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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

OR

OR

Commission File Number 333-11910

MAXCOM TELECOMMUNICATIONS, INC.

UNITED MEXICAN STATES

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

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

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.

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.

Indicate by check mark which financial statement item the registrant has elected to follow:

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     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 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, 2002 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, 2002, which was Ps.10.43 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.

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     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.

     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 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, 1998, 1999, 2000, 2001 and 2002, including the audited consolidated financial statements as of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001, and 2002 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 22 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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Notes to Selected Historical Consolidated Financial Information

(1)		All amounts incurred in operations from February 28, 1996 (date of incorporation) to May 1, 1999 (commencement of operations) were capitalized as “preoperating expenses” under Mexican GAAP. Therefore, no amounts are reported in the statement of operations for those periods.
(2)		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.
(3)		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, 2002. Restatement into December 31, 2002 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, 2002. The inflation index used in this annual report for 1998 figures is 1.3505, for 1999 figures is 1.2024 for 2000 figures is 1.1035 and for 2001 figures is 1.0570.
(4)		Peso amounts were converted to U.S. dollars at the exchange rate of Ps.10.43 per U.S.$1.00 reported by the Federal Reserve Bank of New York as its noon buying rate for pesos on December 31, 2002. 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.
(5)		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).
(6)		EBITDA represents earnings before income and asset taxes, integral cost of financing, other income (expense), nonrecurring charges, and depreciation and amortization. We have included information concerning EBITDA (which is not a measure of financial performance under Mexican or U.S. GAAP) because we believe it is a standard financial statistic commonly reported and widely used by analysts and other interested parties. We understand that EBITDA is also used by investors as one measure of an issuer’s ability to service or incur indebtedness. We also understand that EBITDA may be defined differently by other companies that disclose a similarly titled account. You should not construe EBITDA as an alternative to operating income or as a measure of liquidity or cash flows from operating activities.
(7)		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.
(8)		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, 1999, 2000, 2001 and 2002 amounted to Ps.279.3 million, Ps.749.6 million, Ps.695.6 million and Ps.725.8 million, respectively. Since there is no statement of operations for the year ended December 31, 1998, the information has not been included.

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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 26, 2003 was Ps.10.458 per U.S.$1.00.

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 expect to generate insufficient cash flows to cover our fixed charges through 2003. This is so even though our fixed charges have decreased significantly as we restructured our financial indebtedness in April 2002 and do not have to make any interest payments on most of our indebtedness until September 1, 2006. 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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Our auditors have indicated in their report that there is substantial doubt about our ability to continue as a going concern under current conditions

     PricewaterhouseCoopers, S.C. in its Report of Independent Accountants dated February 19, 2003 has stated that we are highly leveraged and have suffered recurring losses from operations that raises substantial doubt about our ability to continue as a going concern. We believe that if our financial situation does not improve and we do not attract new capital, we will be unable to service our debt and operate as a viable company and we may qualify for dissolution or liquidation under Mexican corporate law.

     In 2002, our accumulated losses were nearly the equivalent of two-thirds of our capital stock. In the first quarter of 2003, our accumulated losses exceeded such threshold. According to the Mexican Companies Law (Ley General de Sociedades Mercantiles), an interested party may file a claim for dissolution and force us to liquidate our assets if the accumulated losses exceed two-thirds of our contributed capital during any fiscal year.

We expect to incur net losses through at least 2003

     Our cash flow from operations for the year 2002 was insufficient to cover our fixed charges. Even with the consummation of the exchange offer and the private equity investment, we expect to continue to incur net losses through at least 2003.

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 2003 of U.S. $11.8 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 will be restricted by the terms of the indenture governing 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.

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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 resigned. We appointed new officers to all these positions during 2001 and 2002.

     However, between January and April 2003, our then chief executive officer, chief marketing officer, chief commercial operations officer and vice president of corporate communications and public relations also resigned. We have since appointed a new chief executive officer who was our former chief operating officer. As part of our cost-reduction efforts and more efficient operations, we have initiated a search for a single executive to head both the marketing and commercial operations areas, and have eliminated the office of vice presidency of corporate communications and public relations.

     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. Our interconnection agreement with Telmex expired on September 15, 2002. However, due to a “continuous application” clause this agreement is still under full force and effect. We are currently negotiating with Telmex a new interconnection agreement. Telmex has requested substantial changes to existing terms and conditions, such as the allowed percentage of imbalance of traffic for the “bill and keep” procedure and the interconnection rate. We cannot assure you that we will be able to obtain the services we require from Telmex on new terms and conditions that permit us to offer services at profitable and competitive rates.

Our high leverage could affect our ability to service our debt

     We are highly leveraged. In 2002, our earnings were insufficient to cover fixed charges by an amount equal to Ps.725.8 million (U.S.$69.6 million), even though we do not have to make any interest payments on most of our financial indebtedness until September 1, 2006 due to our April 2002 debt restructuring.

     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 new notes issued pursuant to the exchange offer 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.

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     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
	•		our ability to compete in our markets.

We are and will be subject to restrictive covenants

     The terms of the new notes, impose significant operating and financial restrictions. These restrictions will 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 a change of control offer

     We will be required to offer to repurchase all of the new notes if a change of control, as such term is defined in the indenture governing the new notes, occurs. However, it is possible that we will not have sufficient funds at the time of the change of control 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

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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.

     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 the international settlement rate system. 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.

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     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.

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 2002, we churned 36,047 lines, of which 28,951 lines were voice lines (residential and business customer lines) and 7,096 were wholesale lines. This resulted in an average monthly churn rate of 2.7% for voice lines. 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 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 could face increased competition if the Mexican government grants more concessions 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.

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 could grant concessions covering the same geographic regions and frequency 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, 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

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certain buildout obligations in certain towns and cities along the Mexico City—City of Querétaro corridor by September 2003. 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.43.3 million in performance bonds that we previously issued to the 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.

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. In 2002, we incurred approximately Ps.3.0 million in expenses for the prevention and detection of fraud.

     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 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.

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     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. We cannot predict the impact that this new political landscape will have on the Mexican economy, particularly on the growth and deregulation of the telecommunications industry.

     In the past, Mexico has experienced economic crises, 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.

     Crises 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 Sales and Use 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.

     The operation of telecommunications systems in Mexico is subject to laws and regulations administered by the Mexican Ministry of Communications and Transportation (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 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.

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dollar. In 2002, the peso devalued 13.91% relative to the U.S. dollar. In the first three months of 2003, the peso devalued 3.36% relative to the U.S. dollar.

     We do not currently have, nor do we expect to have, hedging arrangements with respect to this risk because we do not believe them to be cost effective for us. 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 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 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 interim financial statements in accordance with Mexican GAAP and only our annual financial statements 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 22 to the consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us.

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 N2 preferred stock, 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 and the old 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.

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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 18.6%, 12.3%, 9.0%, 4.4% and 5.7% in 1998, 1999, 2000, 2001 and 2002, 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 24.8%, 21.4%, 15.2%, 11.3% and 7.2% for 1998, 1999, 2000, 2001 and 2002, 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 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.

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     We commenced commercial operations on May 1, 1999. We are currently offering local, long distance and data services in Mexico City and the cities of Puebla and Querétaro.

     For the three years ended December 31, 2002, we invested approximately Ps.1,593.3 million in capital expenditures, primarily for the buildout of our infrastructure.

     For 2003, we plan to invest approximately U.S.$11.8 million in capital expenditures, mainly to continue to build out our network. Of this amount, we had already spent approximately Ps.32.5 million (approximately U.S. $3.0 million) by March 31, 2003.

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 and other value-added services to targeted 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, and certain other cities where we are planning to operate in accordance with our nationwide concession, 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. 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, 2002, we had in service three state-of-the-art Lucent Technologies 5ESS switches.

     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 Mexico City 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 full service telecommunications provider for our customers. In addition to our existing local, long distance and data services, we offer value-added products such as broadband (ADSL), high-speed dedicated and dial-up Internet access. 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.

     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

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•

state-of-the-art call center equipped with a 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 14.6 telephone lines per 100 inhabitants as of December 31, 2002 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. 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.

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 generally from 1,500 to 6,000 lines.

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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 2002 our number of lines in service grew by 48.4% and where we installed almost 28% of new net additions in the whole state of Puebla according to COFETEL.

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 start providing service to the cities of San Luis Potosi during 2003; Veracruz and Toluca by 2004; León, Guadalajara and Tehuacan by 2005 and Oaxaca and Aguascalientes by 2006. 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 2002, Mexico City had a population of approximately 18.6 million people, according to the Mexican National Population Council (Consejo Nacional de Población). Although the Federal District, which covers most of Mexico City, has the highest teledensity rate in Mexico at approximately 37.3% telephone lines per 100 inhabitants as of December 2002, we believe that significant unmet demand for high-quality local telephony services in Mexico City remains. As of December 31, 2002, we had 69,795 lines in service in Mexico City.

     We commenced commercial operations in the City of Puebla in May 1999. Puebla is the fourth largest city in Mexico, with a population of approximately 1.4 million people as of December 31, 2002. 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 and to 9.5% in 2002. As of December 31, 2002, we had 53,362 lines in service, as compared to 36,108 lines in service as of December 31, 2001. According to COFETEL, these new lines represented 28% of all the new lines installed in the whole state of Puebla during this period.

     We also commenced commercial operations in the City of Querétaro in November 2002. Querétaro is the fourteenth largest city in Mexico, with a population of approximately 687,000 people as of December 31, 2002. In our first two months of operations, we had 2,074 lines in service, representing 10.8% of all new lines installed in the City of Querétaro during this period according to COFETEL.

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, 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 generally 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 and data services, such as ADSL 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, 2002, 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 Potosí, Aguascalientes, León, Irapuato, Guadalajara, Celaya, Querétaro, México and Toluca) and six optical regenerators. We are currently installing Digital Wavelength Division Multiplexing (also known as DWDM) equipment, with a maximum capacity of 32 Lambdas, each with 2.5 Gbps capacity. We are installing 3 Lambdas that we expect will be operational by July 2003. We have the capability with this link to transmit synchrony links, LAN network links, long distance links and dedicated links. We have also installed a Lucent Technologies 5ESS digital switch in Mexico City and the cities of Puebla and Querétaro 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 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 Querétaro 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.

     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

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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 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 Querétaro. 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 1 and 3 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 Querétaro, to assure the proper signaling in our interconnection with all other carriers.

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 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

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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.

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.

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	•		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.
	•		Speedy Max (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.
	•		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.

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•

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.

     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.

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, 2002, we employed 22 internal salespeople and 182 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.

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     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. 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. Our hours of operation are 8:00 a.m. to 8:00 p.m. on Mondays through Fridays and 9:00 a.m. to 6:00 p.m. on Saturdays.
	•		walk-in center. We have two walk-in centers in Mexico City, two 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 with their credit cards at the branches of three of the largest Mexican banks or at our main office located in Santa Fe, Mexico City or at our walk-in centers located in the City of Puebla. We also assist our customers with new service requests and product information at our walk-in centers.

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 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/Arbor billing platform interfaced with our customer service system.

     We perform six 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

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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 call the customer and leave a reminder message on its phone. If the bill remains unpaid for five additional days, we restrict service to 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 in-bound traffic but only in order to contact our customer, negotiate and collect the payment. After 30 days past-due, unpaid and uncollected receivables are assigned to collection agencies. If no payment is received after ninety days, we disconnect the line. If the bill remains unpaid past such period, we assign the receivables to another collection or legal agency.

     For customers with more than six lines we use the same process to the one described above, except that we do not assign unpaid bills to collecting agencies. Instead, we use a personalized approach where we try to negotiate payment terms before imposing any restriction, suspension or disconnection of the link. 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 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. As part of our cost reduction measures, we do not plan to invest additional resources to upgrade our CRM program during 2003.

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 market. Although we provide long distance service, we position such service as an integrated value-added service for our local telephony customers. As a result, 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.

     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.

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.

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     Avantel, in which MCI WorldCom Inc. is a shareholder, was awarded a long distance service concession in 1996 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, 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 Bell Canada International is a shareholder, was awarded a nationwide local telephony and long distance concession in June 1996, and fixed wireless local loop frequencies in the 3.4 to 3.7 GHz band in May 1998. 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 León during 2001. 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.

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

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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), which we refer to as the “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.

     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., in which AT&T Corp. is a shareholder;
	•		Avantel, S.A. de C.V., in which MCI WorldCom Inc. is a shareholder;

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	•		Axtel, S.A. de C.V., in which Bell Canada International is a shareholder; and
	•		Iusatel, S.A. de C.V., in which Verizon and Vodafone are indirect shareholders.

     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 2000, Mexico had an estimated population of 97.3 million and a population growth rate of approximately 1.3% for the period from 1995 to 2000. In 2002, 32.2% of the population was under the age of 15, 62.9% between the ages of 15 and 65 and only 4.9% was over 65. 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%.

     Underserved telephony market. In 1999, The World Bank ranked Mexico as the 12th largest economy in the world. However, in terms of wireline penetration, Mexico was ranked 69th in the world. This relatively low level of wireline penetration evidences substantial unmet demand for fixed telephony service. The following table presents telephone wirelines in service per 100 inhabitants for the United States and selected Latin American countries as of December 31, 2002.

Selected Teledensity Rates

     According to Pyramid Research, the wireline local telephony market represents approximately 35% of Mexico’s total telecommunications market, when measured by revenues, and generated approximately U.S.$6.7 billion of revenue in 2002.

     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 2002 and 2007 fixed line penetration in service in Mexico is expected to increase by 14.7%.

     According to Pyramid Research, local and domestic long distance services revenues are expected to experience 7.6%, and 2.1% average annual growth rates between 2002 and 2007, respectively. In contrast, internal long distance services revenues are expected to experience a 0.2% average annual decrease over the same period.

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     Total local wireline telephony revenues in Mexico are expected to increase from U.S.$6.7 billion in 2002 to U.S.$9.2 billion in 2007. In contrast, international long distance services revenues are expected to experience a 0.2% average annual decrease over the same period. This growth is expected to result from an increase in the number of lines in service combined with the growth in the average usage per line. Despite the expected reduction in international long distance revenues, it is expected that local usage revenues will drive total market growth.

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 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;

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	•		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 enacted a law effective January 1, 2002, that expanded the scope of the sales and use tax to include additional services, including 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.

     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 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;

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•

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

	•		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.

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 Federal Antitrust Commission (Comisión Federal de Competencia) to have substantial

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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;
	•		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 Mexico City—City of Querétaro corridor by September 2003. We are in the process of preparing a request for a modification to the buildout requirement of the concession from COFETEL. If granted, this

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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.13.1 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.”

     As of January 1, 2003, the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps.87,300 to Ps.4.4 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;
	•		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 Mexico City—City of Querétaro corridor by September 2003. We are in the process of preparing a request for a modification to the buildout requirement of the concession from COFETEL. If granted, this

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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.13.4 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, 2003, the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps.87,300 to Ps.4.4 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.

     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 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.12.2 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, 2003, the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps.87,300 to Ps.4.4 million, depending on the nature of the infraction. In the case of multiple recurring infractions, these fines may be doubled.

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     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.

     We, together with 14 other concessionaires, have been 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.

     We cannot assure you that COFETEL will grant our request. 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.4.5 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, 2003 the level of fines, which are based on a multiple of the Mexican minimum daily salary, ranged from Ps.87,300 to Ps.4.4 million, depending on the nature of the infraction. In the case of multiple recurring infractions, these fines may be doubled.

     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 and Ps.0.0990 per minute for the months of December 2000, 2001 and 2002, 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.

     Under the “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 70%, then no interconnection fee amounts are payable by the net user of interconnection services. If the imbalance exceeds 70% in any given month, the “bill and keep” feature will not apply for that month.

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     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 local concessions granted to Alestra and Avantel it defines it to mean that at least 50% of the customers are residential.

     Our interconnection agreement with Telmex expired on September 15, 2002. However, due to a “continuous application” clause this agreement is still under full force and effect. We are currently negotiating with Telmex a new interconnection agreement. Telmex has requested substantial changes to existing terms and conditions, such as the allowed percentage of imbalance of traffic for the “bill and keep” procedure and the interconnection rate. We cannot assure you that we will be able to obtain the services we require from Telmex on new terms and conditions that permit us to offer services at profitable and competitive rates.

     Through December 31, 2002, 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., (“Pegaso”). Telcel and Pegaso are the first and second largest mobile telephony service providers in Mexico, respectively. Telcel and Pegaso are nationwide cellular operators. Iusacell provides cellular mobile services in seven of the nine regions covering central Mexico. Unefon is a nationwide PCS mobile operators.

     The mobile to wireline interconnection fees with these carriers were Ps.0.3220, Ps.0.1159 and Ps.0.0990 per minute for the months of December 2000, 2001 and 2002, respectively. The wireline to mobile interconnection fees under the “calling party pays” mode was Ps.1.90 per minute for December 2000, 2001 and 2002. 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 and Ps.0.0304 for the month of December 2002.

     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.”

     As a company that provides local service, we have requested interconnection from all long distance carriers. To date, only Telmex, Alestra S. de R.L. de C.V. (“Alestra”), Bestel, S.A. de C.V., Operadora Protel, S.A. de C.V. and Iusatel, S.A. de C.V., the long distance subsidiary of Grupo Iusacell, have agreed to provide interconnection. We have filed a complaint with COFETEL against four other long distance carriers who have refused to provide interconnection. It is unclear when COFETEL will rule in this issue.

     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 only two subsidiaries, Corporativo en Telecomunicaciones, S.A. de C.V. and Maxcom Servicios Administrativos, S.A. de C.V., each a Mexican limited liability company (sociedad anónima de capital

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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 the other subsidiary. This organizational structure is due to the fact that Mexican law requires that limited liability companies have a minimum of two stockholders.

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.

     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 115,110 square feet.

     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 lease obligation 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 will be 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.

     Our offices in the City of Querétaro are leased for a 15-year renewable term that expires on August 1, 2017. These offices in Querétaro are comprised of 13,186 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 12,015 square feet and holds one of our other Lucent Technologies 5ESS switch.

     We have a 96,900-square-foot industrial warehouse in Mexico City leased for a 2-year term that expires on July 31, 2003. We do not plan to renew this lease, and we are looking for a smaller warehouse. In addition, we lease approximately 131 other sites that are used as hosts or single-site buildings and are located throughout Mexico City and the cities of Puebla. 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, 2002 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, 2002. 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, 2002, which was Ps.10.43 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, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 and related notes.

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     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 22 to our consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us. Note 22 to our financial statements also provides a reconciliation to U.S. GAAP of our net losses for the years ended December 31, 2000, 2001 and 2002 and of stockholders’ equity as of December 31, 2000, 2001 and 2002.

     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, 2002), 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, 2002. 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 2000, 2001 and 2002, the rates of inflation in Mexico, as measured by changes in the Mexican national consumer price index, were 9.0%, 4.4% and 5.7%, 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 March 18, 2003, our board of directors elected Mr. René S. Sagastuy as our new chief executive officer. Mr. Sagastuy was our Chief Operating Officer for the past two years and replaced Mr. Fulvio del Valle who served as our chief executive officer for the same period of time. See “Item 3. Key Information—D. Risk Factors—We have experienced significant turnover in our executive ranks which has affected our ability to develop and execute our business strategies,” for a description of risks associated with our significant turnover at the executive level. For more information with respect to our management please see “Item 6. Director, Senior Management and Employer—A. Directors and Senior Management.”

Debt restructuring and recapitalization

     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 13 3/4% series B senior notes due 2007 (which we refer to in this annual report as the “old notes”) in exchange for an aggregate of (i) U.S.$165,078,150 in principal amount of new senior notes (which we refer to in this annual report as the “new notes”) bearing 0% interest through March 1, 2006, and 10% annual interest in the last year, and (ii) 26,459,820 series N2 convertible preferred stock, with an initial liquidation preference of U.S.$0.4927 per share and limited voting rights, in the form of Mexican Trust Certificates known as “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 stock (more fully described in “Item 7. Major Shareholders and Related Party Transactions—A. Major

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			shareholders and share ownership—The capital restructuring”), which represented in the aggregate 77.0% of our then total capital stock;
	•		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 old notes we had purchased in the secondary market prior to the debt restructuring. In addition, on July 25, 2002, we completed an additional exchange of U.S.$4,000,000 in aggregate principal amount of old notes under the same terms and conditions of the exchange offer consummated on April 29, 2002. As of December 31, 2002, 95.8% of the total old notes were exchanged and or cancelled, and new notes on an aggregate principal amount of U.S.$167,623,590 remained outstanding. Old notes representing an aggregate principal amount of U.S.$11,590,000 remained outstanding as of the same date.

     As a result of the debt restructuring, we will save U.S.$38.1 million in interest expense on an annualized basis from the date of issuance of the new notes through February 28, 2006. From March 1, 2006 until March 1, 2007, which is the maturity date of the new notes, we will save U.S.$20.5 million in interest expense.

     In addition, as a result of the debt restructuring and in accordance with Mexican corporate law, we recognized a capital stock issuance premium in an aggregate amount of U.S.$82,548,690. This premium, as well as other items of the capital stock, was applied to partially offset prior year’s accumulated deficits in capital stock at year end 2002.

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.

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

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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.9.60 on December 31, 2000 to Ps.9.14 on December 31, 2001. However, in 2002, the peso devalued 13.9% relative to the U.S. dollar. In the first three months of 2003, the peso devalued 3.4% 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 and 2001, the inflation rate decreased to 12.3%, 9.0% and 4.4%, respectively. In 2002, the inflation rate was 5.7%.

     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 preoperating expenses

     We commenced commercial operations on May 1, 1999. As permitted under Mexican GAAP, during our preoperating stage, we capitalized all of our general and administrative expenses and our net integral cost of financing. Accordingly, our financial statements do not include consolidated statements of operations for the periods from February 28, 1996 (our date of incorporation) to April 30, 1999.

     Beginning on May 1, 1999, we were required to begin to amortize all previously capitalized pre-operating cost. These capitalized preoperating expenses, net, which amounted to Ps.266.4 million at December 31, 2000, Ps.234.5 million at December 31, 2001 and Ps.204.4 million at December 31, 2002, are amortized on a straight-line basis for a period not exceeding ten years.

Voice, data and wholesale revenues

     Beginning with the third quarter of 2002, we itemize voice, data and wholesale service revenues in our reporting.

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

	•		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;

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	•		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; and
	•		charges relating to value-added services such as voice mail, call waiting, call forwarding, three-way calling and caller identification.

     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 and digital private lines. We charge for these services on a bandwidth basis.

     Wholesale service revenues are related basically to the sale of bulk minutes where the tariff 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: