<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ---------------

                                   Form 20-F

                                ---------------

          [_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                       OR
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1998
                                       OR
            [_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                     for the transition period from      to
                         Commission File Number 1-12500

                                ---------------

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

          IUSACELL GROUP, INC.                 THE UNITED MEXICAN STATES
 (Translation of Registrant's name into    (Jurisdiction of incorporation or
                English)                             organization)

                                ---------------

                     Prolongacion Paseo de la Reforma 1236
                                Colonia Santa Fe
                             Delegacion Cuajimalpa
                           05348 Mexico, D.F., Mexico
                    (Address of principal executive offices)

                                ---------------

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

<TABLE>
<CAPTION>
                                                Name of each exchange
                 Title of each class             on which registered
                 -------------------           -----------------------
        <S>                                    <C>
        American Depositary Shares,            New York Stock Exchange
         each representing 10 Series D Shares
        Series D Shares                        New York Stock Exchange*
        American Depositary Shares,            New York Stock Exchange
         each representing 10 Series L Shares
        Series L Shares                        New York Stock Exchange*
</TABLE>
-------
* Not for trading, but only in connection with the registration of American
  Depositary Shares, pursuant to the requirements of the Securities and
  Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
                                      NONE

 Securities for which there is a reporting obligation pursuant to Section 15(d)
                                  of the Act:
                                      NONE

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:

<TABLE>
            <S>                     <C>
            Series A Capital Stock  891,753,409 Shares
            Series B Capital Stock    5,562,450 Shares
            Series D Capital Stock  186,904,725 Shares
            Series L Capital Stock  151,326,154 Shares
</TABLE>

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

                                 Yes  X  No

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

                            Item 17     Item 18  X

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<PAGE>


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
 <C>       <S>                                                            <C>
 PART I    .............................................................    4
  ITEM 1.  Description of Business......................................    4
  ITEM 2.  Description of Property......................................   30
  ITEM 3.  Legal Proceedings............................................   30
  ITEM 4.  Control of Registrant........................................   32
  ITEM 5.  Nature of Trading Market.....................................   34
           Exchange Control and Other Limitations Affecting Security-
  ITEM 6.  Holders......................................................   35
  ITEM 7.  Taxation.....................................................   37
  ITEM 8.  Selected Financial Data......................................   43
           Management's Discussion and Analysis of Financial Condition
  ITEM 9.  and Results of Operations....................................   48
  ITEM 9A. Market Risks.................................................   73
  ITEM 10. Directors and Officers of Registrant.........................   74
  ITEM 11. Compensation of Directors and Officers.......................   80
           Options to Purchase Securities from Registrant or
  ITEM 12. Subsidiaries.................................................   81
  ITEM 13. Interest of Management in Certain Transactions...............   81
 PART II   .............................................................   84
  ITEM 14. Description of Securities to be Registered...................   84
 PART III  .............................................................   84
  ITEM 15. Default Upon Senior Securities...............................   84
           Changes in Securities and Changes in Security for Registered
  ITEM 16. Securities...................................................   84
 PART IV   .............................................................   84
  ITEM 17. Financial Statements.........................................   84
  ITEM 18. Financial Statements.........................................   84
  ITEM 19. Financial Statements and Exhibits............................  F-1
</TABLE>

                                ---------------

In this annual report on Form 20-F, all references to "we," the "Company" or
"Iusacell" are to Grupo Iusacell, S.A. de C.V., a limited liability stock
company (sociedad anonima de capital variable) organized under the laws of
Mexico on October 6, 1992 and, depending on the context, its subsidiaries.

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, 1998 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
noon buying rate at December 31, 1998, which was Ps.9.901 per U.S. dollar.
These 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, could have been or could be converted into Dollars at those or any
other rates of exchange.

                                ---------------

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 Grupo Iusacell, S.A. de
C.V., Prolongacion Paseo de la Reforma 1236, Colonia Santa Fe, Delegacion
Cuajimalpa, 05348 Mexico, D.F., Mexico, Attention: Director, Investor
Relations. Telephone requests may be directed to 011-52-5-109-5759.


                                       1
<PAGE>

                      GLOSSARY OF TELECOMMUNICATIONS TERMS

<TABLE>
 <C>               <S>
 analog:           A transmission method employing a continuous electrical
                   signal that varies in amplitude or frequency in response to
                   changes in sound, light, position, etc., impressed on a
                   transducer in the sending device.

 band:             A range of frequencies between two defined limits.

 CDMA:             Code Division Multiple Access, a standard of digital
                   cellular technology which provides more call carrying
                   capacity than analog or TDMA.

 Cellular A-Band:  The range of frequencies used to provide cellular wireless
                   service between 825-835 MHz and between 870-880 MHz of the
                   radio spectrum.

 Cellular B-Band:  The range of frequencies used to provide cellular wireless
                   service between 835-845 MHz and between 880-890 MHz of the
                   radio spectrum

 channel:          A pathway for the transmission of information between a
                   sending point and a receiving point.

 COFETEL:          Comision Federal de Telecomunicaciones, the Mexican Federal
                   Telecommunications Commission.

 Covered POPs:     The number of POPs in a defined area for whom a cellular
                   signal is accessible.

 digital:          A method of storing, processing and transmitting information
                   through the use of distinct electronic or optical pulses
                   that represent the binary digits 0 and 1. Digital
                   transmission and switching technologies employ a sequence of
                   discrete, distinct pulses to represent information, as
                   opposed to the continuous analog signal.

 hertz:            The unit measuring the frequency with which an alternating
                   electromagnetic signal cycles through the zero-value state
                   between lowest and highest states. One hertz (abbreviated
                   Hz) equals one cycle per second. KHz (kilohertz) stands for
                   thousands of hertz; MHz (megahertz) stands for millions of
                   hertz and GHz (gigahertz) stands for billions of hertz.

 IMTS:             Improved mobile telephone service; IMTS systems are analog
                   mobile telephone systems that employ a single powerful radio
                   base station to communicate with IMTS mobile telephones that
                   are within approximately a 25-mile-wide radius.

 LATA:             Local Access and Transport Area; an area in which a local
                   exchange carrier is permitted to provide service as
                   designated by the 1982 United States federal court decree
                   resulting from antitrust litigation brought by the United
                   States Department of Justice against AT&T Corporation.

 PCS:              Personal Communications Services. PCS has come to represent
                   two things: first, a digital wireless communications service
                   operating over the 1.9 GHz band; and second, more
                   generically, a wireless communications service utilizing a
                   digital network that offers typical features such as voice,
                   video and data applications, short messaging, voicemail,
                   caller identification, call conferencing and call
                   forwarding. Generic PCS suppliers promote this service on
                   the ability of its features to be customized, or "bundled,"
                   to the needs of the individual customers.

 PCS A Band:       The range of frequencies used to provide PCS wireless
                   services between 1.850-1.865 GHz and between 1.930-1.945 GHz
                   of the radio spectrum.

 PCS B Band:       The range of frequencies used to provide PCS wireless
                   services between 1.870-1.885 GHz and between 1.950-1.965 GHz
                   of the radio spectrum.

 PCS D Band:       The range of frequencies used to provide PCS wireless
                   services between 1.865-1.870 GHz and between 1.945-1.950 GHz
                   of the radio spectrum.

 PCS E Band:       The range of frequencies used to provide PCS wireless
                   services between 1.885-1.890 GHz and between 1.965-1.970 GHz
                   of the radio spectrum.

 Penetration rate: A cellular operator's subscribers within a defined area
                   divided by total POPs within that area.

</TABLE>


                                       2
<PAGE>

<TABLE>
 <C>       <S>
 POPs:     The population for a particular area based on the 1990 Mexican
           census. Population figures for 1994, 1995, 1996, 1997 and 1998 have
           been calculated by applying the forecast annual population growth
           rate for 1992 and 1995, as published by the Instituto Nacional de
           Estadistica, Geografia e Informatica (the National Institute of
           Statistics, Geography and Data Processing, "INEGI") to the official
           1990 census figures. Where the population information is set forth
           without reference to a year, the information given is as of December
           31, 1998. The SCT divides Mexico into nine geographic regions for
           the provision of cellular service (individually a "Region" and
           collectively the "Regions"). Information regarding the numbers of
           POPs within a given region has been calculated using the national
           population growth rate, as published by INEGI. Information regarding
           the number of POPs within a given city has been calculated using the
           growth rate for that city, as published by INEGI, which may not be
           the same as the national growth rate published by INEGI. The number
           of POPs in any region or other geographic area should not be
           confused with the current number of users of wireless services in
           that region or other geographic area and is not indicative of the
           number of users of wireless services in the future.

 Region 1: Consists of the states of Baja California Norte and Baja California
           Sur and some municipalities in northwestern Sonora. Major cities in
           the region include Tijuana, Mexicali, Ensenada, Tecate and La Paz.

 Region 2: Consists of the states of Sonora and Sinaloa (except for some
           municipalities in northwestern Sonora). Major cities in the region
           include Hermosillo, Ciudad Obregon, Culiacan and Mazatlan.

 Region 3: Consists of the states of Chihuahua and Durango and the
           municipalities of Torreon, Francisco I. Madero, Matamoros, San Pedro
           and Viesca in the state of Coahuila. Major cities in the region
           include Ciudad Juarez, Chihuahua, Durango, Gomez Palacio and
           Torreon.

 Region 4: Consists of the states of Tamaulipas and Nuevo Leon and, with the
           exception of the municipalities of Torreon, Fransisco I. Madero,
           Matamoros, San Pedro and Viesca, the state of Coahuila. Major cities
           in the region include Monterrey, Saltillo, Ciudad Victoria, Tampico,
           Reynosa and Matamoros.

 Region 5: Consists of the states of Colima, Jalisco, Michoacan and Nayarit
           (except for twelve municipalities in the northeastern Jalisco).
           Major cities in the region include Guadalajara (population 1.8
           million), Mexico's second largest city, Morelia, Tepic, Colima and
           Manzanillo.

 Region 6: Consists of the states of Aguascalientes, Guanajuato, Queretaro, San
           Luis Potosi, Zacatecas and twelve municipalities in northeastern
           Jalisco. Major cities in the region include Leon, Queretaro, San
           Luis Potosi, Aguascalientes and Zacatecas.

 Region 7: Consists of the states of Guerrero, Oaxaca, Puebla, Tlaxcala and
           Veracruz. Major cities in the region include Puebla, Acapulco,
           Veracruz and Oaxaca.

 Region 8: Consists of the states of Yucatan, Quintana, Roo, Campeche, Chiapas
           and Tabasco. Major cities in the region include Merida, Cancun,
           Villahermosa, Campeche, Tuxtla Gutierrez and San Cristobal de las
           Casas.

 Region 9: Consists of the states of Mexico, Hidalgo and Morelos and the
           Federal District. Major cities in the region include Mexico City,
           one of the world's most populous cities, Toluca, Cuernavaca and
           Pachuca.

 roaming:  A service offered by mobile communications providers which allows a
           subscriber to use his or her telephone while in the service area of
           another carrier.

 SCT:      Secretaria de Comunicaciones y Transportes, the Mexican
           Telecommunications and Transportation Secretariat.

 switch:   A device that opens or closes circuits or selects the paths or
           circuits to be used for transmission of information. Switching is
           the process of interconnecting circuits to form a transmission path
           between users.

 TDMA:     Time Division Multiple Access, a standard of digital cellular
           technology, which provides more call carrying capacity than analog,
           but less than CDMA.
</TABLE>

                                       3
<PAGE>

                                     PART I

ITEM 1. Description of Business

Company Overview

Grupo Iusacell, S.A. de C.V., or Iusacell, together with its subsidiaries, is
the second largest wireless telecommunications provider in Mexico, owning and
operating the Cellular A-Band concessions in four contiguous regions in central
Mexico. These regions include Mexico City, one of the world's most populous
cities, and the cities of Guadalajara, Puebla, Veracruz, Leon, Acapulco and San
Luis Potosi, and combined represent approximately 67 million POPs or 69% of
Mexico's population. In May 1998, Iusacell won auctions for concessions for a
range of frequencies in the 1.9 GHz PCS E-Band in two regions in northern
Mexico to provide wireless PCS services. These new regions include the cities
of Monterrey and Tijuana, and combined represent approximately 11 million POPs
or 11% of Mexico's population. Iusacell expects to launch wireless services in
Region 4 in the first quarter of 2000 subject to obtaining financing.

Iusacell and its subsidiaries had a total of 755,375 cellular subscribers at
December 31, 1998, and an average monthly cellular revenue per subscriber
during the year ended December 31, 1998 of Ps.361 (approximately U.S.$36). In
May 1998, Iusacell launched digital service using CDMA technology in the 800
MHz frequency band in the Mexico City area and extended this service to other
cities in each of its other cellular regions in October 1998. The CDMA roll-out
should be completed and digital service should be available to all contract
subscribers in the third quarter of 1999. In addition to its core cellular
services, Iusacell also provides a wide range of other telecommunications
services including long distance, paging, local telephony and data
transmission. See "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "--Cellular Services" and "--Other
Services."

Since 1993, Bell Atlantic has invested approximately U.S.$1.2 billion for its
approximate 47.2% economic interest and 50.1% voting interest in Iusacell and
has become increasingly involved in its management and operations. From late
1993 through February 1997, Bell Atlantic participated substantially in the
financial and technological operations of Iusacell. In February 1997, Bell
Atlantic assumed control of the Board of Directors and management of Iusacell.
Today, Bell Atlantic personnel seconded to Iusacell and Bell Atlantic
consultants are integrally involved in managing the day-to-day operations and
defining and implementing the long-term strategy of Iusacell. In particular,
Bell Atlantic seconded employees are now directing Iusacell's network and
financial operations.

The management team at Iusacell is able to draw extensively upon Bell
Atlantic's expertise in the development and implementation of Iusacell's
operating strategy. Iusacell's Chief Executive Officer is also President of
Bell Atlantic's international wireless operations and has significant
experience with Bell Atlantic's wireless operations in the United States.
Iusacell's Chief Financial Officer has 15 years of executive telecommunications
experience with Bell Atlantic, and Iusacell's Chief Technology Officer has 29
years of experience with Bell Atlantic.

In June 1997, Iusacell appointed as its Director General a Mexican citizen with
extensive experience in multinational operations, who immediately prior to
joining Iusacell had been the managing director of the Mexican cellular company
which operates the Cellular A-Band concessions in two contiguous northern
regions. Iusacell's Chief Operating Officer, who was appointed in February
1999, also has an extensive background in multinational operations, with more
than five years of sales, marketing and operational experience in wireless
communications. In April 1999, Iusacell appointed as its Chief Financial
Officer Designate a telecommunications industry veteran with more than 15 years
of experience with BellSouth Corporation and Nextel International, Inc.,
including seven years of experience in the Latin American wireless industry.

The management team is supported by an experienced group of Mexican executives
and other personnel from Bell Atlantic.

Bell Atlantic Relationship

Bell Atlantic is one of the largest telecommunications companies in the world,
with extensive participation in and knowledge of the wireless
telecommunications business. In August 1997, Bell Atlantic and NYNEX
Corporation, two of the original seven Regional Bell Operating Companies formed
as a result of the break-up of AT&T in 1984, completed their merger to form the
new Bell Atlantic. Bell Atlantic now provides local exchange telephone service
in 12 states and the District of Columbia in a region in the northeastern
United States stretching from Maine to Virginia that encompasses 63 million
people and 22 million households, utilizing more than 40 million access lines
and employing more than 140,000 people.


                                       4
<PAGE>

Bell Atlantic is also one of the world's largest wireless telecommunications
companies, with more than 7 million attributable customers in its cellular and
PCS operations in 24 states in the United States and in its six international
wireless investments in Latin America, Europe and the Pacific Rim. In its
wireless markets, Bell Atlantic has emphasized the delivery of high-quality
customer service through customer service centers, call centers and an
extensive distribution system. Bell Atlantic had operating revenues and net
income of approximately U.S.$31.6 billion and U.S.$2.9 billion, respectively,
for the fiscal year ended December 31, 1998 and total assets of approximately
U.S.$55.1 billion at such date.

On July 27, 1998, Bell Atlantic and GTE Corporation entered into a definitive
agreement providing for a merger of equals transaction in which GTE
shareholders will receive 1.22 shares of Bell Atlantic common stock for each
GTE share they own. GTE is one of the world's largest telecommunications
companies, providing landline and wireless telephone, advanced internet,
information, and paging services and systems. The combined Bell Atlantic/GTE
entity will have a presence in over 30 countries and the customers in their
service territories currently account for more than 30% of the world's
international telecommunications traffic. Consummation of the Bell Atlantic/GTE
merger depends on a number of conditions, including approvals by the United
States Federal Communications Commission and various other regulatory
authorities.

Bell Atlantic and GTE are reporting companies under the Exchange Act. Reports
and information filed by Bell Atlantic and GTE with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Office at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained by mail
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.

Competitive Strengths

Large Subscriber Base

Iusacell has built a base of 755,375 cellular subscribers at December 31, 1998,
including both contract and prepay subscribers. Approximately 36.7% of that
cellular subscriber base consists of customers who purchase cellular services
pursuant to fixed term contracts with Iusacell. Iusacell believes that these
customers seek the convenience of uninterrupted mobile cellular service and
access to high quality customer service and are willing to pay a monthly fee
for the choice of value-added services such as call waiting, emergency service
(*911), short messaging service and caller identification. Customers who
purchase cellular services in advance through prepay calling cards represent
the remaining 63.3% of Iusacell's cellular customers at December 31, 1998.
Prepay subscribers are attractive to Iusacell because of their higher average
per minute airtime charges, lower acquisition costs and the absence of billing
costs, credit concerns and collection risk. Iusacell's large customer base
allows it to cross-sell its services to its existing cellular customers through
a "one-stop-shopping" approach.

Bell Atlantic Wireless Expertise and Support

In February 1997, Iusacell began the implementation of a broad strategic and
operating plan modeled upon Bell Atlantic's wireless success in the United
States and Europe. Bell Atlantic is one of the largest cellular operators in
the United States, serving more than 6.0 million subscribers along the East
Coast and in the Southwest. Bell Atlantic also has substantial investments in
other wireless telecommunications companies, including PrimeCo Personal
Communications L.P. in the United States, Omnitel Pronto Italia S.p.A. in
Italy, EuroTel Praha s.r.o. in the Czech Republic, EuroTel Bratislava a.s. in
the Slovak Republic, STET Hellas Telecommunications S.A. in Greece and P.T.
Excelcomindo Pratama in Indonesia. Iusacell believes that Bell Atlantic's
extensive experience in the development and implementation of marketing
programs designed to promote substantial subscriber growth provides Iusacell
with a significant competitive advantage in the Mexican cellular market.

Iusacell Brand Name

Iusacell believes that its call quality and customer care contribute to its
strong, favorable brand awareness. In order to maximize brand equity,
management has consolidated its brand names under the single, well-recognized
IUSACELL Digital brand name. Iusacell's ten years of operation give it
significant advantages over new entrants to the wireless market offering
similar services.


                                       5
<PAGE>

State-of-the-Art Technology Platform

Iusacell has an existing integrated network infrastructure that serves as the
backbone for its core cellular business and provides a platform for bundled
product offerings, such as long distance, paging and other telecommunications
services. With the benefit of Bell Atlantic's expertise, Iusacell has invested
in digital switching systems, dedicated microwave links, cell sites and other
network infrastructure. As of December 31, 1998, Iusacell had a network of
seven cellular switches, 341 cell sites and 53 repeaters, which covered
approximately 79% of Iusacell's total POPs. In December 1997, Iusacell signed
an agreement with subsidiaries of Lucent Technologies for the replacement of
Iusacell's existing analog network with Lucent Technologies analog and CDMA
digital network equipment. This replacement began in February 1998 and is
expected to be completed by the third quarter of 1999.

Experienced Management Team

The six senior members of the current management team appointed by Bell
Atlantic have an aggregate of approximately 80 years of experience in the
telecommunications industry. Individually, Iusacell's operating managers have
established track records of producing subscriber growth, penetrating new
markets and developing new telecommunications product offerings. Iusacell's
management team is complemented by experienced Mexican and Bell Atlantic
telecommunications executives and consultants.

Business Strategy

Iusacell's management team is implementing a comprehensive operating and
strategic plan primarily focused on increasing Iusacell's subscriber base,
subscriber usage, revenues and profitability in its core wireless businesses.
This strategic plan incorporates the following key elements:

Nationwide Digital Coverage

A fundamental strategy is to provide digital coverage throughout all of the
regions where Iusacell operates. Digital coverage allows Iusacell to provide a
higher-quality signal and a greater variety of value-added services, such as
caller identification and short messaging. In February 1998, Iusacell began
replacing its existing analog network with Lucent Technologies analog network
equipment and an overlay of Lucent Technologies CDMA network equipment. This
new network has several times the capacity of the existing analog network and
has superior switching and transmission capabilities; these features allow for
lower capital expenditures per subscriber and reduced network operating costs.
In addition, the new network will position Iusacell to compete with new digital
competitors in PCS. This replacement is expected to be completed in the third
quarter of 1999. In addition, Iusacell installed 57 new cell sites and 21 new
repeaters in 1997, 71 new cell sites and 5 new repeaters in 1998 and 1 new cell
site in the first quarter of 1999.

In May 1998, Iusacell won auctions for 1.9 GHz (PCS) concessions in two regions
in northern Mexico. Iusacell expects to launch service in Region 4 in the first
quarter of 2000 subject to obtaining financing. These new PCS concessions,
together with the cellular concessions that Iusacell owns and operates in four
contiguous regions in central Mexico, would allow Iusacell to provide service
to regions encompassing approximately 79 million POPs, or 81% of Mexico's
population.

In order to take advantage of the benefits of its new digital network capacity,
Iusacell expects to stop providing analog handsets to contract customers and to
accelerate its efforts to migrate existing analog contract customers to digital
service. At December 31, 1998, Iusacell had approximately 27,000 digital
contract customers and expects to have more than 80,000 digital contract
customers by the end of June 1999. Iusacell's digital contract customers in the
aggregate currently generate approximately 18% of total Iusacell cellular
traffic.

Enhanced and Improved Distribution Channels; Customer Service

Iusacell has improved the distribution of its products based upon the Bell
Atlantic model which emphasizes consistent, standardized merchandising through
a well-balanced mix of company-owned stores and independent distributors
conveniently located throughout its operating regions. Iusacell is also
developing more solid and longer-term relationships with its distributors in an
effort to prevent their change in affiliation to Telcel or any of the new
entrants.

At December 31, 1997, Iusacell had 918 points of distribution. This number
increased to 2,820 by December 31, 1998. Iusacell opened or remodeled 17 new
customer sales and service centers in 1997 and 22 in 1998, bringing the total
number of customer sales and service centers owned and operated by Iusacell at
December 31, 1998 to 96. Thirty-two of these stores present Iusacell's new
store image, an environment which emphasizes retail merchandizing rather than
transaction processing.

                                       6
<PAGE>

Iusacell's marketing strategy emphasizes proactive and timely customer service.
Iusacell utilizes welcome packages, customer satisfaction calls, Executive Blue
Chip programs for corporate customers and customized billing to communicate its
commitment to its customers. Iusacell's customer service centers offer "one-
stop-shopping" for cellular, long distance, paging and data transmission
services as a convenience to its customers. In addition, in 1998, Iusacell
opened two call centers that will provide more automated and efficient service
to customers through the use of state-of-the-art software and rigorous customer
service training. By the end of 1998, these call centers consolidated the work
previously done in six call centers.

In March 1999, Iusacell completed the installation of a new prepay operating
system in its four regions. The prepay operating system has improved customer
satisfaction through automated card activation and account information and by
providing voice messaging and other value-added services. It has also lowered
both the cost of support for prepay services and prepay turnover and
facilitated per subscriber usage.

Customer Segmentation and Sales Force Incentives

Iusacell continues to introduce product and pricing packages targeted both at
high-usage contract customers, who favor value-added products, and at low-usage
prepay customers. Iusacell considers its contract customers to be particularly
receptive to bundled product offerings that include long distance, paging, and
other telecommunications services. Iusacell's prepay customers seek service
without a fixed financial commitment. Iusacell recently launched several
marketing initiatives focused on increasing usage among pre-pay customers. In
addition, with the digitalization of its network, Iusacell is considering
marketing its cellular services to customers for use in a limited geographic
zone. In 1997 and 1998, Iusacell's sales force compensation plan was redesigned
to be largely performance based. This compensation plan rewards the sales force
for product bundling and selling value-added products as well as the migrating
of analog contract customers to digital service and qualified prepay customers
to contract plans.

Unified Branding

In 1997, Iusacell launched its newly-designed brand logo and product packages
with a new advertising campaign targeted at higher usage customers. For the
first time, all product offerings were marketed under the single, well-
recognized IUSACELL brand name in order to increase brand awareness and
customer loyalty. In anticipation of the digitalization of Iusacell's network
and product offerings, in February 1998 the IUSACELL brand name was
reinaugurated as IUSACELL Digital.

Local Telephony Service Offerings

Iusacell has historically provided local telephony in Mexico on a limited basis
through a mobile nationwide IMTS radiotelephony network and through both rural
and public cellular based telephony programs. Iusacell also had approximately
16,192 customers at December 31, 1998 who participate in a trial of local
wireless service, which it began in 1994. Iusacell plans to pursue alternatives
for the provision of local telephony on a larger scale, such as limited zone
product offerings in the 800 MHz frequency band in Regions 5, 6, 7 and 9 and in
the 1.9 GHz (PCS) frequency band in Regions 1 and 4 using digital technology
that permits mobility or fixed product offerings in such bands. See "Item--9
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Local Telephony in the 450 MHz Frequency Band" and "--Other
Services--Local Telephony."

The Telecommunications Industry in Mexico

Market Liberalization

The Mexican government initiated its efforts to liberalize the
telecommunications industry in 1989, dividing Mexico into nine geographic
regions for the provision of cellular service. In order to provide an
alternative for cellular customers, two concessions were granted in each
region, one to Radiomovil Dipsa, S.A. de C.V., commonly known as Telcel, the
cellular subsidiary of Telefonos de Mexico, S.A. de C.V., the former state
telephone monopoly commonly known as Telmex, and the other to an independent
operator. In addition, Telmex was required to interconnect all cellular
operators to its network in an effort to facilitate competition.

In December 1990, the Mexican government initiated the privatization of Telmex,
then the sole provider of landline local, long distance and Cellular B-Band
cellular services, when it sold 20.4% of the equity and 50.1% of the voting
power in Telmex to a private consortium for U.S.$1.76 billion. The winning
consortium consisted of Grupo Carso, S.A. de C.V., a Mexican conglomerate which
owns or otherwise controls a majority of the consortium's voting interest, SBC

                                       7
<PAGE>

Communications Inc. and France Telecom S.A. Subsequent to the original
privatization, the Mexican government further reduced its holdings in Telmex
through additional transactions and has substantially completed the
privatization process.

Telcel holds the "B" Band cellular concession in each of the nine cellular
regions and is Mexico's largest cellular operator. The "A" Band concession
holders and the regions in which they serve are:

  .  subsidiaries of Iusacell in Regions 5, 6, 7 and 9,

  .  Baja Celular, S.A. de C.V. in Region 1,

  .  Movitel del Noroeste, S.A. de C.V. in Region 2,

  .  Telefonia Celular de Norte, S.A. de C.V. in Region 3,

  .  Celular de Telefonia, S.A. de C.V. in Region 4, and

  .  Portatel del Sureste, S.A. de C.V. in Region 8.

Motorola, Inc. is a controlling or significant shareholder in the
aforementioned five non-Iusacell concession holders. Telcel is the sole
cellular competitor for each "A" Band cellular company.

In connection with the privatization of Telmex in 1990, the Mexican government
granted Telmex a concession to provide public domestic and international long
distance telephone service with an exclusivity period of six years. In August
1996, the exclusivity period expired, and competition with proprietary
infrastructure commenced in January 1997. A presubscription balloting process
has been conducted in Mexico's 150 largest cities, covering 85% of Mexico's
total POPs, to enable customers to choose a long distance provider.

The SCT has granted 17 long distance concessions, including that held by
Iusacell. Services are currently being provided under only eight of these
concessions. Long distance concessionaires include, among others:

  .  Alestra S. de R.L., in which AT&T corporation is a shareholder,

  .  Avantel, S.A. de C.V., in which MCI Worldcom Inc. is a shareholder,

  .  Telinor, S.A. de C.V. (Axtel), in which The Bell Telephone Company of
     Canada, commonly known as Bell Canada, is a shareholder, and

  .  Iusatel, S.A. de C.V., a subsidiary of Iusacell.

Each concession has a nationwide scope and a thirty-year term. Concession
holders are authorized to offer domestic, international and value-added
services, including voice and data transmission services.

The Mexican government has also initiated the liberalization process for
competition in local telephony service. Accordingly, the SCT has already
granted three concessions for wireline local telephone service.

In May 1998, the COFETEL-organized auctions for spectrum in the 450 MHz, 1.9
GHz (PCS) and 3.4-3.7 GHz (Wireless Local Loop) frequency bands for local
wireless service concluded. Four companies won nationwide concessions in the
Wireless Local Loop frequencies:

  .  Telmex,

  .  Axtel,

  .  Midicel, S.A. de C.V. (Midicel), and

  .  Servicios Profesionales de Comunicacion, S.A. de C.V. (Unefon), a TV
     Azteca, S.A. de C.V. subsidiary and Elektra, S.A. de C.V. affiliate.

Three companies won nationwide concessions in the 1.9 GHz (PCS) frequencies.
Unefon won the 30 MHz PCS A Band auction on a nationwide level. Pegaso
Comunicaciones y Sistemas, S.A. de C.V. (Pegaso), a consortium of Leap
Communications International, Inc., Televisa, S.A. de C.V. and an affiliate of
Televisa, won a mix of 30 MHz PCS B

                                       8
<PAGE>

Band and 10 MHz PCS E Band concessions across all nine regions. Telcel won the
10 MHz PCS D Band auction on a nationwide level. Grupo Hermes, S.A. de C.V. and
Midicel won auctions for seven of the remaining nine PCS B Band and PCS E Band
properties.

Formal concessions for Wireless Local Loop and PCS frequencies were issued in
late 1998 to all auction winners, except Unefon and Midicel, which received
extensions to May 15, 1999 to pay accrued interest and to June 15, 1999 to pay
the balance of their concession fees. Midicel did not meet its interest payment
requirements in May 1999 and forfeited its Wireless Local Loop and PCS licenses
and approximately U.S.$50 million in deposits, letters of credit and surety
bonds. Unefon did meet its May 1999 and June 1999 payment requirements.

Each concession has a twenty-year term and authorizes the provision of mobile
and fixed wireless service and other value-added services.

Underserved Telephony Market

Iusacell believes that there is substantial unmet demand for telephone service
in Mexico as demonstrated by the relatively low level of wireline and cellular
penetration and the long customer wait for landline service. According to the
International Telecommunications Union, an agency of the United Nations, as of
December 31, 1997, there were approximately 9.6 lines per 100 inhabitants in
Mexico, which is lower than the teledensity rates in some other Latin American
countries and substantially lower than those in developed countries such as the
United States.

The following table presents, for major Latin American countries and the United
States, telephone lines in service per 100 inhabitants as of December 31, 1997.

                         Selected Telephone Penetration

<TABLE>
<CAPTION>
                                                            Lines in service per
      Country                                               100 inhabitants(/1/)
      -------                                               --------------------
      <S>                                                   <C>
      United States........................................         62.7
      Uruguay..............................................         23.2
      Argentina............................................         18.9
      Chile................................................         17.8
      Venezuela............................................         12.3
      Colombia.............................................         14.8
      Mexico...............................................          9.6
      Brazil...............................................          9.6
      Peru.................................................          6.8
</TABLE>
-------

(/1/) Source: International Telecommunications Union--World Telecommunications
Development Report 1998.

The Mexican government, together with the telecommunications industry, is
discussing alternative incentive to help correct Mexico's comparatively low
teledensity.

Changing Competitive Dynamics

Iusacell's cellular competitor is Telcel, a wholly-owned subsidiary of Telmex,
which holds the Cellular B-Band concession in all nine regions of Mexico.
Iusacell believes that Telmex faces increasing competition, especially in the
long distance market, which was opened to competition in January 1997, and in
local telephony upon the introduction of service by the new local telephony
concessionaires during 1999. Telmex's major long distance competitors include
Alestra and Avantel two joint ventures in which AT&T and MCI Worldcom,
respectively, are the strategic partners. Telmex's major local telephony
competitors will include Axtel, in which Bell Canada is the strategic partner,
and Unefon, a Mexican company whose affiliates have strong distribution and
marketing capabilities.

In late 1995, Iusacell brought a suit charging Telmex with unlawfully cross-
subsidizing Telcel's cellular phone operations. Iusacell believes that the
increased competition in both the long distance and local markets, together
with the

                                       9
<PAGE>

proposed accounting separation rules issued by the COFETEL in December 1998 and
dominant carrier regulations, if implemented, should hinder Telmex's ability to
continue to cross-subsidize Telcel. See "Item 3--Legal Proceedings."

Cellular Services

History and Overview

Iusacell's predecessor became the first Mexican provider of cellular
telecommunications services in 1989, when it commenced operation of the
Cellular A-Band network in Region 9. Through a series of transactions from 1990
to 1994, Iusacell acquired 100% beneficial ownership interests in the entities
which hold the "A" Band cellular concessions in Regions 5, 6 and 7. These
regions cover a contiguous geographic area in central Mexico, which allows
Iusacell to achieve economies of scale.

Iusacell's regions cover a variety of industries. Region 9 includes Mexico
City, which has the greatest concentration of service and manufacturing
industries and is also the center of Mexico's public and financial services
sectors. Region 5 includes Guadalajara, Mexico's second largest city and the
commercial and service center of western Mexico. Region 6 includes Leon and San
Luis Potosi and has historically been dominated by the agricultural sector,
although it has recently begun to develop as an automobile manufacturing
center. Region 7 includes Puebla, Veracruz, Acapulco and Oaxaca and contains
major operations of the Mexican petrochemical and automotive industries and
significant tourist resorts and attractions.

Subscribers and System Usage

As of December 31, 1998, Iusacell had a total of 440,048 cellular subscribers
in Region 9. Of this number, 35.2% were contract plan subscribers and 64.8%
were prepay customers. According to customer profiles, professionals comprise a
large portion of its Region 9 cellular subscriber base. Iusacell offers a
number of value-added services designed specifically to fulfill the demands of
this important group of contract subscribers. For example, it offers
secretarial services and provides English-speaking operators to serve the large
English-speaking market in Region 9. Iusacell also provides financial news
reporting, emergency services, entertainment information, reservations services
and sports reports. Moreover, CDMA digital contract customers in Region 9 have
available caller identification, short messaging service and data transmission
services. Iusacell believes that these value-added services help increase
contract subscriber usage and also enhance its market image as a full service
cellular provider.

Iusacell believes that a strong distribution network is necessary in order to
develop and sustain a significant presence in this important market. Iusacell
believes it has particularly strengthened its competitive position in Region 9
by entering into a distribution contract with Precel which, as of December 31,
1998, had 116 points of distribution, including 89 points of distribution in
Region 9. See "--Marketing--Distribution."

As of December 31, 1998, Iusacell had a combined total of 315,327 cellular
subscribers in Regions 5, 6 and 7. Of this number, 38.7% were contract plan
subscribers and 61.3% were prepay customers. Iusacell believes that its
subscriber base in these regions consists of subscribers engaged in a variety
of occupations. Due to the lower landline penetration outside of Region 9, the
subscriber base in Regions 5, 6 and 7 includes a number of users who purchase
cellular services as a principal means of telecommunications. Compared to
Region 9, the marketing programs in these regions have focused more on the
benefits inherent in basic cellular service, such as mobility and convenience.

Prepay Customers

A prepay customer is no longer considered a customer of Iusacell when a
specified period of time has elapsed since the customer purchased and
activated, or added credit to, his or her last prepay card. The customer's
telephone number is then deactivated, and he or she is considered to have
turned over.

Iusacell's current prepay customers who want to continue to have cellular
service must choose to:

  .  continue to be prepay customers of Iusacell by purchasing another card,

  .  become contract customers of Iusacell, or

  .  become either contract or prepay customers of Telcel.


                                       10
<PAGE>

A VIVA prepay customer currently has 185 days to activate a new card after the
balance on his existing card becomes zero before losing his phone number.
During such time and with the implementation of the calling party pays
modality, a VIVA customer will be able to receive local incoming calls but such
a customer will not be able to make outgoing calls. Balances automatically
become zero if the customer has not activated a new card within 180 days after
activation of the previous card. Iusacell continues to evaluate different
methods of determining turnover, as the current method is dependent upon, among
other things, the number of days of use Iusacell permits before deactivating a
telephone number.

In March 1999, Iusacell substantially completed the installation of the VIVA
prepay operating system and the conversion of its Control Plus platform
customers to VIVA throughout its regions. The VIVA platform will better track
those customers who turn over. This new operating system (together with
initiatives to increase the number of distribution points for prepay cards,
adjust commissions to encourage distributors to sell prepay cards of higher
denominations, improve customer care and otherwise improve the convenience of
the prepay program) has enhanced Iusacell's ability to add and retain prepay
customers and has increased usage. See "--Marketing--Pricing."

Given the higher turnover among its prepay customers, Iusacell pursues plans to
migrate its qualified prepay customers to contract plans, where customer
loyalty and retention have been historically higher.

Contract Churn

Contract churn measures both voluntarily and involuntarily disconnected
subscribers. Through December 31, 1997, Iusacell calculated contract churn for
a given period by dividing, for each month in that period, the total number of
contract subscribers disconnected in such month by the number of contract
subscribers at the beginning of such month and dividing the sum of the
resulting quotients for all months in such period by the number of months in
such period. Effective January 1, 1998, Iusacell changed the methodology by
which it determines average monthly contract churn for a given period. Average
monthly contract churn for a given period is now calculated by dividing the sum
of all contract subscribers disconnected during such period by the sum of the
beginning-of-month contract subscribers for each of the months in such period,
expressed as a percentage.

Voluntarily disconnected subscribers encompass subscribers who choose to:

  .  no longer subscribe to cellular service,

  .  become a prepay customer of Iusacell, or

  .  obtain cellular service on a contract or a prepay basis from Telcel.

Involuntarily disconnected subscribers encompass customers whose service is
terminated after failing to meet Iusacell's payment requirements.

Iusacell believes that a significant part of its contract churn in 1996 and the
first half of 1997 was due to customers switching from its contract plans to
either Telcel's prepay program, launched in February 1996, or Iusacell's own
prepay plan, launched in June 1996. With improved economic conditions in
Mexico, improved customer service and customer retention programs and the
digitalization of the network, the contract churn rate declined substantially,
from 3.17% in the first quarter of 1997, to 2.59% in the fourth quarter of
1998.

Roaming

Iusacell offers its contract cellular subscribers nationwide and international
service via roaming agreements. Subscribers can make calls from any location in
Mexico served by a Cellular A-Band operator, and can receive any call made to
the subscriber's number (automatic call delivery) regardless of the region in
Mexico in which such subscriber is located. Iusacell also provides cellular
services to all subscribers of other non-wireline cellular operators in Mexico
while such subscribers are temporarily located in a region served by Iusacell.

An operator (a host operator) providing service to another operator's
subscriber temporarily located in its service region (an in-roamer) earns usage
revenue. Iusacell bills such other operator (the home operator) of an in-roamer
for the in-roamer's usage. In the case of roaming by an Iusacell subscriber in
the region of a host operator (an out-roamer), Iusacell is billed by the host
operator for the subscriber's usage. Iusacell remits the billed amount to the
host operator and bills its own customer, the out-roamer, without any markup.
As a result, Iusacell retains the collection risk for roaming charges

                                       11
<PAGE>

incurred by its own subscribers. Conversely, roaming charges billed by Iusacell
for in-roaming usage by subscribers of other non-wireline operators are the
responsibility of those operators. Roaming charges between non-wireline
operators are settled monthly.

Interconnection charges owed to Telmex and long-distance charges owed to the
carrier as a result of roaming are the responsibility of the host operator. In
addition to higher per minute charges for airtime (as compared to home region
rates), the host operator is entitled to receive a fee for each day roaming
service is initiated. In-roaming fees and usage revenue represented 3.9% of
Iusacell's total revenues for the year ended December 31, 1997 and 3.6% of
Iusacell's total revenues for the year ended December 31, 1998. Out-roaming
charges represented 5.2% of Iusacell's total revenues for the year ended
December 31, 1997 and 5.4% for the year ended December 31, 1998.

Iusacell has signed over 54 agreements with United States and other foreign
operators to provide its subscribers with international roaming capabilities.
These operators include Bell Atlantic Mobile, AT&T Wireless, BellSouth
Mobility, Rogers Cantel and AirTouch Communications. Iusacell is continually
reviewing opportunities to enter into agreements with other cellular operators
to expand its international roaming capabilities. In addition, Iusacell
provides, through the National Automatic Cellular Network, automatic call
delivery throughout most of the United States, including Puerto Rico, and
Canada, whereby Iusacell subscribers may receive telephone calls from Mexico
without the caller having to dial access codes.

Personal Communications Services

In May 1998, Iusacell won auctions for concessions of 1.9 GHz personal
communications services frequencies in Regions 1 and 4 in northern Mexico for
which Iusacell paid Ps. 493.2 million (U.S.$49.8 million; U.S.$57.3 million
including value added tax) in June and September 1998. These two regions
include the cities of Monterrey and Tijuana, and combined represent
approximately 11 million POPs or 11% of Mexico's population. Iusacell intends
to launch service in Region 4 in the first quarter of 2000, subject to
obtaining financing.

Long Distance Services

In August 1996, Iusacell became one of Telmex's first competitors in long
distance service when Iusacell began to provide long distance services to its
cellular subscriber base in Mexico pursuant to the 30-year concession to
Iusatel which was awarded in October 1995 and was modified in December 1997.
Iusacell's competitors in long distance include the 16 other companies granted
concessions, including Telmex, the former long distance monopoly. Iusacell
believes that competition in the Mexican long distance market has stimulated
growth in demand for long distance service; as prices dropped approximately
30%, long distance traffic increased nearly 14% in 1997 compared to 1996.
During 1998, there were no significant price changes and long distance traffic
increased 11% compared with 1997.

Iusacell currently provides long distance service using its own switches and
transmission equipment and a combination of fiber optic lines, microwave links,
satellite transmission and lines leased from Telmex. At December 31, 1998,
Iusacell provided long distance service in 60 cities to 782,549 customers,
approximately 771,573 of whom were existing customers for Iusacell's other
services. Iusacell has chosen not to commit significant marketing resources to
the presubscription balloting process, from 1997 to the present, and as a
result fared poorly in initial balloting results. Revenues related to long
distance services represented 10.5% of total revenues for the year ended
December 31, 1998. See "--The Telecommunications Industry in Mexico--Market
Liberalization" and "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Iusacell's long distance concession provides for coverage and technological
investment requirements. If Iusacell does not satisfy such requirements, it may
have to pay fines and penalties and potentially lose its long distance
concession. After evaluating the commercial feasibility of complying with its
initial concession, Iusacell requested that the SCT and the COFETEL modify the
terms of such concession to reflect a more rational business plan. In December
1997, the government granted the modification request, authorizing a change in
the coverage requirements and increasing flexibility in the choice of
transmission technology, significantly reducing Iusacell's investment
requirements. See "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Other Material Trends and Contingencies--
Regulatory Developments--Long Distance Concession."

Iusacell further reduced the capital investment for its long distance business
by entering into a fiber optic cable swap agreements with two other long
distance companies, Marcatel and Bestel, in March 1998 and December 1998,

                                       12
<PAGE>

respectively. These agreements have allowed Iusacell effectively to acquire
fibers in the long distance fiber optic networks being built by Marcatel and
Bestel in central and northern Mexico in exchange for fibers in the long
distance fiber optic network Iusacell was building in central Mexico. See "--
Government Regulation--Concessions and Permits--Long Distance" and "Item 9--
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources--Capital Expenditures."

Other Services

Paging

On December 14, 1995, Iusacell and Infomin formed Infotelecom as a joint
venture to market national and international paging services. Iusacell owns 49%
of Infotelecom, Infomin owns 49%, and the remaining 2% is owned by Jose Ramon
Elizondo, a director of Iusacell. Infomin has a concession, which expires on
July 20, 2009, to provide nationwide paging services in Mexico. Under the
Infotelecom joint venture agreement, Infomin is obligated to contribute this
concession to Infotelecom. See "--Government Regulation--Concession and
Permits--Paging."

Pursuant to a marketing agreement between Iusacell and Infomin, Infotelecom has
the right to market national paging services on behalf of Infomin, and
Infotelecom is required to make monthly payments to Infomin equal to 5% of all
gross revenues for the preceding month. This payment represents the amount
which Infomin, as the concession holder, must pay the SCT for the right to
provide paging services.

Infotelecom began marketing paging services in August 1996 and, at December 31,
1998, provided service in 17 cities including Mexico City, Guadalajara,
Monterrey, Puebla, Cuernavaca, Toluca, Queretaro, Leon and Ciudad Juarez.
Infotelecom plans to expand the marketing of paging services to a total of 30
cities by early 2000. Iusacell plans to take advantage of its existing cellular
network and its operating and administrative resources in order to achieve cost
efficiencies in the provision of paging services. As of December 31, 1998,
Infotelecom had 26,361 paging customers. Revenues related to paging services
represented 1.6% of total revenues for the year ended December 31, 1998. See
"Item 9--Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Under their joint venture agreement, Iusacell and Infomin valued the Infomin
paging concession at U.S.$10.5 million, and Iusacell agreed to fund the first
U.S.$10.5 million of Infotelecom's cash requirements before Infomin would be
required to make pro rata cash contributions. In December 1998, Iusacell and
Infomin determined the appropriate manner in which to capitalize Infotelecom.
Up to that time, Iusacell had been funding the joint venture by means of loans.
On December 31, 1998, Iusacell capitalized Ps.111.0 million (U.S.$11.2 million)
in advances to Infotelecom, including Ps.41.2 million (U.S.$4.2 million) in
interest which was not credited against the U.S.$10.5 million required to be
funded by Iusacell. U.S.$9.0 million of such capitalization was applied against
the U.S.$10.5 million to be funded by Iusacell.

Local Telephony

Iusacell operates a mobile nationwide IMTS radiotelephone network in the 440-
450 MHz, 485-495 MHz and 138-144 MHz frequency bands, providing local
radiotelephone services to commercial and noncommercial customers across
Mexico. As of December 31, 1998, Iusacell had 226 IMTS radiotelephone
subscribers with average monthly billings for the year ended December 31, 1998
of approximately Ps.1,100 (U.S.$111.1) per customer. Due to the
substitutability of cellular service for IMTS service, Iusacell is negotiating
the cessation of IMTS service and the migration of IMTS subscribers to cellular
service or local telephony services with the SCT and the COFETEL.

Iusacell also operates public and rural telephony programs, utilizing available
cellular capacity. These programs provide telecommunications services through
cellular telephones in phone booths, intercity buses and rural areas. The
provision of services in this way fulfills the terms of Iusacell's concessions
for the provision of cellular telephone service and utilizes Iusacell's
cellular network to provide telecommunications coverage in areas with little or
no basic service. As of December 31, 1998, Iusacell had 10,611 cellular
telephones in service under its public and rural telephony programs.

As of December 31, 1998, Iusacell was providing, on a trial basis pending
approval from the SCT, local wireless service in the 450 MHz frequency band to
16,198 customers in selected markets in Region 9. The 1998 average monthly
minutes of use for these trial subscribers who had average monthly billings of
approximately Ps.225 (U.S.$23) per subscriber, excluding long distance charges,
was approximately 296 minutes per subscriber divided equally among incoming and
outgoing calls. Iusacell believes that there is substantial unmet demand for
telephone service in Mexico as demonstrated

                                       13
<PAGE>

by the relatively low level of residential wireline, business wireline and
cellular penetration. See "--The Telecommunications Industry in Mexico--
Underserved Telephony Market."

Iusacell has experienced substantial delays in obtaining the SCT's approval of
its technical and economic plans for local wireless service in the 450 MHz
frequency band. However, on June 10, 1997, the SCT and Iusacell reached
agreement on a process by which Iusacell could obtain a concession issued and
recognized by the SCT to provide local wireless service in the 450 MHz
frequency band. Under this agreement, Iusacell would convert and consolidate
its existing concessioned radiotelephony frequencies into 450 MHz spectrum in
Regions 4, 5, 6, 7 and 9 and would have a right of first refusal to acquire the
concessions to provide local wireless service over such frequencies at prices
derived from the prices of the winning bids in the auctions for 450 MHz and 1.9
GHz (PCS) frequency bands concluded in May 1998. These auctions yielded a right
of first refusal exercise price estimated at U.S.$2.25 million for all five
regions. However, neither the SCT nor the COFETEL has formally notified
Iusacell of the exact right of first refusal exercise price, the payment terms
or the coverage/build-out requirements relating to the concessions, all of
which are necessary for Iusacell to properly decide whether to exercise its
right of first refusal.

As a result of the delays experienced by Iusacell and the uncertainty relating
to its ability, at a commercially acceptable cost, to implement full scale
local wireless service in the 450 MHz frequency band, Iusacell is exploring
alternatives for providing local telephony services, such as limited zone
wireless services in the 800 MHz (cellular) or 1.9 GHz (PCS) frequency bands
deploying digital technology that permits mobility or fixed wireless services
over such bands. If Iusacell were to determine that it would be preferable to
pursue such an alternative rather than to continue to pursue local wireless
service in the 450 MHz frequency band, such alternative could require the
acquisition of concessions, other regulatory approvals and the payment of
substantial fees. Iusacell expects to make its decision on the overall strategy
for providing local telephony services before the fourth quarter of 1999.

In September 1998, Iusacell determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of its investment in 450 MHz TDMA
technology had occurred. As a result, Iusacell recorded a substantial non-cash
writedown of its investment in the 450 MHz fixed local wireless project. See
"--Government Regulation--Concessions and Permits--Local Telephony," "Item 9--
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Local Telephony in the 450 MHz Frequency Band" and "Item 9--
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Non-recurring charges."

In expanding its local telephone services, Iusacell plans to capitalize on
synergies between its mobile wireless and local wireless services, utilizing
its existing cellular network and anticipated 1.9 GHz (PCS) network for
connections with the local subscribers' premises. Furthermore, Iusacell
believes that local wireless service requires a lower infrastructure investment
per line than landline service.

In January 1996, Iusacell's long distance subsidiary applied to modify its
concession to allow it to provide local wireline service, including dedicated
circuits, local switching and data service. This request was reasserted in
Iusacell's October 1997 application to modify its long distance concession. See
"--Long Distance Services." This request was rejected for procedural reasons in
July 1998, and the subsidiary is considering filing a modified application.
Iusatelecomunicaciones, S.A. de C.V., Iusacell's 450 MHz local wireless
subsidiary, is also considering filing for a local wireline concession. While
Iusacell currently does not anticipate that the provision of local wireline
service will become a significant part of its services, it may provide, on a
case-by-case basis, local wireline telephone service as part of its overall
provision of telecommunications services.

Data Transmission

Iusacell began providing data transmission services in 1993. Iusacell provides
both public and private data transmission primarily using excess capacity in
its microwave backbone in its existing cellular network in Region 9, and
satellite transmission through Satelitron, S.A. de C.V., a joint venture among
Iusacell, Hughes Network Systems and another partner which provides a shared
hub for private networks. Iusacell currently intends to sell its interest in
Satelitron. Iusacell provides its data transmission services primarily to the
financial services and consumer products industries.

Microwave Transmission

In December 1998, the SCT issued three 20 year concessions to Punto a Punto
Iusacell, S.A. de C.V., a joint venture between Iusacell and Mr. Jose Ramon
Elizondo, a director of Iusacell, for short haul microwave frequencies in the

                                       14
<PAGE>

15 GHz and 23 GHz frequency bands won at auction. Punto a Punto Iusacell paid
approximately Ps.33.3 million (U.S. $3.4 million) for these concessions. These
frequencies are being used to interconnect Iusacell's cell sites, business
customers and other networks. Additionally, Iusacell has an obligation to lease
these frequencies to other users to enable them to install their own microwave
links. No such leasing is currently taking place.

In March 1999, Punto a Punto Iusacell began to participate in the auctions for
long haul microwave frequencies in the 7 GHz frequency band. This auction is
still ongoing.

Marketing

With the assumption of control by Bell Atlantic, Iusacell has redefined its
marketing strategy for achieving profitable growth, particularly in its
cellular business. More recently, Iusacell has focused its marketing strategy
on the CDMA digital cellular business, where there is greater per subscriber
usage and revenues. Iusacell seeks to increase its average monthly revenue per
subscriber, aggressively grow its cellular subscriber base, decrease the cost
of acquiring additional subscribers and reduce contract churn and prepay
turnover by improving its marketing to its existing and potential cellular
subscribers.

Iusacell's subscribers consist of contract and prepay customers who can be
classified as high, moderate or low-usage customers. Iusacell is implementing
distribution, advertising, customer service support and pricing plans targeted
to each specific customer segment and to increase airtime usage.

Contract Subscribers

Contract subscribers seek uninterrupted mobile cellular service, including long
distance, roaming, access to high-quality customer service and the ability to
choose among value-added services such as call waiting, *911 service, short
message service, caller identification and conference call service, all for one
monthly fee.

High-usage contract subscribers include corporate customers, professionals,
owners of small to medium-sized businesses and other subscribers who have a
high need for mobility and who rely on cellular service daily. These
subscribers are willing to pay a higher monthly fee in exchange for a large
block of free minutes, a lower airtime rate and a full range of value-added
services and customer service conveniences. These subscribers are concentrated
in analog and digital premium plans. Iusacell is aggressively pursuing customer
growth in this segment, particularly with its "New Millennium" digital plans,
through targeted marketing and distribution, advertising campaigns, pricing
plans and special promotions.

Moderate-usage contract subscribers include some professionals, small business
owners and residential customers who use cellular services frequently and
require the reliability of a contract plan, but do not generate the monthly
MOUs of high-usage contract subscribers. Iusacell plans to continue to generate
revenue from this segment through targeted marketing and distribution,
advertising, pricing and special promotions. Iusacell seeks to migrate these
customers to digital service as well.

While Iusacell does not target low-usage contract customers as aggressively as
other customers, it provides service options to meet the requirements of this
subscriber group. The low-usage contract plan segment consists primarily of
residential customers and small business owners who prefer the reliability of
contract plan service, but whose usage may not justify the inclusion of various
value-added services in the fixed monthly charge. This segment is targeted
through Iusacell's group of independent distributors and, to some extent,
through its commission agents and advertising programs. Three pricing plans are
currently offered to meet the needs of low-usage contract customers.

Prepay Subscribers

Since the inception of the prepay plan in 1996, the number of prepay
subscribers has grown to represent approximately 63.3% of Iusacell's
subscribers at December 31, 1998. A prepay subscriber can activate a cellular
phone at a Iusacell customer sales and service center, purchase a prepaid card
with a fixed amount of credit to be used over a period of up to 180 days and
credit the prepaid card value to the subscriber's account either at a customer
service center or by a phone call. Such a customer will have access to incoming
and thereafter outgoing cellular service until the credit is fully used or
otherwise until the card expires at the end of 180 days, whichever occurs
first, and will have access to incoming local cellular service for an
additional 185 days without activating a new card. See "--Cellular Services--
Prepay Customers."

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<PAGE>

Iusacell believes that prepay plans are attractive to a wide range of cellular
customers. In addition to helping customers control costs, a prepay program has
no monthly bill and allows customers to prepay for cellular services in cash.
The prepay market is composed of customers who, among others, typically earn a
variable income and prefer not to make a fixed financial commitment, do not
have the credit profile required to purchase a contract plan or seek cellular
services for emergency or limited use only.

Iusacell believes the prepay service offerings provide an opportunity to
improve margins because, compared to the average contract plan, prepay plans
involve higher average per minute airtime charges, a lower cost to acquire
prepay subscribers and the absence of billing costs, credit concerns and
payment risk. Prepay customers are also potential customers for other services
and products offered by Iusacell. However, prepay customers, on average, have
substantially lower minutes of use than contract customers and do not pay
monthly fees and, as a result, generate substantially lower average monthly
revenues per customer. Iusacell focuses marketing efforts on increasing usage
by its prepay customers, including migrating qualified prepay customers to
higher revenue contract plans.

As of the end of 1998, Iusacell had installed and substantially completed the
migration of all of its prepay customers to its new VIVA prepay operating
system in all four of its operating regions. This new operating system allows
Iusacell to better track the usage patterns and identity of its prepay
subscribers. The new operating system has improved customer satisfaction
through automated reactivation, voice messaging and other value-added services,
and has lowered the cost of support for prepay services. The new operating
system, together with initiatives to increase the number of distribution points
for prepay cards, adjust commissions to encourage distributors to sell prepay
cards of higher denominations, improve customer care and otherwise improve the
convenience of Iusacell's prepay program, has enhanced Iusacell's ability to
add and retain prepay customers.

Distribution

Iusacell targets the various segments of its subscriber base through six sales
and distribution channels: customer sales and service centers, corporate
representatives, independent distributors, a direct sales force, commission
sales agents and telemarketing. Iusacell is aggressively increasing the number
of its points of distribution in order to acquire additional subscribers. At
December 31, 1998, Iusacell had 2,820 points of distribution, compared to 918
and 228 at December 31, 1997 and 1996, respectively. These points of sale are
comprised of 96 customer sales and service centers owned and operated by
Iusacell, 712 points of sale operated by independent distributors who offer all
Iusacell products and 2,012 points of sale for distribution only of VIVA prepay
cards also operated by independent distributors.

Iusacell's redesigned sales force compensation plan is structured to motivate
the sales force within each distribution channel through monetary incentives.
In addition, this plan provides training so that the sales force is encouraged
to activate profitable and loyal accounts, cross-sell the full line of
Iusacell's service offerings and maintain its standards in advertising,
promotions and customer service.

Customer Sales and Service Centers. Iusacell has reconfigured each of its
customer sales and service centers to offer one-stop-shopping for a variety of
cellular, long distance and paging services, as well as accessories. Walk-in
customers can subscribe to cellular service contract plans, purchase prepay
cards, sign up for long distance service and purchase equipment such as
handsets, pagers and accessories. In an effort to maximize customer loyalty,
reduce contract churn and prepay turnover, and increase average monthly revenue
per subscriber through cross-selling, Iusacell continues to emphasize the
customer sales and service centers that it owns and operates itself as a key
distribution channel. In 1997, Iusacell opened or remodeled 17 customer sales
and service centers, including 10 redesigned prototype customer sales and
service centers incorporating a new uniform store design, which provided the
basis for new and refurbished centers in the future. During 1998, Iusacell
opened 22 new customer sales and service centers based on the experience gained
from the ten prototype locations.

Corporate Representatives. To service the needs of its large corporate and
other high-usage customers, Iusacell has created a dedicated corporate sales
group, which, at December 31, 1998, included 86 full-time sales
representatives. This group of trained representatives seeks to increase sales
to high-usage customers by:

  .  "bundling" combinations of services into customized packages designed to
     meet customers' requirements,

  .  developing and marketing new services to satisfy the demands of such
     customers, and

  .  educating corporate purchasing managers about alternative pricing plans
     and services.

Iusacell plans to increase the size and geographic reach of this sales force in
the future.

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<PAGE>

Independent Distributors. In order to broaden its market, Iusacell maintains
relationships with a broad network of 139 exclusive distributors that, at
December 31, 1998, sold all of Iusacell's products at 712 points of sale and
distributed VIVA prepay cards at an additional 2,012 points of sale. This
includes a distribution contract with Precel, formerly one of Telcel's largest
distributors, which, at December 31, 1998, provided exclusive distribution in
116 locations. In order to ensure that its standards are maintained at all
distribution points, Iusacell provides assistance to its distributors in
training, promotions and advertising. Iusacell also provides them with
information on its customer base to allow the distributors to service
Iusacell's customers effectively.

Direct Sales Force. As of December 31, 1998, Iusacell employed 17 direct sales
representatives to target moderate-usage contract plan subscribers. These
direct sales representatives travel extensively to deliver personalized service
to subscribers such as small and medium-sized businesses and individuals.
Iusacell also has established a program dedicated to servicing heavy users in a
personal and expedient manner. Iusacell carefully selects, trains and motivates
this sales force to maintain service standards.

Commission Sales Agents. Iusacell retains commission agents as a flexible sales
force in all of its cellular regions. The agents function as cellular service
brokers for Iusacell, working out of their own premises to better target their
customers. These agents provide additional distribution outlets with minimal
support from Iusacell. As of December 31, 1998, Iusacell had arrangements with
65 commission sales agents who distribute its products with no direct costs to
Iusacell.

Telemarketing. From time to time, Iusacell engages telemarketing service
providers to follow up on targeted mailings.

Advertising

Iusacell has launched an integrated media plan emphasizing the benefits of its
products and supported by the Iusacell brand image, the logo for which was
redesigned in 1997. Since that time, all product offerings have been marketed
under the single, well-recognized IUSACELL brand name which was reinaugurated
as IUSACELL Digital in February 1998, in anticipation of the digitalization of
Iusacell's network and product offerings.

The media plan targets potential subscribers through a coordinated print,
radio, television and fixed and moving outdoor advertising campaign. A key
element of this integrated media plan is a periodic agency review, where the
sales results of a given campaign are evaluated. The integrated media plan
enables Iusacell to negotiate more favorable advertising rates. Television and
print advertisements prominently feature an ad-response telephone number to
solicit new customer inquiries. Trained representatives who are equipped to
answer questions regarding services and products are available from 7 a.m. to
11 p.m. daily.

Customer Service

Iusacell views superior customer service as essential in order to distinguish
itself in the competitive Mexican cellular telecommunications market. Iusacell
trains its customer service representatives to ensure that each customer
receives prompt attention, informed answers to any inquiries and satisfactory
resolution of any concerns. Iusacell believes that enhanced customer service,
especially after-sales support, is integral in developing brand loyalty and
supports the efforts of its sales force to cross-sell its services and
products. For prepay customers, the newly installed VIVA prepay operating
system better tracks the usage patterns and identities of these subscribers.
The new operating system has improved customer satisfaction through automated
activation, voice messaging and other value-added services and has lowered the
cost of support services.

To further enhance customer service, Iusacell has installed dedicated personal
computer terminals linked to its billing system so that each customer service
representative, either at an Iusacell customer sales and service center or at a
Iusacell call center, can handle customer inquiries, billing questions and
account payments with real-time data and a full customer profile in hand.
Customer data gathered from such sources as the activation process, the billing
system and exit interviews with customers who terminate service, allows
Iusacell to better tailor its marketing strategy to each customer. Along with
providing information as to how Iusacell can improve its customer service, this
data is expected to enable representatives from each of the distribution
channels to better target their sales approach to each customer when cross-
selling Iusacell's services and products.

In early 1998, Iusacell opened two call centers that provide more automated and
efficient service to customers through the use of state-of-the-art software and
rigorous customer service training. By the end of 1998, these call centers
consolidated the work previously done by six call centers. In 1998, Iusacell
also began implementing the Customer Attention Support

                                       17
<PAGE>

Team (CAST) program in its busiest customer service centers in order to
accelerate the problem resolution process. This program has also been expanded
to include the majority of Iusacell's customer service centers in all four of
its cellular operating regions.

Pricing

General. Iusacell offers a variety of flexible pricing options for its cellular
service. The primary components of the contract pricing plans include monthly
fees, per minute usage charges and a number of free minutes per month. The
prepay program markets cards which credit a defined number of Pesos to a
customer's account, to be utilized for outgoing calls over a period of no more
than 180 days and for local incoming calls for 185 additional days. Most of the
contract plans include a selection of free cellular handsets. The prepay plans
do not provide free cellular handsets.

Contract Plans. The digital and analog contract pricing plans are designed to
target primarily high and moderate usage contract subscribers. High-usage
customers are typically willing to pay higher monthly fees in exchange for
larger blocks of free minutes, value-added services, a free handset and lower
per minute airtime charges under a single contract. Moderate-usage contract
subscribers typically prefer pricing options which have a lower monthly charge,
fewer free minutes and higher per minute airtime charges than those options
chosen by high-usage customers.

With the introduction of CDMA cellular service in Region 9 in early 1998,
Iusacell inaugurated five digital contract pricing plans. In September 1998,
Iusacell added six more plans. The pricing plans for digital service target
moderate and high-usage customers and offer incremental free minutes as a part
of the basic monthly charge. The digital pricing plans offer different packages
of additional services and features available only with CDMA technology.

In April 1999, in an effort to differentiate its digital product, Iusacell
drastically simplified its digital contract plan offerings. Iusacell reduced
the number of its contract plans from 11 to 5 and substantially increased the
number of minutes included with the monthly fee when compared with previous
comparable digital and analog contract plans.

To satisfy the more limited needs of the low-usage contract subscribers,
Iusacell offers plans which offer a moderately priced, fixed monthly charge
coupled with a high per minute airtime charge and relatively few free minutes.

Prepay Plans. In contrast to contract subscribers, prepay customers typically
generate low levels of cellular usage, do not have access to value-added
services (except for purchasers of Ps.500 prepay cards) or roaming, generally
already own a handset and often are unwilling to make a fixed financial
commitment or do not have the credit profile to purchase contract plan cellular
services. Other prepay customers include vacationers and traveling business
people who require cellular service for short periods of time. In addition to
helping customers control costs, Iusacell's prepay programs have no monthly
bill and allow customers to prepay for cellular services in cash.

In September 1997, Iusacell introduced its next-generation VIVA prepay service
to replace its in-house Control Plus platform. VIVA provides for automated
reactivation without human intermediaries and value-added services such as
voice-messaging. VIVA prepay cards are available in denominations of Ps.100,
150, 250 and 500 although a new customer cannot be activated with a Ps.100
card. As of the end of 1998, VIVA had been implemented in all four regions and
substantially all existing Control Plus customers had been migrated to VIVA.

Discounts on Incoming Calls. In response to competitive and market conditions,
Iusacell offers discounts on the airtime charges of up to 50% for incoming
calls for its customers who are in their home region and who have opted out of
the calling party pays system. Beginning in May 1999, with the advent of the
calling party pays modality, cellular customers who do not opt out of calling
party pays do not pay airtime charges for incoming local calls (other than
incoming local calls while roaming outside their home region).

Strategy. Iusacell intends to continually review market pricing and will
attempt to increase prices, if economic and competitive conditions permit, to
keep pace with inflation. In April 1997, Iusacell announced a weighted average
increase of 14.8% for the per minute airtime price on all its contract and
prepay plans. This weighted average price increase was calculated by applying
the actual price increases announced in April 1997 to both peak and non-peak
per minute airtime charges for each of Iusacell's contract and prepay plans,
weighted by the ratio of each plan's contribution to overall airtime revenues
during the month of February 1997.

In May 1997, Iusacell announced a weighted average increase of 4.5% for the
fixed monthly charges on all its contract plans. This weighted average price
increase was calculated by applying the actual price increases announced in May
1997

                                       18
<PAGE>

for all Iusacell's contract plans, weighted by the ratio of each plan's
contribution to overall monthly fixed charges during the month of April 1997.

To maintain competitiveness, airtime prices were adjusted downward by 4.6% on a
weighted average basis in October 1997 and another 1.0% on one of the low-end
contract plans in November 1997. Also, in response to Telcel pricing actions
and as a means of boosting traffic volumes and ultimately average revenue per
subscriber, the airtime price for incoming calls was reduced by 25%-50% for all
contract plans in October 1997.

In late March 1998, Iusacell raised airtime prices approximately 7.9% on
average for contract plans and 13.6% for prepay customers. Because of market
and competitive conditions, however, this increase was partially rolled back in
early May 1998 for both contract and prepay customers and, in late May 1998,
the remainder of the price increase for contract plans was reversed. As a
result, however, a 9.9% price increase for prepay customers remained.

In August 1998, Iusacell filed with the COFETEL to register tariffs that would
increase analog contract plan airtime prices in Region 9 by approximately 3% on
a weighted average basis. Competitive conditions caused this price increase not
to be implemented. In October 1998, Iusacell raised airtime prices for its
contract plans by approximately 8% on a weighted average basis. In late March
1999, Iusacell raised airtime prices on its contract plans by approximately 12%
on a weighted average basis and approximately 6% for prepay customers. These
price increases remained in place as the competition matched the increases.

Activation, Billing and Collection Procedures

Iusacell can activate a phone within 30 minutes of receiving credit approval
for customers who intend to pay their monthly charges with a credit card. For
customers who intend to pay their monthly charges in cash, there is a credit
review process of no longer than 48 hours prior to the delivery and activation
of a cellular telephone and a requirement of a security deposit, depending on
the contract plan, in a minimum amount equal to 1.5 times the corresponding
monthly rental fee. For prepay customers, activation time is 30 minutes or
less. Iusacell believes that its ability to activate a cellular telephone
number promptly gives it a competitive advantage over Telcel.

Iusacell mitigates its credit exposure in five ways:

  .  for those customers paying by credit card, by obtaining a credit report
     from the Bureau Nacional de Credito ("National Credit Bureau"), a
     Mexican affiliate of TransUnion Corporation,

  .  by requiring payment to be made by credit card or, for those customers
     who do not pay by credit card, by requiring security deposits and
     conducting a credit investigation,

  .  by requiring that contract customers purchase a bond, which provides for
     payment in the event of customer defaults, after the first year of
     service,

  .by establishing credit limits, and

  .by utilizing prepay cards, which eliminate all credit risk.

For 1997 and 1998, Iusacell reserved approximately 1.0% of its cellular
revenues for doubtful receivables.

Iusacell has instituted customer retention procedures where a late-paying
customer is contacted by a service representative prior to termination to urge
such customer to settle his or her account and to inquire about the reasons for
nonpayment. Iusacell believes that these follow-up procedures help decrease the
rate of nonpayment and improve customer goodwill by allowing Iusacell to
address any customer grievances which may have led to customer delinquency,
helping to retain potentially profitable accounts.

Iusacell has also implemented a system to monitor MOU levels and the number of
calls to certain geographic areas in order to identify abnormal usage by
contract subscribers. When abnormal usage is detected, Iusacell contacts the
subscriber to determine whether such usage has been authorized. Iusacell
believes that these procedures are effective in reducing the number of billing
disputes with subscribers and losses due to cellular fraud.

Billing is currently administered using eight different billing systems,
including a customized version of Bell Canada's "Link" billing system in
Regions 6, 7 and 9 and a new customer care and billing system provided by LHS
Communications Systems, Inc. in Region 5. Iusacell compiles billing information
from its switches on magnetic tape

                                       19
<PAGE>

every 24 hours for processing by its billing systems. Protective and disaster
recovery measures are taken in connection with all billing information.

In late 1997, Iusacell decided to implement the LHS customer care and billing
system to support its cellular business in all of its regions. Although the
implementation of the LHS customer care and billing system has experienced
certain performance and stability problems in Region 5 due to software defects
which have negatively impacted billing cycles and the implementation of
flexible pricing discounts Iusacell expects that the new LHS system will
ultimately improve processing speed and data integrity; will permit easier and
more flexible access to customer information, thereby facilitating targeted
marketing and resolution of customer complaints; and will help resolve Year
2000 compliance issues. In the future, Iusacell may determine to extend this
new system to all of its product lines to permit a customer to receive a single
bill for all services provided.

Iusacell expects to invest in 1998 and 1999 a total of approximately U.S.$17.7
million for the cellular portion of its new customer call and billing systems
which will be largely implemented by the fourth quarter of 1999. See "Item 9
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" and "--Liquidity and Capital Resources--
Capital Expenditures."

Network and Equipment

Cellular Services

At December 31, 1998, Iusacell's integrated cellular network was composed of 7
cellular switches, 342 cell sites and 53 repeaters, and covers approximately
80% of total cellular regional POPs.

In December 1997, Iusacell signed an agreement with subsidiaries of Lucent
Technologies, Inc. for the replacement of Iusacell's existing analog network
equipment with Lucent Technologies analog and CDMA digital network equipment.
This replacement began in February 1998 and is expected to be completed by the
third quarter of 1999. In May 1998, Iusacell launched CDMA digital service in
the Mexico City area of Region 9. In the fourth quarter of 1998, Iusacell
introduced digital service in the cities of Guadalajara, Morelia, Leon,
Queretaro, Puebla and Cuernavaca. Region 5 became Iusacell's first region to
swap out completely to Lucent Technologies analog and CDMA network equipment in
February 1999 and, since that time, Iusacell has been gradually swapping out
the remainder of its network on a sub-region by sub-region basis.

Iusacell elected to deploy CDMA technology instead of TDMA technology based on
its and Bell Atlantic's evaluation of the two technologies. Bell Atlantic is
successfully using CDMA technology in most of its U.S. markets with favorable
customer response. CDMA offers significantly greater call-carrying capacity,
superior voice quality and lower fraud and is easier to upgrade than TDMA.
Iusacell will maintain transmitting equipment to serve both analog and digital
formats, and Iusacell is marketing dual-mode cellular telephones capable of
sending and receiving both analog and digital transmissions. See "Item 9--
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Digitalization."

Iusacell's cellular network consists of digital switching systems that are
capable of serving multiple markets. Region 9 is served by two Northern Telecom
DMS 250 (MTX) switches and two Lucent Technologies 5ESS switches. Region 5 is
served by one Lucent Technologies 5ESS switch. Analog customers in Regions 6
and 7 are served by two Northern Telecom DMS 250 (MTX) switches and digital
customers in Regions 6 and 7 are currently served by the Lucent Technologies
5ESS switches in place in Regions 9 and 5. All switching equipment is fully
networked.

Iusacell installed its first mobile switching center in 1989 in Region 9 and
currently operates 187 cell sites in Region 9, providing telephone coverage to
substantially all of the populated territory and major highway routes of Region
9. Regions 5, 6 and 7 currently operate with a total of 155 cell sites,
resulting in cellular telephone coverage in all major population centers as
well as along the principal highway routes in the regions.

Iusacell installed 71 cell sites and 5 repeaters in its regions during 1998 in
an effort to increase geographic coverage, as well as boost call-carrying
capacity within areas already covered, and removed from operation 4 cell sites
and 9 repeaters in 1998. Iusacell installed one cell site in the first quarter
of 1999 and plans to install 32 additional cell sites and 6 repeaters during
the remaining three quarters. Iusacell increases call-carrying capacity and
coverage by three principal

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<PAGE>

means: "cell splitting," deploying "micro-cells" and using cell site repeaters
or enhancers. Approximately 70% of the cells in Region 9 were created as a
result of cell splitting.

Digital microwave links between cell sites and the landline system are supplied
by various equipment manufacturers. Taking advantage of the ability of its
various switching systems to run customized software, Iusacell has developed a
proprietary software package which is able to track and report, in real-time,
all aspects of network performance, including traffic analysis, call quality
and alarms. Iusacell seeks to upgrade and improve its cellular network as new
technologies become available.

Iusacell has a network operations and control center (NOCC) in Mexico City
which oversees, administers and provides technical support to all regions.
Iusacell plans to upgrade its NOCC by installing a new network management
system that will provide more complete and automated surveillance capabilities
and fault and performance management for all network equipment. The first phase
of the NOCC upgrade became operational in the first quarter of 1999 and the
second and final phase will become operational during the second half of 1999.

Other Services

Iusacell provides paging services primarily using its own cellular network
facilities as well as 48 owned and one leased paging antennas. For long
distance, Iusacell uses fiber optics and state-of-the-art digital systems. In
particular, Iusacell uses its three long distance switches and its own fiber
optic network and transmission equipment, as well as other facilities leased
from Telmex and other competitors.

Iusacell provides private data transmission services, primarily using excess
capacity in its microwave backbone in its existing cellular network in Region
9, and satellite transmission through its Satelitron joint venture, which
provides a shared hub for private networks.

Iusacell's local wireless network, if implemented in the 450 MHz frequency
band, is expected to be based on the most advanced digital switching,
transmission and subscriber connection equipment that is readily available and
commercially feasible. Iusacell would utilize its existing infrastructure,
including one switch and 15 450 MHz cell sites, to the extent possible. If
Iusacell opts to provide local wireless service through its 800 MHz cellular or
1.9 GHz (PCS) frequency bands, the digital technology that would be employed
would offer additional features such as out-of-zone mobility.

Infrastructure Synergies

While cellular transmitters are unique to cellular service, towers can be used
for cellular and paging transmissions, and the same physical infrastructure can
be used for cellular, paging and long distance equipment. Synergies also exist
in maintenance, work force training and equipment purchasing. Iusacell believes
that, as it expands its non-cellular offerings, these synergies will allow it
to reduce its infrastructure costs significantly and will reduce the time
needed for implementation of a new service.

For a discussion of Iusacell's capital expenditure plans for its cellular and
other services, see "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Capital
Expenditures."

Competition

The offering of cellular services in Mexico is currently a regulated duopoly in
each region. Iusacell's cellular competitor in all regions in which it provides
service is Telcel, the holder of the Cellular B-Band concession for service
throughout Mexico and the country's largest cellular provider. Cellular systems
compete principally on the basis of quality of telecommunications services,
customer service, price, breadth of coverage area, roaming capabilities and
value-added services. Operators are largely free to set their own rates,
provided they are set on the basis of cost. See "--Government Regulation."

Iusacell will face increasing competition from companies providing mobile
wireless telecommunications services utilizing alternative technologies. Nextel
de Mexico, S.A. de C.V. began marketing its enhanced specialized mobile radio
services in 1998. In 1999, Iusacell will begin to face competition from the
winners of 1.9 GHz (PCS) spectrum in the auctions concluded in May 1998. Pegaso
commercially launched its PCS services in Region 1 in February 1999. Iusacell
expects

                                       21
<PAGE>

Pegaso to begin to provide PCS services in at least some of the major cities in
Iusacell's cellular regions during the second half of 1999. Iusacell also
expects to face increasing competition from companies that provide services
utilizing new technologies, such as satellite telephony.

In paging services, Iusacell competes with established companies such as
Comunicaciones Mtel, S.A. de C.V. (Skytel), Operadora Biper, S.A. de C.V.
(Biper), Enlaces Radiofonicos, S.A. de C.V. (Digitel), Comunicacion Dinamica
Metropolitana, S.A. de C.V. (Coditel), Grupo Radio Beep, S.A. de C.V. and
Buscatel, S.A. de C.V., a Telmex subsidiary. Some of Iusacell's paging
competitors have already established nationwide paging networks, giving them a
significant operational and marketing advantage over Iusacell. The COFETEL
recently concluded auctions for a series of nationwide and regional concessions
for frequencies to be used to provide two-way paging services, which we expect
will become operational by mid-1999. Moreover, digital wireless providers,
including Telcel, Pegaso and Iusacell, have begun to provide short message
service, which is a paging service, over wireless frequencies.

In providing long distance telephone service, Iusacell faces or will face
competition from 16 other concession holders, including Telmex and joint
venture companies in which AT&T and MCI Worldcom have beneficial ownership
interests. Presubscription balloting took place in 150 cities in 1997, 1998 and
the first quarter of 1999 in which telephone customers chose their long
distance carrier. Iusacell chose not to commit significant marketing resources
to the balloting process and fared poorly in initial balloting results.

In the local telephony market, Iusacell expects to face significant competition
from both Telmex, the existing monopoly, and new competitors providing service
over the 1.9 GHz (PCS) and 3.4-3.7 GHz Wireless Local Loop frequency bands. See
"--The Telecommunications Industry in Mexico--Market Liberalization."

In providing data transmission services, Iusacell competes for customers with
Telmex, state-owned Telecom and the operational long distance companies. In
addition, Iusacell believes that the current Mexican data transmission industry
includes over 1,000 private networks that provide data transmission services.

International Joint Ventures

On September 12, 1997, Iusacell signed an agreement to sell its direct and
indirect minority interests in its Ecuadorian cellular company, Conecel, and
its Ecuadorian paging company, Corptilor, S.A., to a corporation controlled by
the controlling shareholder of the majority shareholder of these companies. At
the September 30, 1997 closing, Iusacell received U.S.$29.4 million in cash
consideration for its direct interests in these companies, and in 1998 it
received approximately U.S.$2.0 million, net of taxes, in respect of its
indirect interest. Iusacell anticipates receiving, by the end of 1999, an
additional U.S.$1.5 million, net of taxes, in respect of the liquidation of the
company that held this indirect interest.

In December 1996, Iusacell sold a 51% stake in Iusatel Chile, a Chilean long
distance company, and agreed to sell the remaining 49% upon acquisition from
its previous partner. The second stage of this transaction was completed in
early 1997. Iusacell received U.S.$5.0 million for the two sales. The sale
transaction also included a capitalization of U.S.$13.3 million of obligations
of Iusacell to Iusatel Chile. Iusacell received full payment in December 1997.

Government Regulation

Telecommunications systems in Mexico are regulated by the SCT and the COFETEL,
an independent regulatory body within the SCT, pursuant to the 1995
Telecommunications Law (Ley Federal de Telecomunicaciones), which became
effective on June 8, 1995. Regulations governing international long distance,
domestic long distance and local telephony have been promulgated under the 1995
Telecommunications Law. However, some rules from the prior Law of General Means
of Communication (Ley de Vias Generales de Comunicacion) and the rules
promulgated under such law, including, without limitation, the
Telecommunications Rules (Reglamento de Telecomunicaciones), which we
collectively refer to as the Original Communications Laws, generally remain
effective.

These laws and regulations define the regulatory structure applicable to the
nationwide telecommunications infrastructure and the provision of
telecommunications services. They govern, among other things, applications to
install, maintain and operate telecommunications systems; the establishment of
technical standards for the provision of telecommunications services; the
grant, revocation and modification of concessions and permits; and the auction
of spectrum.


                                       22
<PAGE>

In particular, the terms and conditions of concessions and permits granted
under the Original Communications Laws, which is the case for most concessions
and permits granted to Iusacell and its subsidiaries, should be governed by the
Original Communications Laws and respected under the new regulatory regime
until their expiration. The 1995 Telecommunications Law may grant rights
enhancing those set forth in the Original Communications Laws. However, rates
charged by holders of concessions and permits granted under the Original
Communications Laws will continue to require prior approval from the SCT,
unless such concession or permit is amended. Iusacell, whose four cellular
concessions were granted under the Original Communications Laws, has requested
an amendment of its concessions to permit it to register tariffs with the
COFETEL without prior approval from the SCT.

Concessions and Permits

To provide public telecommunications services in Mexico through a public
network, the service provider must first obtain a concession from the SCT.
Pursuant to the 1995 Telecommunications Law, concessions for public networks
may not exceed a term of 30 years, and concessions for radioelectric spectrum
may not exceed a term of 20 years. Concessions may be extended for a term
equivalent to the term for which the concession was originally granted, but not
to exceed such 20- or 30-year limit, as the case may be. Concessions specify,
among other things:

  .the type of network, system or service,

  .the allocated spectrum, if applicable,

  .the geographical region in which the holder of the concession may provide
  the service,

  .the required capital expenditure program,

  .the term during which such service may be provided,

  .  the payment, where applicable, required to be made to acquire the
     concession, including, where applicable, the participation of the
     Mexican government in the revenues of the holder of the concession, and

  .any other rights and obligations affecting the concession holder.


In addition to concessions, the SCT may also grant permits for (x)
establishing, operating or exploiting private telecommunications services not
constituting a public network (i.e., reselling) and (y) installing, operating
or exploiting transmission-ground stations. There is no specified maximum term
for permits. Under the 1995 Telecommunications Law, only registration with the
SCT is required to provide value-added telecommunications services.

Under the 1995 Telecommunications Law and the Foreign Investment Law (Ley de
Inversion Extranjera), concessions may only be granted to Mexican individuals
and to Mexican corporations in which non-Mexicans hold no more than 49% of
their voting shares or which are not otherwise controlled by non-Mexicans,
except that, in the case of concessions for cellular communications services,
foreign investment participation may exceed 49% with the prior approval of the
Mexican Foreign Investment Commission of the Mexican Ministry of Commerce and
Industrial Development. There are no foreign investment participation
restrictions in respect of operations conducted under permits.

A concession or a permit may be terminated pursuant to the 1995
Telecommunications Law upon:

  .  expiration of its term,

  .  resignation by the concession holder or the permit holder,

  .  revocation,

  .  expropriation, or

  .  dissolution or bankruptcy of the concession holder or the permit holder.

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

  .unauthorized interruption of service,

  .the taking of any action that impairs the rights of other concessionaires
  or permit holders,

  .failure to comply with the obligations or conditions specified in the
  concession or permit,

  .failure to provide interconnection services with other holders of
  telecommunications concessions and permits,


                                       23
<PAGE>

  .  loss of the concession or permit holder's Mexican nationality in
     instances in which Mexican nationality is legally required,

  .  unauthorized assignment, transfer or encumbrance of the concession or
     permit, of any rights under the concession or permit or of assets used
     for the exploitation of the concession or permit,

  .  failure to pay to the Mexican government its fee for the concession or,
     where applicable, its participation in the revenues of the holder of the
     concession, and

  .participation of any foreign government in the capital stock of the holder
  of the concession.

In addition, the SCT may establish for any concession further events which
could result in revocation of that concession.

The Mexican government, through the SCT, may also temporarily seize all assets
related to a concession or permit in the event of a natural disaster, war,
significant public disturbance or threats to internal peace and for other
reasons related to preserving public order or for economic reasons. In
addition, the government has the statutory right to expropriate a concession
and assets related to its exploitation for public interest reasons. Under
Mexican law, the Mexican government is obligated to compensate the owner of the
assets in the case of a statutory expropriation or temporary seizure, except in
the event of war. If the Mexican government temporarily seizes such assets, it
must indemnify the concession or permit holder for all losses and damages,
including lost revenues.

In the case of an expropriation, the amount of the compensation is to be
determined by appraisers. If the party affected by the expropriation disagrees
with the amount appraised, it may initiate judicial action against the
government. Should no agreement be reached on the amount of the indemnity in
the case of a seizure or expropriation, the determination will be made by an
independent appraiser. Iusacell is not aware of any instance in which the SCT
has exercised any of these powers in connection with a cellular company.

The Original Concession. Iusacell's right to provide radiotelephony, local
wireless and data transmission services nationwide, as well as cellular service
in Region 9, is based upon the concession granted to the predecessor of
Iusacell's wholly-owned subsidiary, SOS Telecomunicaciones, S.A. de C.V., on
April 1, 1957, as amended, which we refer to as the Original Concession. The
term of the Original Concession is 50 years, and it expires on April 1, 2007.
The Original Concession may, however, be revoked prior to such date in the
event that SOS fails to comply with its terms or applicable law. The Original
Concession is renewable upon timely application to the SCT, provided that SOS
has complied with all of the requirements of the Original Concession and agrees
to any new terms and conditions established by the SCT at the time of renewal.

In consideration for the Original Concession, SOS must make payments to the
Mexican government equal to 5% of all gross revenues derived from services
provided through its Region 9 cellular network and payments in an amount which
is the greater of (i) 4% of all gross revenues and (ii) 10% of net income, in
either case, derived from services provided through its nationwide
radiocommunications network.

Under the terms of the Original Concession, SOS must continually modernize its
services. In updating its services, SOS must submit technical and economic
plans for approval by the SCT. In determining whether to approve these plans,
the SCT is authorized to consider whether the plans sufficiently address
factors such as the public interest (including, without limitation,
teledensity) and efficiency and uniformity in telecommunications throughout
Mexico.

Initially, the Original Concession authorized only the installation and
commercial operation of nationwide mobile (vehicle-installed) radiotelephone
public service in the 132-144 MHz frequency range. Since then, however, the
Original Concession has been amended numerous times, allowing Iusacell to
expand the types of telecommunications services which it may offer. In 1978,
the Original Concession was amended to grant SOS an additional allocation in
the 440-450 MHz and 485-495 MHz frequency ranges in return for yielding a
portion of its 132-144 MHz frequency range allocation. SOS retained the
frequencies between 138 and 144 MHz.

Between 1986 and 1989, the Original Concession was further amended to enable
SOS to provide fixed rural radiotelephony service, to offer telex and data
transmission with the obligation to link its subscribers to the network owned
by Telecom, and to interconnect its radiocommunications ground stations through
satellite.

In 1989, SOS was authorized to install, operate and maintain a mobile public
radiocommunications network with cellular technology in the 825-835 MHz and
870-880 MHz frequency bands in Region 9. In 1990, SOS was authorized to carry

                                       24
<PAGE>

intra-regional cellular-to-cellular communications throughout Region 9 without
being required to interconnect with the long distance carrier. In 1992, SOS was
authorized to provide public data transmission service nationwide through its
radio communications networks without the obligation to link its subscribers to
the Telecom network.

In 1993, SOS was granted an additional 5 MHz band in the 800 MHz frequency
range for the provision of cellular service, due to the high volume of cellular
traffic experienced in Region 9. In the same year, SOS was authorized to
improve its radiocommunications public service in the 440-450 MHz and 485-495
MHz frequency ranges by utilizing digital technology and to interconnect its
telecommunications systems through fiber optic, satellite and microwave
technologies. The SCT also clarified the ability, and indeed the obligation, of
SOS to interconnect customers of its nationwide radio communications network
regardless of whether such customers use fixed, mobile or portable telephones.

In accordance with the 1995 Telecommunications Law, SOS applied to renew the
Original Concession in March 1997. Moreover, in December 1996, Iusacell applied
to divide the Original Concession into two concessions, one relating to the
provision of cellular services over the 800 MHz frequency band in Region 9,
which would not be subject to restrictions on foreign investment, and a second
relating to the 450 MHz frequencies, which would be subject to restrictions on
foreign investment. See "--Foreign Ownership Restrictions." Iusacell is
currently negotiating the terms and conditions for such extension and division
with the COFETEL.

Cellular Concessions. Mexico is divided into nine cellular regions. The SCT has
allocated cellular telephone system frequencies in each region in the Cellular
A-Band and the Cellular B-Band. In each region, Telcel holds the Cellular B-
Band concession and its cellular competitor in each region holds the Cellular
A-Band concession.

In Region 9, Iusacell holds the right to provide cellular service pursuant to
an authorization granted to SOS by the SCT in 1989 under the Original
Concession. In Regions 5, 6 and 7, Iusacell holds the right to provide cellular
service through its subsidiaries Comunicaciones Celulares de Occidente, S.A. de
C.V., known as Comcel, Sistemas Telefonicos Portatiles Celulares, S.A. de C.V.,
known as Portacel, and Telecomunicaciones del Golfo, S.A. de C.V., known as
Telgolfo, respectively. Comcel, Portacel and Telgolfo each hold 20-year
concessions expiring in 2010 which authorize these subsidiaries to install,
operate, maintain and exploit mobile public radiotelephone networks with
cellular technology for commercial use in the Cellular A-Band. In consideration
for these authorizations and concessions, the subsidiaries made initial
payments to the Mexican government and, in addition, must make payments as
follows:

<TABLE>
<CAPTION>
                                                              Percent of Gross
                                                             Revenues Payable To
         Subsidiary                                          Mexican Government
         ----------                                          -------------------
         <S>                                                 <C>
         Comcel.............................................           8%
         Portacel...........................................           7%
         Telgolfo...........................................           8%
</TABLE>

By the terms of their concessions, Comcel, Portacel and Telgolfo must
continually modernize their services after receiving approval of their
technical and economic plans from the SCT. In determining whether to approve
these plans, the SCT is authorized to consider whether the plans sufficiently
address factors such as the public interest (including, without limitation,
teledensity) and efficiency and uniformity in telecommunications throughout
Mexico. These concessions may be revoked or terminated prior to their
expiration dates in the event the concession holder fails to comply with the
conditions established in the concessions or applicable law. The concessions
may, however, be renewed for a term equal to the original term upon timely
application to the SCT, provided that the concession holder had complied with
all of the requirements of its concession and agrees to any new terms and
conditions established by the SCT at the time of such renewal.

Paging. On December 14, 1995, Iusacell and Infomin formed Infotelecom as a
joint venture to market national and international paging services. Infomin has
a concession, which expires on July 20, 2009, to provide nationwide paging
services in Mexico. Although the joint venture agreement between Iusacell and
Infomin contemplates that Infomin will ultimately transfer its paging
concession to Infotelecom, Infomin's paging concession prohibits foreign
ownership of more than 49% of the voting shares of the entity holding the
concession. Infomin, therefore, would be unable to contribute its paging
license to the joint venture so long as Bell Atlantic continued to control the
management of Iusacell and Iusacell continued to hold more than 49% of the
voting shares of Infotelecom. In order to eliminate this obstacle to the
transfer of the paging concession to Infotelecom, in December 1998, Iusacell
sold a 2% interest in Infotelecom to Jose Ramon Elizondo, a director of
Iusacell. As a result, Iusacell currently holds a 49% interest in Infotelecom.
See "--Other Services--Paging." Infotelecom is required to make monthly
payments to Infomin equal to 5% of all gross revenues for the

                                       25
<PAGE>

preceding month. This payment represents the amount which Infomin as concession
holder must pay the SCT for the right to provide paging service.

Long Distance. Iusacell's right to provide international long distance services
is based upon a long distance concession granted by the SCT to Iusatel, S.A. de
C.V. on October 16, 1995. The term of the long distance concession is 30 years
and may be renewed upon timely application to the SCT, for an equal period of
time, provided that Iusatel complies with certain requirements. Upon Iusacell's
application, the SCT and the COFETEL modified this concession on December 17,
1997, authorizing a change in the coverage requirements and increasing
flexibility in the choice of transmission technology.

Pursuant to the modified concession, Iusatel is required to comply with
technical specifications and had to serve with its own infrastructure a minimum
of 11 specified cities by July 31, 1998, 26 additional specified cities by
December 31, 1999 and another 13 additional specified cities by December 31,
2000. See "Item 9--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Capital
Expenditures."

In February 1997, the Mexican Foreign Investment Commission conditioned its
approval of Bell Atlantic assuming management control over Iusacell upon the
requirement, among others, that Iusacell transfer at least 51% of the voting
shares of Iusatel to Mexican investors on terms acceptable to the Foreign
Investment Commission. In November 1998, Iusacell complied with this
requirement by having Jose Ramon Elizondo, a director of Iusacell, agree to
subscribe to 5.1% of the capital stock of Iusatel, comprising 51% of the voting
shares thereof. Iusacell retained a 94.9% equity interest in Iusatel, including
a 90% equity interest through the ownership of neutral limited voting stock
(inversion neutra) and a 49% voting interest representing a 4.9% equity
interest. See "--Foreign Ownership Restrictions."

Local Telephony. Iusacell believes its right to provide local telephony service
is derived from the Original Concession. The Original Concession, as originally
granted, permitted Iusacell to provide radiocommunications service to vehicle-
mounted terminal equipment nationwide.

In 1986, the SCT amended the Original Concession to authorize Iusacell to
provide fixed public radiotelephony service in rural areas nationwide in
accordance with plans to be approved by the SCT. In 1990, the Reglamento de
Telecomunicaciones was promulgated by the Mexican government which further
modified the Original Concession.

These regulations classified radiocommunications services on the basis of the
networks used to provide such services rather than upon the basis of subscriber
terminal equipment. Radiocommunications networks are generally classified as
either "fixed" or "mobile." Iusacell's radiocommunications network is a mobile
network. In 1993, the SCT clarified the ability, and indeed the obligation, of
SOS to interconnect customers of its nationwide radiocommunications network
regardless of whether such customers use fixed, mobile or portable telephones.

Pursuant to the Original Concession, the commencement of construction and
marketing of local wireless service in the 450 MHz frequency band on a
commercial basis requires the prior approval of the SCT. Iusacell has never
received the SCT's approval of its technical and economic plans for local
wireless service in the 450 MHz frequency band.

However, in June 1997, the SCT and Iusacell reached agreement on a process by
which Iusacell could obtain a concession issued and recognized by the SCT to
provide local wireless service in the 450 MHz frequency band. Under this
agreement, Iusacell would convert and consolidate some of its existing
concessioned radiotelephony frequencies into 450 MHz spectrum in Regions 4, 5,
6, 7 and 9 and would have a right of first refusal to acquire the concessions
to provide local wireless service over such frequencies at prices derived from
the prices of the winning bids in the auctions for 450 MHz and 1.9 GHz (PCS)
frequency bands concluded in May 1998.

These auctions yielded a right of first refusal exercise price estimated at
U.S.$2.25 million for all five regions. However, neither the SCT nor the
COFETEL has formally notified Iusacell of the exact right of first refusal
exercise price, the payment terms or the coverage/build-out requirements
relating to the concessions, all of which are necessary for Iusacell to decide
whether to exercise its right of first refusal.

Iusacell is exploring alternatives for providing local telephony services,
including limited zone wireless services in the 800 MHz (cellular) or 1.9 GHz
(PCS) frequency bands deploying digital technology that will permit mobility
and fixed wireless services over such bands. If Iusacell were to determine that
it would be preferable to pursue such alternatives, the acquisition of
concessions, other regulatory approvals and the payment of substantial fees
could be required. Iusacell

                                       26
<PAGE>

expects to make its decision on the overall strategy for providing local
telephony services before the fourth quarter of 1999.

In September 1998, Iusacell determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of its investment in 450 MHz TDMA
technology had occurred. As a result, Iusacell recorded a substantial non-cash
writedown of its investment in the 450 MHz fixed local wireless project. See
"Item 9--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Local Telephony in the 450 MHz Frequency Band."

In November 1998, Mr. Jose Ramon Elizondo, a director of Iusacell, agreed to
subscribe to 5.1% of the capital stock of Iusatelecomunicaciones S.A. de C.V.,
the Iusacell subsidiary which provides local wireless service in the 450 MHz
frequency band on a trial basis, comprising 51% of its total voting shares.
Iusacell retained a 94.9% equity interest in Iusatelecommunications, including
a 90% equity interest through the ownership of neutral limited voting stock
(inversion neutra) and a 49% voting interest, representing a 4.9% equity
interest. See "--Foreign Ownership Restrictions."

Data Transmission. Iusacell's right to offer telex and provide public data
transmission service throughout Mexico is derived from the Original Concession.
Iusacell utilizes its allocations in the 138-144 MHz, 440-450 MHz and 485-495
MHz frequency bands, excess capacity in its cellular microwave backbone in
Region 9 and Satelitron satellite transmission services to provide data
transmission services.

Satellite Transmission Permit. On December 15, 1991, Satelitron, a joint
venture among Hughes Network Systems, Iusacell and one other investor, was
granted a 15-year permit to provide dedicated circuit services and private
networks through Mexican satellites or any other satellites designated by the
Mexican government. The Satelitron permit is renewable for 15 additional years
upon timely application to the SCT, provided Satelitron has complied with all
of the requirements of the permit and agrees to any new terms and conditions
established by the SCT at the time of such renewal. Under this permit,
Satelitron is required to make monthly payments to the SCT equal to 2.5% of all
gross revenues derived from its provision of access to its satellite bandwidth,
and 2.5% of all such gross revenues to Telecom for supervision and supporting
services. Iusacell currently intends to sell its interest in Satelitron.

Dedicated Microwave Circuit Services Permit. On December 8, 1993, the SCT
authorized SOS to use its microwave network's excess capacity to provide
dedicated circuit services. In accordance with the terms of this permit, these
dedicated microwave circuits cannot be interconnected to public exchange
networks, and the service must only be provided through the links of the
microwave network authorized by the SCT. On February 1, 1994, the SCT
authorized SOS to carry voice, data and video conferencing through these
dedicated circuit services.

Value-Added Services Permit. On June 17, 1993, SOS was granted a permit to
provide through its public network the following value-added telecommunications
services to its cellular subscribers:

  . secretarial service,

  . voice mail, and

  . data transmission.

The term of this permit is the same as that of the authorization for using the
Region 9 cellular network through which the value-added services are to be
provided. Under this permit SOS is required to make annual payments to the
Mexican government equal to 5% of all gross revenues derived directly from the
provision of these services. In October 1994, Comcel, Telgolfo and Portacel
were each granted a permit to provide secretarial services under the same terms
granted to SOS, including the making of the annual payments to the Mexican
government.

Foreign Ownership Restrictions

Pursuant to the 1995 Telecommunications Law and the 1993 Foreign Investment
Law, holders of concessions to provide telecommunications services in Mexico,
excluding providers of cellular service, cannot have a majority of their voting
shares owned by, and cannot be otherwise controlled by, foreign persons. In
February 1997, the Mexican Foreign Investment Commission conditioned its
approval of Bell Atlantic assuming management control over Iusacell upon the
requirement that, within a renewable period of 180 days, Iusacell would
transfer at least 51% of the voting shares of Iusatelecomunicaciones and
Iusatel to Mexican investors on terms acceptable to the Foreign Investment
Commission. The Foreign Investment Bureau of the SECOFI twice extended the
transfer deadline.

                                       27
<PAGE>

In November 1998, Iusacell complied with this requirement by transferring 51%
of the voting shares of these two subsidiaries to Mr. Jose Ramon Elizondo, a
director of Iusacell, by means of a subscription to capital. Iusacell retained
49% of the voting shares of these subsidiaries. Iusacell also holds another 90%
of the capital of these subsidiaries through the ownership of neutral limited
voting stock (inversion neutra) that does not constitute voting shares for
purposes of the Mexican foreign investment laws. Consequently, Iusacell holds a
94.9% equity interest in these two subsidiaries.

In order to participate in the auctions for concessions for microwave
frequencies concluded in September 1997, Iusacell formed Punto a Punto
Iusacell, S.A. de C.V., a joint venture with Mr. Elizondo. The Mexican Foreign
Investment Bureau has approved a capital structure substantially similar to
that authorized for Iusatel and Iusatelecomunicaciones for the microwave joint
venture.

In order to participate in the auctions for concessions for 1.9 GHz personal
communications services frequencies concluded in May 1998, Iusacell formed
Iusacell PCS, S.A. de C.V., another joint venture with Mr. Elizondo. The
Mexican Foreign Investment Bureau approved a capital structure substantially
similar to that authorized for Iusatel, Iusatelecomunicaciones and Punto-a-
Punto Iusacell.

Moreover, in December 1998 Mr. Elizondo acquired a 2% interest in Infotelecom,
S.A. de C.V., a company which commercializes paging services, from Iusacell. As
a result, Iusacell currently holds only 49% of this entity, complying with the
condition precedent necessary to allow its other partner, Infomin, S.A. de
C.V., a Mexican controlled company, to transfer its paging concession to
Infotelecom, as previously agreed with Iusacell. See "Item 13--Interest of
Management in Certain Transactions--Interests of Directors."

Rates for Telecommunications Services

Under the Original Communications Laws, SCT approval was required for rates
charged for all basic and certain value-added cellular services and for data
transmission services. Historically, the SCT permitted rate increases based on
the cost of service, the level of competition, the financial situation of the
carrier and 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 were also authorized by the
SCT. All terms of interconnection (such as point of interconnection) other than
interconnection rates were negotiated between the regional non-wireline
cellular carriers and Telmex under the SCT's supervision. Rates for dedicated
circuit services through microwave networks, and dedicated circuits and private
networks through satellites, were not regulated under the Original
Communications Laws.

Under the 1995 Telecommunications Law, rates for telecommunications services,
including cellular and long distance services, are now freely determined by the
providers of such services. Providers are prohibited from adopting
discriminatory practices in the application of rates. In addition, the SCT is
authorized to impose specific rate requirements on those companies determined
by the Federal Competition Commission to have substantial market power. All
tariffs for telecommunications services, other than value-added services, must
be registered with the COFETEL prior to becoming effective.

United States Regulation

Bell Atlantic, like all other regional Bell operating companies, was subject to
a consent decree (the "Decree") entered in a United States federal court in
1982 resulting from antitrust litigation brought by the United States
Department of Justice against AT&T. The Decree required AT&T to divest itself
of its local telephone companies. Under the Decree, Bell Atlantic was
prohibited from providing interLATA (long distance) telecommunications,
engaging in the manufacture of customer premises equipment ("CPE"), or engaging
in the manufacture or sale of telecommunications equipment.

The Telecommunications Act of 1996 (the "1996 Act"), which became effective on
February 8, 1996, includes provisions that open local telephony markets to
competition and would permit regional Bell operating companies, such as Bell
Atlantic, to provide interLATA services (long distance) and video programming
and to engage in manufacturing. Under the 1996 Act, Bell Atlantic was allowed
to provide certain interLATA (long distance) services immediately upon
enactment, including interLATA (long distance) services originating outside the
states where its subsidiaries provide local exchange telephone services and
interLATA (long distance) services that are "incidental" to other permitted
business such as wireless services.

However, the ability of Bell Atlantic and its affiliates to engage in
businesses previously prohibited by the Decree, including providing interLATA
(long distance) services originating in the states where Bell Atlantic's
subsidiaries provide

                                       28
<PAGE>

local exchange telephone service, and manufacturing CPE or telecommunications
equipment, is largely dependent on satisfying certain conditions contained in
the 1996 Act and related regulations.

Since Iusacell is affiliated with Bell Atlantic, its operations must comply
with the terms of the Decree. Bell Atlantic obtained waivers under the Decree
in 1986 and 1993 that together permitted it to conduct business outside the
United States, subject to certain exceptions and restrictions. Under such
exceptions and restrictions, a foreign telecommunications entity affiliated
with Bell Atlantic (an "FTE"), such as Iusacell, could not provide
interexchange (long distance) telecommunications services between points in the
United States or own any international telecommunications facilities in the
United States.

As to telecommunications traffic between the United States and a foreign
country, an FTE could provide only the foreign "half" of such traffic. An FTE
was prohibited from discriminating in handling traffic to and from the United
States and was limited as to interests it could own in international cables and
satellite facilities to and from the United States. Finally, an FTE was
prohibited from exporting to the United States any telecommunications equipment
or CPE manufactured outside the United States.

The 1996 Act eliminated certain restrictions under the Decree including:

  .  restrictions that precluded an FTE from providing the United States
     "half" of traffic originating in a foreign country,

  .  restrictions on exporting to the United States telecommunications
     equipment or CPE manufactured outside the United States, and

  .  restrictions on providing interLATA (long distance) telecommunications
     services between points in the United States or international long
     distance service originating in the United States, and from owning
     international telecommunications facilities in the United States subject
     to the same conditions that Bell Atlantic must satisfy under the 1996
     Act and any regulations promulgated thereunder with respect to interLATA
     (long distance) telecommunications services originating in the states in
     which Bell Atlantic's local exchange subsidiaries provide service.

Under the 1996 Act, Iusacell may now provide both the foreign "half" and the
United States "half" of telecommunications traffic originating in Mexico (or
any other foreign country) and may now carry international telecommunications
traffic which, although routed through the United States, neither originates
nor terminates in the United States. In addition, Iusacell may, on a resale
basis, carry United States originated traffic bound for Mexico (or other
foreign countries) so long as traffic originates outside the states where Bell
Atlantic's subsidiaries provide local exchange telephone service.

In 1996, Iusatel applied for and received authorization under Section 214 of
the United States Communications Act of 1934 to become a facilities-based
provider of international long distance services from the United States (the
"Section 214 Authorization"). The Section 214 Authorization was transferred to
a Peralta Group entity in January 1996. Because the restructuring of Iusatel to
comply with the 1995 Telecommunications Law and the Foreign Investment Law has
been completed, Iusatel and such Peralta Group entity intend to seek to
formally return control of the Section 214 Authorization to Iusatel. Iusacell
has not yet determined whether it will engage in activities permitted by the
1996 Act or, upon any reassignment to Iusatel, the Section 214 Authorization.
If Iusacell chooses to engage in such activities, no definitive prediction can
be made as to the specific impact of such activities on Iusacell's business,
financial condition or results of operations.

Other laws of the United States may restrict activities of Iusacell by virtue
of Bell Atlantic's ownership interest, including laws and regulations that
restrict trade with, and investments in, specific countries, as well as the
United States Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act
is also applicable to Iusacell because its securities are listed on the New
York Stock Exchange.

The Iusacell Shareholders Agreement contains provisions designed to require
Iusacell to refrain from taking any actions that would cause Bell Atlantic to
be in violation of applicable law.


                                       29
<PAGE>

Employees

At December 31, 1998, Iusacell and its subsidiaries had an aggregate of 2,250
full-time and part-time employees. Approximately 37.0% of the employees were
members of a labor union. Iusacell has never experienced a work stoppage and
management considers its relationship with its employees to be good.
ITEM 2. Description of Property

Throughout the regions served by its cellular operations at, December 31, 1998,
Iusacell operated 96 customer sales and service centers and a total of 341
cellular 800 MHz cell sites, 15 fixed local wireless 450 MHz cell sites, 56
repeaters, seven mobile switching centers, one switch for local wireless
service, three switches for long distance service and 49 paging antennas.

Iusacell generally leases the land where its customer sales and service
centers, cell sites, antennas, microwave transmission equipment and mobile
switching centers are located. Iusacell owns and leases administrative offices
in Mexico City as well as in Guadalajara, Puebla, Monterrey, Leon and Ciudad
Juarez. Iusacell generally owns its cellular network equipment, subject to
liens.

ITEM 3. Legal Proceedings

Although Iusacell is a party to some legal proceedings in the ordinary course
of its business, management believes that none of these proceedings,
individually or in the aggregate, are likely to have a material adverse effect
on Iusacell.

Suit Against Telmex and Telcel

A ruling by the Federal Competition Commission is still pending on the suit
filed by Iusacell in November 1995, against Telmex and Telcel, claiming that
the two companies have engaged in monopolistic practices in the Mexican
telecommunications market, including unlawful cross-subsidies by Telmex of
Telcel's cellular phone operations.

As relief, Iusacell sought a declaration that Telmex and Telcel have violated
Mexican antitrust laws; the imposition of applicable sanctions; the termination
of the anticompetitive control that Telmex allegedly exercises over Telcel; the
modification of the interconnection contracts between Telmex and Iusacell to
eliminate anticompetitive provisions; the declaration of Telmex as a dominant
carrier in the cellular market; the regulation of interconnection in a manner
that promotes competition, including special regulation of Telmex as a dominant
carrier; the regulation of the terms under which users have access to the
different services that Telmex provides; the establishment of separate
accounting standards for Telmex; and the establishment of regulations for
unbundled and non-discriminating interaffiliate interconnection tariffs between
and among Telmex and its affiliates.

Telmex and Telcel have filed various motions against the suit. In February
1997, the Federal Competition Commission imposed a fine of Ps.847,500
(approximately U.S.$106,000 at that time) on Telmex and Telcel for their
refusal to provide the expert appointed by Iusacell with the necessary
information to prepare his opinion on the cross-subsidies claim. Additional
fines were to accrue on a daily basis. Telmex and Telcel filed for an
injunction (amparo) against the Federal Competition Commission asserting that
Mexican antitrust laws do not apply to Telmex and Telcel and questioning the
constitutionality of the Federal Competition Commission. In October 1997, the
Administrative Third Court of Appeals for the First Circuit in Mexico denied
granting Telmex and Telcel a preliminary injunction. Telmex and Telcel appealed
this denial to the Mexican Supreme Court, which has yet to determine the
matter. In November 1998, in order to accelerate resolution of this matter, the
Federal Competition Commission issued a new discovery order against Telmex and
Telcel, confirming that the per diem fines accrued against Telmex and Telcel
for their prior refusal to comply had reached approximately Ps.8.5 million
(U.S. $860,000). Telmex and Telcel have filed an injuctive action (amparo)
against this new discovery order and the imposition of the fine.

Suit by Mitsubishi

Mitsubishi Electronics America, Inc. filed a complaint with the Circuit Court
of Cook County, Illinois, in the United States on July 18, 1996 against
Iusacell, Bell Atlantic Corporation and Bell Atlantic Latin American Holdings,
Inc. Mitsubishi's complaint alleges, among other things, that Iusacell breached
a purported contract for the purchase of 60,000 local wireless telephone
terminals at a cost of U.S.$510 each. Mitsubishi seeks judgment in an amount in
excess of

                                       30
<PAGE>

U.S.$50,000 for each of three counts against Iusacell, plus punitive damages
for one of those counts. Mitsubishi has filed answers to interrogatories
claiming damages in an amount of U.S.$8,825,343. Iusacell's motions to dismiss
the complaint for lack of personal jurisdiction and on substantive grounds were
rejected, although the court reserved judgment on Iusacell's motion to dismiss
for forum non conveniens. The litigation is now in the discovery stage;
production of documents has largely been completed and depositions of witnesses
has begun. Iusacell believes the lawsuit has no basis and does not anticipate
that Mitsubishi will obtain a judgment in its favor for a material amount of
money damages because, in Iusacell's view the purported contract was a non-
binding letter of intent, and the purported reliance by Mitsubishi on
negotiations with Iusacell to order terminal components was unreasonable and
unwarranted. Accordingly, Iusacell has not yet created any contingency reserve
with respect to the litigation.

Suit by Publicidad Ferrer

In February 1998, Publicidad Ferrer y Asociados, S.A. de C.V., Iusacell's
former advertising agency, filed a complaint with the 39th Civil Superior
Tribunal in the Federal District of Mexico against Iusacell. Publicidad
Ferrer's complaint alleges that Iusacell improperly terminated its contract and
seeks approximately Ps.23.7 million (U.S.$2.5 million) in damages in respect of
lost commissions. In September 1998, the 39th Civil Superior Tribunal ruled in
favor of Iusacell, finding no breach of contract and no damages. Publicidad
Ferrer appealed to the Third Superior Tribunal in the Federal District of
Mexico, which affirmed the lower court's ruling. Publicidad Ferrer then
appealed to the First Circuit Collegial Tribunal of the Mexican Supreme Court.
In June 1999, the First Circuit Collegial Tribunal reversed the ruling of the
Third Superior Tribunal, finding Iusacell in breach and finding further that
Publicidad Ferrer suffered Ps.23.7 million in damages. The First Circuit
Collegial Tribunal remanded the case to the Third Superior Tribunal for
sentencing in accordance with the guidelines set forth in its ruling. Upon
remand, the Third Superior Tribunal found Iusacell in breach of its contract,
but also ruled that the damages suffered by Publicidad Ferrer were only Ps.16.8
million (U.S.$1.8 million). Iusacell intends to file an injunctive action
(amparo) against this sentence. Iusacell believes the First Circuit Collegial
Tribunal exceeded the scope of its review in finding Iusacell in breach of
contract and assessed damages incorrectly based on an expert's study of the
Mexican advertising industry rather than on Iusacell's actual post-termination
advertising.

Non-Judicial Disputes

In early 1999, the Mexican government enacted amendments to the Ley del
Impuesto Sobre la Renta (Mexican Income Tax Law) pursuant to which holding
companies, beginning January 1, 1999, were required to limit their tax
consolidation to 60% of all of its subsidiaries. Prior to January 1, 1999,
Iusacell prepared its tax returns on a fully consolidated basis (except for
three non-wholly-owned subsidiaries which were 60% consolidated for tax
purposes), benefiting from the ability to offset losses incurred by some
subsidiaries against the gains of others within the consolidated group. In
April 1999, Iusacell filed an injunctive action (amparo) with the Second Court
in Administrative Matters of the Federal District of Mexico against these new
income tax law amendments on the grounds that they were unconstitutional. The
court has not yet issued any ruling relating to the amparo. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Income Tax, Asset Tax and Employees' Profit Sharing."

In May 1998, Iusacell discovered that its former corporate headquarters in
Mexico City, of which one of its subsidiaries is the owner, was encumbered by
liens for an amount in excess of the estimated fair market value of the
property. The potential loss that may result due to the liens would be the book
value of the building, which was Ps.83.4 million (U.S.$8.5 million) at December
31, 1998. Iusacell is currently analyzing the matter and the actions it needs
to pursue to unencumber the property. We cannot assure you, however, that
Iusacell will be able to remove the liens from such property and realize any
value from such asset.

In April 1994, Iusacell and Northern Telecom Limited ("Nortel") entered into a
five-year, U.S.$330.0 million agreement, which we refer to as the Nortel
Agreement, pursuant to which Nortel would supply network switching equipment,
switching center transmission equipment and radio base station equipment, as
well as associated software and technical services, for the development of the
450 MHz local wireless network. Pursuant to a side letter agreement entered
into in December 1995, the Nortel Agreement would terminate automatically if
Iusacell's technical and economic plans for the 450 MHz project had not been
approved by, or Iusacell did not receive a concession to provide local wireless
telephony in the 450 MHz frequency band from, the SCT on or before December 31,
1997. Neither event having occurred on or prior to December 31, 1997, the
Nortel Agreement has terminated. In 1994, as required under the Nortel
Agreement, Iusacell made advance payments of U.S.$15.0 million in anticipation
of 1995 and 1996 purchases which were never made. Iusacell now seeks a refund
of such advanced funds. Nortel, however, has asserted that such advances should
be credited against development costs.

                                       31
<PAGE>

In 1995, Iusacell entered into a U.S.$82.0 million purchase agreement with
Telrad Telecommunications Electronics Industries, Ltd. for 450 MHz local
wireless terminals. Iusacell terminated this agreement in November 1996 based
on the failure by Telrad to meet delivery and government approval milestones
and the failure to meet quality standards.

Although Iusacell believes that it has no further liability under the Telrad
contract and has no further liability under the Nortel Agreement, we cannot
assure you that Telrad or Nortel will not seek legal redress against Iusacell
or that Telrad or Nortel will not succeed in obtaining damages from Iusacell.
Although Iusacell believes that Nortel is legally obligated to refund the
U.S.$15 million advance to Iusacell, there can be no assurance that Iusacell
will succeed in obtaining such refund. See "--Government Regulation."

In 1996, Mexican tax authorities commenced tax audits on Iusacell and two of
its subsidiaries. These audits were completed in early 1999. The Mexican tax
authorities have assessed Iusacell a Ps.21 million (U.S.$2.1 million) penalty
for purported incorrect deductions of certain interest expense for income tax
purposes. Iusacell intends to pay this assessment when due.

ITEM 4. Control of Registrant

The Peralta Group currently owns approximately 43.8% of the economic interest
of Iusacell and approximately 47.4% of the Company's voting rights. Bell
Atlantic currently owns approximately 47.2% of the economic interest of
Iusacell and approximately 50.1% of the Company's voting rights. The following
table sets forth the current ownership of all classes of the capital stock of
Iusacell by the Peralta Group and Bell Atlantic. Excluding shares held by the
Peralta Group as disclosed below, the Company's remaining directors and
executive officers as a group own less than 1% of the outstanding Series D
shares and less than 5% of the outstanding Series L shares.

<TABLE>
<CAPTION>
                                Identity of Person or                 Percent of
     Title of Class             Group                    Amount Owned   Class
     --------------             ---------------------    ------------ ----------
     <S>                        <C>                      <C>          <C>
     Series A.................. Peralta Group            376,537,587     40.2%
                                Bell Atlantic            559,501,536     59.8
     Series B.................. Bell Atlantic              5,562,450    100.0
     Series D.................. Peralta Group            158,598,110     84.9
     Series L.................. Peralta Group             25,413,000     16.7
                                Bell Atlantic             38,792,690     25.5
</TABLE>

In February 1997, Bell Atlantic and the Peralta Group consummated certain of
the transactions contemplated by the 1996 Share Conversion Agreement entered
into among the Peralta Group, Bell Atlantic and the Company (the "1996 Share
Conversion Agreement"). As a result of the surrender to the Company by Bell
Atlantic and the Peralta Group of shares of certain series of the Company's
capital stock for conversion into shares of other series of the Company's
capital stock, Bell Atlantic obtained management control of Iusacell despite
the Peralta Group maintaining a majority of the voting rights pertaining to the
Company's capital stock. Bell Atlantic paid the Peralta Group U.S.$50.0 million
as consideration for such conversions. In addition, Bell Atlantic granted the
Peralta Group put options with respect to all outstanding shares of the Company
held by the Peralta Group; the Peralta Group has the right to put one-third of
the total number of its current outstanding Iusacell shares to Bell Atlantic on
December 31 of each of 1997, 1998 and 1999 at a per share price of U.S.$0.85,
U.S.$0.96 and U.S.$1.07, respectively. In order to effect the change of
management control, the bylaws of the Company were amended. Pursuant to these
amendments to Iusacell's bylaws, Bell Atlantic has the ability to determine the
outcome of any action requiring the approval of the Company's shareholders,
except that the Peralta Group's concurrence is currently required in order to
change the nationality, corporate nature or corporate purpose of the Company,
to amend the Company's bylaws, to merge or dissolve the Company, to spin off
parts of the Company, to increase the fixed capital of the Company, to issue
bonds or preferred capital stock, to redeem shares of capital stock, to cancel
the registration of the Series L Shares of the Company on the Mexican Stock
Exchange or any other securities exchange, to sell or acquire, or exercise
withdrawal rights with respect to, shares of other companies if the relevant
consideration exceeds 20% of the stockholders' equity of the Company and with
respect to any other matter which, pursuant to applicable law or the Company's
bylaws, may require a special quorum at the relevant shareholders meeting.

In accordance with the bylaws of the Company and the Amended and Restated
Shareholders Agreement dated as of February 18, 1997 (the "Iusacell
Shareholders Agreement"), Iusacell's Board of Directors consists of 21 members.
The Series A shareholders have the right to appoint ten Series A Directors and
their alternates, the Series B shareholders have the right to appoint nine
Series B Directors and their alternates, the Series D shareholders have the
right to appoint one

                                       32
<PAGE>

Series D Director and an alternate and the Series L shareholders have the right
to appoint one Series L Director and an alternate. Pursuant to the Iusacell
Shareholders Agreement, Bell Atlantic and the Peralta Group each have the right
to nominate two Series A Directors and their respective alternates and have
agreed to vote their respective Series A shares to elect all such nominees.
Bell Atlantic and the Peralta Group have also agreed to consult with each other
to attempt to agree upon the remaining six Series A Directors and their
alternates; in the absence of any such agreement, Bell Atlantic, as holder of a
majority of the Series A Shares, has the right to nominate and elect such
remaining Series A Directors and their alternates.

The Company's bylaws provide that resolutions of the Board of Directors shall
be valid when approved by a majority of the vote of the members present,
including the favorable vote of at least one Series A Director and one Series B
Director. As a result, the Directors nominated by Bell Atlantic have the power
under the bylaws to approve, without the affirmative vote of any other
Directors, all resolutions of the Board of Directors. The Iusacell Shareholders
Agreement, however, grants the Peralta Group supermajority rights with respect
to certain transactions. For actions of the Board of Directors, a
"supermajority vote" means the affirmative vote of a majority of the members of
the Board of Directors, including at least one Series A Director, one Series B
Director and one Series D Director. The following transactions are subject to a
supermajority vote by the Company's Board of Directors:

  (i) acquisitions of non-telecommunications businesses for a purchase price
      in excess of U.S.$30.0 million;
  (ii) certain acquisitions, joint ventures and mergers within the
       telecommunications business involving assets in excess of U.S.$100.0
       million;
  (iii) certain dispositions of assets for a consideration in excess of
        U.S.$30.0 million in any twelve month period;
  (iv) certain incurrences of indebtedness after January 1, 1998 in an amount
       exceeding U.S.$100.0 million in the aggregate within any twelve month
       period;
  (v) certain issuances of capital stock in an amount exceeding U.S.$50.0
      million in the aggregate within any twelve month period;
  (vi) entering into, amending or terminating contracts with or for the
       benefit of certain affiliates of the Company, except for any renewals
       or extensions on substantially similar terms of certain consulting and
       seconded employee arrangements with Bell Atlantic affiliates;
  (vii) termination or disposition of any telecommunication transmission
        business with annual revenues of more than U.S.$10.0 million in each
        of the two most recent fiscal years; and
  (viii)  certain terminations of concessions relating to telecommunications
          operations.

Since January 1, 1998, each of Bell Atlantic Latin America Holdings, Inc.
("BALAH") and Bell Atlantic International, Inc. ("BAII"), acting on behalf of
itself, its affiliates and its transferees, and one member of the Peralta
Group, acting on behalf of the Peralta Group and its transferees, have the
right to cause Iusacell to facilitate two registered secondary public offerings
of its shares, subject to certain minimum ownership requirements. In addition,
since January 1, 1998, each of BALAH and BAII and such Peralta Group member has
a one-time option to cause Iusacell to effect a six-month shelf registration of
its shares. After one party's exercise of its registration rights, all other
parties having registration rights may elect to include their shares in the
offering. Any party holding registration rights may not exercise such rights
during the 90-day period commencing on the effective date of any registration
statement filed by Iusacell for a primary equity offering in which gross
proceeds are expected to exceed U.S.$30.0 million. The Iusacell Shareholders
Agreement also provides that if Iusacell registers any equity securities for a
primary or secondary offering after January 1, 1998, it must permit BALAH and
BAII and the Peralta Group (and anyone to whom they have transferred shares
otherwise than in a public offering) to include their shares in such offering.
Iusacell has agreed to bear all expenses of any of the above-described primary
or secondary offerings (other than the fees of counsel to the holders of the
registration rights and underwriters' commissions and discounts). In addition,
the Company has agreed not to effect any public sale or distribution of
securities similar to those being registered during the period commencing 21
days prior to the effective date of a registration statement covering the
registered securities and continuing until 90 days following such effective
date.

In August 1998, Iusacell announced that its principal shareholders, Bell
Atlantic and the Peralta Group, had agreed to recapitalize and restructure
Iusacell. The principal objectives of this reorganization are to increase the
liquidity of Iusacell's publicly-held shares, fund the acquisition of
concessions and infrastructure to provide personal communications services in
northern Mexico and create additional structural flexibility to obtain debt
financing for Iusacell's capital expenditure program. As part of this
reorganization, a new holding company has been created to effect an exchange
offer of new holding company shares for Iusacell shares. Upon the consummation
of this exchange offer, the new holding company will hold the shares of
Iusacell. Bell Atlantic and the Peralta Group intend to enter into a new
shareholders

                                       33
<PAGE>

agreement with terms and conditions that are substantially similar to those
contained in the Iusacell Shareholders Agreement. Upon consummation of the
reorganization, Bell Atlantic will retain management control over the new
holding company and Iusacell.

ITEM 5. Nature of Trading Market

Shares and ADRs

The series D and L shares of Iusacell are listed on the Bolsa Mexicana de
Valores, S.A. de C.V. ("Mexican Stock Exchange"). The American Depositary
Shares ("ADSs") representing such shares are listed on the New York Stock
Exchange, Inc. (the "New York Stock Exchange" or "NYSE") under the symbols
CEL.D and CEL, respectively. The ADSs are evidenced by American Depositary
Receipts issued by the Bank of New York under separate Deposit Agreements among
Iusacell, the Depositary and the holders from time to time of ADRs.

The following tables present for the periods indicated, the high, low and
period end sales prices and the average daily trading volume of the series D
and L common shares on the Mexican Stock Exchange as reported by the Mexican
Stock Exchange, and the high, low and period end sales price and the average
daily trading volume of the series D and L ADSs on the New York Stock Exchange
as reported by the New York Stock Exchange.

                        Mexican Stock Exchange (in Ps.)

<TABLE>
<CAPTION>
                                                                  Average Daily
Period                                          High   Low  Close Trading Volume
------                                          ----- ----- ----- --------------
                                                                     (shares)
<S>                                             <C>   <C>   <C>   <C>
Series D
First Quarter 1997.............................  7.15  4.94  7.15      2,081
Second Quarter 1997............................ 11.08  7.17 11.08        758
Third Quarter 1997.............................  9.77  9.77  9.77      2,484
Fourth Quarter 1997............................ 12.75  9.07 12.75    159,903
First Quarter 1998............................. 12.89 12.73 12.73      1,823
Second Quarter 1998............................  8.76  8.76  8.76        403
Third Quarter 1998.............................  8.52  4.00  4.00        661
Fourth Quarter 1998(/1/).......................  4.00  4.00  4.00          0
Series L
First Quarter 1997.............................  9.34  6.79  8.46     14,105
Second Quarter 1997............................ 13.97  8.98 13.97      6,489
Third Quarter 1997............................. 14.77 13.47 13.97     34,077
Fourth Quarter 1997............................ 17.24 12.97 17.20     44,456
First Quarter 1998............................. 18.86 16.27 18.86      5,818
Second Quarter 1998............................ 16.47 16.17 16.17        866
Third Quarter 1998............................. 14.56  4.90  4.90     14,452
Fourth Quarter 1998............................  8.50  4.50  8.10      1,935
</TABLE>


                                       34
<PAGE>

                       New York Stock Exchange (in U.S.$)

<TABLE>
<CAPTION>
                                                                  Average Daily
Period                                        High   Low   Close  Trading Volume
------                                        ----   ---   -----  --------------
                                                                      (ADSs)
<S>                                          <C>    <C>    <C>    <C>
Series D
First Quarter 1997..........................  9.625  5.605  8.375      9,958
Second Quarter 1997......................... 15.125  8.375 14.750     10,238
Third Quarter 1997.......................... 16.000 11.000 12.500      5,648
Fourth Quarter 1997......................... 15.875 12.000 15.250     13,277
First Quarter 1998.......................... 16.500 13.625 14.000     10,853
Second Quarter 1998......................... 13.813  9.250  9.250     10,888
Third Quarter 1998.......................... 12.188  3.875  4.656      6,211
Fourth Quarter 1998.........................  8.750  4.125  6.313      4,316
Series L
First Quarter 1997.......................... 12.000  7.125 10.375     54,169
Second Quarter 1997......................... 18.875 10.750 18.375     44,148
Third Quarter 1997.......................... 20.000 15.375 19.938     45,653
Fourth Quarter 1997......................... 22.438 17.125 21.688     38,135
First Quarter 1998.......................... 22.813 19.063 20.625     31,575
Second Quarter 1998......................... 20.563 13.625 13.750     33,946
Third Quarter 1998.......................... 16.500  4.563  4.938     47,167
Fourth Quarter 1998.........................  9.813  4.375  7.125     33,575
</TABLE>
-------
(/1/)There was no trading of series D shares during this period.

Trading on the Mexican Stock Exchange

The Mexican Stock Exchange, which was founded in 1894 and has operated
continuously since 1907, is located in Mexico City and is Mexico's only stock
exchange. The Mexican Stock Exchange is organized as a corporation, and its
shares are owned by Mexico's 33 operating brokerage firms. These firms are
exclusively authorized to trade on the floor of the Mexican Stock Exchange.

Electronic trading on the Mexican Stock Exchange takes place between the hours
of 8:30 a.m. and 3:00 p.m., Mexico City time, on each weekday other than public
holidays. Lot sizes are of 1,000 shares. Brokerage firms are permitted to buy
odd lots for their own account. The Mexican Stock Exchange publishes an
official daily price list that includes price information for each listed
security.

The Mexican Stock Exchange operates a system of automatic suspension of trading
in a number of shares as a means of controlling excessive price volatility.
Each day, a price band, with upper and lower limits, for such shares is
established. If, during the day, a bid or offer in respect of a listed share is
accepted at a price outside this band, trading in all series of shares issued
by Iusacell of such listed shares is automatically suspended for one hour. The
automatic suspension system does not apply to equity securities such as
Iusacell's series D and L shares, which also trade in the form of depositary
shares on exchanges, including automated quotation systems, other than the
Mexican Stock Exchange, unless otherwise authorized by the CNBV. In addition,
the Mexican Stock Exchange may also suspend trading of a security, including
securities not subject to the automatic suspension system for up to five days
if it determines that disorderly trading is occurring with respect to such
security, which may be extended beyond five days if so approved by the CNBV.

Settlement is effected two trading days after a share transaction is completed
on the Mexican Stock Exchange. Deferred settlements, even if by mutual
agreement, are not permitted without the approval of the CNBV. All securities
traded on the Mexican Stock Exchange are on deposit with Indeval, which
commenced operations in 1979. Pursuant to the Mexican Securities Market Law of
1975, the only persons authorized to be shareholders of Indeval are the Mexican
Central Bank, brokerage firms, securities specialists, stock exchanges, credit
institutions and insurance and bonding companies. Indeval acts as a clearing
house, depositary, custodian, settlement, transfer and registration institution
for Mexican Stock Exchange transactions, eliminating the need for physical
delivery of securities.


                                       35
<PAGE>

The Mexican Stock Exchange is Latin America's second largest exchange in terms
of market capitalization, but it remains relatively small and illiquid compared
to major world markets. As of December 31, 1998, 195 Mexican companies were
listed on the Mexican Stock Exchange, excluding mutual funds. During 1998, the
ten most actively traded equity issues represented approximately 47.0% of the
total volume of the shares traded on the Mexican Stock Exchange, not including
public offerings. Although there is substantial participation by the public in
the trading of securities on the Mexican Stock Exchange, a major part of such
activity reflects transactions of institutional investors. There is no formal
over-the-counter market for securities in Mexico.

Market Regulation and Registration Standards

On April 28, 1995, the National Banking and Securities Commission Law (Ley de
la Comision Nacional Bancaria y de Valores) was enacted, which merged the
former Mexican National Securities Commission with the Mexican National Banking
Commission to create the CNBV, which now has supervisory jurisdiction over both
banking and securities activities. The CNBV regulates the public offering and
trading of securities and imposes sanctions on illegal use of privileged
information. The CNBV regulates the Mexican securities market, the Mexican
Stock Exchange and brokerage houses through a Board of Governors composed of 13
members, five of which are appointed by the Mexican Ministry of Finance and
Public Credit.

In order to offer securities to the public in Mexico, an issuer must meet
qualitative and quantitative requirements, and only securities for which a
listing application has been approved by the Mexican National Securities
Commission may be listed on the Mexican Stock Exchange. CNBV approval does not
imply any kind of certification or assurance relating to the merits or the
quality of the securities or the solvency of Iusacell. In 1993, the CNBV
published general rules to implement an intermediate securities market in
addition to the current market operated by the Mexican Stock Exchange in order
to permit less liquid issues and issuers with a lower capitalization to
participate in a public securities market. The general rules of the CNBV divide
the Securities Section of the National Registry of Securities and
Intermediaries, which we refer to as the RNVI, into two subsections, Subsection
A and Subsection B.

In general, in order to become registered and maintain such registration in
Subsection A of the RNVI, an issuer is required to meet more stringent
qualitative and quantitative requirements than for Subsection B. To become
registered in Subsection A, an issuer is generally required to have:

 .  at least three years operating history unless the issuer is a holding
   company, in which case the issuer's principal subsidiaries must have an
   operating history of at least three years,

 .  stockholders' equity of at least 125,000,000 unidades de inversion, which we
   refer to as UDIs, and are inflation-indexed currency units (equivalent to
   Ps.295.3 million or U.S.$29.8 million as of December 31, 1998),

 .  profits for the last three years of operation taken as a whole,

 .  a public float of at least 15% of the capital stock on a fully diluted
   basis, and

 .  as a result of its initial offering, at least 200 stockholders, with
   diversified individual participation with respect to the total amount of the
   offering.
To maintain their registration in Subsection A, issuers are required to have:

 .  stockholders' equity of at least 62,500,000 UDIs (equivalent to Ps.147.6
   million or U.S.$14.9 million as of December 31, 1998),

 .  a public float of at least 12% of the capital stock on a fully diluted
   basis, and

 .  at least 100 stockholders, whose individual participation is diversified
   with respect to the total capitalization of the issuer, in accordance with
   the current market price for the securities.

The CNBV has the authority to waive one or more of these requirements under
certain circumstances.

The requirements for registration in Subsection B of the RNVI are similar to
those for registration in Subsection A, except that the quantitative
requirements are lower. The Mexican Stock Exchange carries out an annual review
of each Subsection A issuer to determine if it continues to meet the
eligibility requirements for registration in Subsection A. The registration of
an issuer's securities may be reclassified to Subsection B if the issuer's
stockholders' equity is less than 62,500,000 UDIs but more than 10,000,000 UDIs
or, if as a result of a spin-off, the issuer does not meet the requirement

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<PAGE>

for Subsection A but meets the requirements for Subsection B. In other
instances, where an issuer fails to comply with any of the requirements for
either Subsection, as appropriate, the Mexican Stock Exchange may request such
issuer to submit a correction program. If the program is not submitted or
complied with by the issuer, the registration and listing with the Mexican
Stock Exchange may be canceled by the CNBV. Securities which are offered
outside Mexico are required to be registered in the Special Section of the
RNVI.

Iusacell is registered in Subsection A of the RNVI.

Pursuant to the Mexican Securities Market Law, the CNBV must be notified before
stockholders of a company listed on the Mexican Stock Exchange effect one or
more simultaneous or successive transactions affecting 10% or more of such
company's capital stock, other than on the Mexican Stock Exchange. The holders
of the shares being transferred in such transactions are obligated to inform
the CNBV of the results of the transactions within three days of completion of
the last transaction, or that the transactions have not been completed. The
CNBV will notify the Mexican Stock Exchange of such transactions, without
specifying the names of the parties involved.

Issuers of listed securities are required to file unaudited quarterly financial
statements and audited annual financial statements as well as various periodic
reports with the CNBV and the Mexican Stock Exchange.

ITEM 6. Exchange Control and Other Limitations Affecting Security-Holders

Mexico abolished its exchange control system on November 11, 1991. Under the
previous Mexican exchange control system established in 1982, Mexican residents
and companies were entitled to purchase, and required to sell, foreign
currencies for certain purposes at a controlled rate of exchange (the
"Controlled Rate") that was established daily by Banco de Mexico. Transactions
to which the Controlled Rate applied included payments for virtually all
merchandise imports, revenues from virtually all merchandise exports, royalty
payments and payments of principal, interest and related expenses with respect
to indebtedness to foreign creditors registered with the Mexican government.
For all transactions to which the Controlled Rate did not apply, foreign
currencies could also be purchased, if they were available, at the then
prevailing domestic free market rate for the type of transaction (the "Free
Market Rate").

From November 11, 1991 to October 20, 1992, Banco de Mexico permitted the Free
Market Rate to fluctuate according to supply and demand within a moving band.
In late December 1994, the Mexican government responded to exchange rate
pressures first by increasing by 15% the upper limit of the Peso/dollar
exchange rate band and then, two days later, allowing the Peso to fluctuate
freely against the dollar. By December 31, 1994, the Peso/dollar exchange rate,
which had been Ps.3.466 to $1.00 on December 19, 1994, was Ps.5.000 to $1.00.
At December 31, 1996, 1997 and 1998 the Peso/dollar exchange rate was Ps.7.881
to $1.00, Ps.8.070 to $1.00 and Ps.9.901 to $1.00, respectively.

Fluctuations in the exchange rate between the Peso and the dollar affect the
dollar equivalent of the Peso price of securities traded on the Mexican Stock
Exchange, including the Shares and, as a result, are likely to affect the
market price of the ADSs. The Peso devaluation most likely had a direct effect
on the drop in the market price of the ADSs recorded after the devaluation. See
"Item 5--Nature of Trading Market." Such fluctuations also would affect the
dollar conversion by the Depositary of any cash dividends paid in Pesos on
Shares represented by ADSs. Fluctuations in the exchange rate can also affect
Iusacell's operating results depending on the terms of its contractual
arrangements and the effect of the fluctuation on the specific industries
served by Iusacell.

Except for the period from September through December 1982 during the Mexican
liquidity crisis, Banco de Mexico consistently has made foreign currency
available to Mexican private sector entities (such as Iusacell) to meet their
foreign currency obligations. Nevertheless, in the event of renewed shortages
of foreign currency, there can be no assurance that Banco de Mexico would
continue to make foreign currency available to private sector companies or that
foreign currency needed by Iusacell to service foreign currency obligations
could be purchased in the open market without substantial additional cost.

Pursuant to the provisions of NAFTA, Mexico remains free to impose foreign
exchange controls on investments made in Mexico, including those made by U.S.
and Canadian investors.

Foreign investment in capital stock of Mexican corporations in certain economic
sectors, including cellular telephony, is regulated by the Foreign Investment
Law (the "Foreign Investment Law") and the regulations applicable thereto (the
"Foreign Investment Regulations"). Under the Foreign Investment Law, foreign
investment is defined in general as the

                                       37
<PAGE>

participation of foreign investors in the capital stock of Mexican
corporations, or investments made therein by Mexican corporations in which
foreign capital has a majority participation, and the participation of foreign
investors in certain activities regulated by the Foreign Investment Law.
Foreign investors are defined as non-Mexican individuals, non-Mexican legal
entities and foreign entities without legal personality.

The National Commission on Foreign Investment (the "Foreign Investment
Commission") and the National Registry of Foreign Investment are responsible
for the administration of the Foreign Investment Law and Foreign Investment
Regulations. In order to comply with restrictions on the percentage of their
capital stock that may be owned by non-Mexican investors, Mexican companies
that are engaged in specified restricted industries typically limit particular
classes of their stock to ownership by Mexican individuals and Mexican
corporations in which foreign investment has a majority participation.

As a general rule, the Foreign Investment Law allows foreign investment in up
to 100% in the capital stock of Mexican companies, except for those engaged in
certain specified restricted industries, such as basic telephone service, where
foreign investment control is limited to 49% of the voting capital stock.
Foreign investment may, however, participate in a proportion in excess of 49%
of the voting capital stock of a Mexican corporation engaged in the cellular
telephone business with the advance approval of the Foreign Investment
Commission. Iusacell has applied for and obtained such approval. In addition to
the limitations on share ownership, the Foreign Investment Law and Foreign
Investment Regulations require that Mexican shareholders retain the power to
determine the administrative control and the management of Mexican corporations
engaged in industries in which special restrictions as to foreign investment
are applicable.

Under Iusacell's By-Laws, and as permitted by the approval mentioned above, the
shares of the Company are not restricted to Mexican ownership. Pursuant to
Iusacell's By-Laws, the series A shares must always represent at least 51% of
the voting stock of Iusacell.

ITEM 7. Taxation

General

The following is a general summary of certain anticipated U.S. and Mexican
federal tax consequences of the ownership of Iusacell's 10% Senior Notes due
2004 (the "Notes"), its series D and L shares (the "Shares") and American
Depositary Shares Representing such Shares (the "ADSs"). The tax treatment of a
holder of the Notes, Shares or ADSs may vary depending upon the particular
situation of the holder. The following summary of U.S. federal income tax
consequences is limited to investors who are U.S. Persons (as defined below)
(except as explicitly provided below) who will hold the Notes, Shares or ADSs
as "capital assets" within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code") and whose "functional currency" within
the meaning of Section 985 of the Code is the dollar. Certain holders
(including, but not limited to, insurance companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax, holders
that are not U.S. Persons, brokers-dealers and holders of 10% or more of the
voting shares of the Company) may be subject to special rules not discussed
below. The discussion below also does not address the effect of any United
States state or local tax law on a holder of the Notes, Shares or ADSs. As used
herein, the term "U.S. Person" means an individual who is a citizen or resident
of the United States, a corporation organized in or under the laws of the
United States or any state thereof, an estate or trust that is subject to
United States federal income taxation without regard to the source of its
income, and a trust, if both (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) one
or more United States persons have the authority to control all substantial
decisions of the trust. In the case of a holder of the Notes, Shares or ADSs
that is a partnership for United States tax purposes, each partner will take
into account its allocable share of income or loss from Notes, Shares of ADSs,
and will take such income or loss into account under the rules of taxation
applicable to such partner, taking into account the activities of the
partnership and the partner.

The summary does not constitute, and should not be considered as, legal or tax
advice to holders of the Notes, Shares or ADSs.

The summary is for general information purposes only and is based upon the tax
laws of the United States and Mexico as in effect on the date hereof, which are
subject to change, possibly with retroactive effect. In addition, the U.S.
Treasury has expressed concerns that parties to whom American Depositary Shares
are released may be taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. Holders of American Depositary Shares.
Accordingly, the analysis of the creditability of Mexican taxes described below
could be affected by future actions that may be taken by

                                       38
<PAGE>

the U.S. Treasury. Prospective purchasers of the Notes, Shares or ADSs should
consult their own tax advisors as to the U.S., Mexican or other tax
consequences of the purchase, ownership and disposition of Shares and ADSs,
including, in particular, the effect of any foreign, state or local tax laws.

Mexico and the United States have signed and ratified a Convention for the
Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to
Taxes on Income and Protocols thereto (collectively, the "Tax Treaty"). The Tax
Treaty is currently in effect and provisions of the Tax Treaty that may affect
holders of the Notes, Shares or ADSs are summarized below. Mexico has also
executed double taxation treaties with other countries as well as agreements
providing for the exchange of information with respect to tax matters, some of
which are in force. The following summary does not take into account the effect
of any such treaties. Holders must consult with their tax advisors as to their
entitlement to the benefits afforded by the Tax Treaty.

In general, for U.S. federal income tax purposes, holders of ADRs evidencing
ADSs will be treated as the owners of the Shares represented by those ADSs.

Taxation of Distributions

U.S. Tax Considerations

Distributions paid out of current or accumulated earnings and profits with
respect to the L Shares and D Shares represented by the Shares or ADSs will be
includible in the gross income of a holder that is a U.S. Person (a "U.S.
holder"), as ordinary income when the distributions are received by the
Depositary or by the U.S. holder of a certificated ADR and will not be eligible
for any dividends received deduction otherwise allowable to corporations under
Section 243 of the Code. To the extent that a distribution exceeds earnings and
profits, it will be treated first as a return of the U.S. holder's basis to the
extent thereof, and then as gain from the sale or disposition of a capital
asset. Dividends paid in Pesos will be includible in the income of a U.S.
holder in a dollar amount calculated by reference to the exchange rate in
effect on the day the Pesos are received by the Depositary or by the U.S.
holder of a certificated ADR. U.S. holders should consult their own tax
advisors regarding the treatment of any foreign currency gain or loss on any
Pesos received which are not converted into dollars on the day the Pesos are
received. Dividends generally will constitute foreign source "passive income"
(or in the case of certain holders, "financial services income") for U.S.
foreign tax credit purposes.

Distributions of additional L Shares or B Shares to holders of Shares with
respect to their ADSs that are made as part of a pro rata distribution to all
shareholders of the Company generally will not be subject to U.S. federal
income tax.

A holder of Shares or ADSs that is, with respect to the United States, not a
U.S. holder (a "non-U.S. holder") generally will not be subject to U.S. federal
income or withholding tax on dividends received on Shares or ADSs. Special
rules may apply in the case of non-U.S. holders (i) that are engaged in a U.S.
trade or business, (ii) that are former citizens or long-term residents of the
United States, "controlled foreign corporations," "foreign personal holding
companies," corporations which accumulate earnings to avoid U.S. Federal income
tax, and certain foreign charitable organizations, each within the meaning of
the Code, or (iii) certain non resident alien individuals who are present in
the United States for 183 days or more during a taxable year. Such persons are
urged to consult their tax advisors before purchasing shares or ADSs.

Mexican Tax Considerations

Dividends, either in cash or in any other form, paid with respect to the Shares
(including Series B Shares and Series L Shares represented by ADSs), will be
subject to 5% Mexican withholding tax based on the amount of the distributed
dividend, multiplied by a factor of 1.5385, which produces a net effect of
approximately 7.7%. In accordance with rules issued by the Ministry of Finance
and Public Credit, the applicable factor is 1,515 for profits resulting from
the previously taxed net earnings account (cuenta de utilidad fiscal neta or
CUFIN) at December 31, 1999. U.S. holders are urged to consult their U.S. tax
advisors regarding the availability of the foreign tax credit with respect to
Mexican withholding taxes. A Mexican corporation will not be subject to any tax
if the amount maintained in its previously reinvested taxed earnings account
(cuenta de utilidad fiscal neta reinvertida or CUFINRE, required for
corporations that have elected to defer a portion of their income taxes) and
CUFIN exceeds the dividend payment to be made. However, corporations that have
elected to defer their income taxes are required to pay such deferred taxes by
applying the rate of 5% (3% during 1999) to the amount of the dividend
multiplied by a factor of 1.5385. Mexican corporations must first exhaust the
balance in their CUFINRE before they can utilize CUFIN balances.

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<PAGE>

If the dividend payment is in an amount greater than the Mexican corporation's
CUFINRE and CUFIN balance (which may occur in a year when net profits exceed
the balance in such accounts), then the issuer will be required to pay a 35%
income tax on an amount equal to the product of (i) the portion of the grossed-
up amount which exceeds such balance times (ii) 1.5385. Such amounts will
generally not constitute creditable foreign taxes with respect to a U.S.
Holder. If the Company were required to pay such income tax, the profits of the
Company would be reduced.

Taxation of Interest Payments

U.S. Tax Considerations

Generally, payments of interest on a Note will be taxable to a U.S. holder as
ordinary interest income at the time such payments are accrued or are received,
in accordance with the U.S. holder's regular method of account for federal
income tax purposes. Interest paid by the Company will constitute income from
sources outside the United States, and with certain exceptions, will be
"passive" or "financial services" income, which is treated separately from
other types of income for purposes of computing the foreign tax credit
allowable to a U.S. holder (as discussed below).

A non-U.S. holder generally will not be subject to U.S. federal income or
withholding tax on dividends received with respect to Notes. Special rules may
apply in the case of non-U.S. holders (i) that are engaged in a U.S. trade or
business, (ii) that are former citizens or long-term residents of the United
States, "controlled foreign corporations," "foreign personal holding
companies," corporations which accumulate earnings to avoid U.S. Federal income
tax, and certain foreign charitable organizations, each within the meaning of
the Code, or (iii) certain non resident alien individuals who are present in
the United States for 183 days or more during a taxable year. Such persons are
urged to consult their tax advisors before purchasing Notes.

Interest paid on the Notes will constitute income from sources outside the
United States, and, with certain exceptions, will be grouped together with
other items of "passive" income, for purposes of computing the foreign tax
credit allowable to a U.S. holder. If the interest payments are subject to a
withholding tax imposed by a foreign country at a rate of 5 percent or more,
the interest may be considered "high withholding tax interest" for purposes of
computing the foreign tax credit. If a U.S. holder is predominantly engaged in
the active conduct of a banking, insurance, financing or similar business, the
interest may be considered "financial services income" for purposes of
computing the foreign tax credit.

A U.S. holder will be required to include foreign withholding taxes, if any,
imposed on payments on a Note in gross income as interest income. Such
treatment will be required regardless of whether, as will generally be true,
the Company is required to pay additional amounts so that the amount of Mexican
withholding taxes does not reduce the net amount actually received by the
holder of a Note. Subject to certain limitations, a U.S. holder may be entitled
to a credit against its U.S. federal income tax liability, or a deduction in
computing its U.S. federal taxable income, for foreign income taxes withheld by
the Company. A U.S. holder may be required to provide the Internal Revenue
Service ("IRS") with a certified copy of the receipt evidencing payment of
withholding tax imposed in respect of payments on the Notes in order to claim a
foreign tax credit in respect of such foreign withholding tax.

Mexican Tax Considerations

Under Mexico's Income Tax Law (the "Income Tax Law"), payments of interest made
by us to a foreign holder in respect of the Notes will be subject to Mexican
withholding taxes assessed at a rate of 10% considering that the Notes have
been (1) offered outside Mexico through a bank or broker and (2) registered
with the Special Section of the National Registry for Securities and
Intermediaries. Pursuant to the Income Tax Law, during 1999, payments of
interest made by us to a foreign holder in respect of the Notes may be subject
to a 4.9% reduced Mexican withholding tax rate if in addition to satisfying the
preceding 2 requirements, (A) the effective beneficiary reside in a country
which has entered into a treaty to avoid double taxation with Mexico, (B) that
treaty is in effect, and (C) the requirements for the application of a lower
rate established in the treaty are satisfied.

In addition, under the general rules issued by the Ministry of Finance and
Public Credit (the "Reduced Rate Regulation"), payments of interest made by us
to foreign holders with respect to the Notes will be subject to withholding
taxes imposed at a rate of 4.9% (the "Reduced Rate") until March 2000 (or
thereafter if, as has been the case in the past, the effectiveness of a rule
equivalent to the Reduced Rate Regulation is extended), regardless of the place
of residence or tax regime applicable to the foreign holder recipient of the
interest, if:

 .  the requirements (1) and (2) in the preceding paragraph are satisfied;

                                       40
<PAGE>

 .  we file timely each quarter of the calendar year with the Ministry of
   Finance and Public Credit information representing that no "party related"
   to us, directly or indirectly, is the effective beneficiary of 5% or more of
   the aggregate amount of the interest payment and we maintain records
   evidencing compliance with this requirement.

Under the Reduced Rate Regulation any of the following would be a "party
related" to us: (1) shareholders of the Company that own, directly or
indirectly, individually or collectively with related persons (within the
meaning of the Reduced Rate Regulation) more than 10% of our voting stock or
(2) corporations if more than 20% of their stock is owned directly or
indirectly, individually or collectively by related persons of the Company.

If the effectiveness of the Reduced Rate Regulation is not extended beyond
March 2000, other reduced rates of Mexican withholding income tax may apply. In
particular under the Tax Treaty, the rate would be reduced to 4.9% for certain
holders that are residents of the United States (within the meaning of the Tax
Treaty) under the circumstances contemplated in the Tax Treaty.

Interest paid on the Notes held by a non-Mexican pension or retirement fund
will be exempt from Mexican withholding tax if the fund (1) has been duly
incorporated as a fund pursuant to the laws of its country of origin, (2) is
the actual beneficiary of the interest, (3) is registered with the Ministry of
Finance and Public Credit, and (4) is exempt from income taxation in its
country of origin.

In the event the effectiveness of the Reduced Rate Regulation is not extended
beyond March 1999, other reduced rates of Mexican withholding income tax may
apply. In particular under the Tax Treaty, the rate would be reduced to 4.9%
for certain holders that are residents of the United States (within the meaning
of the Tax Treaty) under certain circumstances contemplated therein.

Capital gains resulting from the sale or other disposition of the Notes by a
foreign holder will not be subject to Mexican income or other taxes.

There are no Mexican stamp, registration, or similar taxes payable by a foreign
holder in connection with the purchase ownership or disposition of the Notes. A
foreign holder of Notes will not be liable for Mexican estate, gift,
inheritance or similar tax with respect to the Notes, although gratuitous
transfers of the Notes may in some circumstances cause a Mexican income tax to
be imposed on the recipient.

Taxation of Capital Gains

U.S. Tax Considerations

Gain or loss recognized by a U.S. holder on the sale or other disposition of
the Notes, ADSs or Shares will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between such holder's
basis in the Notes, ADSs or Shares and the amount realized on the disposition.
Such gain or loss will be treated as long-term capital gain or loss of the
Notes, ADSs or Shares have been held for more than one year on the date of such
sale or other disposition. Gain recognized by a U.S. holder on a sale or other
disposition of the Notes, ADSs or Shares, including gain that arises because
the U.S. holder's basis in the Shares or ADSs has been reduced because the
distribution is treated as a return of capital rather than as a dividend,
generally will be treated as a U.S. source of income for foreign tax credit
purposes. Consequently, in the event Mexico imposes a tax on capital gains
realized by a U.S. holder on a sale or other disposition of Notes, Shares or
ADSs (see Mexican Tax Considerations), such U.S. holder may not be able to
obtain credit for such taxes against the U.S. holder's U.S. Federal income tax
liability unless (i) such gains are re-sourced as foreign source income under
the Tax Treaty or (ii) such holder can apply the credit against tax due on
income from other foreign sources. Deposits and withdrawals of Shares by U.S.
holders in exchange for ADSs will not result in the realization of gain or loss
for U.S. federal income tax purposes. U.S. holders that withdraw any Shares
should consult with their own tax advisors regarding the treatment of any
foreign currency gain or loss on any Pesos received in respect of such Shares.

A non-U.S. holder of Notes, Shares or ADSs will generally not be subject to
U.S. federal income or withholding tax on gains realized on the sale of Notes,
Shares or ADSs. Special rules apply in the case of non-U.S. holders (i) that
are engaged in a U.S. trade or business, (ii) that are former citizens or long-
term residents of the United States, "controlled foreign corporations,"
"foreign personal holding companies," corporations which accumulate earnings to
avoid U.S.

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<PAGE>

Federal income tax, and certain foreign charitable organizations, each within
the meaning of the Code, or (iii) certain non resident alien individuals who
are present in the United States for 183 days or more during a taxable year.
Such persons are urged to consult their U.S. tax advisors before purchasing
Notes, Shares or ADSs.

Mexican Tax Considerations

The sale or disposition of ADSs by holders who are nonresidents of Mexico (as
described below) will not be subject to Mexican tax. Deposits of Shares in
exchange for ADSs and withdrawals of Shares in exchange for ADSs will not give
rise to Mexican tax. Gain realized by a nonresident of Mexico on the sale or
other disposition of stock of a Mexican corporation (like the Company) through
a recognized stock exchange or highly exchangeable market is exempt from
Mexican income tax if the stock is on the list of publicly traded shares
published by the Ministry of Finance in the Official Gazette. The Shares are
included on that list. Accordingly, gain realized by a nonresident holder on
the sale or other disposition of Shares through a recognized stock exchange or
a highly exchangeable market, such as the Mexican Stock Exchange and the New
York Stock Exchange, is exempt from Mexican income tax. Pursuant to the Tax
Treaty, gain realized by qualifying U.S. Holders from the sale or other
disposition of Shares, even if the sale is not conducted through a recognized
stock exchange or a highly exchangeable market, will not be subject to Mexican
income tax except that Mexican taxes may apply if (i) 50% or more of the assets
of the Company consist of immovable property situated in Mexico, (ii) such U.S.
Holder owned 25% or more of the capital of the Company, directly or indirectly,
during the 12-month period preceding such disposition, or (iii) the gain is
attributable to a permanent establishment or fixed base of the U.S. Holder in
Mexico.

Under current law, gains realized by a nonresident holder on the sale or
disposition of Shares not conducted through a recognized stock exchange or a
highly exchangeable market generally are subject to a Mexican tax at a rate of
20% of the gross sale price. However, if the holder is a resident of a country
which is not considered to be a low tax rate country (by reference to a list of
low rate countries published by the Mexican Ministry of Finance and Public
Credit), the holder may elect to designate a resident of Mexico as its
representative, in which case the tax generally would be 40% of the gain on
such disposition. Pursuant to the Tax Treaty, the gain realized by a U.S.
holder from the sale or other disposition of Shares may not be subject to
Mexican taxes if the applicable conditions contemplated by the Tax Treaty are
met. Brokerage commissions paid in connection with transactions on the Mexican
Stock Exchange are subject to a value added tax of 15%.

For purposes of Mexican taxation, an individual is a resident of Mexico if he
or she has established his or her home in Mexico, unless he or she has resided
in another country for more than 183 calendar days during a year and can
demonstrate that he or she had become a resident of that country for tax
purposes. A legal entity is a resident of Mexico if it (i) was established
under Mexican law or (ii) has its main management in Mexico. If a legal entity
has a permanent establishment in Mexico, such permanent establishment shall be
required to pay taxes in Mexico in accordance with relevant tax provisions.

Other Mexican Taxes

There are no inheritance or succession taxes applicable to the ownership,
transfer or disposition of ADSs or Shares. There are no Mexican stamp, issuer,
registration or similar taxes or duties payable by holders of ADSs or Shares,
although gratuitous transfers of Series C shares may in some circumstances
cause a Mexican federal tax to be imposed on the recipient.

Treaties to prevent double taxation have been executed between Mexico and
several countries. This summary does not discuss the effects of the treaties
entered into by, or effective with respect to, Mexico.

Information Reporting and Backup Withholding

Each U.S. payor making payments in respect of Shares or ADSs will generally be
required to provide the IRS with certain information, including the name,
address and taxpayer identification number of the beneficial owner of Notes,
Shares or ADSs, and the aggregate amount of interest and dividends paid to such
beneficial owner during the calendar year. These reporting requirement,
however, do not apply with respect to certain beneficial owners, including

                                       42
<PAGE>

corporations, securities broker-dealers, other financial institutions, tax-
exempt organizations, qualified pension and profit sharing trusts and
individual retirement accounts.

In the event that a beneficial owner of Notes, Shares or ADSs fails to
establish its exemption from such information reporting requirements or is
subject to the reporting requirements described above and fails to supply its
correct taxpayer identification number in the manner required by applicable
law, or underreports its tax liability, as the case may be, the U.S. payor
making payments in respect of Notes, Shares or ADSs may be required to "backup"
withhold a tax equal to 31% of each payment with respect to Notes, Shares or
ADSs. This backup withholding tax is not an additional tax and may be credited
against the beneficial owner's U.S. Federal income tax liability if the
required information is furnished to the IRS. For those non-U.S. holders who
are not exempt recipients, compliance with the identification procedures
contained in IRS Form W-8 will establish an exemption from information
reporting and backup withholding.

The United States Treasury Department has recently issued new regulations (the
"New Regulations") regarding the withholding and information reporting rules
discussed above. In general, the New Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and modify reliance standards. The New Regulations are
generally effective for payments made on or after January 1, 2001, subject to
certain transition rules. Potential investors of Notes, Shares or ADSs should
consult their own tax advisors concerning the adoption of the New Regulations
and the potential effect on their acquisition, ownership and disposition of
Notes, Shares or ADSs.

ITEM 8. Selected Financial Data

The following tables present selected consolidated financial information of
Iusacell and its consolidated subsidiaries. This information has been derived
from, and should be read in conjunction with, the audited consolidated
financial statements of Iusacell as of December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and 1996 (the "Consolidated Financial
Statements") appearing elsewhere in this annual report.

The financial statements have been prepared in accordance with Mexican GAAP,
which differs in significant respects from U.S. GAAP. Pursuant to Mexican GAAP,
the financial statements and the selected financial data presented below have
been prepared in accordance with Bulletin B-10 of the Mexican Institute of
Public Accountants, which provides for the recognition of certain effects of
inflation.

Until December 31, 1996, Bulletin B-10 required Iusacell to restate non-
monetary assets at current replacement cost, to restate non-monetary
liabilities using the National Consumer Price Index (Indice Nacional de Precios
al Consumidor), also referred to as the NCPI, to restate the components of
shareholders' equity using the NCPI and to record gains or losses in purchasing
power from holding monetary liabilities or assets. Beginning on January 1,
1997, Bulletin B-10 requires Iusacell to restate non-monetary assets (other
than inventory) using the NCPI.

Bulletin B-10 also requires restatement of all financial statements to constant
Pesos as of the date of the most recent balance sheet presented. Accordingly,
all data in the financial statements and in the selected financial data set
forth below have been restated in constant Pesos as of December 31, 1998. The
effect of these inflation accounting principles has not been reversed in the
reconciliation to U.S. GAAP. Note 20 to the Audited Consolidated Financial
Statements contains a reconciliation of Iusacell's net income and stockholders'
equity to U.S. GAAP.

The U.S. dollar amounts provided below are translations from the Peso amounts,
solely for the convenience of the reader, at the noon buying rate for December
31, 1998 of Ps.9.9010 to U.S.$1.00. These translations 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 as of any
dates mentioned in this annual report.


                                       43
<PAGE>

<TABLE>
<CAPTION>
                                                  As of and for the Year Ended December 31,
                          ----------------------------------------------------------------------------------------------
                              1994           1995           1996           1997           1998              1998
                          -------------  -------------  -------------  -------------  -------------  -------------------
                                                                                                        (Thousands of
                              (Thousands of constant December 31, 1998 Pesos, except ratios             U.S. dollars,
                                                and subscriber data)(/1/)                            except ratios)(/2/)
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
Income Statement Data:
Mexican GAAP:
Revenues:
Services................  Ps. 2,583,128  Ps. 2,083,117  Ps. 1,887,841  Ps. 1,830,309  Ps. 2,449,130     U.S.$ 247,362
Telephone equipment
 sales and other........        352,395        371,173        304,505        376,414        375,297            37,905
<CAPTION>
                          -------------  -------------  -------------  -------------  -------------  -------------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
 Total..................      2,935,523      2,454,290      2,192,346      2,206,723      2,824,427           285,267
Cost of sales:
Cost of services........        750,703        763,724        692,128        609,910        766,400            77,406
Cost of telephone equip-
 ment and other.........        173,263        206,014        169,766        238,936        200,808            20,282
<CAPTION>
                          -------------  -------------  -------------  -------------  -------------  -------------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
 Total..................        923,966        969,738        861,894        848,846        967,208            97,688
Gross profit............      2,011,557      1,484,552      1,330,452      1,357,877      1,857,219           187,579
Operating expenses......      1,249,705      1,084,028        959,214        882,194      1,077,760           108,854
Depreciation & amortiza-
 tion...................        752,064        863,599        779,640        690,222        794,915            80,286
450 Project non-cash
 writedown..............            --             --             --             --         981,484            99,131
Operating profit
 (loss).................          9,788       (463,075)      (408,402)      (214,539)      (996,940)         (100,692)
Other income, net.......            --             --             --             --         132,698            13,403
Integral financing cost
 (gain):
Interest expense, net...        263,091        223,407        362,440        294,390        223,356            22,559
Foreign exchange (gain)
 loss, net..............        676,538        909,281        (80,098)        57,483        836,425            84,479
Gain on net monetary po-
 sition.................        (64,436)      (646,734)      (449,128)      (347,200)      (678,936)          (68,573)
<CAPTION>
                          -------------  -------------  -------------  -------------  -------------  -------------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
 Total..................        875,193        485,954       (166,786)         4,673        380,845            38,465
Equity participation in
 net income (loss) of
 associated companies...          3,996        (50,473)         1,700        187,034         24,859             2,511
Provision for equipment
 impairment(/3/)........            --             --             --       1,100,703            --                --
 Loss before asset tax,
 employee profit shar-
 ing, minority interest,
 extraordinary item and
 discontinued opera-
 tions..................       (861,409)      (999,502)      (239,916)    (1,132,881)    (1,220,228)         (123,243)
Provision for asset
 tax....................         41,860         37,516         45,388         53,772         64,216             6,486
Employee profit shar-
 ing....................            835          2,684            --             --             --                --
<CAPTION>
                          -------------  -------------  -------------  -------------  -------------  -------------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
 Total..................         42,695         40,200         45,388         53,772         64,216             6,486
 Loss before minority
 interest, extraordinary
 item and discontinued
 operations.............       (904,104)    (1,039,702)      (285,304)    (1,186,653)    (1,284,444)         (129,729)
Minority interest.......             58         47,750          4,099            246          5,646               570
<CAPTION>
                          -------------  -------------  -------------  -------------  -------------  -------------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
 Loss before extraordi-
 nary item and discon-
 tinued operations......       (904,046)      (991,952)      (281,205)    (1,186,407)    (1,278,798)         (129,159)
Extraordinary
 item(/4/)..............            --             --         187,226)           --             --                --
Loss from discontinued
 operations(/5/)........            --             --             --             --         (18,444)           (1,862)
<CAPTION>
                          -------------  -------------  -------------  -------------  -------------  -------------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
Net loss................       (904,046)      (991,952)      (468,431)    (1,186,407)    (1,297,242)         (131,021)
<CAPTION>
                          =============  =============  =============  =============  =============  ===================
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
Loss per share before
 extraordinary item.....      Ps. (0.96)     Ps. (1.02)     Ps. (0.28)     Ps. (1.11)     Ps. (1.14)      U.S.$ (0.12)
Net loss per share......          (0.96)         (1.02)         (0.47)         (1.11)         (1.16)            (0.12)
U.S. GAAP:(/6/)
Total revenues..........  Ps. 2,935,524  Ps. 2,454,290  Ps. 2,294,097  Ps. 2,309,322  Ps. 2,842,451      U.S.$287,087
Operating profit
 (loss).................          9,787       (463,075)      (648,827)    (1,471,402)      (843,580)          (85,201)
Net income (loss).......       (883,422)      (468,405)      (167,320)      (805,398)    (1,288,752)         (130,164)
Basic and diluted loss
 per share(/7/).........          (0.94)         (0.47)         (0.19)         (0.75)         (1.15)            (0.12)
</TABLE>

FOOTNOTES APPEAR ON PAGE 46



                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                  As of and for the Year Ended December 31,
                          -----------------------------------------------------------------------------------------------
                              1994          1995          1996          1997          1998                1998
                          ------------  ------------  ------------  ------------  ------------  -------------------------
                           (Thousands of constant December 31, 1998 Pesos, except ratios           (Thousands of U.S.
                                             and subscriber data)(/1/)                           dollars, except ratios
                                                                                                and subscriber data)(/2/)
<S>                       <C>           <C>           <C>           <C>           <C>           <C>
Balance Sheet Data:
Mexican GAAP:
Working capital.........      (491,954)   (1,862,581)   (2,101,612)     (308,963)   (1,201,744)          (121,376)
Property & equipment,
 net....................     5,771,778     5,526,947     4,264,953     3,575,688     5,307,983            536,106
Total assets............    10,171,565     9,394,864     7,686,834     7,917,448     9,928,198          1,002,747
Total debt..............     1,863,591     2,140,494     1,811,389     2,634,921     4,453,456            449,799
Stockholders' equity....     7,238,386     5,658,338     4,299,106     3,947,747     3,666,548            370,321
U.S. GAAP:(/6/)
Working capital.........           --      2,156,054    (2,254,463)     (498,018)   (1,350,657)          (136,416)
Property & equipment,
 net....................     5,771,778     5,526,947     4,264,953     3,575,688     5,141,227            519,263
Total assets............    10,139,766    10,230,917     8,540,660     8,704,121    10,326,531          1,042,979
Total debt..............     1,863,591     2,140,494     1,811,389     2,634,921     4,464,192            450,883
Minority interests......        14,277       (33,040)        7,174        13,727           811                 82
Stockholders' equity....     7,006,520     4,785,584     3,900,114     3,905,250     3,668,677            370,536
Other Financial Data:
Mexican GAAP:
EBITDA(/8/).............       761,852       400,524       371,238       475,683       774,156             78,190
U.S. GAAP:
EBITDA(/8/).............       761,852       400,524       130,813      (781,180)      938,276             94,766
Cash Flow Data:(/9/)
Mexican GAAP:
Net cash provided (used)
 by operating activi-
 ties...................       455,987       718,679       408,509      (267,562)      681,454             68,827
Net cash used in invest-
 ing activities.........    (3,769,749)   (1,097,788)      (63,034)   (1,369,860)   (3,446,890)          (348,136)
Net cash provided (used)
 by financing activi-
 ties...................     2,409,963       276,899      (450,379)    1,652,025     2,881,296            291,011
U.S. GAAP:(/6/)
Net cash provided (used)
 by operating activi-
 ties...................     1,551,139       308,650      (101,779)       93,292     1,705,271            172,232
Net cash provided (used)
 in investing activi-
 ties...................    (3,748,392)   (1,097,788)      173,287    (1,213,700)   (3,280,133)          (331,293)
Net cash provided (used)
 by financing activi-
 ties...................     1,293,452       686,931      (176,412)    1,135,011     1,690,722            170,763
Subscriber Data:
POPs....................    61,464,945    63,447,714    64,730,493    66,014,273    67,298,053
Subscribers(/10/)
 Contract...............       194,723       208,802       159,144       199,964       277,014
 Prepay.................           --          1,399        73,762       200,159       478,361
 Total..................       194,723       210,201       232,906       400,123       755,375
Gross subscriber addi-
 tions..................       117,539       103,733       172,519       406,353       747,720
Average subscrib-
 ers(/11/)..............       161,042       202,462       221,554       387,765       742,601
Average monthly contract
 churn(/12/)............          2.67%         3.62%         4.28%         2.95%         2.58%
Penetration(/13/).......          0.32%         0.33%         0.36%         0.61%         1.12%
Average monthly MOUs per
 subscriber(/14/).......           179           140           118           105            87
Nominal average monthly
 revenue per subscrib-
 er(/15/)...............       Ps. 595       Ps. 464       Ps. 492       Ps. 464           361           U.S.$ 36
</TABLE>

FOOTNOTES APPEAR ON PAGE 46

                                       45
<PAGE>

 (/1/) According to Mexican GAAP, financial data for all periods in the
  financial statements included in this annual report, unless otherwise
  indicated, have been restated in constant December 31, 1998 Pesos.
  Restatement into December 31, 1998 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, 1998.
  The inflation indices used in this annual report are 2.6636 for 1994 figures,
  1.7528 for 1995 figures, 1.3725 for 1996 figures and 1.1861 for 1997 figures.

 (/2/) Peso amounts were converted to U.S. dollars at the exchange rate of
  Ps.9.901 per U.S.$1.00 reported by the Federal Reserve Bank of New York as
  its noon buying rate for Pesos on December 31, 1998. Such conversions 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 for such date, or at all.

 (/3/) Iusacell's financial statements for the year ended December 31, 1997
  have been restated to reflect a reassessment of the accounting for the
  impairment charge related to the analog communications network. The
  impairment which had previously been recorded directly against stockholders'
  equity has now been recorded as an expense under Mexican GAAP in the restated
  financial statements. For U.S. GAAP purposes, the impairment charge relating
  to the analog communications equipment was initially recorded as an operating
  expense. See Note 22 to the Audited Consolidated Financial Statements.

 (/4/) For 1996, the extraordinary item represents restructuring expenses
  associated with the reorganization and change in management control of
  Iusacell, the write-off of obsolete network equipment and an additional
  reserve for doubtful accounts.

 (/5/) In December 1998, Iusacell discontinued the operations of its
  subsidiary, Cellular Solutions de Mexico, S.A. de C.V., a company engaged in
  the selling of accessories for cellular handsets. Cellular Solutions de
  Mexico transferred all its existing inventories as of December 31, 1998 to
  another subsidiary of Iusacell and terminated all its employees during
  January and February 1999. See Note 19 to the Audited Consolidated Financial
  Statements. Under U.S. GAAP, the loss from discontinued operations is
  recorded as an operating expense.

 (/6/) See Note 20 to the Audited Consolidated Financial Statements and "Item
  9--Management's Discussion and Analysis of Financial Condition and Results of
  Operations--U.S. GAAP Reconciliation" for a discussion of differences between
  U.S. GAAP and Mexican GAAP.

 (/7/) Diluted earnings (loss) per share for the years ended December 31, 1998
  and 1997 is equal to basic earnings (loss) per share. Any unutilized
  drawdowns and conversions under the subordinated convertible facility with
  Bell Atlantic and the authorized but unissued shares subject to the
  management executive employee stock purchase plan are excluded from the
  computation of diluted earnings (loss) per share because to include them
  would have been antidilutive for the periods presented because the loss per
  share for such periods would have been reduced. For the years ended December
  31, 1998 and 1997, the number of potentially dilutive shares that were
  excluded from the computation of diluted earnings (loss) per share for any
  unutilized drawdowns and conversions under the facility with Bell Atlantic
  were 69,285,714 and 214,285,714 shares, respectively, and for the authorized
  but unissued shares subject to the management executive employee stock
  purchase plan were 70,004 and 262,666 shares, respectively.

  Diluted earnings (loss) per share for the years ended December 31, 1996,
  1995 and 1994 is equal to basic earnings (loss) per share as Iusacell did
  not have any potentially dilutive securities.

 (/8/) EBITDA as used in this annual report is operating profit (loss) plus the
  sum of depreciation and amortization and is presented because Iusacell
  believes that EBITDA provides useful information regarding Iusacell's debt
  service ability. EBITDA should not be considered in isolation or as a
  substitute for the consolidated income statements or the consolidated
  statements of changes in financial position prepared in accordance with
  Mexican GAAP or as a measure of profitability or liquidity. EBITDA is not (i)
  a measure determined under U.S. GAAP, (ii) an alternative to U.S. GAAP
  operating income (loss) and net income (loss), or (iii) a measure of
  liquidity or cash flows as determined under U.S. GAAP. EBITDA does not
  represent discretionary funds. EBITDA, as calculated by Iusacell, may not be
  comparable to similarly titled measures reported by other companies.

 (/9/) Under Mexican GAAP, the cash flow data has been adjusted for inflation
  and includes certain non-cash items, such as monetary gains and losses and
  foreign exchange gains and losses and, as a result, are not comparable with
  the respective U.S. GAAP cash flow data. Under U.S. GAAP, the effect of
  inflation adjustments has been included in the separate line item "Gain on
  net monetary position and foreign exchange losses." See Note 20 to the
  Audited Consolidated Financial Statements.

                                       46
<PAGE>

(/10/) Subscribers refers to Iusacell's cellular subscribers in its cellular
  operating regions at the end of the respective periods. A prepay customer is
  included as a subscriber if, at the end of the period, the customer's
  telephone number has not yet been deactivated. See "Item 1--Business--
  Cellular Services--Prepay Customers."

(/11/) Average subscribers represents the rolling monthly average number of
  subscribers for the respective periods.

(/12/) Effective January 1, 1998, Iusacell changed the methodology by which it
  determines average monthly contract churn for a given period. Average
  monthly contract churn for a given period is now calculated by dividing the
  sum of all contract subscribers disconnected during such period by the sum
  of the beginning-of-month contract subscribers for each of the months in
  such period, expressed as a percentage. Only 1997 average monthly contract
  churn information, which was 2.88% under the old methodology, has been
  restated under the new methodology. The average monthly contract churn data
  for 1994 through 1996 is presented under the old methodology, which
  calculates average monthly contract churn for a given period by dividing,
  for each month in that period, the total number of contract subscribers
  disconnected in such month by the number of contract subscribers at the
  beginning of such month and dividing the sum of the resulting quotients for
  all months in such period by the number of months in such period.

(/13/) Penetration represents the end of period subscribers divided by the end
  of period POPs in Iusacell's cellular operating regions, expressed as a
  percentage.

(/14/) Effective January 1, 1998, Iusacell changed the methodology by which it
  determines average monthly MOUs (minutes of use) per subscriber. Average
  monthly MOUs per subscriber for a given period are now calculated by
  dividing total MOUs in the period by the sum of the monthly average
  subscribers for each of the months in such period. Only 1997 average monthly
  MOUs per subscriber information, which was 98 under the old methodology, has
  been restated under the new methodology. The average monthly MOUs per
  subscriber data for 1994 through 1996 are presented under the old
  methodology, which calculates average monthly MOUs per subscriber for a
  given period by dividing the total minutes of use for the respective period
  by the number of average subscribers for the respective period and dividing
  the result by the number of months in such period.

(/15/) Effective January 1, 1998, Iusacell changed the methodology by which it
  determines nominal average monthly cellular revenue per subscriber (ARPU).
  ARPU for a given period is now calculated by dividing the sum of the monthly
  cellular revenue and other cellular revenues for each of the months in the
  period by the sum of the monthly average cellular subscribers for each of
  the months in such period. Only 1997 ARPU information, which was Ps.451
  under the old methodology, has been restated under the new methodology. The
  ARPU for 1994 through 1996 is presented under the old methodology, which
  calculates ARPU for a given period by dividing the total cellular service
  revenue for the respective period by the average number of subscribers for
  the respective period and dividing the quotient by the number of months in
  such period.

                                      47
<PAGE>

ITEM 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Unless otherwise indicated, all financial information discussed herein is
presented in constant Pesos as of December 31, 1998 and, in the case of tables,
in millions of Pesos. The U.S. dollar translations provided herein are, unless
otherwise indicated, calculated at the exchange rate at December 31, 1998
reported by the Federal Reserve Bank of New York as its noon buying rate for
Pesos, which was Ps.9.9010 per U.S. dollar. Sums may not add due to rounding.

General

The following discussion and analysis is intended to help you understand and
assess the significant changes and trends in the historical results of
operations and financial condition of Iusacell and its subsidiaries and factors
affecting Iusacell's financial resources. You should read this section in
conjunction with the Consolidated Financial Statements and their notes
appearing elsewhere in this annual report.

The Consolidated Financial Statements have been prepared in accordance with
Mexican GAAP, which differs in significant respects from U.S. GAAP. Note 20 to
the Audited Consolidated Financial Statements provides a description of the
principal differences between Mexican GAAP and U.S. GAAP as they relate to
Iusacell. Note 20 to the Audited Consolidated Financial Statements also
provides a reconciliation to U.S. GAAP of Iusacell's net income and total
stockholders' equity as of and for the years ended December 31, 1996, 1997 and
1998.

As a Mexican company, Iusacell maintains its financial records in Pesos.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on
Financial Information," and Bulletin B-12, "Statement of Changes in Financial
Position," issued by the Mexican Institute of Public Accountants, Iusacell's
financial statements are reported in period-end Pesos to adjust for the
interperiod effects of inflation. The presentation of financial information in
period-end, or constant, currency units is intended to eliminate the distorting
effect of inflation on the financial statements and to permit comparisons
across comparable periods in comparable monetary units. Bulletin B-10 requires
Iusacell to restate non-monetary assets (other than inventory), non-monetary
liabilities and the components of stockholders' equity using the INPC. The
effects of these inflation accounting principles have not been eliminated in
the reconciliation to U.S. GAAP. See Note 20 to the Audited Consolidated
Financial Statements.

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, 1998, in accordance with the
fifth amendment to Bulletin B-10. 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 1996, 1997 and 1998, the
rates of inflation in Mexico, as measured by changes in the NCPI, were 27.7%,
15.7% and 18.6%, respectively. The inflation indices used are 1.3725 for 1996
figures and 1.1861 for 1997 figures.

In reporting under Mexican GAAP and in accordance with Bulletin B-10, Iusacell
is required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes, "integral
financing cost (gain)" refers to the combined financial effects of:

  .  net interest expense or interest income,

  .  net foreign exchange gains or losses, and

  .  net gains or losses on monetary position.

Net foreign exchange gains or losses reflect the impact of changes in foreign
exchange rates on monetary assets and liabilities denominated in currencies
other than Pesos. A foreign exchange loss arises if a liability is denominated
in a foreign currency which appreciates relative to the Peso between the time
the liability is incurred and the date it is repaid, as the appreciation of the
foreign currency results in an increase in the amount of Pesos which must be
exchanged to repay the specified amount of the foreign currency liability. The
gain or loss on monetary position refers to the gains and losses realized from
holding net monetary assets or liabilities and reflects the impact of inflation
on monetary assets and liabilities. For example, a gain on monetary position
results from holding net monetary liabilities in Pesos during periods of
inflation, as the purchasing power of the Peso declines over time.

Devaluation and Inflation

On December 20, 1994, the Mexican government responded to exchange rate
pressures by increasing the upper limit of the then existing free market
Peso/U.S. dollar exchange rate band by 15% and, two days later, by eliminating
the band to allow the Peso to fluctuate freely against the U.S. dollar. This
resulted in a major devaluation of the Peso relative to the U.S. dollar. Where
the noon buying rate had been Ps.3.4662 to U.S.$1.00 on December 19, 1994, by
December 31, 1994

                                       48
<PAGE>

the noon buying rate had fallen to Ps.5.0000 to U.S.$1.00, representing a 44.3%
devaluation. The Peso continued to decline against the U.S. dollar during 1995,
closing at a noon buying rate of Ps.7.7400 to 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 GDP grew by 5.1% and 7.0%, respectively.
The noon buying rates were Ps.7.8810 to U.S.$1.00 and Ps.8.0700 to U.S.$1.00 on
December 31, 1996 and 1997, respectively. However, the 1998 crises in emerging
markets, together with the weakness in the price of oil, which is a significant
source of revenue for the Mexican government, contributed to renewed weakness
in the Peso. For the first nine months of 1998, the Peso devalued 26.8%
relative to the U.S. dollar to Ps.10.1960 per U.S. dollar on September 30,
1998, but strengthened in the fourth quarter of 1998. For the twelve months of
1998, the Peso devalued 22.7% relative to the U.S. dollar to Ps.9.9010 per U.S.
dollar on December 31, 1998.

Peso devaluations have 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% for the
year 1998.

In the past, these economic conditions have negatively affected Iusacell's
results of operating and financial condition and may do so in the future. See
"--Other Material Trends and Contingencies--Negative Economic Conditions."

Impact on Iusacell's Results of Operations

The general economic conditions in Mexico resulting from the devaluation of the
Peso and the resulting inflation have had, and may have, an overall negative
impact on Iusacell's results of operations primarily as a result of the
following factors:

  .  Peso devaluations result in a significant decrease in the purchasing
     power of Mexican consumers, resulting in a decrease in the demand for
     cellular telephony.

  .  Due to competitive market conditions and the overall state of the
     Mexican economy, Iusacell is not always able to increase its prices in
     line with the significant inflation in the economy. It was not able to
     do so in 1995, 1996 and the period beginning in the fourth quarter of
     1997 through the third quarter of 1998.

  .  The significant inflation experienced in 1995 led to an upward
     restatement of Iusacell's assets and, therefore, resulted in a
     substantial increase in depreciation and amortization expense, which had
     an adverse impact on Iusacell's earnings for that year. In 1996, while
     there was still significant inflation, depreciation and amortization
     expense decreased as the result of a substantial reduction in capital
     expenditures and the reduction in the Peso-carrying value of dollar-
     acquired non-monetary assets as at the end of 1995 in accordance with
     the rules of the Mexican Stock Exchange. Depreciation and amortization
     also decreased in 1997 as capital expenditures did not substantially
     increase until the second half of the year and as a result of the
     reduction in the carrying value of dollar-acquired non-monetary assets
     as at the end of 1996 in accordance with the rules of the Mexican Stock
     Exchange as the rate of inflation exceeded that of devaluation.
     Beginning in 1998, the restatement of the valuation of assets using a
     foreign exchange rate is no longer permitted under Mexican GAAP.

  .  The significant devaluation of the Peso as compared to the U.S. dollar
     in 1995 resulted in the recording of exchange losses given Iusacell's
     net U.S. dollar liability position. In 1996 and 1997, Iusacell recorded
     a gain because of the appreciation of the Peso against the U.S. dollar
     during a significant portion of the year. Iusacell again recorded
     exchange losses in the first nine months of 1998 because of the effect
     of the 26.8% devaluation of the Peso in that period on its net U.S.
     dollar liability position. Iusacell recorded exchange gains in the
     fourth quarter of 1998, although these were insufficient to offset the
     cumulative exchange losses through September 30, 1998.

  .  A portion of Iusacell's costs and expenses (e.g., depreciation and
     amortization and interest expense) is denominated in, or indexed to,
     U.S. dollars, while almost all of Iusacell's revenues are denominated in
     Pesos. In a period of Peso devaluation, this relationship causes a
     negative impact on Iusacell's margins.

Impact on Iusacell's Financial Condition

The general economic conditions in Mexico resulting from the devaluation of the
Peso and the resulting inflation have had, and may have, an overall negative
impact on Iusacell's financial condition as a result of the following factors:

  .  Substantially all of Iusacell's indebtedness is denominated in U.S.
     dollars. As a result, the Peso-carrying amount of such debt increases to
     reflect the additional Pesos required to meet such foreign currency
     liabilities.

                                       49
<PAGE>

  .  Prior to 1998, whenever the inflation rate exceeded the devaluation
     rate, as was the case in 1996, the carrying value of Iusacell's assets
     purchased in foreign currencies would be reduced. This was because,
     assuming the foreign currency value of a given asset remained unchanged
     between periods, the value of such asset for the prior period was
     restated upwards using the inflation rate, while the valuation of such
     asset for the current period was restated using a foreign exchange rate
     which increased at a lower rate. Beginning in 1998, the restatement of
     the valuation of assets using a foreign exchange rate is no longer
     permitted under Mexican GAAP.

Increase in Prepay Subscriber Base

In June 1996, Iusacell introduced its Control Plus prepay program in response
to economic conditions in Mexico and to a prepay cellular card program offered
by Telcel. In September 1997, Iusacell introduced in Region 9 its next-
generation, automated VIVA prepay program which had, as of the end of 1998,
almost completely replaced Control Plus in all of Iusacell's cellular markets.

The Control Plus and VIVA programs have been extremely popular, with prepay
customers increasing from an insignificant percentage of Iusacell's subscriber
base at June 30, 1996 (14,675 subscribers) to 31.7% at December 31, 1996
(73,762 subscribers), 50.0% at December 31, 1997 (200,159 subscribers) and
63.3% at December 31, 1998 (478,361 subscribers). Prepay customers comprised
75.6% and 78.3% of Iusacell's net subscriber additions in 1997 and 1998,
respectively. Iusacell expects that prepay customers will continue to comprise
the substantial majority of new subscriber additions. As a result, Iusacell
expects that the percentage of its customers who subscribe to cellular service
on a prepay basis will continue to increase.

The percentage of total service revenues derived from prepay customers was 3.7%
in 1996, 14.1% in 1997 and 17.3% in 1998.

In 1996, Iusacell experienced a 23.8% reduction in the number of contract
customers, who generate higher average revenue per subscriber than do prepay
customers. Many of these contract customers migrated to Iusacell's prepay
program, resulting in lower revenues from these customers. In 1997 and 1998,
Iusacell experienced a 25.6% and 38.5% increase in the aggregate number of
contract customers, respectively, compared to the beginning period number, with
limited migration by contract customers to prepay programs. Although the
current rate of growth is expected to decline as the contract customer base
grows, Iusacell anticipates further growth in the number of contract
subscribers, including both customers converting from analog to digital
service, and new digital cellular customers. See "--Digitalization."

Prepay customers, on average, have substantially lower minutes of use than
contract customers and do not pay monthly fees and, as a result, generate
substantially lower average monthly revenues per subscriber even though prepay
plans involve higher outgoing call per minute airtime charges than the average
contract plan. Consequently, as the percentage of prepay customers to
Iusacell's total subscribers continues to increase, Iusacell expects that
average minutes of use per customer and average monthly revenues per customer
will continue to decrease. Iusacell expects the decrease to moderate with the
implementation of the calling party pays modality. See "--Other Material Trends
and Contingencies--Regulatory Developments."

In November 1998, Iusacell extended the life of VIVA prepay cards from a
maximum of 135 days to a maximum of 180 days to allow greater flexibility in
their use. In April 1999, in anticipation of the advent of the calling party
pays modality and for competitive reasons, Iusacell extended the life of its
VIVA prepay cards to a maximum of 365 days. After the balance of a prepay card
becomes zero, the VIVA customer currently has 185 days to activate a new card
before losing his phone number. During this 185-day period, the VIVA customer
will be able to receive incoming calls, but will not be able to make outgoing
calls. See "Item 1--Description of Business--Cellular Services--Prepay
Customers."

Extending the life of VIVA prepay cards defers the turnover of prepay
customers. The November 1998 extension, by deferring prepay turnover for 45
additional days, contributed to the strong growth in subscriber net additions,
particularly prepay net additions, during the fourth quarter of 1998.

Digitalization

In December 1997, Iusacell entered into an agreement with subsidiaries of
Lucent Technologies, Inc. to swap out its existing analog network for a Lucent
Technologies analog network overlaid with a CDMA digital network. Since
Iusacell received a trade-in credit from Lucent Technologies for the book value
of the swapped-out network equipment, under Mexican GAAP and U.S. GAAP Iusacell
will not be required to write off the value of any of such swapped-out assets.

                                       50
<PAGE>

Digital and dual-mode (i.e., digital-analog) handsets are substantially more
expensive than analog handsets, although the prices for all types of handsets
have declined over time. As a result, Iusacell expects that the subsidies it
provides for handsets will be higher than they would have been had Iusacell
remained an exclusively analog service provider as Iusacell migrates a portion
of its analog customers to digital service and subscribes new digital
customers. These new digital customers will initially be almost all contract
subscribers, since Iusacell does not intend to commercialize a digital prepay
service until more economical digital handsets become available.

Local Telephony in the 450 MHz Frequency Band

In November 1994, Iusacell sought government approval of its technical and
economic plans for the commercial launch of fixed local wireless service in the
450 MHz frequency band on a national level. The SCT never approved such plans.
In June 1997, however, the SCT and Iusacell reached agreement on a process by
which Iusacell could obtain one or more regional concessions to provide such
service. See "Item 1--Description of Business--Other Services--Local
Telephony." The price for such concessions was to be derived from the prices of
the winning bids in the auctions for 450 MHz and 1.9 GHz (PCS) frequency bands,
which concluded in May 1998.

Based on the results of these auctions, Iusacell anticipates that it would be
required to pay approximately U.S.$2.25 million for concessions in Regions 4,
5, 6, 7 and 9, where it has a right of first refusal to acquire such
concessions. However, the exact price, payment terms and coverage/build-out
requirements relating to the concessions, which may be substantial, have not
yet been formally defined by the SCT and the COFETEL. Consequently, Iusacell
has not yet determined whether to proceed with its 450 MHz fixed local wireless
project. However, given the capabilities of the CDMA technology that it is
implementing, Iusacell is exploring alternatives for providing local telephony
services, including fixed or limited zone wireless local telephony services in
the 800 MHz frequency band in Regions 5, 6, 7 and 9 and in the 1.9 GHz PCS
frequency band in Regions 1 and 4. Iusacell expects to make its decision on the
overall strategy for providing local telephony services before the fourth
quarter of 1999.

In September 1998, Iusacell determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of its investment in 450 MHz TDMA
technology had occurred. As a result, Iusacell recorded a non-cash writedown of
100% of the development and preoperating expenses for the project and 90% of
the fixed assets deployed in the project. The writedown in 1998 amounted to
Ps.981.5 million (U.S.$99.1 million). Iusacell also determined that certain of
the 450 MHz project assets, representing about 10% of their book value, are
redeployable in the mobile wireless network.

Iusacell was party to certain agreements regarding the supply and servicing of
infrastructure equipment and handsets for its 450 MHz local wireless service.
These agreements terminated in 1997, and there could be substantial costs
arising from the termination of these agreements in addition to the non-cash
losses described above. In addition, Iusacell could be required to write off
some or all of a U.S.$15 million advance made in 1994 to a vendor in respect of
network infrastructure that was never ordered to the extent such advance is not
refunded to Iusacell. Finally, Iusacell could be required to purchase
approximately U.S.$2.1 million in handsets that were ordered, manufactured and
delivered, but not yet paid for, and is involved in litigation with another
handset vendor in connection with a purported agreement to purchase 60,000
handsets that Iusacell never executed. See "Item 3--Legal Proceedings."

                                       51
<PAGE>

Non-recurring Charges

During the three year period ended December 31, 1998, Iusacell recorded various
non-recurring charges as summarized in the following table.

<TABLE>
<CAPTION>
                          For the year ended December 31,
                         ----------------------------------
                                                                Mexican GAAP
                            1996        1997        1998          Treatment
                         ---------- ------------ ---------- ---------------------
                              (In thousands of Pesos)
                         ----------------------------------
<S>                      <C>        <C>          <C>        <C>
Restructuring Charges
  Employee severance.... Ps.118,647 Ps.      --  Ps.    --
  Fixed assets
   obsolescence
   reserve..............     45,294          --         --
  Provision for
   consolidation of
   facilities...........     16,274          --         --
  Change in estimate of
   allowance for
   doubtful accounts....      7,011          --         --
<CAPTION>
                         ---------- ------------ ----------
<S>                      <C>        <C>          <C>        <C>
    Total restructuring
     charges............ Ps.187,226 Ps.      --  Ps.    --     Extraordinary item
Impairment of analog
 communications
 equipment.............. Ps.    --  Ps.1,100,703 Ps.    --  Non-operating expense
Project 450 writedown... Ps.    --  Ps.      --  Ps.981,484     Operating expense
<CAPTION>
                         ---------- ------------ ----------
<S>                      <C>        <C>          <C>        <C>
Total non-recurring
 charges................ Ps.187,226 Ps.1,100,703 Ps.981,484
<CAPTION>
                         ========== ============ ==========
</TABLE>

Under U.S. GAAP, all of the above non-recurring charges were recorded as
operating expenses during the respective periods, except that the restructuring
charge related to the provision for consolidation of facilities was not
considered an expense for U.S. GAAP purposes. The following is a description of
each of the non-recurring charges.

Restructuring Charges

In connection with the reorganization of Iusacell during 1996, Iusacell
recorded a restructuring charge of Ps.187.2 million (U.S.$18.9 million). This
charge, because of its characteristics of being non-recurring and unusual, was
classified as an extraordinary item in the consolidated statement of income
under Mexican GAAP.

As a result of a misclassification and further analysis of the amounts
previously reported for employee severance and consolidation of facilities, the
components of the restructuring reserve have been reclassified as follows:

<TABLE>
<CAPTION>
                                                       Originally
                                                        Reported  Reclassified
                                                       ---------- ------------
                                                       (in thousands of Pesos)
     <S>                                               <C>        <C>
     Employee severance(/1/).......................... Ps. 98,412  Ps.118,647
     Provision for consolidation of facilities(/2/)...     36,509      16,274
     Fixed assets obsolescence reserve(/3/)...........     45,294      45,294
     Change in estimate of allowance for doubtful
      accounts(/4/)...................................      7,011       7,011
<CAPTION>
                                                       ---------- ------------
     <S>                                               <C>        <C>
       Total.......................................... Ps.187,226  Ps.187,226
<CAPTION>
                                                       ========== ============
</TABLE>
-------
(/1/) The reserve for employee severance, as originally reported, was
      understated. The reclassified amount is comprised of an estimate of
      severance payments to be made to (i) approximately 400 mid-level
      management and non-management employees pursuant to Mexican labor law
      requirements and (ii) three senior management employees pursuant to the
      terms of their respective individual employment contracts. These severance
      payments do not relate to prior employee service, have any related
      contingencies or require that employees provide future services.

(/2/) As a result of the decision to dispose of its corporate headquarters
      building ("Montes Urales"), Iusacell recorded an impairment loss to adjust
      the book value of Montes Urales to its fair value less costs to sell based
      on an agreement to sell Montes Urales. The provision for consolidation of
      facilities, as originally reported, was overstated. The reclassified
      amount considers the book value of Montes Urales and the agreed upon sales
      price. The book value of Montes Urales as of December 31, 1996, 1997 and
      1998 was Ps.103.3 million (U.S.$10.4 million), Ps.89.6 million

                                       52
<PAGE>

  (U.S.$9.0 million) and Ps.87.0 million (U.S.$8.8 million), respectively.
  Iusacell has reassessed this accounting treatment under U.S. GAAP and
  determined that, as management did not have the current ability to remove
  Montes Urales from operations in December 1996, Montes Urales did not qualify
  as an asset held to be disposed of at such date and consequently, should have
  been accounted for as an asset to be held and used pursuant to the provisions
  of Statement of Financial Accounting Standards No. 121, "Accounting for the
  Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
  As a result, under U.S. GAAP, an impairment charge would not have been
  recorded at December 31, 1996 related to Montes Urales. See "U.S. GAAP
  Reconciliation--Restatement related to the provision for consolidation of
  facilities."

(/3/)The fixed assets obsolescence reserve relates to certain spare parts for
    the analog communications equipment that, as a result of a detailed review
    by Iusacell's engineers in November 1996, were determined to be obsolete.
    Consequently, Iusacell recorded an impairment provision to adjust such
    assets to their estimated salvage value and ceased the recording of
    depreciation expense. The remaining book value of the spare parts as of
    December 31, 1996 and 1997 was Ps.13.0 million (U.S.$1.3 million) and
    Ps.11.7 million (U.S.$1.2 million), respectively. During 1998, in
    connection with the implementation of the CDMA digital technology, Iusacell
    determined that the remaining spare parts could be utilized in the
    conversion process and, consequently, placed such parts into operations and
    began to record depreciation expense. The remaining book value of the spare
    parts as of December 31, 1998 was Ps.9.3 million (U.S.$0.9 million).

(/4/)During 1996, Iusacell began to fully reserve accounts receivable over 90
    days past due, based on changes in the estimation of the probable loss
    inherent in the accounts receivable. Previously, Iusacell's policy involved
    fully reserving balances over 120 days past due. The allowance for doubtful
    accounts represents Iusacell's estimate of the probable loss inherent in
    all accounts receivable considering general historical trends of customer
    performance and factors surrounding the credit risk of specific customers.

As of December 31, 1996, 1997 and 1998 the remaining reserves related to these
charges were as follows:

<TABLE>
<CAPTION>
                                                          At December 31,
                                                     -------------------------
                                                        1996      1997   1998
                                                     ----------- ------ ------
                                                      (in thousands of Pesos)
     <S>                                             <C>         <C>    <C>
     Employee severance(/1/)........................ Ps. 188,647 Ps.--  Ps.--
     Fixed assets obsolescence reserve(/2/).........      45,294    --     --
     Provision for consolidation of facili-
      ties(/3/).....................................      16,274    --     --
     Change in estimate of allowance for doubtful
      accounts(/4/).................................       7,011    --     --
<CAPTION>
                                                     ----------- ------ ------
     <S>                                             <C>         <C>    <C>
       Total restructuring reserves................. Ps. 187,226 Ps.--  Ps.--
<CAPTION>
                                                     =========== ====== ======
</TABLE>
-------
(/1/)Recorded in other payables under both Mexican GAAP and U.S. GAAP. As a
    result of (i) negotiations with top-level management during 1997 and (ii)
    an actual headcount reduction which was 29 lower than the original
    estimate, actual severance benefits paid of Ps.65.6 million (U.S.$6.6
    million) were less than the amount originally accrued. Consequently,
    Iusacell reversed the remaining original liability amounting to Ps.53.1
    million (U.S.$5.4 million) into operating income in 1997.

(/2/)Recorded against fixed assets under both Mexican GAAP and U.S. GAAP.

(/3/)Recorded in other payables under Mexican GAAP. Under U.S. GAAP, the reserve
    was not recorded. See "--U.S. GAAP Reconciliation--Restatement related to
    the provision for consolidation of facilities."

(/4/)Recorded in the allowance for doubtful accounts under both Mexican GAAP and
    U.S. GAAP.

Impairment of Analog Communications Equipment

During 1997, based on certain changes in circumstances surrounding Iusacell's
analog communications equipment, Iusacell determined that the carrying value of
such equipment was impaired. See "--Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997--Provision for Equipment Impairment."
Consequently, Iusacell recorded an impairment loss of Ps.1,100.7 million
(U.S.$111.2 million) to reduce the value of its analog communications equipment
to fair value, amounting to Ps.2,888.0 million (U.S.$291.7 million). The book
value of the analog communications equipment as of December 31, 1997 and 1998
was Ps.2,888.0 million (U.S.$291.7 million) and Ps.3,237.7 million (U.S.$327.0
million), respectively. The equipment is currently being used to provide
cellular service to

                                       53
<PAGE>

Iusacell's customers and will continue to be used in this manner until the
conversion process to Lucent Technologies equipment is completed in the third
quarter of 1999.

Project 450 Non-Cash Writedown

During 1998, Iusacell determined that, because of many factors, including the
impact of changing technology since the initiation of the 450 MHz project in
1994, an impairment of its investments in the project assets had occurred.
Consequently, Iusacell recorded an impairment charge of Ps.981.5 million
(U.S.$99.1 million) to write down the 450 MHz assets to fair value, amounting
to Ps.51.4 million (U.S.$5.2 million). Even though there was a limited market
for the 450 MHz network equipment, Iusacell's operations group determined that
certain of these assets, representing about 10% of the related fixed assets,
could be redeployed in the mobile wireless network and such assets continue to
be depreciated. A full provision for impairment was recorded for all other
assets associated with the project. The book value of the 450 MHz project fixed
assets as of December 31, 1998 is Ps.40.6 million (U.S.$4.1 million). See "--
Local Telephony in the 450 MHz Frequency Band."

Year 2000 Compliance

General

The Year 2000 problem relates to computers, software and other equipment that
include programming code in which calendar year data is abbreviated to only two
digits. As a result of this design decision, some of these systems could fail
to operate or fail to produce correct results if "00" is interpreted to mean
1900, rather than 2000.

Iusacell has initiated an enterprise-wide program to identify and address the
impact of the Year 2000 on its operations. This program includes steps to:

  .  identify hardware and equipment issues and identify each item of
     firmware and each software application or software application element
     that will require modification or replacement in order to process and
     store correctly dates and date-related data prior to, through and
     subsequent to January 1, 2000,

  .  develop a plan and cost estimate for any such required modification or
     replacement and a contingency plan and cost estimate in the event any or
     all such modifications or replacements are not expected to be
     implemented on a timely basis,

  .  implement such corrective action or contingency plans, and

  .  test and evaluate the modified or replaced application internally and
     verify resolution of Year 2000 problems externally.

Iusacell has completed the inventory, assessment and initial planning phases of
its Year 2000 compliance program. Remediation, replacement and retirement
activities were initiated in July 1998. Iusacell currently expects that
substantially all the required modifications or replacements of mission
critical systems and internal network elements will be implemented by the end
of the third quarter of 1999. A number of the necessary changes for Year 2000
compliance are being made as part of larger systems upgrades or replacements;
for example, the replacement of the existing analog cellular network with a new
analog and digital cellular network and the replacement of several existing
cellular billing systems with a new single cellular billing and customer care
system. Approximately two-thirds of the planned internal testing took place in
the first half of 1999. External interoperability testing has recently been
completed with respect to billing system interoperability. Iusacell has
determined that, given the projected testing costs, network interoperability
testing with Telmex is not cost effective. However, because protocols for
signaling and interconnection do not involve date-related information,
signaling and interconnection with Telmex are not susceptible to Year 2000
problems. If Telmex is not Year 2000 compliant for other reasons, it is
possible that calls made by customers on or after January 1, 2000 which
interconnect with Telmex's landlines may fail to be completed.

State of Readiness

Iusacell's program is focused on five key functional areas. These areas involve
software, firmware and equipment to:

  .provide cellular communications services,

  .bill customers and render customer care,

                                       54
<PAGE>

  .generate financial and administrative information,

  .support sales functions, and

  .support marketing functions.

Network Elements. The number of applications and generic elements at final
inventory was 174. At the completion of the inventory assessment, 130 (or 75%)
of these elements were assessed as non-compliant. Cellular handsets, 450 MHz
terminals and substantially all pagers, as passive receptors of information
from our switches, do not present Year 2000 problems.

Information Systems. The number of applications and generic elements at final
inventory was 303. At the completion of the inventory assessment, 171 (or 56%)
of these elements were assessed as non-compliant.

Finance and Administration. The number of applications and generic elements at
final inventory was 21. At the completion of the inventory assessment, six (or
29%) of these elements were assessed as non-compliant.

Sales. The number of applications and generic elements at final inventory was
two. At the completion of the inventory assessment, one (or 50%) of these
elements was assessed as non-compliant.

Marketing. The number of applications and generic elements at final inventory
was five. At the completion of the inventory assessment, all such elements were
assessed as compliant.

Iusacell's definition of a fixed, replaced or retired element is when all steps
of the modification or replacement program have been completed and the element
has been tested and is in full operation and production. The progress of the
remediation, replacement and retirement efforts for Iusacell's Year 2000
programs as of May 31, 1999, appears below:

<TABLE>
<CAPTION>
                                               Non-Compliant                  Fixed, Replaced
                                              Elements to be                  or Retired (% of
                            Total   Compliant Fixed, Replaced Fixed, Replaced  Non-Compliant
        Project           Inventory Elements    or Retired      or Retired         Total)
        -------           --------- --------- --------------- --------------- ----------------
<S>                       <C>       <C>       <C>             <C>             <C>
Network.................     174        44          130              45              35%
Information Systems.....     303       132          171             126              74%
Finance/Administration..      21        15            6               5              83%
Sales...................       2         1            1               1             100%
Marketing...............       5         5            0             N/A             N/A
</TABLE>

Third Party Issues

In general, Iusacell's product vendors have made available either Year 2000
compliant versions of their offerings or new compliant products as replacements
of discontinued offerings. In most cases, the compliance status of the product
in question is based on vendor-provided information, which remains subject to
Iusacell's testing and verification activities. In several instances, vendors
have not met original delivery schedules, resulting in delayed testing and
deployment. At this time, Iusacell does not anticipate that such delays will
have any material impact on its ability to achieve Year 2000 compliance within
desired time-frames. Iusacell cannot yet determine the Year 2000 readiness of
most key utilities and similar services providers or the likelihood that those
providers will successfully handle the Year 2000 transition. Iusacell intends
to monitor critical service provider activities, as appropriate, through the
completion of their respective remediation projects.

Due to factors such as liability concerns, logistical complexity and possible
adverse customer relations, some of Iusacell's vendors continue to express
concerns about providing information on the status of the Year 2000 compliance
efforts for their products or services. Iusacell will continue to pursue all
appropriate measures with vendors in order to resolve information sharing
issues.

Iusacell's network operations interconnect with domestic and international
networks of other carriers. If one of these interconnecting carriers should
fail or suffer an adverse impact from a Year 2000 problem, customers could
experience impairment of service.

Iusacell cannot provide any assurance that all significant third parties will
implement timely corrective measures necessary on their part to prevent
disruption of services or to ensure correct billing and payments. In that
event, Iusacell

                                       55
<PAGE>

will, in most cases, be able to implement contingency plans to minimize and
eliminate potential billing and service disruptions. However, no contingency
plan would be possible if Telmex were unable to terminate incoming cellular
calls on its network or transport and switch outgoing wireline calls to
cellular telephones because of Year 2000 problem. Telmex has publicly announced
that its own Year 2000 compliance program has been substantially completed.

Contingency Plans

Iusacell will develop two different types of contingency plans, where
appropriate. Contingency plans are being developed for addressing delays in
remediation activities. Iusacell is also developing a corporate contingency
plan to ensure that core business functions and key support processes are in
place in the event of external, internal or supply chain failures. These plans
are expected to be completed in August 1999. Because of the performance and
stability problems experienced by Iusacell with the LHS cellular customer care
and billing system, Iusacell has decided to implement a contingency plan to
make the Link cellular billing system, which it currently uses in Regions 6, 7
and 9, Year 2000 compliant. If the difficulties with the LHS cellular customer
care and billing system are not resolved by October 1999, Iusacell intends to
implement the upgraded Link cellular billing system in all of its regions in
November 1999. Full implementation of this cellular billing system contingency
plan will cause Iusacell to incur U.S.$3.5 million in expenses. See "Business--
Activation, Billing and Collection Procedures."

Costs

From the inception of the Year 2000 project through December 31, 1998, Iusacell
has incurred pretax expenses of approximately U.S.$1.8 million. Capital
expenditures were insignificant in 1998. Based on internal and external
studies, Iusacell estimates that total costs from July 1, 1998 through the end
of 1999 to resolve its Year 2000 problem will be as high as U.S.$16.9 million:
U.S.$9.2 million for inventory, assessment, initial planning and the primary
remediation and replacement program and, in the event such corrective action is
not implemented on a timely basis in whole or in part, up to U.S.$7.7 million
to implement the above mentioned contingency plans.

These costs are associated with both internal and external staffing resources,
a portion of which will not be incremental, but rather will represent the
redeployment of existing information technology resources; however, because of
the complexity of the issue and possible unidentified risks, actual costs may
vary from this estimate. Funding for Year 2000 activities will come primarily
from cash flow from operations.

Risks

The failure to correct a material Year 2000 problem could cause an interruption
or failure of Iusacell's normal business functions or operations, which could
have a material adverse effect on Iusacell's reputation, results of operations,
liquidity or financial condition.

Due to the uncertainty inherent in other Year 2000 issues that are ultimately
beyond Iusacell's control, including, for example, the final Year 2000
readiness of suppliers, customers and interconnecting carriers, Iusacell is
unable to determine, at this time, the likelihood of a material impact on
results of operations, liquidity or financial condition. However, Iusacell is
taking measures to mitigate that risk through the scheduled implementation and
completion of its Year 2000 company-wide program. Iusacell anticipates that, in
the event of any material interruptions or failures of service or billing
resulting from actual or perceived Year 2000 problems within or beyond
Iusacell's control, Iusacell could be subject to third party claims and
sanctions by Mexican authorities.

These estimates and conclusions contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
plan include the availability of resources, our ability to identify and correct
potential Year 2000 problems which could have a serious impact on specific
equipment, firmware or software elements and the ability of suppliers and
interconnecting carriers to bring their systems into Year 2000 compliance.

Other Material Trends and Contingencies

Iusacell's financial condition and results of operations could also be
materially affected by the following events and developments:

Negative Economic Conditions

The late 1997 and 1998 financial crises in emerging markets, together with the
weakness through the fourth quarter of 1998 in the price of oil, which is a
significant source of revenue for the Mexican government, contributed to
renewed

                                       56
<PAGE>

weakness in the Peso in the first three quarters of 1998, although the Peso
strengthened significantly in the fourth quarter of 1998. The Mexican
government responded to revenue shortfalls from the oil sector with new
cutbacks in federal spending. Press reports during the second and third
quarters of 1998 also suggested that consumer spending, which had been
recovering, may have suffered a temporary setback.

Although the exact correlation between general government and consumer spending
and wireless telephony purchases and usage in Mexico is unknown, these economic
conditions may negatively affect subscriber growth rates and the willingness of
consumers to use their phones, thereby negatively affecting average monthly
revenues per subscriber. In addition, the weakness in the Peso resulted in
significant foreign exchange losses for Iusacell in the first nine months of
1998. However, in the fourth quarter of 1998, Iusacell had significant foreign
exchange gains. These economic conditions, which also contributed to an
increase in domestic interest rates in the second half of 1998, may also
negatively impact the availability and cost of funds.

Price Increases and Rollbacks

Iusacell has attempted, and continues to attempt, to exercise price leadership
in the Mexican cellular market, with a strategy of having its prices keep pace
with inflation if economic and competitive conditions permit. During the first
half of 1997, this strategy was effectively implemented through weighted
average price increases of 15% in April 1997 for the per minute airtime price
on its contract and prepay plans, and 8.3% in May 1997 for the fixed monthly
charge on all its contract plans. See "Item 1--Description of Business--
Marketing--Pricing." In October 1997, however, Iusacell initiated pricing
discounts of between 25% and 50% for the cost of incoming cellular calls, in
response to pricing actions by Telcel and as a means of boosting traffic
volumes and, ultimately, average revenue per subscriber. Moreover, in October
1997 Iusacell adjusted airtime prices downward by 4.6% on a weighted average
basis and in November 1997 further decreased airtime charges on one of its low-
end contract plans by 1.0%, in each case in order to maintain competitiveness.

In late March 1998, Iusacell raised airtime prices approximately 7.9% on
average for contract plans and 13.6% for prepay customers. Because of market
and competitive conditions, however, this increase was partially rolled back in
early May 1998 for both contract and prepay customers and, in late May 1998,
the remainder of the price increase for contract plans was reversed. As a
result, however, a 9.9% airtime price increase for prepay customers remained.

In August 1998, Iusacell filed with the COFETEL to register tariffs that would
increase analog contract plan airtime prices in Region 9 by approximately 3% on
a weighted average basis. Competitive conditions caused this price increase not
to be implemented. However, in October 1998, Iusacell raised airtime prices for
its contract plans by approximately 8% on a weighted average basis. In late
March 1999, Iusacell raised airtime prices on its contract plans by
approximately 12% on a weighted average basis and approximately 6% for prepay
customers. These price increases remained in place as the competition followed
our lead.

Iusacell's revenues will be adversely affected to the extent that price
increases cannot keep pace with inflation.

New Competition

As a direct result of the spectrum auctions organized by the COFETEL which
concluded in May 1998, Iusacell will be facing additional mobile wireless
competition operating in the 1.9 GHz (PCS) spectrum in their cellular
territories by the second half of 1999 and, later in 1999, additional local
telephony competition operating in the 3.4-3.7 GHz Wireless Local Loop
spectrum. The specific consequences for Iusacell of this new competition are
difficult to predict. The experience of other countries suggests that, although
overall demand for wireless telephony services will increase, prices will
experience downward pressure, especially at the time of market entry by the new
competitors.

Regulatory Developments

The Mexican authorities resolved several critical regulatory issues in 1998 and
will likely continue to resolve additional important regulatory issues in 1999
which may have a material effect on Iusacell's financial condition and results
of operations.

Local Interconnection. On December 1, 1998, the COFETEL issued a resolution
which established the per minute interconnection rate for telephone calls made
from wireless customers to wireline customers at Ps.0.2573 per full minute

                                       57
<PAGE>

payable on a per second basis, which will be indexed on a monthly basis for
inflation as of October 1, 1998. In accordance with a September 1997 agreement
with Telmex, this tariff will be applied retroactively to June 1, 1997.
Iusacell had been paying an interconnection fee of Ps.0.31 per minute or
fraction of a minute. As a result of the retroactive application of this
interconnection tariff, Iusacell will receive a minimum benefit of Ps.33.3
million (U.S.$3.4 million), of which Ps.29.1 million (U.S.$2.9 million) was
recognized in 1998.

The COFETEL declined to provide for any amount of reciprocity in the
interconnection fee payable by Telmex to wireless operators for interconnection
services that Iusacell provides Telmex for calls made by wireline customers to
mobile wireless customers. As a result, Iusacell booked a net Ps.29.7 million
(U.S.$3.0 million) revenue reduction for the fourth quarter of 1998 and, in
early January 1999, filed for an administrative reconsideration of the local
interconnection ruling seeking, among other things, full interconnection
reciprocity for calls made by wireless customers to wireline customers.

Calling Party Pays. On December 1, 1998, the COFETEL also ruled that the
calling party pays modality would be implemented by May 1, 1999 as an option
for the wireless customer. The calling party pays modality is a cellular
telephony payment scheme similar to the existing wireline payment scheme, where
the wireline or fixed wireless party that places a call to a cellular
telephone, and not the cellular subscriber receiving the call, will be billed
for interconnection access, and the recipient will not be billed for the
airtime charges corresponding to that call. The COFETEL established the calling
party pays interconnection tariff at Ps.1.80 per minute or fraction of a
minute, which was to be indexed on a monthly basis for inflation as of October
1, 1998, for calls from Telmex wireline customers to mobile wireless customers.
The calling party pays modality would only apply to local calls and the mobile
party pays modality would continue to apply to incoming long distance and
incoming calls to a roamer.

In early January 1999, Telmex filed an injunction which suspended temporarily
the scheduled implementation of calling party pays. This preliminary injunction
was set aside by the Mexican courts in February 1999. In early January 1999,
Iusacell filed with the COFETEL for an administrative reconsideration of the
calling party pays ruling, seeking, among other things:

 .  an increase in the calling party pays interconnection tariff to in excess of
   Ps.2.00 per minute, and

 .  interconnection reciprocity for any and all incoming calls from wireline
   telephones to subscribers maintaining the mobile party pays modality.

In April 1999, Telmex and the Cellular A-Band carriers completed negotiating a
new mobile wireless Telmex local wireline interconnection agreement with the
approval of the COFETEL. The calling party pays modality was implemented on May
1, 1999. All mobile wireless customers were automatically converted to calling
party pays, with the right to revert to the mobile party pays modality. The
interconnection rate was frozen for six months at Ps.1.90 per minute or
fraction of a minute. Had the indexing established by the December 1, 1998
COFETEL resolution been applied, the rate for May 1999 would have been Ps.1.97
per minute or fraction of a minute. The price which Telmex may charge its
customers was frozen for six-months at Ps.2.50 per minute or fraction of a
minute, plus Telmex's applicable per call local charge. The calling party pays
interconnection tariff and the Telmex surcharges will be reassessed prior to
the expiration of this six month period in November 1999. We cannot assure you
that the interconnection rate will remain at the same level following this
reassessment.

Telmex greeted the May 1, 1999 implementation of calling party pays with an
advertising campaign critical of the high costs to wireline customers, whom
they urged to block calling party pays calls. But after a moderate decline in
traffic during the first two weeks of May 1999, Iusacell experienced a gradual
increase in traffic over the last two weeks of May 1999, slightly exceeding
pre-calling party pays traffic levels by the end of the month.

Iusacell expects the overwhelming majority of its customers to choose not to
opt out of the calling party pays modality and further expects that the
implementation of the calling party pays modality will accelerate subscriber
growth and increase subscriber usage throughout the Mexican wireless market.
Iusacell believes that when other countries have implemented calling party
pays, they generally have experienced substantial increases in usage by
wireless telephone customers. In the event that calling party pays causes a
surge in cellular traffic, Iusacell will likely experience improved revenue
growth, but it may also need to incur substantial additional capital
expenditures to augment its capacity in order to handle this greater traffic.


                                       58
<PAGE>

Long Distance Interconnection. In a separate resolution issued on December 1,
1998, the COFETEL also established the interconnection tariff between long
distance and local wireline carriers at Ps.0.2573 per full minute payable on a
per second basis, which will be indexed on a monthly basis for inflation as of
October 1, 1998. With respect to international long distance calls, the COFETEL
eliminated the requirement that a Mexican long distance company pay 58% of the
incoming international settlement rate to the local telephone carrier
terminating a call.

Long Distance Concession. In December 1997, the COFETEL authorized a
modification of Iusacell's concession to provide long distance services,
modifying coverage requirements and permitting the use of microwave and other
non-fiber technologies for transmission purposes. Together with fiber-swapping
agreements reached by Iusacell with two of its competitors, the modified
concession permits a more efficient, more technologically flexible long
distance network and eliminates more than U.S.$200 million in Iusacell capital
expenditure requirements over the next three years. In 1999, the SCT and the
COFETEL may also determine how much, through what means and over how much time
long distance concessionaires, including Iusatel, will pay for the special
projects implemented by Telmex prior to January 1997 to permit competition in
long distance telephony, including the numbering and signaling plans and
expenditures to facilitate interconnection. In May 1997, the COFETEL issued a
ruling mandating that the total amount reimbursable to Telmex for such special
projects was U.S.$422 million. Several long distance concessionaires objected
to the ruling, and the COFETEL is reviewing its ruling in light of these
objections.

During the third quarter of 1998, Telmex and Alestra, S. de R.L., which is
commercially known as Alestra and in which AT&T is a shareholder, attempted to
reach a negotiated settlement of several issues related to long distance,
including the amount and reimbursement mechanism for such special projects. No
definitive agreement has been reached to date on such special projects and, if
such an agreement is reached, the impact on the financial condition and
operations of Iusacell cannot yet be estimated.

                                       59
<PAGE>

Results of Operations

The following table presents for the periods indicated the percentage
relationships which certain items bear to revenues:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    -------------------------
                                                     1996     1997     1998
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Revenues:
  Cellular service revenues........................    70.2%    74.1%    74.6%
  Other service revenues...........................    15.9      8.8     12.1
<CAPTION>
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
    Total service revenues.........................    86.1     82.9     86.7
    Telephone equipment and other revenues.........    13.9     17.1     13.3
<CAPTION>
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
    Total..........................................   100.0    100.0    100.0
Cost of sales:
  Cost of services.................................    31.6     27.6     27.1
  Cost of telephone equipment and other............     7.7     10.8      7.1
<CAPTION>
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
    Total..........................................    39.3     38.4     34.2
Gross profit.......................................    60.7     61.5     65.8
Operating expenses.................................    43.8     40.0     38.2
Depreciation & amortization........................    35.6     31.3     28.1
450 Project non-cash writedown.....................     --       --      34.8
<CAPTION>
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Operating income (loss)............................   (18.7)    (9.8)   (35.3)
Other income, net..................................     --       --       4.7
Integral financing cost (gain):
  Interest expense, net............................    16.5     13.3      7.9
  Foreign exchange (gain) loss, net................    (3.7)     2.6     29.6
  Gain on net monetary position....................   (20.5)   (15.7)   (24.0)
<CAPTION>
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
    Total..........................................    (7.7)     0.2     13.5
Equity participation in net income (loss) of
 associated companies..............................     0.1      8.5      0.9
Provision for equipment impairment.................     --     (49.9)     --
Income (loss) from continuing operations before
 asset tax, employee profit sharing, minority
 interest and extraordinary item...................   (10.9)   (51.4)   (43.2)
Provision for asset tax and employee profit
 sharing...........................................     2.1      2.4      2.3
Minority interest..................................    (0.2)     --       0.2
Extraordinary item.................................     8.5      --       --
Loss from discontinued operations..................     --       --      (0.7)
<CAPTION>
                                                    -------
<S>                                                 <C>      <C>      <C>
Net income (loss)..................................  (21.3)%  (53.8)%  (46.0)%
<CAPTION>
                                                    =======  =======  =======
</TABLE>

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues

The following table presents the source of Iusacell's revenues for the years
ended December 31, 1997 and 1998.

<TABLE>
<CAPTION>
                                              Year Ended
                                  -----------------------------------
                                  December 31, 1997 December 31, 1998
                                  ----------------- -----------------
                                     Ps.       %       Ps.       %    % Change
                                  --------- ------- --------- ------- --------
     <S>                          <C>       <C>     <C>       <C>     <C>
     Cellular service revenues...   1,635.4    74.1   2,107.4    74.6   28.9
     Other service revenues......     194.9     8.8     341.7    12.1   75.3
<CAPTION>
                                  --------- ------- --------- -------
     <S>                          <C>       <C>     <C>       <C>     <C>
       Total service revenues....   1,830.3    82.9   2,449.1    86.7   33.8
       Telephone equipment and
        other revenues...........     376.4    17.1     375.3    13.3   (0.3)
<CAPTION>
                                  --------- ------- --------- -------
     <S>                          <C>       <C>     <C>       <C>     <C>
         Total revenues..........   2,206.7   100.0   2,824.4   100.0   28.0
<CAPTION>
                                  ========= ======= ========= =======
</TABLE>

                                       60
<PAGE>

Cellular Services. The table below presents cellular service revenues by source
for the years ended December 31, 1997 and 1998.

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                     ---------------------------
                                                       1997(/1/)     1998(/1/)
                                                     ------------- -------------
                                                       Ps.     %     Ps.     %
                                                     ------- ----- ------- -----
     <S>                                             <C>     <C>   <C>     <C>
     Airtime(/2/)...................................   612.1  37.4   756.2  35.9
     Monthly fees...................................   729.3  44.6   961.0  45.6
     Long distance..................................   144.7   8.8   176.4   8.4
     Value-added services(/3/)......................    84.7   5.2   150.5   7.1
     In-roaming(/4/)................................    63.2   3.9    56.4   2.7
     Activation fees................................     1.4   0.1     6.9   0.3
<CAPTION>
                                                     ------- ----- ------- -----
     <S>                                             <C>     <C>   <C>     <C>
       Total cellular service revenues.............. 1,635.4 100.0 2,107.4 100.0
<CAPTION>
                                                     ======= ===== ======= =====
</TABLE>
-------
(/1/)Figures reflect intercompany eliminations. These figures do not include
    revenues derived from paging, or from long distance services related to
    cellular service, local telephony or data transmission services.
(/2/)Incoming and outgoing airtime is charged on a per-minute basis for peak
    (Monday to Friday, 8:00 a.m. to 10:00 p.m.) and non-peak airtime.
(/3/)Includes fees for value-added services such as call waiting, call transfer,
    emergency service, secretarial service and conference calling, and revenues
    from activation bonds, insurance-related charges payable by subscribers,
    rural and public telephony and Iusacell's cellular magazine. Does not
    include charges for related airtime. Customers using value-added services
    such as news, weather, sports and entertainment reports are charged only
    for airtime. These revenues are therefore included in airtime.
(/4/)See "Item 1--Description of Business--Cellular Services--Roaming" for a
    discussion of the differences between in-roaming and out-roaming and the
    revenues associated with these services. In-roaming revenues are reflected
    in total service revenues and are paid to Iusacell by operators from other
    regions. Out-roaming revenues are reflected in telephone equipment and
    other revenues and are passed through to the applicable host operator.

Cellular service revenues increased by 28.9% to Ps.2,107.4 million (U.S.$212.8
million) in 1998 from Ps.1,635.4 million (U.S.$165.2 million) in 1997 and
represented 74.6% and 74.1% of total revenues in 1998 and 1997, respectively.
Revenues increased primarily as a result of a larger subscriber base. The
number of contract subscribers increased 38.5% and the number of prepay
subscribers increased 139.0% at December 31, 1998 as compared to December 31,
1997. The benefit of the increase in subscriber base was offset in part by a
17.1% decrease in average monthly MOUs and a 22.2% decrease in nominal average
monthly cellular revenue per subscriber in 1998 as compared to 1997.

Monthly fees from contract customers increased 31.8% to Ps.961.0 million
(U.S.$97.1 million) in 1998 from Ps.729.3 million (U.S.$73.7 million) in 1997
because of the increase in contract subscribers. Airtime revenues also
increased 23.5% to Ps.756.2 million (U.S.$76.4 million) in 1998 from Ps.612.1
million (U.S.$61.8 million) in 1997 mainly because of higher usage resulting
from the increase in the subscriber base. Long distance cellular revenues
increased 22.1% to Ps.176.4 million (U.S.$17.8 million) in 1998 from Ps.144.7
million (U.S.$14.6 million) in 1997 mainly because of additional high volume
customers and an increase in usage by all customers.

Average monthly MOUs for 1998 were 87, a decrease of 17.1% compared to the
monthly average of 105 MOUs in 1997. This decline in MOUs was largely due to
the significant increase in the number of Iusacell's prepay customers, who
generate substantially lower average MOUs than contract customers. In addition,
Iusacell has experienced a trend toward lower MOUs as Iusacell's expanded
customer base now includes subscribers who tend to generate fewer MOUs.

Nominal average monthly cellular revenue per subscriber declined 22.2% to
Ps.361 in 1998 from Ps.464 in 1997. This decline was primarily due to the same
reasons noted to explain the decline of monthly MOUs, and to a shift in usage
mix towards discounted incoming calls (discounts were implemented in October
1997). See "--Other Material Trends and Contingencies--Price Increases and
Rollbacks."

Iusacell had 755,375 and 400,123 cellular subscribers at December 31, 1998 and
1997, respectively. Prepay subscribers increased by 139.0% from 200,159
subscribers, or 50.0% of total subscribers, at December 31, 1997 to 478,361
subscribers, or 63.3% of total subscribers, at December 31, 1998. See "Item 1--
Description of Business--Cellular Services--Prepay Customers." Contract
subscribers increased by 38.5% from 199,964 to 277,014 between the same dates.


                                       61
<PAGE>

Contract subscriber churn declined to an average monthly level of 2.58% for
1998 from 2.95% for 1997. This decline reflects improved customer service and
the implementation of special programs specifically designed to enhance
customer retention and loyalty.

Other Services. Other service revenues increased by 75.3% to Ps.341.7 million
(U.S.$34.5 million) in 1998 from Ps.194.9 million (U.S.$19.7 million) in 1997,
and represented 12.1% and 8.8% of total revenues in 1998 and 1997,
respectively. This increase was principally due to higher sales of non-cellular
products and services.

Telephone Equipment and Other. Telephone equipment and other revenues decreased
0.3% to Ps.375.3 million (U.S.$37.9 million) in 1998 from Ps.376.4 million
(U.S.$38.0 million) in 1997. This decrease was primarily due to lower out-
roaming revenues.

Cost of Sales

Total cost of sales increased 13.9% to Ps.967.2 million (U.S.$97.7 million) in
1998 from Ps.848.8 million (U.S.$85.7 million) in 1997. As a percentage of
total revenues, cost of sales decreased to 34.2% in 1998 from 38.4% in 1997.

Cost of Services. Cost of services increased 25.7% to Ps.766.4 million
(U.S.$77.4 million) in 1998 from Ps.609.9 million (U.S.$61.6 million) in 1997.
This increase was mainly due to the 28.9% increase in cellular service revenues
(which resulted in higher overall (i) taxes and fees payable to the Mexican
government and (ii) Telmex interconnection fees), offset in part by a 21.2%
decrease in long-distance interconnection costs resulting from a greater use of
Iusacell's own expanded network. As a percentage of service revenues, cost of
services decreased from 33.3% for 1997 to 31.3% for 1998 mainly because of cost
improvement actions and a retroactive reduction in Telmex interconnection
fees.See "--Other Material Trends and Contingencies--Regulatory Developments."

Cost of Telephone Equipment and Other. Cost of telephone equipment and other
costs decreased by 16.0% to Ps.200.8 million (U.S.$20.3 million) in 1998 from
Ps.238.9 million (U.S.$24.1 million) in 1997 primarily due to a lower cost of
handsets. As a percentage of telephone equipment and other revenues, costs
decreased to 53.5% in 1998 from 63.5% in 1997. The cost of a cellular handset
given to a contract customer is amortized over 18 months, the average length of
Iusacell's cellular contract, instead of being expensed in the period in which
the customer received the telephone. If the handset costs had been expensed
instead of amortized, Iusacell's cost of telephone equipment and other costs
would have increased by Ps.248.8 million (U.S.$25.1 million) and Ps.80.1
million (U.S.$8.1 million) in 1998 and 1997, respectively.

Operating Expenses

Operating expenses increased 22.2% to Ps.1,077.8 million (U.S.$108.9 million)
in 1998 from Ps.882.2 million (U.S.$89.1 million) in 1997. As a percentage of
total revenues, operating expenses decreased to 38.2% in 1998 from 40.0% in
1997. Sales and advertising expenses increased by 34.6% from Ps.550.1million
(U.S.$55.6 million) in 1997 to Ps.738.6 million (U.S.$74.6 million) in 1998,
primarily because of increased competition for customer growth and the launch
of Iusacell's digital services. General and administrative expenses increased
2.1% to Ps.339.2 million (U.S.$34.3 million) in 1998 from Ps.332.1 million
(U.S.$33.5 million) in 1997, primarily due to higher salaries and benefits and
general operating costs. In accordance with Mexican GAAP, until September 1998,
certain pre-operating expenses, primarily related to Project 450, were
capitalized rather than expensed as under U.S. GAAP. In September 1998, under
Mexican GAAP, Iusacell wrote off all capitalized pre-operating expenses
accumulated as of that date as a charge against current operations. See "--
Depreciation and Amortization."

Depreciation and Amortization

Depreciation and amortization expenses, including the 450 non-cash writedown,
increased by 157.4% to Ps.1,776.4 million (U.S.$179.4 million) in 1998 from
Ps.690.2 million (U.S.$69.7 million) in 1997. This significant increase was
primarily due to the Ps.981.5 million (U.S.$99.1 million) non-cash writedown of
the carrying value of Iusacell's investment in its 450 MHz fixed wireless
project. See "--Local Telephony in the 450 MHz Frequency Band."

Operating Income (Loss)

Iusacell recorded an operating loss of Ps.997.0 million (U.S.$100.7 million) in
1998 as compared to an operating loss of Ps.214.5 million (U.S.$21.7 million)
in 1997. Excluding the non-cash writedown for the 450 MHz project, the 1998
operating loss would have been Ps.15.5 million (U.S.$1.6 million).

                                       62
<PAGE>

Other Income

Other income of Ps.132.7 million (U.S.$13.4 million) in 1998 primarily
represents a gain from the Mexican GAAP accounting of a fiber optic cable
agreement with Bestel, S.A. de C.V. See "--U.S. GAAP Reconciliation--Gain from
the exchange of non-monetary assets."

Integral Financing Cost (Gain)

Integral financing cost was Ps.380.8 million (U.S.$38.5 million) in 1998
compared to a cost of Ps.4.7 million (U.S.$0.5 million) in 1997 due principally
to a foreign exchange loss of Ps.836.4 million (U.S.$84.5 million) in 1998 as
compared to a foreign exchange loss of Ps.57.5 million (U.S.$5.8 million) in
1997, resulting from the effect of a higher Peso devaluation and U.S. dollar
net liability position in 1998 as compared with 1997. Net interest expense
decreased by 24.1% to Ps.223.4 million (U.S.$22.6 million) in 1998 from
Ps.294.4 million (U.S.$29.7 million) in 1997 because of the capitalization of
interest related to investments in fixed assets in the amount of Ps.123.7
million (U.S.$12.5 million). Monetary gain increased by 95.5% to Ps.678.9
million (U.S.$68.6 million) in 1998 from Ps.347.2 million (U.S.$35.1 million)
in 1997 primarily due to a higher net monetary liability position and period-
over-period inflation of 18.6%.

Provision for Equipment Impairment

As a result of a reassessment of the accounting for the impairment charge
related to Iusacell's analog communications network under Mexican GAAP, a
provision of Ps.1,100.7 million (U.S.$111.2 million) was recorded as a charge
to income in 1997. See "--U.S. GAAP Reconciliation--Fixed Assets Revaluation"
and Notes 20 and 22 to the Audited Consolidated Financial Statements.

For U.S. GAAP purposes, the Ps.1,100.7 million impairment provision was
determined in accordance with the Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-lived Assets and Assets to be
Disposed of" ("SFAS 121"). During the year ended December 31, 1997, changes in
circumstances indicated that the carrying amount of Iusacell's analog
telecommunications network might not be recoverable. These circumstances
included:

  .  Customer and marketing requirements for better voice quality, more and
     improved value-added services and reduction of wireless fraud, all of
     which were more viable with a digital platform. These requirements
     accelerated the adoption of digital technology in the Mexican wireless
     market.

  .  The view of Bell Atlantic, which assumed management control of Iusacell
     in February 1997, that Iusacell would need to adopt digital technology
     in order to remain competitive and that CDMA was the best technology
     available to Iusacell.

  .  The plans developed in 1997 by Telmex, the incumbent carrier, and other
     wireless carriers to launch digital technology in Mexico in 1998.

  .  Iusacell's decision to participate in the digital personal
     communications services auctions that were announced in November 1997.
     Effectively, the auctions were contributing to the growing market
     pressures for a wireless service change from analog to digital
     technology throughout Mexico.

  .  An increase in Iusacells subscriber base during 1997, such that the
     analog network was operating at close to full capacity by November 1997.
     The CDMA digital network has the potential to increase capacity by a six
     to eight multiple compared with analog.

In view of these changes in circumstances, Iusacell estimated the future cash
flows, undiscounted and without interest, of the analog equipment based on its
remaining life and considering the eventual disposition of the equipment under
the terms of a December 1997 agreement with Lucent Technologies to replace such
equipment. At the time of that assessment, the sum of the undiscounted future
cash flows was less than the book value of the analog equipment.

Having determined that the analog equipment had been impaired, Iusacell then
used the measurement criteria in SFAS 121 to determine the amount of the
impairment. Because the analog network is Iusacell's principal fixed asset and
integral to its operations, Iusacell believes that the asset does not qualify
as an asset to be disposed of in accordance with SFAS 121, but rather an asset
to be held and used. Consequently, for U.S. GAAP purposes, Iusacell reduced the
value of its investment in the analog network to its fair value and recorded
such write-down as a charge to operating expenses. Fair value was determined
based on an independent appraisal. Furthermore, such fair value approximates
the amount of

                                       63
<PAGE>

the trade-in credits to be granted pursuant to the agreement with Lucent
Technologies. See "--Digitalization" and Note 20 to the Audited Consolidated
Financial Statements.

Loss from Discontinued Operations

Loss from discontinued operations of Ps.18.4 million (U.S.$1.9 million) in 1998
represents the loss recognized as a result of Iusacell's discontinuation of its
Cellular Solutions de Mexico operation. See Note 19 to the Audited Consolidated
Financial Statements.

Net Income (Loss)

As a result of the factors described above, Iusacell's net loss was Ps.1,297.2
million (U.S.$131.0 million) in 1998 as compared to a net loss of Ps.1,186.4
million (U.S.$119.8 million) in 1997. Excluding the non-cash writedown for the
450 MHz project, Iusacell's net loss for 1998 would have been Ps.315.8 million
(U.S.$31.9 million). Excluding the provision for equipment impairment for the
analog communications network, Iusacell's net loss for 1997 would have been
Ps.85.7 million (U.S.$8.7 million).

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenues

The following table presents the source of Iusacell's revenues for the years
ended December 31, 1996 and 1997.

<TABLE>
<CAPTION>
                                              Year Ended
                                  -----------------------------------
                                  December 31, 1996 December 31, 1997
                                  ----------------- -----------------
                                     Ps.       %       Ps.       %    % Change
                                  --------- ------- --------- ------- --------
<S>                               <C>       <C>     <C>       <C>     <C>
Cellular service revenues........   1,540.1    70.2   1,635.4    74.1    6.2
Other service revenues(/1/)......     347.7    15.9     194.9     8.8  (43.9)
<CAPTION>
                                  --------- ------- --------- ------- --------
<S>                               <C>       <C>     <C>       <C>     <C>
  Total service revenues.........   1,887.8    86.1   1,830.3    82.9   (3.0)
Telephone equipment and other
 revenues........................     304.5    13.9     376.4    17.1   23.6
<CAPTION>
                                  --------- ------- --------- ------- --------
<S>                               <C>       <C>     <C>       <C>     <C>
    Total revenues...............   2,192.3   100.0   2,206.7   100.0    0.7
<CAPTION>
                                  ========= ======= ========= ======= ========
</TABLE>
-------
(1) Other service revenues consist of revenues from the provision of
    telecommunication services in Mexico other than cellular and, until
    December 1996, from revenues derived from Iusacell's consolidated 51%
    investment in Iusatel Chile, S.A. de C.V. ("Iusatel Chile"), a Chilean long
    distance provider. Iusacell sold its 51% stake in Iusatel Chile in December
    1996. See "Item 1--Business--International Joint Ventures."

Cellular Services. The table below presents cellular service revenues by source
for the years ended December 31, 1996 and 1997.

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                     ---------------------------
                                                       1996(/1/)     1997(/1/)
                                                     ------------- -------------
                                                       Ps.     %     Ps.     %
                                                     ------- ----- ------- -----
      <S>                                            <C>     <C>   <C>     <C>
      Airtime(/2/)..................................   538.0  34.9   612.1  37.4
      Monthly fees..................................   702.3  45.6   729.3  44.6
      Long distance(/3/)............................   115.1   7.5   144.7   8.8
      Value-added services(/4/).....................   114.6   7.4    84.7   5.2
      In-roaming(/5/)...............................    70.0   4.6    63.2   3.9
      Activation fees...............................     0.1   0.0     1.4   0.1
<CAPTION>
                                                     ------- ----- ------- -----
      <S>                                            <C>     <C>   <C>     <C>
        Total cellular service revenues............. 1,540.1 100.0 1,635.4 100.0
<CAPTION>
                                                     ======= ===== ======= =====
</TABLE>
(/1/)Figures reflect intercompany eliminations. These figures do not include
    revenues derived from paging, local telephony or data transmission services
    or from long distance services unrelated to cellular service.
-------
(/2/)Incoming and outgoing airtime is charged on a per-minute basis for peak
    (Monday to Friday, 8:00 a.m. to 10:00 p.m.) and non-peak airtime.
(/3/)Long distance revenues generated by cellular subscribers were passed
    through to Telmex prior to August 11, 1996. Since that date, such revenues
    have been retained by Iusacell.

                                       64
<PAGE>

(/4/)Includes fees for value-added services such as call waiting, call transfer,
    emergency service, secretarial service and conference calling, and revenues
    from activation bonds, insurance-related charges payable by subscribers,
    rural and public telephony and Iusacell's cellular magazine. Does not
    include charges for related airtime. Customers using value-added services
    such as news, weather, sports and entertainment reports are charged only
    for airtime. These revenues are therefore included in airtime.
(/5/)See "Item 1--Business--Cellular Services--Roaming" for a discussion of the
    differences between in-roaming and out-roaming and the revenues associated
    with these services. In-roaming revenues are reflected in total service
    revenues and are paid to Iusacell by operators from other regions. Out-
    roaming revenues are reflected in telephone equipment and other revenues
    and are passed through to the applicable host operator.

Cellular service revenues increased by 6.2% to Ps.1,635.4 million (U.S.$165.2
million) in 1997 from Ps.1,540.1 million (U.S.$155.5 million) in 1996 and
represented 74.1% and 70.2% of total revenues in 1997 and 1996, respectively.
Revenues increased as a result of a 71.8% increase in total subscribers in
1997, including a 25.6% increase in contract subscribers and a 171.4% increase
in prepay subscribers, offset in part by a 11.0% decrease in average monthly
MOUs.

Airtime revenues increased 13.8% to Ps.612.1 million (U.S.$61.8 million) in
1997 from Ps.538.0 million (U.S.$54.3 million) in 1996, and represented 37.4%
of total cellular revenue in 1997 as compared to 34.9% in 1996. This increase
in airtime revenue results mainly from price increases and higher usage
resulting from the increase in the subscriber base. Monthly fees from contract
customers increased 3.8% to Ps.729.3 million (U.S.$73.7 million) in 1997 from
Ps.702.3 million (U.S.$70.9 million) in 1996. Monthly fee growth benefited from
price increases in 1997, but trailed contract customer growth because the
majority of the new contract plan additions was added during the second half of
1997. Long distance cellular revenues increased 25.7% to Ps.144.7 million
(U.S.$14.6 million) in 1997 from Ps.115.1 million (U.S.$11.6 million) in 1996
mainly because of the growth in the cellular subscriber base in 1997.

Iusacell had 400,123 and 232,906 cellular subscribers at December 31, 1997 and
1996, respectively. Prepay subscribers increased by 171.4% from 73,762
subscribers, or 31.7% of total subscribers, at December 31, 1996 to 200,159
subscribers, or 50.0% of total subscribers, at December 31, 1997. Contract
subscribers increased by 25.6% from 159,144 to 199,964 between the same dates.

In 1997, contract subscriber churn declined dramatically to an average monthly
level of 2.95% from 4.28% during 1996. This decline reflects net increases in
contract subscribers, which reversed the previous downward trend in contract
customers experienced in 1996 when many such customers migrated to prepay plans
as a result of economic conditions, as well as improved customer service.

Average monthly MOUs for 1997 were 105, a decrease of 11.0% compared to the
monthly average of 118 MOUs in 1996. This decline in MOUs was largely due to
the significant increase in the number of Iusacell's prepay customers, who
generate substantially lower average MOUs than contract customers. In addition,
Iusacell has experienced a trend toward lower MOUs as its expanded customer
base is now attracting subscribers who tend to generate fewer MOUs.

Nominal average monthly cellular revenue per subscriber decreased 5.7% to
Ps.464 in 1997 from Ps.492 in 1996. This decline was primarily due to the same
reasons noted to explain the decline of monthly MOUs.

Other Services. Other service revenues decreased by 43.9% to Ps.194.9 million
(U.S.$19.7 million) in 1997 from Ps.347.7 million (U.S.$35.1 million) in 1996,
and represented 8.8% and 15.9% of total revenues in 1997 and 1996,
respectively. This decrease, in large part was because of the sale of
Iusacell's interest in Iusatel Chile in December 1996. Revenues derived from
Iusatel Chile were Ps.81.3 million (U.S.$8.2 million) in 1996.

Telephone Equipment and Other. Telephone equipment and other revenues grew
23.6% to Ps.376.4 million (U.S.$38.0 million) in 1997 from Ps.304.5 million
(U.S.$30.8 million) in 1996. This increase was primarily due to an increase in
handset sales to support Iusacell's growing prepay program.

Cost of Sales

Total cost of sales decreased 1.5% to Ps.848.8 million (U.S.$85.7 million) in
1997 from Ps.861.9 million (U.S.$87.1 million) in 1996. As a percentage of
total revenues, cost of sales decreased to 38.5% in 1997 from 39.3% in 1996.

Cost of Services. Cost of services decreased 11.9% to Ps.609.9 million
(U.S.$61.6 million) in 1997 from Ps.692.1 million (U.S.$69.9 million) in 1996.
This decrease was mainly due to the sale of Iusatel Chile and reduced Telmex
interconnection fees.

                                       65
<PAGE>

Cost of Telephone Equipment and Other. Despite the lower rate of inflation in
1997 relative to the rate of inflation in 1996, cost of telephone equipment and
other costs increased by 40.7% to Ps.238.9 million (U.S.$24.1 million) in 1997
from Ps.169.8 million (U.S.$17.1 million) in 1996, primarily due to an increase
in handsets sold to support Iusacell's prepay program. As a percentage of
telephone equipment and other revenues, costs of telephone equipment and other
costs increased to 63.5% in 1997 from 55.8% in 1996. The cost of a cellular
handset given to a contract customer is amortized over 18 months, instead of
being expensed in the period in which the customer received the telephone. If
these handset costs had been expensed instead of amortized, Iusacell's cost of
telephone equipment and other costs would have increased by Ps.187.0 million
(U.S.$18.9 million) and Ps.267.6 million (U.S.$27.0 million) in 1997 and 1996,
respectively.

All of Iusacell's cellular handsets are subject to obsolescence based on a
number of factors, including changes in customer preferences, competition and
technological developments. The decrease in the allowance for obsolete and slow
moving inventories as a percentage of cellular telephone and accessories (from
39% at December 31, 1996 to 11% at December 31, 1997) was primarily related to
two items: (i) a significant amount of handsets were purchased in December 1997
in anticipation of a sales promotion to be launched in early 1998 and (ii) a
special provision for loss established at the end of 1996 to cover damage from
a flood at one of Iusacell's warehouses.

Operating Expenses

Operating expenses decreased 8.0% to Ps.882.2 million (U.S.$89.1 million) in
1997 from Ps.959.2 million (U.S.$96.9 million) in 1996, and, as a percentage of
total revenues, decreased to 40.0% in 1997 from 43.8% in 1996. Sales and
advertising expenses grew 6.7% from Ps.515.4 million (U.S.$52.1 million) in
1996 to Ps.550.1 million (U.S.$55.6 million) in 1997. General and
administrative expenses declined 25.2% to Ps.332.1 million (U.S.$33.5 million)
in 1997 from Ps.443.8 million (U.S.$44.8 million), primarily due to the
elimination of general and administrative expenses from Iusatel Chile, a 17%
reduction in administrative and staff personnel and a decline in consulting
fees in 1997.

In accordance with Mexican GAAP, pre-operating expenses (net of pre-operating
revenues) associated with Iusacell's provision of local wireless service in the
450 MHz band on a trial basis (as well as with certain other services) are
capitalized rather than, as required under U.S. GAAP, expensed. The pre-
operating expenses (net of pre-operating revenues) that were capitalized in
1997 and 1996 equaled Ps.100.5 million (U.S.$10.2 million) and Ps.98.4 million
(U.S.$9.9 million), respectively.

Depreciation and Amortization

Depreciation and amortization expenses decreased by 11.5% to Ps.690.2 million
(U.S.$69.7 million) in 1997 from Ps.779.6 million (U.S.$78.7million) in 1996.
The decline in depreciation and amortization is attributable to the reduction
in the carrying value of fixed assets during 1997. In accordance with Mexican
GAAP and following Bulletin B-10, fixed assets and depreciation for the year
are restated using inflation factors without exceeding net realizable value.

Operating Loss

For 1997, Iusacell recorded an operating loss of Ps.214.5 million (U.S.$21.7
million) as compared to an operating loss of Ps.408.4 million (U.S.$41.2
million) in 1996.

Integral Financing Cost (Gain)

Integral financing cost was Ps.4.7 million (U.S.$0.5 million) in 1997 compared
to a gain of Ps.166.8 million (U.S.$16.8 million) in 1996 due principally to a
foreign exchange loss of Ps.57.5 million (U.S.$5.8 million) in 1997 compared to
a foreign exchange gain of Ps.80.1 million (U.S.$8.1 million) in 1996. In 1997,
Iusacell recorded a decrease in gain on monetary position of 22.7% to Ps.347.2
million (U.S.$35.1 million) in 1997 from Ps.449.1 million (U.S.$45.4 million)
in 1996 reflecting the lower rate of inflation in 1997. Net interest expense
decreased 18.8% to Ps.294.4 million (U.S.$29.7 million) in 1997 from Ps.362.4
million (U.S.$36.6 million) in 1996. The decrease in interest expense was due
to significantly lower interest rates, offset in part by higher levels of
borrowing in 1997.

Equity Participation in Net Income (Loss) of Associated Companies

Iusacell recorded equity participation in net income of associated companies of
Ps.187.1 million (U.S.$18.9 million) in 1997 as compared to Ps.1.7 million
(U.S.$0.2 million) in 1996. This increase was due to the gain on the sale of
Iusacell's Ecuadorian affiliate. See "Item 1--Description of Business--
International Joint Ventures."

                                       66
<PAGE>

Provision for Equipment Impairment

As a result of a reassessment of the accounting for the impairment charge
related to Iusacell's analog communications network under Mexican GAAP, a
provision of Ps.1,100.7 million (U.S.$111.2 million) was recorded as a charge
to income in 1997. See "--U.S. GAAP Reconciliation--Fixed Assets Revaluation"
and Notes 20 and 22 to the Audited Consolidated Financial Statements.

Net Income (Loss)

As a result of the factors described above, Iusacell's net loss was Ps.1,186.4
million (U.S.$119.8 million) in 1997 as compared to a net loss of Ps.468.4
million (U.S.$47.3 million) in 1996. Excluding the provision for equipment
impairment for the analog communications network, Iusacell's net loss for 1997
would have been Ps.85.7 million (U.S.$8.7 million).

Income Tax, Asset Tax and Employees' Profit Sharing

Prior to January 1, 1999, Iusacell prepared its tax returns on a fully
consolidated basis for all but three of its subsidiaries, benefiting from the
ability to offset losses incurred by some subsidiaries against the gains of
others within the consolidated group. Iusacell only consolidated 60% of
Iusatel, S.A. de C.V. Iusatelecomunicaciones, S.A. de C.V. and Infotelecom,
S.A. de C.V. for tax purposes because they were not wholly-owned subsidiaries.
Beginning January 1, 1999, as a result of Mexican income tax law amendments,
Iusacell must limit its tax consolidation to 60% of all its subsidiaries,
except for five entities (Iusatel, S.A. de C.V., Iusatelecomunicaciones, S.A.
de C.V., Infotelecom, S.A. de C.V., Iusacell PCS, S.A. de C.V. and Punto a
Punto Iusacell, S.A. de C.V.) which will not be included in its consolidated
tax return (although they are consolidated for accounting purposes), because
Iusacell does not hold at least 51% of the voting shares of such subsidiaries.
Iusacell filed an injunction (amparo) against the new income tax law amendments
on the basis that the law is unconstitutional. The Mexican court has not yet
ruled on the injunction.


Iusacell and its subsidiaries pay an alternative net asset tax which is levied
on the average value of substantially all assets less certain liabilities. This
tax, which was 1.8% in 1996, 1997 and 1998 is required to be paid if the amount
of the asset tax exceeds the computed income tax liability. Iusacell provided
for Ps.45.4 million (U.S.$4.6 million), Ps.53.8 million (U.S.$5.4 million) and
Ps.64.2 million (U.S.$6.5 million) of net asset taxes for 1996, 1997 and 1998,
respectively. These taxes may be applied in subsequent years against income tax
payments, to the extent income tax liabilities for such years exceed the net
asset tax calculation. Due to net losses, Iusacell paid no income taxes in
1996, 1997 and 1998 and paid the asset taxes specified above. See Note 12 to
the Audited Consolidated Financial Statements for a discussion of Iusacell's
carryforward tax losses.

While Iusacell has no employees at the holding company level, Iusacell's
subsidiaries are required under Mexican law to pay their employees, in addition
to their required compensation and benefits, profit sharing in an aggregate
amount equal to 10% of the taxable income of the relevant subsidiary
(calculated without reference to inflation adjustments or amortization of tax
loss carryforwards). There was no statutory profit-sharing in any periods
presented, except for Ps.0.5 million in 1998.

Liquidity and Capital Resources

Liquidity

Iusacell's liquidity has been provided by cash from operations, short and long-
term borrowings, vendor financing and capital contributions.

Total debt at December 31, 1998 was Ps.4,574.3 million (U.S.$462.0 million), an
increase of 67.8% from its total debt at December 31, 1997. All of Iusacell's
debt outstanding at December 31, 1998 was U.S. dollar denominated and unhedged
against foreign exchange risk. At December 31, 1998, Iusacell's average cost of
outstanding debt was approximately 8.5%, with a remaining average maturity of
approximately 3.6 years. At December 31, 1998, Iusacell's debt to total capital
ratio stood at 55.5% as compared to 40.2% at December 31, 1997. Excluding the
one-time charge related to the 450 MHz project, the debt to total capital ratio
would have been 50.6% at December 31, 1998.

In February 1997, as part of the transactions relating to the assumption of
management control by subsidiaries of Bell Atlantic, Iusacell converted
approximately U.S.$70.1 million in debt held by its principal shareholders into
approximately

                                       67
<PAGE>

100.3 million shares of Iusacell's capital stock. In addition, a subsidiary of
Bell Atlantic committed to provide Iusacell with subordinated convertible
financing in an aggregate amount of U.S.$150 million bearing interest at an
annual rate of LIBOR plus 5.0%. In the second half of 1998 and the first
quarter of 1999, Iusacell borrowed an aggregate of U.S.$132.5 million under
this facility, which Bell Atlantic immediately converted into 189,285,713
Iusacell series A shares, 43,571,428 of which were then sold by Bell Atlantic
to the Peralta Group. This facility expires at the end of June 1999 and
Iusacell does not expect to make any further borrowings under it.

In July 1997, Iusacell refinanced approximately U.S.$210.1 million in
indebtedness (including accrued and unpaid interest) with the net proceeds of:

  .  the issuance of U.S.$150.0 million of 10% Senior Notes due 2004 under
     the Indenture dated as of July 25, 1997 among Iusacell, the subsidiaries
     of Iusacell guaranteeing such notes and First Union National Bank, as
     Trustee (the "Indenture"), almost all of which were exchanged in January
     1998 for 10% Series B Senior Notes due 2004 which are also governed by
     the Indenture (whether or not exchanged, the "10% Senior Notes"), and

  .  the Chase Credit Facility (as defined below).

The "Chase Credit Facility" consists of:

  .  a five-year senior secured term facility in the principal amount of
     U.S.$125.0 million, all of which was drawn down in July 1997, and

  .  a five-year senior secured revolving credit facility in an aggregate
     principal amount of U.S.$100.0 million.

By July 24, 1998, U.S.$100.0 million under the revolving credit facility had
been drawn and on that date the facility commitment was terminated.

The obligations of Iusacell under the Chase Credit Facility are unconditionally
guaranteed, jointly and severally, by the principal operating and concession-
holding subsidiaries of Iusacell and are secured by the pledge of substantially
all capital stock and equity interests held by Iusacell and by all cellular
concessions and substantially all assets used in connection with or related to
such concessions.

Loans outstanding under the Chase Credit Facility bear interest at a rate per
annum equal to (at Iusacell's option):

  .  one-, two-, three- or six-month LIBOR plus 1.75%, or

  .  an alternate base rate (equal to the higher of the prime rate of The
     Chase Manhattan Bank, the reserve adjusted secondary market rate for
     certificates of deposit plus 1% per annum and the Federal Funds
     effective rate plus 0.5% per annum).

As required by the Chase Credit Facility, on May 22, 1998 Iusacell entered into
an interest rate collar agreement with The Chase Manhattan Bank to limit the
maximum interest rate Iusacell must pay on U.S.$35.0 million of its floating-
rate debt. Under the terms of this collar agreement, Iusacell's maximum
effective LIBOR cost is limited to 6.12% if six-month LIBOR is lower than 7.12%
and, if six-month LIBOR equals or goes above 7.12%, then Iusacell's maximum
effective LIBOR cost is limited to 7.12%.

On February 26, 1999, Iusacell entered into a second interest rate collar
agreement with The Chase Manhattan Bank to limit the maximum interest rate
Iusacell must pay on U.S.$15.0 million of its floating rate debt. Under the
terms of this second collar agreement, Iusacell's maximum effective LIBOR cost
is limited to 5.82% if six-month LIBOR is lower than 6.82% and, if six-month
LIBOR equals or goes above 6.82%, then Iusacell's maximum effective LIBOR cost
is limited to 6.82%.

The Indenture and the Chase Credit Facility contain a number of restrictive
covenants that, among other things, restrict the ability of Iusacell and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness or amend other debt instruments and material agreements, pay
dividends or make distributions, create liens on assets, enter into sale and
leaseback transactions and other lease financings, make loans or investments,
make acquisitions, engage in mergers or consolidations, change the business
conducted by Iusacell and its subsidiaries, or engage in certain transactions
with affiliates and otherwise restrict some types of corporate activities.

In addition, under the Chase Credit Facility, Iusacell is required to comply
with specified financial ratios and tests, including minimum interest coverage
ratios, maximum leverage ratios and maximum capital expenditure levels. In

                                       68
<PAGE>

February 1999, Iusacell obtained certain modifications of and waivers to these
restrictive covenants in order to enable it to proceed with the Eximbank
Financing (as defined below) and make capital expenditures in excess of the
permitted limitations for 1998, including the acquisition of PCS licenses in
Regions 1 and 4.

In March 1998, Iusacell secured a U.S.$52.0 million bridge loan facility from
Swiss Bank Corporation (now UBS AG). The bridge loan facility was modified in
August and December 1998 and in April 1999, the effects of which were to
increase the amount of the facility to U.S.$85.0 million and extend the
maturity date to July 15, 1999. At December 31, 1998, Iusacell had borrowed
U.S.$75.0 million under this facility. The proceeds from these borrowings,
which mature on July 15, 1999, had an annual interest rate of six-month LIBOR +
1.0% until December 31, 1998 and an annual interest rate of one-month, three-
month or four-month LIBOR + 2.5% from January 1, 1999 to July 15, 1999, and are
being applied towards the acquisition and installation of Lucent Technologies
analog and CDMA digital cellular network equipment.

This bridge loan is expected to be replaced in early July 1999 by the "Eximbank
Financing" which will consist of:

  .  a five-year senior secured term facility provided by UBS AG in the
     principal amount of U.S.$72.5 million, which will be guaranteed by the
     Export-Import Bank of the United States, and

  .  a two-year senior secured term facility provided by UBS AG and
     Commerzbank AG in the principal amount of U.S.$25.6 million, which will
     not be guaranteed by the Export-Import Bank of the United States.

Iusacell's obligations under the Eximbank Financing will be unconditionally
guaranteed, jointly and severally, by the principal operating and concession-
holding subsidiaries of Iusacell and will be secured by a first lien on the
initial commitment of Lucent Technologies analog and CDMA digital cellular
network equipment to be acquired for Regions 6, 7 and 9, a second lien on any
and all other Lucent Technologies analog and CDMA digital cellular network
equipment to be acquired under Iusacell's contract with Lucent Technologies,
including such equipment in Region 5, and a second lien on Iusacell's four
cellular concessions and substantially all other assets used in connection with
or related to such concessions.

Loans outstanding under the Eximbank Financing will bear interest at a rate per
annum equal to 0.20% per annum above six-month LIBOR, in the case of the
facility guaranteed by the Export-Import Bank of the United States, and 1.50%
per annum above six-month LIBOR, in the case of the facility which is not
guaranteed by the Export-Import Bank of the United States.

Iusacell expects to replace the UBS AG bridge loan with the Eximbank Financing
prior to the current maturity date of the bridge loan.

In January 1999, Iusacell secured a Handset Financing from UBS AG, which
consists of a 360-day senior unsecured credit facility in the principal amount
of U.S.$10 million to be used solely to acquire cellular handsets. Loans
outstanding under the Handset Financing will bear interest at a rate per annum
equal to 1.50% per annum above LIBOR for the related interest period, which can
have a duration of 30, 60, 90, 180 or 360 days, with respect to each
disbursement. Iusacell drew down the entire U.S.$10 million available under
this facility in April 1999.

Iusacell, from time to time, also incurs vendor financing indebtedness in order
to finance purchases of equipment, hardware and software. As of December 31,
1998, Iusacell had U.S.$11.7 million of such vendor financing outstanding, all
of which is due and payable in 2000.

Iusacell's ability to service and repay the 10% Senior Notes, the borrowings
under the Chase Credit Facility, the bridge loan facility, the Eximbank
Financing and the Handset Financing will depend on future economic and
competitive conditions and on financial, business and other factors, many of
which are beyond Iusacell's control.

                                       69
<PAGE>

The following table presents Iusacell's amortization requirements with respect
to its total indebtedness and short term vendor financings at December 31, 1998
through December 31, 2004.

<TABLE>
<CAPTION>
                           Amount (Before                 Amount (After
     Year                Eximbank Financing)           Eximbank Financing)
     ----           ----------------------------- -----------------------------
                    (in millions of U.S. Dollars) (in millions of U.S. Dollars)
     <S>            <C>                           <C>
     1999..........              86.8                          19.0
     2000..........              33.8                          61.1
     2001..........              92.2                         119.6
     2002..........              99.0                         113.5
     2003..........               0.0                          14.5
     2004..........             150.0                         157.3
</TABLE>

Iusacell believes that funds from operating activities, borrowings already
drawn under the Bell Atlantic subordinated convertible facility, additional
vendor and export credit agency financing and the proceeds of the rights offer
and the primary offer described in this annual report will be adequate to meet
its debt service and principal amortization requirements, working capital
requirements and its capital expenditure needs for its existing businesses for
1999 and 2000, although no assurance can be given in this regard. Iusacell's
capital expenditure needs and working capital requirements to build-out and
operate concessions to provide wireless telephone services in Region 1 and
Region 4 over the PCS E-Band will require a significant amount of additional
funding. Iusacell's future operating performance and ability to service and
repay its indebtedness will be subject to future economic and competitive
conditions and to financial, business and other factors, many of which are
beyond Iusacell's control. See "--Capital Expenditures."

Capital Expenditures

Iusacell expects to make substantial capital expenditures to upgrade network
infrastructure, build out cellular, long distance, local telephony and paging
networks, build out PCS networks in Region 1 and Region 4, implement new
billing systems, become Year 2000 compliant and support existing operations and
new business opportunities. The degree and timing of capital expenditures will
remain strongly dependent on the competitive environment and economic
developments in Mexico, including inflation and exchange rates, as well as on
the timing of regulatory actions and on the availability of suitable debt
and/or equity financing. See "--Liquidity."

As a result of the financial constraints caused in part by the economic
situation in Mexico and the inability of Iusacell to obtain significant amounts
of additional financing, Iusacell reduced its capital expenditure program in
1996 and the first quarter of 1997, with outlays principally limited to
expansion of the cellular network and the start-up of long distance and paging.
Substantial capital expenditures resumed in the second quarter of 1997. Total
capital expenditures in 1997 were Ps.838.6 million (U.S.$84.7 million),
compared with Ps.324.8 million (U.S.$32.8 million) in 1996. Total capital
expenditures in 1998 increased substantially because of the accelerated
deployment of the CDMA digital network and were Ps.3,236.7 million (U.S.$326.9
million), including Ps.493.2 million (U.S.$49.8 million) for the acquisition of
PCS frequency concessions in Regions 1 and 4.

Iusacell expects capital expenditures for 1999, 2000 and 2001 to total
approximately U.S.$375.0 million, of which approximately U.S.$94.0 million will
be invested during 1999. In 1999, approximately U.S.$56.0 million will be
allocated to the development of the wireless network, including completion of
the deployment of a replacement analog cellular network and a new CDMA digital
network pursuant to an agreement entered into with Lucent Technologies in
December 1997. The balance of U.S.$38.0 million primarily will be:

  .  invested in developing long distance, paging and other networks,

  .  used to fund non-network infrastructure, such as the further development
     and deployment of the new billing system and upgrades to other
     management information systems,

  .  used to acquire concessions for long-haul microwave frequencies in the 7
     GHz band, and

  .  used to make equipment and software applications Year 2000 compliant.

Additional funds will be allocated to the build-out and operation of
concessions to provide wireless telephony over the PCS E-Band in Region 1 and
Region 4, subject to obtaining financing. Iusacell expects that capital
expenditures to build out its wireless network in northern Mexico to range
between approximately U.S.$90 million and U.S.$115 million in 1999, 2000 and
2001. Iusacell will need to obtain significant capital from outside sources to
continue to build out our wireless infrastructure and pursue long distance
opportunities.

                                       70
<PAGE>

In December 1997, the COFETEL approved the modification of Iusacell's long
distance concession, substantially reducing the coverage and technological
investment requirements. Iusacell estimates that full compliance with these
requirements will require approximately U.S.$115.0 million in capital
expenditures, of which approximately U.S.$58.0 million had already been
invested prior to 1998, approximately U.S.$27.0 million was invested in 1998
and approximately U.S.$25.0 million will be invested in 1999, 2000 and 2001.

Iusacell believes that funds from operating activities, borrowings already
drawn under the Bell Atlantic subordinated convertible facility, vendor
financing, export credit agency financing and further bank or capital market
borrowings, described in this annual report will be adequate to meet capital
expenditure needs for its existing businesses for 1999-2001. The capital
expenditure needs and working capital requirements to build out and operate
concessions to provide PCS services in Region 1 and Region 4 will require a
significant amount of additional funding, for which Iusacell will be required
to seek additional bank financing or seek to issue additional debt securities.
To the extent that financing is not available, Iusacell could be required to
substantially limit its capital expenditure plans. The Indenture and the Chase
Credit Facility limit, and the Eximbank Facility will limit, the ability of
Iusacell to incur debt. The degree to which Iusacell is leveraged will also
adversely affect our ability to obtain additional financing.

Dividend Policy

Since becoming a public company in 1994, Iusacell has not paid dividends and,
currently, Iusacell has no plans to initiate dividend payments. In addition,
the Indenture and the Chase Credit Facility limit, and the Eximbank Facility
will limit, Iusacell's ability to pay dividends.

U.S. GAAP Reconciliation

The principal differences between Mexican GAAP and U.S. GAAP as they relate to
Iusacell are the adjustment for the effects of inflation, the treatment of
fixed assets revaluation, minority interests, deferred income taxes, employee
profit sharing, capitalized pre-operating costs for Iusacell's 450 MHz local
wireless project, provisions for consolidation of facilities and accounting for
non-monetary exchanges and interest rate collars. See Note 20 to the Audited
Consolidated Financial Statements for a reconciliation to U.S. GAAP of
stockholders' equity and net loss for the respective periods presented.

Inflation Adjustments

The reconciliation to U.S. GAAP does not include the reversal of the
adjustments to the financial statements for the effects of inflation required
under Mexican GAAP (Bulletin B-10) because the application of Bulletin B-10
represents a comprehensive measure of the effects of price level changes in the
Mexican economy and, as such, is considered a more meaningful presentation than
historical cost-based financial reporting for both Mexican and U.S. accounting
purposes.

Deferred Income Taxes and Employee Profit Sharing

Under Mexican GAAP, deferred income taxes are provided for identifiable, non-
recurring timing differences at rates in effect at the time such differences
originate. Benefits from loss carryforwards are not allowed to be recognized
before the period in which the carryforward is utilized.

Under U.S. GAAP, Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" requires an asset and liability method of
accounting for income taxes whereby deferred taxes are recognized for the tax
consequences of all temporary differences between the financial statement
carrying amounts and the related tax bases of assets and liabilities. The
effect on deferred taxes of a change in tax rate is recognized in income in the
period in which the change is enacted.

SFAS 109 requires deferred tax assets to be reduced by a valuation allowance
if, based on the weight of available evidence, including cumulative losses in
recent years, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.

As of December 31, 1998, Iusacell had recognized for U.S. GAAP purposes a gross
deferred tax asset of Ps.1,113.2 million (U.S.$112.4 million), reflecting the
benefit of tax loss carryforwards which expire in varying amounts between 2001
and 2008. Realization is dependent on generating sufficient taxable income
prior to expiration of the loss

                                       71
<PAGE>

carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the net deferred tax asset at December 31,
1998 will be realized based on the following:

  .  although Iusacell has generated consolidated operating losses for the
     past five years, it believes that it is more likely than not that the
     net deferred tax asset will be realized based on Iusacell's latest
     estimate of future taxable income over the next five years in an amount
     sufficient to utilize the net deferred tax losses recorded as of
     December 31, 1998, and

  .  the net deferred tax asset amounting to Ps.165.0 million (U.S.$16.7
     million) represents only the tax loss carryforwards (which are subject
     to indexation) of 1997 and 1998 which have expiration periods of 9 and
     10 years, respectively.

Iusacell's estimate of future taxable income is based primarily on and
supported by

  .  management's expectations of Iusacell's growth and profitability over
     the next 5 years,

  .  the significant improvement in operating performance from February 1997
     through December 1998, as evidenced by the success of the implementation
     of the Bell Atlantic wireless business model. This model has produced
     strong subscriber growth in excess of 80% year over year in 1997 and
     1998, improved revenues (based on customer growth and price increases),
     and lower network and operating costs, resulting in an operating profit
     in the first two quarters of 1998 (and, excluding the 450 write-down,
     also in the third quarter of 1998), as compared to an operating loss
     during 1997, and

  .  the effects of cost-cutting measures achieved as a result of the
     restructuring completed during 1997 and 1998, primarily related to a 15%
     reduction in headcount and elimination of duplicate administrative
     costs.

The amount of the deferred tax asset considered realizable could be reduced in
the near term if estimates of future taxable income during the carryforward
periods are lower than currently expected.

Employee profit sharing expense, which is based on the taxable income of each
corporate entity after statutory adjustments, is included in the income tax
provision under Mexican GAAP. Under U.S. GAAP, the provision for employee
profit sharing is charged to operations.

Pre-Operating Costs

Under Mexican GAAP, Iusacell capitalized certain pre-operating costs primarily
related to its 450 MHz local wireless project. Under U.S. GAAP, pre-operating
costs are expensed as incurred. During 1998, Iusacell recorded a non-cash
writedown related to its investment in the 450 MHz project for Mexican GAAP
purposes and, consequently, wrote off all pre-operating costs as of that date.

Fixed Assets Revaluation

As described in Note 4 b) to the Audited Consolidated Financial Statements,
under Mexican GAAP the writedown of the carrying value of the
telecommunications analog equipment was originally recorded as a direct charge
to the excess from restatement account included in stockholders' equity.
Iusacell has restated the financial statements for the year ended December 31,
1997 to reflect such writedown as a charge against income from operations.
Under U.S. GAAP, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," requires that long-lived assets to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the entity should estimate the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized based on the fair value of the asset. The
impairment loss is recorded as a component of income from operations.

Minority Interests

Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component within the stockholders' equity section of
the consolidated balance sheet. For U.S. GAAP purposes, minority interest is
not included in stockholders' equity and accordingly is deducted as a
reconciling item to arrive at U.S. GAAP equity.


                                       72
<PAGE>

Gain from the exchange of non-monetary assets

In December 1998, Iusacell entered into a fiber optic cable swap agreement with
Bestel, S.A. de C.V. to exchange certain long-distance fiber optic cables for a
contract amount of Ps.191.5 million (U.S.$19.3 million). Under Mexican GAAP,
Iusacell recorded the transaction as both an acquisition and sale of fixed
assets based on the contract amount, resulting in a gain on the sale of
Ps.166.8 million (U.S.$16.8 million). Under U.S. GAAP, because the assets
exchanged are similar productive assets and, on a net basis, no cash was
exchanged, the transaction does not result in the recognition of earnings.
Consequently, under U.S. GAAP, the acquisition and sale would not have been
recorded.

Interest Rate Collar

Under Mexican GAAP, the interest rate collar agreements are recorded on a cash
basis. Under U.S. GAAP, the differential to be paid or received as interest
rates change is accrued and recognized as an adjustment of interest expense at
the balance sheet date. Additionally, the related amount payable or receivable
from counterparties is included in other accrued expenses at the balance sheet
date.

Restatement related to the provision for consolidation of facilities

As described in Note 2 to the Audited Consolidated Financial Statements, during
the year 1996 Iusacell originally recorded a provision for consolidation of
facilities related to its former headquarters building ("Montes Urales") under
both Mexican GAAP and U.S. GAAP. Iusacell has reassessed this accounting
treatment under U.S. GAAP and determined that, as management did not have the
ability to remove Montes Urales from operations in December 1996, Montes Urales
did not qualify as an asset held to be disposed of at such date and
consequently, should have been accounted for as an asset to be held and used
pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As a result,
under U.S. GAAP, an impairment charge would not have been recorded at December
31, 1996 related to Montes Urales.

ITEM 9A. Market Risks

Iusacell's earnings are affected by changes in interest rates as a result of
its long-term borrowings. Iusacell's short-term bridge loan bears interest at a
variable rate of LIBOR plus 2.5%. The Chase Credit Facility bears interest at a
variable rate equal to (at Iusacell's option):

  .  one-, two-, three- or six-month LIBOR plus 1.75%, or

  .  an alternate base rate equal to the higher of (a) the prime rate of The
     Chase Manhattan Bank, (b) the reserve adjusted secondary market rate for
     certificates of deposit plus 1% per annum and (c) the Federal Funds
     effective rate plus 0.5% per annum.

Iusacell also has fixed rate debt under the unsecured 10% Senior Notes.

Iusacell does not enter into derivative financial contracts for trading or
speculative purposes; however, Iusacell manages the exposure to interest risk
rate through the use of interest rate collars. In July 1998, Iusacell entered
into an interest rate collar agreement. The interest rate collar agreement has
a capped interest rate range of 6.12% to 7.12% above six-month LIBOR and a
floor of 5.30% to 6.12% above six-month LIBOR on a notional amount of U.S.$35.0
million until July 30, 2002. The following table summarizes the maturity dates,
carrying values and fair values of the debt obligations and the interest rate
collar agreement as of December 31, 1998.

<TABLE>
<CAPTION>
                            1999      2000      2001      2002      2003    Thereafter   Total    Fair Value
                         ---------- --------- --------- --------- --------- ---------- ---------- ----------
                                                    (in millions of U.S. dollars)
<S>                      <C>        <C>       <C>       <C>       <C>       <C>        <C>        <C>
Short-term notes
 payable................ U.S.$ 75.0 U.S.$ --  U.S.$ --  U.S.$ --  U.S.$ --  U.S.$ --   U.S.$ 75.0 U.S.$ 75.0
Chase Credit Facility...        --       33.8      92.3      99.0       --        --        225.0      225.0
10% Senior Notes........        --        --        --        --        --      150.0       150.0      130.0
Interest rate collar....       35.0      35.0      35.0      35.0       --        --          --         1.1
</TABLE>


                                       73
<PAGE>

On February 26, 1999, Iusacell entered into a second interest rate collar
agreement to limit the maximum interest rate Iusacell must pay on U.S.$15.0
million of its floating rate debt. Under the terms of this second collar
agreement, Iusacell's maximum effective LIBOR cost is limited to 5.82% if six-
month LIBOR is lower than 6.82% and, if six-month LIBOR equals or goes above
6.82%, then Iusacell's maximum effective LIBOR cost is limited to 6.82%.

Iusacell's primary foreign currency exposure relates to its foreign currency
denominated debt. Iusacell's debt obligations are denominated in U.S. dollars
while it generates revenues in Mexican Pesos. Therefore, Iusacell is exposed to
currency exchange rate risks that could significantly affect Iusacell's ability
to meet its obligations. Iusacell currently does not plan to enter into hedging
transactions with respect to these foreign currency risks, but continues to
consider the appropriateness of this option. The exchange rate of Pesos to the
U.S. dollar is a freely floating rate and the Peso has experienced significant
devaluations in recent years. Any significant decrease in the value of the Peso
relative to the U.S. dollar in the near term may have a material adverse effect
on Iusacell and on its ability to meet its long-term debt obligations. As of
December 31, 1998, a hypothetical immediate 10% devaluation of the Peso
relative to the U.S. dollar, as it relates to Iusacell's foreign debt, would
have a Ps.70.4 million (U.S.$7.1 million) unfavorable impact over a one-year
period on earnings and on cash flows.

ITEM 10. Directors and Officers of Registrant

Iusacell is managed by a twenty-one-member Board of Directors. The directors
nominated by Bell Atlantic have the power under Iusacell's bylaws to approve,
without the affirmative vote of any other directors, all resolutions of the
Board of Directors, except with respect to some transactions over which the
Iusacell Shareholders Agreement grants the Peralta Group supermajority rights.
See "Item 4--Control of Registrant."

Directors

The following table presents information with respect to the current directors
of Iusacell:

<TABLE>
<CAPTION>
 Name                     Age                                     Position(s)
 ----                     ---                                     -----------
<S>                       <C> <C>
Lawrence T. Babbio,
 Jr. ...................   54 Chairman of the Board of Directors and Series A Director

Carlos Peralta
 Quintero...............   47 Series A Director

Thomas A. Bartlett......   41 Chief Executive Officer and Series B Director

Fulvio V. del Valle.....   49 President, Director General and Series L Director

Gabriel Alarcon
 Velazquez..............   62 Series A Director

John E. Chynoweth.......   48 Series A Director

Jose Ramon Elizondo
 Anaya..................   45 Series A Director

Rodolfo Garcia Muriel...   54 Series A Director

Luis Felipe Gonzalez
 Munoz..................   44 Series A Director

Eduardo Rihan Azar......   77 Series A Director

Manuel Somoza Alonso....   51 Series A Director

Dennis F. Strigl........   53 Series A Director

Thomas E. Burgos........   48 Vice President, Technical Operations, Chief Technology Officer and Series B Director

Mary A. Cummings........   40 Series B Director

Fernando de Ovando......   47 Series B Director

Stephen B. Heimann......   44 Series B Director

Javier Martinez del
 Campo Lanz.............   40 Series B Director

Jeffrey S. Noto.........   34 Series B Director

Ruben G. Perlmutter.....   41 Vice President--Mergers and Acquisitions and General Counsel and Series B Director

Howard F. Zuckerman.....   55 Vice President--Finance and Audit, Chief Financial Officer and Series B Director

Ernesto Canales Santos..   58 Series D Director

</TABLE>



                                       74
<PAGE>

Executive Officers

The following table presents information relating to the current executive
officers of Iusacell:

<TABLE>
<CAPTION>
 Name                    Age Position(s)
 ----                    --- -----------
<S>                      <C> <C>
*Thomas A. Bartlett.....  41 Chief Executive Officer

Fulvio V. del Valle.....  49 President and Director General

*Howard F. Zuckerman....  55 Executive Vice President, Finance and Audit, and Chief Financial Officer

William S. Roberts......  44 Executive Vice President and Chief Financial Officer Designate

Rolando Stevens.........  43 Executive Vice President and Chief Operating Officer

Ricardo Arevalo.........  34 Vice President, Information Systems, and Chief Information Officer

*Thomas Burgos..........  48 Vice President, Technical Operations, and Chief Technology Officer

Ramon Pando.............  43 Vice President, Sales

*Ruben G. Perlmutter....  41 Vice President, Mergers and Acquisitions, and General Counsel

Amaury Rivera...........  38 Vice President, Marketing

Francisco Soroa.........  46 Vice President, Public Relations and Corporate Communications

Jose Bellido............  39 Director, Human Resources

Jorge Halvas............  35 Director, Regulatory Affairs

Enrique Martinez........  40 Director, Credit, Collections and Fraud Control
</TABLE>
-------
*  Indicates an employee of Bell Atlantic who is currently serving as an
   officer of Iusacell pursuant to consulting or secondment arrangements. See
   "Item 4--Control of Registrant."

Generally, the Board of Directors is authorized to elect or appoint Iusacell's
executive officers as well as officers of wholly-owned subsidiaries and
employees or agents of Iusacell. However, Mr. Babbio (or his successor as
Chairman of the Board of Directors, as the case may be) has the power under the
Iusacell Shareholders Agreement to appoint and dismiss the Chief Executive
Officer, President, Director General, Chief Operating Officer and Director of
the Cellular Division of Iusacell. If Bell Atlantic no longer has control of
the Board of Directors, the Chief Financial Officer and the principal officer
responsible for each of strategic planning and network planning at Iusacell
will continue to be nominated by Bell Atlantic, provided that Bell Atlantic
maintains certain minimum ownership requirements.

Biographies

Lawrence T. Babbio, Jr. has been a member of the Board of Directors of Iusacell
since November 1993, became Vice Chairman of the Board in February 1994 and,
upon the death of Alejo Peralta y Diaz Ceballos on April 8, 1997, became
Chairman of the Board. Since 1966, Mr. Babbio has served in a variety of
capacities with affiliates of Bell Atlantic and its predecessors. In August
1997, Mr. Babbio was elected president and chief executive officer of the
Network Group and chairman of the Global Wireless Group of Bell Atlantic. From
January 1995 until August 1997, Mr. Babbio served as vice chairman of Bell
Atlantic. From May 1994 to January 1995, he served as executive vice president
and chief operating officer of Bell Atlantic. From February 1991 to May 1994 he
served as chairman, president and chief executive officer of Bell Atlantic
Enterprises International, Inc. Prior to that, he served as president of Bell
Atlantic Mobile Systems, Inc., a position he had held since November 1990. He
currently serves on the board of directors of Bell Atlantic, Compaq Computer
Corporation and Aramark Corporation. Mr. Babbio holds an undergraduate degree
in electrical engineering from Stevens Institute of Technology and an M.B.A.
from New York University.

Carlos Peralta Quintero has been a member of the Board of Directors of Iusacell
since October 1992 and served as Vice Chairman of Iusacell from October 1992 to
February 1997. He also currently serves as the Chairman of the Board of
Directors and Chief Executive Officer of Grupo Industrial IUSA, S.A. de C.V.
Mr. Peralta is also a member of the boards of directors of Compania Industrial
de Parras, S.A. de C.V., Hilaturas Parras, S.A. de C.V., Cambridge Lee
Industries Ltd. and Alper Holdings Ltd.

Thomas A. Bartlett has been a member of the Board of Directors of Iusacell
since April 1996 and Chief Executive Officer of Iusacell since February 1997;
he also served as President of Iusacell from February 1997 through September
1997.

                                       75
<PAGE>

Since 1983, Mr. Bartlett has served in a variety of capacities with affiliates
of Bell Atlantic. In August 1995, he was appointed president of Bell Atlantic's
international wireless operations. For more than four years prior to such
appointment, Mr. Bartlett served in several capacities with Bell Atlantic
Mobile Systems, Inc. and Bell Atlantic NYNEX Mobile: as president of the New
England and Upstate New York region for Bell Atlantic NYNEX Mobile in July and
August 1995, as regional vice president for the Philadelphia Tri-State region
for Bell Atlantic Mobile Systems, Inc. from May 1992 through June 1995, and as
vice president for business development for Bell Atlantic Mobile Systems, Inc.
from July 1991 to May 1992. From December 1988 to July 1991, Mr. Bartlett
served as chief financial officer of Bell Atlantic Business Systems Services,
Inc. Mr. Bartlett holds an industrial engineering degree from Lehigh University
and an M.B.A. from Rutgers University.

Fulvio V. del Valle has been the President of Iusacell since October 1997, the
Director General of Iusacell since June 1997 and a member of the Board of
Directors of Iusacell since June 1998. From August 1996 until June 1997, Mr.
del Valle served as managing director of the non-wireline cellular companies in
Regions 3 (Norcel) and 4 (CedeTel). For more than 20 years prior, Mr. del Valle
served in senior Latin America region executive positions for several
multinational corporations. Mr. del Valle was employed by AMP Inc., as regional
director, Latin America, from January 1996 through July 1996 and as managing
director, Mexico from August 1992 until December 1995. From September 1986
until July 1992, Mr. del Valle served as Regional Director for South America,
Electronics Division for DuPont Latin America Corp. and from March 1980 through
August 1986, he served as general manager, Latin American North Region for
National Semiconductor Corp. Mr. del Valle holds an undergraduate degree in
electrical engineering from the Instituto Politecnico Nacional of Mexico and a
master's degree in physics from Virginia Polytechnic Institute.

Gabriel Alarcon Velazquez has been a member of the Board of Directors of
Iusacell since November 1993. He is currently president and chief executive
officer of the Mexican newspaper El Heraldo de Mexico, Grupo Alarcon, S.A. de
C.V. and Cadena Real, S.A. de C.V. He is also currently on the board of
directors of Grupo Financiero Bancomer, S.A. de C.V. and Grupo Financiero
Interacciones, S.A. de C.V. Mr. Alarcon was chief executive officer of Portacel
from 1989 to 1993. Mr. Alarcon holds a degree in business administration from
Instituto Tecnologico Autonomo de Mexico.

Ricardo Arevalo Ruiz has served as Vice President, Information Systems of
Iusacell since November 1997 and as Chief Information Officer since August
1998. Mr. Arevalo joined Iusacell in August 1997 and served as Director,
Systems Development until November 1997. From May 1993 until August 1997, Mr.
Arevalo served as Director, Information Systems, Materials and Logistics, and
Customer Service at AMP de Mexico, S.A. de C.V. Prior to such position, from
October 1990 until May 1993, Mr. Arevalo was employed as Information Systems
Manager for Tequila Cuervo, S.A. de C.V. Mr. Arevalo holds an undergraduate
degree in computer sciences and a diploma in marketing from the Instituto
Tecnologico y de Estudios Superiores de Monterrey.

Jose Bellido Valerio has been Director, Human Resources of Iusacell since May
1996. Before that, from May 1994 through April 1996, he served as Iusacell's
Director of Personnel and, from February 1993 through April 1994, as Iusacell's
Human Resources Manager. For more than four years prior to joining Iusacell,
Mr. Bellido served as Manager of Industrial Relations for Aeromexico, S.A. de
C.V. Mr. Bellido holds a law degree from the Universidad Nacional Autonoma de
Mexico, a specialized degree in labor law from Universidad Panamericana, a
diploma in human resources strategic planning from the University of California
at Berkeley, and a masters degree in business from the Instituto Panamericano
de Alta Direccion de Empresas (IPADE).

Thomas Burgos has been Vice President, Technical Operations and Chief
Technology Officer of Iusacell since June 1998 and, from June 1997 until June
1998, served as Iusacell's Director of Network Operations. Since 1970, Mr.
Burgos has served in a variety of network and marketing positions with
affiliates of Bell Atlantic and their predecessors. From February 1993 until
June 1997, Mr. Burgos served as Director, Network of Bell Atlantic-New Jersey,
Inc. From November 1989 until February 1993, Mr. Burgos served as Director of
Staff Support, Network and Network Services for Bell Atlantic Network Services,
Inc. For 13 years before, Mr. Burgos served in various network and marketing
capacities for New Jersey Bell, Inc. and worked 6 years as a telecommunications
specialist in AT&T's long lines division. Mr. Burgos holds a B.S. degree from
Trinity University, Delaware.

Ernesto Canales Santos has been a member of the Board of Directors of Iusacell
since November 1993. Mr. Canales is a founding partner of Canales Asesoria
Juridica, S.C., a law firm formed in 1986. Previously, he was chief legal
counsel of Grupo Industrial Alfa, S.A. de C.V., from 1974 to 1986. Mr. Canales
is a member of the boards of directors of Grupo Financiero Banamex/Accival,
S.A. de C.V., Industrias Axa, S.A. de C.V., Industrias Unidas, S.A. (IUSA) and
Industrias Monterey, S.A. (IMSA). Mr. Canales is also a member of the Patronato
del Museo de Historia Mexicana. Mr. Canales

                                       76
<PAGE>

holds a law degree from the Escuela Libre de Derecho and a master's degree in
comparative law from Columbia University.

John E. Chynoweth has been a member of the Board of Directors of Iusacell since
April 1999. Since 1981, Mr. Chynoweth has served in a variety of financial and
external affairs capacities with affiliates of Bell Atlantic Corporation and
its predecessors. Mr. Chynoweth has served as Executive Director -- Finance and
Planning of Bell Atlantic Global Wireless, Inc. since March 1994 and, since
January 1996, has also served as Secretary and Treasurer of Bell Atlantic
Global Wireless, Inc. and Vice President of Bell Atlantic Mobile Systems, Inc.
For four years prior, Mr. Chynoweth was responsible for establishing and
managing the financial targets and business plans of Bell Atlantic Corporation.
Mr. Chynoweth holds an undergraduate degree in accounting and a masters degree
in business administration from Gannon University.

Mary A. Cummings has been a member of the Board of Directors of Iusacell since
April 1999. Since 1977, Ms. Cummings has served in a variety of capacities with
affiliates of Bell Atlantic and its predecessors, the last four and a half
years with Bell Atlantic's international wireless operations (BAIW). In May
1999, Ms. Cummings was appointed BAIW's Vice President, Latin American
Operations. From July 1998 until May 1999, Ms. Cummings served as Director,
Professional Services--Europe for BAIW and from July 1997 through June 1998 as
Director, Professional Services--Latin America. From January 1995 until July
1997, Ms. Cummings served as Associate Director of Customer Service for BAIW.
For more than ten years prior thereto, Ms. Cummings held various positions
related to interexchange access services. Ms. Cummings holds an undergraduate
degree in communications and an M.B.A. in international business from the
University of Pittsburgh.

Fernando de Ovando has been a member of the Board of Directors of Iusacell
since February 1997 and was the Secretary of Iusacell from November 1993 until
February 1997. Mr. de Ovando has been a partner in the law firm of De Ovando y
Martinez del Campo, S.C. and its predecessors since 1984. Mr. de Ovando serves
on the board of directors of Grupo Financiero Inverlat, S.A. de C.V. and Q.B.
Industrias, S.A. de C.V., and is a member of the boards of directors and/or
secretary of several other private Mexican corporations and Mexican
subsidiaries of foreign corporations. Mr. de Ovando holds a law degree from the
Universidad Anahuac and an LL.M. degree from the University of Toronto.

Jose Ramon Elizondo Anaya has been a member of the Board of Directors of
Iusacell since February 1997. Since June 1991, Mr. Elizondo has served as
chairman of the board and chief executive officer of Union de Capitales, S.A.
de C.V. (UNICA), a capital investment fund. For more than ten years prior to
such position, Mr. Elizondo was a manager of Operadora de Bolsa, Casa de Bolsa,
including managing director of the investment banking department and president
of its investment banking committee and managing director of the mergers and
acquisitions and corporate finance departments. Mr. Elizondo is a member of the
boards of directors of Ekco, S.A., Banca Quadrom, S.A. de C.V., Grupo Azucarero
Mex, S.A. de C.V., Grupo Embotelladoras, S.A. de C.V., Grupo Financiero
BanCrecer, S.A., Grupo Marti, S.A. and Q Tel, S.A. de C.V. as well as the
companies in which UNICA has invested. Mr. Elizondo holds an undergraduate
public accounting degree from Universidad LaSalle and received an M.B.A. from
the Instituto Tecnologico y de Estudios Superiores de Monterrey.

Rodolfo Garcia Muriel was an alternate member of the Board of Directors of
Iusacell from November 1993 to May 1994 and became a Director in May 1994. He
is currently general director of Compania Industrial de Parras, S.A. de C.V.
Mr. Garcia Muriel has been a member of the boards of directors of Cementos
Mexicanos, S.A. de C.V., Cementos Maya, S.A., Cementos Tolteca, S.A. de C.V.,
and Grupo Financiero InverMexico, S.A. de C.V. He also served as chairman of
the boards of directors of Corporacion Industrial Mexico Francia, Fondo de
Optimacion de Capitales, Consejo Regional Metropolitano de Banco Mexicano,
Parras Cone de Mexico, S.A. de C.V. and Lavapar, S.A. de C.V., and is currently
the vice president of the National Chamber of the Textile Industry (Canaitex).

Luis Felipe Gonzalez Munoz has been a member of the Board of Directors of
Iusacell since April 1997 and between May 1994 and December 1996; between
December 1996 and April 1997, Mr. Gonzalez was an alternate member of the Board
of Directors. Mr. Gonzalez is a member of the Finance and Audit Committee. Mr.
Gonzalez has served as chief financial officer of Industrias Unidas, S.A. de
C.V. since November 1993. For more than ten years prior to such position, Mr.
Gonzalez was employed by Vitrocrisa, S.A. de C.V. and its affiliates, including
as director of administration, finance and human resources from September 1990
until July 1993, and as director of administration and finance from February
1988 to September 1990. Mr. Gonzalez is a member of the board of directors of
Grupo Industrial IUSA, S.A. de C.V., Propulsora de Negocios, S.A. de C.V.,
Cambridge Lee Industries Inc., Compania Industrial Parras, S.A. de C.V. and
Hilaturas Parras, S.A. de C.V. Mr. Gonzalez holds an undergraduate business
administration degree and M.B.A. from the Instituto Tecnologico y de Estudios
Superiores de Monterrey.

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Jorge Halvas Begovich has been Director, Regulatory Affairs of Iusacell since
June 1997 and, from December 1995 until June 1997, served as Manager,
Regulatory Affairs of Iusacell. For more than eight years prior to such
position, Mr. Halvas worked in various capacities in the banking and brokerage
industries: from January 1995 through November 1995, Mr. Halvas served as a
consultant to the Vice President of Specialized Supervision of the Comision
Nacional Bancaria y de Valores, and from February 1993 until December 1994, he
served as a Credit Director for Banca Confia, S.A. Abaco Grupo Financiero. Mr.
Halvas holds an undergraduate business degree from Universidad Panamericana and
an M.B.A. from the Instituto Panamericano de Alta Direccion de Empresas
(IPADE).

Stephen B. Heimann has been a member of the Board of Directors of Iusacell
since April 1999. Mr. Heimann has been Senior Attorney -- International
Wireless at Bell Atlantic Network Services, Inc. since August 1997, having
previously been employed as a mergers and acquisitions attorney for that
company since February 1990. From September 1981 until February 1990, Mr.
Heimann was a corporate associate at the Washington, D.C. law firm of Shaw,
Pittman, Potts & Trowbridge. Mr. Heimann holds degrees from Yale College and
Yale Law School.

Javier Martinez del Campo Lanz has been a member of the Board of Directors of
Iusacell since February 1997. Mr. Martinez del Campo has been a partner in the
law firm of De Ovando y Martinez del Campo, S.C. and its predecessors since
1984. Mr. Martinez del Campo serves on the board of directors of Grupo Gigante,
S.A. de C.V. and is a member of the board of directors or secretary of several
other Mexican subsidiaries of foreign corporations. Mr. Martinez del Campo
holds a law degree from the Universidad Anahuac and a masters degree in
comparative law from the University of San Diego.

Enrique Martinez Franco has served as Director, Credit, Collections and Fraud
Control of Iusacell since April 1999 and as Manager of Credit and Collections
from May 1993 through March 1999. For three years prior, Mr. Martinez served as
an Accounting Manager at Nhuma, S.A. de C.V. Mr. Martinez holds a public
accounting degree from the Instituto Politecnico Nacional and has received
diplomas in leadership development from the Instituto de Capacitacion de Mandos
Intermedios and in financial engineering from the Colegio de Contadores
Publicos de Mexico, A.C.

Jeffery S. Noto has been a member of the Board of Directors of Iusacell since
June 1998. Since 1987, Mr. Noto has served in a variety of customer service,
planning and finance capacities within Bell Atlantic's wireless group, the last
five years as part of the international wireless division. In May 1998, Mr.
Noto was appointed Vice President - Administration and Chief Financial Officer
of Bell Atlantic's international wireless operations. Prior thereto, he served
as Director of Operations from January 1997 to May 1998, as Associate Director
of Business Development and Business Operations from August 1994 to January
1997, and as Manager of Business and Strategic Planning from August 1992 to
August 1994. Mr. Noto holds an undergraduate degree in economics from Rutgers
University

Ramon Pando Leyva has served as Vice President, Sales of Iusacell since April
1999. For more than five years prior, he served in a variety of sales positions
within Iusacell: as Region 9 Sales Director from February 1997, to April 1999,
as Sales and Distribution Director of Wireless Local Telephony from July 1994
to February 1997, and as Region 9 Cellular Division Sales Director from April
1993 until July 1994. For more than six years before joining Iusacell, Mr.
Pando was the Commercial Director of Valvulas Inoxidables, S.A. de C.V. Mr.
Pando holds an undergraduate degree in business administration from the
Universidad Autonoma de Mexico (UNAM), has received diplomas in marketing and
financial administration from the Instituto Tecnologico de Monterrey and
completed the advanced management program at the Instituto Panamericano de Alta
Direccion de Empresas (IPADE).

Ruben G. Perlmutter has served as Vice President, Mergers & Acquisitions and
General Counsel and a member of the Board of Directors of Iusacell since
February 1997. From November 1993 through February 1997, Mr. Perlmutter was
employed as an attorney by Bell Atlantic Network Services, Inc. For more than
four years prior to such position, Mr. Perlmutter was a corporate associate at
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, a New York law firm. Mr.
Perlmutter holds degrees from Harvard College and Harvard Law School.

Eduardo Rihan Azar was an alternate member of the Board of Directors from
November 1993 to May 1994 and has been a member of the Board of Directors of
Iusacell since May 1994. Mr. Rihan is president of Acco Mexicana, S.A. de C.V.,
Wearever de Mexico, S.A. de C.V., Mex-Internacional, S.A. de C.V., Inmobiliaria
Chihuahua, S.A. de C.V. and Promotora de Maquiladoras DNC, S.A. de C.V. Mr.
Rihan serves as a member of the board of directors of Baja del Mar, S.A. de
C.V., Grupo Iusa, S.A. de C.V. and Desarrollo Industrial de Tijuana, S.A. de
C.V. Mr. Rihan attended the University of Southern California where he studied
chemical engineering.

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Amaury Rivera has been Vice President, Marketing of Iusacell since February
1999. Before joining Iusacell, from March 1996 through January 1999, Mr. Rivera
served as Regional Vice President of Lambda Communications Inc. and General
Manager of Centennial Puerto Rico Wireless. Mr. Rivera served as Vice President
and General Manager of Perry Products Co., Inc. from January 1993 until March
1996; as Vice President, Marketing and Assistant to the President of Vassallo
Industries, Inc. from January 1990 to January 1993; and, for more than five
years before then, as an investment banker at Bear Stearns & Co. Mr. Rivera
holds an undergraduate degree in marketing and finance from the School of
Management of Boston University.

William S. Roberts has served as Executive Vice President and Chief Financial
Officer Designate of Iusacell since April 1999. From June 1998 until December
1998, Mr. Roberts served as Vice Chairman and Chief Executive Officer of Nextel
Mexico, S.A. de C.V. From September 1997 to June 1998 Mr. Roberts was employed
as Vice President, International Operations of Nextel International, Inc., and
he served as Chief Operating Officer of McCaw International, Inc. from November
1996 to September 1997. For 13 years prior, Mr. Roberts served in a variety of
capacities with affiliates of Bell South Corporation, the last seven with Bell
South International, Inc. and its affiliates. Mr. Roberts was employed for more
than four years by Bell South Inversiones S.A. in Chile: as Chief Operating
Officer from August 1994 to November 1996, as Director General of the Cellular
Division from February 1995 to September 1995, and as Finance Director from
July 1992 through July 1994. From July 1990 to July 1992, Mr. Roberts served as
Finance Director of Comunicaciones Celulares de Occidente, S.A. de C.V.,
Iusacell's Region 5 cellular concessionaire. Mr. Roberts is a Certified Public
Accountant in Virginia and Georgia and holds an undergraduate accounting degree
from the University of West Florida.

Manuel Somoza Alonso has been a member of the Board of Directors of Iusacell
since February 1997. Since 1996, Mr. Somoza has served in a variety of
capacities within the banking and brokerage industries. Mr. Somoza is currently
serving as chairman of Apolo Sociedad Operadora de Sociedades de Inversion.
Prior thereto, from 1995 to 1997, Mr. Somoza served as chairman of the board of
directors of Somoza, Cortina y Asociados, Casa de Bolsa, and from December 1996
to September 1997 as Director General of Grupo Financiero Bancrecer, S.A. From
November 1991 through June 1995, Mr. Somoza served as director general of Grupo
Financiero Invermexico, S.A. de C.V. and, from April 1992 through June 1995, as
director general of Banco Mexicano. Mr. Somoza serves on the board of directors
of Mexicana de Inversiones Femac, S.A. de C.V. Mr. Somoza holds an
undergraduate degree in economics from Universidad Anahauc and received an
M.B.A. from the Instituto Tecnologico y Estudios Superios de Monterrey.

Francisco Soroa de las Cuevas has been Vice President, Public Relations and
Corporate Communications of Iusacell since February 1997 and, from November
1996 until February 1997, served as Director, Public Relations of Iusacell.
From October 1998 through January 1999 Mr. Soroa was also responsible for human
resources. From May 1995 until November 1996, Mr. Soroa served as Director of
Public Relations of Pepsico de Mexico, S.A. de C.V. For more than seven years
prior to such position, from June 1987 until May 1995, Mr. Soroa served as
Director of Public Relations and Service to Personnel of Volkswagen de Mexico,
S.A. de C.V. Mr. Soroa holds an undergraduate degree in international relations
from the Universidad de las Americas.

Rolando Stevens Avila has been Executive Vice President and Chief Operating
Officer of Iusacell since February 1999 and served as Senior Vice President,
Commercial Operations of Iusacell from February 1997 through January 1999. Mr.
Stevens has also served as Director General of Infotelecom, S.A. de C.V. since
August 1996. Prior thereto, between August 1994 and February 1997, he served as
Divisional Director of Wireless Local Telephony of Iusacell and, from January
1994 until August 1994 served as Region 9 Cellular Operations Director of
Iusacell. For more than nine years prior to such position, Mr. Stevens held
Director General positions for several divisions of Philips N.V. as well as
marketing executive positions for Philips projects in Mexico, Brazil, Europe
and the United States. For more than eight years prior thereto, Mr. Stevens
held technical management positions for several divisions of the Philips
Company. Mr. Stevens holds a degree in mechanical electrical engineering from
the Universidad Nacional Autonoma de Mexico and an M.B.A. from the Universidad
LaSalle and received post-graduate training in industrial engineering at UCLA.

Dennis F. Strigl has been a member of the Board of Directors of Iusacell since
April 1997 and was a member of the Board of Directors between November 1993 and
September 1995. Mr. Strigl has served as president and chief executive officer
of Bell Atlantic Mobile Systems, Inc. and Bell Atlantic NYNEX Mobile since
1991, and in August 1997 was elected group president and chief executive
officer of the Global Wireless Group of Bell Atlantic. Prior to such position,
Mr. Strigl was vice president for operations and chief operating officer of
Bell Atlantic New Jersey, Inc. (formerly New Jersey Bell Telephone Company) and
served on its board of directors. Between 1984 and 1989, Mr. Strigl served in a
variety of capacities for Ameritech Corporation. Mr. Strigl currently serves on
the board of directors of General Magic

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Corp. and Salient 2 Communications, Inc. Mr. Strigl holds an undergraduate
degree in business administration from Canisius College and an M.B.A. from
Fairleigh Dickinson University.

Howard F. Zuckerman has been Executive Vice President, Finance and Audit and
Chief Financial Officer of Old Iusacell since September 1998, Vice President,
Finance and Audit and Chief Financial Officer of Old Iusacell between February
1997 and August 1998 and a member of the Board of Directors of Old Iusacell
since April 1997. Since March 1984, Mr. Zuckerman has served in a variety of
financial management positions with affiliates of Bell Atlantic. In May 1993,
he was appointed vice president, finance of the carrier services division
(serving the United States interexchange carrier market) of Bell Atlantic
Network Services, Inc. For more than nine years prior to such position, Mr.
Zuckerman had served in a variety of executive capacities with Bell Atlantic
Enterprises International, Inc. and related affiliates of the unregulated
businesses of Bell Atlantic, including chief financial officer of Bell Atlantic
Investment Development Corporation from 1988 to 1992 and director of accounting
of Bell Atlantic Enterprises, Inc. From 1975 to 1983, Mr. Zuckerman held
financial management positions with Squibb Corporation, a diversified
pharmaceutical company based in the United States, and was appointed an
Assistant Corporate Controller in July 1982. From 1970 to 1975, Mr. Zuckerman
was employed by the audit division of the New York office of Arthur Andersen &
Co. Mr. Zuckerman is a Certified Public Accountant in New York and New Jersey.
He holds an economics degree from Cornell University and an M.B.A. from the
University of Chicago.

Alternate Directors

  Iusacell's bylaws authorize alternate directors to serve on the Board of
Directors in place of directors who are unable to attend meetings or otherwise
participate in the activities of the Board of Directors. The Series A Alternate
Directors are Gabriel Alarcon Brockmann, Victor Barreiro Cortes, Antonio
Cortina Icaza, Marco Antonio de la Torre Barrance, Hermilo Flores Vargas,
Ignacio Gomez Morin, Alejandro Portilla Garceran, Manuel Romano Mijares, Luis
Felipe Sanchez Parra and Pedro Santamarina Noriega. The Series B Alternate
Directors are Christopher M. Bennett, Jose Estandia Fernandez, Jenna Fiorito,
John Furey, Theresa Gomez Fernandez del Castillo, Silvia Malagon Sobernanes,
Pilar Olmedo Martell, David A. Riffelmacher and Xavier Sanchez Gavito. The
Series D Alternate Director is Francisco Jose Flores Melendez. The Series L
Alternate Director is David A. Riffelmacher.

Committees of the Board of Directors

Iusacell has established Executive, Finance and Audit, and Human Resources and
Compensation, Committees of the Board of Directors. All decisions of these
committees will require a majority vote of their members, including the
favorable vote of at least one member appointed by the series A shareholders.
See "Item 4 -- Control of Registrant."

The Executive Committee, an administrative and decision-making body of the
Board of Directors, may act for the Board of Directors except where Mexican law
requires action of the Board of Directors. The members of the Executive
Committee are Messrs. Babbio, Strigl, Bartlett, Chynoweth, Heimann, Peralta,
Canales and del Valle.

The Finance and Audit Committee recommends Iusacell's independent public
accountants, reviews Iusacell's annual consolidated financial statements,
provides oversight of Iusacell's auditing, accounting, financial reporting and
internal control functions, and reviews with management and Iusacell's
independent public accountants the plans and results of the auditing function.
The members of the Finance and Audit Committee are Messrs. Bartlett, Chynoweth,
Heimann, Noto, Canales and Gonzalez.

The Human Resources and Compensation Committee reviews, evaluates and makes
recommendations to the Board of Directors regarding Iusacell's executive
compensation standards and practices, including salaries, bonus distributions,
grants under the executive employee stock purchase plan (as described below)
and deferred compensation arrangements. The members of the Human Resources and
Compensation Committee are Messrs. Bartlett, Heimann and Rihan and
Ms. Cummings.

ITEM 11. Compensation of Directors and Officers

The aggregate amount of compensation paid by Iusacell in 1998 to all directors
and executive officers as a group was Ps.38.7 million (U.S.$3.9 million).

In addition, in 1998 Iusacell granted purchase rights with a respect to a total
of 913,100 series L shares to its executive officers under the management
employee stock purchase plan (described below). As of December 31, 1998, the

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individuals who are currently executive officers of Iusacell held purchase
rights with respect to 2,808,282 series L shares. In 1998, the individuals who
are currently Iusacell executive officers exercised purchase rights with
respect to 330,510 series L shares and executive officers whose labor
relationship with Iusacell terminated during 1998 exercised purchase rights
with respect to 144,750 series L shares. In addition, purchase rights with
respect to 604,103 series L shares were forfeited by executive officers whose
labor relationship with Iusacell had terminated during 1998. See "Item 12--
Options to Purchase Securities from Registrant or Subsidiaries--Executive
Employee Stock Plan."

As part of its general compensation policy, Iusacell also conducts periodic
reviews of its management and employees to determine bonus compensation. Old
Iusacell also provides its executive officers with use of an automobile. In
addition, Old Iusacell provides its executive officers and other employees with
food and gas stamps on a monthly basis (Ps.700 and Ps.1,035 per month,
respectively) and with contributions to a savings plan (Ps.1,361 per month).

ITEM 12. Options to Purchase Securities from Registrant or Subsidiaries

Management Employee Stock Purchase Plan

In March 1997, Iusacell adopted a management employee stock purchase plan in
order to help retain key executives and better align their interests with those
of Iusacell. The stock purchase plan is administered by a management trust with
the assistance of the trust division of Bancrecer, S.A. Under the stock
purchase plan, the technical committee of the management trust (the "Technical
Committee"), which is composed of certain executive officers of Iusacell,
determines the executive employees to whom series L shares of Iusacell will be
offered for purchase under the stock purchase plan.

The Technical Committee determines the number of series L shares to be offered
for purchase to such executive employees, the purchase price per share for such
purchase rights, the vesting schedule for such purchase rights, the payment
terms and all other terms and conditions. The purchase price per share for the
purchase rights is the closing price for the series L shares on the Mexican
Stock Exchange on the business day selected by the Technical Committee as the
date of sale.

Grantees who leave the employ of Iusacell forfeit unvested purchase rights and,
after a period of time, forfeit vested and unexercised purchase rights, all of
which forfeited purchase rights may be reissued by the Technical Committee. The
number of series L shares that may be granted under the stock purchase plan
cannot exceed 4.9% of the aggregate number of issued and outstanding Iusacell
shares.

In December 1996, Iusacell's shareholders approved the issuance of 7,812,500
series L shares for grant of purchase rights under the stock purchase plan. In
March 1998, 262,666 Iusacell series L shares which were authorized for issuance
but never issued under the stock purchase plan were, in accordance with Mexican
law, canceled. In June 1998, Iusacell's shareholders approved a 1,187,500 share
increase in the number of series L shares available for grant under the stock
purchase plan.

In 1997, the Human Resources and Compensation Committee and the Technical
Committee granted purchase rights with respect to a total of 8,571,311 series L
shares to 51 executive employees at purchase prices ranging between Ps.8.48 and
Ps.14.00 per series L share. In 1998, the Human Resources and Compensation
Committee and the Technical Committee granted purchase rights with respect to a
total of 2,199,600 series L shares to 15 executive employees at purchase prices
ranging between Ps.5.16 and Ps.6.98 per series L share. All such purchase
rights vest either in three equal annual installments commencing a year after
the date of grant or in a lump sum two or three years after the date of the
grant.

As of December 31, 1998, purchase rights with respect to 7,699,890 series L
shares were outstanding, purchase rights with respect to 2,103,581 series L
shares had been forfeited and purchase rights with respect to 967,440 series L
shares had been exercised.

ITEM 13. Interest of Management in Certain Transactions

General Policy

Iusacell adopted a policy on transactions with related parties in November 1993
in connection with the acquisition by Bell Atlantic of its initial holdings in
Iusacell. This policy provides that Iusacell will not, and will not permit any
of its subsidiaries to, enter into any contract or transaction with or for the
benefit of any of their affiliates (excluding transactions with, between or
among wholly owned subsidiaries), including the Peralta Group and Bell
Atlantic, which is

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not at a price and on other terms at least as favorable to Iusacell or the
subsidiary as those which could be obtained on an arm's-length basis from an
unaffiliated third party. This policy has been formalized in the Iusacell
shareholders agreement.

The Bell Atlantic Facility

On July 25, 1997 Bell Atlantic agreed to provide Iusacell with a subordinated
convertible financing facility in an aggregate amount of U.S.$150 million (the
"Bell Atlantic Facility"). See "Item 9--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Liquidity." The subordinated convertible debentures (the
"Debentures") useable under the Bell Atlantic Facility are available for
issuance through June 30, 1999, will mature on December 31, 1999, and will bear
interest at an annual rate equal to six-month LIBOR plus 500 basis points,
payable semi-annually in cash or by issuance of additional Debentures, at the
option of Bell Atlantic, subject to the terms of a subordination agreement with
certain senior lenders.

The principal amount of the Debentures is convertible at any time prior to
maturity into series A shares of Iusacell at a conversion price of U.S.$0.70
per share. Any Debentures issued in lieu of cash interest are convertible at
any time prior to maturity into series A shares at a conversion price equal to
the average closing price on the New York Stock Exchange of the ADRs evidencing
series D ADSs and series L ADSs of Iusacell over 10 trading days preceding such
interest payment date. The Debentures are transferable only to affiliates of
Bell Atlantic, subject to certain exceptions.

In August, September and December 1998, Iusacell effected borrowings totaling
U.S.$101.5 million under the Bell Atlantic Facility. The Debentures were
converted upon borrowing into an aggregate of 144,999,999 series A shares of
Iusacell, 21,428,571 of which shares were simultaneously sold to the Peralta
Group. In March 1999, Iusacell borrowed an additional U.S.$31 million under the
Bell Atlantic Facility. The Debentures issued upon such borrowing were
immediately converted into an aggregate of 44,285,714 series A shares,
22,142,857 of which shares were simultaneously sold to the Peralta Group. The
availability of funds under the Bell Atlantic Facility expires on June 30, 1999
and Iusacell does not intend to draw down any of the remaining U.S.$17.5
million available.

Consulting and Secondment Agreements

Iusacell and some subsidiaries of Bell Atlantic have entered into a series of
consulting and secondment agreements pursuant to which Bell Atlantic has
agreed, for an indefinite term, to provide Iusacell with management, technical,
marketing, legal and other consulting services and seconded employees. Seconded
employees generally agree to expatriate assignments of two to three years
duration, with such employees' compensation being paid by Bell Atlantic and
reimbursed by Iusacell. Bell Atlantic charges Iusacell for the provision of
consulting services at cost.

With respect to consulting services and seconded employees provided in 1998,
Iusacell has been invoiced by Bell Atlantic for a total of U.S.$5.8 million,
which amount includes U.S.$2.4 million in reimbursement of the actual cost of
seconded employees. At December 31, 1998, Iusacell owed Bell Atlantic U.S.$13.1
million for consulting services and seconded employees provided in 1996, 1997
and 1998.

Real Estate Leases

Inmobiliaria Montes Urales 460, S.A. de C.V., a subsidiary of Iusacell, leases
office space to Servicios Corporativos IUSA, S.A. de C.V., a member of the
Peralta Group, pursuant to one-year lease which is re-priced on January 1 of
each year. Currently, payments under the lease equal U.S.$99,220 per month. In
1998, Servicios Corporativos IUSA paid Inmobiliaria Montes Urales 460
U.S.$813,072 for such office space.

The Peralta Group owns Fraccionadora y Constructora Mexicana, S.A. de C.V.,
known as Fracomex, a company engaged in real estate investment and management
that has entered into 13 lease agreements with some subsidiaries of Iusacell.
The total amount paid by Iusacell to Fracomex per month for all such leases is
approximately U.S.$28,671. In 1998, these payments totaled approximately
U.S.$344,000.

Two Peralta Group members lease land to Iusacell at the Peralta Group
industrial complex in Pasteje, Mexico, upon which Iusacell has built and
operates warehouses. Iusacell subleases some of this land to its Satelitron
satellite transmission subsidiary. These land leases expire in December 2015,
but can be terminated before then if either party gives the other one year's
prior written notice. Currently, Iusacell pays these two Peralta Group entities
U.S.$22,830 per month for these land leases. In 1998, payments for these leases
totaled U.S.$273,960.

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Iusacell leases office space to Telecomunicaciones y Equipos, S.A. de C.V.
(TESA), a Peralta Group member. Currently, payments under the lease equal
U.S.$6,410 per month. In 1998, lease payments totaled U.S.$76,920. TESA owes
Iusacell rental payments for 1996 in the total amount of U.S.$76,920.

Other Services

Iusacell's Satelitron subsidiary provides data transmission services, technical
services and facilities to Internet Director, S.A. de C.V., a Peralta Group
member that provides transmission enhancement services to internet access
providers, at market-based or tariffed rates. In 1998, Iusacell billed Internet
Directo U.S.$247,696, including value-added taxes, for such services,
U.S.$139,270 of which currently remain outstanding.

In 1996 and 1997, a subsidiary of Iusacell provided dedicated circuits to
Empresa Attis de Mexico, S.A. de C.V., a Mexican company in which, at that
time, the Peralta Group held a minority position. Since 1997, Empresa Attis has
owed Iusacell Ps.493,484.74 (U.S.$49,842) for such circuits. Empresa Attis was
adjudged bankrupt in 1997. This receivable has recently been determined to be
unrecoverable and has been charged against Iusacell's bad debt reserve.

Interests of Directors

In December 1998, Iusacell paid Marco Antonio de la Torre Barranco, an
alternate director of Iusacell, U.S.$350,000 for his 31.7% interest in Cellular
Solutions de Mexico, S.A. de C.V., a company involved in the sale of cellular
accessories. Iusacell now owns 100% of Cellular Solutions de Mexico, S.A. de
C.V., which ceased business operations in December 1998.

In 1998, Manufacturas Electronicas Pasteje, S.A. de C.V., a joint venture
between the Peralta Group and Marco Antonio de la Torre Barranco, provided
telephone and accessory repair services to Iusacell in the amount of
approximately Ps.3.1 million (approximately U.S.$315,000).

In 1998, Telemercadeo Integral Panamericano, S.A. de C.V., a joint venture
between the Peralta Group and Marco Antonio de la Torre Barranco, provided
telemarketing services to Iusacell in the amount of approximately Ps.3.0
million (approximately U.S.$285,000).

Fernando de Ovando, a director of Iusacell, Javier Martinez del Campo, a
director of Iusacell, and Ignacio Gomez Morin, an alternate director of
Iusacell, are members of the law firm of De Ovando y Martinez del Campo, S.C.,
which, in 1998, provided legal services to Iusacell in the amount of
approximately Ps.1,060,000 (approximately U.S.$107,000).

As of November 1998, Iusacell and Jose Ramon Elizondo, a director of Iusacell,
entered into an agreement to participate together in the microwave frequencies
leasing, long distance, local telephony, PCS and paging businesses. Iusacell
and Mr. Elizondo have agreed that Iusacell will own 94.9% of the economic
interest and 49% of the voting shares of

  .  Iusatel, S.A. de C.V., Iusacell's long distance concessionaire,

  .  Iusatelecomunicaciones, S.A. de C.V., Iusacell's fixed local wireless
     telephony operation,

  .  Punto-a-Punto Iusacell, S.A. de C.V., a microwave frequencies
     concessionaire, and

  .  Iusacell PCS, S.A. de C.V., which holds concessions for 1.9 GHz (PCS)
     frequencies in Region 1 and Region 4.

Mr. Elizondo will own 5.1% of the economic interest and 51% of the voting
shares of these companies.

In addition, Mr. Elizondo agreed to purchase a 2% economic and voting interest
in Infotelecom, S.A. de C.V., a paging company, at cost from Iusacell, which
will continue to hold a 49% economic and voting interest in such company.
Mr. Elizondo completed this purchase in December 1998 for Ps.23,728
(approximately U.S.$2,400).

Iusacell and Mr. Elizondo organized Punto-a-Punto Iusacell, S.A. de C.V. in
July 1997 to participate in the operation of three concessions for point-to-
point short haul microwave frequencies acquired in the auctions concluded in
October 1997 and to participate in the auctions for long haul microwave
frequencies that commenced in March 1999. Iusacell and Mr. Elizondo created a
similar entity, Iusacell PCS, S.A. de C.V., in October 1997 to operate the
concessions for 1.9 GHz (PCS) frequencies in Region 1 and Region 4 acquired
through the auctions completed in May 1998. See "Item 1--Business--Government
Regulation--Foreign Ownership Restrictions."

Iusacell estimates that Mr. Elizondo's maximum investment in these five
entities will be U.S.$15 million. The shares acquired or to be acquired by Mr.
Elizondo will be or are illiquid. From and after June 30, 2002, Mr. Elizondo
can put all, but not less than all, shares in any one or more of these five
joint venture investments to Iusacell for an amount equal to his investment in
the corresponding joint venture company or companies, his cost of money to
finance such investment or investments plus, for each year of his investment,
4% of the corresponding investment amount, grossed up with respect to any
applicable Mexican income taxes. Iusacell and Iusacell each will have the
right, at any time, to call Mr. Elizondo's interest in these companies at the
same price as if the put were exercised.

                                       83
<PAGE>

                                    PART II

ITEM 14. Description of Securities to be Registered

  Not applicable.

                                    PART III

ITEM 15. Default Upon Senior Securities

  Not applicable.

ITEM 16. Changes in Securities and Changes in Security for Registered
Securities

  Not applicable.

                                    PART IV

ITEM 17. Financial Statements

  We have responded to Item 18 in lieu of responding to this Item.

ITEM 18. Financial Statements

  See Item 19(a) for a list of financial statements filed under Item 18.


                                       84
<PAGE>

ITEM 19. Financial Statements and Exhibits

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
(a) List of Financial Statements
    <S>                                                                   <C>
    Report of Independent Accountants.................................... F-1
    Consolidated Balance Sheets--December 31, 1998 and 1997.............. F-4
    Consolidated Statements of Income--Fiscal Years Ended December 31,
     1998, 1997 and 1996................................................. F-5
    Consolidated Statements of Changes in Stockholders' Equity--Fiscal
     Years Ended December 31, 1998, 1997 and 1996........................ F-6
    Consolidated Statements of Changes in Financial Position--Fiscal
     Years Ended December 31, 1998, 1997 and 1996........................ F-7
    Notes to Consolidated Financial Statements........................... F-8
    Financial Statement Schedules
    Report of Independent Accountants on Financial Statement Schedules... S-1
    Schedule IX--Valuation and Qualifying Accounts and Reserves.......... S-2
</TABLE>

(b) List of Exhibits

None.


                                      F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS


The Board of Directors of

Grupo Iusacell, S. A. de C. V.:


We have audited the accompanying consolidated balance sheets of Grupo Iusacell,
S. A. de C. V. (the "Company") and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and changes in financial position for each of the three
years ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.


We conducted our audits in accordance with generally accepted auditing standards
in Mexico which are substantially similar, in all material respects, to United
States generally accepted auditing standards.  Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and are prepared in
accordance with generally accepted accounting principles.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grupo
Iusacell, S. A. de C. V. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of its operations, changes in stockholders' equity and
changes in its consolidated financial position for each of the three years in
the period ended December 31, 1998, in conformity with accounting principles
generally accepted in Mexico.


Accounting principles generally accepted in Mexico vary in certain respects from
accounting principles generally accepted in the United States. In our opinion,
based on our audits, application of accounting principles generally accepted in
the United States would have affected the determination of the amount shown as
net loss for the years ended December 31, 1998, 1997 and 1996 and the total
amount of stockholders' equity as of December 31, 1998 and 1997 to the extent
summarized in Note 20 to the consolidated financial statements.


As described in Note 22 as it relates to Mexican GAAP, the Company had
previously recorded an impairment charge related to the analog communications
network directly against stockholders' equity.  The Company has reassessed this
accounting treatment and determined that the impairment charge should have been
recorded as an operating expense.  Consequently, the accompanying consolidated
financial statements for the year ended December 31, 1997 have been restated
accordingly (see Note 22).

                                      F-2
<PAGE>

As described in Note 18, in 1998, the Company recorded an impairment loss
related to the 450 project assets amounting to Ps.981,484,000 as a result of a
decision by management to reevaluate the feasibility of the 450 MHz technology
as a fixed wireless service.



PricewaterhouseCoopers



Juan Manuel Ferron Solis
Public Accountant





Mexico  City,  D.  F., Mexico.
February  22, 1999 (except  with
respect to the matters discussed
in Notes 13.b, 20, 21 and 22 for
which the date is May 21, 1999,
and to the matter discussed in
Note 13.e, for which the date is
June 25, 1999).


                                      F-3
<PAGE>

                GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
                -----------------------------------------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                       AS OF DECEMBER 31, 1998 AND 1997
                       --------------------------------

                             (Notes 1, 2, 3 and 4)
                              -------------------

   (Adjusted for price-level changes and expressed in thousands of constant
    -----------------------------------------------------------------------

                    Mexican pesos as of December 31, 1998)
                    -------------------------------------

<TABLE>
<CAPTION>

                                                                                                  1998              1997
                                                                                       ---------------  ----------------
<S>                                                                                    <C>              <C>
                         ASSETS
                         ------
CURRENT:
    Cash and cash equivalents                                                          Ps.     255,223  Ps.      139,363
                                                                                       ---------------  ----------------
    Accounts receivable:
        Trade, net of Ps.67,220 and Ps.92,677 of  allowance for doubtful
           accounts in 1998 and 1997, respectively (Note 4.d)                                  303,145           242,572
        Related parties (Note 5)                                                                11,380            52,222
        Recoverable taxes and other                                                            589,361           268,158
                                                                                       ---------------  ----------------
                                                                                               903,886           562,952
                                                                                       ---------------  ----------------
    Inventories (Note 6)                                                                       185,018           319,143
                                                                                       ---------------  ----------------
                  Total current assets                                                       1,344,127         1,021,458

INVESTMENT IN ASSOCIATED COMPANIES (Note 7)                                                     15,514            21,090
PROPERTY AND EQUIPMENT, net (Note 8)                                                         5,307,983         3,575,688
OTHER ASSETS, net (Note 9)                                                                   1,558,673         1,501,063
EXCESS OF COST OF INVESTMENTS IN SUBSIDIARIES OVER BOOK VALUE, net of
    accumulated amortization of Ps.364,233 in 1998 and Ps.299,131 in 1997 (Note 4.i)         1,701,900         1,798,150
                                                                                       ---------------  ----------------
                  Total assets                                                         Ps.   9,928,197  Ps.    7,917,449
                                                                                       ===============  ================
                          LIABILITIES
                          -----------
CURRENT:
    Notes payable (Note 10)                                                            Ps.     742,342  Ps.        3,159
    Trade accounts payable (Note 11)                                                           873,174           835,031
    Related parties (Note 5)                                                                   124,717            95,237
    Taxes and other payables                                                                   757,277           386,422
    Income tax (Note 12)                                                                        48,354            10,477
    Employee profit sharing (Note 12)                                                                5                93
                                                                                       ---------------  ----------------
                  Total current liabilities                                                  2,545,869         1,330,419

LONG-TERM DEBT (Note 10)                                                                     3,711,113         2,631,763
TRADE ACCOUNTS PAYABLE, LONG-TERM (Note 11)                                                      2,110             4,792
COMMITMENTS AND CONTINGENCIES (Notes 4.k and 13)                                                 2,556             2,727
                                                                                       ---------------  ----------------
                  Total liabilities                                                          6,261,648         3,969,701
                                                                                       ---------------  ----------------
                     STOCKHOLDERS' EQUITY
                     --------------------

CONTRIBUTED CAPITAL (Notes 14 and 15):
    Capital stock:
        Nominal                                                                              3,998,608         2,979,286
        Restatement                                                                          4,635,155         4,591,714
                                                                                       ---------------  ----------------
                                                                                             8,633,763         7,571,000
                                                                                       ---------------  ----------------
    Capital contributed:
        Nominal                                                                                 18,655            18,655
        Restatement                                                                             54,001            54,001
                                                                                       ---------------  ----------------
                                                                                                72,656            72,656
                                                                                       ---------------  ----------------
                                                                                             8,706,419         7,643,656
                                                                                       ---------------  ----------------
EARNED CAPITAL (Note 16):
    Accumulated losses:
        Legal reserve                                                                            3,972             3,972
        For prior years                                                                 (    3,067,417)  (     1,881,010)
        For the year                                                                    (    1,297,242)  (     1,186,407)
                                                                                       ---------------  ----------------
                                                                                        (    4,360,687)  (     3,063,445)
                                                                                       ---------------  ----------------
        Deficit from restatement                                                        (      679,994)  (       646,191)
                                                                                       ---------------  ----------------
                  Total majority stockholders' equity                                        3,665,738         3,934,020

MINORITY INTEREST                                                                                  811            13,728
                                                                                       ---------------  ----------------
                  Total stockholders' equity                                                 3,666,549         3,947,748
                                                                                       ---------------  ----------------
                  Total liabilities and stockholders' equity                           Ps.   9,928,197  Ps.    7,917,449
                                                                                       ===============  ================

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

                                      F-4
<PAGE>

                GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
                -----------------------------------------------

                        CONSOLIDATED INCOME STATEMENTS
                        ------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
             ----------------------------------------------------

                            (Notes  1,  2, 3 and 4)
                             ---------------------

   (Adjusted for price-level changes and expressed in thousands of constant
    -----------------------------------------------------------------------

                    Mexican pesos as of December 31, 1998)
                    -------------------------------------

<TABLE>
<CAPTION>
                                                                                                  Restated
                                                                                  1998                1997                  1996
                                                                     -----------------    ----------------      ----------------
<S>                                                                  <C>                  <C>                   <C>
REVENUES:
       Services                                                          Ps.2,449,130         Ps.1,830,309         Ps.1,887,841
       Telephone equipment sales and other                                    375,297              376,414              304,505
                                                                      ---------------      ---------------      ---------------
                                                                            2,824,427            2,206,723            2,192,346
                                                                      ---------------      ---------------      ---------------
COST OF SALES:
       Cost of services                                                       766,400              609,910              692,128
       Cost of telephone equipment sales and other                            200,808              238,936              169,766
                                                                      ---------------      ---------------      ---------------
                                                                              967,208              848,846              861,894
                                                                      ---------------      ---------------      ---------------
                    Gross profit                                            1,857,219            1,357,877            1,330,452
                                                                      ---------------      ---------------      ---------------

OPERATING EXPENSES                                                          1,077,760              882,194              959,214

DEPRECIATION AND AMORTIZATION                                                 794,915              690,222              779,640

450 PROJECT NON CASH WRITEDOWN (Note 18)                                      981,484                    -                    -
                                                                      ---------------      ---------------      ---------------
                    Operating loss                                      (     996,940)       (     214,539)      (      408,402)
                                                                      ---------------      ---------------      ---------------

OTHER INCOME, net                                                             132,698                    -                    -
                                                                      ---------------      ---------------      ---------------

PROVISION FOR EQUIPMENT IMPAIRMENT (Notes 4.b and 22)                               -        (   1,100,703)                   -
                                                                      ---------------      ---------------      ---------------
INTEGRAL FINANCING COST (GAIN):
       Interest expense, net                                                  223,356              294,390              362,440
       Foreign exchange loss (gain), net                                      836,425               57,483        (      80,098)
       Gain from monetary position                                      (     678,936)       (     347,200)       (     449,128)
                                                                      ---------------      ---------------      ---------------
                                                                              380,845                4,673        (     166,786)
                                                                      ---------------      ---------------      ---------------
EQUITY PARTICIPATION IN NET GAIN OF
       ASSOCIATED COMPANIES AND NET GAIN
       ON SALE OF EQUITY INVESTMENTS (Note 7)                           (      24,859)       (     187,034)       (       1,700)
                                                                      ---------------      ---------------      ---------------
             Loss from continuing operations before assets
             tax,  minority interest and extraordinary item             (   1,220,228)       (   1,132,881)       (     239,916)
                                                                      ---------------      ---------------      ---------------
PROVISIONS FOR ASSETS TAX                                                      64,216               53,772               45,388
                                                                      ---------------      ---------------      ---------------
             Loss from continuing operations before minority
             interest and extraordinary item                            (   1,284,444)       (   1,186,653)       (     285,304)

MINORITY INTEREST                                                               5,646                  246                4,099
                                                                      ---------------      ---------------      ---------------
             Loss from continuing operations before extra-
             ordinary item                                              (   1,278,798)       (   1,186,407)       (     281,205)

EXTRAORDINARY ITEM:
       Group reorganization charge (Notes 2, 4.d and 8.b)                           -                    -              187,226
                                                                      ---------------      ---------------      ---------------
             Net loss from continuing operations                        (   1,278,798)       (   1,186,407)       (     468,431)

LOSS FROM DISCONTINUED OPERATIONS (Net of Income tax) (Note 19)                18,444                    -                    -
                                                                      ---------------     ----------------      ---------------
             Net loss for the year                                      (Ps.1,297,242)       (Ps.1,186,407)       (Ps.  468,431)
                                                                      ===============     ================      ===============
WEIGHTED AVERAGE NUMBER OF SHARES OF
       COMMON STOCK OUTSTANDING (thousands)                                 1,121,396            1,070,825              981,624
                                                                      ===============     ================      ===============

LOSS PER SHARE BEFORE EXTRAORDINARY ITEM (pesos)                        (Ps.     1.16)       (Ps.     1.11)       (Ps.     0.29)
                                                                      ===============     ================      ===============

NET LOSS PER SHARE (pesos)                                              (Ps.     1.16)       (Ps.     1.11)       (Ps.     0.48)
                                                                      ===============     ================      ===============

            The  accompanying  notes  are  an  integral  part  of  these consolidated financial statements.
</TABLE>

                                      F-5
<PAGE>

                GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
                -----------------------------------------------

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
          ----------------------------------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
             ----------------------------------------------------

                            (Notes  1,  2, 3 and 4)
                             ---------------------

   (Adjusted for price-level changes and expressed in thousands of constant
    -----------------------------------------------------------------------

                    Mexican pesos as of December 31, 1998)
                    -------------------------------------

<TABLE>
<CAPTION>
                                                                             Accumulated losses
                                           Capital                       --------------------------
                                            stock          Capital         Legal        Prior                  For the
                                         subscribed     contributions     reserve             years               year
                                     ----------------   -------------    ---------  ---------------    ---------------
<S>                                 <C>                <C>              <C>        <C>                <C>
Balance at December 31, 1995             Ps.6,742,506       Ps.72,656     Ps.3,972   (Ps.   420,628)    (Ps.   991,951)

Application of 1995 net loss                                                         (      991,951)           991,951
Recognition of inflation effects
    on financial information
Minority interest for the year
Net loss for the year                                                                                   (      468,431)
                                     ----------------    ------------   ----------  ---------------    ---------------

Balance at December 31, 1996                6,742,506         72,656         3,972  (     1,412,579)    (      468,431)

Application of 1996 net loss                                                        (       468,431)           468,431
Increase in capital stock from the
    capitalization of stockholders'
    debt                                      728,082
Increase in capital stock through
    the issuance of shares under the
    Executive Stock Purchase Plan             100,412
Minority interest for the year
Net loss for the year                                                                                   (    1,186,407)
                                     ----------------    ------------   ----------  ---------------    ---------------

Balance at December 31, 1997                7,571,000          72,656        3,972  (     1,881,010)    (    1,186,407)

Application of 1997 net loss                                                        (     1,186,407)         1,186,407
Increase in capital stock from the
    capitalization  of stockholders'
    debt                                    1,055,586
Increase in capital stock through
    the issuance of shares under the
    Executive Stock Purchase Plan               7,177
Recognition of inflation effects
    on financial information
Minority interest for the year
Net loss for the year                                                                                   (    1,297,242)
                                     ----------------    ------------   ----------  ---------------    ---------------

Balance at December 31, 1998             Ps.8,633,763       Ps.72,656     Ps.3,972  (Ps.  3,067,417)    (Ps. 1,297,242)
                                     ================    ============   ==========  ===============    ===============


<CAPTION>
                                        (Deficit)                          Total
                                       excess from      Minority        stockholders'
                                       restatement      Interest              equity
                                     --------------   ------------    ----------------
<S>                                 <C>              <C>             <C>
Balance at December 31, 1995             Ps.284,822     (Ps.33,040)       Ps.5,658,337

Application of 1995 net loss                                                         -
Recognition of inflation effects
    on financial information         (      931,013)                  (        931,013)
Minority interest for the year                              40,214              40,214
Net loss for the year                                                 (        468,431)
                                     --------------   ------------    ----------------

Balance at December 31, 1996         (      646,191)         7,174           4,299,107

Application of 1996 net loss                                                         -
Increase in capital stock from the
    capitalization of stockholders'
    debt                                                                       728,082
Increase in capital stock through
    the issuance of shares under the
    Executive Stock Purchase Plan                                              100,412
Minority interest for the year                               6,554               6,554
Net loss for the year                                                 (      1,186,407)
                                     --------------   ------------    ----------------

Balance at December 31, 1997         (      646,191)        13,728           3,947,748

Application of 1997 net loss                                                         -
Increase in capital stock from the
    capitalization of stockholders'
    debt                                                                     1,055,586
Increase in capital stock through
    the issuance of shares under the
    Executive Stock Purchase Plan                                                7,177
Recognition of inflation effects
    on financial information         (      33,803)                   (         33,803)
Minority interest for the year                       (      12,917)   (         12,917)
Net loss for the year                                                 (      1,297,242)
                                     --------------   ------------    ----------------

Balance at December 31, 1998           (Ps.679,994)    Ps.     811        Ps.3,666,549
                                     ==============   ============    ================



     The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

                                      F-6
<PAGE>

                GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
                -----------------------------------------------

           CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
           --------------------------------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
             ----------------------------------------------------

                             (Notes 1, 2, 3 and 4)
                              -------------------

   (Adjusted for price-level changes and expressed in thousands of constant
    -----------------------------------------------------------------------

                    Mexican pesos as of December 31, 1998)
                    -------------------------------------

<TABLE>
<CAPTION>

                                                                                    1998                1997               1996
                                                                       -----------------    ----------------    ----------------
<S>                                                                    <C>                  <C>                 <C>
OPERATING ACTIVITIES:
  Loss from continuing operations before extraordinary item            (Ps.    1,278,798)   (Ps.   1,186,407)   (Ps.     281,205)
  Items not requiring the use of resources:
     Depreciation and amortization                                               794,915             690,222             779,640
     450 Project non cash writedown                                              981,484                   -                   -
     Provision for equipment impairment                                                -           1,100,703                   -
     Equity participation in net gain of associated companies
       and net gain on sale of equity investments                      (          24,859)   (        187,034)   (          1,700)
     Minority interest                                                 (           5,646)   (            246)   (          4,099)
                                                                       -----------------    ----------------    ----------------
                                                                                 467,096             417,238             492,636

  Resources (used for) provided by operating activities-
       Trade accounts receivable                                       (          60,573)   (         61,578)             49,360
       Related parties                                                            70,322    (        429,641)            424,103
       Recoverable taxes and other                                     (         321,203)   (        157,256)   (         32,679)
       Inventories                                                               100,322    (        181,891)             72,501
       Trade accounts payable                                                     35,461             231,284    (        541,054)
       Taxes and other payables                                                  370,855    (         87,856)            124,264
       Income tax                                                                 37,877               2,086               6,795
       Employee profit sharing                                         (              88)   (             77)   (            269)
       Other                                                           (             171)                128                  78
                                                                       -----------------    ----------------    ----------------
        Resources provided by (used for)  operating
           activities before extraordinary item and
           discontinued operations                                               699,898    (        267,563)            595,735

  Extraordinary item:
     Group reorganization charge                                                       -                   -             187,226
  Loss from discontinued operations                                               18,444                   -                   -
                                                                       -----------------    ----------------    ----------------
        Resources provided by (used for) operating activities                    681,454    (        267,563)            408,509
                                                                       -----------------    ----------------    ----------------
FINANCING ACTIVITIES:
  Proceeds from long-term debt                                                 1,102,570           2,631,763             134,314
  Principal payments on long-term debt                                 (          23,220)    (       851,442)   (        659,353)
  Increase (decrease) in notes payable                                           739,183     (       956,789)             74,660
  Increase in capital stock from the capitalization of stockholders'
     debt                                                                      1,055,586             728,082                   -
  Increase in capital stock through the issuance of shares under
     the Executive Employee Stock Purchase Plan                                    7,177             100,412                   -
                                                                       -----------------    ----------------    ----------------
        Resources provided by (used for) financing activities                  2,881,296           1,652,026    (        450,379)
                                                                       -----------------    ----------------    ----------------
INVESTING ACTIVITIES:
  Purchase of property and equipment                                   (       2,356,800)    (       838,587)   (        327,381)
  Sale of common stock of associated companies                                    10,981             286,533              36,604
  Purchase of PCS frequencies                                          (         493,121)                  -                   -
  Increase in telephones to be amortized                               (         552,705)    (       200,873)   (         54,425)
  (Purchase) disposal of other assets                                  (          55,245)    (       616,933)            282,168
                                                                       -----------------    ----------------    ----------------
        Resources used for investing activities                        (       3,446,890)    (     1,369,860)   (         63,034)
                                                                       -----------------    ----------------    ----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             115,860              14,603    (        104,904)

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
     THE YEAR                                                                    139,363             124,760             229,664
                                                                       -----------------    ----------------    ----------------
CASH AND  CASH  EQUIVALENTS  AT THE END OF THE YEAR                    Ps.       255,223    Ps.      139,363    Ps.      124,760
                                                                       =================    ================    ================

        The  accompanying  notes  are an  integral  part of  these  consolidated financial statements.

</TABLE>

                                      F-7
<PAGE>

                GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
                -----------------------------------------------

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 ----------------------------------------------

                     AS OF DECEMBER 31, 1998, 1997 AND 1996
                     --------------------------------------

  (Except as otherwise noted, adjusted for price-level changes and expressed
   -------------------------------------------------------------------------

        in thousands of constant Mexican pesos as of December 31, 1998.
        ---------------------------------------------------------------

              Amounts expressed in U.S. Dollars are in thousands.)
              ----------------------------------------------------


1. Entity and Nature of Business
   -----------------------------

     Grupo Iusacell, S.A. de C.V. (the "Company") is a holding company
       incorporated on October 6, 1992.  Its subsidiaries are primarily engaged
       in the wireless telecommunications business and hold concessions to
       operate cellular telephone systems in four contiguous market areas
       ("Regions") in central Mexico. The Company and its subsidiaries are
       referred to collectively herein as the "Group" or "Grupo Iusacell".

     In October 1995, a subsidiary of the Company received a concession from the
       Mexican government to operate as a long distance carrier and began
       offering long distance service in August 1996. During 1996, the Company
       also signed a joint venture agreement for the operation of a business to
       provide nationwide and international paging services. The joint venture
       began to provide paging services in August 1996. In May 1998, a
       subsidiary of the Company acquired frequencies through auctions conducted
       by the Mexican government to provide personal communication wireless
       services (PCS) in Regions 1 and 4 in northern Mexico.

     Affiliated companies of each of Carlos Peralta (together with Carlos
       Peralta, the "Peralta Group") and Bell Atlantic Corporation ("Bell
       Atlantic") hold substantial ownership interests (direct or indirect) in
       the Company.

     Based on a definitive agreement between the Company's principal
       stockholders and approval by the Mexican government, in February 1997
       Bell Atlantic assumed management control of the Company from the Peralta
       Group.

   Summary
   -------

      The subsidiaries of the Company which are included in the consolidated
        financial statements are as follows:
<TABLE>
<CAPTION>

                                                                       Economic interest
                                                                     (direct or indirect)
                                                                             as of
                                                                          December 31
                                                                      -------------------
        Subsidiary                                                       1998     1997
-------------------------                                                ----     ----
<S>                                                                      <C>      <C>
S.O.S. Telecomunicaciones, S.A. de C.V. (Region 9)                       100%     100%
Iusacell, S.A. de C.V.                                                   100%     100%
Sistecel, S.A. de C.V.                                                   100%     100%
Comunicaciones Celulares de Occidente,  S.A. de C.V. (Region 5)          100%     100%
Sistemas Telefonicos Portatiles Celulares, S.A. de C.V. (Region 6)       100%     100%
</TABLE>

                                     F-8
<PAGE>

<TABLE>
<CAPTION>
                                                              Economic interest
                                                            (direct or indirect)
                                                                    as of
                                                                 December 31
                                                             -------------------
        Subsidiary                                              1998     1997
-------------------------                                       ----     ----
<S>                                                             <C>      <C>
Telecomunicaciones del Golfo, S.A. de C.V.  (Region 7)          100%     100%
Inflight Phone de Mexico, S.A de C.V.                           100%     100%
GMD Comunicaciones, S.A. de C.V.                                  -      100%
Hermes Telecomunicaciones, S.A. de C.V.                           -      100%
Inmobiliaria Montes Urales 460, S.A. de  C.V.                   100%     100%
Portaserv, S.A. de C.V.                                           -      100%
Mexican Cellular Investments, Inc.                              100%     100%
Iusanet, S.A. de C.V.                                           100%     100%
Promotora Celular, S.A. de C.V.                                 100%     100%
Renta-Cell, S.A. de C.V.                                        100%     100%
Iusatelecomunicaciones, S.A. de C.V.                             95%     100%
Iusatel, S.A. de C.V.                                            95%     100%
Grupo Iusacell Nicaragua, S.A.                                  100%     100%
Compania Colombiana de Telefonia Celular, S.A.                   70%      70%
Cellular Solutions de Mexico, S.A. de C.V.                      100%      68%
Satelitron, S.A. de C.V.                                         65%      65%
Infotelecom, S.A. de C.V.                                        49%      51%
Punto a Punto Iusacell, S.A. de C.V.                             95%      95%
Iusacell PCS, S.A. de C.V. (Regions 1 and 4)                     95%       -
</TABLE>

2. Acquisitions, Group Structure and Group
   Reorganization
   --------------

    Acquisitions of Regions 5, 6 and 7
    ----------------------------------

      In 1993, the Company obtained 100% ownership of Sistemas Telefonicos
        Portatiles Celulares, S.A. de C.V. ("Portacel") and majority ownership
        of Telecomunicaciones del Golfo, S.A. de C.V. ("Telgolfo").

      Portacel and Telgolfo hold the non-wireline cellular concessions for
        Region 6 (Leon) and Region 7 (Puebla), respectively. The cost incurred
        in 1993 to acquire control of Portacel and Telgolfo amounted to
        Ps.1,096,823, of which Ps.935,681 represented the excess of investment
        cost over the book value. In 1994, the Group purchased the remaining
        minority ownership interest of Telgolfo for Ps.66,852, of which
        Ps.62,226 represented the excess of investment cost over the book value.

      In 1993, the Company acquired 67% of Hermes Telecomunicaciones, S.A. de
        C.V. ("Hermes"), which owns 51% of Comunicaciones Celulares de
        Occidente, S.A. de C.V. ("Comcel").  Comcel holds the non-wireline
        cellular concession for Region 5 (Guadalajara). In December 1993, the
        Company reached an agreement for the Group to purchase the remaining
        interests in both Comcel and Hermes. The Group's cost of  acquiring
        Comcel   and   Hermes   totaled Ps.1,432,225, of which Ps.1,161,103
        represented the excess of investment cost over the book value.

                                     F-9
<PAGE>

    Other acquisitions and subsidiaries
    -----------------------------------

      In 1994, the Company acquired 51% of Telecomunicaciones Digitales
        Internacionales, S.A. de C.V. (later renamed Iusatel Chile, S.A. de
        C.V.).  The Company purchased this ownership interest for Ps.26,344,
        which was the book value of the shares acquired.  During 1996, the
        Company increased its ownership interest in Iusatel Chile, S.A. de C.V.
        from 51% to 100% through the payment of $100 U.S. Dollars to the
        minority stockholders in connection with the settlement of litigation
        among the Company, Iusatel Chile, S.A. de C.V. and such minority
        stockholders.  In December 1996, the Company sold its debt and equity
        investments in Iusatel Chile, S. A. de C. V. for $5,000 U.S. Dollars.
        Payment was received in the form of three promissory notes which matured
        between March and July 1997. Full payment of such notes was made in
        December 1997.

      In 1994, the Company increased its ownership in Compania Colombiana de
        Telefonia Celular, S.A. ("Telecel") from 28.5% to 63.25%, by acquiring
        an additional 34.75% interest from another Telecel shareholder.  The
        cost to acquire this interest was Ps.42,372, of which Ps.30,017
        represented the excess of investment cost over the book value.  In 1995,
        the Company increased its ownership interest in Telecel from 63.25% to
        70.14% through a capital contribution of Ps.995. Telecel had a minority
        ownership in Ecuadorian cellular and paging companies, which was sold in
        September 1997 (see Note 7). Telecel is currently in the process of
        being liquidated and no gain or loss is anticipated in such liquidation.

      In 1994, the Company acquired 99.9% of Inmobiliaria Montes Urales 460,
        S.A. de C.V.. The cost was Ps. 91,861 of which Ps. 17,262 represented
        the excess of investment cost over the book value.

      In March 1997, the Company signed an agreement under which the assets of
        this subsidiary were to be sold to a third party for approximately
        $8,275 U.S. Dollars (see Note 13.f).

      In 1995, the Company incorporated a new subsidiary, Grupo Iusacell de
        Nicaragua, S.A.  This subsidiary owns 100% of the shares of Radio
        Telefonia Rural de Nicaragua, S.A.  As of December 31, 1998, the Company
        had not made any investment in this project and has no commitments for
        any such investments.

      In January 1996, the Group increased its ownership in Renta-Cell, S.A. de
        C.V. ("Renta-Cell"), which rents cellular phones, from 33.33% to 70%
        through the acquisition of an additional 36.67% interest from the other
        Renta-Cell shareholders. The cost to acquire this interest was Ps.4,491.
        Starting in January 1996, the Company consolidated the assets,
        liabilities and operating results of this subsidiary.  In November 1997,
        in connection with the resolution of various matters, the Group
        increased its ownership in Renta-cell from 70% to 100% through the
        acquisition of the remaining 30% interest from the other Renta-Cell
        shareholders. The cost to acquire the remaining interest was Ps.21,943,
        all of which represented the excess of investment cost over book value.
        Such amount was charged to operations during the year ended December 31,
        1997.

      In December 1998, the Company increased its ownership in Cellular
        Solutions de Mexico, S.A. de C.V. ("Cellular Solutions") from 68% to
        100% through the acquisition of an additional 32% interest from the
        other shareholder, an alternate director of the Company. Such interest
        was acquired in anticipation of the disposition of Cellular Solutions
        (see Note 19). The cost to acquire this interest was Ps.3,500, all of
        which represented the excess of investment cost over book value. The
        amount of such excess was included in the loss from discontinued
        operations of Cellular Solutions for the year ended December 31, 1998.


                                     F-10
<PAGE>

   Group Structure
   ---------------

      Under the laws established by the Mexican government related to Bell
        Atlantic's assumption of management control, the Company may not own the
        majority of the voting stock of companies that hold concessions to
        provide telecommunications services other than cellular service. In
        November 1998, the Company and Jose Ramon Elizondo, a director of the
        Company (herein referred to as the "Mexican National"), entered into a
        joint venture formation agreement (the "Agreement") pursuant to which
        they agreed to participate together in the microwave frequencies
        leasing, long distance, local telephony, PCS and paging businesses.  The
        Company and the Mexican National agreed that the Company would own 94.9%
        of the economic interest and 49% of the voting shares of Iusatel, S.A.
        de C.V., the Company's long distance concessionaire ("Iusatel"),
        Iusatelecomunicaciones, S.A. de C.V., the Company's fixed wireless local
        telephony operation ("Iusatelecomunicaciones"), Punto-a-Punto Iusacell,
        S.A. de C.V., a microwave frequencies concessionaire ("Punto-a-Punto
        Iusacell"), and Iusacell PCS, S.A. de C.V., which holds concessions for
        1.9GHz (PCS) frequencies in Regions 1 and 4 ("Iusacell PCS").  The
        Mexican National would own 5.1% of the economic interest and 51% of the
        voting shares of these companies.  In addition, the Mexican National
        agreed to purchase a 2% economic and voting interest in Infotelecom,
        S.A. de C.V., a paging company ("Infotelecom"), at cost, from the
        Company, which would continue to hold a 49% economic and voting interest
        in such company.  The Mexican National completed this purchase in
        December 1998 for Ps. 23,572.

      In December 1995, the Company signed a joint venture agreement with
        Infomin, S.A. de C.V., a Mexican company which holds a fifteen-year
        concession to provide nationwide and international paging services
        through July 2009.  Pursuant to this agreement, in March 1996, the
        Company and Infomin established a joint venture company, Infotelecom. As
        of December 31, 1998, Infotelecom is owned 49%, 49% and 2%, by the
        Company, Infomin and the Mexican National, respectively.  Under the
        joint venture agreement for Infotelecom, the Company committed to
        contribute up to $10,500 U.S. Dollars; as of December 31, 1998 and 1997,
        the Company had invested $9,032  and $8,500 U.S. Dollars, respectively,
        in this joint venture. The joint venture agreement establishes the
        individual and joint responsibilities of the partners. In case a partner
        does not fulfill its responsibilities, sanctions could cause  such
        partner to lose its investment and incur up to $1,000 U.S. Dollars as a
        penalty.

      In October 1997, the Company and the Mexican National incorporated Punto a
        Punto Iusacell, a company engaged in the participation in government
        auctions for microwave frequencies and to operate any concessions
        acquired in those auctions. Punto a Punto Iusacell acquired three
        concessions in the short haul microwave frequencies auction concluded in
        October 1997 and is also participating in the long haul microwave
        frequency auctions.

      In June 1998, the Company and the Mexican National incorporated Iusacell
        PCS, a company formed to participate in government auctions for
        frequencies in the 1.9 GHz band and to operate any concessions acquired
        in those auctions. Iusacell PCS acquired concessions in Regions 1 and 4
        in such auctions. Which were concluded in May 1998.

      In November 1998, pursuant to the Agreement, both Iusatel and
        Iusatelecomunicaciones were reorganized, as described above, whereby 51%
        of the respective voting shares were subscribed to by the Mexican
        National for Ps. 22,373 and Ps. 7,654, respectively.


                                     F-11
<PAGE>

      The shares acquired by the Mexican National of the five entities subject
        to the Agreement are or will be illiquid.  As a result, the Company
        agreed to grant the Mexican National, from and after June 30, 2002 (or
        sooner under certain circumstances), the right to put all, but not less
        than all, shares in any one or more of these five joint venture
        investments to the Company for an amount equal to his investment in the
        corresponding joint venture company or companies, his cost of money to
        finance such investment or investments plus, for each year of his
        investment, 4% of the corresponding investment amount, grossed up with
        respect to any applicable Mexican income taxes. In return, the Agreement
        also contains a call option which provides the Company the right at any
        time to call the Mexican National's interest in these companies at the
        same price as if the put were exercised, subject to any legal
        requirement to have another Mexican national as the purchaser of the
        shares subject to the call option.

      The Mexican National does not have the unilateral right to approve actions
        at the shareholder or board level of these five companies. Under each
        such company's by-laws, all shareholder or board action must also be
        approved by the majority of the shares held by the Company or a majority
        of the board members designated by the Company, respectively.

      The Agreement, together with each joint venture company's by-laws, enable
        the Company to have management control over the day-to-day operations
        and financial administration of Infotelecom, Punto a Punto Iusacell,
        Iusacell PCS, Iusatel and Iusatelecomunicaciones (see Note 7). The
        Mexican National, among other things, cannot alone select, terminate or
        determine the compensation of management and cannot alone establish
        operating and capital decisions in the ordinary course of business.

      Consequently, the Company  consolidates these subsidiaries in accordance
        with Mexican GAAP Bulletin B-8, which provides that, in the event that
        majority ownership of a company's voting shares does not exist,
        management control over the day-to-day operations and financial
        administration of that company may be achieved by other means.  Since
        the Company has such other arrangements in place with the majority
        shareholder, the Mexican GAAP requirement for consolidation is
        satisfied.


    Group reorganization
    --------------------

      As a part of the reorganization of the Company during 1996, the respective
        stockholders of Hermes, GMD Comunicaciones, S.A. de C.V., and Portaserv,
        S.A. de C.V., voted to dissolve these companies. From such date, these
        three companies have not engaged in any business. On December 31, 1998
        these subsidiaries were liquidated.

      Additionally, the reorganization plan, approved by the Company's Executive
        Committee, included a reduction in facilities, the replacement of
        certain top-level management and a general head count reduction.

                                     F-12
<PAGE>

      In connection with the reorganization plan and the change in managerial
        and administrative control of the Group (see Note 14), the Company
        established a reserve of Ps.187,226 on December 31, 1996 for the above
        expenses.  This reserve, due to its characteristics of being
        nonrecurring and unusual, is classified as an extraordinary item in the
        consolidated statements of income.

      As a result of a misclassification and further analysis of the amounts
        previously reported for employee severance and consolidation of
        facilities, the components of the restructuring reserve have been
        reclassified as follows:

<TABLE>
<CAPTION>
Originally
                                                                        Reported                 Reclassified
                                                                 ---------------------         -----------------
<S>                                                              <C>                           <C>
Employee severance /(1)/                                         Ps.           98,412          Ps.       118,647

Provision for consolidation of facilities /(2)/
                                                                               36,509                     16,274


Fixed assets obsolescence reserve /(3)/                                        45,295                     45,295

Change in estimate of allowance for doubtful accounts /(4)/
                                                                                7,010                      7,010

                                                                    -----------------             --------------
                                                                 Ps.          187,226          Ps.       187,226
                                                                    =================             ==============
</TABLE>

(1)  The reserve for employee severance, as originally reported, was
     understated. The reclassified amount is comprised of an estimate of
     severance payments to be made to (i) approximately 400 mid-level management
     and non-management employees pursuant to Mexican Labor Law and (ii) 3
     senior management employees pursuant to the terms of their respective
     individual employment contracts.  These severance payments do not: a)
     relate to prior employee service; b) have any related contingencies; or c)
     require that employees provide future services.

(2)  As a result of the decision to dispose of its corporate headquarters
     building ("Montes Urales"), the Company recorded an impairment loss to
     adjust the book value of Montes Urales to its fair value less costs to sell
     based on an agreement to sell Montes Urales (see note 13.f). The provision
     for consolidation of facilities, as originally reported, was overstated.
     The reclassified amount considers the book value of Montes Urales and the
     agreed upon sales price.

(3)  The fixed assets obsolescence reserve relates to certain spare parts for
     the analog communications equipment that were purchased at values over the
     minimum amount under the Company's capitalization policy for fixed assets
     and have average lives of approximately 12 years.  As a result of a
     detailed review by the Company's engineers in November 1996, the equipment
     was determined to be obsolete. Consequently, the Company recorded an
     impairment provision to adjust such assets to their estimated salvage
     value.

(4)  During 1996, the Company began to fully reserve accounts receivable over 90
     days past due, based on a change in estimate of the probable loss inherent
     in the accounts receivable. Previously, the Company's policy involved
     reserving such balances over 120 days past due. This change in estimate in
     the allowance for doubtful accounts represents the Company's estimate of
     the probable loss inherent in all accounts receivable considering (i)
     general historical trends of customer performance and (ii) factors
     surrounding the credit risk of specific customers.


                                     F-13
<PAGE>

3. Basis of presentation
   ---------------------

    a) Basis of presentation
    ------------------------

      The Group's consolidated financial statements have been prepared in
        conformity with accounting principles generally accepted in Mexico
        ("Mexican GAAP"). The consolidated financial statements have been
        presented in thousands of constant Mexican pesos as of December 31, 1998
        as required by Bulletin B-10, "Recognition of the Effects of Inflation
        on Financial Information", as amended, issued by the Mexican Institute
        of Public Accountants ("Bulletin B-10").

      The 1997 financial statements have been restated, as mentioned in Note 4
        b) below.


    b) Consolidated financial
       statements
    -------------------------

      Those companies in which the Company holds 50% or more of the capital
        stock and/or exercises control over operating and financing activities
        are included in the consolidated financial statements. The Company also
        consolidates Iusatel, Iusatelecomunicaciones, Infotelecom, Punto a Punto
        Iusacell and Iusacell PCS, over which the Company owns less than 50% of
        the voting common stock, but exercises management control over their
        day-to-day operations and financial administration by appointment of the
        shareholders and other arrangements (see Note 2). All significant inter-
        company balances and transactions have been eliminated in consolidation.


    c) Use of estimates
    -------------------

      The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities
        and disclosure of contingent assets and liabilities at the dates of the
        financial statements and the reported amounts of revenues and expenses
        during the reporting periods.  Actual results could differ from those
        estimates.


4. Accounting Policies
   -------------------

    A summary of the Group's significant accounting policies is as follows:

    a) Monetary unit
    ----------------

      The financial statements are presented in Mexican pesos, the currency
        that, based on Mexican laws, must be used  to  prepare the  accounting
        records of the Company and  its Mexican subsidiaries.

                                     F-14
<PAGE>

    b) Effects of inflation on the
       financial statements
    ------------------------------

      The consolidated financial statements of the Group have been prepared in
        accordance with Bulletin B-10. The Third Amendment of Bulletin B-10,
        effective for fiscal years beginning January 1, 1990, requires the
        restatement of all comparative financial statements to constant Mexican
        pesos as of the date of the most recent balance sheet presented.
        Accordingly, the consolidated financial statements have been restated as
        follows:

        -  The balance sheet amounts as of December 31,1997 presented in the
           consolidated financial statements have been restated to constant
           Mexican pesos as of December 31, 1998 based on the National Consumer
           Price Index ("NCPI") published by Banco de Mexico (the "Mexican
           Central Bank").

        -  Consolidated income statements for the current and prior years have
           been restated to constant Mexican pesos as of December 31, 1998
           using the NCPI from the periods in which the transactions (income
           and expenses) occurred.

        -  Bulletin B-12,  "Statement of Changes  in Financial Information",
           issued by the Mexican Institute of Public Accountants ("Bulletin B-
           12"), addresses the presentation of the statement of changes in
           financial position when financial statements have been restated to
           constant Mexican pesos as of the latest balance sheet date.
           Bulletin B-12 identifies the origination and application of
           resources representing differences between beginning and ending
           balance sheet balances in constant Mexican pesos, excluding the
           effect of holding non-monetary assets. Bulletin B-12 also provides
           that monetary and foreign exchange gains and losses should not be
           eliminated from resources provided by operating nor financing
           activities.

      The items that originate from the recognition of effects of inflation on
        financial information are as follows:

      Restatement of non-monetary assets:

      Inventories are valued at the average price of the purchases made during
        the period, and are restated using the NCPI, without exceeding net
        realizable value.

      Based on the Fifth Amendment of Bulletin B-10, effective January 1, 1997,
        property and equipment, net, and depreciation for the year, are restated
        using the NCPI, without exceeding net realizable value.

      Restatement of 1997:

      In October 1997, the Group recorded an impairment loss to reduce the value
        of the investment in its analog communications equipment to fair value.
        The valuation of the analog equipment was determined based on an
        appraisal performed by independent appraisers registered with the
        Comision Nacional Bancaria y de Valores in order to comply with Bulletin
        B-10, which requires non-monetary assets to be as close as possible to,
        but not higher than, their fair market value. In 1997 such impairment
        loss was charged to the deficit from holding non-monetary assets
        restatement account in stockholders' equity.


                                     F-15
<PAGE>

      In December 1997, as further described in Note 13 d), the Company signed
        an agreement with Lucent Technologies ("Lucent") to purchase digital
        communications equipment, primarily to address (i) customer requirements
        for better voice quality, (ii) a need to increase network capacity to
        handle rapidly growing subscriber levels, and (iii) a need to remain
        competitive, particularly in view of the government's auction of digital
        wireless concessions to other carriers. In 1998, based on further
        analysis of the accounting effects of the contract with Lucent, the
        Company reconsidered the appropiate presentation of the impairment loss
        described in the preceding paragraph and decided to charge it directly
        against income, thus restating the 1997 financial statements herein.

      Property and equipment are depreciated using the straight-line method,
        based on the restated values. The average annual rates of depreciation
        used by the Company are as follows:
<TABLE>
<CAPTION>

                                              1998   1997
                                              -----  -----
                <S>                           <C>    <C>

                Buildings and facilities       4%     3%
                Communications equipment       9%     9%
                Furniture and fixtures         9%     9%
                Transportation equipment      18%    17%
                Computer equipment            21%    21%
                Cellular rental telephones    25%    25%
</TABLE>

      Investments in associated companies are accounted for using the equity
        method based on the investees' equity and are adjusted for the effects
        of inflation in accordance with Bulletin B-10.

      Restatement of stockholders' equity:

      The contributed and earned capital accounts include the effect of
        restatement determined by applying the NCPI factor from the date capital
        was contributed or earned. The restatement represents the amount
        required to maintain the contributions and accumulated results in
        constant Mexican pesos as of December 31, 1998.

      The excess or deficit from restatement of capital account is an element of
        stockholders' equity that includes surplus or deficit from holding non-
        monetary assets, which represents the excess or deficit in specific
        values of net non-monetary assets in comparison with the increase
        attributable to general inflation as measured by the NCPI.


      Integral financing (gain) cost:

      Integral financing (gain) cost is comprised of net interest expense,
        foreign exchange gains and losses, and gains and losses from net
        monetary position.

      Foreign exchange gains and losses on transactions denominated in
        currencies other than Mexican pesos result from fluctuations in exchange
        rates between the date transactions are recorded and the date of
        settlement or period end.

      Gains and losses from net monetary position represent the effects of
        inflation, as measured by the NCPI, on the Group's monetary assets and
        liabilities at the beginning of each month. If monetary liabilities
        exceed monetary assets, there is a gain from monetary position. If
        monetary liabilities are less than monetary assets, there is a resulting
        loss from monetary position.


                                     F-16
<PAGE>

    c) Cash and cash equivalents
    ----------------------------

      Cash and short-term investments consist primarily of short-term, fixed
        rate investments and bank deposits.  The Group invests its excess cash
        in deposits with major banks.  The investments are carried at cost plus
        accrued interest, which approximates market value. These investments are
        highly liquid cash equivalents, having a maturity of ninety days or less
        when acquired.

    d)  Allowance for doubtful
        accounts
    ----------------------------

      The Group cancels service to customers with invoices that are 60 days past
        due. The allowance for doubtful accounts represents the Company's
        estimate of the probable loss inherent in all accounts receivable
        considering (i) general historical trends of customer performance and
        (ii) factors surrounding the credit risk of specific customers. During
        1998, 1997 and 1996, the Group wrote off accounts receivable for
        Ps.52,979, Ps.77,210 and Ps.117,534, respectively.  The charge to income
        for the year,  to increase the allowance for doubtful accounts, amounted
        to Ps.27,522, Ps.43,203 and Ps.91,439, in 1998, 1997 and 1996,
        respectively.

    e)  Investment in associated
        companies
    ----------------------------

      The Group carries long-term investments in associated companies in which
        the Group owns between 20% and   50% of the entity's voting common stock
        and over which the Group can exercise significant influence. Such
        investments  are accounted for using the equity method. As described in
        Note 2, the Company has consolidated Iusatel, Iusatelecomunicaciones,
        Infotelecom, Punto a Punto Iusacell and Iusacell PCS, in which the
        Company owns less than 50% of the voting common stock, but exercises
        management control over the day-to-day operations and financial
        administration. Under the equity method such investments are carried at
        cost adjusted for the Company's share of the net income or losses of
        these companies and the effects of restatement of non-monetary assets in
        the associated companies.   The effects of transactions with such
        associated companies are eliminated before applying the equity method.

    f) Cellular Telephones
    ----------------------

      The cost of cellular telephones given to customers under exclusive service
        contracts is amortized based on the nature and terms of the service
        contracts to match costs with the timing of revenues earned. The costs
        of such telephones are included in other assets, net of accumulated
        amortization, not to exceed market value.

      At the end of the contract term, the cellular telephone is given to the
        customer. In the event of an early termination of an exclusive service
        contract, the customer either (a) is required to return the phone to the
        Group or (b) acquires the telephone at its book value on the date of
        termination.

      The cost of cellular telephones sold to customers is recorded as cost of
        sales based on the average cost of such telephones.  Telephones leased
        to customers are included in fixed assets and are depreciated over the
        initial lease period, generally two years.

                                     F-17
<PAGE>

    g)  Concessions
    ---------------

      Costs related to the acquisition of concessions granted by the Mexican
        government to provide cellular telephone services have been capitalized
        and are included in other assets.  Such costs are amortized on a
        straight-line basis over the initial terms of the respective concession.
        The Mexican government requires the Group to comply with the specific
        terms of each concession. The Group has substantially complied with such
        requirements through December 31, 1998, except for certain informational
        requirements of the Mexican authorities. The Group believes that such
        noncompliance does not expose the Group to any type of regulatory risk
        such as concession forfeiture.

    h)  Advertising
    ---------------

      Advertising costs are expensed as incurred. The cost of prepaid media
        advertising (including television air time, magazine, directory and
        other print media) is deferred and recorded in other assets until the
        advertising airtime or space is used, at which time such cost is
        recognized as an operating expense. Advertising expense amounted to
        Ps.180,858, Ps.127,409 and Ps.147,393 for 1998, 1997 and 1996,
        respectively.

    i)  Excess of cost of investment
        in subsidiaries over book value
    -----------------------------------

      The excess of cost over the book value of net assets of acquired
        subsidiaries is amortized on a straight-line basis over twenty years.
        Amortization expense was Ps.108,433, Ps.110,725 and Ps.119,785 in 1998,
        1997 and 1996, respectively.

      The carrying amount of such excess cost applicable to each acquired
        subsidiary is reviewed if the facts and circumstances suggest that it
        might be impaired.

    j)  Income taxes and employee
        profit sharing
    -----------------------------

      Income taxes are computed in accordance with the partial liability method,
        as required by Bulletin D-4, "Accounting Treatment for Income Tax and
        Employee Profit Sharing", issued by the Mexican Institute of Public
        Accountants ("Bulletin D-4"), under which deferred income tax provisions
        are recorded for identifiable, non-recurring temporary differences
        (i.e., those expected to reverse over a definite period of time) at
        rates in effect at the time such differences arise, and reversed at the
        rates in effect at the time such differences reverse.

      In accordance with Bulletin D-4, the Group did not record a provision for
        deferred taxes as of December 31, 1998 and 1997.

      Employee profit sharing is a statutory labor obligation payable to
        employees which is determined on the basis of each subsidiary's pretax
        income as adjusted in accordance with the provisions of Mexican labor
        law and Mexican tax law.

                                     F-18
<PAGE>

    k) Seniority premiums
    ---------------------

      In accordance with Mexican labor law, the Group's employees are entitled
        to seniority premiums after 15 years of service or upon dismissal,
        disability or death.  The Group follows Bulletin D-3, "Labor
        Obligations", issued by the Mexican Institute of Public Accountants
        ("Bulletin D-3"). Under Bulletin D-3, the actuarially determined
        projected benefit obligation is computed using estimates of salaries
        that will be in effect at the time of payment.

      Personnel not yet eligible for seniority premiums are also included in the
        determination of the obligation with necessary adjustments made in
        accordance with the probability that these employees will reach the
        required seniority.  At December 31, 1998, the average seniority of the
        eligible employees is less than 4 years. The Group's liability and
        related costs for seniority premiums are immaterial for all periods
        presented.

      In accordance with Mexican labor law, the Group is liable for severance
        payments to employees who are dismissed under certain circumstances.
        Such compensation is expensed when paid.

      The Group has no employee pension plans and does not provide for post
        retirement benefits.

    l) Earnings (loss) per share
    ----------------------------

      Effective January 1, 1997, Bulletin B-14 "Earnings per Share" issued by
        the Mexican Institute of Public Accountants ("Bulletin B-14"), requires
        disclosure in the income statement of the net earnings (loss) per share,
        and the per share effect of any extraordinary item affecting the net
        profit or loss for the year. Such per share amounts must be calculated
        based on the weighted average number of shares of common and/or
        preferred stock outstanding.

    m) Revenue recognition
    ----------------------

      Cellular air time is recorded as revenue as service is provided except for
        revenue from the sale of prepay cards which is recognized at the date of
        sale.  The Company recognizes the revenue on the sale of prepay cards at
        the date of sale rather than on a deferred basis because the length of
        the average consumption period for such prepay cards is not significant,
        i.e., approximately 1.2 months or less, and it is not material to
        results of operations for all periods presented. Sales of equipment and
        related services are recorded when goods and services are delivered.
        Cellular access charges are billed in advance and recognized when the
        services are provided.  Other revenues, mainly from paging and long
        distance services, are recognized on provision of these services.

    n) Foreign currency transactions
    --------------------------------

      Foreign currency transactions are recorded at the exchange rates in effect
        at the transaction date. Assets and liabilities denominated in foreign
        currencies are translated to Mexican pesos using the exchange rates in
        effect at the time of settlement or valuation at each balance sheet
        date, with the resulting exchange differences being recognized as
        exchange gains or losses.

                                     F-19
<PAGE>

5. Related parties
   ---------------

    Affiliates of the Peralta Group and Bell Atlantic hold substantial ownership
      interests in the Company. In addition, the Peralta Group holds ownership
      interests in various other entities, primarily Industrias Unidas, S.A. de
      C.V. ("IUSA") and related entities, which are customers of or suppliers to
      the Group.

    A summary of related party accounts and notes receivable, including
      interest, as of December 31, is as follows:
<TABLE>
<CAPTION>

                                                   1998       1997
                                                 ---------  ---------
<S>                                              <C>        <C>

         Punto a Punto Iusacell, S.A. de C.V.    Ps.     -  Ps.43,214
         IUSA and related entities                  11,380      9,008
                                                            ---------
              Total                              Ps.11,380  Ps.52,222
                                                            =========
</TABLE>

    Accounts receivable result from the financing of related parties'
      operations, the sale of cellular telephone services and operating lease
      contracts.

    Accounts and notes payable to related parties, including interest, as of
      December 31, are as follows:
<TABLE>
<CAPTION>

                                         1998        1997
                                      ----------  ----------
<S>                                   <C>         <C>

         IUSA and related entities    Ps.      -  Ps.  4,243
         Bell Atlantic                   124,717      90,994
                                                  ----------
              Total                   Ps.124,717   Ps.95,237
                                                  ==========
</TABLE>

    Accounts payable result from the leasing of certain facilities and services
      received.

    During 1997, the Company had notes payable and interest of $57,900 U.S.
      Dollars (Ps.459,008) due to Bell Atlantic, of which $25,000 U.S. Dollars
      (Ps.198,190) were repaid and $32,900 U.S. Dollars (Ps.260,818) were
      converted to equity (see Note 14).

    The $25,000 U.S. Dollars of borrowings were repaid prior to the stated
      maturity date as part of the debt restructuring program described in Note
      10. There was no gain (loss) recognized by the Company related to the
      early repayment.

    Following is an analysis of the related party transactions described above
      for the years ended December 31:
<TABLE>
<CAPTION>

                               1998        1997      1996
                             ---------  ---------  ---------
<S>                          <C>        <C>        <C>

          Service revenue    Ps.14,639  Ps.10,482  Ps.12,802
          Lease income          11,105      2,395      2,723
                                ------      -----  ---------
          Total income       Ps.25,744  Ps.12,877  Ps.15,525
                                ======      =====  =========
</TABLE>

                                     F-20
<PAGE>

<TABLE>
<CAPTION>
                                           1998       1997        1996
                                         ---------  ---------  ----------
          <S>                            <C>        <C>        <C>
          Commission expenses             Ps.  -     Ps.106    Ps.  4,238
          Technical expenses              44,027     36,077        81,636
          Lease expenses                   2,530      4,253         8,194
          Interest expense                11,235     26,420        40,620
          Operating expenses                   -          -         8,693
                                       ---------  ---------    ----------
           Total expenses              Ps.57,792  Ps.66,856    Ps.143,381
                                       =========  =========    ==========
</TABLE>

6. Inventories
   -----------

As of December 31, inventories consisted of the following:

<TABLE>
<S>                                                 <C>             <C>
                                                        1998            1997
                                                     ----------      ----------
          Cellular telephones and accessories        Ps.147,057      Ps.300,828
          Less: Allowance for obsolete and
           slow-moving inventories                  (    11,242)    (    34,810)
                                                     ----------      ----------
              Net                                       135,815         266,018
          Advances to suppliers                          49,203          53,125
                                                     ----------      ----------
              Total inventories                      Ps.185,018      Ps.319,143
                                                     ==========      ==========
</TABLE>

7. Investment in associated
   companies
   ------------------------

    On September 30, 1997, the Group sold the direct and indirect interests of
      its Ecuadorian cellular and paging companies, Consorcio Ecuatoriano de
      Telecomunicaciones, S. A. (CONECEL) and Corptilor, S.A. In 1997, the Group
      received $29,400 U.S. Dollars in cash consideration for its direct
      interests in CONECEL, resulting in a gain of Ps.186,039. At December 31,
      1997, the gain on sale of the Company's indirect interest in CONECEL by
      its Colombian subsidiary was deferred as a result of an uncertainty as to
      the timing and, given some of the capital markets legislation emerging
      from Colombia at that time, even the possibility of repatriation of the
      proceeds from Colombia, As a result, the Company believed that sale
      recognition was not appropriate.

    The Group received $2,000 U.S. Dollars, net of taxes, in respect to its
      indirect interests during 1998, resulting in a gain of Ps.16,194.

    As of December 31, the Group's investment in associated companies is as
       follows:
<TABLE>
<CAPTION>
                                              1998                    1997
                                     ----------------------  ----------------------

             Entity                  Ownership   Investment  Ownership   Investment
       ------------------------      ---------   ----------  ---------   ----------
<S>                                 <C>         <C>         <C>         <C>
         de C.V.                       40.00%    Ps.  6,698     40.00%   Ps.  4,533
       Punto a Punto Iusacell,
         S. A. de C. V.                    -              -     94.90%           57
       Other                                          8,816                  16,500
                                                      -----               ---------
                                                 Ps. 15,514              Ps. 21,090
                                                 ==========              ==========
</TABLE>

                                     F-21
<PAGE>

    As of December 31, 1998 the investment of the Company in Punto a Punto
      Iusacell was consolidated (see Note 2).

    Summarized financial information for these associated companies accounted
      for by the equity method as of December 31, 1998 and 1997 and for the
      years ended December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>

                                               1998        1997         1996
                                             ---------  -----------  ----------
<S>                                          <C>        <C>          <C>

       Total assets                          Ps.12,296  Ps.  53,601  Ps.616,256
       Total liabilities                         2,526       47,797     326,788
       Revenues                                 34,469       32,193     335,316
       Gross profit                             17,465       15,321      17,427
       Net income                                6,498        2,488       7,304
       Group's share of net earnings             2,599          995       1,700
       Gain on sale of equity investments       22,260      186,039           -

</TABLE>
8. Property and equipment, net
   ---------------------------

    a) At December 31, property and equipment, net consisted of:
<TABLE>
<CAPTION>
                                             1998            1997
                                        --------------  --------------
<S>                                     <C>             <C>
          Buildings and facilities       Ps.1,245,103    Ps.1,245,970
          Communications equipment          3,237,682       2,888,070
          Furniture and fixtures              130,311         109,157
          Transportation equipment             47,805          45,954
          Computer equipment                  284,838         266,186
          Cellular rental telephones            2,197          31,570
                                          -----------     -----------
                                            4,947,936       4,586,907
          Accumulated depreciation      (   3,084,743)  (   1,860,292)
                                          -----------     -----------
                                            1,863,193       2,726,615
          Land                                 45,204          43,359
          Construction in progress          3,304,568         527,870
          Advances to suppliers                95,018         277,844
                                          -----------     -----------
                                         Ps.5,307,983    Ps.3,575,688
                                          ===========     ===========
</TABLE>

    b)   Depreciation expense was Ps.338,413, Ps.392,562 and Ps.392,268 for
         1998, 1997 and 1996, respectively. In addition, as described in Note
         18, the charge for the write-down of the 450 MHz project fixed assets
         was Ps.286,092 and is included in the caption entitled 450 MHz project
         non-cash write-down in the accompanying income statement.

                                     F-22
<PAGE>

9. Other assets
   ------------

    a)     At December 31, other assets consisted of the following:

<TABLE>
<CAPTION>
                                             1998            1997
                                         ------------    ------------
<S>                                      <C>             <C>
          Buildings and facilities       Ps.1,245,103    Ps.1,245,970
Concessions                              Ps.  739,834    Ps.  230,753
Cellular telephones to be amortized           304,717         100,081
Prepaid expenses                              152,441         115,090
Advance payments                              245,982         353,458
Project 450 pre-operating expenses and
 capitalized interest (Note 18)                     -         603,864
Pre-operating expenses, other                  43,725          27,561
Other                                          71,974          70,256
                                         ------------    ------------
                                         Ps.1,558,673    Ps.1,501,063
                                         ============    ============
</TABLE>

    b)  Concessions and cellular telephone amortization expense was  Ps.348,069,
      Ps.186,935 and Ps.267,587  in 1998, 1997 and 1996, respectively. In
      addition, in 1998 the charge for the write-down of the 450 MHz project
      pre-operating expenses and capitalized interest, as described in Note 18,
      was Ps.695,392 and is included in the caption entitled 450 MHz project
      non-cash asset write-down in the accompanying income statement.


10.  Notes payable and long-term debt
     --------------------------------

    During the year ended December 31, 1997, the Company completed a $150,000
      U.S. Dollars offering of long-term, unsecured senior notes and borrowed
      $125,000 U.S. Dollars under a long-term bank loan. Proceeds were used to
      repay certain short-term notes, and short-term and long-term loans,
      including the loan from Bell Atlantic. As a part of this arrangement, the
      Company obtained a revolving credit line of $100,000 U.S. Dollars. During
      1998, the Company borrowed the total amount available under this revolving
      credit line.

    As of December 31, 1998 and 1997, the long-term debt of the Group consisted
      of the following:
<TABLE>
<CAPTION>
                                                 Mexican Pesos
                                           --------------------------
                              U.S.Dollars      1998          1997
                             ------------  ------------  ------------
<S>                          <C>           <C>           <C>
Long-term bank loan          U.S.$125,000  Ps.1,237,038  Ps.1,196,255
Unsecured senior notes            150,000     1,484,445     1,435,508
Revolving credit facility         100,000       989,630             -
                             ------------  ------------  ------------
                             U.S.$375,000  Ps.3,711,113  Ps.2,631,763
                             ============  ============  ============
</TABLE>
    Long-term bank loan and revolving credit facility
    -------------------------------------------------

    The long-term bank loan and revolving credit facility bear interest at a
      variable rate equal to the lower of (i) LIBOR plus 1.75% or (ii) the
      higher of the loan agent's prime rate, the reserve adjusted secondary
      market rate for certificates of deposit plus 1% or the Federal Funds
      effective rate plus 0.5%. Interest is payable quarterly.

                                     F-23
<PAGE>

    Unsecured senior notes
    ----------------------

    On July 25, 1997 the Company completed an offering of long- term, unsecured
      senior notes due July 15, 2004 for  $150,000 U.S. Dollars, bearing
      interest at a fixed rate of 10%, payable semi-annually starting January
      15, 1998 (the "notes").  The notes are redeemable at the option of the
      Company, in whole or in part, at any time on or after July 15, 2001
      starting at a redemption price of 105.0% of principal amount plus accrued
      interest, if any, declining to 102.5% after July 15, 2002, and finally to
      100.0% after July 15, 2003.

    In addition, at any time prior to July 15, 2000 the Company may redeem in
      the aggregate up to 35% of the original aggregate principal amount of the
      notes with proceeds of a public equity offering by the Company at a
      redemption price of 110.0% of principal amount plus accrued interest, if
      any. The notes may also be redeemed at a price equal to 100.0% of
      principal amount plus accrued interest, if any, in the case of legal
      changes affecting the treatment of the withholding taxes on payments to
      holders of the notes.

    Amortization and collateral
    ---------------------------

    The long term bank loan and revolving credit facility have payment
      requirements of $33,750 U.S. Dollars in 2000, $92,250 U.S. Dollars in 2001
      and $99,000 U.S. Dollars in 2002. The U.S. $150,000 of unsecured senior
      notes are due in 2004.

    The long-term bank loan, revolving credit facility and unsecured senior
      notes contain certain restrictive covenants, including the maintenance of
      certain financial ratios, restrictions on incurring additional debt,
      limitations on capital expenditures and restrictions on the sale or lease
      of the Group's assets.  As of December 31, 1998, the Group had complied
      with such covenants except for the limitation on 1998 capital expenditures
      for which the Company has received a waiver from the banks which extended
      for a period of more than twelve months beyond the balance sheet date.

    As of December 31, 1998 and 1997, assets collateralizing all long-term debt
      include substantially all assets used in Grupo Iusacell's cellular
      business (including the cellular concessions), as well as other property
      and equipment.

    Bell Atlantic Subordinated Convertible Debt Facility
    ----------------------------------------------------

    In July 1997, Bell Atlantic committed to provide the Company with
      subordinated convertible financing in an aggregate amount up to $150,000
      U.S. Dollars. Borrowings under the facility bear interest at an annual
      rate of LIBOR plus 5.0%. The availability of funds under this facility
      expires on June 30, 1999. At the option of Bell Atlantic, borrowings under
      the facility are convertible into Series A shares of the Company at a
      conversion price of $0.70 U.S. Dollars per share.  During the year ended
      December 31, 1998, the Company borrowed $101,500 U.S. Dollars
      (Ps.1,055,586) under the facility, which were converted into Series A
      common shares (see Note 14).  As of December 31, 1998, no borrowings were
      outstanding under this facility and $48,500 U.S. Dollars were available
      for further borrowing.

                                     F-24
<PAGE>

    Notes payable
    -------------

    As of December 31, 1998 and 1997, notes payable consisted of the following:
<TABLE>
<CAPTION>
                                                                        Mexican Pesos
                                                                 -------------------------
                                                    U.S.Dollars     1998          1997
                                                   ------------  ------------  -----------
<S>                                                 <C>           <C>           <C>
        Short-term  loan bearing interest at a
        variable  rate  of  LIBOR plus  2.5%
        maturing on April 30, 1999                  U.S.$52,000   Ps.514,608    Ps.      -

        Short-term  loan  bearing interest at a
        variable  rate of  LIBOR  plus 2.5%
        maturing on April 30, 1999                       23,000      227,615             -

         Other                                                -          119         3,159
                                                   ------------  ------------  -----------
         Total                                      U.S.$75,000   Ps.742,342    Ps.  3,159
                                                   ============  ============  ===========
</TABLE>

    The Company is currently negotiating a long-term refinancing of the $75,000
      U.S. Dollars in short-term loans.

    The Group leases certain communications equipment and transportation
      equipment under agreements which are classified as capital leases.  Most
      of these leases have purchase options at the end of the original lease
      term. Leased capital assets included in property and equipment at December
      31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                         1998         1997
                                                    ------------  ------------
<S>                                                 <C>          <C>
          Leased equipment                          Ps.        -   Ps.  23,220
          Accumulated depreciation                             - (       6,636)
                                                    ------------  ------------
                                                    Ps.        -   Ps.  16,584
                                                    ============  ============
</TABLE>

11. Trade accounts payable
    ----------------------

       As of December 31, trade accounts payable consisted of the following:
<TABLE>
<CAPTION>
                                                         1998         1997
                                                    ------------  ------------
<S>                                                 <C>           <C>
  Current accounts                                  Ps.756,539    Ps.  826,356
  Short-term notes payable                             116,635           8,675
                                                    ----------    ------------
   Total                                            Ps.873,174    Ps.  835,031
                                                    ==========    ============
  Long-term notes payable                           Ps.  2,110    Ps.    4,792
                                                    ==========    ============
</TABLE>

                                     F-25
<PAGE>

    On August 14, 1997, the Company and Telmex entered into a settlement
      agreement with respect to the fees charged by Telmex to Iusacell through
      May 31, 1997 for interconnection services, switched long distance services
      and certain other services billed by Telmex as of the date of the
      settlement  agreement.  The  Company  paid  Telmex Ps.201,637, of which
      Ps.26,331 constituted value-added tax and Ps.33,922 was accounted for as
      interest expense.

    In September 1997, the Company and Telmex amended such interconnection
      agreement, requiring the Company to pay Telmex an interim interconnection
      rate of 31 centavos per minute retroactive to June 1, 1997 and that Telmex
      extend to the Company a 38% discount available to other large business
      consumers for use of its long distance network.

    In December 1998, COFETEL reached an agreement on various outstanding
      interconnection issues, including a reduction in the rate charged for
      calls terminated by Telmex from 31 centavos per minute to approximately 26
      centavos per minute, effective October 1, 1998 (such rate being subject to
      inflation adjustments).

12. Income Tax, Net Assets Tax and
    Employee Profit Sharing
    ----------------------------

     The Company has filed annual consolidated income tax returns since the tax
       year beginning January 1, 1994.

     The income tax rate in Mexico is 34%.  The provision for income tax differs
       from the statutory income tax rate due to temporary and permanent
       differences in the determination of income for tax reporting and
       financial reporting purposes. The most significant temporary differences
       are the tax deduction for inventory purchases and certain liability
       accruals which are deductible only when paid for tax purposes. The most
       significant permanent differences are the differences between book and
       tax depreciation, goodwill amortization and non-deductible expenses. In
       accordance with Mexican accounting principles, no deferred taxes have
       been provided for temporary differences since such differences are of a
       recurring nature and their realization does not occur over a defined time
       period.

     The 1.8% net assets tax is calculated on the average value of substantially
       all assets less certain liabilities. This tax is required to be paid if
       this computation exceeds the amount of income tax.  The 1.8%  net assets
       tax paid may be utilized as a credit against future income tax in the
       years in which the Group generates an income tax in excess of the assets
       tax.  The assets tax is available as a carry forward for up to ten years
       and is subject to restatement based on the NCPI when used. As of December
       31, 1998, the net assets tax available as carry forward was Ps.220,396.

     At December 31, 1998, the Group had the following net operating losses for
       income tax purposes that may be carried forward and applied against
       future taxable earnings:

<TABLE>
<CAPTION>
                  Year of        Amount         Expiration
                   loss          of loss           year
                  -------       ---------       ----------
<S>                             <C>             <C>

                   1991         Ps.11,175          2001
                   1993           198,938          2003
                   1994         1,139,766          2004
                   1995           588,929          2005
                   1996            16,342          2006
                   1997           472,084          2007
                   1998           198,824          2008
</TABLE>

                                     F-26
<PAGE>

    These losses are indexed for inflation from the year incurred to the sixth
      month of the year utilized.  Accordingly, these amounts include inflation
      up to June 1998.  Losses include Ps.203,335 and Ps.306,036 of capital
      stock issuance costs expensed for tax purposes in 1994 and 1993,
      respectively. Such amounts were charged against stockholders' equity in
      the financial statements.

    Employee profit sharing, generally 10%, is computed on taxable income, with
      adjustments to exclude inflationary effects and the restatement of
      depreciation expense. In the year ended December 31, 1998, there was a
      provision for profit sharing for Ps 497. In the year ended December 31,
      1997 there was no provision for profit sharing.

    The effective rate reconciliation as of December 31, is as follows:

<TABLE>
<CAPTION>
                                                          1998             1997             1996
                                                     ---------------  ---------------  ---------------
<S>                                                  <C>              <C>              <C>
Income tax benefit at statutory rate                  (Ps. 414,878)    ( Ps. 385,179)   (Ps. 81,571)
         Add (deduct):
          Inventory purchases less cost of  sales          224,832     (      90,477)   (    43,552)
          Depreciation and amortization                      7,898     (     131,901)   (   129,810)
          Provision for equipment impairment                     -           374,237              -
          Project 450 non-cash write-down                  333,705                 -              -
          Differences between interest and
           inflationary gains or losses              (     112,313)          125,327        196,647
          Net assets tax                                    64,216            53,772         45,388
          Income tax loss  carryforwards                    67,600           160,509          5,556
          Provision for doubtful accounts            (     103,281)           10,199    (     3,599)
          Telephones to be amortized                       118,343            63,558         90,979
          Goodwill amortized                                36,867            37,647         40,727
          Other                                      (     158,773     (     163,920)   (    75,377)
                                                     ---------------  ---------------  ---------------
       Effective income tax expense at
         effective rate                                Ps.  64,216        Ps. 53,772     Ps. 45,388
                                                     ===============  ===============  ===============
</TABLE>

13. Commitments and contingencies
    -----------------------------

     As of December 31, 1998, the Group had the following commitments and
       contingent liabilities:

       a) The Group has entered into operating lease agreements for
          administrative offices, sales branches and service facilities. Such
          lease agreements expire at various dates through 2007. Some agreements
          contain options for renewal. Rental expense was Ps.98,475, Ps.73,735
          and Ps.64,535 for the years ended December 31, 1998, 1997 and 1996,
          respectively.

          Future annual minimum rental payments under existing leases with terms
          in excess of one year as of December 31, 1998 are as follows:
<TABLE>

<S>                                <C>
                1999               Ps.  96,163
                2000                    84,866
                2001                    73,708
                2002                    60,293
                Thereafter              39,017
                                   -----------
                                    Ps.354,047
                                   ===========
</TABLE>


                                     F-27
<PAGE>

      b)  The Group may have contingent liabilities for taxes and penalties that
          the tax authorities may assess based on audit of prior years' tax
          returns. During 1997, the Mexican tax authorities completed an audit
          of three companies of the Group (Grupo Iusacell, S.A. de C.V.,
          Iusacell, S. A. de C.V. and SOS Telecomunicaciones, S.A. de C.V.),
          resulting in claims of Ps.7,277, including penalties and surcharges.
          These differences were paid in 1997 and are classified as a part of
          the provision for taxes in the income statement for that year. Further
          in 1999, as a result of those investigations, the Company was assessed
          a Ps.19,932 penalty by the tax authorities under the claim that it had
          incorrectly deducted for income tax purposes certain interest expense.
          The Company plans to challenge this penalty as it believes it has
          strong legal grounds to overcome the assessment.

      c)  Mitsubishi Electronics America Inc. ("MELA") filed a complaint in the
          United States on July 18, 1996 against Grupo Iusacell, Bell Atlantic
          Corporation and Bell Atlantic Latin America Holdings Inc., an
          affiliate of Bell Atlantic. Essentially, MELA alleges that it had a
          contract with Grupo Iusacell for the sale of telephone terminals and
          that Grupo Iusacell has breached the contract by not purchasing the
          terminals. MELA alleges the contract was for the sale of 60,000 units
          at a unit cost of $0.510 U.S. Dollars. The lawsuit is currently in the
          discovery stage. Management believes the lawsuit has no basis as no
          contract was ever signed and that, at trial, no material damages will
          result in favor of MELA. Based on external counsel's opinion it is too
          early to evaluate the extent of the Company's exposure to loss by
          judgement at trial.

      d)  In December 1997, the Company signed an agreement with Lucent
          Technologies with a commitment to purchase CDMA digital wireless
          equipment for $188,000 U.S. Dollars to install its digital cellular
          network. In connection with this contract, Lucent will issue trade-in
          credits to the Company for approximately $93,000 U.S. Dollars,
          representing the net replacement cost of the network equipment being
          displaced. The trade-in credits are deducted from each purchase
          invoice proportionally to the total equipment purchased. As of
          December 31, 1998 the Company had purchased equipment priced at
          approximately $120,000 U.S. Dollars under this agreement.

      e)  In February 1998, the Company's former advertising agency sued the
          Company for Ps.23,000, alleging improper termination of its contract.
          The Company won the lawsuit during 1998 without any damages in favor
          of such former advertising agency and also won a first appeal. The
          Company's former advertising agency has recently filed a second and
          final appeal. Management believes the lawsuit has no basis and does
          not anticipate that any significant damages in favor of such former
          advertising agency will result at the end of the lawsuit. In June
          1999, Mexican Supreme Court found the Company in breach of its
          contract with the Company's former advertising agency and found
          further that the advertising agency suffered Ps.23,000 in damages.
          Subsequently, another tribunal confirmed the breach of contract
          finding, but ruled that the damages suffered by the agency were only
          Ps.16,000. The Company intends to file an injunctive action (amparo)
          against this sentence on the basis that the tribunal exceeded the
          scope of its review and also assessed damages incorrectly.

      f)  As a result of delays in the construction of the new corporate
          headquarters, the sale of Montes Urales did not take place during the
          year ended December 31, 1997. In April 1998, the Company learned that
          the property was subject to two liens from the former owner that,
          until removed, prohibited the Company from transferring the title of
          Montes Urales to the prospective buyer. Such liens were not identified
          when the Company acquired the stock of the Corporation which owned
          Montes Urales in 1994, nor was the Company notified of such liens
          subsequent to the acquisition. The Company is currently analyzing the
          matter and the actions it needs to pursue to remove such liens. There
          can be no assurance, however, that the Company will be able to remove
          the liens from such property and realize any value from such assets.


                                     F-28
<PAGE>

      g)  The Company has certain commitments derived from its joint venture
          agreement with Infomin, S.A. de C.V. (see Note 2).


14. Contributed capital
    -------------------

    As stated in Note 1, in December 1996, the Company's principal stockholders
      signed an agreement to transfer management control of Grupo Iusacell to
      Bell Atlantic.  Following execution of the agreement, at an extraordinary
      shareholders' meeting, the Company's shareholders approved the following
      modifications of the Company's estatutos sociales (by-laws):

      1)  Series A shares may be acquired by Mexicans and/or foreigners.

      2)  The conversion of 200,000,000 Series B shares and 166,769,760 Series D
          shares held by Bell Atlantic into 366,769,760 Series A shares.

      3)  The conversion of 100,000,000 Series A shares held by the Peralta
          Group into 100,000,000 Series D shares.

    These modifications were subject to the receipt of authorizations from the
      National Foreign Investment Commission and the Federal Competition
      Commission.  On February 10 and 12, 1997, Grupo Iusacell's new share
      ownership and management control structure received the required Mexican
      government authorizations.

    Based on the above mentioned authorizations and the adoption of such
      resolutions, the total authorized fixed portion of capital stock was
      increased by Ps.853,992 through the authorization of up to 74,163,591
      Series A shares and up to 54,407,837 Series D shares.

    At the same shareholders' meeting, an Executive Employee Stock Purchase Plan
      for the Company's executive employees (the "Stock Purchase Plan") was
      approved (see Note 15). As part of this plan, the total authorized fixed
      portion of capital stock was increased by Ps.118,610 through the issuance
      of up to 15,625,000 Series L shares (to be made available under the Stock
      Purchase Plan and to provide for the exercise of preemptive stockholder
      rights).

    On February 28, 1997 the Company's Board of Directors ratified a capital
      increase of Ps.728,082.  The shares were offered for subscription and
      payment in the following way:

      a)  Bell Atlantic subscribed for 47,017,491 Series A shares through the
          conversion of certain debt (Note 5).

      b)  FIUSA Pasteje, S.A. de C.V. subscribed for 4,390,619 Series A shares
          and 48,754,000 Series D shares through the capitalization of certain
          liabilities.

      c)  Preemptive stockholder rights were exercised for the amount of 265
          Series D shares and 92,564 Series L shares.

    Additionally, 7,812,500 of the 15,625,000 previously authorized Series L
      shares were kept in the Company's treasury available for the Stock
      Purchase Plan; the balance of 7,719,916 Series L shares were cancelled.
      During 1997, 7,549,834 of these shares were subscribed by employees, as
      follows:

                                     F-29
<PAGE>

      On April, 17, 1997, the Technical Committee of the trust administrating
      the Stock Purchase Plan ("Technical Committee") approved the subscription
      of 4,719,560  Series  L  shares  for  the Stock Purchase Plan. The
      subscription price for those shares was Ps.51,464.

      On June 6, 1997, the Technical Committee approved the subscription of
      1,272,200 Series L shares for the Stock Purchase Plan.  The subscription
      price for those shares was Ps.22,207.

      On September 30, 1997 the Technical Committee approved the subscription of
      1,558,074 Series L shares for the Stock Purchase Plan.  The subscription
      price for those shares was Ps.26,741.

      On April 17, 1998, 262,666 Series L shares which had not been subscribed
      for under the Stock Purchase Plan were automatically cancelled.

    At a shareholders' meeting in June 1998, the total authorized fixed portion
      of capital stock was increased by Ps. 30,476 through the issuance of up
      to 2,000,000 Series L shares under the Stock Purchase Plan.

    From June 30 to July 14, 1998, preemptive stockholder rights related to the
      new authorization of Series L shares for the Stock Purchase Plan were
      exercised for 40 Series L shares in the amount of Ps.0.57. The balance of
      812,460 Series L shares were cancelled.

    During June 1998, 1,187,500 of the 2,000,000 previously authorized Series L
      shares were added to the Company's treasury available for the Stock
      Purchase Plan. During 1998, 1,117,476 of these new shares made available
      under the Stock Purchase Plan were subscribed by employees, as follows:

      On September 2, 1998, the Technical Committee approved the subscription of
      582,456 Series L shares for the Stock Purchase Plan. The subscription
      price for those shares was Ps.4,299.

      On October 2, 1998, the Technical Committee approved the subscription of
      535,040 Series L shares for the Stock Purchase Plan. The subscription
      price for those shares was Ps.2,878.

    As of December 31, 1998,  70,004 Series L shares remained available in the
      Company's treasury for issuance under the Stock Purchase Plan.

    On November 17, 1998 the Company's Board of Directors ratified a capital
      stock increase of Ps.761,997 by the issuance of 102,142,857 Series A
      shares which were subscribed through the conversion of debentures issued
      by the Company under the Bell Atlantic Subordinated Convertible Debt
      Facility (see Note 10). The convertible debentures were issued and
      converted as follows:

      On August 19, 1998, the Company issued debentures in a principal amount of
      Ps.267,186 ($25,200 U.S. Dollars), which were converted into 36,000,000
      Series A shares on the same date.

      On September 29, 1998, the Company issued debentures in a principal amount
      of Ps.494,811 ($46,300 U.S. Dollars), which were converted into 66,142,857
      Series A shares on the same date.

                                     F-30
<PAGE>

    On December 21, 1998 the Board of Directors of the Company ratified a
      capital increase of Ps.293,589 by the issuance of 42,857,142 Series A
      shares. The increase was subscribed through the conversion of debentures
      issued by the Company under the Bell Atlantic Subordinated Convertible
      Debt Facility, in an aggregate principal amount of $30,000 U.S. Dollars.
      The 42,857,142 Series A shares were initially subscribed by Bell Atlantic,
      of which 50%, or 21,428,571, of such shares, were then sold to the Peralta
      Group.  There was no gain or loss recognized from the sale.

    The changes in the number of shares of common stock for the period January
      1, 1996 through December 31, 1998 ara analyzed as follows:
<TABLE>
<CAPTION>
                                                                   Number of shares
                                                                   ----------------
<S>                                                                <C>

               January 1, 1996 balance                                  981,624,430
                No changes                                                        -
                                                                      -------------

               December 31, 1996 balance                                981,624,430
                February  28, 1997 - issuance of common
                 stock through the capitalization of debt               100,162,110
                February 28, 1997 - issuance of common stock
                 upon exercise of preemptive stockholder rights              92,829
                April 17, 1997 -  issuance of common
                 stock for the Stock  Purchase Plan                       4,719,560
               June 6,  1997  -  issuance of common
                 stock for the Stock Purchase Plan                        1,272,200
               September 30, 1997 - issuance of
                 common  stock  for  the  Stock
                 Purchase Plan                                            1,558,074
                                                                      -------------

               December 31, 1997 balance                              1,089,429,203
                July 14, 1998 - issuance of common
                 stock upon exercise of preemptive
                 stockholder rights                                              40
                September 2, 1998 - issuance of common
                 stock for the Stock Purchase Plan                          582,456
                October 2, 1998 - issuance of common
                 stock for the Stock Purchase Plan                          535,040
                November 17, 1998 - issuance of common
                 stock through the capitalization of debt               102,142,857
                December 21, 1998 - issuance of common
                 stock through the capitalization of debt                42,857,142
                                                                      -------------
               December 31, 1998 balance                              1,235,546,738
                                                                      =============
</TABLE>

                                     F-31
<PAGE>

    At December 31, 1998 and 1997, the issued and outstanding shares of common
      stock of the Company, without par value, are as follows:
<TABLE>
<CAPTION>

                              1998           1997
                          -------------  -------------
<S>                       <C>            <C>

              Series A      891,753,409    746,753,410
              Series B        5,562,450      5,562,450
              Series D      186,904,725    186,904,725
              Series L      151,326,154    150,208,618
                          -------------  -------------
                Total     1,235,546,738  1,089,429,203
                          =============  =============
</TABLE>

    Series A, B and D represent shares entitling the holder of each share to one
      vote at the Company's stockholders' meetings.  The holders of Series L
      shares may vote only in limited circumstances as described in the
      Company's bylaws.  Stockholder actions on certain matters require approval
      by both Series A and Series B stockholders.

    Series A shares must always represent no less than 51% of the capital stock
      with full voting rights and may be acquired by Mexicans or foreigners.
      Series B, D and L shares may also be acquired by foreigners or Mexicans.

    Series B shares cannot exceed 29.1% of the total capital stock and Series D
      shares cannot exceed 19.9% of the total capital stock.  Series L shares
      cannot exceed 19% of the total capital stock.

    On August 26, 1998 the Company announced a recapitalization and
      restructuring plan. Under this plan a new holding company, Nuevo Grupo
      Iusacell, S.A. de C.V. ("Nuevo Iusacell") has been created. Nuevo Iusacell
      will offer to exchange, on a one for one basis, Nuevo Iusacell Series V
      shares for outstanding Series B, D and L shares and for some Series A
      shares, and will offer to exchange, on a one for one basis, Nuevo Iusacell
      Series A shares for all other Series A shares. All Nuevo Iusacell shares
      will have full voting rights.


15. Executive Employee Stock
    Purchase Plan
    ------------------------

    In March 1997, the Company adopted the Stock Purchase Plan.  The Stock
      Purchase Plan is administrated by a management trust with the assistance
      of the trust division of a Mexican Bank.  Under the Stock Purchase Plan,
      the Technical Committee, which is composed of certain executive officers
      of the Company, determines the executive employees to whom Series L shares
      of the Company will be offered for purchase.  The Technical  Committee
      also determines the number of Series L shares to be offered for purchase
      to such executive employees, the purchase price per share for such
      purchase rights, the vesting schedule for such purchase rights, the
      payment terms and all other terms and conditions therefor.

    The number of Series L shares that may be subject to purchase rights granted
      under the Stock Purchase Plan cannot exceed 4.9% of the aggregate number
      of issued and outstanding Company shares.

    During 1997, the Technical Committee granted purchase rights with respect to
      a total of 7,549,834 Series L shares.  All such purchase rights vest
      either in three equal annual installments commencing on April 17, 1998,
      June 6, 1998 or September 30, 1998 or in their entirety on April 17, 1999
      or June 6, 1999 (see Note 14).


                                     F-32
<PAGE>

    During 1998, the Technical Committee granted purchase rights with respect to
      a total of 2,199,600 Series L shares through the issuance of 1,117,516
      Series L shares and the reassignment of 1,082,084 Series L shares.  All
      such purchase rights vest either in three equal annual installments
      commencing on September 1, 1999 or commencing on October 1, 1999 (see Note
      14).

16. Earned Capital
    --------------

    Under Mexican law, a legal reserve must be created, and annually increased
      by 5% of the annual net earnings until it reaches 20% of the nominal
      amount of its capital stock.  This reserve is not available for dividends,
      but may be used to reduce a deficit or may be transferred to capital.

    Under the Federal income tax law, a tax on dividends is calculated based on
      the paid dividends which exceed taxable net income.  The accumulated
      taxable net income of the Company as of December 31, 1998 is approximately
      Ps.103,964.   The Company cannot pay dividends under the covenants for the
      senior notes and bank loans.

    The earned capital accounts consist of the following:
<TABLE>
<CAPTION>
                                                December 31, 1998
                             ------------------------------------------------------
                                                   Accumulated
                                Historical       adjustments for
                                   value            inflation            Total
                             ----------------   ----------------   ----------------
<S>                          <C>                <C>                <C>
Legal reserve                  Ps.      1,499     Ps.      2,473     Ps.      3,972
Accumulated losses from
 prior years                  (     1,839,161)   (     1,228,256)   (     3,067,417)
Net  loss for the year        (     1,464,050)           166,808    (     1,297,242)
Deficit  from restatement                   -    (       679,994)   (       679,994)
                             ----------------   ----------------   ----------------
Total                         (  Ps.3,301,712)   (  Ps.1,738,969)   (  Ps.5,040,681)
                             ================   ================   ================
</TABLE>

<TABLE>
<CAPTION>
                                                December 31, 1997
                             ------------------------------------------------------
                                                   Accumulated
                                Historical       adjustments for
                                   value            inflation            Total
                             ----------------   ----------------   ----------------
<S>                          <C>                <C>                <C>
Legal reserve                Ps.        1,499     Ps.      2,473    Ps.       3,972
Accumulated losses from
 prior years                (       1,646,797)  (        234,213)  (      1,881,010)
Net loss for the year       (         192,364)  (        994,043)  (      1,186,407)
Deficit from restatement                    -   (        646,191)  (        646,191)
                             ----------------    ---------------    ---------------
 Total                      (Ps.    1,837,662)  (Ps.   1,871,974)  (Ps.   3,709,636)
                             ================    ===============    ===============
</TABLE>

                                     F-33
<PAGE>

17. Foreign Currency Position
    -------------------------

     The balance sheet as of December 31 includes assets and liabilities
       denominated in U.S. Dollars, as follows:
<TABLE>
<CAPTION>
                                                 1998          1997
                                            -------------  -------------
<S>                                         <C>            <C>

         Monetary assets                    U.S.$  46,331  U.S.$  52,166
         Monetary liabilities                     574,489        360,775
                                            -------------  -------------
         Net monetary liability position
          in U.S. Dollars                   U.S.$ 528,158  U.S.$ 308,609
                                            =============  =============
         Equivalent in nominal
          Mexican pesos                      Ps.5,226,810   Ps.2,489,888
                                            =============  =============
</TABLE>

    As of December 31, 1998 and 1997, most of the communications equipment and
      inventories of cellular telephones and accessories are of foreign origin
      (see Notes 6 and 8).

    During 1998 and 1997, interest expense and interest income on assets and
      liabilities denominated in U.S. Dollars were as follows:
<TABLE>
<CAPTION>

                                            1998          1997          1996
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>

       Interest income
                                        U.S.$    494  U.S.$    386  U.S.$ 18,298
       Interest expense                       16,419        15,994        52,011
                                        ------------  ------------  ------------
         Net interest expense           U.S.$ 15,925  U.S.$ 15,608  U.S.$ 33,713
                                        ============  ============  ============
       Equivalent in nominal Mexican
         Pesos                            Ps.157,599    Ps.125,927    Ps.264,057
                                        ============  ============  ============
</TABLE>

    Operating results for the years ended December 31, 1998 and 1997, include
      depreciation and amortization expenses, originated by fixed assets and
      inventories of foreign origin.

    The exchange rate as of December 31, 1998 and 1997 was Ps.9.8963  and
      Ps.8.0681, per 1 U.S. Dollar, respectively.  At the issuance date of these
      financial statements, February 22, 1998, the exchange rate in effect was
      Ps.9.9333 per 1 U.S. Dollar

18.  Project 450
     -----------

    During 1994, the Company created a subsidiary to provide fixed wireless
      local telephony services using the 450 MHz frequency band ("Project 450").
      At  December  31, the Company's investment in Project 450 consisted of the
      following assets:

                                     F-34
<PAGE>

<TABLE>
<CAPTION>
                                            1998               1997
                                        ------------       ------------
<S>                                     <C>                <C>
        Fixed assets                       Ps.40,659       Ps.  483,575
        Capitalized interest (Note 9)              -            318,966
        Inventory of handsets                 18,188             25,738
        Pre-operating expenses (Note 9)            -            284,898
                                        ------------       ------------
         Total                             Ps.58,847       Ps.1,113,177
                                        ============       ============
</TABLE>

    On June 10, 1997, the Mexican Ministry of Communications and Transport
      ("SCT") and the Company reached an agreement on a process whereby the
      Company could obtain concessions issued by the SCT to provide local
      wireless service in the 450 MHz frequency band. While awaiting the Mexican
      Government's resolution on coverage, spectrum  clearing and other
      requirements which may cause management to reconsider the feasibility of
      fully deploying the 450 MHz technology, the Group began its overlay of
      CDMA digital technology in the 800 MHz frequency band.

    Given the capabilities of CDMA technology and the success the Group has had
      thus far with its deployment, the Group is exploring alternatives for
      providing local telephony service, including fixed or limited zone
      wireless service in the 800 MHz and 1.9 GHz bands. The Group has not made
      a decision as to whether it will pursue its right of first refusal to
      acquire the above-mentioned 450 MHz concessions, or whether it will pursue
      an alternative means to provide local telephony services.

    During September 1998, the Group made the decision to write-down the
      carrying value of the assets supporting its Project 450 MHz assets as the
      Group believes  there has been an impairment of its investment in this
      technology. During 1998  an impairment charge for Ps.981,484 was recorded,
      and represented 100% of the pre-operating expenses and 90% of the fixed
      assets deployed in this project.

19.  Discontinued Operations
     -----------------------

    In December 1998, the Company decided to discontinue the operations of its
      subsidiary, Cellular Solutions, basically the selling of accessories for
      cellular handsets. Cellular Solutions transferred all its existing
      inventories as of December 31, 1998 to another subsidiary of the Company
      and terminated all its employees during January and February 1999.

    Financial information regarding Cellular Solutions as of December 31 was as
      follows:
<TABLE>
<CAPTION>
                                                           1998           1997          1996
                                                      --------------  ------------  -------------
<S>                                                   <C>             <C>           <C>

          Current assets                                 Ps.  3,129    Ps.  8,157     Ps.  5,184
          Total assets                                        4,923         9,472          7,115
          Total liabilities                                  36,418         8,699          7,582
          Revenues                                           17,831        21,726         14,472
          Gross Profit                                        3,919         6,219          5,109
          Loss from operations before income taxes     (      7,854)  (     6,539)   (    16,417)
          Provision for income taxes                             90           168            184
          Loss on disposal, including provision of
            Ps. 949 for operating losses during
            phase-out period (no applicable taxes)     (     10,500)            -              -
          Net (loss) profit                            (  Ps.18,444)  (  Ps.6,707)   ( Ps.16,601)
                                                      ==============  ============  =============
</TABLE>


                                     F-35
<PAGE>

20. Differences between Mexican and United
    States Generally Accepted Accounting
    Principles
    --------------------------------------

    The Company's consolidated financial statements are prepared based on
      accounting principles generally accepted in Mexico ("Mexican GAAP"), which
      differ in certain significant respects from United States generally
      accepted accounting principles ("U.S. GAAP").

    The following reconciliation to U.S. GAAP does not include the reversal of
      the adjustments to the financial statements for the effects of inflation
      required under Mexican Bulletin B-10. The application of Bulletin B-10
      represents a comprehensive measure of the effects of price-level changes
      in the financial statements based on historical cost for Mexican and U.S.
      accounting purposes. The principal differences, other than inflation
      accounting, between Mexican and U.S. GAAP are listed below, together with
      an explanation where appropriate, of the adjustments that affect
      consolidated net income and stockholders' equity for each of the years
      ended December 31, 1998, 1997 and 1996.

    a)  Deferred income taxes and
        employee profit sharing
    -----------------------------

    Under Mexican GAAP, deferred income taxes are provided for identifiable,
      non-recurring timing differences (those expected to reverse over a
      definite period of time) at rates in effect at the time such differences
      originate. Benefits from loss carryforwards are not allowed to be
      recognized before the period in which the carryforward is utilized. For
      purposes of this reconciliation to U.S. GAAP, the Company has applied
      Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
      for Income Taxes"("SFAS 109"), for all periods presented.

    SFAS 109 requires an asset and liability method of accounting whereby
      deferred taxes are recognized for the tax consequences of all temporary
      differences between the financial statement carrying amounts and the
      related tax bases of assets and liabilities. Under U.S. GAAP, the effect
      on deferred taxes of a change in tax rate is recognized in income in the
      period that includes the enactment date.

    SFAS 109 requires deferred tax assets to be reduced by a valuation allowance
      if, based on the weight of available evidence, including cumulative losses
      in recent years, it is more likely than not that some portion or all of
      the deferred tax assets will not be realized.

    As described in Note 12, Mexican tax law requires payment of a 1.8% tax on
      the Company's net assets which may be used to offset future income tax
      obligations. Under Mexican GAAP, the net asset tax is charged to the
      provision for income taxes. Under SFAS 109, such amounts are treated as a
      deferred tax benefit and offset by a valuation allowance, if required.

    Employee profit sharing expense, which is based on each subsidiary's taxable
      income after certain statutory adjustments, is included in the income tax
      provision under Mexican GAAP. The provision for employee profit sharing is
      charged to operations for U.S. GAAP purposes.


                                     F-36
<PAGE>

    b) Preoperating costs
    ---------------------

    Under Mexican GAAP, the Company capitalized certain pre-operating costs,
      primarily related to Project 450. Under U.S. GAAP, pre-operating costs are
      expensed as incurred.  During 1998, the Company recorded a write-down
      related to its investment in Project 450 for Mexican GAAP purposes and
      consequently, wrote-off all capitalized pre-operating costs as of that
      date.

    c)  Restatement related to the provision for consolidation of facilities
    ------------------------------------------------------------------------

    As described in Note 2, during the year ended December 31, 1996, the Company
      originally recorded a provision for consolidation of facilities related to
      Montes Urales under both Mexican and U.S. GAAP.  The Company has
      reassessed this accounting treatment under U.S. GAAP and determined that,
      as management did not have the ability to remove Montes Urales from
      operations in December 1996, Montes Urales did not qualify as an asset
      held to be disposed of at such date and consequently, should have been
      accounted for as an asset to be held and used pursuant to the provisions
      of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
      Long-Lived Assets to Be Disposed Of."  As a result, under U.S. GAAP, an
      impairment charge would not have been recorded at December 31, 1996
      related to Montes Urales.  The effect of this restatement on U.S. GAAP net
      loss and basic and diluted net loss per share is as follows:

                                           For the year ended December 31, 1996
                                       As previously reported       As restated
                                       ----------------------      -------------

    Net loss under U.S. GAAP                    (Ps. 182,772)      (Ps. 167,320)
    Basic and diluted net loss per share
      under U.S. GAAP (Pesos)                   (Ps.    0.19)      (Ps.    0.17)


    The effect of the additional depreciation on Montes Urales related to the
    -------------------------------------------------------------------------
      1996 restatement was immaterial for 1998 and 1997. Consequently, the
      --------------------------------------------------------------------
      Company has not revised the financial statements for such periods.
      ------------------------------------------------------------------


    d) Minority interest
    -----------------------

    Under Mexican GAAP, the minority interest in consolidated subsidiaries is
      presented as a separate component within the stockholders' equity section
      of the consolidated balance sheet. For U.S. GAAP purposes, minority
      interest is not included in stockholders' equity and accordingly is
      deducted as a reconciling item to arrive at U.S. GAAP equity.

                                     F-37
<PAGE>

    e) Basic and fully diluted loss per share
    -----------------------------------------

    As of January 1, 1997, Mexican GAAP requires the disclosure of earnings
      (loss) per share for public companies. Under U.S. GAAP, disclosure of
      basic earnings (loss) per share and diluted earnings (loss) per share is
      required for public companies in accordance with SFAS No. 128, "Earnings
      Per Share". Basic earnings (loss) per share is computed by dividing income
      (loss) available to common shareholders by the weighted average number of
      common shares outstanding for the year.  The computation of diluted
      earnings (loss) per share is similar to basic earnings (loss) per share,
      except that the denominator is increased to include the number of
      additional common shares that would have been outstanding if the
      potentially dilutive common shares had been issued. Diluted earnings
      (loss) per share is equal to basic earnings (loss) per share for the years
      ended December 31, 1998 and 1997 as the drawdowns and conversions under
      the subordinated convertible facility with Bell Atlantic (Note 10) and the
      shares subject to rights under the Stock Purchase Plan (see Note 15) are
      excluded from the computation of diluted earnings (loss) per share because
      to do so would have been anti-dilutive for the periods  presented.  For
      the years ended December 31, 1998 and 1997, the number of potentially
      dilutive shares that were excluded from the computation of diluted
      earnings (loss) per share for the drawdowns and conversions under the
      facility with Bell Atlantic were 69,285,714 and 214,285,714 shares,
      respectively, and for the shares subject to rights under the Stock
      Purchase Plan 332,650 and 262,666 shares, respectively. Diluted earnings
      (loss) per share is equal to basic earnings (loss) per share for the year
      ended December 31, 1996 as the Company did not have any potentially
      dilutive securities.

    f) Effect of inflation accounting
       on U.S. GAAP adjustments
    ---------------------------------

    In order to determine the net effect on the financial statements of
      recognizing certain of the adjustments described above, it is necessary to
      recognize the effects of applying the Mexican GAAP inflation accounting
      principles (described in Note 4) to such adjustments.


    g) Comprehensive income
    -----------------------

    On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
      Comprehensive Income". SFAS No. 130 establishes guidelines for the
      reporting and display of comprehensive income and its components
      (revenues, expenses, gains and losses) in a full set of general purpose
      financial statements. SFAS No. 130 requires that all items that are
      required to be recognized under accounting standards as components of
      comprehensive income be reported in a financial statement that is
      displayed with the same prominence as other financial statements. The
      statement, however, does not address recognition or measurement issues.
      The adoption of SFAS No. 130 had no impact on net loss or shareholders'
      equity.  The Company has presented comprehensive loss and accumulated
      comprehensive loss under U.S. GAAP for each of the three years ended
      December 31, 1998 in Note 20 j) below.

                                     F-38
<PAGE>

    h)  Interest rate collar
    ------------------------

    Effective July 30, 1998, in connection with the $225,000 U.S. Dollars credit
      agreement (see Note 10), the Company was required to enter into an
      interest rate collar agreement designated as a hedge of a portion of the
      Company's floating rate debt. The interest rate collar limits the
      Company's exposure to fluctuations in short-term interest rates by locking
      in a range of interest rates on $35,000 U.S. Dollars of its floating rate
      debt. The cap rates range from 6.12% to 7.12% above six-month LIBOR with
      the floor rates ranging from 5.30% to 6.12% above six-month LIBOR. The
      interest rate collar matures on July 30, 2002.

    Under Mexican GAAP, the interest rate collar agreement is recorded on a cash
      basis. Under U.S. GAAP, the differential to be paid or received as
      interest rates change is accrued and recognized as an adjustment of
      interest expense at the balance sheet date. Additionally, the related
      amount payable or receivable from counter-parties is included in accrued
      other expenses at the balance sheet date.

    The $35,000 U.S. Dollar million notional amount of the interest rate collar
      agreement does not quantify risk or represent assets or liabilities of the
      Company, but is used in the determination of cash settlements under the
      agreement. The Company is exposed to credit loss from counterparty
      nonperformance, but does not anticipate any such loss from the interest
      rate collar agreement, which is with a major financial institution.

    The fair value of the interest rate collar agreement is Ps.10,737 ($1,085
      U.S. Dollars) as of December 31, 1998, and is estimated based on current
      market settlement prices of comparable contracts obtained from dealer
      quotes. The Company does not hold or issue derivative financial
      instruments for trading purposes.


    i)  Gain from the exchange of non-monetary assets
    -------------------------------------------------

    In December, 1998, the Company entered into a fiber optic cable swap
       agreement with Bestel to exchange certain long-distance fiber optic
       cables for a contract amount of Ps.191,489.  Under Mexican GAAP, the
       Company recorded the transaction as both an acquisition and sale of fixed
       assets based on the contract amount, resulting in a gain on the sale of
       Ps.166,756 which was recorded as other income.  Under U.S. GAAP, because
       the assets exchanged are similar productive assets and, on a net basis,
       no cash was exchanged, the transaction does not result in the recognition
       of earnings.  Consequently, under U.S. GAAP, the acquisition and sale
       would not have been recorded.


    j) Net loss and stockholders' equity
       under U.S. GAAP
    ------------------------------------

    The following is a summary of net loss and stockholders' equity adjusted to
      take into account certain material differences between Mexican GAAP and
      U.S. GAAP:

                                     F-39
<PAGE>

<TABLE>
<CAPTION>


                                                                Years ended December 31,
                                              -------------------------------------------------------
                                                                       (Restated)
                                                     1998                 1997               1996
                                              ------------------   ------------------  ---------------
<S>                                           <C>                  <C>                 <C>
Net loss as reported under Mexican GAAP        (    Ps.1,297,242)   (    Ps.1,186,407)  (   Ps.468,431)
 Deferred income taxes                                    50,385              439,200          231,692
 Pre-operating costs                                     158,817    (          76,151)  (       82,666)
 Interest rate collar                          (          10,737)                   -                -
 Gain from the exchange of non-monetary
  assets                                       (         166,756)                   -                -
 Provision for consolidation of facilities                     -                    -           15,452
 Effect of inflation accounting on U.S.
  GAAP adjustments                             (          23,219)              17,960          136,633
                                              ------------------   ------------------  ---------------
 Net loss under U.S. GAAP                      (       1,288,752)   (         805,398)  (      167,320)
                                              ==================   ==================  ===============
 Weighted average number of shares
  outstanding
  (thousands)                                          1,121,396            1,070,825          981,624
                                              ==================   ==================  ===============
 Basic and diluted net loss per share
  (pesos)                                      (Ps.         1.15)   (Ps.         0.75)  (Ps.      0.17)
                                              ==================   ==================  ===============


Comprehensive income:

<CAPTION>
                                                                Years ended December 31,
                                              -------------------------------------------------------
                                                     1998                 1997               1996
                                              -------------------  ------------------  ---------------
<S>                                           <C>                  <C>                 <C>

 Net loss under U.S. GAAP                       (Ps.   1,288,752)     (Ps.    805,398)  (Ps.   167,320)
 Inflation effects for the period               (         10,584)     (        17,960)  (    1,067,646)
 Deffered income taxes                                         -                    -          349,496
                                              ------------------   ------------------  ---------------
 Comprehensive loss                             (Ps.   1,299,336)     (Ps.    823,358)  (Ps.   885,470)
                                              ==================   ==================  ===============
 Accumulated comprehensive loss                 (Ps.   5,755,892)     (Ps.  4,456,556)  (Ps. 3,633,198)
                                              ==================   ==================  ===============
</TABLE>

<TABLE>
<CAPTION>
                                                     Years ended December 31,
                                              ---------------------------------------
                                                     1998                 1997
                                              -------------------  ------------------
<S>                                           <C>                  <C>
 Stockholders' equity under Mexican GAAP            Ps.3,666,549        Ps.3,947,748
 Minority interest                                (          811)     (       13,728)
 Deferred income taxes                                   164,980             114,595
 Pre-operating costs                                           -      (      158,817)
 Interest rate collar                             (       10,737)                  -
 Gain from the exchange of non-monetary
  assets                                          (      166,756)                  -
 Provision for consolidation of facilities                15,452              15,452
                                                 ---------------     ---------------
 Stockholders' equity as reported under
  U.S. GAAP                                         Ps.3,668,677        Ps.3,905,250
                                                 ===============     ===============
</TABLE>

                                     F-40
<PAGE>

    The following is the Statement of Stockholders' Equity under US GAAP for
      each of the two years ended December 31, 1998:


<TABLE>
<CAPTION>
                                               Contributed             Accumulated               Loss for
                                                 Capital                  Losses                 the year                  Total
                                           -----------------      -------------------      ------------------      -----------------
<S>                                        <C>                    <C>                      <C>                     <C>
Balances as of 12/31/96                         Ps.6,815,162          (Ps. 2,747,728)           (Ps. 167,320)          Ps.3,900,114
Application of 1996 net loss                                          (      167,320)                167,320                      -
Increase in capital stock                            828,494                                                                828,494
Effects of inflation                                                  (       17,960)                                 (      17,960)
Net loss for the year                                                                         (      805,398)         (     805,398)
                                           -----------------     -------------------      ------------------      -----------------
Balances as of 12/31/97                            7,643,656         (     2,933,008)         (      805,398)          Ps.3,905,250
Application of 1997 net loss                                         (       805,398)                805,398                      -
Increase in capital stock                          1,062,763                                                              1,062,763
Effects of inflation                                                 (        10,584)                                (       10,584)

Net loss for the year                                                                         (    1,288,752)        (    1,288,752)

                                           -----------------     -------------------      ------------------      -----------------
Balances as of 12/31/98                         Ps.8,706,419           (Ps.3,748,990)         ( Ps.1,288,752)          Ps.3,668,677
                                           =================     ===================      ==================      =================
</TABLE>

    k) Provision for impairment of analog equipment
    ------------------------------------------------------------

    As mentioned in Note 4.b, during the year ended December 31, 1997, changes
      in circumstances indicated that the carrying amount of the Group's analog
      telecommunications network might not be recoverable.  These circumstances
      included:  (i) customer and marketing requirements for better voice
      quality, more and improved value added services and reduction of  wireless
      fraud, all of which were more viable with a digital platform.  Hence,
      these requirements accelerated the adoption of digital technology in the
      Mexican wireless market. (ii) the view of Bell Atlantic, which obtained
      management control of the Company in 1997, that the Company would need to
      adopt digital technology in order to remain competitive and that  CDMA was
      the best technology available to the Company. (iii) the plans, developed
      in 1997 by other wireless carriers, to launch digital technology in Mexico
      in 1998. (iv) the Company's decision to participate in the digital PCS
      auctions that were announced in November 1997 (v) an increase in the
      Company's subscriber base during 1997, such that the analog network was
      operating at close to full capacity by November 1997.  The CDMA digital
      network has the potential to increase capacity by a six to eight multiples
      compared with analog. Consequently, under U.S. GAAP, the Company evaluated
      the analog equipment for impairment using the criteria of SFAS 121,
      "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to Be Disposed Of."

    In December 1997, the future estimated cashflows (undiscounted and without
      interest) of the analog equipment, considering the disposition of the
      equipment under the terms of the agreement with Lucent Technologies (see
      Note 13), were less than the book value. Consequently, the Company
      recorded an impairment charge of Ps.1,100,703 to adjust the carrying
      amount of the analog equipment to its fair value, amounting to Ps.
      2,888,070, based on an independent appraisal performed by Consultores y
      Valuadores de Empresas, S.C.

    Under U.S. GAAP, this impairment charge is reflected as a component of
      operating loss for the year ended December 31, 1997.


                                     F-41
<PAGE>

      l) Employee severance
      ---------------------

      The Group is required to pay certain severance benefits only to employees
        that are dismissed without proper cause. Since during the normal course
        of operations, it is impracticable to estimate the number of employees
        that will be dismissed in the future, under U.S. GAAP, severance
        payments made to employees during the normal course of operations are
        expensed when paid.  As of December 31, 1998 and 1997 severance accruals
        recorded were immaterial.


      m) Supplementary U.S. GAAP disclosures
      --------------------------------------

      1) Cash flow information

        SFAS No.95, "Statement of Cash Flows" ("SFAS 95"), does not provide any
          specific guidance with respect to inflation adjusted financial
          statements. For U.S. GAAP purposes, the following cash flow statement
          is presented, using U.S. GAAP balance sheets restated for inflation.
          Monetary gains and losses, and unrealized foreign exchange gains and
          losses have been included as operating cash flow reconciling items.
          Other items have been included based on their cash flows, adjusted by
          inflation.
<TABLE>
<CAPTION>

                                                                                 Years ended December 31,
                                                               ---------------------------------------------------------
                                                                      1998                 1997               1996
                                                               ------------------   -----------------   ----------------
<S>                                                            <C>                  <C>                 <C>
              Operating activities:
                  Net loss under U.S. GAAP                          (Ps.1,288,752)      (Ps.  805,398)      (Ps. 167,320)
                   Adjustments to reconcile net loss to
                    cash (used in) provided by operating
                     activities:
                    Depreciation                                          338,413             392,562            392,265
                    Amortization                                          456,502             297,660            387,375
                    450 Project non-cash write-down                       822,667                   -                  -
                    Equity in loss of associated
                     companies                                      (       2,599)     (          995)      (      1,700)
                    Gain on sale of equity investments              (      22,260)     (      186,039)                 -
                    Increase in allowance for doubtful
                     accounts                                              27,522              43,203             91,439
                     Increase in allowance for obsolete
                      and slow-moving inventories                               -              18,387              5,298
                    Fixed assets impairment charge                              -           1,100,703                  -
                    Minority interest                               (       5,646)                246)      (      4,099)
                    Deferred income taxes and employee
                     profit sharing                                        13,831      (      385,428)      (    186,305)
                    Gain on net monetary position and
                     foreign exchange losses                              180,708      (      387,687)      (    784,711)
                    Reorganization reserve                           Ps.        -       Ps.         -         Ps.187,226
</TABLE>


                                     F-42
<PAGE>

<TABLE>
<CAPTION>
                                                          Years ended December 31,
                                          -------------------------------------------------------
                                               1998                 1997               1996
                                          ----------------   -----------------   ----------------
<S>                                       <C>                <C>                 <C>
    Changes in operating assets
     and liabilities:
    Accounts receivable                      (Ps.518,888)      (Ps.129,503)     (Ps. 111,967)
    Inventories                                  100,322       (   200,277)           67,206
    Trade accounts payable and
     related parties                           1,169,875           619,686      (     86,945)
    Taxes and other payable                      460,175       (   286,830)          103,851
    Income tax                               (    26,427)            3,086             6,527
    Other                                    (       171)              406                81
                                             -----------       -----------      ------------
 Net cash provided by (used in)
  operating activities                         1,705,272            93,290      (    101,779)

 Investing activities:
   Purchase of property and
    equipment, net                           ( 2,190,044)      (   804,001)     (    272,406)
   Proceeds from sales of
    investments in asso-
    ciated companies                              10,981           293,333            36,604
   Purchase of other assets                  ( 1,101,071)      (   703,032)          409,089
                                             -----------       -----------      ------------
 Net cash (used in) provided by
  investing
   activities                                ( 3,280,134)      ( 1,213,700)          173,287
                                             -----------       -----------      ------------
 Financing activities:
   Proceeds from notes payable and
    long-term debt                             1,706,765         2,842,509           178,318
   Payments of notes payable and
    long-term debt                           (    23,220)      ( 1,807,908)     (    354,730)
   Increase of capital stock                       7,177           100,412                 -
                                             -----------       -----------      ------------
 Net cash provided by (used in)
  financing
   Activities                                  1,690,722         1,135,013      (    176,412)
                                             -----------       -----------      ------------
 Net increase  (decrease) in  cash
  and cash
   equivalents                              Ps.  115,860       Ps.  14,603      (Ps. 104,904)

 Cash and cash equivalents at
  beginning of year                              139,363           124,760           229,664
                                             -----------       -----------      ------------
 Cash and cash equivalents at the
  end of year                                Ps. 255,223       Ps. 139,363       Ps. 124,760
                                             ===========       ===========      ============
   Interest expense paid                     Ps. 307,653       Ps. 219,914       Ps. 296,378
                                             ===========       ===========      ============
   Income tax paid                           Ps.  32,779       Ps.  38,668       Ps.  27,562
                                             ===========       ===========      ============

<CAPTION>
 Supplemental disclosures of
  non-cash activities:
                                                          Years ended December 31,
                                          -------------------------------------------------------
                                               1998                 1997               1996
                                          ----------------   -----------------   ----------------
<S>                                       <C>                <C>                 <C>
Sales of investment in Iusatel
  Chile in exchange for
  notes receivable (Note 2)               Ps.          -     Ps.         -       Ps. 53,551
Conversion of debt to equity                   1,055,586           728,082                -
</TABLE>

                                     F-43
<PAGE>

2) The provision for income taxes for the years ended December 31, 1998, 1997
   and 1996 was as follows:
<TABLE>
<CAPTION>
                                               Years ended December 31,
                                      ----------------------------------------
                                          1998           1997         1996
                                      ----------    ----------   -------------
<S>                                 <C>             <C>          <C>
 Asset tax not offset by current
  taxes                               Ps. 64,216    Ps. 53,772    Ps.  45,388
  Deferred tax                       (    50,385)  (   439,200)  (    231,692)
                                      ----------    ----------   -------------
  Tax charge (benefit)                Ps. 13,831   (Ps.385,428)  (Ps.186,306)
                                      ==========    ==========   =============
</TABLE>

3) Deferred income taxes

      For Mexican tax purposes, inventories are expensed when purchased and
        consequently, result in the recognition of a deferred tax liability.

      Significant components of deferred income taxes under U.S. GAAP are as
        follows:
<TABLE>
<CAPTION>

                                                                               December 31, 1998
                                                       -----------------------------------------
                                                           SFAS 109       SFAS 109
                                                         applied to     applied to
                                                       Mexican GAAP      U.S. GAAP
                                                           balances    adjustments         Total
                                                       ------------    -----------   -----------
<S>                                                    <C>             <C>           <C>
Deferred liabilities:
 Inventories                                           Ps.   62,906    Ps.       -   Ps.  62,906
 Property and equipment                                     230,944              -       230,944
 Cellular telephones to be amortized                        103,604              -       103,604
 Concessions                                                  2,656              -         2,656
                                                       ------------    -----------   -----------
Deferred tax liabilities                               Ps.  400,110    Ps.       -   Ps. 400,110
                                                       ------------    -----------   -----------
Deferred assets:
 Allowance for doubtful accounts                       Ps.   22,855    Ps.       -   Ps.  22,855
 Net operating loss carryforwards and tax credits         1,113,256              -     1,113,256
 Reorganization reserve                                      20,264              -        20,264
 Interest rate collar                                             -          3,651         3,651
 Gain from the exchange of non-monetary
  assets                                                          -         56,697        56,697
 Valuation allowance                                   (    591,285)   (    60,348)  (   651,633)
                                                       ------------    -----------   -----------
Deferred tax assets                                         565,090              -       565,090
                                                       ------------    -----------   -----------
Net deferred tax assets                                (Ps. 164,980)   Ps.       -  (Ps. 164,980)
                                                       ============    ===========  ============
</TABLE>

                                     F-44

<PAGE>

<TABLE>
<CAPTION>

                                                                                   December 31, 1997
                                                     -----------------------------------------------
                                                         SFAS 109        SFAS 109
                                                       applied to      applied to
                                                     Mexican GAAP       U.S. GAAP
                                                         balances     adjustments             Total
                                                     ------------     -----------    --------------
<S>                                                  <C>              <C>          <C>
Deferred liabilities:
 Inventories                                         Ps.  108,508     Ps.       -     Ps.   108,508
 Property and equipment                                   311,633               -           311,633
 Cellular telephones to be amortized                       34,028               -            34,028
 Concessions                                                2,487               -             2,487
                                                     ------------     -----------     -------------
Deferred tax liabilities                             Ps.  456,656     Ps.       -     Ps.   456,656
                                                     ------------     -----------     -------------
Deferred assets:
 Allowance for doubtful accounts                     Ps.   31,510     Ps.       -     Ps.    31,510
 Net operating loss carryforwards and tax
  credits                                               1,061,565               -         1,061,565
 Reorganization reserve                                    24,035               -            24,035
 Preoperating expenses                                          -          25,891            25,891
 Valuation allowance                                 (    545,858)    (    25,891)    (     571,749)
                                                     ------------     -----------     -------------
Deferred tax assets                                       571,252               -           571,252
                                                     ------------     -----------     -------------
Net deferred tax assets                              (Ps. 114,596)    Ps.       -     (Ps.  114,596)
                                                     ============     ===========     =============
</TABLE>

      Under U.S GAAP, the effect of the restatement of non-monetary assets is
        recorded directly  to stockholders' equity. Accordingly, the  deferred
        taxes related to such assets would  be  reflected directly in equity
        under U.S. GAAP.  Deferred  taxes  recorded directly  to stockholders'
        equity relating to  the  restatement of non-monetary assets were
        Ps.349,496 for the year ended December 31, 1996 (not applicable
        thereafter).

      The Company  has  recorded  a deferred tax asset of Ps.1,113,256
        reflecting  the benefit of tax loss carryforwards, which expire in
        varying amounts between 2001 and 2008. Realization is dependent on
        generating sufficient taxable income prior to expiration of the loss
        carryforwards. Although realization is not assured, management believes
        it is more likely than not that all of the net deferred tax asset at
        December 31, 1998 will be realized based on the following:

        (i)  the net deferred tax asset amounting to Ps.164,980 represents only
             the tax loss carryforwards (which are subject to indexation) of
             1997 and 1998 which have expiration periods of 9 and 10 years,
             respectively, and

        (ii) although the Group has generated operating losses for the past five
             years, it believes that it is more likely than not that the net
             deferred tax asset will be realized based on Group's business plan
             based estimate of future taxable income over the next five years in
             an amount sufficient to utilize the net deferred tax losses
             recorded as of December 31, 1998.


                                     F-45

<PAGE>

      Group's estimate of future taxable income is based primarily on and
        supported by (i) management's expectations of the Company's growth and
        profitability over the next 5 years, (ii) the significant improvement in
        operating performance from February 1997 through December 1998, as
        evidenced by the success of the implementation of the Bell Atlantic
        wireless business model. This model has produced strong subscriber
        growth in excess of 80% year over year, improved revenues (based on
        customer growth and price increases), and lower network and operating
        costs, resulting in an operating profit in the first two quarters of
        1998 and, excluding the Project 450 write-down, also in the third
        quarter of 1998, as compared to an operating loss during 1997 and (iii)
        the effects of cost-cutting measures achieved as a result of the
        restructuring completed during 1997 and 1998, primarily related to a 15%
        reduction in headcount and elimination of duplicate administrative
        costs.

      The amount of the deferred tax asset considered realizable could be
        reduced in the near term if estimates of future taxable income during
        the carryforward periods are reduced (See Note 12.)

      The effective rate reconciliation under U.S. GAAP as of December 31, is as
        follows:
<TABLE>
<CAPTION>

                                                                  1998            1997              1996
                                                         -------------    -------------    -------------
<S>                                                      <C>              <C>              <C>
Income tax benefit at statutory rate                      (Ps.429,122)     (Ps.404,964)     (Ps. 63,222)
         Add (deduct):
          Inventory purchases less cost of sales              179,230      (    28,634)     (    68,202)
          Depreciation and amortization                       260,914      (   230,338)     (   129,810)
          Differences between interest and
           inflationary gains or losses                   (   112,313)         125,327          196,647
          Net assets tax                                       64,216           53,772           45,388
          Income tax loss carryforwards                        61,336          100,004      (    38,271)
          Provision for doubtful accounts                 (    94,626)          22,088            3,442
          Telephones to be amortized                          187,919           55,968           18,504
          Goodwill amortized                                   36,867           37,647           40,727
          Pre-operating expenses                          (    53,997)          25,891           28,106
          Other                                           (    86,593)     (   142,189)     (   219,616)
                                                         -------------    -------------    -------------
       Effective income tax benefit at effective rate     Ps.  13,831      (Ps.385,428)     (Ps.186,306)
                                                         =============    =============    =============
 </TABLE>

     4) Fair values of financial instruments

      The following methods and assumptions were used by the Company in
        estimating its fair value disclosures for financial instruments at
        December 31, 1998 and 1997.

      Cash and cash equivalents: The carrying amount reported in the balance
        sheet approximates fair value due to its short-term nature.

      Long term debt: The Company's long-term debt, except for the unsecured
        senior notes, bear interest at variable rates and consequently, the
        carrying value approximates fair value.  As of December 31, 1998 and
        1997, the carrying value of the unsecured senior notes was Ps.1,484,445
        and Ps.1,435,508 and the fair value was Ps.1,286,272 and Ps.1,435,508,
        respectively.


                                     F-46
<PAGE>

     5) Economic environment

      The Company is a Mexican corporation with substantially all its operations
        situated in Mexico and approximately 99.5% of its revenues in 1998
        generated within Mexico. Accordingly, the economic environment within
        Mexico, which is significantly affected by the actions taken by the
        Mexican government, can be expected to have a significant impact on the
        Company's financial condition and results of operations and on the
        Company's ability to meet its future obligations. The Company imports
        (and purchases in U.S. dollars) handsets, equipment for cellular sites
        and other telecommunications equipment, while prices and revenues are
        generated in Mexican pesos.


     6) Disclosure of certain significant risks and uncertainties:

        a) Year 2000 compliance:
        ------------------------

        All external and internal costs specifically associated with modifying
          internal-use software for the Year 2000 are charged to expenses as
          incurred by the Company. As of December 31, 1998, the amounts incurred
          by the Company, related to its Year 2000 compliance costs, were
          approximately $2,800 U.S. Dollars. Amounts incurred as of December 31,
          1997 were immaterial.

        b) Foreign Currency Exchange Risk
        ---------------------------------

        A substantial amount of the Company's debt obligations, including the
          long-term bank loan and unsecured senior notes, are denominated in
          U.S. Dollars while the Company generates revenues in Mexican Pesos.
          Therefore, the Company is exposed to currency exchange rate risks that
          could significantly affect the Company's ability to meet its
          obligations. The Company currently does not plan to enter into hedging
          transactions with respect to these foreign currency risks, but
          continues to consider the appropriateness of this option. The exchange
          rate of Mexican Pesos to the U.S. Dollar is a freely floating rate
          which has declined in recent years. Any significant decrease in the
          value of the Mexican Peso relative to the U.S. Dollar in the near term
          may have a material adverse effect on the Company and on its ability
          to meet its long-term debt obligations.

        c) Working capital deficiency
        -----------------------------

        The Company's consolidated financial statements for year ended December
          31, 1998 have been prepared on a going concern basis which
          contemplates the realization of assets and settlement of liabilities
          in the normal course of business. Under U.S. GAAP, the Company
          incurred a net loss of Ps.1,111,259 for the year ended December 31,
          1998, which included a Ps. 981,484 non cash expense for the write down
          of its investment in the 450 MHz project. In addition, under U.S.
          GAAP, the Company had negative working capital of Ps.1,350,657 at
          December 31, 1998. The continuation of the Company as a going concern
          is dependent upon its ability to generate sufficient cash from
          operations and financing activities. In this regard, management
          expects operational cash flows in the coming years, and its plans
          include raising additional financing to develop PCS and to fully
          develop digital CDMA based wireless services.


                                     F-47
<PAGE>

     7) Stock Purchase Plan

      As mentioned in Note 15, the Company has a fixed stock option plan, the
        Stock Purchase Plan. This plan grants options to purchase Iusacell
        common stock at a price equal to the market price of the stock at the
        date of the grant. The Company applies Accounting Principales Board
        Opinion No.25 "Accounting for Stock Issued to Employees" and related
        interpretations in accounting for its plan. The Company has adopted the
        disclosure-only provisions of SFAS No.123 "Accounting for Stock based
        Compensation". The Company recognizes no compensation expense for its
        Stock Purchase Plan. If the Company had elected to recognize
        compensation expense based on the fair value at the grant dates for 1997
        and subsequent fixed plan awards consistent with the provisions of SFAS
        No.123, net income and earnings per share would have been changed to the
        pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                   Years  ended  December  31,
                                                  -----------------------------

                                                           1998           1997
                                                  -------------  -------------
<S>                                               <C>            <C>
Under Mexican GAAP:

Net loss           As reported                   (Ps.1,297,242)  (Ps. 1,186,407)
                    Pro forma                    (   1,305,446)  (    1,227,978)
Basic and
fully diluted      As reported                   (Ps.     1.16)  (Ps.      1.11)
loss per share      Pro forma                    (        1.16)  (         1.15)

Under U.S. GAAP:

Net loss           As reported                   (Ps.1,288,752)  (Ps.   805,398)
                    Pro forma                    (   1,296,956)  (      846,969)

Basic and
fully diluted      As reported                   (Ps.     1.15)  (Ps.      0.75)
loss per share      Pro forma                    (        1.16)  (         0.79)

</TABLE>

      These results may not be representative of the effects on pro forma net
        income for future years.

      The Company determined the pro forma amounts using the Black-Scholes
        option-pricing model based on the following weighted-average
        assumptions:

                                                 1998   1997
                                                 -----  -----

                    Dividend yield                  0%     0%
                    Expected volatility            67%    45%
                    Risk-free interest rate        25%    23%
                    Expected lives (in years)      2.7    2.7


      The weighted average value of options granted during 1998 and 1997 was
        Ps.3.93 and Ps.4.85, respectively.


                                     F-48
<PAGE>

      This table is a summary of the status of the Stock Purchase Plan:

                                                                   Weighted
                                                                    Average
                                              Stock Options  Exercise Price
                                              -------------  --------------

             Granted                              8,571,311      Ps.  10.28
             Exercised                                    -               -
             Canceled/forfeited                   1,021,477            8.48
             Outstanding December 31, 1997        7,549,834           10.52
             Granted                              2,199,600            6.47
             Exercised                              967,440            8.20
             Canceled/forfeited                   1,082,104            9.63
             Outstanding December 31, 1998        7,699,890            9.78


      As of December 31, 1998, 5,500,290 shares were exercisable; none were
        excercisable at December 31, 1997. The following table summarizes
        information about Stock Purchase Plan options outstanding as of December
        31, 1998 and 1997:


                     Range                                   Weighted
                      of                         Remaining    Average
                   Exercise                    Contractual   Exercise
                    Prices            Shares          Life      Price
                 -----------        ----------  ----------  ---------

   1997          Ps. 8.48 to 14.00   7,549,834         2    Ps. 10.52
   1998          Ps. 5.16 to 14.00   7,699,890         2    Ps.  9.78


     8) Capitalized interest

      As of December 31, 1998, 1997 and 1996, capitalized interest amounted to
        Ps. 123,668, Ps.310,978 and Ps.198,949, respectively. For the years
        ended December 31, 1998, 1997 and 1996 interest expensed amounted to
        Ps.326,943, Ps.273,323 and Ps.429,198, respectively.


     9) New Accounting Pronouncements


      SFAS 133, "Accounting for Derivative Instruments and Hedging Activities"
        is effective for all fiscal quarters of all fiscal years beginning after
        June 15, 2000. SFAS 133 requires that all derivative instruments be
        recorded on the balance sheet at their fair value. Changes in the fair
        value of derivatives are recorded each period in current earnings or
        other comprehensive income, depending on whether a derivative is
        designated as part of a hedge transaction and, if it is, the type of
        hedge transaction. Derivative financial instruments are currently used
        by the Company to manage interest rate risk on certain long-term debt.
        The Company has not yet determined the impact that the adoption of SFAS
        133 will have on its financial position or results of operations.


                                     F-49
<PAGE>

      Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
        Software Developed or Obtained for Internal Use," effective for fiscal
        years beginning after December 15, 1998, provides guidance on accounting
        for the costs of computer software developed or obtained for internal
        use.  This SOP requires that only certain costs of acquiring or
        developing internal-use software be capitalized and amortized to expense
        over the expected useful life of the software.  The Company is currently
        assessing the impact of the adoption of this SOP on its results of
        operations, financial position and cash flows.


      SOP 98-5, "Reporting on the Costs of Start-Up Activities", effective for
        fiscal years beginning after December 15, 1998, requires costs of start-
        up activities and organization costs to be expensed as incurred.  Under
        U.S. GAAP, the Company expenses costs of start-up activities as incurred
        and, consequently, the Company believes that the adoption of this SOP
        will not have a material impact on its results of operations, financial
        position or cash flows.


      10)  Restructuring Reserve

      As described in Note 2,  a restructuring reserve associated with the
        Company's reorganization plan was recorded during the year ended
        December 31, 1996.  Under U.S. GAAP, the components of the restructuring
        reserve were recorded as operating expenses.  The following are
        additional disclosures as required by U.S. GAAP, including a detail of
        the changes in components of the reserve for the years ended December
        31, 1998 and 1997:


<TABLE>
<CAPTION>
                                     Original        Cash      Non-cash      Remaining                Remaining
                                     reserve        outlays   adjustments     reserve     Activity     reserve
                                    12/31/96 /a/     1997        1997         12/31/97      1998       12/31/98
                                 ------------------------------------------------------------------------------
<S>                                <C>           <C>           <C>           <C>          <C>        <C>
Employee severance accrual           Ps.118,647  (     65,562) (Ps.53,085)       -        Ps. -       Ps.   -
Fixed assets obsolescence                45,295         -           -            -            -             -
                                 ------------------------------------------------------------------------------
Total restructuring reserve          Ps.163,942   ( Ps.65,562) (Ps.53,085)    Ps.41,591   Ps. -       Ps.   -
                                 ==============================================================================
</TABLE>


        /a/ Under Mexican GAAP the Company recorded Ps. 187,226 as a
        restructuring reserve as of December 31, 1996.  Under U.S. GAAP the
        reserve amounted to Ps.163,942 as a result of (i) the consolidation of
        factilities reserve was not recorded under U.S. GAAP (see Note 20.c) and
        (ii) the change in estimate of allowance for doubtful accounts is
        excluded from the restructuring reserve under U.S. GAAP.


                                     F-50

<PAGE>

        Employee severance accrual
        --------------------------

        The replacement of certain top-level management and a general headcount
        reduction was completed during the year ended December 31, 1997.

        As a result of (i) negotiations with top-level management during 1997
        and (ii) an actual headcount reduction of 371 employees, which was lower
        than the original estimate of 400 employees, actual severance benefits
        paid of Ps.65,563 were less than the amount originally accrued, and
        consequently, the Company reversed the remaining original liability
        amounting to Ps.53,085 into income in 1997.


        Fixed assets obsolescence reserve
        ---------------------------------

        The fixed assets obsolescence reserve relates to certain spare parts
        related to the analog communications equipment that, as a result of a
        detailed review by the Company's engineers in November 1996, were
        determined to be obsolete.

        For US GAAP purposes, such equipment was classified as assets to be
        disposed of as of December 31, 1996. The Company recorded an impairment
        provision to adjust such assets to their respective estimated salvage
        value, amounting to Ps.13,047, based on information provided by the
        engineers and ceased the recording of depreciation expense.

      11) Project 450 non-cash write-down

      As described in Note 18, during the year ended December 31, 1998, the
        Company recorded an impairment charge to write-down the Project 450
        assets to their fair value. Under U.S. GAAP, the impairment charge was
        determined in accordance with SFAS 121 as follows:

      During the third quarter of 1998, changes in circumstances indicated that
        the carrying amount of the Project 450 assets might not be recoverable.
        These circumstances included: the successful deployment of more
        attractive alternative technology, the availability of 450 Mhz handsets
        at substantially lower costs had not occurred, the Mexican government
        had not issued the coverage and investment requirements for the 450 Mhz
        licenses, nor had the government provided any indications on timing and
        means to clear the contaminated frequencies in the northern regions.

      In view of these circumstances, the Company decided not to fully continue
        Project 450, given that it was becoming less operationally and
        technically feasible.  At such time, the undiscounted future cash flows
        were less than the carrying value of the Project 450 assets.  As a
        result, in September 1998, the Company's Board of Directors resolved to
        write-down the Project 450 assets.  An impairment charge of Ps.981,484
        was recorded to reduce the Project 450 assets to their fair value,
        amounting to Ps. 40,659.  Even though there was no market for the 450
        Mhz network equipment, the Company's operations group determined that
        certain of these assets, representing about 10% of the related fixed
        assets, could be re-deployed in the mobile wireless network. Therefore,
        a full provision for impairment was recorded for all other assets
        associated with the project.

      12) Segment Information

      In 1998, the Company adopted Statement of Financial Accounting Standard
        No. 131, "Disclosures about Segments of an Enterprise and Related
        Information" (SFAS 131). SFAS 131 establishes standards for the way that
        public enterprises must determine and report information about operating
        segments in their annual and interim reports.

                                     F-51
<PAGE>

      The "management approach" designates the internal organization that is
        used by management for making operating decisions and assessing
        performance as the source of the Company's reportable segments.  The
        adoption of SFAS 131 did not affect results of operations or financial
        position.

      The Company has three reportable segments that it operates and manages as
        strategic business units that offer different products and services.
        The Company measures its reportable segments based on operating income
        (loss), that includes intersegment revenues and corporate expenses that
        are allocated to the operating segments and excludes any non-recurring
        items.  Intersegment transactions are accounted for at current market
        prices.  The Company evaluates the performance of its segments and
        allocates resources to them based on earnings before interest, taxes,
        depreciation and amortization (EBITDA) and operating income (loss). The
        Company is not dependent on any single customer. The accounting policies
        underlying the reported segment data are the same as those described in
        the summary of significant accounting policies (see Note 4).

      The Company's three reportable segments and their principal activities
        are:

      Cellular - The Company operates and provides wireless cellular telephone
        services in four out of the nine Regions that exist in the Mexican
        market.  The Company serves customers in large metropolitan areas such
        as Mexico City, Guadalajara, Leon and Puebla. The Company's services
        include "value added services" such as voice mail and caller
        identification of incoming calling numbers.

      Long Distance- The Company provides long distance services, for which its
        first natural market is its cellular subscriber base. The Company is
        also providing this type of service to residential and commercial
        entities. The Company uses its own switches and transmission equipment
        and a combination of fiber optic lines, microwave links, satellite
        transmission and lines leased from Telmex to provide these services.

      Other Businesses- The Company provide paging, local telephony and data
        transmission services. It has concessions for PCS services and microwave
        links, which are in a preoperating stage.

      The table below presents information about reported segments for the year
        ended December 31, 1998 under Mexican GAAP measurement, using the
        presentation required by SFAS 131.  The Company has not provided
        information for the years ending December 31, 1997 and 1996 as it was
        impracticable to prepare such information.

<TABLE>
<CAPTION>
                                                    Long          Other           Total         Reconciling          Total
                                     Cellular     Distance      Businesses       Segments        Items (2)        Consolidated
                                 ----------------------------------------------------------------------------------------------
<S>                                <C>           <C>          <C>             <C>             <C>               <C>
Revenues- third party              Ps.2,619,236  Ps.  55,027  Ps.   158,363    Ps.2,832,626      (Ps. 8,199)      Ps.2,824,427
Revenues- affiliates                  1,114,995      181,265        445,255       1,741,515      (1,741,515)           -
Depreciation and
amortization                            753,836       22,582         20,259         796,677          (1,762)           794,915
Operating income
(loss)                                   53,494      130,083  (      15,190)   (    796,676)     (  905,161)     (     996,940)
EBITDA (1)                              837,289      107,502          5,067         704,895      (   74,564)           779,459
Total assets                         12,249,960      987,292      1,195,933      14,433,185      (4,504,988)         9,928,197
Capital expenditures                  2,787,030      430,688         19,006       3,236,724               -          3,236,724
</TABLE>


                                     F-52

<PAGE>

        (1) EBITDA as used by the Company is operating profit (loss) plus the
        sum of depreciation and amortization.  The Company's reconciliation of
        EBITDA to consolidated net loss under Mexican GAAP as of December 31,
        1998 is as follows:

<TABLE>
<S>                                               <C>
                EBITDA                                            Ps.     779,459
                Depreciation and amortization                            (794,915)
                Project 450 non-cash write-down                          (981,484)
                Other income, net                                         132,698
                Integral cost of financing                               (380,845)
                Equity participation in net gain of associated
                 companies and net gain on sale of equity
                 investments                                               24,859
                Assets tax                                                (64,216)
                Minority interest                                           5,646
                Loss from discontinued
                operations                                                (18,444)
                                                                   ---------------

                Net loss for the year                              (Ps. 1,297,242)
                                                                   ==============
</TABLE>


        (2) Reconciling items primarily reflect intersegment eliminations and
        certain non-recurring items, including a gain on sale of Ps. 166,756
        related to the accounting for a fiber optic cable agreement under
        Mexican GAAP (see Note 20.i) and a non-cash write-down of Ps.981,484 in
        connection with Project 450 (see Notes 18 and 20.b).

      n) Discontinued Operations
      --------------------------

      As described in Note 19, in December 1998, the Company decided to
        discontinue the operations of its subsidiary, Cellular Solutions de
        Mexico, which was in the business of selling accessories for cellular
        handsets, and consequently, recognize a loss from discontinued
        operations amounting to Ps.18,444. Under U.S. GAAP the loss from
        discontinued operations is recorded as an operating expense.


21. Condensed Consolidating Financial Information
    ---------------------------------------------

    As mentioned in Note 10, in July 1997, the Company issued $150,000 U.S.
      Dollars of senior unsecured notes (the "Notes") as part of its refinancing
      program.    The Notes are guaranteed on a senior subordinated, unsecured
      basis pursuant to guarantees by most of the Company's subsidiaries both
      directly and indirectly wholly-owned ("Guarantor Subsidiaries").    The
      subsidiary guarantees are full, unconditional, joint and several.

    Presented below is condensed consolidating financial information as of
      December 31, 1998 and 1997 and for the three years ended December 31, 1998
      for i) the parent company; ii) the combined Guarantor Subsidiaries; iii)
      the combined non-Guarantor Subsidiaries; iv) eliminations; and v) the
      Company's consolidated financial statements.

    Where applicable, the equity method has been used by the parent company with
      respect to its investments in certain subsidiaries for the respective
      periods presented.

    The Company has not presented separate financial statements and other
      disclosures concerning each of the Guarantor Subsidiaries because
      management has determined that such information is not material to
      investors.

                                     F-53

<PAGE>

          CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998

<TABLE>
<CAPTION>

                                                               Combined          Combined
                                                 Parent       Guarantor     Non-Guarantor
                                                Company    Subsidiaries      Subsidiaries    Eliminations    Consolidated
                                                -------    ------------    --------------    ------------    ------------
                                                        ASSETS
<S>                                       <C>              <C>              <C>              <C>            <C>
Current assets:
 Cash and short-term
  investments                              Ps.  226,549    (Ps.  25,387)     Ps.   53,303    Ps.      758    Ps.  255,223
                                           ------------    ------------      ------------    ------------    ------------
 Accounts receivable:
  Trade                                         291,987         335,873            10,948   (     335,663)        303,145
  Related parties                             1,092,356         626,498                -    (   1,707,474)         11,380
  Recoverable taxes and other                         -         116,736           388,128          84,497         589,361
                                           ------------    ------------      ------------    ------------    ------------
                                              1,384,343       1,079,107           399,076   (   1,958,640)        903,886
                                           ------------    ------------      ------------    ------------    ------------
 Inventories                                      4,569         166,022            22,896   (       8,469)        185,018
                                           ------------    ------------      ------------    ------------    ------------
 Total current assets                         1,615,461       1,219,742           475,275   (   1,966,351)      1,344,127
                                           ------------    ------------      ------------    ------------    ------------

Investment in associated companies            1,896,674         159,213                 -   (   2,040,373)         15,514
Property and equipment, net                   3,672,404       1,012,744           676,561   (      53,726)      5,307,983
Other assets                                    272,089         615,422            87,131         584,031       1,558,673
Excess of investment cost over
 book value                                   1,673,416          28,484                 -               -       1,701,900
                                           ------------    ------------      ------------    ------------    ------------
 Total assets                              Ps.9,130,044    Ps.3,035,605      Ps.1,238,967   (Ps.3,476,419)   Ps.9,928,197
                                           ============    ============      ============    ============    ============
<CAPTION>
                                                      LIABILITIES
<S>                                       <C>              <C>              <C>              <C>            <C>
Current liabilities:
 Notes payable                             Ps.  742,342    Ps.        -      Ps.        -    Ps.        -    Ps. 742,342
 Trade accounts payable                         474,023         387,617           310,783   (     299,249)       873,174
 Related parties                                      -               -         1,177,373   (   1,052,656)       124,717
 Taxes and other payable                        490,849         182,958           136,265   (      52,795)       757,277
 Income tax                                      45,978           1,225             1,156               -         48,359
                                           ------------    ------------      ------------    ------------    ------------
 Total current liabilities                    1,753,192         571,800         1,625,577   (   1,404,700)     2,545,869

Long-term debt                                3,711,113               -                 -               -      3,711,113
Trade accounts payable, long-term                     -           2,110                 -               -          2,110
Commitments and contingencies                         -           2,504                52               -          2,556
                                           ------------    ------------      ------------    ------------    ------------
 Total liabilities                            5,464,305         576,414         1,625,629   (   1,404,700)     6,261,648
                                           ------------    ------------      ------------    ------------    ------------
</TABLE>

                                     F-54
<PAGE>

<TABLE>
<CAPTION>
                                                      Combined          Combined
                                      Parent         Guarantor     Non-Guarantor
                                     Company      Subsidiaries      Subsidiaries       Eliminations      Consolidated
                                     -------      ------------     -------------       ------------      ------------

                                         STOCKHOLDERS' EQUITY
<S>                            <S>               <C>               <C>                <C>               <C>
Stockholders' equity:

Capital contributions              8,689,617         4,795,802           983,565      (   5,762,565)        8,706,419
Earned capital                 (   5,023,878)    (   2,336,611)    (   1,370,227)         3,690,035     (   5,040,681)
Minority interest                          -                 -                 -                811               811
                                ------------      ------------      ------------       ------------      ------------
Total stockholders' equity         3,665,739         2,459,191     (     386,662)     (   2,071,719)        3,666,549
                                ------------      ------------      -----------        ------------      ------------
Total liabilities and
 stockholders' equity           Ps.9,130,044      Ps.3,035,605      Ps.1,238,967      (Ps.3,476,419)     Ps.9,928,197
                                ============      ============      ============       ============      ============
Total stockholders' equity
 under Mexican GAAP             Ps.3,665,739      Ps.2,459,191     (Ps.  386,662)     (Ps.2,071,719)     Ps.3,666,549
Minority interest                          -                 -                 -      (         811)    (         811)
Deferred income taxes                165,305            10,221            13,751      (      24,297)          164,980
Interest rate collar           (      10,737)                -                 -                  -     (      10,737)

Gain from exchange of
 non-monetary assets                       -                 -     (     166,756)                 -     (     166,756)

Provision for consolidation
 of facilities                        15,452                 -                 -                  -            15,452
                                ------------      ------------      -----------        ------------      ------------
Total stockholders' equity
 under US GAAP                  Ps.3,835,759      Ps.2,469,412     (Ps.  539,667)     (Ps.2,096,827)     Ps.3,668,677
                                ============      ============      ============       ============      ============
</TABLE>

                                     F-55
<PAGE>

                    CONDENSED CONSOLIDATED INCOME STATEMENT
                      FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>

                                                  Combined         Combined
                                    Parent       Guarantor    Non-Guarantor
                                   Company    Subsidiaries     Subsidiaries    Eliminations    Consolidated
                                 ---------    ------------    -------------    ------------    ------------
<S>                          <C>              <C>             <C>              <C>             <C>
Total revenues               Ps.   240,005    Ps.4,011,866     Ps.  322,277   (Ps.1,749,721)   Ps.2,824,427
Total cost of sales                 19,011       1,665,687          277,657   (     995,147)        967,208
                             -------------    ------------     ------------    ------------    ------------
  Gross profit                     220,994       2,346,179           44,620   (     754,574)      1,857,219

Operating expenses                  54,880       1,656,835          118,133   (     752,088)      1,077,760
Depreciation and
 amortization                      302,111         464,402           30,201   (       1,799)        794,915
450 Project non-cash
 write-down                              -               -          981,484               -         981,484
                             -------------    ------------     ------------    ------------    ------------
  Operating profit (loss)   (      135,997)        224,942    (   1,085,198)  (         687)  (     996,940)
                             -------------    ------------     ------------    ------------    ------------
Other income                             -               -          132,698               -         132,698
                             -------------    ------------     ------------    ------------    ------------
Integral financing result:
  Interest expense, net     (      237,814)        162,368          233,479         65,323          223,356
  Foreign exchange loss, net       746,737          85,771            3,917              -          836,425
  Gain from monetary
   position                 (      313,334)  (      94,133)   (     193,269)  (     78,200)   (     678,936)
                             -------------    ------------     ------------    ------------    ------------
                                   195,589         154,006           44,127   (     12,877)         380,845
                             -------------    ------------     ------------    ------------    ------------
Equity participation in
 net (gain) loss of
 associated companies              934,196   (      25,737)               -   (    933,318)   (      24,859)
Provision for assets tax            27,960          34,942            1,314              -           64,216
Minority interest                        -               -                -          5,646            5,646
Loss from discontinued
 operations                          3,500          14,944                -              -           18,444
                             -------------    ------------     ------------    ------------    ------------
Net loss for the year       (Ps. 1,297,242)   Ps.   46,787    (Ps.  997,941)   Ps. 951,154    (Ps.1,297,242)
                             =============    ============     ============    ===========     ============
Net loss for the year under
  Mexican GAAP              (Ps. 1,297,242)   Ps.   46,787    (Ps.  997,941)   Ps. 951,154    (Ps.1,297,242)
Deferred income taxes               51,109   (      23,018)          15,616          6,678           50,385
Pre-operating costs                      -               -          158,817              -          158,817
Interest rate collar        (       10,737)              -                -              -    (      10,737)
Gain from exchange of
 non-monetary assets                     -                    (     166,756)             -    (     166,756)
Effect of inflation on
 U.S. GAAP Adjustments      (       23,552)         10,608    (       7,196)  (      3,079)   (      23,219)
                             -------------    ------------     ------------    ------------    ------------
Net loss for the year
 under U.S. GAAP            (Ps. 1,280,422)   Ps.   34,377    (Ps.  997,460)   Ps. 954,753    (Ps.1,288,752)
                             =============    ============     ============    =============   ============
</TABLE>

                                     F-56
<PAGE>

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                        Combined        Combined
                                       Parent          Guarantor   Non-Guarantor
                                      Company       Subsidiaries    Subsidiaries     Eliminations     Consolidated
                                 ------------       ------------   -------------     ------------     ------------
<S>                             <C>                 <C>            <C>               <C>              <C>
Operating activities:
  Net loss for the year         (Ps.1,280,422)    Ps.    34,377    (Ps.  997,460)    Ps.  954,753    (Ps.1,288,752)
Adjustments to reconcile
  net loss to cash provided
  by (used in) operating
  activities:
Depreciation and
  amortization                        302,111           464,402           30,201   (        1,799)         794,915
450 Project non cash
  write-down                                                             822,667                -          822,667
Equity in net loss
  (earnings) of associated
  companies and net gain
  on sale of equity
  investments                       1,069,548                 -                -   (    1,094,407)   (      24,859)
Increase in allowance for
  doubtful accounts                    26,509            30,493              994   (       30,474)          27,522
Minority interest                           -                 -                -   (        5,646)   (       5,646)
Deferred income taxes and
 employee profit sharing        (      23,149)           57,960    (      14,302)  (        6,678)          13,831
Gain on net monetary
 position and foreign
 exchange losses                      456,955    (       18,970)   (     182,156)  (       75,121)         180,708
Changes in operating
 assets and liabilities:
 Accounts receivable            (     385,648)           33,473    (     267,989)         101,276    (     518,888)
 Inventories                           12,193            99,068           21,716   (       32,655)         100,322
 Trade accounts payable
  and related parties               1,814,458    (       66,002)         703,055   (    1,281,636)       1,169,875
 Taxes and other payable              403,706    (       30,172)         183,028   (       96,387)         460,175
 Income Tax                            10,277    (       36,202)   (       1,361)             859    (      26,427)

 Other                                      -    (           40)   (         131)               -    (         171)
                                 ------------     -------------     ------------     ------------     ------------
Net cash provided by (used
 in) operating activities           2,406,538           568,387          298,262   (    1,567,915)   (   1,705,272)
                                 ------------     -------------     ------------     ------------     ------------
Investing activities:
Purchase of property and
 equipment, net                 (   2,023,452)   (      325,509)   (     911,252)       1,070,169    (   2,190,044)
Investment in associated
companies, net cash acquired    (   1,934,154)   (      146,780)           9,867        2,082,048           10,981
Purchase of other assets        (      39,791)   (      128,007)         655,063   (    1,588,336)   (   1,101,071)
                                 ------------     -------------     ------------     ------------     ------------
Net cash (used in) provided
by investing activities         (   3,997,397)   (      600,296)   (     246,322)  (    1,563,881)   (   3,280,134)
                                 ------------     -------------     ------------     ------------     ------------
Financing activities:
Proceeds from notes
 payable and long-term debt         1,706,765                 -                -                -        1,706,765
Payments of notes payable
 and long-term debt             (      28,012)                -                -            4,792    (      23,220)
Increase of capital stock               7,177                 -                -                -            7,177
                                 ------------     -------------     ------------     ------------     ------------
Net cash provided by (used
 in) financing activities           1,685,930                 -                -            4,792        1,690,722
                                 ------------     -------------     ------------     ------------     ------------
Net increase (decrease) in
 cash                                  95,071    (       31,909)          51,940              758          115,860

Cash at beginning of year             131,478             6,522            1,363                -          139,363
                                 ------------     -------------     ------------     ------------     ------------
Cash at the end of year          Ps.  226,549    (Ps.    25,387)    Ps.   53,303     Ps.      758      Ps. 255,223
                                 ============     =============     ============     ============     ============
</TABLE>

                                     F-57
<PAGE>

          CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                         Combined            Combined
                                      Parent            Guarantor       Non-Guarantor
                                     Company         Subsidiaries        Subsidiaries     Eliminations    Consolidated
                                  ----------         ------------       -------------     ------------    ------------

                                                   ASSETS
<S>                            <C>                <C>                  <C>                <C>            <C>
Current assets:
Cash and short-term
  investments                   Ps.  131,478         Ps.    6,522        Ps.    1,363     Ps.        -    PS.  139,363
                                ------------         ------------        ------------     ------------    ------------
 Accounts receivable:
  Trade                                    -              253,707              25,495    (      36,630)        242,572
  Related parties                  4,520,291                    -                   -    (   4,468,069)         52,222
  Recoverable taxes and
   other                              38,405              141,446             102,631    (      14,324)        268,158
                                ------------         ------------        ------------     ------------    ------------
                                   4,558,696              395,153             128,126    (   4,519,023)        562,952
                                ------------         ------------        ------------     ------------    ------------
 Inventories                          16,762              265,092              44,613    (       7,324)        319,143
                                ------------         ------------        ------------     ------------    ------------
 Total current assets              4,706,936              666,767             174,102    (   4,526,347)      1,021,458

Investment in associated
 companies                         1,065,871               12,433               9,867    (   1,067,081)         21,090
Property and equipment, net        1,815,666            1,151,645             610,240    (       1,863)      3,575,688
Other assets                         268,414              490,449             742,200                -       1,501,063
Excess  of  investment
 cost over book value              1,772,696               25,454                   -                -       1,798,150
                                ------------         ------------        ------------     ------------    ------------
 Total assets                   Ps.9,629,583         Ps.2,346,748        Ps.1,536,409    (Ps.5,595,291)   Ps.7,917,449
                                ============         ============        ============     ============    ============
<CAPTION>
                                         LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                            <C>                <C>                  <C>                <C>            <C>
Current liabilities:
 Notes payable                  Ps.    3,159         Ps.        -        Ps.        -     Ps.        -    Ps.    3,159
 Trade accounts payable              461,841              339,259              41,255    (       7,324)        835,031
 Related parties                   2,441,225              622,687           1,499,391    (   4,468,066)         95,237
 Taxes and other payable             145,041              234,711              58,628    (      51,958)        386,422
 Income tax                            7,742                2,486               1,204    (         862)         10,570
                                ------------         ------------        ------------     ------------    ------------
 Total current liabilities         3,059,008            1,199,143           1,600,478    (   4,528,210)      1,330,419

Long-term debt                     2,631,763                    -                   -                -       2,631,763
Trade accounts payable, long-term      4,792                    -                   -                -           4,792
Commitments and contingencies              -                2,545                 182                -           2,727
                                ------------         ------------        ------------     ------------    ------------
 Total liabilities                 5,695,563            1,201,688           1,600,660    (   4,528,210)      3,969,701
                                ------------         ------------        ------------     ------------    ------------
</TABLE>

                                     F-58
<PAGE>

<TABLE>
<CAPTION>

                                                      Combined          Combined
                                      Parent         Guarantor     Non-Guarantor
                                     Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                             ---------------   ---------------   ---------------      ------------      ------------
<S>                          <C>               <C>               <C>               <C>               <C>

Stockholders' equity:
Capital contributions              7,643,656         3,361,016           359,318     (   3,720,334)        7,643,656
Earned capital               (     3,709,636)  (     2,215,956)  (       423,569)          2,639,5     (   3,709,636)
Minority interest                          -                 -                 -            13,728            13,728
                             ---------------   ---------------   ---------------      ------------      ------------
Total stockholders' equity         3,934,020         1,145,060   (        64,251)    (   1,067,081)        3,947,748
                             ---------------   ---------------   ---------------      ------------      ------------
Total liabilities and
 stockholders' equity           Ps.9,629,583      Ps.2,346,748      Ps.1,536,409     (Ps.5,595,291)     Ps.7,917,449
                             ===============   ===============   ===============      ============      ============

Total stockholders' equity
 under Mexican GAAP             Ps.3,934,020      Ps.1,145,060   (  Ps.   64,251)   (Ps. 1,067,081)     Ps.3,947,748
Minority interest                          -                 -                 -    (       13,728)    (      13,728)
Deferred income taxes                114,196            33,239   (         1,865)   (       30,975)          114,595
Pre-operating costs                        -   (       158,817)                -                 -     (     158,817)
Provision for consolidation
 of facilities                        15,452                 -                 -                 -            15,452
                             ---------------   ---------------   ---------------      ------------      ------------
Total stockholders' equity
 under US GAAP                  Ps.4,063,668      Ps.1,019,482   (Ps.     66,116)    (Ps.1,111,784)     Ps.3,905,250
                             ===============   ===============   ===============      ============      ============
</TABLE>

          CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED
                               DECEMBER 31, 1997

<TABLE>
<CAPTION>

                                                                Combined          Combined
                                                Parent         Guarantor     Non-Guarantor
                                               Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                                        --------------   ---------------   ---------------      ------------      ------------
<S>                                    <C>               <C>               <C>                 <C>               <C>

Total revenues                          Ps.    435,314   Ps.   3,155,435   Ps.     266,119     (Ps.1,650,145)     Ps.2,206,723
Total cost of sales                             25,062         1,457,833           236,221     (     870,270)          848,846
                                        --------------   ---------------   ---------------      ------------      ------------
 Gross profit                                  410,252         1,697,602            29,898     (     779,875)        1,357,877

Operating expenses                              71,339         1,533,722           205,151     (     928,018)          882,194
Depreciation and amortization                  329,362           340,520            20,340                 -           690,222
                                        --------------   ---------------   ---------------      ------------      ------------
 Operating profit (loss)                         9,551  (        176,640) (        195,593)          148,143     (     214,539)
                                        --------------   ---------------   ---------------      ------------      ------------

Provision for equipment impairment     (       673,507) (        427,196)                -                 -    (    1,100,703)
                                        --------------   ---------------   ---------------      ------------      ------------
Integral financing result:
 Interest expense, net                          16,914            35,607           161,511            80,358           294,390
 Foreign exchange loss, net                     49,516             7,331               636                 -            57,483
 Gain from monetary position           (       115,630) (         39,962) (        133,574)    (      58,034)    (     347,200)
                                        --------------   ---------------   ---------------      ------------      ------------
                                       (        49,200)            2,976            28,573            22,324             4,673
                                        --------------   ---------------   ---------------      ------------      ------------
Equity participation in net (gain)
 loss of associated companies                  562,363               -              -          (      749,397)   (     187,034)
Provision for assets tax                         9,288            38,760               385             5,339            53,772
Minority interest                                    -                 -                 -               246               246
                                        --------------   ---------------   ---------------      ------------      ------------
Net loss for the year                  (Ps.  1,186,407) (Ps.     645,572) (Ps.     224,551)     Ps.  870,123     (Ps.1,186,407)
                                        ==============   ===============   ===============      ============      ============

</TABLE>

                                     F-59
<PAGE>

<TABLE>
<CAPTION>
                                                         Combined          Combined
                                         Parent         Guarantor     Non-Guarantor
                                        Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                                        -------      ------------     -------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>               <C>
Net loss for the year under
 Mexican GAAP                     (Ps.1,186,407)    (Ps.  645,572)    (Ps.  224,551)     Ps.  870,123     (Ps.1,186,407)
Deferred income taxes                   257,601           109,425            72,174                 -           439,200
Pre-operating costs                           -     (      76,151)                -                 -     (      76,151)
Effect of inflation on
 U.S. GAAP Adjustments                   10,534             4,475             2,951                 -            17,960
                                   ------------      ------------      ------------      ------------      ------------
Net loss for the year
 under U.S. GAAP                  (Ps.  918,272)    (Ps.  607,823)    (Ps.  149,426)     Ps.   870,123    (Ps.  805,398)
                                   ============      ============      ============      =============     ============
</TABLE>

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                         Combined          Combined
                                         Parent         Guarantor     Non-Guarantor
                                        Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                                        -------      ------------     -------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>               <C>
Operating activities:
 Net loss for the year            (Ps.  918,272)    (Ps.  607,823)    (Ps.  149,426)     Ps.  870,123     (Ps.  805,398)
Adjustments to reconcile
 net loss to cash provided by
 (used in) operating
  activities:
    Depreciation and amortization       329,362           340,520            20,340                 -           690,222
 Provision for equipment
  impairment                            673,507           427,196                 -                 -        1 ,100,703
 Equity in net loss
  (earnings) of associated
  companies                             562,363                 -                 -     (     749,397)    (     187,034)
 Increase in allowance for
   doubtful accounts                          -            20,808     (         874)           23,269            43,203
Increase in allowance for
 obsolete and slow-moving
  inventories                     (          64)    (       3,170)    (         153)           21,774            18,387
Minority interest                             -                 -                 -     (         246)    (         246)
Deferred income taxes and
 employee profit sharing          (     248,312)    (      70,663)    (      71,790)            5,337     (     385,428)
Gain on net monetary
 position and
 foreign exchange losses          (      72,096)    (     114,708)    (     139,847)    (      61,036)    (     387,687)
Changes in operating
 assets and liabilities:
Accounts receivable               (      21,703)    (     116,713)           35,398     (      26,485)    (     129,503)
Inventories                       (       3,593)    (     180,561)    (       8,566)    (       7,557)    (     200,277)
Trade accounts payable and
 related parties                  (     855,625           627,018            23,645           619,686     (     886,602)
Taxes and other payable           (      87,297)    (     155,932)           33,227     (      76,828)    (     286,830)
Income Tax                        (         288)            2,376               954                44             3,086
Other                                         -                74               127               205               406
                                   ------------      ------------      ------------      ------------      ------------
Net cash provided by (used
 in) operating activities         (     672,995)          397,029           346,408            22,848            93,290
                                   ------------      ------------      ------------      ------------      ------------
Investing activities:
Purchase of property and
 equipment, net                   (     708,775)    (       4,164)            6,748     (      97,810)    (     804,001)
Investment in associated
 companies, net cash
  acquired                        (     135,170)           18,552     (       9,867)          419,818           293,333
Purchase of other assets                334,306     (      72,864)    (     347,696)    (     616,778)    (     703,032)
                                   ------------      ------------      ------------      ------------      ------------
Net cash (used in) provided
by investing activities           (     509,639)    (      58,476)    (     350,815)    (     294,770)    (  1 ,213,700)
                                   ------------      ------------      ------------      ------------      ------------
</TABLE>

                                     F-60
<PAGE>

<TABLE>
<CAPTION>
                                                         Combined          Combined
                                         Parent         Guarantor     Non-Guarantor
                                        Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                                        -------      ------------     -------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>               <C>
Financing activities:
Proceeds from notes payable
 and long-term debt                   2,069,435     (     274,772)    (         636)        1,048,482         2,842,509
                                   ------------      ------------      ------------      ------------      ------------
Payments of notes payable
 and long-term debt               (     956,790)    (      71,662)                -     (     779,456)    (   1,807,908)
Increase of capital stock               100,423                 -                 -     (          11)          100,412
                                   ------------      ------------      ------------      ------------      ------------
Net cash provided by (used
 in) financing activities             1,213,068     (     346,434)    (         636)          269,015         1,135,013
                                   ------------      ------------      ------------      ------------      ------------

Net increase (decrease) in cash          30,434     (       7,881)    (       5,043)    (       2,907)           14,603

Cash at beginning of year               101,044            14,403             6,406             2,907           124,760
                                   ------------      ------------      ------------      ------------      ------------
Cash at the end of year            Ps.  131,478      Ps.    6,522      Ps.    1,363      Ps.        -      Ps.  139,363
                                   ============      ============      ============      ============      ============
</TABLE>

      CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER
                                    31, 1996

<TABLE>
<CAPTION>
                                                         Combined          Combined
                                         Parent         Guarantor     Non-Guarantor
                                        Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                                        -------      ------------     -------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>               <C>
Total revenues                     Ps.  402,323      Ps.3,093,407      Ps.  117,177     (Ps.1,420,561)     Ps.2,192,346
Total cost of sales                       7,010         1,384,172            86,473     (     615,761)          861,894
                                   ------------      ------------      ------------      ------------      ------------
 Gross profit                           395,313         1,709,235            30,704     (     804,800)        1,330,452

Operating expenses                       95,345         1,518,177            54,875     (     709,183)          959,214
Depreciation and amortization           317,661           460,512             1,467                 -           779,640
                                   ------------      ------------      ------------      ------------      ------------
 Operating profit (loss)          (      17,693)    (     269,454)    (      25,638)    (      95,617)    (     408,402)
                                   ------------      ------------      ------------      ------------      ------------
Integral financing result:
 Interest expense, net                  137,086            39,654           106,450            79,250           362,440
 Foreign exchange loss, net       (      77,158)    (       1,357)    (       1,583)                -     (      80,098)
 Gain from monetary position      (     195,047)    (      73,666)    (     105,199)    (      75,216)    (     449,128)
                                   ------------      ------------      ------------      ------------      ------------
                                  (     135,119)    (      35,369)    (         332)            4,034     (     166,786)
                                   ------------      ------------      ------------      ------------      ------------
Equity participation in
 net (gain) loss of associated
  companies                             378,668                 -                 -     (     380,368)    (       1,700)
Provision for assets tax                 26,973            65,596               228     (      47,409)           45,388
Minority interest                             -                 -                 -             4,099             4,099
Group reorganization reserve            180,216             7,010                 -                 -           187,226
                                   ------------      ------------      ------------      ------------      ------------
Net loss for the year             (Ps.  468,431)    (Ps.  306,691)    (Ps.   25,534)     Ps.  332,225     (Ps.  468,431)
                                   ============      ============      ============      ============      ============
Net loss for the year under
 Mexican GAAP                     (Ps.  468,431)    (Ps.  306,691)    (Ps.   25,534)     Ps.  332,225     (Ps.  468,431)
Deferred income taxes                   107,486           124,207                 -                 -           231,692
Pre-operating costs                           -     (      82,666)                -                 -     (      82,666)
Provision for consolidation
 of facilities                           15,452                 -                 -                 -            15,452
Effect of inflation on
 U.S. GAAP Adjustments            (     182,487)          319,120                 -                 -           136,633
                                   ------------      ------------      ------------      ------------      ------------
Net loss for the year
 under U.S. GAAP                  (Ps.  527,980)     Ps.   53,970     (Ps.   25,534)     Ps.  332,225     (Ps.  167,320)
                                   ============      ============      ============      ============      ============
</TABLE>

                                     F-61
<PAGE>

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                         Combined          Combined
                                         Parent         Guarantor     Non-Guarantor
                                        Company      Subsidiaries      Subsidiaries      Eliminations      Consolidated
                                        -------      ------------     -------------      ------------      ------------
<S>                                <C>               <C>               <C>               <C>               <C>
Operating activities:
 Net loss for the year            (Ps.  527,980)     Ps.   53,970     (Ps.   25,534)     Ps.  332,225     (Ps.  167,320)
Adjustments to reconcile
 net loss to cash provided by
 (used in) operating activities:
   Depreciation and amortization        317,661           460,512             1,467                 -           779,640
  Equity in net loss (earnings)
    of associated companies             378,668                 -                 -     (     380,368)    (       1,700)
  Increase in allowance for
    doubtful accounts                         -            89,343            15,812     (      13,716)           91,439
Increase in allowance for obsolete
  and slow-moving inventories               506             3,141             1,385               266             5,298
Minority interest                             -                 -                 -     (       4,099)    (       4,099)
Deferred income taxes and
 employee profit sharing          (      80,513)    (      58,611)              228     (      47,409)    (     186,305)
Gain on net monetary
 position and foreign
 exchange losses                  (      89,718)    (     394,143)    (     106,782)    (     194,068)    (     784,711)
 Group reorganization reserve           180,216             7,010                 -                 -           187,226

Changes in operating
 assets and liabilities:
Accounts receivable               (      11,690)    (      85,543)    (      35,745)           21,011     (     111,967)
Inventories                              13,473            60,714               797     (       7,778)           67,206
Trade accounts payable and
 related parties                  (     327,938)    (     146,365)          312,522            74,836     (      86,945)
Taxes and other payable           (      80,783)           22,567     (         854)          162,920           103,851
Income Tax                                6,735     (       7,727)    (       1,979)            9,498             6,527
Other                                         -               810     (         827)               98                81
                                   ------------      ------------      ------------      ------------      ------------
Net cash provided by (used
 in) operating activities         (     221,363)            5,678           160,490     (      46,584)    (     101,779)
                                   ------------      ------------      ------------      ------------      ------------
Investing activities:
Purchase of property and
 equipment, net                   (     162,610)    (      53,287)           79,621     (     136,130)    (     272,406)
Investment in associated
 companies, net cash acquired           630,852            90,616            24,161     (     709,025)           36,604
Purchase of other assets          (     524,313)          399,159     (     210,747)          744,990           409,089
                                   ------------      ------------      ------------      ------------      ------------
Net cash (used in) provided
by investing activities           (      56,071)          436,488     (     106,965)    (     100,165)          173,287
                                   ------------      ------------      ------------      ------------      ------------
Financing activities:
Proceeds from notes payable
 and long-term debt                     386,411                 -           100,005     (     308,098)          178,318
Payments of notes payable and
 long-term debt                   (     180,658)    (     479,585)    (     158,318)          463,831     (     354,730)
                                   ------------      ------------      ------------      ------------      ------------
Net cash provided by (used
 in) financing activities               205,753     (     479,585)    (      58,313)          155,733     (     176,412)
                                   ------------      ------------      ------------      ------------      ------------

Net increase (decrease) in cash   (      71,681)    (      37,419)    (       4,788)            8,984           104,904

Cash at beginning of year               172,725            51,822            11,194     (       6,077)          229,664
                                   ------------      ------------      ------------      ------------      ------------
Cash at the end of year            Ps.  101,044      Ps.   14,403      Ps.    6,406      Ps.    2,907      Ps.  124,760
                                   ============      ============      ============      ============      ============
</TABLE>

                                     F-62
<PAGE>

22. Restatement of 1997 Financial Statements
    ----------------------------------------

      As described in Note 4.b, the Company had previously recorded an
        impairment charge related to the analog communications network directly
        against stockholders` equity.

      The Company has reassessed this accounting treatment and determined that
        the impairment charge should have been recorded as operating expense.
        Consequently, the financial statements for the year ended December 31,
        1997 have been restated. The effect of the restatement is as follows:

                                                            For the year ended,
                                                             December 31, 1997
                                                -------------------------------
                                                As previously
                                                   reported        As restated
                                                -------------     -------------
              Consolidated Income statement:
                 Net loss                       (Ps.   85,706)    (Ps.1,186,407)
                 Net loss per share             (Ps.     0.08)    (Ps.     1.11)

                 - - - - - -  - - - - - - - - - - - - - - - -

                                     F-63
<PAGE>

        REPORT OF INDEPENDENT ACCOUNTS ON FINANCIAL STATEMENTS SCHEDULES

The Board of Directors of Grupo Iusacell, S.A. de C.V.:

We have audited the accompanying consolidated financial statements of Grupo
Iusacell, S.A. de C.V. and subsidiaries as December 31, 1998, and 1997, and for
each of the three years in the period ended December 31, 1998 and have issued
our report thereon dated February 22, 1999 (included elsewhere in this Annual
Report 20-F). Our audits also included the financial schedules listed in Item
19 of this Annual Report 20-F. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.

In our opinion, based on our audit, the financial statements schedules referred
to above, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.

                                      PricewaterhouseCoopers

                                             /s/PricewaterhouseCoopers
                                           Juan Manuel Ferron Solis Public
                                                     Accountant
<PAGE>

                  GRUPO IUSACELL S.A. de C.V. and Subsidiaries

                 Schedule II--Valuation and Qualifying Accounts
                        Years Ended 1996, 1997 and 1998

  (Thousands of Mexican Pesos, with Purchasing Power as of December 31, 1998)

<TABLE>
<CAPTION>
                          Balance at  Charged to Charged to            Balance at
                         Beginning of  Cost and    Other                 End of
                            Period     Expenses   Accounts  Deductions   Period
                         ------------ ---------- ---------- ---------- ----------
<S>                      <C>          <C>        <C>        <C>        <C>
1996
Allowance for obsolete
 and slow-moving
 inventories............    67,282       5,298      --        28,376     44,204
Allowance for doubtful
 accounts...............   152,780      91,349      --       117,534    126,595
Allowance for obsolete
 fixed assets...........       --       61,567      --           --      61,567
Restructure reserve.....       --      118,647      --           --     118,647
1997                                                --
Allowance for obsolete
 and slow-moving
 inventories............    44,204      18,387      --        27,781     34,810
Allowance for doubtful
 accounts...............   126,595      43,202      --        77,211     92,586
Allowance for obsolete
 fixed assets...........    61,567         --       --        61,567        --
Restructure reserve.....   118,647         --       --       118,647        --
1998                                                --
Allowance for obsolete
 and slow-moving
 inventories............    34,810         --       --        23,568     11,242
Allowance for doubtful
 accounts...............    92,586      27,523      --        52,979     67,130
</TABLE>

                                      S-2
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.


                                      GRUPO IUSACELL, S.A. DE C.V.

                                         /s/ Howard F. Zuckerman
                                      By: _____________________________________
                                         Howard F. Zuckerman
                                         Executive Vice President,
                                         Finance and Audit and
                                         Chief Financial Officer

Date: June 30, 1999