities in 2004 compares to resources provided of Ps.98.8 million for the year ended December 31, 2003, due primarily to the inflationary effect (non-cash).

     For the year ended December 31, 2003, net resources generated by financing activities amounted to Ps.98.8 million, mostly driven by inflationary effect (non-cash), compared to resources provided of Ps.876.8 million for the year ended December 31, 2002. This change was attributable to (i) Ps.819.0 million lower additional paid-in capital as a consequence of the debt capitalization resulting from the exchange of 133/4% notes for old notes and equity instruments pursuant to the debt restructuring completed in April 2002, (ii) Ps.858.9 million lower additional capital stock related to the U.S.$66.2 million private placement completed in April 2002, and (iii) Ps.900.0 million higher liabilities mainly attributable to the exchange of the 133/4% notes in 2002.

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Resources used for investing activities

     For the year ended December 31, 2004, net resources used for investing activities amounted to Ps.347.8 million compared to Ps.131.9 million for the year ended December 31, 2003. The increase was mainly attributable to a Ps.209.3 million increase in investment in telephone equipment as a result of Maxcom’s strategy of infrastructure growth during 2003, and a Ps.6.6 million increase in investment in intangible and other assets resulting primarily from a non-cash inflationary effect.

     For the year ended December 31, 2003, net resources used for investing activities amounted to Ps.131.9 million compared to Ps.577.7 million for the year ended December 31, 2002. The decrease was mainly attributable to a Ps.285.8 million decrease in investment in telephone equipment as a result of Maxcom’s strategy of prioritizing infrastructure growth at a time of financial constraints, and a Ps.162.1 million decrease in investment in intangible assets resulting mainly from our purchase in 2002 of the irrevocable and exclusive right to use two strands in a 2,011-kilometer fiber optic link covering cities between Mexico City and Laredo, Texas.

Other contractual obligations

     In addition to our financial indebtedness, we are committed to make certain payments under various lease arrangements. All of our peso-denominated leases and some of our dollar-denominated site leases adjust automatically to reflect any variances experienced by the Mexican and U.S. consumer price index, respectively.

     Our new corporate headquarters are leased for a 5-year term, renewable for two additional 5-year terms. Site leases generally run for five, ten or fifteen year terms.

     In May 2003, we reached an agreement with our landlord at our former headquarters in Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May 2013 on the first floor, where one of our Lucent 5ESS switches is located, and the roof-top, where we have microwave transmission antennas and a section of the basement, which will be used for parking and to place some of our electric equipment that supports the switch. We were also released from our lease obligations on approximately 35,887 square feet plus parking space of the building originally running through September 30, 2013. In exchange for the new lease and the releases, we agreed to prepay the full, ten-year lease obligations on the first floor, the roof-top and basement, as well as pay past-due lease payments dating back from October 2002 through April 2003. All these payments amount in the aggregate to U.S.$2.7 million and were paid in installments through May 2004.

     The following table presents our minimum contractual operating lease obligations denominated in Pesos for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     thereafter  
    (in thousands of Pesos)  
Facilities
  Ps. 4,827     Ps. 3,337     Ps. 3,248     Ps. 1,891     Ps. 14,062  
Sites
    13,988       8,170       5,939       5,138       17,358  
Poles
    6,693       6,693       6,693       6,693       60,233  
Others
    809       708       708       708       6,369  
 
                             
Total
  Ps. 26,317     Ps. 18,908     Ps. 16,588     Ps. 14,430     Ps. 98,022  
 
                             

     The following table presents our contractual operating lease obligations denominated in dollars for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     Thereafter  
    (in thousands of U.S. dollars)  
Corporate headquarters
  $ 2,666     $ 2,752     $ 472     $       $    
Sites
    248       69       60       40       364  
Poles
                                       
Others
    591       285       35                  
 
                             
Total
  $ 3,505     $ 3,106     $ 567     $ 40     $ 364  
 
                             

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     The following table presents our minimum contractual operating maintenance obligations denominated in Pesos for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     thereafter  
    (in thousands of Pesos)  
Corporate equipment(1)
  Ps. 89     Ps.       Ps.       Ps.       Ps.    
Network(1)
    115                                  
 
                             
Total
  Ps. 204     Ps.       Ps.       Ps.       Ps.    
 
                             
 
(1)   Renewal on an annual basis.

     The following table presents our contractual operating maintenance obligations denominated in dollars for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     thereafter  
    (in thousands of U.S. dollars)  
Telephone equipment(1)
  $ 1,560     $       $       $       $    
Fiber optic
    780       780       780       780       10,915 (2)
Software(1)
    1,251                                  
 
                             
Total
  $ 3,591     $ 780     $ 780     $ 780     $ 10,915  
 
                             
 
(1)   Renewal on an annual basis.
 
(2)   Included until 2022.

Capital expenditures

     Through December 31, 2004, we have invested Ps.3,427.1 million in the buildout of our network operating support system and other capital expenditures, excluding cumulative pre-operating expenses and the expenses related to the issuance of the 133/4% notes, the old notes and the new notes and the U.S.$66.2 million private equity investment. This amount includes Ps.139.8 million paid to obtain all of our frequency rights.

     For 2005, we plan to make capital expenditures of approximately U.S.$35.8 million, mainly to continue to build out of our network. Of this total amount, we had already spent approximately Ps.84.1 million (approximately U.S.$7.4 million) by March 31, 2005. Our ability to make the remaining expenditures hinges on our ability to obtain financing for them. We cannot assure you that financing will be available or on terms acceptable to us.

Dividend policy

     Our current policy is to reinvest profits into our operations. In addition, the indenture that governs the terms of the new notes allows us to pay cash dividends only if we meet the following conditions:

    a minimum consolidated leverage ratio of less than 3.75 to 1.00;
 
    a minimum fixed charge coverage ratio of 2.00 to 1.00;

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    no default (as defined in the indenture) must have occurred and be continuing or result from the payment of the cash dividend; and
 
    the cash dividend payments do not exceed an amount determined in the indenture based on, among other things, cash flow generated from operations or equity offerings and consolidated interest expense.

Critical accounting policies

     Applications of critical accounting policies and estimates.

     We have identified certain key accounting estimates on which our consolidated financial condition and results of operations are dependent. These key accounting estimates most often involve complex matters or are based on subjective judgments or decisions that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. In the opinion of our management, our most critical accounting estimates under both Mexican GAAP and U.S. GAAP are those that require management to make estimates and assumptions that affect the reported amounts related to the accounting for the allowance for doubtful accounts receivable, revenue recognition, installation revenues and costs, valuation of long-lived assets, stock-based compensation and fair value of our common stock, and deferred taxes. For a full description of all of our accounting policies, see Notes 3 and 23 to the Consolidated Financial Statements included in this Annual Report.

     There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

    it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate, and
 
    changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

Allowance of doubtful accounts receivable

     The allowance for doubtful accounts represents our estimate of losses resulting from the failure or inability of our customers to make required payments. Determining our allowance for doubtful accounts receivable requires significant estimates. Due to the large number of customers that we serve, it is impractical to review the credit-worthiness of each of our customers, although a credit review is performed for business customers that request more than two lines. We consider a number of factors in determining the proper level timing for the recognition of and the amount of allowance, including historical collection experience, customer base, current economic trends and the aging of the accounts receivable portfolio. From this analysis, our current policy is to reserve in the amount of 90% and 100% of account receivable balance due over 90 but less than 119 days, and over 120 days, respectively except when there is a negotiated agreement with a customer. In such cases, a reserve is created in the amount of 30% once accounts receivable balance is 90 days past due and 100% when the balance is due over 120 days. We periodically review this policy to ensure that it accurately reflects current collection patterns.

     In addition, in order to mitigate collections risk, our collection procedures include, but are not limited to, periodic reminder phone calls once a customer is past due, suspension of service, use of a collection agency and disconnection of service, if needed. Furthermore, within our network we have systems to detect fraudulent call activity. If these systems fail to identify any of this activity, we may have to recognize a higher degree of un-collectable accounts. While we believe that our estimates are reasonable, changes in our customer trends or any of the factors mentioned above could materially affect our bad debt expense.

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Revenue recognition

The Company recognizes revenues from telephone services provided to customers, the sale of customer-premise equipment, services provided to other telephone-service companies (such as interconnection services), and installation charges.

Revenues from services provided to customers, including installation and maintenance, are recognized in the month the service is rendered. When the installation is not charged to the customer, the cost is amortized on a straight-line basis over a period equal to the remaining original term of our microwave concessions, which will expire in October 2017.

Revenues from the sale of customer-premise equipment are recognized at the time of the sale and delivery and installation of such equipment.

Revenues from interconnections services are recognized on an accrual basis. The Company has entered into agreements with several telephone companies under the “Bill and Keep” compensatory agreement. Under this arrangement and in most cases, if the imbalance between local calls originated by the other carrier and terminated by Maxcom and calls originated by Maxcom and terminated by the other carrier during a month does not exceed a determined percentage, then no interconnection fee amounts are payable by the net user of interconnection services. If the imbalance exceeds that percentage in any given month, the net user will be subject to a per minute charge. The percentage of the aforementioned imbalance was 70% for the period February 25, 1999 to December 31, 2002, 30% for January 1, 2003 to October 31, 2004, 18% for December 1 to 31, 2004 and 15% as of January 2005. In the event that we fail to maintain a significant percentage of residential users, the compensatory agreement will be terminated and asymmetric interconnection rates could be applied.

The Company also has interconnection agreements for mobile and long distance services with other carriers, however, they do not incorporate the feature of the compensatory agreement.

In 2003 we started a new business line, the lease of transmission capacity through its fiber optic ring. Revenues from lease of capacity will be recorded in deferred revenue as billed and then recognized ratably into revenue over the term of the contract. (See Note 23)

Advances from customers are classified as current liabilities until they are refunded. When the contract is rescinded, these deposits are applied to any outstanding balance with the respective customer.

The Company creates a reserve in the amount of 90% and 100% of account receivable balance due over 90 but less than 119 days, and over 120 days, respectively except when there is a negotiated agreement with a customer. In such cases, a reserve is created in the amount of 30% once accounts receivable balance is 90 days past due and 100% when the balance is due over 120 days.

Under U.S. GAAP, customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence. If element based on the relative fair values of the separate elements and the revenue associated with each element is recognized as earned. If the elements are not deemed separable, total consideration is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period. We believe that the accounting estimates related to customer relationship periods and to the assessment of whether bundled elements are separable are “critical accounting estimates” because: (i) they require management to make assumptions about how long we will retain customers; (ii) the assessment of whether bundled elements are separable can be subjective; (iii) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material; and (iv) the assessment of whether bundled elements are separable may result in revenues being reported in different periods than significant portions of the related costs.

Installation revenues and costs

     Installation costs include labor, tools and materials. Through December 31, 2002, when we waived installation costs to our customers, installation costs were capitalized and amortized on a straight-line basis over a period of 20 years. Beginning in 2003, when we waive installation costs, we capitalize and amortize them on a

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straight-line basis over a period equal to the remaining original term of the microwave concessions, which expire in October 2017. When we charge installation fees to our customers, we recognize this cost as an expense and we do not capitalize or amortize it. Once service with a customer is terminated, the capitalized installation cost is expensed. Under U.S. GAAP, installation revenues and the related direct installation costs are deferred and amortized over the expected customer’s relationship period. When installation costs are not billed to customers, the related costs are expensed immediately.

     We do not track capitalized installation costs on an individual customer basis because to do so would not be efficient. Based on an analysis of customer history including installation costs and cancellations, we have determined an estimated average cost per customer and estimated customer life and we use these estimates to calculate the amount of cost deferred and the amortization period of such deferred costs and the related installation revenue that is deferred and amortized over the customer relationship. As we have a limited operating history, past history cannot be used as the only accurate indicator as the average customer life. Based on our limited operating history and industry benchmarking, we have determined an average customer relationship period of four years.

Valuation of long-lived assets

     We review fixed, definite lived intangible and other long-lived assets at least annually, under Statement C-15. Impairment reviews require a comparison of the estimated future undiscounted cash flows to the carrying value of the asset for U.S. GAAP reporting and discounted cash flows to the carrying value of the asset for statutory reporting. If the total of the undiscounted cash flows is less than the carrying value under U.S. GAAP or discounted cash flows is less than the carrying value under statutory reporting, an impairment charge is recorded for the difference between the estimated fair value and the carrying value of the asset. In making such evaluations, we estimated the fair value of the long-lived assets as well as the undiscounted and discounted cash flows. In determining our undiscounted and discounted cash flows we make significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as estimating remaining useful lives and the possible impact that inflation may have in our ability to generate cash flow, as well as customer growth and the appropriate discount rate. Although we believe that our estimates are reasonable, different assumptions regarding such remaining useful lives or future cash flows could materially affect the valuation of our long-lived assets.

     We also evaluate our operating leases for utilization. Spaces leased in buildings with low occupancy have been reserved based on the contractual penalty for early termination, which is calculated as the maximum amount that would be paid upon termination of the contract.

     Upon adoption of SFAS 142 “Goodwill and Other Intangible Assets” and Statement C-15 “Impairment of the Value of Long Lived Assets and their Disposal” we were required to reassess the useful lives of our intangible assets, which primarily consist of Mexican government telecommunications concessions and infrastructure rights. Upon reassessment, we concluded that our concessions would be definite lived intangibles. We will periodically reassess the useful lives of our concessions.

Stock-based compensation and fair value of our common stock

     We have historically entered into various agreements with third parties and our employees to exchange our warrants or our stock for services rendered to us. The fair value of such transactions is based on various assumptions, such as volatility, risk free interest rates and expected life of the options. We contract a third party to assist in developing said assumptions and establishing the appropriate valuation model. Different assumptions regarding such estimations could materially affect our financial position and results of operations.

     As our common stock is not traded on the open market there is not a readily determinable fair value. The fair value of our common stock is essential for calculating stock compensation amounts and in the calculation of the troubled debt restructurings as recorded under U.S. GAAP in 2002 and 2004. To evaluate the fair value of our

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common stock we contracted a third party who used assumptions related to the Mexican telecommunications industry, general market data, the current state and future operations of Maxcom, as well as other pertinent factors.

Deferred taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from the different treatment for tax and accounting purposes of several items, such as depreciation, amortization, and allowance for doubtful accounts. These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely to occur, we must include an expense within the tax provision in the statement of operations.

     Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The valuation allowance is based on management projections of future financial results. Accordingly, we have created a valuation account for the full balance of our deferred tax asset as we feel it is unlikely we will use our net operating loss carry forwards before they expire. If actual results differ from these estimates or we adjust the projections in future periods, we may need to materially adjust the valuation allowance.

C. Research and development, patents and licenses, etc.

     Maxcom does not undertake research and development activities other than market research.

D. Trend information

     The growth of competition has been substantial and we expect it to continue. We are continuously improving our competitive position by strengthening our voice and data products and services. The increase in competition negatively affects our profit margins.

     Our current financial constraints (including the insufficiency of our earnings to cover fixed charges and the uncertainty as to the availability of financing) has and may continue to negatively affect our plans for growth, including the buildout of our network. See “Item 3. Key Information—D. Risk Factors—We may need additional financing.”

E. Off – balance sheet arrangements

     Not applicable.

F. Tabular disclosure of contractual obligations

     The following table presents our minimum contractual operating lease obligations denominated in Pesos for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     thereafter  
    (in thousands of Pesos)  
Facilities
  Ps. 4,827     Ps. 3,337     Ps. 3,248     Ps. 1,891     Ps. 14,062  
Sites
    13,988       8,170       5,939       5,138       17,358  
Poles
    6,693       6,693       6,693       6,693       60,233  
Others
    809       708       708       708       6,369  
 
                             
Total
  Ps. 26,317     Ps. 18,908     Ps. 16,588     Ps. 14,430     Ps. 98,022  
 
                             

     The following table presents our contractual operating lease obligations denominated in dollars for the periods indicated:

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                                    2009 &  
    2005     2006     2007     2008     Thereafter  
    (in thousands of U.S. dollars)  
Corporate headquarters
  $ 2,666     $ 2,752     $ 472     $       $    
Sites
    248       69       60       40       364  
Poles
                                       
Others
    591       285       35                  
 
                             
Total
  $ 3,505     $ 3,106     $ 567     $ 40     $ 364  
 
                             

     The following table presents our minimum contractual operating maintenance obligations denominated in Pesos for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     thereafter  
    (in thousands of Pesos)  
Corporate equipment(1)
  Ps. 89     Ps.       Ps.       Ps.       Ps.    
Network(1)
    115                                  
 
                             
Total
  Ps. 204     Ps.       Ps.       Ps.       Ps.    
 
                             
 
(1)   Renewal on an annual basis.

     The following table presents our contractual operating maintenance obligations denominated in dollars for the periods indicated:

                                         
                                    2009 &  
    2005     2006     2007     2008     thereafter  
    (in thousands of U.S. dollars)  
Telephone equipment(1)
  $ 1,560     $       $       $       $    
Fiber optic
    780       780       780       780       10,915 (2)
Software(1)
    1,251                                  
 
                             
Total
  $ 3,591     $ 780     $ 780     $ 780     $ 10,915  
 
                             
 
(1)   Renewal on an annual basis.
 
(2)   Included until 2022.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Directors

     Our board of directors is responsible for the management of our business. The current members of the board of directors were elected at a shareholders’ meeting held on August 23, 2004. Pursuant to the capital restructuring described in “Item 7. Major Shareholders and Related Party Transactions—A. Major shareholders and share ownership—The capital restructuring,” our series A and A-1 shareholders, voting together as a class, appoint five directors. The remaining four directors are appointed by our series B and B-1 shareholders, voting together as a class. Pursuant to the terms of the securityholders agreement described in “Item 7. Major Shareholders and Related Party Transactions—A. Major shareholders and share ownership—Securityholders agreement,” which became effective upon the consummation of the debt restructuring and recapitalization, the four series B and B-1 directors

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are now selected from among nominees proposed by Nexus – Maxcom Holdings I, LLP, a major shareholder which we refer to in this annual report as “Nexus.”

     Series N-2 shareholders have the right to appoint an observer to our Board of Directors for so long as the series N-2 preferred shares represent at least 3% of the outstanding capital stock of the Company or, so long as any series N-2 preferred shares remain outstanding and at least U.S.$17.5 million aggregate principal amount of the old notes remain outstanding. This observer, who is not a member of the Board of Directors, has the right to attend meetings of the Board of Directors but is not entitled to vote. In the event Mexican foreign ownership restrictions are lifted, the series N-2 shareholders will be entitled to appoint one director, provided the series N-2 shares represent at least 10% of Maxcom’s outstanding capital stock.

     The following table presents information concerning our current directors (ages as of December 31, 2004):

             
Name   Position   Age
Adrián Aguirre Gómez
  Series A and A-1 Director and Chairman of the Board     54  
Manuel Rubiralta Diaz
  Series A and A-1 Director     61  
María Elena Aguirre Gómez
  Series A and A-1 Director     52  
Marco Provencio Muñoz
  Series A and A-1 Director     46  
Rodrigo Guerra Botello
  Series A and A-1 Director     63  
Roberto Chute
  Series B and B-1 Director     31  
Jacques Gliksberg
  Series B and B-1 Director     47  
Marco Viola
  Series B and B-1 Director     39  
Martin Molina
  Series B and B-1 Director     28  

     Miguel Sepúlveda Martínez, María Guadalupe Aguirre Gómez, Raul Guijarro de Pablo, Gilberto Solis Silva and María Trinidad Aguirre Gómez serve as alternate Series A and A-1 directors during the absence of Adrian Aguirre Gómez, Manuel Rubiralta Díaz, Maria Elena Aguirre Gómez, Rodrigo Guerra Botello and Marco Provencio Muñoz, respectively. Jorge Cervantes Trejo serve as an alternate Series B and B-1 director during the absence of any one of Roberto Chute, Jacques Gliksberg, Marco Viola or Martin Molina. Gonzalo Alarcón I. is the secretary of the Board and our General Counsel.

     Enrique Boilini was the board observer for the Series N-2 shareholders until July 2003 when he resigned. As of today such position remains vacant.

     Adrián, María Guadalupe, María Trinidad and María Elena Aguirre Gómez are siblings. Gilberto Solís Silva is the spouse of María Elena Aguirre Gómez. Raúl Guijarro de Pablo is the spouse of María Trinidad Aguirre Gómez. Miguel Sepúlveda Martínez is the spouse of María Guadalupe Aguirre Gómez.

     Set forth below is a brief biographical description of our directors:

     Adrián Aguirre Gómez has been a series A, and after the capital restructuring a series A and A-1 director and Chairman of the Board of Maxcom, since Maxcom’s incorporation in February 1996. Mr. Aguirre also sits on the Board of Directors of Corporativo en Telecomunicaciones, S.A. de C.V., a subsidiary of Maxcom, Grupo Empresarial de Telecomunicaciones, S.A. de C.V., Operadora Plusgamma, S.A. de C.V. (formerly known as Recover, S.A. de C.V.) and Fundación Teletón. He has been the Chairman of the Board since December 1992 for Operadora Plusgamma, S.A. de C.V. In addition, he was a member of the Consulting Board of UNICEF Mexico from 1997 to 2003. Previously, Mr. Aguirre was CEO of Grupo Radio Centro, S.A. de C.V. from November 1968 to May 24, 1999 and a Director until May 1999. Mr. Aguirre is a certified public accountant and holds an undergraduate degree in accounting from the Instituto Tecnológico Autónomo de México (ITAM).

     Manuel Rubiralta Diaz has been a series A, and after the capital restructuring a series A and A-1 director of Maxcom since June 2002. Mr. Rubiralta is also the President and Chief Executive Officer of Bacardí Compañía, S.A. de C.V. Previously, Mr. Rubiralta was the Commercial Director of Corporate Accounts of Grupo Maseca, S.A. de C.V. from 1999 to 2000 and Vice-president of Grupo Televisa from 1996 to 1998. Mr. Rubiralta was the President of Pepsico de Mexico from 1993 to 1996. Mr. Rubiralta was the President of FEMSA in the United States from 1982 to 1991 and the Sales and Marketing Vice-President for FEMSA’s brewing operations in Mexico from

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1975 to 1982. Mr. Rubiralta holds an undergraduate degree in business administration from the Universidad Nacional Autónoma de Mexico (UNAM).

     María Elena Aguirre Gómez was a Series A and A-1 alternate director from June 10, 2003 until August 22, 2004. Prior to that she also served as Series A and A-1 director from 2000 until 2003. She also sits on the board of MG Radio, S.A. de C.V., Radiocomunicación Enfocada, S.A. de C.V. and Radiocomunicación de Saltillo, S.A. de C.V. Mrs. Aguirre was also an alternate director of Grupo Radio Centro, S.A. de C.V. from 1979 to 19999.

     Marco Provencio Muñoz has been a series A, and after the capital restructuring a series A and A-1 director of Maxcom, since May 2001. He is also a partner and head of the public relations practice at the consulting firm MBD: Mexico Business Development. During 2000, Mr. Provencio was the press secretary and the spokesman for the then Mexican President Mr. Ernesto Zedillo. He served 14 years in the Ministry of Finance and Public Credit where he held various positions, including Director General for International Financial Affairs. Mr. Provencio worked also for three years for the Foreign Affairs Ministry, where he was appointed under-secretary for Economic and Multicultural Affairs. Mr. Provencio holds an undergraduate degree in economics from the Universidad Iberoamericana and a master’s degree in economics and public affairs from the Woodrow Wilson School at Princeton University.

     Rodrigo Guerra Botello has been a series A, and after the capital restructuring a series A and A-1 director of Maxcom since June 2002. Mr. Guerra is also the President of the Universidad Regiomontana in Monterrey, Mexico, since September 2001. Mr. Guerra was the Executive President of CETRO (a private trust for the development of small private business in Mexico), the National Vice-President of COPARMEX and the General Director and Treasurer of the Businessman Coordination Council. Mr. Guerra was also Director of Sidek and Situr. Previously, Mr. Guerra worked for AT&T Mexico from March 1995 to January 1999 and served as President and Chief Executive Officer of IBM de México from October 1980 to February 1995. Mr. Guerra holds an undergraduate degree in Chemical Engineering from Universidad Tecnológica de Monterrey.

     Jacques Gliksberg was a series N director of Maxcom from May 1998 until April 2002, and has been a series B and B-1 director since then. He also sits on the board of directors of Bank America International Investment Corporation, Geoplan Assessoria LTDA. (Brazil), Organizacion Rescarven, C.A. (Venezuela), Velocom and Difusion Panoramica, S.A. de C.V. Mr. Gliksberg was a managing partner of Banc of America Equity Partners from 1994 until 2005. He is now the managing partner of Nexus Partners, LLC. Mr. Gliksberg holds a Bachelor of Arts degree in Economics and Political Science from the University of Rochester and a master’s degree in business administration from the J. L. Kellogg Graduate School of Management of Northwestern University, Chicago, Illinois.

     Roberto Chute has been a series B and B-1 director since April 2002. Mr. Chute sits on the board of directors of Difusion Panoramica, a Mexican outdoor advertising company, and Eki Discount, an Argentinean discount store chain. Mr. Chute was an associate and principal of Banc of America Equity Partners from 2001 to 2005. Mr. Chute is now a principal of Nexus Partners, LLC. Previously, Mr. Chute worked for Goldman, Sachs, Techint and Strat Management Consulting. Mr. Chute holds an industrial engineering degree from the Instituto Tecnológico de Buenos Aires, Argentina and a master’s degree in business administration from the J. L. Kellogg Graduate School of Management of Northwestern University, Chicago, Illinois.

     Marco Viola has been a series B and B-1 alternate director since June 10, 2003. Mr. Viola joined Banc of America Equity Partners — Latin America as managing director in 1995 until 2005. He now is a managing partner at Nexus Partners, LLC. Prior to that, he was a principal in Booz Allen & Hamilton’s Financial Services Group, based in New York. Mr. Viola was active in a variety of valuation, joint venture, merger and turnaround projects for his clients. Before joining Booz Allen, Mr. Viola worked in budgeting and planning for Banco Roberts in Argentina and as an internal consultant for Aeroterra, a satellite technology and image processing company. Viola is currently a director of Eki Discount and Publicidad Sarmiento (Argentina), Geoplan (Brazil), Organizacion Rescarven (Venezuela) and BankAmerica International Investment Corporation. He received an MSM from the M.I.T. Sloan School of Management and a BS from Universidad de Buenos Aires.

     Martin Molina holds an Industrial Engineering degree from Instituto Tecnologico de Buenos Aires and a postgraduate degree in Finance from Universidad Torcuato Di Tella. Before joining Banc of America Equity

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Partners in 2003, he worked at the corporate finance sector for Tenaris — global producer of steel pipes, and previously worked at a Fujitsu’s consulting branch.

Executive officers

     We have experienced significant turnover in our executive ranks over the last years. In June and July 2000, our then chief executive, chief operations and chief marketing officers resigned. In April 2001, our then chief financial officer resigned. We appointed new officers to all these positions during 2001 and 2002.

     However, between January and September 2003, our then chief executive officer, chief marketing officer, chief commercial operations officer and vice president of corporate communications and public relations and chief financial officer also resigned. We have since appointed a new chief executive officer who was our former chief operating officer a new chief financial officer who was our former treasurer and director of investor relations. As part of our cost-reduction efforts and more efficient operations, we have split the commercial operations areas into two main segments, one for business and other for residential customers, we have eliminated the office of vice presidency of corporate communications and public relations and consolidated the vice presidencies of operations and information systems into a single vice presidency of operations.

     On February 2004 our Chief Engineering Officer resigned. We have consolidated the responsibilities of this area with the vicepresident of operation. On November 2004 our Human Resources Vicepresident resigned. These responsibilities have been assumed by Ms. Verónica Macias, our former director of recruiting, and now director of human resources.

     The significant turnover we have experienced in our management has affected our ability to develop and execute our business strategies. The success of our company depends in part upon our ability to hire and retain highly skilled and qualified management personnel. The competition for highly qualified management personnel in the telecommunications industry is intense and, accordingly, we cannot assure you that we will be able to hire or retain the management personnel necessary for our success.

     The following table sets forth our current executive officers (ages as of December 31, 2004):

             
Name   Position   Age
René Sagastuy
  President and Chief Executive Officer     44  
José Antonio Solbes
  Chief Financial Officer     39  
Ricardo Arévalo Ruiz
  Chief Operating and Information Technology Officer     40  

Set forth below is a brief biographical description of each of our executive officers not otherwise provided above:

     René Sagastuy has been the Chief Executive Officer of Maxcom since March 2003. Mr. Sagastuy was our Chief Operating Officer from May 2001 until March 2003. Prior to joining Maxcom, Mr. Sagastuy served for one year as Director of Operations for Johnson Controls in Mexico, a U.S. public company with 19 manufacturing sites in Mexico. Mr. Sagastuy also served as operations, strategic planning, manufacturing and project manager and director of several companies in Mexico, including Avex Electronics, AMP de México, S.A. de C.V. and the Jefferson Smurfit Group in Mexico. Mr. Sagastuy holds a bachelor’s degree in civil engineering from the Universidad Iberoamericana in Mexico and a master’s degree in Business Administration form the Instituto Tecnológico Autónomo de México.

     José Antonio Solbes has been Chief Financial Officer since October, 2003. Mr. Solbes was our Treasurer and Director of Investor Relations since March 2000. Prior to that Mr. Solbes held the positions of Director of Administration and Treasurer. Prior to joining Maxcom, Mr. Solbes was Corporate Financial Manager at Grupo Empresarial Organizado, S.A. de C.V. Mr. Solbes holds and accounting degree from the Universidad Anahuac and a Masters degree in Finance from the same university. Mr. Solbes completed the Corporate Financial Strategy Program at the J.L. Kellog Graduate School of Management in Northwestern University in Chicago.

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     Ricardo Arévalo Ruiz has been our Chief Operating and Information Technology Officer since May 2003. Mr. Arévalo was Chief Information Systems Officer from April 2001 to April 2003. Prior to joining Maxcom, Mr. Arévalo served as Vice-President, Information Systems and Chief Information Officer of Iusacell from August 1997 to May 2001. Mr. Arévalo also served as Vice President, Information Systems, as Chief Information Officer and as Director, Systems Development of Grupo Iusacell Cellular during the previous two years. Before then, Mr. Arévalo served as Director of Information Systems, Materials, Logistics and Customer Service of AMP de México, S.A. de C.V. from May 1993 until August 1997. Mr. Arévalo was also the Information Systems Manager for Tequila Cuervo, S.A. de C.V. from October 1990 until May 1993. Mr. Arévalo has an undergraduate degree in computer sciences and a diploma in marketing from the Instituto Tecnológico y de Estudios Superiores de Monterrey.

B. Compensation

General

     For the year ended December 31, 2004, our executive officers received an aggregate compensation (including bonuses and severance payments but excluding options) of approximately Ps26.2 million. This amount was recognized as selling, general and administrative expenses for 2004, which represent 7.0% of our total selling, general and administrative expenses for 2004.

     During 2004, members and the Chairman of the Board received options that vest immediately to purchase up to 2,500 and 5,000 series N-1 shares, respectively, at an exercise price of U.S.$0.01 per share, for each time the member attended a board of directors or any board committee meeting. We already approved similar options incentives for the year 2004. There were five board of directors meetings, seven Operating Advisory Committee meetings and two Audit Committee meetings, during 2004. In 2004, we granted to our directors and committee members options to purchase a total of up to 187,500 series N-1 shares at an exercise price of U.S.$0.01.

     At a extraordinary shareholders meeting held on December 17, 2004, our shareholders decided to change the underlying value of these options from series N shares to series N-1 shares, which are preferred shares.

Old executive stock option plan

     We implemented an executive compensation plan that included bonuses and stock options on our series N shares.

     We granted 42,250, 383,000 and 131,820 options in 1999, 2000 and 2001, respectively for the services rendered during the years 1998, 1999 and 2000. Options granted had exercise prices of U.S.$8.70, U.S.$10.45 and U.S.$12.55, respectively, which were the then estimated fair market values. Of these options, 304,502 had vested and 252,568 had been forfeited as of June 29, 2005.

New executive stock option plan

     We implemented a new executive stock plan, covering services rendered during the years 2001, 2002, 2003 and 2004. The plan is divided into four levels, depending on the ranking of the different members of management. There were initially 80 participants in the plan. Participants in the top three levels are guaranteed a minimum number of options for series N-1 shares. The granting of options for the fourth level, which is comprised of the junior-most management, is discretionary.

     The number of options granted depends on certain revenue and operating cash flow targets. There is a bonus portion of the plan that is allocated to individual executives at the discretion of management and the board of directors. Vesting is 20% upon allocation and 20% per year for the next four years. At an extraordinary shareholders meeting held on December 17, 2004, our shareholders decided to change the underlying value of these options from series N shares to series N-1 shares, which are preferred shares.

     Our new chief executive officer, Mr. Rene Sagastuy, received a signing bonus of options to purchase 100,000 series N shares at an exercise price of U.S.$0.01 per share. These options were exercised in May, 2004.

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     The maximum aggregate number of series N-1 shares that can be distributed under the new executive stock plan is 17,657,064 million, which is equivalent to about 6.0% of our capital stock on a fully diluted basis (excluding other options outstanding).

C. Board practices

     The members of our board of directors are elected annually at our ordinary general meeting of shareholders. All board members hold the positions for one year and may be reelected. The current members of the board of directors were selected at the general annual ordinary and extraordinary shareholders’ meeting held on August 23, 2004.

     Our board of directors established an Operating Advisory Committee responsible for advising the Board on, and overseeing, Maxcom’s operations. The Operating Advisory Committee is currently comprised of Adrián Aguirre, Jacques Gliksberg, Roberto Chute and Rene Sagastuy. Mr. Salvatore A. Grasso, former member of the Operating Advisory Committee resigned in January 2004. His position remains vacant.

     Our board of directors established an Audit Committee responsible for advising the Board on, and overseeing, Maxcom’s financial condition and matters regarding accounting, taxation and release of financial information. The Audit Committee is currently comprised of Marco Provencio, Adrián Aguirre, and Roberto Chute. Mr. Juan Manuel Ferrón, our statutory auditor, and Gonzalo Alarcón, our general counsel and secretary of the Board, are required to participate in each meeting, although they are not formal members of the committee. Mr. Salvatore A. Grasso, former member of the Operating Advisory Committee resigned in January 2004. His position remains vacant.

     Under the Mexican Companies Law (Ley General de Sociedades Mercantiles), we are required to have at least one statutory auditor (comisario), who is elected by our shareholders at the annual ordinary general shareholders’ meeting. C.P. Juan Manuel Ferrón is our statutory auditor. Mr. Ferrón is a partner of PricewaterhouseCoopers, S.C., who are our external auditors. The primary role of the statutory auditor is to report to our shareholders at the annual ordinary general shareholders’ meeting regarding the accuracy, sufficiency and reasonable basis of the financial information presented to such shareholders by the board of directors.

     Our executive officers are appointed by the board of directors for an indefinite term and may be removed by the Board at will, provided the corresponding severance payments are made in accordance with Mexican labor law and the applicable labor contract.

     Members of the board of directors are not entitled to any benefits upon termination.

D. Employees

     As of December 31, 2004, we had 683 employees, a 21% increase as compared to the number of employees one year earlier to a total of 564 at the end of 2003. Of our total employees, 163 are managed through external agencies, 30 are unionized and covered by the terms of a collective bargaining agreement that we entered into with the National Union of Telecommunications, Communications, Cybernetics, Electric, Electronic and Similar Products Workers of the Mexican Republic (Sindicato Nacional de Trabajadores de Telecomunicaciones, Telefonía, Comunicaciones, Cibernética, Productos Eléctricos, Electrónicos, Similares y Conexos de la República Mexicana). This agreement is renewable every year and next expires on March 31, 2006. We have not experienced any strikes or work stoppages and believe that our relations with our employees are satisfactory.

     We also had 233 sales representatives as of December 31, 2004, compared to 144 sales representatives as of December 31, 2003.

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E. Share ownership

     Messrs. Jacques Gliksberg, Roberto Chute, Marco Viola and Martin Molina, series B and B-1 Directors, Nexus-Holdings I, LLC, BASCF-Maxcom Holding I, LLC and BAS Capital Funding Corporation, shareholders that hold, directly and indirectly 71.04% of our capital stock. None of our other directors or officers owns more than 1% of our shares, except for shares held by the Aguirre Gómez family, which are described below in “Principal Shareholders.”

The only agreements that we currently maintain for purposes of compensating our employees with our capital stock our old and new executive stock option plans, described above under “—B. Compensation.”

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major shareholders and share ownership

     The following table presents the equity structure and the major shareholders of Maxcom as of the date of this annual report:

                                 
    Shareholders        
            Banc America              
    Aguirre Gómez     Equity     Other        
Shares   Family(1)     Partners(2)     Investors     Subtotal  
Series A Shares
                               
Number of shares
    4,508,644                   4,508,644  
Percentage owned
    100.00 %                 100.00 %
Series A-1 Shares
                               
Number of shares
    6,088,896                   6,088,896  
Percentage owned
    100.00 %                 100.00 %
Series B-1 Shares
                               
Number of shares
          10,089,375       92,575       10,181,950  
Percentage owned
          99.09 %     0.91 %     100.00 %
Series N Shares
                               
Number of shares
    42,052       3,505,738       5,314,044 (4)     8,861,834  
Percentage owned
    0.47 %     39.56 %     59.97 %     100.00 %
Series N-1 Shares
                               
Number of shares
          217,207,981       3,506,893 (4)     220,714,874  
Percentage owned
          98.41 %     1.59 %     100.00 %
Series N-2 Shares(3)
                               
Number of shares
                26,867,820       26,867,820  
Percentage owned
                100.00 %     100.00 %
 
Total
                               
Number of shares
    10,639,592       230,803,094       35,781,332       277,224,018  
Percentage owned
    3.84 %     83.26 %     12.91 %     100.00 %
 
(1)   The shares of Maxcom controlled by the Aguirre Gómez family are held individually or through trusts or corporations. As part of the 2004 restructuring, the Aguirre Gómez family exchanged i) 1,226,373 of our series B common shares for 1,226,373 of our series A common shares, and ii) 2,055,843 of our series N shares for 2,055,843 of our series A shares.
 
(2)   The shares of Maxcom controlled by Banc America Equity Partners are held through (i) Nexus-Maxcom Holdings I, LLC, which holds 166,408,377 shares or approximately 60.3% of the total outstanding capital stock, (ii) BASCF-Maxcom Holding I, LLC which holds 60,888,979 shares or approximately 21.96% of the total outstanding capital stock, (iii) BAS Capital Funding Corporation, which holds 3,155,164 shares or approximately 1.14%, and (iv) BankAmerica Investment Corporation, which hold approximately 0.13% of the total outstanding capital stock. As part of the 2004

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    restructuring the entities controlled by Banc America Equity Partners exchanged 4,333,741 of our series N-1 shares for 4,333,741 of our series B-1 shares.
 
(3)   The series N-2 shares were originally issued to the bondholders who participated in our debt restructuring. During 2003 Nexus – Maxcom Holdings I, LLC acquired an amount of approximately 75% of the old notes, as well as a similar percentage of series N-2 shares, which are now beneficially owned by Nexus – Maxcom Holdings I, LLC See “Item 5—Operating and Financial Review and Prospects—Debt restructuring and recapitalization.” Additionally, during 2003 Nexus – Maxcom Holdings I, LLC acquired Series B-1 and N-1 shares previously held by Morgan Stanley Asset Management, Caxton International and Credit Suisse First Boston Corporation.
 
(4)   As part of the agreements made between some of our current officers which also held shares, in February 2005 Rene Sagastuy Ferrándiz, our Chief Executive Officer, Ricardo Arévalo, our Chief Operation and Information Technology Officer and, Rogelio Espinosa Cantellano, head of the Strategic Negotiations Direction exchanged an aggregate amount of 1,469,836 of our series N shares for 1,469,836 of our series N-1 shares.

     In addition, we have options authorized for the purchase of up to 3,024,011 series N and 23,010,943 series N-1 shares. See “Outstanding options and warrants.”

The capital restructuring

     On April 11, 2002 we obtained an authorization from the Mexican Foreign Investment Bureau (Dirección General de Inversión Extranjera) to increase our ability to issue neutral investment shares for up to 95% of our total capital stock and to simplify our equity structure.

     Our capital structure is comprised of the following stock:

    Series A-1 common voting shares with preferred liquidation rights;
 
    Series B-1 common voting shares with preferred liquidation rights;
 
    Series N-1 preferred shares with limited voting rights; and
 
    Series N-2 preferred shares with limited voting rights.

     The holders of our series A shares and series A-1 preferred shares voting together as a class have the ability to elect the majority of the board of directors. All series A shares and A-1 preferred shares are beneficially owned, directly or indirectly, by several members of the Aguirre Gómez family, including Adrián Aguirre Gómez, María Guadalupe Aguirre Gómez, María Elena Aguirre Gómez, and María Trinidad Aguirre Gómez. Pursuant to our amended by-laws, our amended series A shares and A-1 preferred shares represent 51% of our voting stock and may only be held by Mexican nationals.

     Although the Aguirre Gómez family holds 51.00% of the voting stock through the series A and A-1 shares, and has the power to elect the majority of the board of directors, its ability to control Maxcom is substantially limited by the terms of the securityholders’ agreement described below under “—Securityholders agreement.” The holders of our series B shares and series B-1 preferred shares voting together have the right to elect four directors of our nine-member board of directors. However, pursuant to the terms of the securityholders agreement, the series B and B-1 director are elected from among nominees proposed by Nexus.

     The holders of our series N-2 preferred shares have the right to appoint an observer to the board of directors for so long as (i) the series N-2 preferred shares represent at least 3% of the outstanding capital stock of Maxcom or (ii) there is at least one share of series N-2 preferred shares remain outstanding and at least U.S.$17.5 million aggregate principal amount of the old notes remain outstanding. This observer, who is not a member of the board of directors, has the right to attend meetings of the board of directors but is not entitled to vote.

     On October 8, 2004, we consummated an exchange offer and consent solicitation. The purpose was to improve our leverage and capital structure, in order to attract additional investments and access multiple opportunities for future growth. The following actions were taken pursuant to the debt restructuring and recapitalization:

    Holders tendered an aggregate of U.S.$162,505,711 in principal amount of old notes in exchange for an aggregate of (i) U.S.$36,117,789 in principal amount of new notes, bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009 (the “new notes”), and (ii) 101,110,338 of our Series N-1 Preferred shares;
 
    Maxcom received consents to the amendment of certain restrictive covenants of the indenture governing the old notes representing 92.0% of the total principal amount of outstanding old notes (other than old notes held by Maxcom or any affiliate of Maxcom), therefore fulfilling the condition for the adoption of the proposed amendments.

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Outstanding options and warrants

     As of the date of this annual report, we have up to 23,010,943 million series N-1 shares and up to 3,024,011 million series N shares authorized for issuance upon the exercise of stock options and warrants. Each option entitles the holder to purchase one series N share or one series N-1 share. The following table presents shares authorized for issuance upon the exercise of stock options and warrants as well as information concerning the stock options and warrants authorized and outstanding:

                     
                Exercise  
    Number of     Type of   price  
Name of option holder   options     Share   Per share  
                (US$)  
CT Global Telecommunications, Inc. (operating services) (1)
    1,105,779     N     3.06  
Bachow & Associates, Inc. (strategic assistance services) (2)
    442,312     N     3.06  
Amsterdam Pacific LLC
    24,426     N     8.70  
1998-2000 Executive Stock Option Plan
    575,000     N     8.70 to 12.50  
2001-2003 Executive Stock Option Plan (9)
    17,998,500     N-1     0.50  
UBS Warburg LLC (3)
    89,244     N     0.01  
Donaldson, Lufkin & Jenrette Securities Corporation (3)
    22,312     N     0.01  
13¾% notes warrantholders (4)
    764,938     N     0.01  
Adrián Aguirre (5)
    3,626,959     N-1     0.49  
Signing bonus reserve for new officers
    246,215     N-1     0.01  
BAS Capital Funding Corporation (management services) (6)
    249,781     N-1     0.01  
BankAmerica Investment Corporation (management services) (7)
    27,754     N-1     0.01  
Bachow & Associates, Inc. (management services) (8)
    277,535     N-1     0.01  
Directors and committee members compensation
    584,199     N-1     0.01  
Total
    26,034,954              
 
(1)   We issued options to purchase up to 250,000 series N shares at U.S.$8.70 per share in May 1998 as compensation for operating services. Pursuant to our 2002 capital restructuring, we issued options to purchase up to an additional 855,779 series N shares at an exercise price of U.S.$3.06 per share and reduced the exercise price of the original options to U.S.$3.06 per share as partial anti-dilution protection.
 
(2)   We issued options to purchase up to 100,000 series N shares at U.S.$8.70 per share in May 1998 as compensation for strategic assistance services. Pursuant to our 2002 capital restructuring, we issued options to purchase up to an additional 342,312 series N shares at an exercise price of U.S.$3.06 per share and reduced the exercise price of the original options to U.S.$3.06 per share as partial anti-dilution protection.
 
(3)   These warrants were issued in March 2000 as partial compensation for underwriting services related to the issuance of units comprised of our 133/4% notes and warrants.
 
(4)   These warrants were issued as part of the March 2000 offering of our units comprised of our 133/4% notes and warrants.
 
(5)   We issued options to purchase up to 375,000 series N shares at a strike price varying between U.S.$8.70 and U.S.$12.50 per share pursuant to the old executive stock option plan described in “Management—Compensation—Old Executive Stock Option Plan.” Pursuant to our 2002 capital restructuring, we issued options to purchase up to 3,251,959 series N shares at an exercise price of U.S.$0.49 and reduced the exercise price of the original options to U.S.$0.49 per share as partial anti-dilution protection. Pursuant to a shareholders meeting held on December 17, 2004 we authorized an amendment to the existing options and warrants issued in connection with employee compensation plans or management services to change the underlying value of the options from N to N-1 preferred shares.
 
(6)   We issued options to purchase up to 42,300 series N shares at U.S.$0.01 per share in May 2001 as compensation for management services provided during 2000. Pursuant to our 2002 capital restructuring, we issued options to purchase up to an additional 207,481 series N shares at an exercise price of U.S.$0.01 per share as partial

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    anti-dilution protection. Pursuant to a shareholders meeting held on December 17, 2004 we authorized an amendment to the existing options and warrants issued in connection with employee compensation plans or management services to change the underlying value of the options from N to N-1 preferred shares.
 
(7)   We issued options to purchase up to 4,700 series N shares at U.S.$0.01 per share in May 2001 as compensation for management services provided during 2000. Pursuant to our 2002 capital restructuring, we issued options to purchase up to an additional 23,053 series N shares at an exercise price of U.S.$0.01 per share as partial anti-dilution protection. Pursuant to a shareholders meeting held on December 17, 2004 we authorized an amendment the existing options and warrants issued in connection with employee compensation plans or management services to change the underlying value of the options from N to N-1 preferred shares.
 
(8)   We issued options to purchase up to 47,000 series N shares at U.S.$0.01 per share in May 2001 as compensation for management services provided during 2000. Pursuant to our 2002 capital restructuring, we issued of options to purchase up to an additional 230,535 series N shares at an exercise price of U.S.$0.01 per share as partial anti-dilution protection. Pursuant to a shareholders meeting held on December 17, 2004 we authorized an amendment to the existing options and warrants issued in connection with employee compensation plans or management services to change the underlying value of the options from N to N-1 preferred shares.
 
(9)   The board has authorized that up to three million options to purchase series N-1 shares be granted to key officers in connection with a change of control as part of there severance package agreements.

     Pursuant to a shareholders meeting held on December 17, 2004 we authorized an amendment the existing options and warrants issued in connection with employee compensation plans or management services to change the underlying value of the options from N to N-1 preferred shares.

     On March 24, 2005 the option of Nissho Iwai American Corporation to subscribe up to 337,472 series N shares at a strike price per share of U.S.$8.70 expired in accordance with the Stock Option Agreement executed by and between Nissho Iwai American Corporation and Maxcom Telecomunicaciones, S.A. de C.V. on March 24, 1998.

Securityholders agreement

     On August 18, 2000, Maxcom executed an amended and restated securityholders agreement with our shareholders to, among other things, reflect the restructuring of our capital stock and to provide that the exchange of series C shares and series N shares for CPOs may not adversely affect in any manner the rights granted to the holders of the series N shares under the original securityholders agreement.

     The securityholders agreement was again amended and restated in connection with our recapitalization. All of the holders of series A shares, series A-1 preferred shares, series B shares, series B-1 preferred shares, series N shares and series N-1 preferred shares are parties to the securityholders agreement, which sets forth certain corporate governance and the transfer or sale of such securities. The primary purpose of the securityholders agreement is to confirm the rights and obligations under the by-laws of each of the parties to such agreement. Accordingly, with certain limited exceptions, the terms of the new securityholders agreement are substantially the same as the terms of the by-laws as applicable to the holders of series A shares, series A-1 preferred shares, series B shares, series B-1 preferred shares, series N shares and series N-1 preferred shares.

     In particular, the new securityholders agreement provides that we are managed by a board of directors composed of nine members and nine alternate members. Five members are designated by holders of a majority of the series A shares and the series A-1 preferred shares, voting together as a single class, and the remaining four members are designated by the holders of our series B shares and series B-1 preferred shares voting together. However, the series B and B-1 directors are selected from among nominees proposed by Nexus.

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     Pursuant to the new securityholders agreement, Maxcom is required to deliver to certain significant holders of series A, B and N shares and series A-1, B-1 and N-1 preferred shares financial statements and other information reasonably requested by such shareholders.

     In addition, the new securityholders agreement provides, among other things, approval of key matters (which will require the affirmative vote of both Nexus and the board, inclusive the approval of at least one director designated by Nexus), restrictions on transfers, rights of first offer, participation rights, and rights and obligations with respect to public offerings. For further description of corresponding provisions of the proposed by-laws see “Item 10. Additional Information—B. Memorandum and articles of association.”

B. Related party transactions

General policy

     Our general policy is that we will not, and will not permit our subsidiaries to, enter into any contract or transaction with or for the benefit of any affiliate (other than transactions between us and our subsidiary), which is not at a price and on other terms at least as favorable to Maxcom or our subsidiaries as those which could be obtained on an arm’s-length basis from an unaffiliated third party.

Operation services

     On October 17, 1997, we entered into an operating agreement with CT Global Telecommunications, Inc., one of our series B shareholders. This agreement was amended in May 21, 1998 and October 1, 1999 and was terminated on December 31, 2000. Under this agreement, CT Global was responsible, among other things, for providing us with advisory consulting and supporting services in our start-up phase.

     During the life of this Agreement, CT Global earned options to purchase our shares as incentive compensation for meeting certain start-up and operational targets. As part of the proposed capital restructuring described in “—A. Major shareholders and share ownership—The capital restructuring,” we authorized the issuance of options in favor of CT Global to purchase up to 855,779 series N shares at an exercise price of U.S.$3.06 per share and to reduce the exercise price of the original options to U.S.$3.06 per share as partial anti-dilution protection. See “—A. Major shareholders and share ownership—Outstanding options and warrants.”

Strategic assistance services

     On May 21, 1998, we entered into a strategic assistance agreement with Bachow & Associates, Inc., an affiliate of one of our current principal shareholders. The agreement provided that Bachow would help us to:

    develop and implement a budget model template for our annual operating and capital budgets;
 
    evaluate and assist in the choice and implementation of a financial accounting system;
 
    develop a template for the monthly board of directors operational reporting package;
 
    evaluate and assist in the choice and implementation of a customer billing system;
 
    design a sales and marketing plan; and
 
    provide training and guidance to our Chief Financial Officer.

     This agreement expired on April 1, 1999. Bachow received, in addition to other compensation, options to purchase 100,000 series N shares at a strike price of U.S.$8.70 per share. In accordance with the terms of the strategic assistance agreement, Bachow may elect to have the Company finance up to 95% of the exercise price with a seven-year term non-recourse loan that will be secured by the stock. Pursuant to the capital restructuring, we authorized the issuance of options to purchase up to an additional 342,312 series N shares at an exercise price of

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U.S.$3.06 per share and to reduce the exercise price of the original options to U.S.$3.06 per share as partial anti-dilution protection.

Advertising

     In April 9, 2002 we agreed to purchase U.S.$3.0 million of advertising time over the Grupo Radio Centro radio network from Operadora Plusgamma, a company controlled by certain members of the Aguirre Gómez family. Operadora Plusgamma is an operator of a network of radio station located throughout Mexico. The Aguirre Gómez family used the U.S.$3.0 million proceeds that were received by Operadora Plusgamma from this agreement to purchase series A-1 shares pursuant to the private equity investment made at the time of the recapitalization.

Management services

     In May 2001, Bank America International Investment Corporation, Bachow & Associates, Inc. and LA Strategic Capital Partners II, which are principal shareholders (or affiliates of principal shareholders in the case of Bachow) received options to purchase an aggregate of 94,000 series N shares at an exercise price of U.S.$0.01 for management services rendered in 2000, during the term of vacancies in the offices of Chief Executive Officer, Chief Operating Officer and Chief Marketing Officer.

     As part of the proposed capital restructuring described in “—A. Major shareholders and share ownership—The capital restructuring,” we authorized the issuance to the same partners of options to purchase 461,069 series N shares at an exercise price of U.S.$0.01 per share partial anti-dilution protection. See “—A. Major shareholders and share ownership—Outstanding options and warrants.”

C. Interest of experts and counsel

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated statements and other financial information

Financial statements

     See Item 18.

Legal proceedings

     We are not currently party to any material legal proceedings other than as described below.

Lease termination agreement

     In September 2002, we commenced actions before the Lease Courts for the Federal District of Mexico against Messrs. Zaga Romano, Zaga Buzali and others (collectively, the “landlord”), seeking the termination of a 15-year lease (expiring on September 30, 2013) of 70,500 square feet plus parking space in a building on Magdalena, Mexico City, which was our former headquarters. The action was based on claims of miscalculation of lease payment amounts and breaches of certain city compliance regulations. The landlord countersued alleging failure to make lease payments.

     In May 2003, we reached an agreement with our landlord at our former headquarters in Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May 2013 on the first floor, where one of our Lucent 5ESS switches is located, the roof-top, where we have three microwave transmission antennas and a section of the basement, which will be used for parking and to place some of our electric equipment that supports the switch. We were also released from our lease obligations on approximately 35,887 square feet plus parking space of the building originally running through September 30, 2013, including past-due lease payments dating back from

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October 2002. In exchange for the new lease and the releases, we agreed to prepay the full, ten-year lease obligations on the first floor, the roof-top and basement, which amount to U.S.$2.7 million and will be payable in full by May 2004.

Significant unpaid receivable

     We have initiated criminal and commercial actions against Americana de Sistemas, S.A. de C.V. for the failure to pay approximately Ps.6.4 million in telecommunications services. This service usage, which was incurred over several days, was detected by our fraud prevention system but was not noticed by our monitoring personnel, which has been significantly reduced as a result of our cost-cutting measures. See “Item 3. Key Information—D. Risk factors—Factors relating to the Mexican telecommunications industry—Fraud increases our expenses.” Fraud on payment of labor quotas to the Mexican Institute of Social Security (IMSS)

     We initiated criminal and commercial actions against Banco Santander Serfin, S.A. and Banco Nacional de México, S.A. (also known as Banamex) for a fraud committed against us in the payment of the bi – monthly labor quotas to IMSS. We presume the fraud was committed by the personnel of the abovementioned banks by paying a check issued to the sole beneficiary of the IMSS to another person. We are no aware still of who the final beneficiary of the funds was, and the banks have not presented the information arguing bank secrecy regulations. We have obtained favorable judgment in connection with this case and we will proceed to liquidate the judgment.

Dividend policy

     Our current policy is to reinvest profits into our operations. In addition, the indenture that governs the terms of the old notes and new notes allows us to pay cash dividends only if we meet the following conditions:

    minimum consolidated leverage ratio of less than 3.75 to 1.00;
 
    a minimum fixed charge coverage ratio of 2.00 to 1.00;
 
    no default (as defined in the indenture) must have occurred and be continuing or result from the payment of the cash dividend; and
 
    the cash dividend payments do not exceed an amount determined in the indenture based on, among other things, cash flow generated from operations or equity offerings and consolidated interest expense.

B. Significant changes

     Except for the debt restructuring and recapitalization described in “Item 5. Operating and Financial Review and Prospects—Debt restructuring and recapitalization,” no significant change has occurred affecting our results or financial conditions since December 31, 2002.

ITEM 9. THE OFFER AND LISTING

A. Offer and listing details

     Not applicable.

B. Plan of distribution

     Not applicable.

C. Markets

     None of Maxcom’s securities are traded on any stock exchange.

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D. Selling shareholders

     Not applicable.

E. Dilution

     Not applicable.

F. Expenses of the issue

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share capital

     Not applicable.

B. Memorandum and articles of association

General

     Maxcom was incorporated on February 28, 1996, under the name “Amaritel, S.A. de C.V.” as a variable capital corporation (sociedad anónima de capital variable) established under the laws of Mexico. Maxcom was registered in the Public Registry of Commerce of the Federal District of Mexico under folio no. 210585 on June 11, 1996. Amaritel changed its name to “Maxcom Telecomunicaciones, S.A. de C.V.” on February 9, 1999.

     Maxcom was formed for the purpose of installing, operating and exploiting a public telecommunications network granted by the Mexican federal government for the provision of local and long distance telephone services.

     Maxcom’s corporate purposes are found under Article Two of its by-laws. The duration of Maxcom’s existence under our by-laws is indefinite.

     The following table sets forth our capital structure as of June 29, 2005:

                 
            % of Total  
    Number     Capital  
Class of Shares   of Shares     Structure  
Series A
    4,508,644       1.62 %
Series A-1 Preferred Shares
    6,088,896       2.19 %
Series B-1 Preferred Shares
    10,181,950       3.67 %
Series N
    8,861,834       3.19 %
Series N-1 Preferred Shares
    220,714,874       79.61 %
Series N-2 Preferred Shares
    26,867,820       9.69 %
 
           
Total
    277,224,018       100.0 %

     On April 11, 2002 we obtained an authorization from the Mexican Foreign Investment Bureau (Dirección General de Inversión Extranjera) to increase our ability to issue neutral investment shares for up to 95% of our total capital stock and to simplify our equity structure.

     In connection with our capital restructuring held in 2002, we issued four new classes of shares: the series A-1, B-1, N-1 and N-2 preferred shares. The series A-1 and B-1 preferred shares have full voting stock and the series N-1 and N-2 preferred shares have limited voting stock. The series N-1 and N-2 preferred shares are not computed for purposes of determining the foreign investment percentage under the Mexican Foreign Investment Law and may be

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subscribed, paid for and held by Mexican and non-Mexican investors. Our series N-2 preferred shares have been deposited into the CPO trust, which is administered by Banco Nacional de México, S.A., also known as Banamex who is also the holder of record of the series N-2 preferred shares. The trust is managed by a technical committee, a majority of the members of which are designated by Maxcom. The technical committee has the authority to direct the trustee to, among other things, waive preemptive rights otherwise provided by Mexican law. Each CPO represents one series N-2 preferred shares.

     Under such capital restructuring, we liquidated the existing C/N CPO trust and cancelled the corresponding C/N CPOs. Additionally, the series C shares was converted at an exchange ratio of one-to-one into series N shares. As a result, holders of C/N CPOs have became the direct holders of two shares of series N shares for each C/N CPO.

     Our series A shares and series A-1 preferred shares, which may only be subscribed, paid for and held by Mexican investors, collectively represent about 51% of our voting stock, and all of our series A and series A-1 shares are held directly or indirectly by members of the Aguirre Gómez family. The series B-1 preferred shares represent 49% of our voting stock and may be subscribed, paid for and held by Mexican and non-Mexican investors.

     In connection with our debt capitalization process held in 2004, at a general annual ordinary and extraordinary meeting of our shareholders, our shareholders authorized the exchange, subject to the completion of the restructuring, (1) 1,226,373 outstanding shares of our series B shares held by Mexicans for 1,226,373 of our series A shares, (2) 4,333,741 of our series N-1 shares for 4,333,741 of our series B-1 shares and (3) a maximum of 2,005,843 of our series N shares held by Mexicans for 2,005,843 of our series A shares. Our offer to exchange shares of our capital stock described in the previous sentence was made to all holders of our series B, N-1 and N shares. This exchange will allow us to issue additional neutral investment shares when required.

Voting rights

     Under our amended by-laws, the holders of series A shares, series A-1 preferred shares, series B shares and series B-1 preferred shares are entitled to vote on all matters submitted to a vote of the shareholders, with each share of series A shares, series A-1 preferred shares, series B shares and series B-1 preferred shares being entitled to one vote. In addition, under our by-laws, holders of series N shares have no voting rights and holders of series N-1 and N-2 preferred shares have limited voting rights. Currently, there are no series B shares outstanding.

     Holders of series N-1 preferred shares will vote together as a separate class in connection with:

    any amendment to the by-laws that adversely and disproportionately affects the economic characteristics (i.e., conversion right, liquidation right and dividend right) of the series N-1 preferred shares as compared to the series N-2 preferred shares; and
 
    any amendment to the section of the by-laws relating to the voting rights of series N-1 preferred shares.

     In addition, holders of series N-2 preferred shares will vote together as a separate class in connection with:

    determining whether a sale of all or substantially all of the consolidated assets of Maxcom or a merger, recapitalization, reorganization or consolidation of Maxcom, immediately after which the shareholders of Maxcom beneficially own less than 50% of the voting power or equity securities of the surviving entity will not be deemed a liquidation event with respect to the series N-2 preferred shares;
 
    any amendment to the by-laws that adversely and disproportionately affects the economic characteristics (i.e., conversion right, liquidation right and dividend right) of the series N-2 preferred shares as compared to the series N-1 preferred shares;

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    any amendment to the by-laws that adversely affects the right of the holders of a majority of the series N-2 preferred shares to designate an observer (or, in the circumstance described below, a member) to the board of directors;
 
    any amendment to the by-laws that adversely affects the rights of the observer designated by the series N-2 preferred shares to receive, subject to any restrictions imposed by applicable law, copies of any written materials distributed to the holders of series A and B shares and series A-1 and B-1 preferred shares simultaneously with such holders;
 
    certain amendments to the by-laws that impose additional transfer restrictions or conditions on the series N-2 preferred shares, except to the extent necessary to comply with applicable law;
 
    any amendment to the by-laws that adversely affects the co-sale rights or obligations of holders of series N-2 preferred shares;
 
    any amendment to the by-laws that adversely affects the forced sale rights or obligations of holders of series N-2 preferred shares; and
 
    any amendment to the section of the by-laws of Maxcom relating to the voting rights of series N-2 preferred shares.

     Shareholders’ meetings may be called by the board of directors, its Chairman, Vice-Chairman or Secretary, the statutory auditor or Nexus or, in certain cases, by a Mexican court of competent jurisdiction. In addition, the board of directors or the statutory auditor must call a shareholders’ meeting at the written request of any shareholder if no ordinary general shareholders’ meeting has been held for two consecutive years or if the shareholders’ meetings held during that period have not considered the items mentioned in Article 181 of the Mexican Companies Law. Notice of meetings must be published in the Official Gazette of the Federation or in a newspaper of general circulation in Mexico City or by written notice given to each shareholder of record at least 15 days prior to the meeting. In order to attend a shareholders’ meeting, a shareholder must request and obtain an admission card by depositing, at least 24 hours before the time set for holding the shareholders’ meeting, such shares with Maxcom’s corporate secretary or with a Mexican bank or other qualified institution. If entitled to attend the meeting, a shareholder may be represented by proxy or a power-of-attorney.

     Shareholders’ meetings may be ordinary, extraordinary or special. Extraordinary general meetings are called to consider the matters specified in Article 182 of the Mexican Companies Law, and principally include increases or reductions of capital stock, amendments to the by-laws, dissolution, issuance of bonds or preferred stock, merger, spin-off, transformation from one type of company to another, change in nationality and change of corporate purpose.

     General meetings called to consider all matters other than those mentioned above are ordinary meetings. An ordinary general meeting of the shareholders of Maxcom must be held at least annually during the four months following the end of each fiscal year to consider matters specified in Article 181 of the Mexican Companies Law, principally including the election of directors, the report of the board of directors regarding the performance of Maxcom, containing the financial statements of Maxcom for the preceding fiscal year and the declaration of dividends, if any.

     Special meetings for each class of stock may be held to elect the members or observers of the board of directors representing those shareholders and to address other matters relating to the relevant series.

     Under our by-laws, the quorum on a first call, and each call thereafter, for an ordinary general shareholders’ meeting is at least a majority of the voting shares. The quorum on a first call for extraordinary shareholders’ meetings, and each call thereafter, is at least a majority of the shares having a right to vote at such meetings. Except for purposes of certain key matters to be voted upon as a separate class by each of the holders of series N-1 and series N-2 preferred shares, series N shares, and series N-1 and N-2 preferred shares are not considered voting shares for purposes of determining the quorum at ordinary general or extraordinary shareholders’ meetings.

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The quorum on a first call for special shareholders’ meetings, and each call thereafter is at least a majority of the shares of the respective series for which the special meeting is being held.

     Resolutions of ordinary general and special shareholders’ meetings may be adopted by the affirmative vote of the majority of shares present at the meeting, except as to certain matters described below. Resolutions of general extraordinary shareholders’ meetings held on a first call, and each call thereafter may be adopted by the affirmative vote of at least a majority of the shares having a right to vote at such meetings.

     Under Mexican law, holders of 33% of Maxcom’s outstanding capital stock may have any shareholder action set aside by filing a complaint with a Mexican court of competent jurisdiction within 15 days after the close of the meeting at which such action was taken, by showing that the challenged action violates Mexican law or Maxcom’s by-laws.

     Under Mexican law, an action for civil liabilities against a member or members of the board of directors may be initiated by a shareholders’ resolution. In the event shareholders decide to bring an action, the person or persons against whom the action is brought will immediately cease to be members of the board of directors. Additionally, shareholders representing not less than 33% of the outstanding shares of Maxcom may directly take such action against members of the board of directors, provided that:

    such shareholders have not voted in favor of a resolution approved at the relevant shareholders’ meeting pursuant to which it was resolved not to take any action against the directors who are to be sued; and
 
    the claim in question covers the total amount of damages alleged to have been caused to Maxcom as well as to the individual plaintiffs’ interests.

     Any recovery of damages will be for the benefit of Maxcom and not the shareholders bringing the action.

     Under Mexican law, any shareholder or director who has a conflict of interests in connection with any matter must abstain from voting at the relevant shareholders’ or board of directors’ meeting, respectively. Any shareholder or director who votes on a business transaction where its interests conflict with those of Maxcom may be liable for damages if the transaction would not have been approved without such shareholder’s or director’s vote.

     The terms of compensation of the members of the board of directors must be approved at a shareholders’ meeting.

Approval of key matters

     Our amended by-laws provide that the approval of each of the key matters described below will require the approval in advance of both Nexus, solely in its capacity as a shareholder, and the board of directors; provided that the approval of the board of directors will require the affirmative vote of at least one director designated by Nexus.

     Key matters generally include the following:

    the incurrence or assumption by the company and/or any of its subsidiaries of any indebtedness (including capitalized lease obligations) or other liabilities exceeding U.S.$10,000,000;
 
    the issuance of any equity securities of the company or any of its subsidiaries;
 
    the sale, transfer, exchange or other disposal of all or a significant portion of the assets or equity securities of the company or any of its subsidiaries;
 
    any assignment by the company or any of its subsidiaries for the benefit of creditors or the voluntary commencement of any bankruptcy or insolvency proceedings;

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    the establishment by the company or any of its subsidiaries of any non-wholly-owned-subsidiary or the making by the company or any of its subsidiaries of any loans or advances to, guarantees for the benefit of, or investments in, any person or entity other than a wholly-owned subsidiary;
 
    the declaration of dividends on, or the making of any other distributions in respect of, any of its capital stock, other than dividends and distributions by a direct or indirect wholly-owned subsidiary of the company to its parent;
 
    the acquisition of any equity securities of the company or any of its subsidiaries;
 
    the entering into any transaction with any restricted persons;
 
    the election, appointment or removal of the Chief Executive Officer, the General Managers of any business units, the Chief Operating Officer, the Chief Financial Officer, the Director of Marketing and the Chief Engineer (or any other individual with a similar or more senior title or position), and the approval of salary, compensation and benefit or other similar plans for such key executives;
 
    the approval of the company’s and its subsidiaries’ annual business plan and annual budget for each fiscal year;
 
    the entering by the company or any of its subsidiaries into any new line of business (other than the main corporate purpose of the company);
 
    any agreement that would restrict the company’s or any of its subsidiaries’ right or ability to perform the provisions of its by-laws (Estatutos) or any agreements or instruments to which it is a party;
 
    the manner in which the shares or other interests of any subsidiary or entity owned by the company shall be voted at shareholders’ meetings called for key matters;
 
    any amendments to the concessions/licenses granted by the Mexican authorities, by-laws and certain other specified agreements;
 
    the subdivision or combination, in any manner, of the outstanding shares of one class or series of shares, unless the outstanding shares of the other class or series of shares of the company shall also be proportionately subdivided or combined in a similar manner;
 
    the grant to any person or entity of the right to request the company to register securities; and
 
    any commitment or agreement to do any of the foregoing.

Board of Directors

     Our board of directors is composed of nine members, five of whom are designated by the holders of series A shares and series A-1 preferred shares and four of whom are designated by the holders of series B shares and series B-1 preferred shares. Pursuant to the terms of the securityholders agreement described in “Item 7. Major Shareholders and Related Party Transaction—A. Major shareholders and share ownership—Securityholders agreement,” each series B and B-1 director must be elected from nominees selected by Nexus. One alternate is also designated for each member of the board of directors.

     Prior to the consummation of a qualified public offering, the holders of series N-2 preferred shares or the new class of voting preferred stock into which the series N-2 preferred shares is convertible are generally entitled to designate one observer to the board of directors. With certain exceptions, the observer has the right to attend meetings of the board of directors and receive information distributed to the company’s directors and copies of any

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written materials distributed to the holders of series A and B shares and series A-1 and B-1 preferred shares. The observer, who is not a member of the board of directors, is also entitled to attend meetings of any committee of the board of directors authorized to act on behalf of the full board of directors. The observer has no right to vote at any meeting of the board of directors or any committee of the board of directors. The holders of series N-2 preferred shares or the new class of preferred stock into which such series N-2 preferred shares is converted are permitted to designate an observer to the board of directors for so long as either:

    the series N-2 preferred shares, or such other voting preferred stock represents at least 3% of the issued and outstanding capital stock of Maxcom; or
 
    there are any shares of series N-2 preferred shares outstanding and at least U.S.$17.5 million principal amount of the old notes outstanding.

     Upon a change in the applicable laws in Mexico permitting a majority of our board of directors to be composed of non-Mexicans, the holders of series N-2 preferred shares, or such other voting preferred stock into which the series N-2 preferred shares is convertible, will be entitled to designate and elect a full member of the board of directors (in lieu of the observer) for so long as series N-2 preferred stock, or such voting preferred stock, represents at least 10% of the total capital stock of the company then outstanding. If the series N-2 preferred shares, or such other voting preferred stock, declines below this threshold, the class will again be permitted to designate an observer.

Dividends

     At the annual ordinary general meeting of shareholders of Maxcom, the board of directors will typically submit the financial statements of Maxcom for the previous fiscal year, together with a report by the board of directors, to the general ordinary shareholders’ meeting for their approval. The holders of series A and B shares and holders of series A-1 and B-1 preferred shares will determine the allocation of Maxcom’s net profits for such fiscal year. At least 5% of such net profits must be allocated to a legal reserve, which is not available for distribution except as a stock dividend, until the amount of the legal reserve equals 20% of Maxcom’s paid-in capital stock. Additional amounts may be allocated to other reserve funds as the shareholders determine. The remaining balance of net profits, if any, is available for distribution as dividends.

     The series N-2 preferred shares (on an as-converted basis) are entitled to receive dividend payments, if any, and rank pari passu with the series A-1, B-1 and N-1 preferred shares with respect to dividend rights. Maxcom will pay no dividends on any class of capital stock that is junior to the series N-2 preferred shares unless it also pays dividends to holders of series N-2 preferred shares.

     Maxcom does not anticipate that it will declare and pay dividends in the foreseeable future.

Liquidation rights

     In the event that we are dissolved or liquidated, one or more liquidators must be appointed at an extraordinary general shareholders’ meeting to wind up our affairs. Except as provided below, all fully paid and outstanding shares of capital stock will be entitled to share ratably in all assets remaining after payment of liabilities. Partially paid shares will be entitled to participate in a liquidation, dissolution or winding up in the same manner as they would in a dividend or distribution.

     However, under our amended by-laws, upon any liquidation, dissolution or winding up of Maxcom, holders of series N-2 preferred shares will be entitled to receive liquidation proceeds in preference to the holders of the series A, B and N shares and pari passu with the holders of series A-1, B-1 and N-1 preferred shares on a pro rata basis in an amount equal to the greater of:

    U.S.$0.4927 per share, as adjusted for stock splits, stock dividends and similar events, plus the accretion of such amount at a cumulative rate of 12% per year compounded semi-annually; and

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    the amount that holders of series N-2 preferred shares would have received if they had converted all of their series N-2 preferred shares into series N shares (or, to the extent the series N shares has been converted, to the class of stock the series N shares is converted into) immediately prior to the liquidation event.

     A sale of all or substantially all of the consolidated assets of Maxcom, or a merger, recapitalization, reorganization or consolidation of Maxcom, immediately after which the shareholders of Maxcom beneficially own less than 50% of the voting power or the equity securities of the surviving entity, will be deemed to be a liquidation event with respect to the series N-2 preferred shares, unless the holders of at least a majority of the series N-2 preferred shares deem that such event does not constitute a liquidation event with respect to their shares.

     A waiver of this deemed liquidation event by holders of series N-2 preferred shares will not impair the liquidation rights of holders of series A-1, B-1 and N-1 preferred shares.

     The liquidation preference rights will not be retained in the event of an optional conversion or mandatory conversion into common stock in connection with a qualified public offering.

Changes in share capital

     An increase of our capital stock may be effected through the issuance of new shares for payment in cash or in kind, by capitalization of indebtedness or by capitalization of certain items of shareholders’ equity. No increase of our capital stock may be effected until all previously-issued shares of capital stock have been fully paid. A reduction of our capital stock may be effected to absorb losses, to redeem shares, or to release shareholders from payments not made.

     Increases in capital may not result in the series N shares and series N-1 and N-2 preferred shares representing more than 95% in the aggregate of the outstanding capital stock of Maxcom. The series N shares and the series N-1 and N-2 preferred shares currently represent 91.8% of our outstanding capital stock.

     The fixed portion of our capital stock may only be increased or decreased by resolution of an extraordinary general meeting of shareholders and an amendment to our by-laws. The variable portion of our capital stock may be increased or decreased by resolution of an extraordinary general meeting of shareholders.

Preemptive rights

     In the event of a capital increase through the issuance of new shares for payment in cash or in kind, as a matter of Mexican law, a holder of shares has a preferential right to subscribe for a sufficient number of new shares to maintain the holder’s existing proportion of shares held.

     Shareholders have a preemptive right to subscribe for shares, except:

    in connection with mergers or spin-offs;
 
    on the conversion of convertible debentures; or
 
    issuances of shares pursuant to a public offering, if a general extraordinary shareholders’ meeting called for such purpose so approves and other requirements specified in Article 81 of the Mexican Securities Law are satisfied, including obtaining the approval of the Mexican National Banking and Securities Commission.

     Under Mexican law, preemptive rights may not be waived in advance by a shareholder, and cannot be represented by an instrument that is negotiable separately from the corresponding share but may be waived at the moment of issuance of such shares.

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     The series N-2 preferred shares are held in a limited purpose trust administered by Banco Nacional de México, S.A., who is also the holder of record. The CPO trust is managed by a technical committee, a majority of the members of which is appointed or designated by Maxcom, which has the authority to direct the trustee to, among other things, waive any applicable preemptive rights. See “—Description of the CPO trust” below.

     We may not be able to offer additional shares of capital stock to holders of the CPOs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of stock, unless a registration statement under the Securities Act is effective or an exemption from the registration requirements is available. Whenever we are required to make a preemptive rights offering to the holders of the series N-2 preferred shares, we will evaluate the costs and potential liabilities associated with any such registration statement, the benefits to the holders of CPOs, and any other factors that we consider appropriate and then we will determine whether or not to file such registration statement. If we determine that we will not be able to offer the holders of CPOs the right to subscribe for additional shares of capital stock, we will direct the trustee of the CPO trust to waive its preemptive rights as the holder of record of the series N-2 preferred shares.

     Our by-laws and securityholders agreement provide that if the trustee of the CPO trust waives the preemptive rights in connection with a share issuance, the holders of series N-1 preferred shares will also waive their preemptive rights with respect to such issuance. Although the holders of series N-1 preferred shares must waive their statutory preemptive rights, such holders will be permitted to participate directly in the share subscription or if otherwise permitted to do so.

Optional conversion rights

     The series N-2 preferred shares is convertible, in whole or in part, at the option of the holder into series N shares at any time prior to the earlier of:

    the consummation of a public offering; and
 
    the elimination of certain foreign ownership restrictions under Mexican law so as to permit the unrestricted ownership and/or control of Maxcom by non-Mexicans.

     Upon a public offering, the series N-2 preferred shares (as well as new voting preferred stock issued pursuant to a mandatory conversion related to the elimination of certain foreign ownership restrictions under Mexican law) will be convertible, in whole or in part, at the option of the holder into the same class of equity securities offered in such public offering.

     In addition, the series A-1, B-1 and N-1 preferred shares are convertible, in whole or in part, at the option of the holder, at such time, and on such terms, as the series N-2 preferred shares.

Mandatory conversion

     Upon a qualified public offering, all, but not less than all, the series N-2 preferred shares (as well as new voting preferred stock issued pursuant to a mandatory conversion related to the elimination of certain foreign ownership restrictions under Mexican law) will be convertible at the option of Maxcom into the same class of equity securities offered in such qualified public offering.

     In addition, all, but not less than all, of the series A-1, B-1 and N-1 preferred shares will be convertible at the option of Maxcom at such time and on such terms, as the series N-2 preferred shares.

     Upon the elimination of certain foreign ownership restrictions under Mexican law so as to permit the unrestricted ownership and/or control of Maxcom by non-Mexicans, the series N-2 preferred shares will automatically convert into a new voting preferred shares. This new voting preferred stock will retain the same liquidation preference rights of the series N-2 preferred shares and the right to appoint either a member of the board of directors or, if such new voting preferred stock represents less than 10% of the outstanding capital stock of Maxcom, an observer to the board of directors.

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Anti-dilution protection and conversion price adjustments

     If Maxcom issues any shares of common equity or securities convertible into common equity (other than certain permitted issuances) for consideration per share of less than either (i) the conversion price, which will initially be U.S.$0.4927 per share, in effect immediately prior to that time or (ii) the then fair market value of the stock sold, then, until December 31, 2002, full ratchet anti-dilution protection will apply, and, thereafter, institutional weighted average anti-dilution protection will apply to the preferred stock, as more fully described below. This anti-dilution protection will no longer be available after the preferred stock is converted into common stock. Maxcom has not issued any shares of common equity or securities convertible into common equity since the adoption of this clause.

     The following permitted issuances will not trigger the anti-dilution protections:

    any rights, options and warrants granted or issued, or authorized to be granted or issued, to certain employees, directors, consultants and vendors of Maxcom and its subsidiaries, as of March 5, 2002, or under any management incentive plan approved by the board of directors, including the affirmative vote of at least one of the directors selected from Nexus appointees.
 
    any securities issued pursuant to the private equity investment and up to U.S.$3.8 million of securities issued within one year of the consummation of the private equity investment at or above U.S.$0.4927 per share;
 
    any shares issued upon the exercise or conversion of any of the foregoing; and
 
    any of the capital stock issued in connection with a conversion of any of the series A-1, B-1, N-1 or N-2 preferred shares.

     Full-ratchet anti-dilution protection means that the conversion price will be automatically reduced to the lowest consideration at which any share of capital stock has been issued or sold.

     Institutional weighted average anti-dilution protection means that the conversion price will be reduced to the lower of:

    an amount equal to (A) the sum of (i) the product derived by multiplying the conversion price in effect immediately prior to such issuance or sale by the number of “common shares deemed outstanding,” as defined below, immediately prior to such issue or sale, plus (ii) the aggregate consideration (expressed as a net price per share), if any received by Maxcom upon such issue or sale, divided by (B) the number of common shares deemed outstanding immediately after such issue or sale; and
 
    the conversion price determined by multiplying the conversion price in effect immediately prior to such issuance or sale by a fraction, the numerator of which will be the sum of (i) the number of the common shares deemed outstanding immediately prior to such issue or sale multiplied by the then market value of the then fair market value of the common stock of Maxcom then outstanding as of the date of such issuance or sale plus (ii) the aggregate consideration, if any, received by Maxcom upon such issuance or sale and the denominator of which shall be the product derived by multiplying the then fair market value of the common stock of Maxcom by the number of common shares deemed outstanding immediately after such issue or sale.

     For the purposes of the foregoing calculations, the term “common shares deemed outstanding” means the currently outstanding capital stock of Maxcom plus all shares of capital stock issuable upon the exercise of options and warrants or conversion of convertible securities. Whenever Maxcom grants options or issues securities convertible into the capital stock of the company, the issue price will be the sum of the per share consideration received by the company upon the grant or issue of the option or convertible security plus any per share additional consideration that the company will receive upon exercise or conversion of such option or convertible security.

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     Determinations of fair market value will be made in good faith by the board of directors so long as the issuance is for cash consideration (and without any associated service arrangements) and at least 70% of the shares issued are to persons who are not then shareholders of Maxcom. Otherwise, Maxcom at its expense will obtain the opinion of an internationally recognized or nationally recognized in the United States financial advisory firm or investment bank to be selected by Maxcom as to the fair value of the shares to be issued and any non-cash consideration for such shares.

     The conversion price will also be adjusted for any stock splits or combinations.

     Following any adjustment of the conversion price of the series N-2 preferred shares, Maxcom will deliver notice to the CPO trustee of the adjustment setting forth the calculation of the adjustment. In addition, upon the written request of the CPO trustee, Maxcom will furnish or cause to be furnished to the CPO trustee a certificate setting forth (i) a summary of all adjustments and readjustments to the conversion price, (ii) the conversion price for the series N-2 preferred shares then in effect, and (iii) the number of shares of capital stock into which the series N-2 preferred shares is then convertible.

Right of first refusal

     Except in connection with a sale of at least 50.1% of the total equity of Maxcom, a public offering or a transfer to an affiliate or a certain other permitted transferee, if a Maxcom shareholder other than certain significant shareholders, who we refer to as the “investors,” intends to sell its capital stock, then shareholders other than the investors and the holders of the series N-2 preferred shares (but only with respect to their series N-2 preferred shares) will have the right to purchase such capital stock. This right of first refusal will terminate upon the earlier of:

    a sale or transfer of at least 50.1% of the total capital stock of Maxcom or the sale of all or substantially all of the consolidated assets of Maxcom in one or more related transactions to an independent third party or parties, or
 
    the elimination of certain foreign ownership restrictions under Mexican law so as to permit the unrestricted ownership and/or control of Maxcom by non-Mexicans.

Right of first offer

     Except in connection with a sale of at least 50.1% of the total equity of Maxcom, a public offering or a transfer to an affiliate or a certain other permitted transferee, in the event any investor intends to transfer any series A-1, B-1 or N-1 preferred shares, or securities received in a conversion of such preferred shares, such investor must offer to sell such securities to each other investor holding more than one percent of the aggregate series A-1, B-1 and N-1 preferred shares, or securities received in a conversion of such preferred stock, then outstanding. This right of first offer will terminate upon the earlier of:

    a qualified public offering;
 
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving at least 50.1% of the total capital stock of Maxcom or a sale of all or substantially all of the consolidated assets of Maxcom in one or more related transactions to an independent third party or parties.

Co-sale rights and forced sale obligations

Co-sale rights

     If holders of series A-1, B-1 or N-1 preferred shares intend to sell, alone or together with any other shareholder of Maxcom, at least 50.1% of the total capital stock of Maxcom in one or more related transactions to an independent third party or parties, then holders of series N-2 preferred shares will, except in certain circumstances, have the right to participate in any such sale on a pro rata basis with the sellers. Holders of series N-2 preferred shares

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will be entitled to sell such shares generally on the same terms and conditions as the selling shareholder. This co-sale right will terminate upon the consummation of the earlier of

    a qualified public offering; or
 
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or substantially all of the consolidated assets of Maxcom to an independent third party or parties in one or more related transactions.

     In connection with any sale or transfer of any of our equity securities, debt securities with equity features or other securities convertible into equity securities, shareholders other than holders of series N-2 preferred shares may participate in such sale on a pro rata basis at a price and on terms substantially the same as the selling securityholder. However, these co-sale rights will not apply to a sale or transfer of no more than 7,000,000 shares of preferred stock. This co-sale right will terminate upon the consummation of the earlier of:

    a qualified public offering; or
 
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or substantially all of the consolidated assets of Maxcom to an independent third party or parties in one or more related transactions.

Forced sale obligations

     If Nexus desires to transfer at least two-thirds of the beneficial ownership of the total capital stock of Maxcom then outstanding, in one or more related transactions to an independent third party or parties, on terms and conditions approved by Nexus, then all shareholders of Maxcom (including holders of series N-2 preferred shares) may be forced by Nexus to sell a proportionate share of their series N-2 preferred shares. Such shareholders will be entitled to sell such shares generally on the same terms and conditions as the selling shareholders.

     If Nexus desires to sell all or substantially all of the consolidated assets of Maxcom in one or more related transactions to an independent third party or parties on terms and conditions approved by Nexus, then all shareholders of Maxcom (including holders of series N-2 preferred shares) may be forced by Nexus to vote in favor of, consent to and raise no objections against such asset sale.

     Holders of series N-2 preferred shares may not be forced to participate in, or vote for, any of the foregoing transactions unless:

    the consideration for such sale is paid in cash and/or freely tradable, exchange—listed equity securities; and
 
    the value of such consideration on a per share basis is not less than the then applicable liquidation preference for each share of series N-2 preferred shares.

     These forced sale obligations will terminate upon the consummation of the earlier of:

    a qualified public offering; or
 
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or substantially all of the consolidated assets of Maxcom to an independent third party or parties in one or more related transactions.

Other provisions

     In both the case of a co-sale and a forced sale, the holders of series N-2 preferred shares will not be required to execute any ancillary documents. However, to the extent the proceeds from any such sale will be subject to any

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expense, escrow, holdback or indemnification obligation, the selling shareholders assume this obligation on a pro rata basis. The amount of any such obligation of each shareholder in connection with a participation in a sale or a forced sale will be limited to the maximum amount of proceeds that the such holder is entitled to receive. Shareholders participating in a sale or forced to sell may provide the purchaser with different assurances or collateral for their indemnification obligations. As a result, some shareholders may be permitted to sign an indemnification agreement or give a guarantee while others may be subject to a hold back of their sale proceeds.

     It is possible that both the participation rights and forced sale obligations will be triggered by a single transaction. In this event, the participation rights will not apply.

     In the event that the participation rights or forced sale obligations have been triggered, we will prepare, and to the extent applicable, file with the appropriate regulatory authority, with the advice of U.S. counsel, any notices or offering material required by our by-laws or applicable Mexican and U.S. federal and state securities laws to be delivered to the beneficial owners of the series N-2 preferred shares and to cause such documents to be delivered to the CPO trustee in sufficient quantities for distribution to the beneficial owners of the series N-2 preferred shares.

Rights and obligations with respect to public offerings

Registration rights

     Nexus at any time and from time to time may request that Maxcom take all requisite action, at its expense, to register one or more series of Maxcom’s equity securities under applicable Mexican securities laws, rules and regulations or applicable U.S. federal and state securities laws. However, the initial demand by Nexus shall be a public offering that is expected to yield aggregate net proceeds of at least U.S.$10.0 million.

     Holders of series N-1 preferred shares and series A-1 and B-1 shares will have the right to participate (piggyback) in any registration statement filed pursuant to the Securities Act for a public offering other than an initial public offering. However, the registration rights will be subject to customary cutback provisions.

Cooperation in connection with an underwritten offering

     During the period commencing on Maxcom’s initial public offering that is not a qualified public offering and ending on the earlier to occur of eighteen months after the consummation of such initial public offering or the consummation of Maxcom’s first qualified public offering, at the request of one or more holders of series N-2 preferred shares, or of any class of stock into which the series N-2 preferred shares has been converted, and at such holders’ expense Maxcom will cooperate one time only with the efforts of such holders to effect an underwritten offering of their stock, provided that such offering is for at least U.S.$5.0 million in net proceeds. In addition, the underwriter must be reasonably acceptable to Maxcom and Maxcom may delay such underwritten offering for up to six months if it is then separately in the process of preparing a qualified public offering. Maxcom will not be obligated to prepare any offering memorandum or registration statement in connection with such offering.

Listing rights

     After a public offering, at the request of any holder of series N-2 preferred shares, or any class into which the series N-2 preferred shares has been converted, Maxcom will, at its expense, use commercially reasonable efforts, to cause the shares into which the series N-2 preferred shares has been converted or is convertible, including any CPOs representing such shares, to be listed on each securities exchange or the NASD automated quotation system, as applicable, on which similar securities of Maxcom, including certificates of participation representing the beneficial ownership of such similar securities are then listed. In connection with any such listing, Maxcom will, if required, also register such securities with the National Registry of Securities and Intermediaries of the National Banking and Securities Commission of Mexico.

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Lock-up restrictions

     We may, under certain circumstances, impose a limitation on the transfer of series N-2 preferred shares, which provides that such stock may not be transferred after notice from Maxcom, which may not be more than 30 days prior to the expected effective date of Maxcom’s first qualified public offering until the 180th day after such effective date. Maxcom may not impose this restriction on the transfer of series N-2 preferred shares if more than 20% of the securities being registered in connection with the qualified public offering are for the account of Maxcom’s shareholders. In addition, this restriction on transfer may not be more restrictive than any restrictions placed on all other shareholders.

Transfer of CPOs and transfer restrictions

     The series N-2 preferred shares and any shares of capital stock into which series N-2 preferred shares is converted is deposited in the CPO trust and may not be transferred separate from the CPOs representing such securities. The CPOs may be transferred without restriction under U.S. federal securities laws by persons who are not affiliates of Maxcom. However, no market currently exists for the CPOs and we do not currently plan to list the CPOs on any exchange for trading. In certain circumstances we may be required to list the CPOs on a securities exchange and to cooperate one time only with efforts of holders of the CPOs to effect an underwritten offering. We may impose limitations on the transfer of CPOs for a period after the consummation of a qualified public offering. See “—Rights and obligations with respect to public offerings.”

     Until the earlier of a qualified public offering or a sale of the company, no holder of series A, B or N shares and series A-1, B-1 or N-1 preferred shares may transfer such shares without the prior approval of both Nexus, solely in its capacity as a shareholder, and the board of directors, which board of directors approval will require the affirmative vote of at least one Nexus director.

     Until a qualified public offering, in the event that certain significant holders of series A-1, B-1 and N-1 preferred shares desire to transfer such shares, such holders will be obligated to first offer to sell such shares to other holders of series A-1, B-1 or N-1 preferred shares at the same price, terms and conditions offered to the initial proposed transferees.

     Upon the effectiveness of changes in certain Mexican regulations, other holders of series A, B and N shares and series A-1, B-1 and N-1 preferred shares who desire to transfer such shares will be obligated to first offer to sell such shares to other series A, B and N shares and series A-1, B-1 and N-1 preferred shares at the same price, terms and conditions offered to the initial proposed transferees.

     There are certain exceptions to the transfer restrictions in our bylaws. These exceptions apply to (i) transfers by BAS Capital Funding Corporation or BASCF–Maxcom Holdings I, LLC with respect to any preferred share acquired by them pursuant to our restructuring and private equity investment, (ii) transfers as a result of inheritance, and (iii) transfers among shareholders and their qualified affiliates.

     During our annual ordinary and extraordinary shareholders’ meeting held on June 10, 2003, we amended our bylaws to include a new exception to the transfer restrictions that allows Morgan Stanley Asset Management, one of the shareholders who participated both in the private equity investment and the exchange offer, to transfer its shares to any of its managed accounts.

     Under our telecommunications concessions and by-laws, the SCT has 90 days to object to any transfer, subscription or conveyance of 10% or more of our capital stock with the exception of:

    transfers related to series N shares and N-1 and N-2 shares and any successor stock; and
 
    subscriptions made pursuant to the exercise of a shareholder’s preemptive rights, as long as the percentage participation of the shareholders in our capital stock does not vary.

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Other provisions

Ownership restrictions

     For a description of the limitations on the right to own securities imposed by Mexican law see “Business Overview – Overview of the Mexican Telecommunications Industry – Ownership Restrictions.”

Forfeiture of stock

     Under our amended by-laws, the current or future foreign shareholders of Maxcom firmly undertake with the Ministry of Foreign Relations (Secretaría de Relaciones Exteriores) to consider themselves as Mexican nationals with respect to the stock of Maxcom that they may acquire or own, as well as with respect to the properties, rights, concessions, securities or interests owned by Maxcom, or the rights and obligations derived from the agreements entered with the Mexican authorities to which Maxcom is a party. The current or future foreign shareholders of Maxcom firmly undertake not to invoke the protection of their government, under penalty of forfeiting such shares to the benefit of the Mexican nation.

Dissolution

     Pursuant to the Mexican Companies Law and our by-laws, we may be dissolved upon the occurrence, among other things, of any of the following events:

    the impossibility of continuing with our current line of business;
 
    the resolution of our shareholders at an extraordinary general shareholders’ meeting;
 
    the reduction of the number of our shareholders to fewer than two; and
 
    the loss of two thirds of our capital stock.

Shareholder conflicts of interest

     Under Mexican law, any shareholder that has a conflict of interest in connection with any transaction must abstain from voting at the relevant shareholders’ meeting. A shareholder that votes on a business transaction in which its interest conflicts with that of Maxcom may be liable for damages if the transaction would not have been approved without such shareholder’s vote.

Director conflicts of interest

     Under Mexican law, any member of the board of directors who has a conflict of interest with Maxcom in any transaction must disclose such a fact to the other members of the board of directors and abstain from voting on such matter at the relevant meeting of the board of directors. Any member of the board of directors who violates such a provision may be liable for damages caused to Maxcom. Additionally, members of the board of directors may not represent any shareholders at any shareholders’ meeting.

Description of the CPO trust

General

     The series N-2 preferred shares have been deposited by Maxcom in a limited purpose trust which is administered by Banco Nacional de México, S.A. under a trust agreement. We refer to the trust as the “CPO trust” and the trustee of the CPO trust as the “CPO trustee.” The CPO trustee is the holder of record of the series N-2 preferred shares and any securities into which the series N-2 preferred shares may be converted.

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     The CPO trustee issued Certificados de Participación Ordinarios, or “CPOs”, which are negotiable instruments under Mexican law that give their holders the economic rights and voting rights of the series N-2 preferred shares or any other shares of capital stock into which the series N-2 preferred shares may be converted, which we refer to together as the “deposited securities.”

     The CPOs are initially held in book-entry form through DTC, and a nominee of DTC is the holder of record of a global CPO certificate. Our amended by-laws provide that we will obtain all governmental approvals required in connection with the conversion of the series N-2 preferred shares held in the CPO trust to other securities of Maxcom.

     The following is a description of (i) certain provisions included in the CPO trust agreement and (ii) applicable provisions of the Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito). This is a summary description and does not purport to be complete and is qualified in its entirety by reference to the CPO trust agreement and the provisions of Mexican law referred to in such description.

Purpose

     The main purpose of the CPO trust is to have the CPO trustee, as record holder of the deposited securities and upon the instructions of the technical committee described below under “Administrator of the CPO trust,” waive or not exercise any statutory preemptive rights that it may have from time to time to subscribe for additional shares of our capital stock. As the record holder of the deposited securities, the CPO trustee exercises certain rights attached to such securities in order to preserve to the largest extent possible the economic and voting rights that would otherwise be held directly by the beneficial owners of the CPOs.

Waiver of statutory preemptive rights

     The trustee of the CPO trust will waive statutory preemptive rights with respect to deposited securities when, in the sole judgment of the technical committee of the CPO trust, as described below, the exercise of such preemptive rights would require that the shares so subscribed be registered pursuant to the Securities Act, unless Maxcom decides to register such shares. If the exercise of the preemptive rights is possible without registration under the Securities Act (or Maxcom decides to carry out such registration) and the holders of CPOs provide the CPO trustee with the necessary funds, the CPO trustee will subscribe for the corresponding number of shares, which will be held in the CPO trust, and deliver additional CPOs in respect of such additional deposited securities to the subscribing CPO holders. Under Mexican law preemptive rights may not be transferred separately from the underlying shares.

Voting and economic rights

     The holders of CPOs are not entitled to directly exercise any voting or economic rights with respect to the deposited securities. Such voting rights are exercisable only by the CPO trustee pursuant to the instructions of the holders of CPOs. The holders of CPOs will be entitled to receive dividend distributions, if any, from Maxcom through the CPO trustee. DTC will receive the distributions and will make distributions to the beneficial owners of the CPOs. In the event of a forced sale the trustee of the CPO trust will cause the series N-2 preferred shares to be delivered in connection with any such sale and will distribute to the record holder of the CPOs the proceeds from such sale subject to any holdbacks required pursuant to the terms of any such sale. The CPO trustee will also deliver deposited securities in connection with the exercise of the co-sale rights and will distribute to the record holders of the CPOs the proceeds from sale subject to any holdbacks required pursuant to the terms of any such sale. See “—Co-sale rights and forced sale obligations” above.

     If a distribution by Maxcom consists of a dividend in shares, such shares will be transferred to the CPO trustee, and held in the CPO trust, and the CPO trustee will distribute to the holders of CPOs in proportion to their holdings, additional CPOs to represent the additional deposited securities received by the CPO trustee as such dividend.

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     The holders representing a majority of the outstanding CPOs will be entitled to appoint the board observer, or in certain circumstances, a member of the board of directors. See “—Board of Directors.”

Administration of the CPO trust

     The CPO trust is administered by the CPO trustee under the direction of a technical committee, which consists of three members, two members of which are designated by Maxcom and one by the holders of CPOs.

Common representative

     The majority of holders of CPOs have the right to appoint a common representative, whose duties include, among others: verification of the due execution and terms of the CPO trust agreement; verification of the existence of the deposited securities; authentication, by its signature, of the certificate evidencing the CPOs, exercise of the rights of the CPO holders in connection with the payment of any dividend or distribution related to the deposited securities to which such CPO holders are entitled; and undertaking of any other action required to protect the rights, actions or remedies to which CPO holders may be entitled to under the CPO trust.

Transfer

     CPO holders may sell their interest in CPOs. Sales of CPOs may be subject to Mexican taxes. Neither Maxcom nor the CPO trustee will have any liability in connection with any such sale. CPO holders may not sell the deposited securities separately from the CPOs.

Term and termination

     The maximum term of the CPO trust is thirty years, but it may be terminated at any moment by recommendation of the technical committee, in which case the deposited securities will be delivered to the CPO holders.

Fees

     The fees of the CPO trustee for the administration of the CPO trust, and the fees of the common representative for acting in such capacity, are paid by Maxcom.

C. Material contracts

Concessions

     In February 1997, we obtained a concession to provide local telephony services covering Mexico City and the Gulf region and long distance services nationwide from the Mexican government. We also obtained a nationwide point-to-point and three regional point-to-multipoint microwave concessions in October 1997. In September 2001, our local telephony concession was expanded to cover all of Mexico. For a description of our concessions, see “Item 4. Information on the Company—B. Business review—Supervision and regulation of the Mexican telecommunications industry—Our concessions.”

Interconnection agreements

     In November 1998, we entered into a local interconnection agreement with Telmex which was amended and extended on December 2003 and August 5, 2004. We have also signed reciprocal interconnection agreements with mobile telephony providers Telcel, Grupo Iusacell and Telefonica Moviles. Finally, we have signed long distance interconnection agreements with Telmex, Alestra, Bestel, Protel and Iusatel. For a description of these interconnection agreements, see “Item 4. Information on the Company—B. Business review—Supervision and regulation of the Mexican telecommunication industry—Interconnection.”

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Lucent supply agreement

     On September 5, 1997, Maxcom executed a purchase and sales agreement with subsidiaries of Lucent Technologies, Inc. pursuant to which Maxcom may purchase from Lucent products, services and software.

Metro Net capacity sales agreement

     On April 28, 2000, Maxcom executed a metropolitan network capacity sale agreement with Metro Net, S.A. de C.V. (which was amended on December 21, 2000) for an aggregate amount of U.S.$7.2 million pursuant to which Maxcom purchased from Metro Net (i) the exclusive and unlimited right to use certain backbone fiber optic capacity of 6 (six) fiber optic strands of Metro Net’s metropolitan rings in Mexico City, and (ii) an option to acquire the exclusive and unlimited right to use additional backbone fiber optic capacity of 6 (six) fiber optic strands.

Bestel capacity acquisition agreement

     On August 13, 2002, Maxcom executed an agreement with Bestel, S.A. de C.V. to acquire the irrevocable right to the exclusive use of two strands in a 2,011-kilometer fiber optic backbone covering the cities located between Mexico City and Laredo, Texas for U.S.$10.9 million. This fiber optic backbone includes a border crossing with the United States.

     Also in 2003 Maxcom exchanged one 2.5 Gbps lambda with another carrier in order to achieve redundancy in the fiber optic backbone, with this redundancy Maxcom acquires a more competitive edge in order to provide its customers with redundant services throughout its fiber backbone.

Axtel sale of capacity agreement

     On October 15, 2003, Maxcom executed an agreement with Axtel, S.A. de C.V. to sell capacity in the form of a STM16 in Maxcom’s fiber optic backbone covering the cities located between Mexico City and Laredo, Texas over a period of 13 years, with the possibility of an extension.

CPO trust agreement

     On April 25, 2002, Maxcom and its shareholders executed an irrevocable trust agreement with Banco Nacional de México, S.A. acting as trustee for the issuance of ordinary participation certificates, also known as “CPOs,” each representing one series N-2 share of the capital stock of Maxcom with liquidation preference rights. For a description of this agreement, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of the CPO Trust.”

Securityholders’ agreement

     On April 29, 2002, Maxcom executed an amended and restated securityholders’ agreement with the shareholders of the Company to, among other things, reflect the restructuring of the capital stock of Maxcom. For a description of the securityholders’ agreement, see “Item 7. Major Shareholders and Related Party Transactions—A. Major shareholders and share ownership—Securityholders agreement.”

Indentures

2000 Indenture

     On March 17, 2000, Maxcom and its subsidiaries, entered into an Indenture with The Bank of New York, acting as trustee, which governs the terms and conditions of the issuance by Maxcom of U.S.$300 million 133/4% notes. The Indenture restricted Maxcom’s ability to incur indebtedness by requiring that Maxcom meet minimum consolidated leverage and fixed charge coverage ratios. In addition, the Indenture limited our ability to pay dividends, repurchase subordinated debt, redeem our capital stock, dispose of assets and make

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investments, among other things. All of these restrictions were eliminated as a result of the exchange offer and U.S.$11,590,000 aggregate amount of 133/4% notes under this indenture remains outstanding.

Old Indenture

     On April 29, 2002, Maxcom and its subsidiaries entered into an Indenture with The Bank of New York acting as a Trustee, which governs the terms and conditions of the issuance by Maxcom of U.S.$167,623,590 old notes. This indenture has substantially the same restrictions the 2000 Indenture had before they were eliminated pursuant to the exchange offer. However, as a result of the exchange offer and consent solicitation we consummated in October 8, 2004: (i) the covenants restricting our ability to pledge our assets as security for financings contained in this indenture were amended to allow us to secure up to an additional U.S.$50 million of liens on our assets, (ii) the covenant limiting our restricted payments, permitted investments and affiliate transactions was also amended to allow us to securitize our assets, including our accounts receivable and (iii) the covenant restricting our ability to enter into sale/leaseback transactions was deleted.

New Indenture

     On October 8, 2004, Maxcom and its subsidiaries, entered into an Indenture with The Bank of New York, acting as trustee, which governs the terms and conditions of the issuance by Maxcom of U.S.$36,117,789 in principal amount of new notes, bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009. The New Indenture restricts our ability to incur indebtedness. In particular, in order to be able to incur additional indebtedness, we must comply with a minimum consolidated leverage ratio of less than 3.75 to 1.00 and a minimum fixed charge coverage ratio of 2.00 to 1.00. However, pursuant to certain exemptions, we are still able to incur up to U.S.$100.0 million of indebtedness to finance the cost of acquiring or constructing or installing telecommunication assets, and up to U.S.$20.0 million for working capital purposes, in each case at any one time outstanding.

Warrant agreement

     On March 17, 2000, Maxcom entered into a warrant agreement with The Bank of New York, acting as warrant agent, pursuant to which Maxcom agreed to issue warrants to purchasers of 133/4% notes for the purchase of up to 764,938 series N shares, convertible into 382,469 CPOs. The exercise price for each warrant, which entitled the purchaser to receive 2.54979 series N shares, was U.S.$0.01. These warrants were offered as an incentive to the purchasers of the 133/4% notes.

Lease termination agreement

     In September, 2002, we commenced actions before the Lease Courts for the Federal District of Mexico against our landlord, seeking the termination of a 15-year lease (expiring on September 30, 2013) of 70,500 square feet plus parking space in a building on Magdalena, Mexico City, which was our former headquarters. The action was based on claims of miscalculation of lease payment amounts and breaches of certain city compliance regulations. The landlord countersued alleging failure to make lease payments.

     In May 2003, we reached an agreement with our landlord at our former headquarters in Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May 2013 on the first floor, where one of our Lucent 5ESS switches is located, the roof-top, where we have three microwave transmission antennas and a section of the basement, which will be used for parking and to place some of our electric equipment that supports the switch. We were also released from our lease obligations on approximately 35,887 square feet plus parking space of the building originally running through September 30, 2013, including past-due lease payments dating back from October 2002. In exchange for the new lease and the releases, we agreed to prepay the full, ten-year lease obligations on the first floor, the roof-top and basement, which amount to U.S.$2.7 million and will be payable in full by May 2004.

Credit facilities

     In November 2004, we executed a credit agreement with Banco Santander Mexicano, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin for Ps.100,000,000 (approximately U.S.$10 million dollars). Under this credit facility we must make 18 equal monthly installments of principal and interest to liquidate the facility. The annual interest rate is equal to the Inter-banking Equilibrium Interest Rate (Tasa de Interés Interbancaria de Equilibrio), which we refer as TIIE plus 1.2 additional percentage points.

     In April 2005, we executed a credit agreement with IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero for Ps.100,000,000 (approximately U.S.$10 million dollars). Under this credit facility we must make 12 equal monthly installments of principal and interest to liquidate the facility. The annual interest rate is equal to the Inter-banking Equilibrium Interest Rate (Tasa de Interés Interbancaria de Equilibrio), which we refer as TIIE plus 3 additional percentage points.

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D. Exchange controls

     The peso fluctuates freely against the U.S. dollar. The Mexican Central Bank intervenes occasionally in the market to stabilize the exchange rate. Mexico had an exchange control system from 1982 until November 11, 1991. Under this system, Mexican residents and companies were entitled to purchase, and required to sell, foreign currencies for certain purposes at a controlled rate of exchange that was established daily by the Mexican Central Bank (Banco de México). Transactions to which the controlled rate applied included payments for virtually all merchandise imports, revenues from virtually all merchandise exports, royalty payments and payments of principal, interest and related expenses with respect to indebtedness to foreign creditors registered with the Mexican government. For all transactions to which the controlled rate did not apply, foreign currencies could also be purchased, if they were available, at the then prevailing domestic free market rate for the type of transaction.

     From November 11, 1991 to October 20, 1992, the Mexican Central Bank permitted a free market rate to fluctuate according to supply and demand within a moving band. In late December 1994, the Mexican government responded to exchange rate pressures first by increasing by 15% the upper limit of the peso/U.S. dollar exchange rate band and then, two days later, allowing the peso to fluctuate freely against the U.S. dollar. By December 31, 1994, the peso/U.S. dollar exchange rate, which had been Ps.3.47 to U.S.$1.00 on December 19, 1994 was Ps.5.00 to U.S.$1.00. The peso continued to devalue significantly through 1998, closing at Ps.9.901 to U.S.$1.00 at December 31, 1998. After a period of stability and modest appreciation, in 2002, the peso devalued 12.18% relative to the U.S. dollar. In the first three months of 2003, the peso devalued 3.82% relative to the U.S. dollar. Although the peso/U.S. dollar exchange rate has remained relatively stable in the last years, there may be significant devaluations in the future.

     Except for the period from September through December 1982 during the Mexican liquidity crisis, the Mexican Central Bank consistently has made foreign currency available to Mexican private sector entities to meet their foreign currency obligations. Nevertheless, in the event of a renewed shortage of foreign currency, we cannot assure you that the Mexican Central Bank would continue to make foreign currency available to private sector companies or that foreign currency we need to service foreign currency obligations could be purchased in the open market without substantial additional cost.

     Pursuant to the provisions of North American Free Trade Agreement, or “NAFTA,” Mexico remains free to impose foreign exchange controls on investments made in Mexico, including those made by U.S. and Canadian investors

E. Taxation

United States Federal Income Tax Considerations

General

     The following is a general discussion of the principal U.S. federal income tax consequences resulting from the beneficial ownership of (1) the old notes and CPOs received in the exchange consummated on April 29, 2002, (2) the 13 3/4% notes for holders who did not participate in the April 29, 2002 exchange, and (3) the new notes received in the October 2004 exchange (the new notes collectively with the old notes and the 13 3/4 %, the “Notes”). In general, the federal income tax consequences of ownership of the Notes are identical, except where discussed below. This summary is relevant to you only if you are a U.S. holder holding your Notes and/or your CPOs (for holders of old notes received in the 2002 exchange) as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. In general, you will be a U.S. holder if you are:

  An individual citizen or resident of the United States;

  a corporation or other entity taxable as a corporation created in or organized under the laws of the United States or of any political subdivision thereof;

  an estate, the income of which is subject to U.S. federal income tax without regard to its source; or

  a trust, if a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of the substantial decisions of such trust.

     As used in this annual report, the term “Non-U.S. holder” means a beneficial owner of a Note or CPO who is not a U.S. holder. In the case of a holder of Notes or CPOs that is a partnership for U.S. federal income tax purposes, each partner generally will take into account its allocable share of income or loss from the Notes or CPOs and will take such income or loss into account under the rules of taxation applicable to such partner, taking into account the activities of the partnership and the partner.

     This summary is based upon the Code, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, all as currently in effect and all subject to change at any time, perhaps with retroactive effect. This discussion is for general information only and does not describe all of the tax consequences that may be relevant to you in light of your particular circumstances or if you are subject to special tax treatment under the Code, including, without limitation, because you are:

  a foreign person or entity;

  a tax-exempt organization, a financial institution, an insurance company, a regulated investment company or a dealer or broker in securities or currencies;

  a trader in securities or commodities that elects mark-to-market treatment;

  a person who holds the Notes, and with respect to a holder of new notes, the CPOs, as part of an integrated investment such as a straddle, hedge, constructive sale, conversion transaction or other risk reduction transaction;

  a person whose functional currency is not the U.S. dollar;

  a partnership or other flow-through entity (including an S corporation or a limited liability company treated as a partnership for U.S. federal income tax purposes);

  a person subject to the alternative minimum tax; or

  a person who owns or will own directly, indirectly or by attribution 10% or more (by voting power) of our voting stock or 10% or more (by value) of our outstanding capital stock.

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     The summary does not include any discussion of the tax laws of any state, locality or non-U.S. government that may be applicable to you. You should note that no rulings have been or will be sought from the United States Internal Revenue Service (or the IRS) with respect to any of the U.S. federal income tax consequences discussed below, and we cannot assure you that the IRS will not take contrary positions. You should consult your own tax advisors concerning the application of U.S. federal income tax laws to your particular situation as well as any consequences of the purchase, ownership and disposition of the Notes or CPOs arising under the laws of any other taxing jurisdiction.

     For holders who acquired the old notes and the CPOs in the 2002 exchange, the U.S. federal income tax consequences of certain aspects of the 2002 exchange were unclear. Therefore, the summary discusses the various alternative tax consequences of the old notes and the CPOs which may depend in part on the results of the 2002 exchange. For more complete information on the 2002 exchange, we urge you to consult the section entitled, “United States Federal Income Tax Considerations” on our Form 20-F for the fiscal year ending December 31, 2001, which was filed on July 1, 2002. You should also consult your own tax advisors concerning the application of U.S. federal income tax laws to your particular situation.

     For holders who acquired the new notes in the 2004 exchange, the U.S. federal income tax consequences of certain aspects of the 2004 exchange were unclear. Therefore, the summary discusses the various alternative tax consequences of the new notes which may depend in part on the results of the 2004 exchange. For more complete information on the 2004 exchange, we urge you to consult the section entitled, “United States Federal Income Tax Considerations” in the Offering Circular with respect to the 2004 exchange. You should also consult your own tax advisors concerning the application of U.S. federal income tax laws to your particular situation.

U.S. federal income tax consequences to U.S. Holders of the Notes

     Payments of interest and additional amounts. Generally, payments of “qualified stated interest,” (as defined below in “Original issue discount”), including Mexican withholding tax imposed on such interest, and additional amounts (if any) would be taxable to you as ordinary income. Payments of qualified stated interest and additional amounts (if any) on the Notes generally are includible in your income as it accrues or is received, in accordance with your regular method of accounting for tax purposes.

     Original issue discount. The treatment of original issue discount in respect of the Notes is highly complex. You are urged to consult with your tax advisor concerning this issue.

     In general, original issue discount on a note is equal to the amount by which the “stated redemption price at maturity” of a note exceeds its “issue price” by more than a de minimis amount (generally, the product of 0.25% of the stated redemption price at maturity and the number of full years to maturity on the instrument). A note’s stated redemption price at maturity equals the total amount of all principal and interest payments to be made on the note, other than “qualified stated interest.” Qualified stated interest generally is stated interest that is unconditionally payable at least annually at a single fixed rate over the entire term of the note.

     The new notes. The interest payments with respect to the new notes that exceed 4.00% do not constitute qualified stated interest because such payments are not made at least annually, and therefore the new notes will be treated as issued with original issue discount.

     Your issue price in respect of the new notes received in the exchange will depend on whether either the old notes surrendered or the new notes received were “publicly-traded” as of the date of the 2004 exchange. If as of the date the 2004 exchange offer was consummated, the new notes were “traded on an established securities market’’ within the meaning of the applicable regulations on or at any time during the sixty day period ending thirty days after the date the 2004 exchange offer was consummated, then the issue price of such notes would equal the fair market value established by such trading. If the new notes were not so traded, but the old notes were so traded, then the issue price of the new notes would equal the fair market value, established by such trading, of the old notes. If neither the new notes nor the old notes were so traded, the issue price of the new notes generally would be the stated principal amount of such notes.

     It could not be determined whether the new notes or the old notes were, at the relevant times, traded on an established securities market within the meaning of the applicable regulations. The relevant Treasury Regulations are complex and highly detailed in defining the phrase “traded on an established market.’’ For example, it is possible that the new notes would have been treated as so traded not only if they are listed on an exchange, but also if transfers of such new notes appear on a computerized quotation medium. You should consult you own tax advisor with respect to whether your old notes or new notes may qualify for this purpose as “traded on an established market.’’

     In the event neither the old notes nor the new notes were treated as traded on an established securities market, the issue price of a new note would equal its stated principal amount, only if the interest rate was equal to or greater than the “applicable federal rate,’’ or AFR, for the month in which the new notes were issued. If the interest rate was less than the AFR, the issue price of a new note would be equal to its imputed principal amount, which generally is the sum of all payments due under the new note (including qualified stated interest) discounted from the date of payment to the issue date of the new notes at the AFR. Under these rules, the new notes would have an issue price equal to their stated principal amount.

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     The old notes. The interest payments with respect to the old notes do not constitute qualified stated interest because such payments are not made at least annually.

     The determination of the issue price of the old notes will depend on whether the old notes or the 13 3/4% notes were “publicly traded” as of the date of the 2002 exchange, and if not publicly traded, whether the interest rate of the old notes is at least equal to or above the applicable federal rate, or AFR. If on the date of the 2002 exchange, the old notes were “traded on an established securities market” within the meaning of the applicable regulations on or at any time during the sixty day period ending thirty days after the date the exchange offer is consummated, then the issue price of such notes would equal the fair market value established by such trading. If the old notes were not so traded, but the 13 3/4% notes were so traded, then the issue price of the old notes would equal the fair market value, established by such trading, of the 13 3/4% notes. Under these rules, if either of the Notes were publicly traded, the old notes will be treated as containing original issue discount if the stated redemption price at maturity of the old notes exceeded the issue price (i.e., the fair market value of the old notes) by more than the de minimis amount.

     It could not be determined whether the old notes or the 13 3/4% notes were, at the relevant times, traded on an established securities market within the meaning of the applicable regulations. The relevant Treasury Regulations are complex and highly detailed in defining the phrase “traded on an established market.” For example, it is possible that the old notes would have been treated as so traded not only if they were listed on an exchange, but also if transfers of such old notes appear on a computerized quotation medium. You should consult you own tax advisor with respect to whether your 13 3/4% notes or old notes qualified for this purpose as “traded on an established market.”

     In the event that neither the old notes nor the 13 3/4% notes were traded on an established securities market, the issue price of the old notes would equal their stated principal amount if the interest rate on the old notes was equal to or greater than the AFR for the month in which the old notes were issued. If the interest rate was less than the AFR, then the issue price of a old note would be equal to its imputed principal amount, which generally is the sum of all payments due under the old note (including qualified stated interest) discounted from the date of payment to the issue date of the old notes at the AFR. Under these rules, if the old notes and the 13 3/4% notes were not traded on an established securities market and, because the interest rate on the old notes was less than the AFR for April 2002, the issue price of the old notes would be the sum of all payments due under the note discounted at the AFR from the date of payment to the old notes’ issue date. The old notes, therefore, would be treated as having original issue discount because the old notes’ stated redemption price at maturity (which is the total amount of all principal and interest payments made on the note, other than “qualified stated interest”) would exceed the issue price of the old notes by more than the de minimis amount.

     The 13 3/4% notes. The 13 3/4% notes were issued with original issue discount for U.S. federal income tax purposes. If you were an original purchaser of an 13 3/4% note, you also acquired a warrant as part of an “investment unit” for federal income tax purposes. Our company allocated the issue price of a unit between the 13 3/4% note and the associated warrant in accordance with our company’s determination of their relative fair market values on the issue date. Our company determined that the issue price of each 13 3/4% note should be U.S. $975.06. Although our company’s allocation is not binding on the IRS, if you were an initial purchaser of a unit, you had to use our company’s determination of the 13 3/4% note issue price for purposes of calculating original issue discount unless you disclosed on your U.S. federal income tax return for the year in which you acquired the unit that you planned to use an allocation inconsistent with our company’s allocation. As mentioned above, the stated redemption price at maturity of a note equals the total amount of all principal and interest payments to be made on the Note, other than qualified stated interest. However, if the amount of original issue discount determined under this formula is “de minimis original issue discount,” then the notes will be treated as if there is no original issue discount. The 13 3/4% notes will have de minimis original issue discount if the total amount thereof is less than the product of 0.25% of the stated redemption price at maturity and the number of full years from the issue date to the maturity date of the note.

     Inclusion of original issue discount in income. You must include any original issue discount on your Notes in income as ordinary interest income as it accrues on the basis of a constant yield to maturity. Original issue discount must be included in income regardless of whether cash is received in respect of such income. The amount of original issue discount includible in income by you is the sum of the “daily portions” of original issue discount with respect to the Notes for each day during the taxable year or portion of the taxable year on which you held such Note. The daily portion is determined by allocating to each day in any accrual period other than the initial short accrual period and the final accrual period an amount equal to the excess of:

  the product of the Note’s “adjusted issue price” at the beginning of such accrual period and its “yield to maturity” (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) over

  the amount of qualified stated interest payments, if any, allocable to such accrual period.

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     The yield to maturity is the discount rate that, when applied to all payments under a Note, results in a present value equal to the issue price. The amount of original issue discount allocable to the final accrual period is the difference between the amount payable at maturity and the adjusted issue price of the Note at the beginning of the final accrual period. The amount of original issue discount allocable to the initial short period may be computed under any reasonable method.

     The adjusted issue price of a Note at the beginning of the first accrual period is equal to its issue price. A Note’s adjusted issue price at the beginning of any subsequent accrual period is equal to its issue price increased by the amount of accrued original issue discount previously includible in your gross income (and market discount, as discussed below) for each prior accrual period and reduced by the amount of any payments previously made on the note to you (other than payments of qualified stated interest, if any).

     Generally, upon election, you may use the constant yield to maturity method applicable to original issue discount to determine the timing of inclusion of all qualified stated interest (if any) and original issue discount on the old notes, subject to certain limitations. Such an election will apply to all debt instruments held or acquired by you on or after the beginning of the first taxable year to which the election applies and may not be revoked without the consent of the IRS.

     The above treatment assumes that the stated redemption price at maturity for a Note does not include any additional amounts payable on the Notes. It is possible that the IRS might disagree with this treatment and contend that the stated redemption price at maturity should include the reasonably expected amount of additional amounts payable on the Notes. In such case, the amount of original issue discount on the Notes would be increased by such amount.

     With respect to the holders of old notes, the rules discussed below under “Premium and acquisition premium” may reduce or eliminate the amount of original issue discount you must include in your income. For example, if your exchange of the 13 3/4% notes for old notes and CPOs qualified as a recapitalization, your basis in the old notes may substantially exceed the issue price of such old notes (depending on your basis in the 13 3/4% notes), and you may be able to reduce or eliminate the amount of original issue discount includible with respect to such old notes.

     You should consult your tax advisor concerning the inclusion in your taxable income of the original issue discount attributable to the old notes or the 13 3/4% notes.

    Premium and acquisition premium.

     The new notes. If you acquired new notes for an amount (or with a basis) less than or equal to the sum of all amounts payable on such new notes after the acquisition date (other than payments of qualified stated interest, if any) but in excess of their adjusted issue price (any such excess being acquisition premium),you will be considered to have acquired the new notes at an acquisition premium. If you do not make the election described below, you are permitted to reduce the daily portions of original issue discount includible in your income by a fraction, (i) the numerator of which is the excess of your adjusted tax basis in the new notes immediately after their acquisition over the adjusted issue price of such new notes and(ii) the denominator of which is the excess of the sum of all amounts payable on such new notes after the acquisition date (other than payments of qualified stated interest, if any) over the adjusted issue price of such new notes.

     If you acquired the new notes for an amount (or with a basis) greater than the sum of all amounts payable on such new notes after the acquisition date (other than payments of qualified stated interest, if any) you will be considered to have acquired the new notes at a premium. In such a case, you will not be required to include any original issue discount in your gross income.

     The old notes. If you acquired old notes for an amount (or with a basis) less than or equal to the sum of all amounts payable on such old notes after the acquisition date (other than payments of qualified stated interest, if any) but in excess of their adjusted issue price (any such excess being acquisition premium), you will be considered to have acquired the old notes at an acquisition premium. If you do not make the election described below, you are permitted to reduce the daily portions of original issue discount includible in your income by a fraction, (i) the numerator of which is the excess of your adjusted tax basis in the old notes immediately after their acquisition over the adjusted issue price of such old notes and (ii) the denominator of which is the excess of the sum of all amounts payable on such old notes after the acquisition date (other than payments of qualified stated interest, if any) over the adjusted issue price of such old notes.

     If you acquired the old notes for an amount (or with a basis) greater than the sum of all amounts payable on such old notes after the acquisition date (other than payments of qualified stated interest, if any) you will be considered to have acquired the old notes at a premium. In such a case, you will not be required to include any original issue discount in your gross income.

     The 13 3/4% notes. Similarly, if you purchased your 13 3/4% notes for an amount (or with a basis) greater than the sum of all amounts payable on your 13 3/4% notes after the purchase date (other than payments of qualified stated interest, if any) you will be considered to have purchased your 13 3/4% notes at a premium.

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     General. You generally may elect to amortize the premium, if any, on the constant yield method. The amount amortized in any year will be treated as a reduction of your interest income from the Notes. The election to amortize the premium on a constant yield method, once made, applies to all debt obligations held or subsequently acquired by you on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS. If you make this election, you will be required to reduce your basis in the Notes to the extent that any amortizable bond premium is applied to offset your interest income on the Notes. If you do not make this election, the premium on your Note, whether on an 13 3/4% note or old note, will decrease the gain or increase the loss otherwise recognized on disposition or retirement of the Note.

     Market discount. If you purchased your Note at a price that is less than its adjusted issue price, the excess of the adjusted issue price over your purchase price will be treated as “market discount.” Such market discount, however, will be considered zero if it does not exceed a “de minimis amount” equal to 0.25% of the Note’s stated redemption price at maturity multiplied by the number of complete years to maturity from the date you purchased the Note.

     General. Under the market discount rules, you generally will be required to treat any partial principal payment on, and any gain realized on the sale, exchange, retirement or other disposition of, a Note as ordinary income (generally treated as interest income) to the extent of the market discount which accrued but was not previously included in income during the period you held such Note. In addition, you may be required to defer your deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such Note until the maturity of the Note or its earlier disposition in a taxable transaction.

     In general, market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the Note, unless you make an irrevocable election (on an instrument-by-instrument basis) to accrue market discount under a constant yield method. You may also elect to include market discount on the Note in income currently as it accrues (under either a ratable or constant yield method), in which case the rules described above regarding the treatment as ordinary income of gain upon the disposition of the Note and upon the receipt of certain payments and the deferral of interest deductions will not apply. The election to include market discount in income currently, once made, applies to all market discount obligations acquired by you on or after the first day of the first taxable year to which the election applies, and may not be revoked without the consent of the IRS. Such currently included market discount will increase your tax basis in the Note and generally is treated as ordinary interest income for U.S. federal income tax purposes.

     The new notes. If you acquired your new notes as part of the 2004 exchange, whether the new notes will be treated as having market discount may depend on whether the exchange was treated as a recapitalization for U.S. federal income tax purposes, which is not entirely clear. If the 2004 exchange was not treated as a recapitalization, the new notes will be considered to have been acquired with market discount if the adjusted issue price of the new notes at the time of the 2004 exchange exceeded your initial tax basis in the new notes by more than a specified “de minimis amount.” As discussed below in “Adjusted tax basis of the new notes,” your initial tax basis in the new notes will depend on whether the new notes were treated as securities for U.S. federal income tax purposes.

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     The Code provides the authority for regulations to be issued by the Treasury Department that would provide that any accrued market discount not treated as ordinary income upon an exchange of market discount bonds in which gain or loss is not recognized in whole or in part, such as the exchange of the new notes and Series N-1 Preferred Stock for the old notes (if such exchange is treated as a recapitalization and the old notes are market discount bonds), would carry over to the nonrecognition property received on the exchange. If such regulations were promulgated and were applicable to the 2004 exchange, any accrued market discount not treated as ordinary income on the exchange would carry over to the nonrecognition property received in the exchange (e.g. the Series N-1 Preferred Stock and/or the new notes if the new notes were treated as securities for U.S. federal income tax purposes). On disposition of any such new notes or stock, any gain recognized generally would be treated as ordinary income to the extent of the amount of accrued market discount carried over thereto (unless, in the case of the new notes, you had previously elected to include market discount in income as it accrues). Although not free from doubt, it is likely that the above characterization would be required under the Code even without the promulgation of regulations.

     The old notes. If you acquired your old notes as part of the 2002 exchange, whether the old notes will be treated as having market discount may depend on whether the exchange was treated as a recapitalization for U.S. federal income tax purposes, which is not entirely clear. If the exchange was not treated as a recapitalization, your old notes will be considered to have been acquired with market discount if the adjusted issue price of your old notes at the time of the exchange exceeded your initial tax basis in the old notes by more than the “de minimis amount.” As discussed below in “Adjusted tax basis of the old notes and the CPOs,” your initial tax basis in the old notes will depend on whether the old notes were treated as securities for U.S. federal income tax purposes.

     The Code provides the authority for regulations to be issued by the Treasury Department that would provide that any accrued market discount not treated as ordinary income upon an exchange of market discount bonds in which gain or loss is not recognized in whole or in part, such as the exchange of the old notes and CPOs for the 13 3/4% notes (assuming: (a) such exchange is treated as a recapitalization, (b) the 13 3/4% notes are market discount bonds, and (c) the old notes are treated as securities for U.S. federal income tax purposes), would carry over to the nonrecognition property received on the exchange. If such regulations were promulgated and were applicable to the 2002 exchange, any accrued market discount with respect to the 13 3/4% notes that was not treated as ordinary income on the exchange would carry over to the old notes and CPOs received in the exchange. On disposition of any such old notes or stock, any gain recognized generally would be treated as ordinary income to the extent of the amount of accrued market discount carried over thereto (unless, in the case of the old notes, you had previously elected to include market discount in income as it accrues, in which case the amount taxable as ordinary income on disposition would be reduced by the amount of market discount previously included in income). Although not free from doubt, it is likely that the above characterization would be required under the Code even without the promulgation of regulations.

     Sale, exchange or retirement of a Note. General. Upon the sale, exchange or retirement of a Note, you generally will recognize capital gain or loss equal to the difference between (i) the amount realized on the sale, exchange or retirement (other than amounts representing accrued and unpaid interest which are taxable as ordinary income) and (ii) your adjusted tax basis in the Note, determined under the rules discussed in the following paragraphs. Such capital gain or loss recognized on the sale, exchange or retirement of the Note generally will be long-term capital gain or loss and subject to a maximum U.S. federal income tax rate of 15% (through December 31, 2008) if you held the Note for more than one year before sale. U.S. corporations, however, are taxed on their net capital gains at the regular corporate income tax rates. Gain or loss recognized by you in connection with the disposition of the Notes generally will be treated as U.S. source gain or loss.

     The adjusted tax bases and the holding periods of the new notes received in the 2004 exchange depends upon the tax consequences of the 2004 exchange of old notes for new notes. While the issue is not free from doubt, we believe that the old notes were likely to be treated as securities for U.S. federal income tax purposes and that there is a reasonable position that the new notes also should be treated as securities for U.S. federal income tax purposes. You are encouraged to consult your own tax advisor with regard to this issue.

     Adjusted tax basis of the new notes. If the 2004 exchange is treated as a recapitalization for U.S. federal income tax purposes, your aggregate tax basis in the new notes you received in the exchange will equal your tax basis in your old notes; provided that the tax basis of any new notes treated as received in satisfaction of accrued but unpaid interest should equal the amount of such accrued interest. Your basis in the new notes will be the same as your basis in the old notes. Your holding period in the new notes will be the same as your holding period in the old notes you surrendered in the 2004 exchange; provided that the holding period for holding period of new notes treated as received in satisfaction of accrued but unpaid interest should not include the holding period in the old notes you surrendered in the exchange.

     If, alternatively, the 2004 exchange is not treated as a recapitalization because the old notes surrendered or new notes received were not securities, then your adjusted basis in the new notes will equal the issue price of the new notes. Your holding period in the new notes will begin on the day following the date of the 2004 exchange.

     Adjusted tax basis of the old notes. If you did not tender your old notes in the 2004 exchange, while the issue is not free from doubt, you should not be deemed to have engaged in a taxable exchange for U.S. federal income tax purposes and you should have the same adjusted tax basis and holding period in your old notes after the exchange.

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     The adjusted tax bases and the holding periods of the old notes, the 13 3/4% notes and the CPOs depend upon the tax consequences of the 2002 exchange of 13 3/4% notes for old notes and CPOs. While the issue is not free from doubt, we believe that the 13 3/4% notes are likely to be treated as securities for U.S. federal income tax purposes and that there is a reasonable position that the old notes also should be treated as securities for U.S. federal income tax purposes. You are encouraged to consult your own tax advisor with regard to this issue.

     Adjusted tax basis of the old notes and the CPOs. If the 2002 exchange is treated as a recapitalization for U.S. federal income tax purposes and the 13 3/4% notes and the old notes qualify as securities, your aggregate tax basis in the old notes and the CPOs will equal your tax basis in your 13 3/4% notes. Although the method for allocating your tax basis in the 13 3/4% notes between the old notes and the CPOs is unclear, the determination of the portion of your tax basis in the 13 3/4% notes that should be allocated to the old notes and the CPOs should be based on the issue price of the old notes (as determined under “Original issue discount”) and the fair market value of the CPOs. Your holding period in the old notes and the CPOs will include your holding period in the 13 3/4% notes you surrender in the exchange.

     If, however, the old notes do not qualify as securities, your tax basis in the old notes should equal their issue price, and your tax basis in the CPOs should equal your tax basis in your 13 3/4% notes, less the issue price of the old notes, plus any gain recognized in the exchange. In addition, your holding period in the old notes will begin on the day following the date of the exchange and your holding period in the CPOs will include your holding period in the 13 3/4% notes you surrendered in the exchange.

     If, alternatively, the exchange is not treated as a recapitalization because the 13 3/4% notes are not securities, then your adjusted basis in the old notes will equal the issue price of the old notes, and your adjusted basis in the CPOs will equal the fair market value of the CPOs. Your holding period in the old notes and the CPOs will begin on the day following the date of the exchange.

     Adjusted tax basis of the 13 3/4% notes. If you did not tender your 13 3/4% notes in the 2002 exchange, while the issue is not free from doubt, you should not be deemed to have engaged in a taxable exchange for U.S. federal income tax purposes and you should have the same adjusted tax basis and holding period in your 13 3/4% notes after the exchange.

     Foreign tax credit. Interest, original issue discount and additional amounts. Qualified stated interest, original issue discount and additional amounts (if any) paid on the Notes will constitute income from sources outside the United States, and, with certain exceptions, generally will be grouped together with other items of passive income, for purposes of computing the foreign tax credit allowable to you. The availability of a foreign tax credit is subject to certain conditions and limitation, and the rules governing the foreign tax credit are complex. U.S. holders should consult their own tax advisors regarding rules governing the foreign tax credit.

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     Effect of Mexican withholding taxes. You will be required to include the amount of Mexican withholding taxes, if any, imposed on payments on a Note (including any additional amounts payable by our company) in gross income as interest income. Such treatment will be required regardless of whether, as will generally be true, our company is required to pay additional amounts so that the amount of Mexican withholding taxes does not reduce the net amount actually received by you as a holder of a Note.

     Subject to certain limitations, you may be entitled to a credit against your U.S. federal income tax liability, or a deduction in computing your U.S. federal taxable income, for the amount of Mexican taxes withheld by our company (which, as described above, would include amounts withheld on additional amounts paid by us with respect to Mexican taxes). However, Mexican taxes may be deducted from your taxable income only if you do not claim a credit for any Mexican or other foreign taxes paid or accrued in that taxable year. You may be required to provide the IRS with a certified copy of the receipt evidencing payment of such withholding tax imposed in respect of payments on the Notes in order to claim a Mexican tax credit in respect of such Mexican withholding tax.

     Since you may be required to include in your gross income original issue discount on the Notes in advance of any withholding of Mexican income taxes from payments relating to the discount (which would generally occur when such discount is paid in cash), you may not be entitled to a credit or deduction for these Mexican withholding taxes in the year the original issue discount is included in your gross income for U.S. federal income tax purposes, and may be limited in your ability to credit or deduct in full the foreign taxes in the year those taxes are actually withheld by our company. In addition, under certain U.S. Treasury Department guidance, foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which your expected economic profit, after non-U.S. taxes, is insubstantial. You should consult your tax advisor concerning the availability and timing of a foreign tax credit or deduction relating to the payment of Mexican withholding taxes.

Certain U.S. federal income tax consequences of holding and disposing of the CPOs

     Distributions. In general, a holder of CPOs will be treated as the beneficial owner of the series N2 preferred stock represented by the CPOs. Subject to the “passive foreign investment company” rules discussed below, generally, distributions of cash or property with respect to your CPOs (including the amount of any Mexican taxes withheld on any such distribution) will constitute ordinary dividend income to the extent of our company’s current and accumulated earnings and profits (as determined for U.S. federal income tax purposes), which generally will be includible in your income on the day on which the dividends are received by the CPO trustee, and will be treated as foreign source dividend income (generally passive income) for foreign tax credit limitation purposes. Any distributions in excess of such earnings and profits will constitute a nontaxable return of capital and reduce your tax basis in such CPOs. To the extent such distributions exceed your tax basis in your CPOs, such excess will constitute capital gain. Dividends on the CPOs will not be eligible for the dividends received deduction allowed to U.S. corporations.

     Dividends paid in a foreign currency (including the amount of any foreign taxes withheld there from) will be includible in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the CPO trustee, regardless whether the dividends are converted into U.S. dollars. In addition, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in your income to the date such payment is converted into U.S. dollars will be exchange gain or loss and will be treated as ordinary income or loss.

     The Jobs Growth Tax Relief Reconciliation Act of 2003 generally lowered to 15% the maximum full income tax rate imposed on dividends received from U.S. and certain foreign corporations for years 2003 through 2008. Recipients of dividends from foreign corporations will benefit from these reduced rates, provided that certain holding period requirements are satisfied, if the dividends are received from certain “qualified foreign corporations,” which generally include corporations located in a jurisdiction with which the United States has an income tax treaty that the Secretary of the Treasury determines is satisfactory and includes an information exchange program, and such corporation is eligible for benefits of such income tax treatment. The Secretary of the Treasury has indicated that the income tax treaty between the United States and Mexico (see “—Mexican Taxation—United States/Mexico and other tax treaties”) would qualify under the legislation. Additionally, dividends paid with respect to stock of a foreign corporation which is readily tradable on an established securities market in the United States also will be treated as having been received from a qualified foreign corporation. However, while not completely clear, we believe that the CPOs will not be treated as readily tradable on an established securities market in the United States. You are urged to consult your tax advisor regarding this legislative change. A qualified foreign corporation, however, does not include any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a “passive foreign investment company”, as discussed below.

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     In addition, the legislation also accelerated to January 1, 2003, the reduction in ordinary income tax rates previously calculated to take effect over the next several years.

     Sale, redemption or other taxable disposition of the CPOs. Subject to the “passive foreign investment company” rules discussed below, generally, you will, upon the sale, redemption or other taxable disposition of your CPOs, recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between (i) the amount of cash and fair market value of property received therefore (if the amount received is denominated in foreign currency other than in U.S. dollars, then its U.S. dollar equivalent determined at the spot rate on the date of the disposition) and (ii) your tax basis in your CPOs (in U.S. dollars) as determined in “Sale, exchange or retirement of a Note—Adjusted tax basis of the old notes and the CPOs.”

     Capital gain recognized by you generally will be long-term capital gain and subject to a maximum federal income tax rate of 15% (through December 31, 2008) if you held CPOs for more than one year before the sale. Recent legislation has reduced the maximum federal income tax rate to 15% for capital gains taken into account from May 6, 2003 through December 31, 2008. U.S. corporations, however, are taxed on their net capital gains at the regular corporate income tax rates. Gain or loss recognized by you in connection with the disposition of your CPOs generally will be treated as U.S. source gain or loss.

     Generally, you will not recognize any gain or loss upon the conversion of the CPOs into series N stock or other classes of our stock.

     Passive foreign investment company considerations. In general, a foreign corporation will be classified as a passive foreign investment company, or PFIC, if (i) at least 75% of its gross income for the taxable year consists of passive income or (ii) at least 50% of the average value of the corporation’s assets (determined as of the close of each quarter) in a taxable year is attributable to assets that produce or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived from the active conduct of a trade or business and not derived from a related person), annuities and gains from assets that produce passive income.

     The determination of PFIC status is a factual determination that must be made annually at the close of each taxable year and depends on the sources of our income and the relative values of our passive assets such as cash and our non-passive assets, including goodwill. Based on the source of our income and the value of our non-passive assets as compared to our passive assets, in 2004 we believe we were not a PFIC for U.S. federal income tax purposes and we do not expect to be a PFIC in future taxable years. However, as noted above, the determination of PFIC status is a factual determination that must be made annually and our current belief that we were not a PFIC could be subject to change in the future. We will make the determination of whether we are a PFIC on an annual basis and intend to notify you within 75 days of the end of any year in which we become a PFIC.

     If we were to become a PFIC in any taxable year, a special tax regime would apply to both (a) any “excess distribution” by us (generally, your ratable share of distributions in any year that are greater than 125% of the average annual distributions received by you in the three preceding years or your holding period, if shorter) and (b) any gain realized on the sale or other disposition (including a pledge) of your CPOs. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over your holding period in the CPOs, (b) the amount deemed realized had been subject to tax in each year of that holding period at the highest applicable tax rate in effect for that year and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years.

     You are urged to consult your own tax advisor as to the effect to you of our company being a PFIC and the availability, if any, of either the “qualified electing fund” or “mark-to-market” election as defined in the Code and the regulations thereunder.

     Controlled foreign corporation considerations. If more than 50% of the voting power of all classes of our capital stock or the total value of our capital stock is owned, directly or indirectly, by “U.S. shareholders,” we may be treated as a controlled foreign corporation, or a CFC, under Subpart F of the Code. U.S. shareholders are defined as citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom owns 10% or more of the total combined voting power of all classes of our capital stock. The United States generally taxes a U.S. shareholder of a CFC currently on its pro rata share of the Subpart F income of the CFC. Such U.S. shareholder is generally treated as having received a current distribution out of the CFC’s Subpart F income and is also subject to current U.S. tax on its pro rata share of the CFC’s earnings invested in U.S. property. In addition, gain from the sale or exchange of stock in a CFC by a U.S. person who is or was a U.S. shareholder of the CFC at any time during the five-year period ending with the sale or exchange is treated as ordinary income to the extent of the CFC’s earnings and profits attributable to the stock sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the foreign corporation generally will not be treated as a PFIC with respect to U.S. shareholders of the CFC.

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     Under the current ownership structure, we believe that we are a CFC for U.S. federal income tax purposes. You should consult your own tax advisor as to the potential application of these rules to you based on your particular circumstances.

Certain U.S. federal income tax consequences to non-U.S. holders of the Notes and CPOs

     Subject to the discussion below concerning information reporting and backup withholding, generally, a non-U.S. holder will not be subject to U.S. federal income or withholding tax on distributions in respect of the Notes or the CPOs unless such income is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States.

     A non-U.S. holder will generally not be subject to U.S. federal income or withholding tax on gain realized on the sale or the other disposition of the Notes or the CPOs unless (i) such gain is effectively connected with the conduct of a United States trade or business by such non-U.S. holder or (ii) such non-U.S. holder is present in the United States for 183 days or more during the taxable year of sale or disposition and certain other conditions are met.

Information reporting and backup withholding

     In general, if you are a non-corporate U.S. holder (or do not come within certain other exempt categories), information reporting requirements will apply to certain payments of principal, premium and interest on the Notes, or dividends on the CPOs, and to payments of the proceeds of the sale of the Notes or CPOs made to you.

     Additionally, if you are a non-corporate U.S. holder (or do not come within certain other exempt categories), you may be subject to backup withholding at a rate of 28% with respect to such payments, unless you provide your taxpayer identification number (social security number or employer identification number), certify that you are not subject to backup withholding and otherwise comply with applicable requirements of the backup withholding rules. Generally, you will provide such certification on IRS Form W-9 (“Request for Taxpayer Identification Number and Certification”) or a substitute Form W-9.

     If you do not provide your correct taxpayer identification number, you may be subject to penalties imposed by the IRS, as well as backup withholding. However, any amount withheld under the backup withholding rules may be allowable as a credit against your U.S. federal income tax liability (which might entitle you to a refund), provided that you furnish the required information to the IRS.

     A non-U.S. holder generally will be exempt from information reporting requirements and backup withholding, but may be required to comply with certification and identification procedures in order to obtain an exemption from information reporting and backup withholding.

Mexican taxation

     The following is a general discussion of the material consequences of the exchange of the old notes, the investment in the new notes and CPOs and the investment in outstanding old notes under the Mexican Income Tax Law (Ley del Impuesto sobre la Renta) and rules and regulations thereunder, as currently in effect based on the advice of PricewaterhouseCoopers, our tax advisors. This summary of certain Mexican tax considerations deals only with holders of notes and CPOs or of a beneficial interest therein that are not residents of Mexico for Mexican tax purposes and that do not conduct a trade or business through a permanent establishment or fixed base in Mexico (a “Foreign Holder”).

     For purposes of Mexican taxation, an individual is a resident of Mexico if he has a permanent home in Mexico. If it has other permanent home in another country, then it should be analyzed if its center of vital interests is in Mexico. For these purposes, the center of vital interests will be deemed to be in Mexico if i) more than 50% of its total income, obtained in a calendar year, is sourced in Mexico; or ii) its main center of professional activities is located in Mexico. A legal entity is a resident of Mexico for tax purposes if it has been incorporated under the laws of Mexico, or has established the principal management of its business or the base of its effective direction in Mexico. A Mexican citizen is presumed to be a resident of Mexico for tax purposes unless such person can demonstrate otherwise. If individuals or legal entities changed their tax residency, they would be obliged to notify the Mexican tax authorities of such change.

United States/Mexico and other tax treaties

     A Convention for the Avoidance of Double Taxation and Prevention of Fiscal Evasion, together with a related Protocol thereto, between the United States and Mexico entered into force on January 1, 1994 as well as its second protocol entered into force as from July 22, 2003 (collectively, the “Tax Treaty”). Provisions of the Tax Treaty that may affect the taxation of certain U.S. holders of notes or CPOs are summarized below. The United States and Mexico have also entered into an agreement that covers the exchange of information with respect to tax matters. Mexico has also entered into and is negotiating several other tax treaties that may reduce the amount of Mexican withholding tax to which the notes may be subject. Holders of the notes and CPOs should consult their own tax advisors as to the tax consequences, if any, of such treaties.

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Mexican tax consequences to Foreign Holders of the exchange of old notes for new notes

     General. A Foreign Holder will not be subject to any Mexican tax upon the exchange of the old notes for the new notes, since it will be treated by us as additional consideration for Mexican tax purposes, paid to the Foreign Holders in exchange for their tendered old notes.

     Other taxes. A Foreign Holder will not be liable for Mexican estate, gift, inheritance or similar taxes with respect of the exchange of the old notes, nor will such a Foreign Holder be liable for Mexican stamp, registration or similar taxes.

Mexican tax consequences to Foreign Holders of the notes

     Taxation of interest and principal. Under the Mexican Income Tax Law, payments of interest made by Maxcom in respect of the new notes (including payments of principal in excess of the issue price of such notes, which, under Mexican law, are deemed to be interest) to a Foreign Holder will generally be subject to a Mexican withholding tax assessed at a rate of 4.9% (the “Reduced Rate”), provided that:

    the notes are offered through banks or brokerage houses in a country with which Mexico has a tax treaty in force;
 
    the notes are registered in the Special Section of the National Registry of Securities (Registro Nacional de Valores); and
 
    certain periodic information requirements by the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público) are complied with.
 
    If these conditions are not met, the applicable withholding tax rate will be 10%.

FOREIGN HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING WHETHER THEY RESIDE IN A COUNTRY THAT HAS ENTERED INTO SUCH A TREATY WITH MEXICO WHICH IS EFFECTIVE, AND IF SO, THE CONDITIONS AND REQUIREMENTS FOR OBTAINING BENEFITS UNDER SUCH TREATY.

     However, if the beneficial owner, either directly or indirectly, individually or jointly with related parties, of more than 5% of the interest derived from the related securities, is any of the following:

    a shareholder of the issuer who owns, directly or indirectly, individually or jointly with related parties, more than 10% of the voting stock of the issuer, or
 
    a legal entity 20% or more of whose stock is owned, directly or indirectly, individually or jointly with related parties, by the issuer,

then, the withholding tax rate will be 33%. For the following years 2005, 2006 and 2007 the tax rate will be 30%, 29% and 28% respectively.

     Pursuant to Rule 3.23.8 (the “Reduced Rate Rule”) issued by the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público) on April 30, 2004 payments of interest with respect to the notes made by us to Foreign Holders, regardless of the place of residence or the tax regime applicable to the Foreign Holder recipient of the interest, will be subject to withholding taxes imposed at the Reduced Rate if:

    the notes are registered with the Special Section of the National Registry of Securities and Intermediaries and copies of approval of such registration are provided to the Ministry of Finance;
 
    we timely file with the Ministry of Finance certain information relating to the issuance of the new notes;

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    we timely file with the Ministry of Finance on a quarterly basis information on the amount and dates of interest payments made during each quarter and information representing that no party related to us, directly or indirectly, is the effective beneficiary of more than five percent (5%) of the aggregate amount of each such interest payment; and
 
    we maintain records that evidence compliance with the conditions set forth above.

     We will comply with the first two conditions set forth above and expect that the last two conditions will also be met and, accordingly, expect to withhold Mexican tax from interest payments on the notes at the Reduced Rate during the effectiveness of such rule.

     However, during the fiscal year 2005, the Tax Treaty is not expected, generally, to have any material effect on the Mexican tax consequences described herein, because, as described above, under Mexican Income Tax Law and regulations as currently in effect, with respect to a U.S. holder that meets the Reduced Rate Rule requirements described above, we will be entitled to withhold taxes in connection with interest payments under the notes at the Reduced Rate. From 2001 and beyond, holders of the notes should consult their own tax advisors as to the possible application of the Tax Treaty.

     Payments of interest we make on the notes to non-Mexican pension or retirement funds will be exempt from Mexican withholding taxes, if any such fund is:

    the effective beneficiary of the interest;
 
    duly incorporated under the laws of its country of origin;
 
    exempt in its country of origin from income tax on interest income; and
 
    registered with the Ministry of Finance for that purpose.

     Under existing Mexican law and regulations, a Foreign Holder will not be subject to any Mexican taxes in respect of payments of principal made by us with respect to the notes.

     Taxation of additional amounts. We have agreed, subject to specified exceptions and limitations, to pay Additional Amounts (as such term is defined in “Description of the Notes—Additional amounts”) to the holders of the notes in respect of the Mexican withholding taxes mentioned above. Payments of Additional Amounts with respect to the notes will be subject to Mexican withholding tax at the same rate applicable to interest paid on the notes.

     Holders or beneficial owners of the notes may be requested to provide certain information or documentation necessary to enable us to establish the appropriate Mexican withholding tax rate applicable to such holders or beneficial owners. In the event that the specified information or documentation concerning the holder or beneficial owner is requested and is not provided on a timely basis, our obligation to pay Additional Amounts will be limited.

     Taxation of accrued interest. Interest accrued that is not due and payable under the terms applicable to the old notes before the exchange of the old notes for the new notes will not be subject to a Mexican income tax withholding under the terms described above, but such interest will be subject to a Mexican income tax withholding when such interest becomes due and payable under the new notes after the exchange of the old notes for the new notes.

     Gain on dispositions. Gains resulting from the sale or other dispositions of the notes and by a Foreign Holder will not be deemed as an income arising from Mexican source, and therefore will not be subject to Mexican income tax.

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Mexican tax consequences to Foreign Holders of the CPOs

     The sale or other disposition of the CPOs by a Foreign Holder will not be subject to any Mexican tax if the sale is carried out through the Mexican Stock Exchange or other securities market approved by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público). Sales or other dispositions of the CPOs made in other circumstances would be subject to Mexican tax, regardless of the nationality or residence of the transferor. However, under the Tax Treaty, a U.S. holder that is eligible to claim the benefits of the Tax Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition of the CPOs in a transaction that is not carried out through the Mexican Stock Exchange or such other approved securities markets, so long as such holder did not own, directly or indirectly, 25% or more of our outstanding shares within the twelve-month period preceding such sale or other disposition.

Certain tax consequences to Mexican holders on the exchange or disposition of the CPOs.

     The Mexican income tax effect for a Mexican resident holder on the taxable disposition or exchange of the CPOs, may vary depending on the conditions of the acquisitions, disposition or exchange of the CPOs, as well as on the characteristics of the holders. Therefore, such holders should seek advice from Mexican tax counsel to determine the effects on a case by case basis.

F. Dividends and paying agents

     Not applicable.

G. Statement by experts

     Not applicable.

H. Documents on display

     We file annual reports with and furnish other information to the SEC as may be applicable from time to time. You may read and copy any documents filed or furnished by Maxcom at the SEC’s public reference rooms in Washington, D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.

I. Subsidiary information

     Not applicable.

PART II

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

     The 133/4% notes, the old notes, the new notes, the working capital credit facilities executed on April 28, 2004 and August 17, 2004 with Banco Santander Mexicano, S.A. (which we refer to as Banco Santander) and the line of credit executed also with Banco Santander on November 5, 2004, constituted substantially all of our indebtedness as of December 31, 2004. For a more detailed description of the Banco Santander’s working capital credit facilities and line of credit, see “Item 5. Operating Review and Financial Prospects — B. Liquidity and Capital Resources — Financing sources and liquidity.” As a result, we do not currently have any significant interest rate risk.

Foreign exchange risk

     Our primary foreign currency exposure relates to our U.S. dollar-denominated debt. A substantial portion of this debt is incurred to finance U.S. dollar-denominated capital expenditures. The majority of our debt obligations at December 31, 2004, were denominated in U.S. dollars. Therefore, we are exposed to currency exchange rate risks

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that could significantly affect our ability to meet our obligations. We currently do not enter into hedging transactions with respect to these foreign currency risks, but continue to consider the appropriateness of this option.

     The exchange rate of the peso to the U.S. dollar is a freely-floating rate and the peso has experienced significant devaluations in recent years. Any significant decrease in the value of the peso relative to the U.S. dollar in the near term may have a material adverse effect on our results of operations and financial condition, including our ability to repay or repurchase the notes. At December 31, 2004, an immediate 10% devaluation of the peso relative to the U.S. dollar would have increased our interest expense by approximately Ps.2.3 million over a one-year period.

     To the extent capital expenditures are financed with operating cash flows, we are also exposed to foreign currency fluctuations. Substantially all of our capital expenditures are denominated in U.S. dollars. In addition, our operating lease for our new headquarters building is denominated in U.S. dollars. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and capital resources—Other contractual obligations” for a description of our contractual operating lease obligations denominated in U.S. dollars.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

PART III

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     Maxcom is not in default under any of its obligations nor is any payment of dividends in arrears.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     Pursuant to the terms of the exchange offer that was consummated on April 29, 2002, the indenture governing the old notes was amended to, among other things, eliminate:

    all of the covenants restricting the incurrence of indebtedness, the making of investments, the granting of loans, the payment of dividends, the creation of liens, the entering into transactions with affiliates, the undertaking of mergers, consolidation of sales, the disposition of assets or subsidiary stock, a change in control and any limitations on the transfer of funds from subsidiaries to Maxcom;
 
    the redemption option in the event of a change of control; and
 
    events of default related to the non-compliance with such covenants, cross-defaults, adverse judgments in excess of U.S.$5.0 million and certain bankruptcy events.

     The modification of the restrictive covenants permits Maxcom, absent the existence of similar covenants under other indebtedness, to take actions that could increase the credit risks, with respect to Maxcom and its subsidiaries, faced by the holders of the old notes or that could otherwise be adverse to the interest of the holders of the old notes.

ITEM 15. CONTROLS AND PROCEDURES

     (a) As of the date of this report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed on Form 20-F and filed with the SEC is recorded, processed, summarized and reported timely. The evaluation was performed with the participation of our key corporate senior management and under the supervision of our Chief Executive Officer, Mr. René Sagastuy and

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our Chief Financial Officer, Mr. José Antonio Solbes. Based on the foregoing, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended) are effective.

     (b) There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof. Therefore, no corrective actions with regard to significant deficiencies and material weaknesses were taken.

ITEM 16.

A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our board of directors has determined that Mr. Adrián Aguirre Gómez is an audit committee financial expert as defined under appropriate Securities and Exchange Commission guidelines. Mr. Aguirre is also Series A and A-1 Director and Chairman of the Board.

B. CODE OF ETHICS

     We have established a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and other corporate and divisional employees. However, our board of directors has not made a determination whether modification of our code of ethics will be required to comply with Securities and Exchange Commission requirements.

C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     PricewaterhouseCoopers, S.C. served as our auditors for the years ended December 31, 2004, 2003, 2002 and 2001. The following table sets forth the fees paid to Pricewaterhouse Coopers, S.C for the financial years ended December 31, 2004 and 2003.

                 
    Year ended December 31  
    2004     2003  
    (in millions)  
Audit Fees(1)
  Ps. 2.6     Ps. 1.5  
Taxes Fees and Other Statutory Audit requirements fees(2)
    0.7       0.7  
 
           
Total revenues
  Ps. 3.3     Ps. 2.2  
 
           
 
     (1) Audit Fees includes fees associated with the annual audit of our consolidated financial statements. Audit fees also include fees associated with Securities and Exchange Commission statutory quarterly and annual reporting audit requirements.

     (2) Taxes Fees and Other Statutory Audit requirements fees includes fees associated with Mexican statutory audit requirements for tax and other purposes. Taxes Fees and Other Statutory Audit requirements fees also includes fees incurred for assistance with tax planning and compliance matters.

     We have introduced procedures for the review and pre-approval of any services performed by PWC. The procedures require that all proposed engagements of Pricewaterhouse Coopers, S.C. for audit and permitted non-audit services are submitted to the audit committee for approval prior to the beginning of any such services.

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PART IV

ITEM 17. FINANCIAL STATEMENTS

     We have responded to Item 18 in lieu of responding to this Item.

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ITEM 18. FINANCIAL STATEMENTS.

         
    Page  
Maxcom Telecomunicaciones, S.A. de C.V. and Subsidiaries
       
 
       
Report of Independent Registered Public Accounting Firm
    F-2  
Consolidated Balance Sheets as of December 31, 2003 and 2004
    F-3  
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004
    F-4  
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2002, 2003 and 2004
    F-5  
Consolidated Statements of Changes in Financial Position for the years ended December 31, 2002, 2003 and 2004
    F-6  
Notes to the Consolidated Financial Statements
    F-7  
 
       
Financial Statement Schedules
       
 
       
Report of Independent Accountants on Financial Statement Schedules
    S-I  
Valuation and Qualifying Accounts
    S-II  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Mexico, City, March 16, 2005, except for Note 22 for which the date is June 27, 2005

To the Board of Directors and Shareholders of
Maxcom Telecomunicaciones, S. A. de C. V. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Maxcom Telecomunicaciones, S. A. de C. V. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, of changes in stockholders’ equity and of changes in financial position for the years ended December 31, 2004, 2003 and 2002. These consolidated financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Public Accounting Oversight Board (United States) and auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred above, present fairly, in all material respects, the financial position of Maxcom Telecomunicaciones, S. A. de C. V. and its subsidiaries at December 31, 2004 and 2003, and the results of its operations, the changes in its shareholders’ equity and the changes in its financial position for the years ended December 31, 2004, 2003 and 2002, in conformity with accounting principles generally accepted in Mexico.

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Accounting principles generally accepted in Mexico differ in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 23 to the consolidated financial statements.

PricewaterhouseCoopers

José S. Oropeza de la Cruz
Audit Partner

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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
(Notes 1, 2 and 3)

In thousands of Mexican pesos (“Ps.”) in purchasing power
as of December 31, 2004 and thousands of U.S. dollars (“$”)

                         
    2004     2003     2004  
                    (Unaudited)  
                    (Note 2b)  
ASSETS
                       
 
                       
Current assets:
                       
Cash and cash equivalents (Note 4)
  Ps. 60,183     Ps. 43,903     $ 5,398  
Restricted cash (Note 5)
    5,555             498  
 
                 
 
    65,738       43,903       5,896  
 
                       
Accounts receivable:
                       
Customers, net of allowance of $63,097 and $65,512 in 2004 and 2003, respectively
    116,825       122,732       10,478  
Value-added tax refundable
    2,597             233  
Other sundry debtors
    29,538       10,263       2,649  
 
                 
 
    148,960       132,995       13,360  
Inventory, net of allowance of $342 and $322 in 2004 and 2003, respectively
    11,311       19,409       1,014  
Prepaid expenses-net
    66,963       56,446       6,006  
 
                 
Total current assets
    292,972       252,753       26,276  
 
                       
Restricted cash (Note 5)
    12,682             1,137  
Frequency rights net (Note 6)
    94,277       101,269       8,455  
Telephone network systems and equipment-net (Note 8)
    1,726,300       1,617,231       154,825  
Preoperating expenses-net (Note 9)
    153,492       188,950       13,766  
Intangible assets-net (Note 10)
    366,128       411,156       32,837  
Rent deposits of $16,146 and $24,871 in 2004 and 2003, respectively and other assets
    20,915       29,620       1,876  
 
                 
Total assets
  Ps. 2,666,766     Ps. 2,600,979     $ 239,172  
 
                 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
 
                       
Current liabilities:
                       
Interest payable (Note 13)
  Ps. 8,509     Ps. 4,951     $ 763  
Bank loans (Note 12)
    145,591             13,057  
Accrued expenses and accounts payable (Note 11)
    226,380       131,764       20,303  
Customer deposits
    2,590       2,242       232  
Payroll and other taxes payable
    46,926       60,855       4,209  
 
                 
 
                       
Total current liabilities
    429,996       199,812       38,564  
 
                 
 
Long-term liabilities:
                       
Senior notes-net (Note 13)
    593,441       2,115,908       53,223  
Long term bank loans (Note 12)
    27,785             2,492  
Notes payable
    31,187       13,690       2,797  
 
                 
 
                       
Total liabilities
    1,082,409       2,329,410       97,076  
 
                 
 
                       
Commitments and contingencies (Notes 12, 13, 14 and 19)
                       
 
                       
Shareholders’ equity:
                       
Capital stock, no par value (Note 15)
    2,420,295       1,843,571       217,067  
Additional paid-in capital (Notes 15 and 21)
    866,612       1,544       77,723  
Accumulated deficit (Note 16):
                       
Prior years deficit
    (1,573,546 )     (1,187,303 )     (141,125 )
Net loss for the period
    (129,004 )     (386,243 )     (11,569 )
 
                 
 
    (1,702,550 )     (1,573,546 )     (152,694 )
 
                 
Total shareholders’ equity
    1,584,357       271,569       142,096  
 
                 
 
                       
Total liabilities and shareholders’ equity
  Ps. 2,666,766     Ps. 2,600,979     $ 239,172  
 
                 

The accompanying notes are an integral part of these consolidated financial statements.

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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3)

In thousands of Mexican pesos (“Ps.”) in purchasing power
as of December 31, 2004 and thousands of U.S. dollars (“$”)

                                 
    2004     2003     2002     2004  
                            (Unaudited)  
                            (Note 2b)  
Net revenues
  Ps. 868,214     Ps. 805,371     Ps. 586,176     $ 77,867  
 
                       
 
                               
Operating costs and expenses:
                               
Network operating costs
    306,395       289,343       227,590       27,479  
Selling, general and administrative expenses
    374,393       405,504       468,916       33,578  
Depreciation and amortization
    334,884       353,626       347,330       30,034  
 
                       
Total operating costs and expenses
    1,015,672       1,048,473       1,043,836       91,060  
 
                       
 
                               
Operating loss
    (147,458 )     (243,102 )     (457,660 )     (13,224 )
 
                       
 
                               
Integral cost (income) of financing:
                               
Interest expense
    37,483       31,794       227,105       3,362  
Interest income
          (4,397 )     (4,891 )      
Exchange loss (gain) — net
    1,404       182,117       225,980       126  
Gain on net monetary position
    (86,168 )     (80,111 )     (110,050 )     (7,728 )
 
                       
 
    (47,281 )     129,403       338,144       (4,240 )
 
                       
 
                               
Other income (expense) — net
    792       157       (2,891 )     71  
 
                       
 
                               
Loss before taxes
    (100,969 )     (372,662 )     (792,913 )     (9,055 )
 
                       
 
                               
Provisions for:
                               
Asset tax (Note 18)
    26,937       12,944       7,461       2,416  
Income tax (Note 18)
    1,098       637       1,013       98  
 
                       
 
    28,035       13,581       8,474       2,514  
 
                       
 
                               
Net loss
  (Ps. 129,004 )   (Ps. 386,243 )   (Ps. 801,387 )   ($ 11,569 )
 
                       

The accompanying notes are an integral part of these consolidated financial statements.

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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3)

In thousands of Mexican pesos (“Ps.”) in purchasing power
as of December 31, 2004 and thousands of U.S. dollars (“$”)

                                 
            Additional             Total  
    Capital     paid-in     Accumulated     shareholders’  
    stock     capital     deficit     equity  
    (Note 15)             (Note 16)          
Balance at December 31, 2002
  Ps. 1,843,571     Ps. 460     Ps. (1,187,303 )   Ps. 656,728  
 
Increase in capital stock
          1,084             1,084  
 
Comprehensive net loss (Note 3a. iii)
                (386,243 )     (386,243 )
 
                       
 
Balance at December 31, 2003
    1,843,571       1,544       (1,573,546 )     271,569  
 
Increase in capital stock (Note 15)
    576,724       865,068             1,441,792  
 
Comprehensive net loss (Note 3a. iii)
                (129,004 )     (129,004 )
 
                       
 
Balance at December 31, 2004
  Ps. 2,420,295     Ps. 866,612     Ps. (1,702,550 )   Ps. 1,584,357  
 
                       
 
U.S. dollars (Note 2)
  $ 217,067     $ 7,723     $ (152,694 )   $ 142,096  
 
                       

The accompanying notes are an integral part of these consolidated financial statements.

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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1,2 and 3)

In thousands of Mexican pesos (“Ps.”) in purchasing power as of
December 31, 2004 and thousands of U.S. dollars (“$”)

                                 
    2004     2003     2002     2004  
                            (Unaudited)  
                            (Note 2b)  
Operating activities:
                               
Net loss
  (Ps. 129,004 )   (Ps. 386,243 )   (Ps. 801,387 )   $ 11,569 )
 
                               
Charges to income not affecting resources:
                               
Depreciation and amortization
    334,884       353,626       347,330       30,034  
 
                               
(Increase) decrease in:
                               
Accounts receivable-net
    (15,966 )     (8,759 )     (47,050 )     (1,431 )
Inventory-net
    8,098       1,525       12,024       726  
Prepaid expenses-net
    (10,517 )     (17,493 )     (27,041 )     (943 )
Restricted cash, liabilities and others-net
    80,295       7,784       144,098       7,201  
 
                       
Resources used for operating activities
    267,790       (49,560 )     (372,026 )     24,018  
 
                       
Financing activities:
                               
Issuance of capital stock
    576,724             858,867       51,724  
Additional paid-in capital
    865,068       1,085       820,064       77,585  
(Repayments) Proceeds from loans and notes payable
    (1,345,533 )     97,675       (802,200 )     (120,676 )
 
                       
Resources provided by (used in) financing activities
    96,259       98,760       876,731       8,633  
 
                       
 
                               
Investing activities:
                               
Investment in telephone network systems and equipment, net of dispositions
    (324,203 )     (114,953 )     (400,775 )     (29,077 )
Intangible assets
    (32,272 )     (16,630 )     (178,725 )     (2,894 )
Other assets
    8,706       (289 )     1,849       781  
 
                       
Resources used for investing activities
    (347,768 )     (131,872 )     (577,651 )     (31,190 )
 
                       
 
                               
Cash and cash equivalents:
                               
Net increase (decrease) in cash and cash equivalents
    16,280       (82,672 )     (72,946 )     1,461  
Cash and cash equivalents at beginning of year
    43,903       126,575       199,521       3,937  
 
                       
 
                               
Cash and cash equivalents at end of year
  Ps. 60,183     Ps. 43,903     Ps. 126,575     $ 5,398  
 
                       

The accompanying notes are an integral part of these consolidated financial statements.

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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

In thousands of Mexican pesos (“Ps.”) in purchasing power as of
December 31, 2004 and thousands of U.S. dollars (“$”)

NOTE 1 — INCORPORATION AND BUSINESS:

Maxcom Telecomunicaciones, S. A. de C. V. (“Maxcom” or the “Company”), is a Mexican company incorporated on February 28, 1996. Its main line of business is the construction and operation of a telephone network, with the purpose of providing local, national and international long-distance, data and other value-added services, and virtual private network service, within Mexico.

The Company started its commercial operations in May 1999.

On February 3, 1997, the Ministry of Communications and Transportation (“SCT”) awarded the Company a concession to install and operate a public telecommunications network in Mexico. Subsequently, on December 7, 1999, September 27, 2001, and December 2, 2004, the Company received amendments to the initial terms and conditions of the concession. This concession is not exclusive. The initial term of the concession is 30 years and includes certain renewal rights. The concession grants the Company the right to provide the services granted in the concession in any part of the Republic of Mexico. Moreover, the last authorization dated December 2, 2004 sets forth future obligations of the Company (Note 19d).

In October 1997, the Company was awarded seven nationwide point-to-point and three regional point-to-multipoint microwave concessions, each for 20 years.

On January 22, 1999, the Company entered into a contract with Telmex through which Maxcom agreed to provide Telmex with interconnection services for Telmex ´s long-distance traffic.
Additionally, the Company subscribed an interconnection service agreement with Telmex, which allows Maxcom, to finish its long distance traffic in Telmex ´s network.

The Company has negotiated the signing of various amending agreements to the Local Interconnection Services contract (the “contract”) with Telmex, to extend the original term of that contract, irrespective of the fact that the contract provides that the interconnection between the two companies is carried out based on the clause denominated “continuous application”. That clause sets forth that upon termination of the first period, the terms and conditions of the contract will continue in full force and effect until the parties sign a new contract to continue interconnecting their networks.

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In addition, this contract was amended on March 23, 1999, in order to apply a compensation agreement between the parties with respect to the reciprocal debts in local interconnection traffic.

During 2003 and 2002 the Company entered into various interconnection and reselling agreements with other local and long distance carriers and mobile phone companies.

The COFETEL (Federal Telecommunications Commission) in their session of November 28, 2000 issued a resolution authorizing the Company to operate as an international port, the station located in Magdalena No. 211, Mexico City.

In August 2002, the Company bought a fiber optic system (2,011 Km), which allows the Company to operate a network that carries traffic from Mexico City to the Nuevo Laredo border crossing.

NOTE 2 — BASIS OF PRESENTATION:

a. Consolidation -

The consolidated financial statements include the accounts of Maxcom and its subsidiaries Corporativo en Telecomunicaciones, S. A. de C. V. (“Corporativo”), Maxcom Servicios Administrativos, S. A. de C. V. (“MSA”), and Maxcom USA, Inc. (“Maxcom USA”). Corporativo and MSA are wholly-owned Mexican subsidiaries. Their main business is to render administrative and technical services mainly to Maxcom. Maxcom holds 99.99% of the capital stock of Maxcom USA, a subsidiary that was incorporated on February 3, 2004 in accordance with the laws of the State of Delaware, USA. Its primary operation is to promote telecommunication services such as international long-distance traffic, data services, and other value added services from the border at Nuevo Laredo and through Mexican territory.

b. Convenience translation -

U.S. dollar amounts ($) shown in the consolidated financial statements have been included solely for the convenience of the reader and were translated from Mexican pesos, as a matter of arithmetic computation only, at December 31, 2004, noon-buying rate of Ps.11.15 per U.S.$1.00, as published by The Federal Reserve Bank of New York. Such translation should not be considered as a representation that the Mexican peso amounts have been or could be converted into U.S. dollars at this or any other rate.

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accompanying consolidated financial statements are expressed in Mexican pesos, denoted by the symbol “Ps.”, and have been prepared in accordance with Accounting Principles Generally Accepted in Mexico (“Mexican GAAP”). The significant accounting policies used by the Company in the preparation of its financial statements, including the concepts, methods and criteria related to the recognition of the effects of inflation on the financial information, are summarized below:

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a.   Recognition of the effects of inflation -

The financial statements of the Company have been prepared in accordance with Statement
B-10 “Recognition of the Effects of Inflation on Financial Information,” (Integrated Document) issued by the Mexican Institute of Public Accountants (“MIPA”), which provides guidance for the recognition of the effects of inflation.

  i.   The Company restates its income statement to reflect the purchasing power of the Mexican peso as of the most recent reporting date (December 31, 2004), using a restatement factor derived from the change in the National Consumer Price Index (“NCPI”) from the month in which the transaction occurred to the most recent year-end. The financial statements have been restated to Mexican pesos as of December 31, 2004 purchasing power, using the NCPI as of that date. The financial statements of the previous years have also been restated in terms of the purchasing power of the Mexican peso as of the most recent financial reporting date, thus making them comparable. The restatement is determined by using a restatement factor derived from the change in the NCPI, which for 2004 and 2003 was 1.0519 and 1.0397, respectively. Therefore, these amounts differ from those previously reported.
 
  ii.   Capital stock, additional paid-in capital and accumulated deficit represent the value of these items stated in purchasing power as of the most recent balance sheet date, and are determined by applying factors derived from the NCPI to the historical amounts.
 
  iii.   Comprehensive income (loss) is represented by the net income (loss) plus those items required by specific accounting standards to be reflected in stockholders’ equity but which do not constitute capital contributions, reductions or distributions. It is restated on the basis of NCPI factors.
 
  iv.   The gain or loss on monetary position represents the inflation gain or loss, measured in terms of the NCPI, on net monthly monetary assets and liabilities for the year, expressed in pesos of purchasing power as of the most recent balance sheet date.
 
  v.   Integral income and cost of financing consists of interest income and expense, exchange gains or losses, and the gain or loss on the net monetary position. Integral income and cost of financing during the development stage period was capitalized to preoperating expenses. Once the Company commenced operations, amortization of these costs began over a ten-year term.
 
  vi.   Statement B-12 “Statement of Changes in Financial Position,” issued by the MIPA, specifies the appropriate presentation of the statement of changes in financial position when the financial statements have been restated in constant monetary units. Statement B-12 identifies the sources and applications of resources as the differences between beginning and ending financial statement balances in constant monetary units. The

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      Statement also requires that monetary and foreign exchange gains and losses not be treated as non-cash items in the determination of resources provided by operations.

b.   Cash and cash equivalents -
 
    The Company considers highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are stated at cost, which approximates fair market value.
 
c.   Inventory -
 
    Inventories are constituted by necessary equipment to maintain the telephone network systems, and their cost of sales, are initially recorded at average cost and are subsequently restated based on factors derived from the NCPI. Amounts so determined do not exceed its fair value.
 
d.   Telephone network systems and equipment -
 
    Telephone network systems and equipment are recorded at acquisition cost and restated by applying factors derived from the change in the NCPI since their acquisition date.
 
    Telephone network equipment held for resale is valued at the lower of acquisition cost or net realization value, where the acquisition cost is determined on the method last in first out (“LIFO”).
 
    Depreciation is calculated by the straight-line method over the restated cost, based on the estimated useful lives of the assets. Depreciation is charged to results of operations.
 
    The Company constructs certain of its own network systems and related facilities. Internal costs directly related to the construction of such facilities are capitalized. Such internal costs capitalized during the year were Ps.43, 222, Ps.36,765 and Ps.36,171 (including Ps.279, Ps.83 and Ps. 7,397 of integral cost of financing) in 2004, 2003 and 2002, respectively.
 
    The Company capitalizes integral cost of financing attributable to assets under construction. Capitalized integral financing costs include interest costs, gains from monetary position, and foreign exchange losses and are determined by reference to the Company’s average interest cost on outstanding borrowings.
 
    Maintenance and repairs are expensed as incurred. Replacements and improvements are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
 
    The telephone network systems and equipment values are subject of an impairment evaluation (Note 8).

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e.   Concession -
 
    On February 3, 1997, the Ministry of Communications and Transportation awarded the Company a concession to install and operate a public telecommunications network for a 30-year period. That concession was subsequently amended in 1999, 2001, and 2004, and currently permits the Company to render basic telephony services with national coverage, long-distance services, data transfer services, and other value added services (Note 19d).
 
    In accordance with Statment C-8 “Intangible Assets”, this concession was not recognized for financial reporting puposes and is only disclosed through notes to the financial statements (Note 1).
 
f.   Frequency rights -
 
    Frequency rights are recorded at acquisition cost and restated by applying factors derived from the change in the NCPI since acquisition date. Amortization is calculated by the straight-line method over the term of the frequency rights, which is 20 years (Note 6).
 
g.   Preoperating expenses -
 
    All expenses incurred during the development stage or in specific projects in progress are capitalized. Such expenses are amortized on a straight-line basis over 10 years. The amortization period begins when the corresponding project commences operations.
 
h.   Intangibles -
 
    The intangible assets are recognized in the balance sheet as long as these are identifiable, provide economic benefits and the Company has control over such benefits. Intangible assets with a definite life are amortized systematically based on the best estimate of their useful life determined in accordance with the expected future economic benefits.
 
    Purchased software and certain activities of developing internal-use software are capitalized and amortized over their expected useful lives. Other activities, such as training, maintenance and re-engineering, are expensed as incurred.
 
    Intangible assets carrying value is subject to an annual impairment evaluation (Note 3i).
 
    Debt issuance costs are amortized on a straight-line basis over the outstanding term of the related debt.
 
i.   Long-lived assets evaluation -

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    The Company evaluates the ability to recover its long-lived assets when events and circumstances indicate that such assets might be impaired. The impairment is determined by comparing the discounted future cash flows estimated to be generated by these assets to their respective carrying amounts. In the event impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. If quoted market prices for an asset are not available, the fair market value is determined primarily using the anticipated future cash flows discounted at a rate commensurate with the risk involved. Losses on the property and equipment to be disposed of, are determined in a similar manner, unless the fair market values are reduced for the cost to dispose (Note 22).
 
j.   Transactions and balances in foreign currencies -
 
    Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates they are entered into and/or settled. Assets and liabilities denominated in such currencies are stated at the Mexican peso equivalents resulting from applying the rates prevailing on the balance sheet date. Exchange differences arising from fluctuations in the exchange rates between the transactions and settlement dates, or the balance sheet date, are charged or credited to income.
 
k.   Income tax and statutory employees’ profit sharing -
 
    The Company has incurred tax losses since inception and accordingly has not provided for income taxes and statutory employees’ profit sharing.
 
    Income tax is recorded by the comprehensive asset-and-liability method, which consists of recognizing deferred tax on all temporary differences between the book and tax values of assets and liabilities (Note 18).
 
l.   Management estimates -
 
    Generally accepted accounting principles require that, in preparing a Company’s financial statements, management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimated.
 
m.   Financial instruments -
 
    The Company’s financial instruments consist principally of cash and cash equivalents, restricted cash, accounts receivable and payable, and notes payable. The carrying amounts of such financial instruments with the exception of Senior Notes, as reflected in the balance sheet, approximate their fair value as of December 31, 2004 and 2003. The following table represents the book and fair values of those notes:

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    2004     2003  
    Book value     Fair value     Book value     Fair value  
Senior Notes
  Ps.  593,441     Ps.  556,656     Ps.  2,115,908     Ps.  1,892,263  

n.   Revenue recognition -
 
    The Company recognizes revenues from telephone services provided to customers, the sale of customer-premise equipment, services provided to other telephone-service companies (such as interconnection services), and installation charges.
 
    Revenues from services provided to customers, including installation and maintenance, are recognized in the month the service is rendered. When the installation is not charged to the customer, the cost is deferred and amortized over the remaining term of concession. The concession expires in October 2017.
 
    Revenues from the sale of customer-premise equipment are recognized at the time of the sale and delivery and installation of such equipment.
 
    Revenue from interconnection services is recognized on an accrual basis. The Company entered into local interconnection contracts with various telephone companies under the “bill and keep” compensatory agreement scheme. In accordance with this agreement, if the imbalance between local calls originated from the other telephony company and completed by Maxcom, and the calls originated from Maxcom and completed by the other telephony company over the course of one month do not exceed a determined percentage, there will be no payment of an interconnection rate charge to the user of the interconnection services. However, if the imbalance exceeds that percentage in a determined month, the net user will be subject to a per minute charge. The percentage of imbalance was 70% for the period February 25, 1999 to December 31, 2002, 30% for January 1, 2003 to October 31, 2004, 18% for December 1 to 31, 2004, and 15% as of January 2005. In the event that the Company fails to maintain a significant percentage of residential users, the compensatory agreement will be terminated and asymmetric interconnection rates could be applied.
 
    The Company also has interconnection contracts for long-distance mobile services with other telephony companies. However, they do not include the feature of the compensatory agreement.
 
    During 2003, the Company started a new business line, the lease of transmission capacity through its fiber optic ring. Revenues from lease of capacity are recorded in deferred revenue as billed and then recognized ratably into revenue over the term of the contract.

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    Advances from customers are classified as current liabilities until they are refunded. When the contract is rescinded, these deposits are applied to any outstanding balance with the respective customer.
 
    The Company creates a reserve in the amount of 90% and 100% of account receivable balance due over 90 but less than 119 days, and over 120 days, respectively except when there is a negotiated agreement with a customer. In such cases, a reserve is created in the amount of 30% once accounts receivable balance is 90 days past due and 100% when the balance is due over 120 days.
 
o.   Stock-based compensation -
 
    The Company accounts for the activity under the employee stock compensation plans under the intrinsic value method. Accordingly, compensation expense has been recognized for the intrinsic value of options granted under these plans. If compensation expense had been determined based on the fair value of the options at the grant dates, the Company’s net income and earnings per share would have decreased or increased to the pro forma amounts indicated below (in thousands, except per share amounts):

                         
    2004     2003     2002  
Net loss of year as reported
  (Ps. 129,004 )   (Ps. 386,243 )   (Ps. 801,387 )
 
Add: stock-based employee compensation expense included in reported net loss
          8       14,355  
 
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards
          (966 )     (36,453 )
 
                 
 
Pro-forma net loss of year
    (129,004 )     (387,201 )     (823,485 )
 
                 
 
                       
Earning loss per share (EPS):
                       
Basic, as reported
  (Ps. 0.00 )   (Ps. 0.02 )   (Ps. 0.06 )
Basic, pro-forma
  (Ps. 0.00 )   (Ps. 0.02 )   (Ps. 0.06 )

The fair value of each option is estimated on the date it is granted using the Black-Scholes option valuation model with the following weighted-average assumptions used for grants during the year ended December 31, 2004, 2003 and 2002 respectively with the following assumption:

                         
    2004     2003     2002  
Expected yield
                 
Expected stock price volatility
    52.03 %     50 %     50 %

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    2004     2003     2002  
Risk-free interest rate
    2.79 %     2.74 %     4.55 %
Expected life of options
    3       3       5  

    Based on a third party valuation management determined that the Series N stock and the related options had an insignificant value for the year ended 2004 and a result no stock based compensation expense was recorded..
 
p.   Advertising and promotional costs -
 
    The Company expenses costs of advertising and promotions as incurred. Advertising and promotional expenses were Ps.14,223, Ps.4,133 and Ps.18,110 in 2004, 2003 and 2002, respectively.
 
q.   Segment reporting -
 
    The Statement B-5 “Financial Information by Segments” requires that companies review their internal organizational structure and internal reporting system for purposes of identifying segments. For all years presented, the Company operates only one segment and does not have any particular geographical location. The revenue by geographical location included in Note 20 is a specific disclosure required by the SCT in the Company’s concession title.
 
r.   Long-lived assets -
 
    The provisions of Statement C-15, “Impairment of the Value of Long-Lived Assets and their Disposal”, issued by the IMCP, went into effect on January 1, 2004. Statement C-15 establishes general criteria for the identification and, if applicable, recording of impairment losses or decrease in the value of long-lived tangible and intangible assets, including goodwill. No impairment was identified or recorded during 2004.
 
s.   New accounting standards -
 
    The following accounting standards, which were issued by the Mexican Institute of Public Accountants (“MIPA”), went into effect on January 1, 2005. Management believes that an adoption of these standards will not have a material effect on its consolidated balance sheet, consolidated statement of operations and statement of changes in financial position.
 
    Statement B-7, “Acquisitions of Businesses”:

Establishes among other things, the purchase method as the only method of accounting for the acquisition of a business, changes to the accounting treatment of goodwill, eliminating the amortization of goodwill as from the date on which that statement went into effect and making it instead subject to annual impairment tests. The statement also provides specific rules for the acquisition of minority interests and the transfer of assets or the exchange of shares between entities under common control.
 
    Amendments to Statement C-2, “Financial Instruments”:

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    Its provisions require that the effects of valuing investments available for sale be recorded in stockholders equity and not in income for the year, and includes rules for determining the effects of impairment of financial instruments.
 
    Statement C-10, “Derivative Financial Instruments and Coverage Hedging”:

This Statement, besides detailing recording, valuation and disclosure criteria applicable to all derivative financial instruments, requires that the effectiveness of hedges of cash flows and of net investment in subsidiaries located abroad be evaluated and that the effective portion of the gains or losses on hedging instruments be recognized within comprehensive income.
 
    Amendments to Statement D-3, “Labor Obligations”:

These amendments provide additional valuation and disclosure rules for recognizing severance payments due to events other than restructuring.

NOTE 4 — CASH AND CASH EQUIVALENTS:

Cash and cash equivalents at December 31 consists of:

                 
    2004     2003  
Cash
  Ps. 11,724     Ps. 6,807  
Bank of America: $902 and $1,040 in certificates of deposit and government instruments, bearing annual interests at variable rate and 0.7%, respectively
    10,159       12,292  
Santander Serfin: money market instruments, bearing interest at a variable rate
    38,300        
Banamex: $24,804 in government instruments, bearing annual interest of 6.1% in 2003
          24,804  
 
           
 
               
 
  Ps. 60,183     Ps. 43,903  
 
           

NOTE 5- RESTRICTED CASH:

Pursuant to the credit agreement with Banco Santander Mexicano, S. A. (Note 12), the Company guaranteed the payment of interest related to the Ps. 100,000 loan, as follows:

a.   In accordance with the loan agreement in effect, the Company must maintain a cash balance on a monthly basis of Ps.5,555 in an account with HSBC, S.A., used for operations, to guarantee the monthly principal payments under the loan.
 
b.   In addition, the Company is required to maintain Ps. 12,682 in a trust to guarantee the payment of two months of principal and accrued interest through the maturity of the loan.

NOTE 6 — FREQUENCY RIGHTS:

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Frequency rights at December 31 consist of the following:

                 
    2004     2003  
Frequency rights
  Ps. 139,846     Ps. 139,846  
Less — Accumulated amortization
    (45,569 )     (38,577 )
 
           
 
               
 
  Ps. 94,277     Ps. 101,269  
 
           

On October 3, 1997, the Mexican Federal Government granted the Company ten concessions to use and exploit different bands of the radio-electric spectrum and to establish point-to-point and point-to-multi-point microwave links; seven of them are nation wide point-to-point and three regional point-to-multipoint microwave concessions. The frequency rights became effective February 28, 1998, and will run through the year 2018.

In accordance with the terms of these frequency rights, the Company must provide to the Mexico’s Ministry of Communications and Transportation (the “SCT”) a guarantee on its operation and renew it every year (Note 19e).

For the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization expense for these frequency rights in the amount of Ps.6,992, Ps.12,938 and Ps.6,992, respectively.

NOTE 7 — TRANSACTIONS WITH RELATED PARTIES:

For the years ended December 31, related party transactions were as follows:

                         
    2004     2003     2002  
Office and site lease (1)
  Ps. 264     Ps. 231     Ps. 230  
Compensation in connection with the operation agreement and other expenses with CT Global Telecommunications, Inc. (2)
                173  
Travel expenses to Bachow and Associates (5)
    31       273       159  
Commissions paid to Francisco Adrián Aguirre Palme (4)
    58              
Travel expenses to Bank Boston (5)
                14  
Expenses to Bank of America (3)
    397       209       234  
Advertising and other management services to Operadora Plusgamma (6)
          306       3,817  
Comissions and management services to Comercializadora Road el Camino (7)
    37       48       579  
Advertising services provided by Difusión Panorámica (8)
    88              
 
                 
 
                       
 
  Ps. 875     Ps. 1,067     Ps.s 5,206  
 
                 

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(1)   The Company leases a site, which is located within the premises of Radio Centro Group, which is controlled by the family of one of the shareholders, Adrian Aguirre Gómez.
 
(2)   It relates to the reimbursement of travel expenses for Board meetings.
 
(3)   2004 expenses include travel expenses reimbursements and expenses relating to the debt restructuring. The expenses during 2003 and 2002, relate to travel expenses reimbursements only.
 
(4)   During 2004, the Company paid sales commissions’ to a family of one of the shareholders, Adrian Aguirre Gómez.
 
(5)   Reimbursement of travel expenses to certain shareholders.
 
(6)   For the years 2003 and 2002, advertising expense related to an advertising purchase agreement of $3,000, signed in April 2003, for advertising service that is being provided by Grupo Radio Centro from its subsidiary Operadora Plusgamma. The Aguirre Gómez family used the $3,000 proceeds from this agreement to purchase Series “A1” stock, pursuant to the private equity investment.
 
(7)   2004 expenses relate to sales commissions paid. Expenses during 2003 and 2004 were related to administrative services.
 
(8)   Advertising expenses paid to Difusión Panorámica, a company owned by an affiliate of one of the shareholders.

NOTE 8 — TELEPHONE NETWORK SYSTEMS AND EQUIPMENT, NET:

At December 31 consists of:

                         
                    Useful life (1)  
    2004     2003     (years)  
Office furniture
  Ps. 16,624     Ps. 16,066       10  
Transportation equipment
    25,731       25,150       4  
Engineering equipment
    11,012       11,000       10  
Computer equipment
    58,751       52,326       3.33  
Telecommunication network and equipment
    1,259,954       1,215,864       10  
Electronic equipment
    223,237       234,561       3.33  
Radio equipment
    273,166       269,769       10  
Leasehold improvements
    305,284       289,951       20  (2)
Other
    16,729       15,653       10  
 
                   

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                    Useful life (1)  
    2004     2003     (years)  
Capitalized internal costs
    157,224       113,995          
Installation costs
    231,849       181,415          
 
                   
 
                       
Subtotal
    2,579,561       2,425,750          
 
                   
 
                       
Less: Accumulated depreciation and amortization
    (1,077,341 )     (879,612 )        
 
                   
 
                       
Plus: Construction in progress
    224,080       71,093          
 
                   
 
  Ps. 1,726,300     Ps. 1,617,231          
 
                   
 
(1)   Useful lives accounted from date of use.
 
(2)   Or life of the lease, whichever is shorter.

For the years ended December 31, 2004, 2003 and 2002, the Company recorded depreciation and amortization expense (including leasehold improvements) of Ps.215,157, Ps.234,431 and Ps.246,250, respectively.

During 2002, the Company wrote-off leasehold improvements related to its vacancy of its previous corporate building lease of Ps.9,956 net of accumulated amortization of Ps.1,528.

NOTE 9 — PREOPERATING EXPENSES:

For the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization expense of Ps.35,435, Ps.34,924 and Ps.34,924, respectively. Accumulated amortization as of December 31, 2004 and 2003 was Ps.197,822 and Ps.162,378, respectively.

NOTE 10 – INTANGIBLE ASSETS:

At December 31 consist of:

                 
    2004     2003  
Software licenses
  Ps. 133,367     Ps. 120,291  
Infrastructure rights
    266,213       265,367  
Debt issuance costs
    256,084       238,535  
 
           
 
               
 
    655,664       624,193  
Accumulated amortization
    (289,536 )     (213,037 )
 
           
 
  Ps. 366,128     Ps. 411,156  
 
           

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For the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization expense of Ps.77,299, Ps.71,321 and Ps.66,148, respectively. These amounts include Ps.30,893, Ps.32,710 and Ps.21,762 of software amortization expense, respectively.

NOTE 11 – ACCRUED EXPENSES AND ACCOUNTS PAYABLE:

As of December 31, 2004 and 2003 the accounts payable consist of:

                 
    2004     2003  
Vendors
  Ps. 113,301     Ps. 59,702  
Suppliers
    47,407       20,028  
Accruals
    35,171       26,280  
Other accounts payable
    30,501       25,754  
 
           
 
  Ps. 226,380     Ps. 131,764  
 
           

NOTE 12 – BANK LOANS:

The Company has three credit lines with Banco Santander Mexicano, S.A.:

(a) On April 28, 2004, the Company obtained a line of credit of $1,980 (U.S. dollars), which generates interest at a monthly LIBOR rate plus 1.9 additional percentage points. The initial term of the line of credit was for 5 months; subsequently an extension was negotiated through October 15, 2005.

(b) On August 17, 2004, the Company obtained a line of credit of Ps.55,941 with a monthly TIIE interest rate plus 1.0 additional percentage points. The initial term of the line of credit was 2 months, subsequently an extension was negotiated through October 15, 2005.

(c) On November 5, 2004, the Company obtained a line of credit from Banco Santander Mexicano, S. A. of Ps.100,000 with a monthly TIIE interest rate plus 1.2 additional percentage points. The terms of the line of credit provide for the monthly payment of principal in accordance with the amortization table set forth in the contract, which considers average monthly payments in the amount of Ps.5,555, plus accrued interest of the period. The term of the line of is for 18 months and the maturity date is May 10, 2006.

Pursuant to this contract, the Company created a trust that guarantees the payment of the interest generated by the Ps. 100,000 line of credit (Note 5).

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NOTE 13 — LONG-TERM DEBT:

At December 31 consists of:

                 
    2004     2003  
$11,590: 133/4% Notes due April, 2007
  Ps. 130,559     Ps. 136,986  
 
               
$5,118 and $167,624 in 2004 and 2003, respectively, Old Notes, which will bear 0% interest up to March 2006. Effective 2006, interest will be generated at a 10% rate.
    57,652       1,981,184  
 
               
$36,118: New Notes that bear interest at a variable interest rate from 4% to 11.25% up to October 2009.
    406,860        
 
               
Less-Discount (net accumulated amortization)
    (1,630 )     (2,262 )
 
           
 
               
 
  Ps. 593,441     Ps. 2,115,908  
 
           

On March 17, 2000, Maxcom issued $300,000 in promissory notes (“133/4% Notes”) due on April 1, 2007. Those Original Senior Notes accrued interest at a 133/4% annual rate (14.46% including the withholding tax effect in accordance with currently enacted tax legislation), payable every semester on April 1 and October 1 every year. During May and June 2001, the Company spent $10,000 on the repurchase of a portion of the 133/4% Notes outstanding, with a face value amounting to $25,000.

At the beginning of 2002, the Company started a negotiation process with the holders of the 133/4% Notes to exchange this debt. On April 29, 2002, the Company announced the completion of the exchange offer of the 133/4% Notes. As a result of this agreement, holders tendered an aggregate of $259,410 in principal amount of the 133/4%Notes, which represented 94.3% of the outstanding 133/4% Notes, in exchange for an aggregate of $165,078 in principal amount of Notes due March 1, 2007 (“Old Notes”), bearing 0% interest through March 1, 2006, and 10% annual interest in the last year. Additionally, holders who accepted the exchange offer received 26,459,820 series N-2 convertible preferred stock, with an initial liquidation preference of U.S.$0.4927 per share and limited voting rights, in the form of Common Participation Certificates (“CPOs”).

In addition, on July 25, 2002, the Company announced the completion of a complement to the exchange offer of the 133/4% Notes in the amount of $4,000. That transaction was carried out on the same terms as the offer completed on April 29, 2002. Holders who accepted the exchange offer received $2,545 in principal amount of Old Notes due March 1, 2007, bearing 0% interest through March 1, 2006, and 10% annual interest in the last year, and 408,000 series N-2 convertible preferred stock, with an initial liquidation preference of U.S.$0.4927 per share and limited voting rights, in the form of Common Participation Certificates (“CPOs”).

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Subsequently, on October 8, 2004, the Company completed an exchange offer and consent solicitation in the amount of $167,624. Holders tendered an aggregate of $162,506 in principal amount of Old Notes in exchange for an aggregate of:

  i)   $36,118 in principal amount of New Step-Up Notes due 2009, bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 through October 14, 2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009 (the “New Notes”).
 
  ii)   101,110,338 shares of our Series N-1 Preferred Stock, at a conversion price of $1.25 per share, $0.75 was recorded as stock subscription premium and $0.50 as capital stock, increasing total shareholder’s equity by $ 126,388.

The indenture governing the Old Notes and the New Notes contains restrictive covenants including; limitations on indebtedness; limitations on investments, the redemption of capital stock, prepayment of subordinated obligations, and granting of loans; restrictions on distributions from restricted subsidiaries; limitations on sales of assets and subsidiary stock; limitation on affiliate transactions; limitation of sale or issuance of capital stock of restricted subsidiaries; limitations on liens; limitation on sale/leaseback transactions; and restrictions on mergers and consolidations, among others items. If an event of default occurs and is continuing, the trustee or the holders of 25% in principal amount of the outstanding notes may declare the principal and any accrued, but unpaid, interest on all the notes to be due and payable.

NOTE 14 — LABOR OBLIGATIONS:

As of December 31, 2004 and 2003, the Company had the following labor obligations:

Seniority premiums, to which employees are entitled upon termination of employment after 15 years of service, are recorded as a cost of the years in which the respective services are rendered.

Statement D-3 “Labor Obligations” issued by the MIPA requires determining the seniority premiums based on actuarial studies carried out using the projected unit credit method. During the years 2004 and 2003, the Company did not recognize its labor obligations in accordance with this method.

Other compensation based on seniority to which employees may be entitled in the event of dismissal or death, in accordance with the Federal Labor Law, is recorded in the consolidated statement of operations in the year in which it becomes payable. As of December 31, 2004 and 2003, these obligations were insignificant due to lack of seniority of the majority of the Company’s employees.

NOTE 15 — CAPITAL STOCK:

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Under Mexican Federal Telecommunications Law and Foreign Investment Law, no more than 49% of the full voting capital stock of a Mexican corporation holding a concession to provide local and long-distance telecommunication services may be held by foreigners.

On April 11, 2002, the Company obtained an authorization from the Mexican Foreign Investment Bureau (Dirección General de Inversión Extranjera) to increase its ability to issue limited voting shares up to 95% of its total capital stock and simplify its equity structure.

Under the capital restructuring effective April 29, 2002 (Note 13), tendering holders received an aggregate of 26,459,820 Series “N2” convertible preferred shares, with an initial liquidation preference of $0.4927 per share and limited voting rights, in the form of CPOs. Private equity investors paid $59,340 and received 6,088,896 and 5,848,209 shares of Series “A1” and “B1”, respectively, common voting stock with preferred liquidation rights and 122,468,441 Series “N1” preferred shares with limited voting rights. In addition, options to purchase an additional 33.2 million Series “N” shares were granted. Additionally, the Series “C” shares were converted at a 1:1 ratio into Series “N” shares. As a result, the holders of the CPOs have become the direct holders of Series “N” shares for each CPO. Additionally, on July 25, 2002, the Company announced a complement of the restructuring debt issuing an aggregate of 408,000 Series “N2” convertible preferred shares, with an initial liquidation preference of $0.4927 per share and limited voting rights in the form of CPOs.

In connection with the capital restructuring mentioned, the Company issued four new classes of shares: the Series “A1”, “B1”, “N1”, and “N2” preferred shares. The Series “A1” and “B1” preferred shares have full voting rights, and the Series “N1” and “N2” preferred shares have limited voting rights. The Series “N1” and “N2” preferred shares are not computed for purposes of determining the foreign investment percentage under the Mexican Foreign Investment Law and may be subscribed, paid for, and held by Mexican and non-Mexican investors. Series “N2” preferred shares have been deposited into the CPO trust, which is administered by Banco Nacional de México, S.A.

In November, 2002, as previously approved by the Shareholders’ Meeting held on March 5, 2002, the Company issued 356,433 Series “N”, Class II, non par value, limited voting rights, shares of the capital stock of the Company in connection with the exercise of certain signing bonuses granted to several officers of the Company as stock options during 2002 and 2001. Additionally, the Company authorized the grant of a special retention bonus to its officers in connection with the consummation of the Exchange Offer and Consent Solicitation, in the form of cash and options to purchase an aggregate amount of 462,936 Series “N”, Class II, non par value, limited voting rights shares at a strike price per share of $0.4927. The executive officers used the cash to exercise the options at the grant date.

On December 31, 2002, based on the Mexican Corporate Law (Ley General de Sociedades Mercantiles) Article 19, the Company compensated its restated additional paid-in capital and the effects of inflation in capital stock by Ps.937,883 and Ps.143,748, respectively, against Ps.1,081,631 of accumulated losses.

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In May 2004, Mr. Rene Sagastuy (New Chief Executive Officer of the Company) received a contract-signing bonus of 100,000 options for the acquisition of an equal number of Series “N” shares at an exercise price per share of $0.01.

In accordance with the capital restructuring completed on October 8, 2004 (Note 13) Old Senior Notes in the amount of $126,388 were exchanged for an aggregate of 101,110,338 shares with no par value shown, of which 96,776,597 were Series “N1” shares and 4,333,741 Series “B1” shares at a subscription price of $1.25 per share, of which $0.75 was recorded as premium on subscription of stock and $0.5 as capital stock.

In addition, an exchange of shares was made as follows (i) the holders of all Series “B” shares (1,226,373 shares) exchanged those shares for Series “A” shares at a 1:1 ratio; (ii) 4,333,741 Series “N1” shares were exchanged for Series “B1” shares, issuing an equal number of shares at a 1:1 ratio; and 1,905,843 Series “N” shares were exchanged for Series “A” shares at a 1:1 ratio. These exchanges were approved at the Annual General Extraordinary Stockholders’ Meetings held on August 23, 2004.

At the General Extraordinary Stockholders’ Meeting held on December 17, 2004, the stockholders approved the cancellation of the 26,040,990shares of Series “N” Class II capital stock held in treasury and the issuance of an equal number of share with no par value, as follows: (i) 3,361,483 Series “N” shares, Class II and (ii) 22,679,507 Series “N1” shares, Class II, to be held in treasury to meet certain commitments under option and warrant agreements, which have been approved by the Stockholders and the Board of Directors of the Company.

As of December 31, the Company’s outstanding shares were as follows: <