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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 20-F/A

(Amendment No. 1)



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



Commission file number: 333-11084



Alestra, S. de R.L. de C.V.

(Exact
name of Registrant as specified in its charter)



ALESTRA

(Translation of Registrants name into English)



United Mexican States

(Jurisdiction of incorporation or organization)



Ave. Lázaro Cárdenas No. 2321, 9th Floor

Col. Residencial San Agustín

Garza García N.L. 66260 México

(Address of principal executive offices)



Securities registered or to be registered pursuant to Section 12(b) of the Act: none

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

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



121/8% senior notes due 2006, series B,

125/8% senior notes due 2009, series B, and

8% senior notes due 2010

(Title of Class)



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: none



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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Explanatory Note



This Form 20-F/A has been filed to amend (1) Note 19 Differences between Mexican GAAP and U.S. GAAP to our Consolidated Financial Statements included in Item
19. Exhibits and (2) other Items relating to Note 19 Differences between Mexican GAAP and U.S. GAAP to our Consolidated Financial Statements included in our Form 20-F for the fiscal year ended December 31, 2003, filed with the Securities and
Exchange Commission on March 30, 2004.



There are no changes to our Mexican
GAAP financial statements; however, we have changed the amount we previously reported in our U.S. GAAP reconciliation of the Reversal of gain on extinguishment of debt to properly reflect the application of Statement of Financial Accounting Standard
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring (SFAS 15), for the year ended December 31, 2003 only. Due to an inadvertent error, the gain from our debt restructuring was partially recognized in
the year ended December 31, 2003 as a reduction of interest expense and we did not record the cost of the debt restructuring as an expense.



For the year ended December 31, 2003, the effect of the correction increases our reported loss under U.S. GAAP by Ps. 352.2 million and decreases our stockholders
equity reported by the same amount. We anticipate that this increased loss in 2003 under U.S. GAAP will be offset by increased net income in future periods as we recognize the gains from our restructuring over the life of our restructured debt.



This Form 20-F/A consists of a cover page, this explanatory note, Item 3, Item
8, Item 15, Item 17, Item 18, Item 19, the signature page and Exhibits 12.1, 12.2, 13.1, and 13.2.



Other than as expressly set forth above, this Form 20-F/A does not, and does not purport to, update or restate the information in any other Item of the Form 20-F or reflect any events that have occurred after the Form
20-F was filed.



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TABLE OF CONTENTS



|                                                   |  |    
|-------------------------------------------------- |  | ---
|Cautionary statement on forward-looking statements |  | 3  
|                                                   | 
|Item 3. Key Information.                           |  | 5  
|                                                   | 
|Item 8. Financial Information.                     |  | 23 
|                                                   | 
|Item 15. Controls and Procedures.                  |  | 24 
|                                                   | 
|Item 17. and 18. Financial Statements.             |  | 25 
|                                                   | 
|Item 19. Exhibits.                                 |  | 25 
|                                                   | 
|Financial Statements                               |  | F-1



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In this annual report, unless the context otherwise requires, the terms we,
us, our, our company and ourselves mean Alestra, S. de R.L. de C.V. and its sole subsidiary, Servicios Alestra, S.A. de C.V.



Cautionary statement on forward-looking statements



This annual report includes or incorporates forward-looking statements. These include statements with respect to our plans, strategies, beliefs and other statements that are not historical facts. These statements are
based on managements assumptions and beliefs in light of the information currently available to it. These assumptions and beliefs include information concerning us and the economy and telecommunications industry in Mexico.



The assumptions also involve risks and uncertainties which may cause the
actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Potential risks and uncertainties include, without limitation:



| | competition in long distance, data and internet and local services;
|- | -------------------------------------------------------------------



| | our ability to service our debt;
|- | --------------------------------



| | limitations on our access to sources of financing on competitive terms;
|- | -----------------------------------------------------------------------



| | significant economic or political developments in Mexico and the U.S.;
|- | ----------------------------------------------------------------------



| | changes in our regulatory environment, particularly developments affecting the regulation of the telecommunications industry;
|- | -----------------------------------------------------------------------------------------------------------------------------



| | our need for substantial capital;
|- | ---------------------------------



| | general economic conditions, including the economic slow-down in the U.S.;
|- | --------------------------------------------------------------------------



| | the global telecommunications downturn;
|- | ---------------------------------------



| | performance of financial markets and thus our ability to refinance our financial obligations when they come due;
|- | ----------------------------------------------------------------------------------------------------------------



| | our history of operating losses;
|- | --------------------------------



| | the risks associated with our ability to implement our growth strategy;
|- | -----------------------------------------------------------------------



| | customer turnover;
|- | ------------------



| | technological innovations;
|- | --------------------------



| | interest rate levels;
|- | ---------------------



| | currency exchange rates, including the Mexican Peso  U.S. dollar exchange rate;
|- | --------------------------------------------------------------------------------



| | changes in our costs of doing business, including but not limited to costs associated with billing and collection, marketing and sales, and personnel training and travel expenses;
and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | changes in the policies of central banks and/or foreign governments.
|- | --------------------------------------------------------------------



Other matters set forth in this annual report may also cause actual results in the future to differ materially from those described in the forward-looking
statements. We undertake no



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obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur. See Item 5. Operating and Financial Review and Prospects.



PART I



Not applicable.



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|Item 3. | Key Information.
|------- | ----------------



A. Selected Financial Data



The following tables set forth summary historical financial data for Alestra and its consolidated subsidiary. The financial information presented as of
and for the fiscal years ended December 31, 2001, 2002 and 2003 was derived from our audited consolidated financial statements contained elsewhere in this annual report. The financial information presented as of and for the fiscal years ended
December 31, 1999 and 2000 was derived from our audited financial statements that are not included in this annual report.



The consolidated financial statements have been prepared in accordance with Mexican GAAP, which differ in certain significant respects from U.S. GAAP. See
Note 19 to our audited financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us.



Mexican GAAP also requires that all financial information be presented in constant Pesos (having the same purchasing power for each period indicated
taking into account inflation) as of the date of the most recent balance sheet. Accordingly, all of the financial information included in this annual report is presented in constant Pesos as of December 31, 2003, unless otherwise noted. See Note 3b
to our audited financial statements. Although the restatement of nominal Peso amounts into constant Peso amounts lessens the distorting effect that inflation has on comparisons of financial statements over time, this restatement does not wholly
eliminate those distortions, and evaluation of period-to-period trends may be difficult. References in this annual report to amounts in nominal Pesos are to Pesos that have not been adjusted for inflation.



The following data should be read in conjunction with, and is qualified in
its entirety by reference to, the Operating and Financial Review and Prospects  and our financial statements, including the notes thereto, included elsewhere in this annual report.



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|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|---------------------------------------------------- |  | ------------------------------------------------- |  | ------ | - |  | --- |  | ------ | - |  | --- |  | ------ | - |  | --- |  | ------ | - |  | --- |  | ------ | -
|                                                     |  | As of and for the year ended December 31,         | 
|                                                     |  |                                                   |  | 1999   |   |  |     |  | 2000   |   |  |     |  | 2001   |   |  |     |  | 2002   |   |  |     |  | 2003   |  
|                                                     |  | (in millions of constant Pesos, excluding ratios) | 
|STATEMENT OF INCOME                                  |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Mexican GAAP:                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Revenues:                                            |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  | Ps.                                               |  | 2,017  |   |  | Ps. |  | 2,217  |   |  | Ps. |  | 2,136  |   |  | Ps. |  | 1,502  |   |  | Ps. |  | 1,243  |  
|International long distance                          |  |                                                   |  | 2,673  |   |  |     |  | 2,636  |   |  |     |  | 1,551  |   |  |     |  | 2,160  |   |  |     |  | 2,977  |  
|Data and internet services                           |  |                                                   |  | 252    |   |  |     |  | 383    |   |  |     |  | 612    |   |  |     |  | 817    |   |  |     |  | 1,085  |  
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 34     |   |  |     |  | 137    |   |  |     |  | 219    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 4,942  |   |  |     |  | 5,236  |   |  |     |  | 4,333  |   |  |     |  | 4,616  |   |  |     |  | 5,524  |  
|Cost of services (excluding depreciation):           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | (1,151 | ) |  |     |  | (1,616 | ) |  |     |  | (922   | ) |  |     |  | (582   | ) |  |     |  | (471   | )
|International long distance                          |  |                                                   |  | (1,438 | ) |  |     |  | (1,119 | ) |  |     |  | (757   | ) |  |     |  | (1,307 | ) |  |     |  | (2,079 | )
|Data and internet services                           |  |                                                   |  | (139   | ) |  |     |  | (134   | ) |  |     |  | (176   | ) |  |     |  | (206   | ) |  |     |  | (259   | )
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | (12    | ) |  |     |  | (23    | ) |  |     |  | (52    | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | (2,728 | ) |  |     |  | (2,869 | ) |  |     |  | (1,867 | ) |  |     |  | (2,118 | ) |  |     |  | (2,861 | )
|Gross profit: (1)                                    |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | 866    |   |  |     |  | 601    |   |  |     |  | 1,214  |   |  |     |  | 920    |   |  |     |  | 772    |  
|International long distance                          |  |                                                   |  | 1,235  |   |  |     |  | 1,517  |   |  |     |  | 794    |   |  |     |  | 853    |   |  |     |  | 898    |  
|Data and internet services                           |  |                                                   |  | 113    |   |  |     |  | 249    |   |  |     |  | 436    |   |  |     |  | 611    |   |  |     |  | 826    |  
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 22     |   |  |     |  | 114    |   |  |     |  | 167    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 2,214  |   |  |     |  | 2,367  |   |  |     |  | 2,466  |   |  |     |  | 2,498  |   |  |     |  | 2,663  |  
|Administrative, selling and other operating expenses |  |                                                   |  | (1,857 | ) |  |     |  | (1,786 | ) |  |     |  | (1,836 | ) |  |     |  | (1,689 | ) |  |     |  | (1,479 | )
|Depreciation and amortization                        |  |                                                   |  | (821   | ) |  |     |  | (893   | ) |  |     |  | (1,047 | ) |  |     |  | (970   | ) |  |     |  | (889   | )
|Operating (loss) income                              |  |                                                   |  | (464   | ) |  |     |  | (312   | ) |  |     |  | (417   | ) |  |     |  | (161   | ) |  |     |  | 295    |  
|Comprehensive financial result                       |  |                                                   |  | (29    | ) |  |     |  | (229   | ) |  |     |  | (250   | ) |  |     |  | (1,281 | ) |  |     |  | (985   | )
|Special item                                         |  |                                                   |  |       |   |  |     |  |       |   |  |     |  |       |   |  |     |  |       |   |  |     |  | 1,508  |  
|Other income (expenses)                              |  |                                                   |  | 4      |   |  |     |  | (41    | ) |  |     |  | (22    | ) |  |     |  | (18    | ) |  |     |  | 99     |  
|Asset tax                                            |  |                                                   |  |       |   |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (4     | )
|Net (loss) income                                    |  |                                                   |  | (489   | ) |  |     |  | (587   | ) |  |     |  | (694   | ) |  |     |  | (1,465 | ) |  |     |  | 913    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|U.S. GAAP:                                           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Revenues:                                            |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  | Ps.                                               |  | 2,017  |   |  | Ps. |  | 2,217  |   |  | Ps. |  | 2,136  |   |  | Ps. |  | 1,502  |   |  | Ps. |  | 1,243  |  
|International long distance                          |  |                                                   |  | 2,673  |   |  |     |  | 2,636  |   |  |     |  | 1,551  |   |  |     |  | 2,160  |   |  |     |  | 2,977  |  
|Data and internet services                           |  |                                                   |  | 252    |   |  |     |  | 383    |   |  |     |  | 612    |   |  |     |  | 817    |   |  |     |  | 1,085  |  
|Local and other services                             |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 34     |   |  |     |  | 137    |   |  |     |  | 219    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 4,942  |   |  |     |  | 5,236  |   |  |     |  | 4,333  |   |  |     |  | 4,616  |   |  |     |  | 5,524  |  
|Cost of services (excluding depreciation):           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | (1,151 | ) |  |     |  | (1,616 | ) |  |     |  | (922   | ) |  |     |  | (582   | ) |  |     |  | (471   | )
|International long distance                          |  |                                                   |  | (1,438 | ) |  |     |  | (1,119 | ) |  |     |  | (757   | ) |  |     |  | (1,307 | ) |  |     |  | (2,079 | )
|Data and internet services                           |  |                                                   |  | (139   | ) |  |     |  | (134   | ) |  |     |  | (176   | ) |  |     |  | (206   | ) |  |     |  | (259   | )
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | (12    | ) |  |     |  | (23    | ) |  |     |  | (52    | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | (2,728 | ) |  |     |  | (2,869 | ) |  |     |  | (1,867 | ) |  |     |  | (2,118 | ) |  |     |  | (2,861 | )
|Gross profit: (1)                                    |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | 866    |   |  |     |  | 601    |   |  |     |  | 1,214  |   |  |     |  | 920    |   |  |     |  | 772    |  
|International long distance                          |  |                                                   |  | 1,235  |   |  |     |  | 1,517  |   |  |     |  | 794    |   |  |     |  | 853    |   |  |     |  | 898    |  
|Data and internet services                           |  |                                                   |  | 113    |   |  |     |  | 249    |   |  |     |  | 436    |   |  |     |  | 611    |   |  |     |  | 826    |  
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 22     |   |  |     |  | 114    |   |  |     |  | 167    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 2,214  |   |  |     |  | 2,367  |   |  |     |  | 2,466  |   |  |     |  | 2,498  |   |  |     |  | 2,663  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|                                                     |  | As of and for the year ended December 31,         | 
|                                                     |  |                                                   |  | 1999   |   |  |     |  | 2000   |   |  |     |  | 2001   |   |  |     |  | 2002   |   |  |     |  | 2003   |  
|Administrative, selling and other operating expenses |  |                                                   |  | (1,857 | ) |  |     |  | (1,786 | ) |  |     |  | (1,836 | ) |  |     |  | (1,689 | ) |  |     |  | (1,479 | )
|Depreciation and amortization                        |  |                                                   |  | (689   | ) |  |     |  | (784   | ) |  |     |  | (948   | ) |  |     |  | (871   | ) |  |     |  | (764   | )
|Operating (loss) income                              |  |                                                   |  | (332   | ) |  |     |  | (203   | ) |  |     |  | (318   | ) |  |     |  | (62    | ) |  |     |  | 421    |  
|Interest expense, net and other (6)                  |  |                                                   |  | (29    | ) |  |     |  | (229   | ) |  |     |  | (250   | ) |  |     |  | (1,281 | ) |  |     |  | (878   | )
|Other income (expenses) (6)                          |  |                                                   |  | 4      |   |  |     |  | (41    | ) |  |     |  | (22    | ) |  |     |  | (18    | ) |  |     |  | (27    | )
|Asset tax                                            |  |                                                   |  |       |   |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (4     | )
|Net loss (6)                                         |  | Ps.                                               |  | (357   | ) |  | Ps. |  | (478   | ) |  | Ps. |  | (595   | ) |  | Ps. |  | (1,367 | ) |  | Ps. |  | (488   | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|BALANCE SHEET                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Mexican GAAP:                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Cash and cash equivalents                            |  | Ps.                                               |  | 1,249  |   |  | Ps. |  | 208    |   |  | Ps. |  | 265    |   |  | Ps. |  | 161    |   |  | Ps. |  | 411    |  
|Trade receivables                                    |  |                                                   |  | 763    |   |  |     |  | 812    |   |  |     |  | 533    |   |  |     |  | 516    |   |  |     |  | 471    |  
|Real estate and equipment, net                       |  |                                                   |  | 5,989  |   |  |     |  | 5,831  |   |  |     |  | 5,589  |   |  |     |  | 5,645  |   |  |     |  | 5,649  |  
|Other assets                                         |  |                                                   |  | 4,518  |   |  |     |  | 3,274  |   |  |     |  | 2,282  |   |  |     |  | 1,625  |   |  |     |  | 1,240  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total assets                                         |  |                                                   |  | 12,519 |   |  |     |  | 10,125 |   |  |     |  | 8,669  |   |  |     |  | 7,947  |   |  |     |  | 7,771  |  
|Senior notes                                         |  |                                                   |  | 6,786  |   |  |     |  | 6,278  |   |  |     |  | 5,726  |   |  |     |  | 6,112  |   |  |     |  | 4,351  |  
|Bank loans and notes payable                         |  |                                                   |  |       |   |  |     |  | 18     |   |  |     |  | 455    |   |  |     |  | 208    |   |  |     |  | 131    |  
|Total debt                                           |  |                                                   |  | 6,786  |   |  |     |  | 6,296  |   |  |     |  | 6,181  |   |  |     |  | 6,320  |   |  |     |  | 4,482  |  
|Accounts payable                                     |  |                                                   |  | 2,380  |   |  |     |  | 992    |   |  |     |  | 637    |   |  |     |  | 651    |   |  |     |  | 454    |  
|Other payables                                       |  |                                                   |  | 404    |   |  |     |  | 678    |   |  |     |  | 747    |   |  |     |  | 909    |   |  |     |  | 378    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total liabilities                                    |  |                                                   |  | 9,570  |   |  |     |  | 7,966  |   |  |     |  | 7,565  |   |  |     |  | 7,880  |   |  |     |  | 5,314  |  
|Contributed capital                                  |  |                                                   |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 1,189  |  
|Accumulated losses                                   |  |                                                   |  | (6,457 | ) |  |     |  | (7,247 | ) |  |     |  | (8,302 | ) |  |     |  | (9,339 | ) |  |     |  | 1,268  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total stockholders equity                           |  |                                                   |  | 2,949  |   |  |     |  | 2,159  |   |  |     |  | 1,104  |   |  |     |  | 67     |   |  |     |  | 2,457  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|U.S. GAAP:                                           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Cash and cash equivalents                            |  | Ps.                                               |  | 1,249  |   |  | Ps. |  | 208    |   |  | Ps. |  | 265    |   |  | Ps. |  | 161    |   |  | Ps. |  | 411    |  
|Trade receivables                                    |  |                                                   |  | 763    |   |  |     |  | 812    |   |  |     |  | 533    |   |  |     |  | 516    |   |  |     |  | 471    |  
|Real estate and equipment, net                       |  |                                                   |  | 6,950  |   |  |     |  | 6,894  |   |  |     |  | 6,886  |   |  |     |  | 6,426  |   |  |     |  | 5,945  |  
|Other assets                                         |  |                                                   |  | 2,995  |   |  |     |  | 1,960  |   |  |     |  | 1,194  |   |  |     |  | 724    |   |  |     |  | 705    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total assets                                         |  |                                                   |  | 11,957 |   |  |     |  | 9,874  |   |  |     |  | 8,878  |   |  |     |  | 7,827  |   |  |     |  | 7,532  |  
|Senior notes(2)(6)                                   |  |                                                   |  | 6,786  |   |  |     |  | 6,278  |   |  |     |  | 5,726  |   |  |     |  | 6,112  |   |  |     |  | 5,988  |  
|Bank loans and notes payable                         |  |                                                   |  |       |   |  |     |  | 18     |   |  |     |  | 455    |   |  |     |  | 208    |   |  |     |  | 131    |  
|Total debt(6)                                        |  |                                                   |  | 6,786  |   |  |     |  | 6,296  |   |  |     |  | 6,181  |   |  |     |  | 6,320  |   |  |     |  | 6,119  |  
|Accounts payable                                     |  |                                                   |  | 2,380  |   |  |     |  | 992    |   |  |     |  | 637    |   |  |     |  | 651    |   |  |     |  | 454    |  
|Other payables                                       |  |                                                   |  | 404    |   |  |     |  | 678    |   |  |     |  | 748    |   |  |     |  | 909    |   |  |     |  | 378    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total liabilities(6)                                 |  |                                                   |  | 9,570  |   |  |     |  | 7,966  |   |  |     |  | 7,565  |   |  |     |  | 7,880  |   |  |     |  | 6,951  |  
|Contributed capital                                  |  |                                                   |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 10,528 |  
|Accumulated losses(6)                                |  |                                                   |  | (7,019 | ) |  |     |  | (7,498 | ) |  |     |  | (8,093 | ) |  |     |  | (9,459 | ) |  |     |  | (9,948 | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total stockholders equity(6)                        |  |                                                   |  | 2,387  |   |  |     |  | 1,908  |   |  |     |  | 1,313  |   |  |     |  | (53    | ) |  |     |  | 581    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|CASH FLOW DATA:                                      |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Resources (used in) provided by (3)                  |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Mexican GAAP:                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Operating activities                                 |  | Ps.                                               |  | (442   | ) |  | Ps. |  | (662   | ) |  | Ps. |  | 745    |   |  | Ps. |  | (19    | ) |  | Ps. |  | 495    |  
|Investing activities                                 |  |                                                   |  | (1,855 | ) |  |     |  | 111    |   |  |     |  | (574   | ) |  |     |  | (223   | ) |  |     |  | (247   | )
|Financing activities                                 |  |                                                   |  | 3,400  |   |  |     |  | (489   | ) |  |     |  | (115   | ) |  |     |  | 138    |   |  |     |  | 1      |  
|Cash flows (used in) provided by (3)                 |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|U.S. GAAP:                                           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|                                                     | 
|                                                     |  | As of and for the year ended December 31,         | 
|                                                     |  |                                                   |  | 1999   |   |  |     |  | 2000   |   |  |     |  | 2001   |   |  |     |  | 2002   |   |  |     |  | 2003   |  
|Operating activities                                 |  | Ps.                                               |  | (84    | ) |  | Ps. |  | (1,479 | ) |  | Ps. |  | (152   | ) |  | Ps. |  | 231    |   |  | Ps. |  | 391    |  
|Investing activities                                 |  |                                                   |  | (2,689 | ) |  |     |  | 190    |   |  |     |  | (226   | ) |  |     |  | 149    |   |  |     |  | (247   | )
|Financing activities                                 |  |                                                   |  | 4,008  |   |  |     |  |       |   |  |     |  | 365    |   |  |     |  | (260   | ) |  |     |  | (198   | )
|OTHER FINANCIAL/OPERATING DATA:                      |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|(Unaudited):                                         |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Capital expenditures (Mexican GAAP)                  |  | Ps.                                               |  | 456    |   |  | Ps. |  | 661    |   |  | Ps. |  | 946    |   |  | Ps. |  | 243    |   |  | Ps. |  | 275    |  
|Minutes of traffic, domestic long distance           |  |                                                   |  | 1,401  |   |  |     |  | 1,926  |   |  |     |  | 2,351  |   |  |     |  | 1,749  |   |  |     |  | 1,671  |  
|Minutes of traffic, international long distance      |  |                                                   |  | 811    |   |  |     |  | 1,051  |   |  |     |  | 1,021  |   |  |     |  | 1,507  |   |  |     |  | 1,893  |  
|Employees(4)                                         |  |                                                   |  | 1,856  |   |  |     |  | 1,922  |   |  |     |  | 2,067  |   |  |     |  | 1,910  |   |  |     |  | 1,876  |  
|Residential lines(5)                                 |  |                                                   |  | 707    |   |  |     |  | 686    |   |  |     |  | 650    |   |  |     |  | 588    |   |  |     |  | 468    |  
|Business Lines(5)                                    |  |                                                   |  | 89     |   |  |     |  | 98     |   |  |     |  | 111    |   |  |     |  | 95     |   |  |     |  | 80     |  

---

|(1) | Excluding depreciation.
|--- | -----------------------



|(2) | Our principal payment obligation on the existing notes was $570 million. Fluctuations are the result of changes in the exchange rate.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



|(3) | Under Mexican GAAP, the sources and uses of resources are determined based upon the differences between beginning and ending financial statement balances in Mexican
Pesos of constant purchasing power. In addition, they include certain non-cash items such as monetary gains and losses and unrealized foreign currency translation gains and losses, which are eliminated in the cash flows presented under U.S. GAAP.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Actual number of employees, not in millions.
|--- | --------------------------------------------



|(5) | In thousands, not millions.
|--- | ---------------------------



|(6) | The Company has restated amounts previously reported in the 2003 US GAAP reconciliation, to properly reflect the application of Statement of Financial Accounting
Standard No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring (SFAS 15). See Note 19 for a discussion of the restatement.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exchange Rate Information



The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rate for the purchase and sale of U.S. dollars
(presented in each case as the average between such purchase and sale rates), as provided by The Federal Reserve Bank of New York expressed in nominal Pesos per U.S. dollar.



|               |  |                                    |  |       |  |            |  |          
|-------------- |  | ---------------------------------- |  | ----- |  | ---------- |  | ---------
|               |  | Noon Buying Rate(Pesos per dollar)
|Year           |  | High                               |  | Low   |  | Average(1) |  | PeriodEnd
|1994(2)        |  | 5.75                               |  | 3.11  |  | 3.48       |  | 5.00     
|1995           |  | 8.05                               |  | 5.27  |  | 6.53       |  | 7.74     
|1996           |  | 8.05                               |  | 7.33  |  | 7.64       |  | 7.90     
|1997           |  | 8.41                               |  | 7.72  |  | 7.97       |  | 8.07     
|1998           |  | 10.63                              |  | 8.04  |  | 9.25       |  | 9.90     
|1999           |  | 10.60                              |  | 9.24  |  | 9.56       |  | 9.48     
|2000           |  | 10.09                              |  | 9.18  |  | 9.46       |  | 9.62     
|2001           |  | 9.97                               |  | 8.95  |  | 9.33       |  | 9.14     
|2002           |  | 10.43                              |  | 9.00  |  | 9.66       |  | 10.43    
|2003           |  | 11.40                              |  | 10.11 |  | 10.79      |  | 11.24    
|               |  |                                    |  |      
|Month          |  |                                    |  |       |  |            |  |          
|June 2004      |  | 10.74                              |  | 10.24 |  | 10.50      |  | 10.46    
|July 2004      |  | 10.59                              |  | 10.34 |  | 10.46      |  | 10.59    
|August 2004    |  | 11.06                              |  | 10.59 |  | 10.78      |  | 11.06    
|September 2004 |  | 11.04                              |  | 10.77 |  | 10.92      |  | 11.00    
|October 2004   |  | 11.32                              |  | 10.97 |  | 11.18      |  | 11.06    
|November 2004  |  | 11.40                              |  | 10.98 |  | 11.15      |  | 11.40    



|(1) | Average of month-end rates.
|--- | ---------------------------



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|(2) | Beginning on December 22, 1994, the Mexican government eliminated the foreign exchange band and the Banco de México discontinued open market
transactions to stabilize the Peso.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December
28, 2004 the noon buying rate as provided by The Federal Reserve Bank of New York was Ps. 11.21 per 1.00 U.S. dollar.



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The Mexican economy has suffered current account balance of payment deficits and shortages in foreign
exchange reserves in the past. The Mexican government may restrict the ability of Mexican or foreign persons or entities to convert Pesos into dollars or other currencies. The Mexican government has instituted restrictive exchange control policies
in the past. The imposition of such a policy in the future may impair our ability to obtain imported goods and to meet our obligations requiring payments in foreign currency, including the senior notes.



B. Capitalization and Indebtedness



Not applicable.



C. Reasons for the Offer and Use of Proceeds



Not applicable.



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D. Risk Factors



Factors relating to Alestra



We have a history of substantial losses and expect to incur future losses



We incurred a net loss of Ps. 693.7 million during 2001, Ps. 1,464.8 million during 2002 and a profit of Ps. 912.8 million
during 2003 due to the benefits associated with our restructuring. As a result of our high debt service burden, the economic slow-down in the United States and Mexico, lower international settlement payments received from foreign telephone carriers,
lower domestic long distance rates resulting from competition from other domestic carriers and high customer attrition and churn rates, we anticipate that we could incur net losses for at least the next several quarters.



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A holder of our senior notes due 2009 commenced a legal action against us in the United States
alleging, among other things, that our senior notes due 2009 have been accelerated, and a holder of our senior notes due 2009 that is affiliated with the U.S. litigant commenced a legal action against us in Mexico requesting a Concurso Mercantil (a
Mexican Reorganization Proceeding) based in part on the alleged acceleration



In September 2003, WRH Global Securities Pooled Trust (WRH) commenced an action against us, our equity holders and the indenture trustee of the indentures governing our 12 1/8% Senior Notes due 2006
(senior notes due 2006) and our 12 5/8% Senior Notes due 2009 (senior notes due 2009, and together with the senior notes due 2006, the senior notes due 2006 and 2009) in the United States District Court for the
Southern District of New York. The complaint sought damages and to enjoin us from consummating our exchange offers and consent solicitations. WRH brought two motions for preliminary injunctions against us to prevent the consummation of the exchange
offers and consent solicitations. The Court denied the first motion upon finding that certain of WRHs claims were moot and that WRH was not entitled to the other relief it had sought. The Court denied the second motion upon finding that WRH
was not entitled to the relief it sought. The exchange offers and consent solicitations were consummated on November 17, 2003. We moved, and WRH cross-moved, for summary judgment on WRHs claim that our senior notes due 2006 and 2009 had been
ipso facto accelerated. On November 18, 2003, in an oral ruling, the court granted our motion for partial summary judgment and dismissed WRHs cross-motion. The Court further memorialized its November 18, 2003 ruling in an order dated March 22,
2004. In December 2003, WRH amended its complaint alleging, among other things, that it elected to accelerate our senior notes due 2009 pursuant to a November 6, 2003 notice. WRH also reasserted its claim that the senior notes due 2006 and 2009 had
been ipso facto accelerated. In January 2004, we, our equity holders and the indenture trustee of the indentures governing our senior notes due 2006 and 2009 moved to dismiss the amended complaint. The motion to dismiss the amended complaint is
pending. If WRH were to succeed on its ipso facto acceleration claim, then the entire principal amount of our senior notes due 2006 and 2009 of $83.0 million would become due and payable, and we may not have sufficient liquidity available to pay the
principal and interest due on those notes. In addition, an ipso facto acceleration may cause a cross default under our other indebtedness, including $304.2 million of senior notes due 2010. If WRH were to succeed on its elective acceleration claim,
then the principal amount of our senior notes due 2009 of $45.9 could become due and payable, subject to the terms of the indenture governing our senior notes due 2009.



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In October 2003, Eximius Capital Funding, an entity related to WRH, filed a request for an insolvency
declaration and a Concurso Mercantil under the Ley de Concursos Mercantiles (the LCM) against us before a court in the State of Nuevo Leon, Mexico. In its petition, Eximius alleged, among other things, that our senior notes
due 2006 and 2009 had been accelerated. Eximius arguments before the Mexican courts are substantially identical to WRHs arguments in the U.S. proceedings. On February 16, 2004, the Mexico City court appointed an expert to conduct the
analysis of our financial situation. On May 11, 2004, the 8th Federal District Judge issued the corresponding judgment, stating that we did not meet any of the statutory requirements of the LCM and therefore do not meet the financial tests to be
placed in a Concurso Mercantil. The judgment requires Eximius to pay all court fees and expenses, including legal and experts fees. Eximius appealed the judgment before the court of appeals. On September 21, 2004 the Court of Appeals
(Primer Tribunal Unitario en materias civil y administrativas del Primer Circuito) confirmed the judgment of the lower court. Eximius subsequently filed an amparo (a federal jurisdictional appeal proceeding) which was admitted on October 14,
2004. By this procedure, Eximius is appealing the resolution of the Court of Appeals, resolution is pending. If Eximius is successful and we are subject to a Concurso Mercantil, we cannot predict the duration of the proceeding or its outcome.
A reorganization would be likely to result in significant changes to our existing obligations, including our senior notes, which could include the cancellation or rescheduling of all or part of the obligations. During the pendency of any such
proceeding our ability to operate or manage our business, to retain employees, to maintain existing or create new client relationships, to continue to collect payment for our services or to obtain any type of funding or financing would likely be
materially adversely affected. Moreover, in the event of a Mexican bankruptcy/liquidation (quiebra) case, our operating concessions and our agreements for the use of the AT&T service mark, which is critical to our business, may be subject
to termination. While we cannot assure you of the outcome, we intend to vigorously contest both the U.S. litigation and the petition for a Concurso Mercantil.



As a result of a high level of competition and an oversupply of fiber optic capacity, the average price of our long
distance services has declined significantly, and may continue to decline, thereby reducing our revenues



We are heavily dependent on domestic and international long distance services, which accounted for 76.4% of our revenues for 2003, 79.3% of our revenues
for 2002 and 85.1% of our revenues for 2001. Average prices for long distance calls in Mexico declined more than 70% in real terms from December 1996 to December 2003. Since there is an oversupply of fiber optic capacity, our competitors can
increase their long distance traffic volumes without incurring any significant costs other than those related to the acquisition of customers. Should our competitors continue to attempt to increase market share by reducing the price they charge for
long distance calls, we expect to continue to experience a drop in revenues as our customers switch to our competitors, or as we are forced to reduce our rates to remain competitive. Our revenues from long distance services may continue to decline
as a result of severe competition and the oversupply of fiber optic capacity.



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Our ability to generate positive cash flow will depend on our ability to successfully compete in
the data and internet services market in Mexico



As a
result of our decreasing revenues from long distance services and the uncertainty resulting from the possible expiration in 2004 of the proportionate return system for calculating and allocating revenues relating to incoming international long
distance minutes, we have begun to refocus our resources and marketing efforts on capturing future growth in data and internet services in Mexico. The successful implementation of this strategy is critical to our ability to continue as a going
concern. This strategy poses many risks, including but not limited to:



| |  | the continuous, rapid and significant changes in technology and new products in the data and internet services market;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | the high level of capital expenditures required to provide data and internet services to business customers and to keep abreast of technological change;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the highly competitive nature of the data and internet services market;
| | - | -----------------------------------------------------------------------



| |  | the superior competitive position of some of our competitors including Teléfonos de México S.A. de C.V. or Telmex, the dominant provider of telecommunications services
in Mexico, which in 2002 introduced residential digital subscriber lines, which we refer to as DSL, service and is better positioned to offer business clients, our primary target market, bundled data and voice services at lower prices;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the limited number of high-usage customers in Mexico;
| | - | -----------------------------------------------------



| |  | the limited flexibility of the telecommunications regulatory framework to address technological change;
| | - | -------------------------------------------------------------------------------------------------------



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| |  | The recent authorization issued by the Secretaría de Comunicaciones y Transportes (the Ministry of Communication and Transportation or SCT) allowing cable TV and
terrestrial microwave TV providers to provide bi-directional data and internet broadband services. This could also impact our domestic and long distance market if the technology is used to offer VoIP services, resulting in lower rates and higher
competition; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The introduction of WiFi technology in Mexico, of which Telmex is the main provider, which could allow Telmex to capture even more of the broadband services market. Additionally,
there is no certainty of our continuing ability to use the 2.4 and 5 GHz segments of the spectrum without regulation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Competition in the data and internet services market may significantly increase if our competitors, including Telmex, Avantel S.A., and Telefónica
Data Mexico, S.A. de C.V. which provides its service under the name Terra, who may also be faced with decreasing margins from voice services, also shift their focus to data and internet services. If we are unsuccessful in implementing this strategy
and are unable to obtain the benefits of higher-margin businesses, our financial results will be materially and adversely impacted and our ability to service our obligations under the new notes and the existing notes will be severely impaired.



We have substantial indebtedness and may need additional
financing in order to service indebtedness and fund operations



As of December 31, 2003, we had consolidated indebtedness of approximately Ps. 4,481.7 million and shareholders equity, including a minority interest in our consolidated subsidiary, of Ps. 2,456.5 million.



Furthermore, the level of our indebtedness has had and may continue to have
important consequences. For example, it has:



| |  | limited cash flow available for capital expenditures, acquisitions, working capital and other general corporate purposes because a substantial portion of our cash flow from
operations must be dedicated to servicing our debt;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limited our ability to roll-out products and technologies to the extent such roll-outs require increased expenditures;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | increased our vulnerability to general adverse economic and industry conditions;
| | - | --------------------------------------------------------------------------------



| |  | limited our flexibility in planning for, or reacting to, competitive and other changes in our business and the industries in which we operate;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | placed us at a competitive disadvantage compared to our competitors that have less debt and greater operating and financing flexibility than we do;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limited, through covenants in our indebtedness, our ability to borrow additional funds; and
| | - | -------------------------------------------------------------------------------------------



| |  | precluded discussions with respect to additional equity financing.
| | - | ------------------------------------------------------------------



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Our ability to generate sufficient revenues to ensure our viability is partly dependent on factors
beyond our control



Our ability to generate sufficient
revenues depends on our ability to attract and retain customers. This in turn depends on our ability to penetrate our targeted markets and to maintain competitive prices. In addition, the development of our business is affected by factors which are
outside of our control, including:



| |  | general economic conditions in Mexico, the United States and the rest of the world;
| | - | -----------------------------------------------------------------------------------



| |  | international long distance settlement rates;
| | - | ---------------------------------------------



| |  | the development and effects of Mexicos telecommunications regulatory environment;
| | - | ----------------------------------------------------------------------------------



| |  | anti-competitive practices by Telmex;
| | - | -------------------------------------



| |  | the growth of the telecommunications market in Mexico;
| | - | ------------------------------------------------------



| |  | the availability, quality and cost offered to customers of competing services; and
| | - | ----------------------------------------------------------------------------------



| |  | churn rates and customer attrition.
| | - | -----------------------------------



Our business is very capital-intensive and as a result of our financial condition we have been forced to curtail our capital expenditures
significantly



Our business is capital-intensive and
requires substantial ongoing expenditures for, among other things, the construction and maintenance of and improvements to our telecommunications network and the roll-out of new services and technologies. Due to our financial condition, in the past
year we have had to reduce our capital expenditures and postpone the roll-out of new services. Our failure to make necessary capital expenditures could impair our ability to accommodate increases in traffic volumes or service our existing customers
as well as to implement our data services strategy, which requires more capital expenditures than we can afford to make at this time.



-14-



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Technological advances may require us to make significant expenditures to maintain and improve the
competitiveness of our service offerings



The
telecommunications industry is subject to continuous, rapid and significant changes in technology and introductions of new products and services. These include evolving industry standards, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new products, enhancements and changes in end-user needs and preferences, and continuing developments of alternative technologies in mobile and fixed-line telephony, high-speed data communications,
satellite direct services and internet services. We expect that new services and technologies applicable to our market will continue to emerge and cannot predict the effect of technological changes on our business. For example, we believe that the
internet will represent an increasingly important medium for voice communication and may displace traditional long distance services, which represent an important part of our business. It may not be practical or cost-effective for us to replace or
upgrade our installed technologies in response to competitors actions. Although we have installed what we consider technologically advanced fiber-optic long distance transmission systems, our competitors may implement superior new
technologies, allowing them to provide lower priced or higher quality services than we do. Any such new service offerings may:



| |  | adversely affect our competitive position;
| | - | ------------------------------------------



| |  | render certain of our current businesses obsolete; or
| | - | -----------------------------------------------------



| |  | require significant capital expenditures for which we may be unable to obtain additional financing.
| | - | ---------------------------------------------------------------------------------------------------



Telmex dominates the telecommunications market in Mexico and we depend on Telmex for interconnection



Telmex exerts significant influence on all aspects of
telecommunications markets in Mexico, including interconnection, which we depend on to service most of our customers. Telmex is well capitalized and has substantially greater financial, technical and marketing resources, larger customer bases and
more established relationships in the telecommunications industry than we do. With these advantages, and as the dominant provider of telecommunications services in Mexico, Telmex has a significant competitive advantage over us. Furthermore, although
not allowed by its concessions and the Ley Federal de Telecomunicaciones enacted in 1995 (the Federal Telecommunications Law), Telmex may be able to subsidize its long distance and data and internet services with revenues obtained from its local
services. If Telmex were to engage in price squeezing or predatory pricing, we would be unable to competitively price our services and could experience significant loss in market share and revenues.



Because we use Telmexs networks to interconnect with the vast majority
of our own customers, we are therefore dependent upon Telmex to meet certain telecommunications needs of our customers and to maintain our service standards. In addition, because Telmex is the dominant provider of local services, almost all of our
customers also maintain an ongoing relationship with Telmex. We may not be able to obtain the services we require from Telmex at rates, and on terms and conditions, that permit us to offer services at rates that are both profitable and competitive,
or even at the same quality or price that Telmex or its subsidiary enterprises offer themselves. We have experienced difficulties in obtaining high quality, reliable and reasonably priced services from Telmex.



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We could be affected by the elimination of by-pass traffic



Pursuant to the Comisión Federal de Telecomunicaciones (the
Federal Telecommunications Commission, or Cofetel), regulations, the only legal way to transport international long distance minutes into Mexico is via the international settlement rate system. Because international settlement rates to
terminate traffic in Mexico are generally higher than rates for terminating domestic Mexican long distance traffic, a portion of the long distance market between Mexico and the U.S. is served by entities that by-pass the international
settlement rate system, a practice deemed illegal by Cofetel. These entities transport international switched telephone traffic into Mexico, for example, over dedicated unswitched circuits and terminate those calls as domestic calls, thus avoiding
the payment of settlement charges.



We comply with the
telecommunications laws relating to long distance services but we do not confirm whether any of our high-volume customers are engaging in by-pass activity. However, a material portion of all of Mexicos domestic long distance traffic may be
derived from customers engaging in by-pass activity. Cofetel has announced its intention to actively pursue persons engaging in by-pass activity. If by-pass traffic were to be eliminated, our revenues from domestic long distance traffic could be
negatively affected.



We experience a high proportion of
unpaid bills, which lowers our cash flow



We
experience difficulties collecting accounts receivable from our subscribers. Some of our customers switch to other carriers without paying their bills to us, and since we do not provide local service to most of our residential customers, we are
unable to disconnect customers local service if they fail to pay for their long distance service. The inability to collect unpaid bills reduces our cash flow. During 2001, we wrote off approximately Ps. 193.4 million in past-due trade
receivables of which Ps. 161.9 million related to residential customers and Ps. 31.5 million related to business customers. In 2002, we did not write off any past-due trade receivables. In 2003, we wrote off approximately Ps. 298.9 million in
past-due trade receivables of which Ps. 84.7 million related to residential customers and Ps. 214.2 million related to business customers. At December 31, 2001 the allowance for doubtful accounts was Ps. 350.7 million, against outstanding
receivables of Ps. 784.0 million. At December 31, 2002, our allowance for doubtful accounts was Ps. 501.3 million against outstanding receivables of Ps. 1,016.9 million. At December 31, 2003, our allowance for doubtful accounts was Ps. 238.3 million
against outstanding receivables of Ps. 709.0 million. If the proportion of our customers who fail to pay their bills increases or if we continue to experience a high proportion of unpaid bills, our cash flows will be adversely affected.



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Our results are negatively impacted by high levels of residential customer attrition



We have experienced a high rate of residential
customer attrition, or churn, which increases our cost of operations and reduces our revenue. Our average churn rate for 2002 was 7.1%, which reflected a rate of 7.6% for our residential customers and 4.4% for our business customers. Our
average churn rate for 2003 was an annualized 2.5% which reflected an annualized rate of 2.4% for our residential customers and 3.4% for our business customers. Our customer attrition may be high in the future because:



| |  | we do not require our customers to sign long-term contracts; and
| | - | ----------------------------------------------------------------



| |  | we choose to disconnect customers if they fail to pay their bills.
| | - | ------------------------------------------------------------------



A high rate of customer attrition could adversely affect our competitive position, results from operations and our costs of obtaining new customers.



Our telecommunications network infrastructure is the
source of nearly all of our revenues



Our network is
the source of nearly all of our revenues. If our network suffered technical problems or damage, our ability to provide telecommunications services to our customers would be impaired, which could cause us to lose customers and thus adversely impact
our revenues. While to date we have not experienced any serious technical problems or damage as a result of our liquidity crisis, we have lowered our capital expenditures for future upgrades, which could adversely impact the quality and reliability
of our network.



Our equity holders, AT&T and Onexa,
may have differing interests, and we may not be able to undertake important business actions if they do not agree



AT&T Telecom Mexico Inc. is the direct holder of AT&T Corp.s equity interest in us. AT&T Mexico and Onexa currently are able to elect
all of our directors and are able to exercise control over our business, policies and affairs. Under our bylaws, actions approved by a majority of the board of directors must also be approved by at least one director elected by AT&T Mexico and
one director elected by Onexa S.A. de C.V. In addition, under the joint venture agreement dated October 17, 1996, as amended, among AT&T, AT&T Mexico, Alfa, S.A. de C.V., BBVA Bancomer S.A., Onexa and ourselves, a number of actions we take
are subject to approval by each of AT&T Mexico and Onexa.



The joint venture agreement also provides that if Alestra desires to offer new telecommunications services, our equity holders must agree whether and how we will provide the new telecommunications services. AT&T and Onexa are currently
analyzing the feasibility of providing, through Alestra, global seamless data services to business customers in Mexico in alignment with AT&Ts strategy. Our equity holders may not agree that it is feasible for us to provide this service.



The failure of AT&T and Onexa to reach an agreement on how
we operate our business or otherwise may delay or inhibit us from exercising our business strategy.



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We rely on the use of the AT&T service mark, and permission to use the service mark may be
withdrawn



We currently use the AT&T registered
service mark to market all of our services. If we were unable to use the AT&T service mark, our ability both to attract new customers and to retain existing customers would likely be materially impaired. Our use of this service mark is governed
by a license agreement between us and AT&T which is terminable:



| |  | on the earlier of
| | - | -----------------



| |  | the date on which AT&T Telecom ceases to be an equity holder of the company or
| | - | ------------------------------------------------------------------------------



| |  | on October 16, 2004; provided, however, that the license may be renewed for five (5) year terms upon mutual consent of the parties;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | if AT&T ceases to directly or indirectly own at least 20% of us;
| | - | ----------------------------------------------------------------



| |  | if AT&T ceases to own at least 50% of AT&T Mexico;
| | - | --------------------------------------------------



| |  | if we fail to pay the license fees under the service mark license agreement in some cases; or
| | - | ---------------------------------------------------------------------------------------------



| |  | if our actions would adversely affect the reputation of the AT&T service mark.
| | - | ------------------------------------------------------------------------------



On October 14, 2004 and on December 20, 2004, we temporarily extended this agreement until December 31, 2004 and February
28, 2005 respectively to allow us to continue to negotiate in good faith with AT&T the terms and conditions of a five year extension of the license agreement.



If this agreement were terminated or not renewed upon expiration, or if we were to fail to meet the applicable operating or
service quality standards, we might not be able to use the AT&T service mark. If we were unable to use the AT&T service mark, our operations would be materially adversely affected. Also, if the name AT&T were to suffer diminished
marketing appeal, our ability both to attract new customers and to retain existing customers could be materially impaired. We may not be able to continue to use the AT&T service mark in the future and the AT&T service mark may suffer
diminished marketing appeal.



You probably will not be
able to effect service of process in the United States upon our officers or our Mexican directors



We are a Mexican company and most of our directors, all of our officers, and nearly all of our assets are located in Mexico. As a result, you probably
will not be able to effect service of process on our Mexican directors or our officers in the United States, and you will probably need to effect service of process on them in Mexico. Additionally, it may be difficult to enforce any actions against
us, our Mexican directors or officers outside of Mexico.



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Factors relating to the Mexican regulatory environment



We operate in a highly regulated industry which is currently
experiencing broad-based regulatory changes



Throughout our existence, the operation of telecommunications systems in Mexico has been subject to laws and regulations administered by the SCT and Cofetel. However, certain important aspects of the Federal Telecommunications Law could be
revised by the Mexican Congress in 2004. Matters relating to interconnection services, dominant carrier regulation, number portability, local loop unbundling, international long distance service, the universal service fund, customer rights,
regulator powers and the allocation of the spectrum may be the subject of such revisions, however, we cannot predict how the SCT or Cofetel will interpret and implement a new federal telecommunications law. We cannot at this time predict whether a
new federal telecommunications law will be enacted or, if passed, its effects on our business. Such uncertainty could damage our business and subject us to additional legal liability or obligations.



In addition, SCT has proposed to amend both SCT and Cofetel operative rules,
and we can not assure you how those new rules could affect our business.



Further, we are subject to and comply with Mexican tax law (including tax regulations, tax rules, administrative decisions, interpretations by the Mexican tax authorities of Mexican tax law and court rulings). Changes
in Mexican tax law, the interpretation of Mexican law by the courts or the challenge by the Mexican authorities of our interpretation of Mexican law may negatively affect the price of our services and our business results.



Our results of operations and ability to meet our dollar-denominated
obligations are affected by reductions of international settlement rates



Revenues from international long distance service reflect amounts earned from our customers and our proportion of settlement payments received from foreign carriers, as well as other special services. A portion of
settlement revenues from foreign carriers is paid in U.S. dollars and accounted for 30.1% of our total revenues in 2000, 17.5% in 2001, 33.1% in 2002, and 46.0% in 2003. Settlement agreements govern our rates of payment to the foreign carriers for
the use of their facilities in interconnecting international calls billed in Mexico and by the foreign carriers to us for the use of our facilities in interconnecting international calls billed abroad. Mexican rules for international long distance
state that rates of payment under such agreements are negotiated with each foreign carrier by the dominant carrier in Mexico, currently Telmex. Since inbound international traffic has historically been more than twice the volume of international
outbound traffic, net settlement amounts payable to us with respect to calls terminated by us have exceeded amounts payable by us to foreign carriers with respect to outbound calls terminated by foreign carriers. Additionally, under current
agreements the per-minute amounts we receive with respect to inbound calls terminated by us are approximately 60% higher than the per-minute amounts payable by us to foreign carriers with respect to outbound calls, further increasing the net
payments received by us. This may not occur in the future and any such change could adversely affect our results.



U.S. telecommunications providers and regulators are also seeking to reduce substantially the international settlement rates applicable to U.S.-originated
international calls. Approximately 98% of our traffic exchanged with foreign carriers in the year 2003 was associated with traffic with the United States. Therefore, such reduction would adversely affect our results.



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Any such reduction in international settlement rates attributable to U.S.-originated international calls
would result in a decrease in dollar-denominated settlement amounts payable to us by U.S. carriers. If our dollar-denominated revenues decrease and no compensation in volume is achieved, we may be unable to meet our dollar-denominated debt and other
obligations without incurring substantial exchange risk. We are not currently engaged in any hedging activity to minimize the risk of changes in the value of the Peso related to the dollar.



Restrictions on foreign ownership may impair our ability to raise
equity capital and limit our growth



Under the Federal
Telecommunications Law and the Ley de Inversión Extranjera (Foreign Investment Law ), no more than 49% of the voting equity of a Mexican corporation holding a concession to provide fixed-line telecommunications services may be held by
non-Mexican nationals. AT&T Mexico, which owns 49% of our equity, is deemed a non-Mexican national for purposes of the Foreign Investment Law. Absent revisions to the Foreign Investment Law, future sales of equity securities to non-Mexicans
would involve securities with limited voting rights or would require a proportional purchase of voting stock by Mexicans. These restrictions limit our ability to raise equity capital which could be used to implement our new business plan and grow
our business. Although several proposals have been made to eliminate these restrictions, there is no indication that such regulatory revisions will occur in the near future.



Our public telecommunications network concession and wireless concessions are subject to revocation in several
circumstances



The Mexican Federal Telecommunications
Law provides that each of our concessions will terminate upon certain circumstances including:



| | our resignation;
|- | ----------------



| | its revocation; or
|- | ------------------



| | governmental taking.
|- | --------------------



If we are unable to operate our network, we will not be able to generate any revenues.



We are subject to different corporate disclosure and accounting standards than U.S. companies



Investors may not be able to obtain as much publicly-available information
about foreign issuers of securities traded in the United States as is regularly published by or about U.S. issuers of publicly traded securities. In addition, we prepare our financial statements in accordance with Mexican GAAP, which differs from
U.S. GAAP in a number of respects. Therefore, potential investors may not be able to as easily ascertain the risks of our company as they would if we were a U.S. company. See Note 19 to our audited financial statements for a description of the
principal differences between Mexican GAAP and U.S. GAAP applicable to us.



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Factors relating to Mexico



Downturns in the Mexican economy adversely affect us



The majority of our customers are Mexican companies or individuals and all
of our operations and the vast majority of our assets are located in Mexico. For these reasons, our operations, results and financial condition are dependent upon the level of economic activity in Mexico. Telecommunications traffic in Mexico and our
revenues are highly affected by the level of economic activity in Mexico and the general purchasing power of individuals and companies. The Mexican economy grew at a rate of 3.8% in 1999 and 6.9% in 2000, and our revenues from domestic long distance
traffic grew at a rate of 25.6% in 1999 and 9.9% in 2000. The Mexican economy contracted at a rate of 0.3% in 2001 and grew only at an annual rate of 0.9% in 2002, and our revenues from domestic long distance traffic decreased at a rate of 3.6% in
2001 and 29.7% in 2002. The Mexican economy grew at an annualized rate of 1.3% in 2003 and our revenues from domestic long distance traffic decreased at an annualized rate of 17.2% during that period.



Currency devaluations may impair our ability to service our debt



Changes in the value of the Peso relative to the
dollar have adversely affected and may continue to adversely affect our financial condition and results of operations. For example, net loss in 2002 as compared to 2001 increased Ps. 771.0 million as a result of the 12.8% currency devaluation of the
Peso against the dollar that occurred in 2002 and generated an exchange loss of Ps. 797.7 million. Similarly, the 9.0% currency devaluation of the Peso against the dollar that occurred in 2003 generated an exchange loss of Ps. 593.7 million. All of
our indebtedness is denominated in dollars, while a majority of our revenues and operating expenses are denominated in Pesos. We also borrow on a short-term basis in dollars under our bank lines of credit and a portion of our trade payables is
denominated in dollars.



The value of the Peso sharply declined
in the 1990s compared to the dollar. The devaluation of the Peso in the 1990s increased the Peso equivalent of Mexican companies obligations under dollar-denominated borrowings and adversely affected companies operations and financial
position. Continued devaluation of the Peso relative to the U.S. dollar would adversely affect our ability to meet our U.S. dollar-denominated trade and financial obligations, including the existing notes and the new notes, and to make additional
capital expenditures.



In addition, any further devaluation of
the Peso may negatively affect the value of Mexican securities, such as ours. We do not have in place hedging arrangements with respect to devaluation risk because we do not believe them to be cost effective for us. We may in the future consider
entering into such arrangements considering the then-relevant risks, costs and other factors.



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Exchange controls may impair our ability to obtain dollars to make dollar-denominated payments



The Mexican economy has suffered current account
balance of payment deficits and shortages in foreign exchange reserves in the past. The Mexican government may restrict the ability of Mexican or foreign persons or entities to convert Pesos into dollars or other currencies. The Mexican government
has instituted restrictive exchange control policies in the past. The imposition of such a policy in the future may impair our ability to obtain imported goods and to meet our obligations requiring payments in foreign currency, including the
existing notes and the new notes.



An increase in
inflation may increase our operating costs but not our revenues



High levels of inflation would cause our operating costs to increase while the rates we charge for our services, due to the competitive environment and regulatory structure, might not. Most of our operating expenses
are based on short-term contracts which may be subject to inflationary pressures, while the rates we charge our business customers for long distance and local service are either fixed by long-term contract, limited by the Mexican Telecommunications
Law, or effectively limited by the competitive nature of the market in which Telmex, with dominant market share, is able to set an effective cap on the prices at which we can sell our services. During most of the 1980s and during 1995, Mexico
experienced periods of very high levels of inflation. Inflation has led to high interest rates, devaluations of the Peso and, during the 1980s, substantial government controls over exchange rates and prices.



Political developments in Mexico may adversely affect us



The Mexican government has exercised, and continues
to exercise, significant influence over the Mexican economy and the Mexican telecommunications market. Mexican governmental action concerning the economy, state-owned enterprises and the Mexican telecommunications industry could have a significant
impact on us.



Although the government of Mexico has pursued
policies of economic liberalization and deregulation in the Mexican economy and in the Mexican telecommunications industry in the past decade, a significant change in those policies may hurt business and economic conditions in Mexico in general and
our business in particular. If there were instability or a market failure in the Mexican telecommunications industry, the Mexican government could reverse its economic policies of liberalization in the Mexican telecommunications market. Since we are
a competitive provider of telecommunications services in Mexico, we believe that any reversal of the Mexican liberalization policies in the Mexican telecommunications market would restrict our ability to expand our market share in voice
communications services or the largely unregulated data and internet services market. This reversal would favor our principal competitor, Telmex. We do not have and do not intend to obtain political risk insurance.



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|Item 8. | Financial Information.
|------- | ----------------------



A. Consolidated statements and other financial information



See Item 19 Exhibits for the list of all financial statements filed as a part of this annual report.



B. Significant changes



Not Applicable



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|Item 15. | Controls and Procedures
|-------- | -----------------------



Alestras management is responsible for establishing and maintaining adequate internal control over financial reporting for Alestra and its
consolidated subsidiary. In order to do so, Alestra will implement a process to evaluate the effectiveness of its internal control over financial reporting, as required by paragraph (c) of 17 CFR 240.13a-15 and 240.15d-15. Based upon that evaluation
and its conclusions, the Chief Executive Officer and Chief Financial Officer will have to certify the effectiveness Alestras controls and procedures alerting them of material information required to be included in its Exchange Act filings.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error, and even effective disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives and management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures.



As of December 31, 2003, an evaluation was carried out under the supervision and with the participation of Alestras management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Alestras disclosure controls and procedures. As a result of a subsequent evaluation, an error was found with respect to the U.S. GAAP
reconciliation for 2003 that required that the U.S. GAAP reconciliation for 2003 be restated. As described in more detail in Note 19 to the financial statements, the restatement related to the gain on extinguishment of debt. Such error was not
detected as a result of a reportable condition (as defined under standards established by the American Institute of Certified Public Accountants) with respect to the procedures for preparation of the U.S. GAAP reconciliation. Other than
as described above, Alestras Chief Executive Officer and its Chief Financial Officer have concluded that Alestras disclosure controls and procedures were effective in providing reasonable assurance that information required to be
disclosed in Alestras reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in applicable legislation and that such information is accumulated and communicated to Alestras
management (including its Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosure. There were otherwise no significant changes in Alestras internal controls or in other
factors that could significantly affect these controls subsequent to the date Alestras Chief Executive Officer and its Chief Financial Officer completed their evaluation.



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PART III



|Item 17. and 18. | Financial Statements.
|---------------- | ---------------------



Reference is made to Item 19 Exhibits for the financial statements filed as a part of this annual report.



|Item 19. | Exhibits.
|-------- | ---------



| | (a) | List of financial statements.
| | --- | -----------------------------



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ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARY

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Content                                                                                                         |  | Page
|                                                                                                                | 
|Independent Auditors Report                                                                                    |  | F-2 
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                                    |  | F-3 
|                                                                                                                | 
|Consolidated Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003                      |  | F-4 
|                                                                                                                | 
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2001, 2002 and 2003 |  | F-5 
|                                                                                                                | 
|Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 2001, 2002 and 2003   |  | F-6 
|                                                                                                                | 
|Notes to Audited Consolidated Financial Statements                                                              |  | F-7 



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders of

Alestra, S. de R. L. de C. V.:



We have audited
the accompanying consolidated balance sheets of Alestra, S. de R. L. de C. V. and Subsidiary (the Company), as of December 31, 2002 and 2003, and the related consolidated statements of operations, changes in stockholders equity and
changes in financial position for the years ended December 31, 2001, 2002 and 2003. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Mexico and are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America) and generally accepted auditing
standards in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 Alestra, S. de R. L. de C. V. and its subsidiary as of December 31, 2002 and 2003, and the consolidated
results of their operations, changes in stockholders equity and changes in their financial position for the years ended December 31, 2001, 2002 and 2003, in conformity with accounting principles generally accepted in Mexico.



In November 2003, the Company restructured its senior notes. The Companys strategy is
described in Note 2.



Accounting principles generally accepted in Mexico vary
in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 19, as restated, to the consolidated financial
statements.



PricewaterhouseCoopers



Miguel Angel Puente Buentello

Public Accountant

Monterrey, Nuevo León, México

March 1, 2004, except for Note 19, which is as of December 14, 2004



F-2



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##### Table of Contents

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2002 AND 2003



(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2003)



|                                                       |  |      |            |   |      |    |          
|------------------------------------------------------ |  | ---- | ---------- | - | ---- | -- | ---------
|                                                       |  | 2002 |            |   | 2003
|Assets                                                 |  |      |            |   |      |    |          
|                                                       |  |     
|CURRENT ASSETS:                                        |  |      |            |   |      |    |          
|Cash and cash equivalents                              |  | Ps   | 161,433    |   |      | Ps | 410,835  
|Trade receivables, net (Note 4)                        |  |      | 515,613    |   |      |    | 470,706  
|Due from affiliates and other related parties (Note 5) |  |      | 188,610    |   |      |    | 90,897   
|Recoverable taxes                                      |  |      | 673        |   |      |    | 6,791    
|Other receivables                                      |  |      | 40,868     |   |      |    | 43,100   
|Prepaid expenses and other assets (Note 6)             |  |      | 21,128     |   |      |    | 16,829   
|                                                       |  |      |            |   |      |    |          
|Total current assets                                   |  |      | 928,325    |   |      |    | 1,039,158
|REAL ESTATE AND EQUIPMENT, NET (Note 7)                |  |      | 5,644,920  |   |      |    | 5,649,136
|DEFERRED CHARGES AND OTHER ASSETS, NET (Note 8)        |  |      | 1,374,443  |   |      |    | 1,082,256
|                                                       |  |      |            |   |      |    |          
|Total assets                                           |  |      | 7,947,688  |   |      |    | 7,770,550
|                                                       |  |      |            |   |      |    |          
|Liabilities and stockholders equity                   |  |      |            |   |      |    |          
|                                                       |  |     
|CURRENT LIABILITIES:                                   |  |      |            |   |      |    |          
|Accounts payable to Telmex                             |  |      | 437,602    |   |      |    | 225,320  
|Other accounts payable                                 |  |      | 119,784    |   |      |    | 93,690   
|Bank loans and notes payable (Note 9)                  |  |      | 96,968     |   |      |    | 129,165  
|Due to affiliates and other related parties (Note 5)   |  |      | 44,845     |   |      |    | 44,532   
|Accrued interest, expenses and other payables          |  |      | 866,241    |   |      |    | 323,886  
|                                                       |  |      |            |   |      |    |          
|Total current liabilities                              |  |      | 1,565,440  |   |      |    | 816,593  
|                                                       |  |     
|LONG-TERM LIABILITIES:                                 |  |      |            |   |      |    |          
|Senior notes (Notes 2 and 10)                          |  |      | 6,112,074  |   |      |    | 4,350,691
|Bank loans and notes payable (Note 9)                  |  |      | 110,825    |   |      |    | 1,854    
|Due to affiliates and other related parties (Note 5)   |  |      | 48,860     |   |      |    | 90,879   
|Other long-term liabilities                            |  |      | 44,176     |   |      |    | 54,035   
|                                                       |  |      |            |   |      |    |          
|Total liabilities                                      |  |      | 7,881,375  |   |      |    | 5,314,052
|                                                       |  |      |            |   |      |    |          
|                                                       |  |     
|STOCKHOLDERS EQUITY (Note 11):                        |  |      |            |   |      |    |          
|Majority interest:                                     |  |      |            |   |      |    |          
|Nominal capital stock                                  |  |      | 5,371,386  |   |      |    | 1,181,346
|Restatement of capital stock                           |  |      | 4,034,704  |   |      |    | 7,341    
|                                                       |  |      |            |   |      |    |          
|Contributed capital                                    |  |      | 9,406,090  |   |      |    | 1,188,687
|Accumulated (deficit) income                           |  |      | (9,339,779 | ) |      |    | 1,267,809
|                                                       |  |      |            |   |      |    |          
|Total majority interest                                |  |      | 66,311     |   |      |    | 2,456,496
|Total minority interest                                |  |      | 2          |   |      |    | 2        
|                                                       |  |      |            |   |      |    |          
|Total stockholders equity                             |  |      | 66,313     |   |      |    | 2,456,498
|CONTINGENCIES AND COMMITMENTS (Note 12)                |  |      |           |   |      |    |         
|                                                       |  |      |            |   |      |    |          
|Total liabilities and stockholders equity             |  | Ps   | 7,947,688  |   |      | Ps | 7,770,550
|                                                       |  |      |            |   |      |    |          



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



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##### Table of Contents

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2003)



|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ------------ | ---- |  | -- | ---------- | -
|                                                     |  | 2001 |            |   | 2002 |    |              | 2003 | 
|REVENUES (Note 13)                                   |  |      |            |   |      |    |              |      |  |    |            |  
|Long distance services:                              |  |      |            |   |      |    |              |      |  |    |            |  
|Domestic                                             |  | Ps   | 2,136,274  |   |      | Ps | 1,502,046    |      |  | Ps | 1,243,097  |  
|International                                        |  |      | 1,551,154  |   |      |    | 2,159,463    |      |  |    | 2,977,039  |  
|Other revenues:                                      |  |      |            |   |      |    |              |      |  |    |            |  
|Data and internet                                    |  |      | 612,165    |   |      |    | 816,905      |      |  |    | 1,084,662  |  
|Local service                                        |  |      | 33,575     |   |      |    | 137,397      |      |  |    | 219,151    |  
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|                                                     |  |      | 4,333,168  |   |      |    | 4,615,811    |      |  |    | 5,523,949  |  
|OPERATING EXPENSES:                                  |  |      |            |   |      |    |              |      |  |    |            |  
|Cost of services (excluding depreciation - Note 13)  |  |      | (1,867,117 | ) |      |    | (2,118,418   | )    |  |    | (2,861,137 | )
|Administration, selling and other operating expenses |  |      | (1,836,318 | ) |      |    | (1,689,078   | )    |  |    | (1,478,189 | )
|Depreciation and amortization                        |  |      | (1,046,729 | ) |      |    | (969,439     | )    |  |    | (889,467   | )
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|Operating (loss) gain                                |  |      | (416,996   | ) |      |    | (161,123     | )    |  |    | 295,156    |  
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|COMPREHENSIVE FINANCIAL RESULT:                      |  |      |            |   |      |    |              |      |  |    |            |  
|Interest expense (Note 16)                           |  |      | (832,497   | ) |      |    | (857,437     | )    |  |    | (662,514   | )
|Interest income                                      |  |      | 62,789     |   |      |    | 17,085       |      |  |    | 6,797      |  
|Exchange gain (loss), net                            |  |      | 272,744    |   |      |    | (797,669     | )    |  |    | (593,729   | )
|Gain from monetary position, net                     |  |      | 246,806    |   |      |    | 356,745      |      |  |    | 263,849    |  
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|                                                     |  |      | (250,158   | ) |      |    | (1,281,276   | )    |  |    | (985,597   | )
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|SPECIAL ITEM (Note 16)                               |  |      |           |   |      |    |             |      |  |    | 1,507,697  |  
|OTHER (EXPENSES) INCOME, NET (Note 5-i)              |  |      | (21,938    | ) |      |    | (17,739      | )    |  |    | 99,429     |  
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|(Loss) gain before provision for asset tax           |  |      | (689,092   | ) |      |    | (1,460,138   | )    |  |    | 916,685    |  
|Asset tax (Note 15)                                  |  |      | (4,654     | ) |      |    | (4,648       | )    |  |    | (3,851     | )
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|Net (loss) income (Note 11)                          |  |      | (Ps693,746 | ) |      |    | (Ps1,464,786 | )    |  | Ps | 912,834    |  
|                                                     |  |      |            |   |      |    |              |      |  |    |            |  



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



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##### Table of Contents

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2003)



|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --- | ------------------------------- | ---------------------------- | ---------- | ----------------------------- | ---------------------------- | -- | ---------- | ----------------- |  | -- | ----------------- | - | -------------------------- | -- | ------------ | - |  | -- | ---------- | - |  | -- | - |  | -- | ---------- | -
|                                                                                                                              |  | Capital stock |     |                                 | Restatement of capital stock |            |                               | Accumulated (deficit) income |    |            | Majority interest |  |    | Minority interest |   | Total stockholders equity |   
|                                                                                                                              |  |               |     | Gain (deficit) from restatement |                              |            | Net (loss) income of the year |                              |    |            |                  
|                                                                                                                              |  | Fixed         |     | Variable                        |                              |            |                               |                              |    |            |                  
|Balance at December 31, 2000                                                                                                  |  | Ps            | 300 |                                 | Ps                           | 5,371,086  |                               |                              | Ps | 4,034,704  |                   |  |    | (Ps1,254,520      | ) |                            |    | (Ps5,992,846 | ) |  | Ps | 2,158,724  |   |  | Ps | 2 |  | Ps | 2,158,726  |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Changes in 2001:                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Net loss                                                                                                                      |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    |                  |   |                            |    | (693,746     | ) |  |    | (693,746   | ) |  |    |  |  |    | (693,746   | )
|Deficit from restatement                                                                                                      |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    | (361,199          | ) |                            |    |             |   |  |    | (361,199   | ) |  |    |  |  |    | (361,199   | )
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Comprehensive loss                                                                                                            |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    | (361,199          | ) |                            |    | (693,743     | ) |  |    | (724,945   | ) |  |    |  |  |    | (724,945   | )
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Balance at December 31, 2001                                                                                                  |  |               | 300 |                                 |                              | 5,371,086  |                               |                              |    | 4,034,704  |                   |  |    | (1,615,719        | ) |                            |    | (6,686,592   | ) |  |    | 1,103,779  |   |  |    | 2 |  |    | 1,103,781  |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Changes in 2002:                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Net loss                                                                                                                      |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    |                  |   |                            |    | (1,464,786   | ) |  |    | (1,464,786 | ) |  |    |  |  |    | (1,464,786 | )
|Gain from restatement                                                                                                         |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    | 427,318           |   |                            |    |             |   |  |    | 427,318    |   |  |    |  |  |    | 427,318    |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Comprehensive loss                                                                                                            |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    | 427,318           |   |                            |    | (1,464,786   | ) |  |    | (1,037,468 | ) |  |    |  |  |    | (1,037,468 | )
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Balance at December 31, 2002                                                                                                  |  |               | 300 |                                 |                              | 5,371,086  |                               |                              |    | 4,034,704  |                   |  |    | (1,188,401        | ) |                            |    | (8,151,378   | ) |  |    | 66,311     |   |  |    | 2 |  |    | 66,313     |  
|Changes in 2003:                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Increases in variable capital stock                                                                                           |  |               |    |                                 |                              | 1,117,571  |                               |                              |    | 4,805      |                   |  |    |                  |   |                            |    |             |   |  |    | 1,122,376  |   |  |    |  |  |    | 1,122,376  |  
|Decrease in capital stock applied against accumulated deficit from restatement and accumulated losses as of December 31, 2002 |  |               |    |                                 |                              | (5,307,611 | )                             |                              |    | (4,032,168 | )                 |  |    | 1,188,401         |   |                            |    | 8,151,378    |   |  |    |           |   |  |    |  |  |    |           |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Net income                                                                                                                    |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    |                  |   |                            |    | 912,834      |   |  |    | 912,834    |   |  |    |  |  |    | 912,834    |  
|Gain from restatement                                                                                                         |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    | 354,975           |   |                            |    |             |   |  |    | 354,975    |   |  |    |  |  |    | 354,975    |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Comprehensive income                                                                                                          |  |               |    |                                 |                              |           |                               |                              |    |           |                   |  |    | 354,975           |   |                            |    | 912,834      |   |  |    | 1,267,809  |   |  |    |  |  |    | 1,267,809  |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  
|Balance at December 31, 2003                                                                                                  |  | Ps            | 300 |                                 | Ps                           | 1,181,046  |                               |                              | Ps | 7,341      |                   |  | Ps | 354,975           |   |                            | Ps | 912,834      |   |  | Ps | 2,456,496  |   |  | Ps | 2 |  | Ps | 2,456,498  |  
|                                                                                                                              |  |               |     |                                 |                              |            |                               |                              |    |            |                   |  |    |                   |   |                            |    |              |   |  |    |            |   |  |    |   |  |    |            |  



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



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##### Table of Contents

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2003)



|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ------------ | ---- |  | -- | ---------- | -
|                                                                                                    |  | 2001 |            |   | 2002 |    |              | 2003 | 
|OPERATING ACTIVITIES:                                                                               |  |      |            |   |      |    |              |      |  |    |            |  
|Net (loss) income                                                                                   |  |      | (Ps693,746 | ) |      |    | (Ps1,464,786 | )    |  | Ps | 912,834    |  
|Adjustments to reconcile net (loss) income to resources (used in) provided by operating activities: |  |      |            |   |      |    |              |      |  |    |            |  
|Special item                                                                                        |  |      |           |   |      |    |             |      |  |    | (1,507,697 | )
|Depreciation and amortization                                                                       |  |      | 1,046,729  |   |      |    | 969,439      |      |  |    | 889,467    |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|                                                                                                    |  |      | 352,983    |   |      |    | (495,347     | )    |  |    | 294,604    |  
|Changes in working capital:                                                                         |  |      |            |   |      |    |              |      |  |    |            |  
|Trade receivables, net                                                                              |  |      | 22,304     |   |      |    | (82,380      | )    |  |    | 44,907     |  
|Receivable from domestic operators, net                                                             |  |      | 257,191    |   |      |    | 99,428       |      |  |    |           |  
|Due from affiliates and other related parties                                                       |  |      | 8,667      |   |      |    | (127,321     | )    |  |    | 97,713     |  
|Recoverable taxes and other receivables                                                             |  |      | 626        |   |      |    | 29,856       |      |  |    | (8,350     | )
|Other accounts receivable, prepaid expenses and other assets                                        |  |      | 12,445     |   |      |    | 34,299       |      |  |    | 4,299      |  
|Restricted investments                                                                              |  |      | 377,900    |   |      |    | 344,973      |      |  |    |           |  
|Accounts payable                                                                                    |  |      | (230,454   | ) |      |    | (10,502      | )    |  |    | (238,375   | )
|Due to affiliates and other related parties                                                         |  |      | (125,076   | ) |      |    | 24,837       |      |  |    | 41,706     |  
|Accrued expenses and other payables                                                                 |  |      | 68,438     |   |      |    | 163,643      |      |  |    | 258,546    |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|Resources provided by (used in) operating activities                                                |  |      | 745,024    |   |      |    | (18,514      | )    |  |    | 495,050    |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|INVESTING ACTIVITIES:                                                                               |  |      |            |   |      |    |              |      |  |    |            |  
|Purchase of real estate and equipment                                                               |  |      | (820,085   | ) |      |    | (240,326     | )    |  |    | (236,120   | )
|Deferred charges and other assets                                                                   |  |      | (130,908   | ) |      |    | 17,807       |      |  |    | (10,400    | )
|Restricted investments                                                                              |  |      | 376,435    |   |      |    |             |      |  |    |           |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|Resources used in investing activities                                                              |  |      | (574,558   | ) |      |    | (222,519     | )    |  |    | (246,520   | )
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|FINANCING ACTIVITIES:                                                                               |  |      |            |   |      |    |              |      |  |    |            |  
|Capital contributions                                                                               |  |      |           |   |      |    |             |      |  |    | 1,122,376  |  
|Bank loans and notes payable, net                                                                   |  |      | 437,154    |   |      |    | (247,009     | )    |  |    | (76,774    | )
|(Decrease) increase of senior debt notes                                                            |  |      | (551,159   | ) |      |    | 384,706      |      |  |    | (1,044,730 | )
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|Resources (used in) provided by financing activities                                                |  |      | (114,005   | ) |      |    | 137,697      |      |  |    | 872        |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|Increase (decrease) in cash and cash equivalents                                                    |  |      | 56,461     |   |      |    | (103,336     | )    |  |    | 249,402    |  
|Cash and cash equivalents, beginning of period                                                      |  |      | 208,308    |   |      |    | 264,769      |      |  |    | 161,433    |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  
|Cash and cash equivalents, end of period                                                            |  | Ps   | 264,769    |   |      | Ps | 161,433      |      |  | Ps | 410,835    |  
|                                                                                                    |  |      |            |   |      |    |              |      |  |    |            |  



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



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ALESTRA, S. DE R.L. DE C.V. AND SUBSIDIARY



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AT DECEMBER 31, 2002 AND 2003

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2003)



|1. | INCORPORATION AND ACTIVITY OF THE COMPANY
|-- | -----------------------------------------



Alestra, S. de R. L. de C. V. (Alestra), a Mexican company with limited liability and variable capital, was incorporated on October 13, 1995,
as a joint venture between Onexa, S. A. de C. V. Onexa (51%) and AT&T Telecom Mexico, Inc. (49%). Onexa is owned by Alfa, S. A. de C. V. (Alfa) (50.2%) and BBVA Bancomer, S. A., Institución de Banca Multiple, Grupo
Financiero (BBVA Bancomer) (49.8%).



Alestra and
its subsidiary Servicios Alestra, S. A. de C. V. (Servicios Alestra) are collectively referred to as the Company.



The Companys business consists of the installation and operation of a public telecommunications network in Mexico, offering local, domestic and
international long distance call services, internet and transmission of data services. The Companys business requires a concession (license granted by the Mexican federal government) to operate. On December 6, 1995, the Secretaría de
Comunicaciones y Transportes (Ministry of Communications and Transportation, or Ministry of Communications) granted Alestra a renewable thirty-year concession to operate its business. The concession places certain performance conditions
on the Company with respect to the roll-out and expansion of its network, quality of its services, rates and billing systems, compliance with the terms established for the operation of the network as well as delivery of audited financial statements
on an annual basis. In accordance with the terms of its concession and the guidelines and schedule established by the Ministry of Communications, on January 1, 1997, the Company began the gradual roll-out and expansion of its domestic and
international long distance services to 60 cities. The Company began earning revenues in 1997. Under the Ministry of Communications guidelines, the Company has gradually expanded its services to additional cities, totaling 198 cities as of December
31, 2003.



On May 30, 2000, the Ministry of Communications
amended Alestras telecommunication public network public network concession in order to permit the Company to provide local telephone services to residential and commercial users in the cities of Mexico, Monterrey and Guadalajara. The Company
started offering this service in 2001. The local telephony concession has been recently modified to allow Alestra to offer a full range of local services throughout Mexico on a regional basis.



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|2. | DEBT RESTRUCTURING
|-- | ------------------



As a result of the Companys liquidity problem, Alestra was unable to cover the payments of the accrued interest of its US$270 million and US$300
million senior notes, which bear interest at a rate of 12.125% and 12.625%, respectively, (collectively the Old Senior Notes) that became due on November 15, 2002 and on May 15, 2003. Since the failure to make theses payments gave the
right to the note holders of the Old Senior Notes to require immediate repayment, the principal amount of Ps6,112,074 (US$570 million) was classified as short-term as of December 31, 2002.



During November 2003, the Company successfully concluded the restructuring of
its Old Senior Notes. As a result of the debt restructuring, the Company extinguish, pursuant to the exchange and cash tender offers, US$232.9 million and US$254.2 million of its 12.125% and 12.625% Old Senior Notes, respectively, representing 85.5%
of the total Old Senior Notes.



In addition, in connection with
the debt restructuring, the Company issued Ps3,415,744 (US$304 million) of new senior notes bearing an interest of 8% due in 2010 (the New Senior Notes) for an aggregate amount of Ps3,208,660 (US$287 million) of the Old Senior Notes.
Furthermore, the Company paid Ps1,229,800 (US$110 million) as a cash tender offer to extinguished Ps2,236,000 (US$200 million) of the senior notes.



As a result of the successful completion of the debt restructuring in November 2003, the Company classified its senior notes as long-term debt for the
year ended December 31, 2002 and 2003. See Note 10 and 16.



Based on the aforementioned financial restructuring and in order to maintain the viability of the Company, the management of the Company has refocused its business strategy and implemented a number of short-term measures that have resulted
in cost savings. Certain elements of this new strategy include reducing the cost structure, focusing capital expenditures on segments that may offer more attractive margins and focusing on the segment related to data, internet and local services.



|3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Mexico (Mexican GAAP)
as promulgated by the Mexican Institute of Public Accountants (MIPA). A reconciliation from Mexican GAAP to generally accepted accounting principles in the United States of America (U.S. GAAP) is included in Note 19.



The principal accounting policies followed by the Company are
as follows:



a. Basis of presentation



The consolidated financial statements are expressed in Mexican Pesos,
denoted by the symbol Ps



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The consolidated financial statements include those of Alestra and its subsidiary, Servicios Alestra, of
which Alestra holds 99.99% of the capital stock. All significant intercompany balances and transactions have been eliminated.



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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period.



Significant estimates and assumptions include certain international long
distance services revenues and expenses (see Note 3-h) and allowance for doubtful accounts (see Note 4). Actual results could differ from those estimates.



b. Recognition of the effects of inflation



The consolidated financial statements have been prepared in accordance with Bulletin B-10, Recognition of the Effects of Inflation on Financial
Information (Bulletin B-10), and determined as follows:



| |  | The statements of income and changes in stockholders equity were restated applying National Consumer Price Index (NCPI) factors from the periods in which the
transactions occurred.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements of changes in financial position present, in constant Mexican Pesos, the resources provided by or used in operating, financing and investing activities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The financial statements of the Company for prior periods have been restated for comparability purposes to the information of the most current period presented; therefore the
Company has restated all financial statements to December 31, 2003 purchasing power by applying the rates of inflation as follows:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     |  |                               |   |  |                                                                   |  
|---- |  | ----------------------------- | - |  | ----------------------------------------------------------------- | -
|Year |  | Inflation rate for the period |   |  | Cumulative Inflation rate as of period ended on December 31, 2003 |  
|2001 |  | 4.40                          | % |  | 14.74                                                             | %
|2002 |  | 5.70                          | % |  | 9.90                                                              | %
|2003 |  | 3.98                          | % |  | 3.98                                                              | %
|     |  |                               |   |  |                                                                   |  



The methodology for
the restatement of the financial statements is as follows:



Restatement of non-monetary assets:



As set forth in note 3-d, real estate and equipment, net, is restated using NCPI factors. Equipment of non-Mexican origin is restated using an index which reflects the inflation in the respective country of origin and the exchange rate of
the Mexican Peso against the currency of such country at the balance-sheet date.



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Restatement of stockholders equity:



The restatement of capital stock, contributed capital and accumulated losses is determined by applying NCPI factors from the
dates on which capital was contributed and earnings were generated, and reflects the amounts necessary to maintain the stockholders investment at the purchasing power of the original amounts. The deficit from restatement represents the
difference between the cost value of equipment of non-Mexican origin as indicated in the above paragraph and the restated cost value by NCPI.



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##### Table of Contents

Gain from monetary position:



Gain from monetary position represents the inflationary effect, measured in terms of the NCPI, on the monetary assets and liabilities of the Company at
the beginning of each month.



c. Cash and cash
equivalents



The Company considers all highly liquid
temporary cash investments with original maturities of three months or less, consisting primarily of short-term deposits and money market accounts, to be cash equivalents.



d. Real estate and equipment, net (Note 7)



Real estate and equipment are recorded at acquisition cost and restated using inflation factors derived from the NCPI. In
accordance with the Modified Fifth Amendment of Bulletin B-10 (Fifth Amendment), real estate and equipment and the related accumulated depreciation are stated at cost and restated by applying factors derived from the NCPI, except for
machinery and equipment of non-Mexican origin, which is restated using an index reflecting the inflation in the respective country of origin and the exchange rate of the Mexican Peso against the currency of such country at the balance-sheet date.



The adoption of the Fifth Amendment resulted in a Ps824,426
and Ps1,188,401 reduction in accumulated net book value of non-Mexican origin equipment as of December 31, 2003 and 2002, respectively, which are recorded as a deficit in the restatement of capital. In 2003, the Companys stockholders decided
to apply the accumulated deficit against the restatement of capital stock at December 31, 2002 (See Note 11).



When assets are retired or otherwise disposed of, the restated cost and accumulated depreciation are removed from the accounts and any gain or loss is
recorded in results of operations.



Depreciation is calculated
using the straight-line method over the useful lives of the assets, as estimated by the Company and references from Comisión Federal de Telecomunicaciones (Cofetel). The estimated useful lives are as follows:



|                                   |  |         
|---------------------------------- |  | --------
|                                   |  | Years   
|Buildings                          |  | 25      
|Telephone network                  |  | 12 to 28
|Billing and customer care software |  | 7       
|Equipment:                         |  |         
|Office                             |  | 10      
|Computer                           |  | 3       
|Transportation                     |  | 4       



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##### Table of Contents

e. Deferred charges and other assets, net



Deferred charges and other assets are recorded at acquisition cost and
restated using inflation factors derived from the NCPI.



Pre-operating expenses consist of incorporation and operating costs incurred from October 13, 1995 (inception date) through roll-out completion, including wages, salaries and benefits, advertising and promotional expenses and professional
fees. The Company ceased capitalizing such costs as long distance service was introduced in each of the initial 60 cities. Amortization is calculated using the straight-line method over a term of ten years.



Leasehold improvements are amortized over the shorter of the life of the
improvement term or the lease term. Internal use software costs are amortized over three years.



f. Capitalized financing costs



The Company capitalizes the comprehensive financing costs attributable to assets under construction and pre-operating expenses. Capitalized comprehensive
financing costs include interest costs, gains or losses from monetary position and foreign exchange gains or losses.



g. Long-lived assets



The Company evaluates potential impairment loss relating to long-lived assets, primarily real estate, equipment and pre-operating expenses, by assessing
whether the unamortized carrying amount can be recovered over the remaining life of the assets through discounted future expected cash flows generated by the assets and without interest charges. If the sum of the expected future discounted cash
flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the assets. Assets to be disposed of are recorded at the lower of carrying amount or fair value less cost to
sell. Testing whether an asset is impaired and for measuring the impairment loss is performed for assets groupings at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other
asset groups.



Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.



In 2002 and 2003, the Company performed an analysis of long-lived and intangible assets for impairment. In accordance with its analysis, expected future
discounted cash flows are higher than the carrying value of the Companys assets and, accordingly, the Company has not recognized any impairment loss.



h. Revenue recognition



Revenues from domestic and international long distance services are recognized based on minutes of traffic processed by the Company. Revenues from
international long distance services into Mexico are recognized on the basis of the international long distance service regulations and the proportional return regulations.



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##### Table of Contents

Pursuant to the international long distance regulations issued by Cofetel, international long distance
telephone traffic into and out of Mexico is routed using uniform settlement rates and the proportional return system. Under the proportional return system, incoming calls attempted are divided among Mexican carriers in proportion to the outgoing
international traffic in call attempts originated by each of the carriers as determined by a committee composed of all the long distance carriers. During 2001, 2002 and 2003, certain incoming international telephone traffic, in calls attempted,
allocated to the Company pursuant to the proportional return system was processed by Telmex and other long distance carriers.



In 2001, 2002 and 2003, the Company recorded revenue for the traffic it had the right to receive and expense to other carriers for processing the
telephone traffic, based on the number of call attempts, converted to estimated minutes in conformity with the Companys experience and the authorized rates. Estimated minutes are adjusted to actual minutes once known.



As a result of the agreements signed with Telmex, the Company agreed with
Telmex to apply a fee per attempted call for the years 2002 and 2003, applicable to the attempts determined by the committee composed of long distance operators. This fee includes Telmexs experience in converting estimated minutes per
attempted call and the rates described below.



Revenue from
international long distance services reflect income obtained under bilateral contracts between the Company and foreign operators, the amounts obtained from clients of the Company in Mexico and the income from the proportional return system described
above. The aforementioned bilateral contracts determine the payment rates of the Company to foreign operators for the use of their telephone networks in long distance interconnections invoiced in Mexico and from the foreign operators to the Company
for the use of the telephone network of the latter for the interconnection of calls invoiced outside of Mexico. Payment rates subject to these contracts are negotiated annually with each foreign operator and by the main operator in Mexico, currently
Telmex, and they are recorded by Cofetel.



In 2001, Telmex
submitted, for the approval of Cofetel, the rates of payments classification, contained in the contract entered into by Telmex and MCI International, which would be applicable to all settlement rates of international long distance services exchanged
between Mexico and the United States. Cofetel authorized a US$0.155 per minute rate.



Due to the fact that Telmex had not reached a rates agreement with AT&T and excluded Alestra from the negotiation process for the applicable settlement rate, the Company contested such settlement rate, and
therefore it used other settlement rates, which were agreed with its main foreign carrier, until an agreement was reached between Telmex and AT&T (See note 12-d). On January 24, 2003, Alestra entered into an omnibus agreement with Telmex in
which, among other things, the Company settled any potential liability it may have had to Telmex as a result of the application of different settlement rates.



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##### Table of Contents

In 2002, Telmex submitted for the approval of Cofetel, the rates of payments classification, contained in
the contract entered into by Telmex and the main foreign carriers of the United States, applicable to the settlement rates of international long distance services exchanged between Mexico and the United States. Cofetel authorized the following rates
that were used by the Company during 2002 and 2003:



| |  | From January 1 to February 28, 2002, the settlements rate was US$0.135 per minute.
| | - | ----------------------------------------------------------------------------------



| |  | Telmex, MCI International and AT&T reached an agreement to reduce the settlement rates between Mexico and the United States for the period from March 1 to December 31, 2002 and
for the year 2003. Under this agreement, a differentiated settlement rate scheme applies, depending on the city of termination in Mexico and the rates are US$0.055, US$0.0850 and US$0.1175 per minute. Mexican carriers will pay US$0.055 per minute
for traffic terminated in the United States.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revenues from installation and related costs are deferred and recognized over the estimated duration of the customer relationship.



All other revenues are recorded when services are rendered.



i. Transactions in foreign currency and exchange differences (Note 17)



Monetary assets and liabilities denominated in foreign currencies, mainly US dollars (US$), are stated in Mexican Pesos at
the exchange rates in effect as of the balance sheet dates. Exchange differences arising from changes in exchange rates between the transaction and settlement dates or the balance-sheet date, are charged or credited to comprehensive financial
result.



j. Advertising



Advertising costs incurred prior to the commencement of operations were
capitalized as part of the pre-operating costs of the Company. Prepaid airtime is amortized based on the transmission of the television spots. The related production costs are recognized in the results of operations the first time the advertising
takes place. All other advertising costs are expensed as incurred.



k. Income taxes and employees statutory profit sharing (Note 15)



Income tax and employees statutory profit sharing are recorded using the assets and liabilities method with an integral approach. Under this method a deferred tax is recognized for all the differences between
accounting and tax values of assets and liabilities.



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##### Table of Contents

l. Risk concentrations



Financial instruments (see Note 18) which potentially subject the Company to significant concentrations of credit risk
consist primarily of cash and cash equivalents, trade accounts receivable, receivables from domestic operators and restricted investments.



The Company maintains its cash and cash equivalents with various major financial institutions, including BBVA Bancomer (a related party), and are
principally invested in short-term deposits and money market accounts.



Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers throughout Mexico. The Company maintains allowances for doubtful accounts based on the expected collectibility of all
receivables (see Note 4).



Approximately 52.6%, 76.8% and 91.8%
of the Companys income related to international long distance services for the years ended December 31, 2001, 2002 and 2003, respectively, were generated from telephone traffic exchanged between AT&T (a related party) and the Company.



In order to service its customers, Alestra must interconnect
with and use the telephone network of Telmex, the only current provider of local telephone services covering all of Mexico. The interconnection and other surcharge rates Alestra must pay Telmex are filed with Cofetel. For the years ended December
31, 2001, 2002 and 2003, interconnection costs, including special projects (see Note 14) amounted to Ps 1,342,577, Ps 989,384 and Ps 898,008, respectively.



m. Pension and seniority premiums



The cost of the employee retirement plans (pension and seniority premiums) that Servicios Alestra has established for its personnel are recognized as
expenses of the years in which the services are rendered, in accordance with actuarial studies made by independent experts and in accordance with Bulletin D-3 Labor Obligations issued by the Mexican Institute of Public Accountants.



Other compensation based on length of service to which
employees may be entitled in the event of dismissal or death, in accordance with the Mexican Labor Law, is charged to income in the year in which it becomes payable.



n. Comprehensive income (loss)



As from January 1, 2001, the Company adopted the provisions of Statement B-4 Comprehensive Income, which require
that the different concepts comprising the capital earned during the year are stated in the statement of changes in stockholders equity under the item called comprehensive expense or income.



F-15



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##### Table of Contents

o. New accounting principles



In January 2002, the MIPA issued Statement C-8 Intangible Assets effective as from January 1, 2003. This
statement establishes criteria for the recognition of intangible assets, as well as their accounting treatment through particular valuation, disclosure and presentation regulations. The adoption of statement C-8 did not have any impact on
Alestras consolidated financial statements.



In January
2002, the MIPA issued Statement C-9 Liabilities, provisions, contingent assets and liabilities and commitments effective as from January 1, 2003. This statement establishes the particular valuation, disclosure and presentation
regulations of liabilities and provisions, as well as those for commitments and contingent assets and liabilities. The adoption of this Statement did not have any impact on the financial statements of the Company.



On January 1, 2004 the standards contained in Statement C 15
Impairment of Long-Lived Assets and Their Disposal issued by the Mexican Institute of Public Accountants became effective. This Statement contains general standards covering the identification and recording of losses due to impairment or
reduction in value of long-lived assets, tangible or intangible, including goodwill, where applicable; in addition, it also describes standards for valuation of long-lived assets. As described in Note 3-g the Company has been applying this
methodology and accordingly, does not expect to have any effect on its financial statement with the adoption of this standard.



In 2003, the MIPA issued new Statement C-12, Financial Instruments Qualifying as Liabilities, Capital or Both (Statement C-12),
which highlights the differences between liabilities and stockholders equity from the viewpoint of the issuer, as a basis for identifying, classifying and recording the liability and capital components of combined financial instruments in
their initial recognition. The new Statement C-12 establishes the methodology for separating liabilities and stockholders equity from the price received from the placement of combined financial instruments. That methodology is based on the
residual nature of stockholders equity and avoids the use of fair values affecting stockholders equity in initial transactions. Additionally, it establishes that beginning on January 1, 2004, the initial costs resulting from the issuance
of the combined instruments are assigned to liabilities and stockholders equity in the same proportion as the amounts of the components recognized as liabilities and stockholders equity; that the losses and incomes related to financial
instrument components classified as liabilities are recorded in overall financing; and the yield distributions to owners of financial instrument components classified as stockholders equity are charged directly to a capital account other than
the income account for the year. Although this Statement C-12 became effective on January 1, 2004, it is not required when restating information for prior periods or when recognizing an initial accrued effect on the income for the year it is
adopted, in accordance with the provisions established in the transitory paragraph of the Statement C-12. The adoption of this Statement will not have a material effect on the consolidated financial statements.



F-16



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##### Table of Contents

|4. | TRADE RECEIVABLES, NET
|-- | ----------------------



As of December 31, 2002 and 2003, trade receivables, net consist of the following:



|                                      |  |      |           |   |      |    |          |  
|------------------------------------- |  | ---- | --------- | - | ---- | -- | -------- | -
|                                      |  | 2002 |           |   | 2003 |   
|Trade receivables                     |  | Ps   | 1,016,874 |   |      | Ps | 708,960  |  
|Less: allowance for doubtful accounts |  |      | (501,261  | ) |      |    | (238,254 | )
|                                      |  |      |           |   |      |    |          |  
|                                      |  | Ps   | 515,613   |   |      | Ps | 470,706  |  
|                                      |  |      |           |   |      |    |          |  



For the years ended
December 31, 2001, 2002 and 2003, the allowance for doubtful accounts is analyzed as follows:



|                                                             |  |            |   |  |            |   |  |            |  
|------------------------------------------------------------ |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                             |  | 2001       |   |  | 2002       |   |  | 2003       |  
|Balance at beginning of year                                 |  | (Ps434,079 | ) |  | (Ps350,718 | ) |  | (Ps501,261 | )
|Provision charges(1)                                         |  | (119,936   | ) |  | (169,458   | ) |  | (34,360    | )
|Write off of receivables (Nominal value)                     |  | 180,515    |   |  |           |   |  | 291,310    |  
|Restatement effect in constant pesos as of December 31, 2003 |  | 22,782     |   |  | 18,915     |   |  | 6,057      |  
|                                                             |  |            |   |  |            |   |  |            |  
|Balance at end of year                                       |  | (Ps350,718 | ) |  | (Ps501,261 | ) |  | (Ps238,254 | )
|                                                             |  |            |   |  |            |   |  |            |  



|(1) | The Company reserves trade receivables which are one day past due.
|--- | ------------------------------------------------------------------



|5. | ACCOUNTS RECEIVABLE AND PAYABLE AND TRANSACTIONS WITH AFFILIATES AND OTHER RELATED PARTIES
|-- | ------------------------------------------------------------------------------------------



|                                |  |      |         |      |    |       
|------------------------------- |  | ---- | ------- | ---- | -- | ------
|                                |  | 2002 |         | 2003
|Due from:                       |  |      |         |      |    |       
|AT&T Corporation and affiliates |  | Ps   | 139,900 |      | Ps | 47,470
|BBVA Bancomer and affiliates    |  |      | 21,349  |      |    | 14,213
|Alfa and affiliates             |  |      | 27,361  |      |    | 29,214
|                                |  |      |         |      |    |       
|                                |  | Ps   | 188,610 |      | Ps | 90,897
|                                |  |      |         |      |    |       
|Due to:                         |  |      |         |      |    |       
|AT&T Corporation and affiliates |  | Ps   | 42,952  |      | Ps | 44,532
|Alfa and affiliates             |  |      | 1,893   |      |    |      
|                                |  |      |         |      |    |       
|Short-term accounts payables    |  | Ps   | 44,845  |      | Ps | 44,532
|                                |  |      |         |      |    |       
|AT&T Corporation and affiliates |  | Ps   | 23,483  |      | Ps | 34,700
|Onexa                           |  |      | 25,377  |      |    | 56,179
|                                |  |      |         |      |    |       
|Long-term accounts payables(1)  |  | Ps   | 48,860  |      | Ps | 90,879
|                                |  |      |         |      |    |       



|(1) | The Companys stockholders agreed that fees from administrative services collected by Onexa and AT&T from the Company be accrued on an annual basis but
payable in 2006, in order to increase liquidity and as part of the financial restructuring process.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

During 2001, 2002 and 2003, the main transactions carried out with affiliates and other related parties
were as follows:



|                                                  |  |      |           |      |    |           |  |    |          
|------------------------------------------------- |  | ---- | --------- | ---- | -- | --------- |  | -- | ---------
|                                                  |  | 2001 |           | 2002 |    | 2003     
|International long distance settlement revenue(a) |  | Ps   | 1,128,014 |      | Ps | 1,658,590 |  | Ps | 2,756,633
|International long distance settlement expense(a) |  |      | 283,151   |      |    | 850,632   |  |    | 1,737,422
|Administrative services received(b)               |  |      | 57,091    |      |    | 55,952    |  |    | 38,287   
|Internet services costs(c)                        |  |      | 9,447     |      |    | 2,772     |  |    | 3,514    
|Income from marketing services(d)                 |  |      | 16,646    |      |    | 11,551    |  |    |         
|Interest income(e)                                |  |      | 3,547     |      |    | 2,233     |  |    | 2,326    
|Trade and service marks license fee(f)            |  |      | 31,520    |      |    | 31,009    |  |    | 33,041   
|Technical services expenses(g)                    |  |      | 72,543    |      |    | 32,089    |  |    | 4,512    
|Rent expense(h)                                   |  |      |          |      |    | 20,991    |  |    | 3,176    
|Other income(i)                                   |  |      |          |      |    |          |  |    | 95,035   



|(a) | These amounts represent mainly the income and expenses derived from the liquidation of international traffic between AT&T and Alestra, as well as the income from
data services and local service with other affiliates. The international settlement rates used are in accordance with Note 3-h.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | The Company has entered into several administrative service agreements with Onexa and
AT&T. During the year ended December 31, 2003, the Company wrote off approximately Ps26,780 (US$2.5 million) on the conclusion of agreements entered into with AT&T in relation to a the dispute about the billing and costumer care platform
provided by AT&T and in respect of the successful conclusion of the Companys debt restructuring.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | This amount corresponds to the costs of services received from an affiliate of AT&T
regarding the payment of Internet Dial Up Services.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(d) | This amount corresponds to marketing services rendered by Servicios Alestra to AT&T in national territory.
|--- | ----------------------------------------------------------------------------------------------------------



|(e) | This amount corresponds to investment interest and loans with affiliated companies.
|--- | -----------------------------------------------------------------------------------



|(f) | The Company entered into a trade and service mark license agreement with AT&T, which
allows the Company to use certain trade and service marks of AT&T in exchange for a minimum payment of Ps33,040 (US $3.0 million).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) | AT&T has agreed to provide certain technical services and software maintenance on an as
needed basis. Such technical services have included assistance in telephone network design and engineering, billing software redesign and improvements and customer care, billing, planning and implementation of new services.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(h) | This amount corresponds to expenses for office leasing agreement held by and between
Servicios Alestra and BBVA Bancomer.
|--- | -------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(i) | Due to the success of the Companys debt restructuring (See Note 10), AT&T paid the Company US$8.5 million under the agreements mentioned in paragraph b.
above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. | PREPAID EXPENSES AND OTHER ASSETS
|-- | ---------------------------------



Prepaid expenses and other assets as of December 31, 2002 and 2003, consist primarily of advertising time, bank commissions and fees.



|7. | REAL ESTATE AND EQUIPMENT, NET
|-- | ------------------------------



As of December 31, 2002 and 2003, real estate and equipment, net, consists of the following:



|                                                |  |      |            |   |      |    |            |  
|----------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                                |  | 2002 |            |   | 2003 |   
|Land                                            |  | Ps   | 140,312    |   |      | Ps | 140,312    |  
|Buildings                                       |  |      | 102,891    |   |      |    | 102,891    |  
|Furniture, fixtures and other                   |  |      | 213,215    |   |      |    | 224,480    |  
|Hardware equipment                              |  |      | 434,306    |   |      |    | 436,633    |  
|Transportation equipment                        |  |      | 17,541     |   |      |    | 23,230     |  
|Telephone network                               |  |      | 6,179,908  |   |      |    | 6,661,117  |  
|Billing and customer care software              |  |      | 1,057,172  |   |      |    | 1,088,334  |  
|Investments in progress                         |  |      | 68,662     |   |      |    | 23,260     |  
|                                                |  |      |            |   |      |    |            |  
|                                                |  |      | 8,214,007  |   |      |    | 8,700,257  |  
|Less: accumulated depreciation and amortization |  |      | (2,569,087 | ) |      |    | (3,051,121 | )
|                                                |  |      |            |   |      |    |            |  
|Total                                           |  | Ps   | 5,644,920  |   |      | Ps | 5,649,136  |  
|                                                |  |      |            |   |      |    |            |  



On September 26, 2000,
the Companys Management decided to substitute the original billing and customer care software that was in operation at that time. The new software started operating in June 2002 with the migration of residential clients. The Company initiated
the accelerated amortization of the balance of the above mentioned billing and customer care software which was fully amortized by June 2002.



Amortization of billing and customer care software charged to income was Ps232,491, Ps60,169 and Ps88,403 for the years ended December 31, 2001, 2002 and
2003, respectively.



Depreciation charged to income, not
including amortization of the billing and customer care software mentioned above was Ps468,568, Ps551,593 and Ps519,811 for the years ended December 31, 2001, 2002 and 2003, respectively.



Real estate and equipment as of December 31, 2003 includes net capitalized financial costs of Ps111,599. Investment in
progress as of December 31, 2002 and 2003 consists mainly of investments in connections from the end customer to Alestras network.



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##### Table of Contents

|8. | DEFERRED CHARGES AND OTHER ASSETS, NET
|-- | --------------------------------------



As of December 31, 2002 and 2003, deferred charges and other consist of the following:



|                                                               |  |      |            |   |      |    |            |  
|-------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                                               |  | 2002 |            |   | 2003 |   
|Pre-operating expenses (a)                                     |  | Ps   | 2,030,572  |   |      | Ps | 2,030,572  |  
|Capitalized expenses derived from issuance of senior notes (b) |  |      | 255,286    |   |      |    | 377,704    |  
|Frequency bands (c)                                            |  |      | 148,585    |   |      |    | 148,585    |  
|Leasehold improvements                                         |  |      | 113,610    |   |      |    | 113,092    |  
|Software (d)                                                   |  |      | 448,328    |   |      |    | 444,318    |  
|Other assets                                                   |  |      | 166,482    |   |      |    | 128,909    |  
|                                                               |  |      |            |   |      |    |            |  
|                                                               |  |      | 3,162,863  |   |      |    | 3,243,180  |  
|Less: accumulated amortization                                 |  |      | (1,788,420 | ) |      |    | (2,160,924 | )
|                                                               |  |      |            |   |      |    |            |  
|Total deferred charges and other                               |  | Ps   | 1,374,443  |   |      | Ps | 1,082,256  |  
|                                                               |  |      |            |   |      |    |            |  



Amortization charged
to income was Ps345,670, Ps357,677 and Ps281,252 for the years ended, December 31, 2001, 2002 and 2003, respectively.



a. Pre-operating expenses



|                             |  |               |          
|---------------------------- |  | ------------- | ---------
|                             |  | 2002 and 2003
|Wages, salaries and benefits |  | Ps            | 991,264  
|Advertising and promotion    |  |               | 589,051  
|Professional fees            |  |               | 86,479   
|Other                        |  |               | 363,778  
|                             |  |               |          
|                             |  | Ps            | 2,030,572
|                             |  |               |          



At December 31, 2002
and 2003, pre-operating expenses included Ps44,254 of capitalized financing income.



b. Debt issuance costs



|                               |  |      |          |   |      |    |         |  
|------------------------------ |  | ---- | -------- | - | ---- | -- | ------- | -
|                               |  | 2002 |          |   | 2003 |   
|Fees and expenses to agents:   |  |      |          |   |      |    |         |  
|Old Senior Notes(1)            |  | Ps   | 255,286  |   |      | Ps | 17,165  |  
|New Senior Notes(2)            |  |      |         |   |      |    | 122,418 |  
|                               |  |      |          |   |      |    |         |  
|                               |  | Ps   | 255,286  |   |      | Ps | 139,583 |  
|Less: accumulated amortization |  |      | (109,294 | ) |      |    | (1,832  | )
|                               |  |      |          |   |      |    |         |  
|Total capitalized expenses     |  | Ps   | 145,992  |   |      | Ps | 137,751 |  
|                               |  |      |          |   |      |    |         |  



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##### Table of Contents

|(1) | During 2003, the Company expensed as a special item, Ps110,180 (see Note 16) corresponding to debt issuance costs in respect of noteholders that accepted to exchange
their Old Senior Notes for the New Senior Notes. The remaining Ps17,165 corresponds to the proportional debt issuance cost of the Old Senior Notes that were not exchange, which will be amortized over the term of the Old Senior Notes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Fees and expenses incurred for the issuance of the New Senior Notes, will be amortized over the term of the New Senior Notes. Amortization charged to income for the
year ended December 31, 2003 amounted to Ps1,832.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



c. Frequency bands



In 1997, the Company
obtained two national point-to-point wireless telecommunications concessions and three point-to-multipoint wireless concessions covering Mexico City, Monterrey and Guadalajara. The concessions are for 20 years beginning in 1998. The licenses are
amortized on a straight-line basis over the license period. Frequency band amortization expense for the years ended December 31, 2001, 2002 and 2003 amounted to Ps7,849, Ps7,457 and Ps7,429, respectively.



d. Software



Software costs consist of purchased internal use software. Software
amortization expense for the years ended December 31, 2001, 2002 and 2003, amounted to Ps83,677, Ps70,127 and Ps61,922, respectively.



|9. | BANK LOANS AND NOTES PAYABLE
|-- | ----------------------------



As of December 31, 2002 and 2003, bank loans and notes payable consist of the following:



|                                                                                                                                                                                                                                                                                        |  |      |         |   |      |    |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -- | -------- | -
|                                                                                                                                                                                                                                                                                        |  | 2002 |         |   | 2003 |   
|Notes payable to Hewlett Packard de México, S. A. de C. V. of US$19.2 million at a 10.08% annual rate for the supply of equipment for
telecommunications projects with a maturity date in 2005. At December 31, 2003, the amount payable was US$9.8 million (US$ 15.0 million in 2002). |  | Ps   | 161,640 |   |      | Ps | 109,883  |  
|Capital lease contract with The Capita Corporation de México, S. A. de C. V., for US$7.0 million for telecommunications equipment. At
December 31, 2003 the amount due was US$1.9 million (US$4.3 million in 2002).(1)                                                                  |  |      | 46,153  |   |      |    | 21,136   |  
|                                                                                                                                                                                                                                                                                        |  |      |         |   |      |    |          |  
|                                                                                                                                                                                                                                                                                        |  |      | 207,793 |   |      |    | 131,019  |  
|Current portion of long term debt                                                                                                                                                                                                                                                       |  |      | (96,968 | ) |      |    | (129,165 | )
|                                                                                                                                                                                                                                                                                        |  |      |         |   |      |    |          |  
|Long term debt                                                                                                                                                                                                                                                                          |  | Ps   | 110,825 |   |      | Ps | 1,854    |  
|                                                                                                                                                                                                                                                                                        |  |      |         |   |      |    |          |  



F-21



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##### Table of Contents

|(1) | The long term capital lease contract entered into to acquire telecommunications equipment
which is denominated in US dollars amounted to Ps21,136 (US$1,881) as of December 31, 2003, bears an interest rate between 9.18% and 8.1%. This capital lease is payable in 36 monthly payments of Ps2,310 (US$224), maturing in June 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Annual maturities of the long term capital lease
are as follows:



|     |  |      |       
|---- |  | ---- | ------
|     |  | 2003
|2004 |  | Ps   | 19,282
|2005 |  |      | 1,854 
|     |  |      |       
|     |  | Ps   | 21,136
|     |  |      |       



|10. | SENIOR NOTES AND BANK LOANS
|--- | ---------------------------



At December 31, 2002 and 2003, the senior notes are integrated as follows:



|                    |  |      |           |      |    |          
|------------------- |  | ---- | --------- | ---- | -- | ---------
|                    |  | 2002 |           | 2003
|A) New Senior Notes |  | Ps   |          |      | Ps | 3,418,272
|B) Old Senior Notes |  |      | 6,112,074 |      |    | 932,419  
|                    |  |      |           |      |    |          
|                    |  | Ps   | 6,112,074 |      | Ps | 4,350,691
|                    |  |      |           |      |    |          



| | A) | New Senior Notes
| | -- | ----------------



During November 2003, the Company successfully concluded the restructuring of its Old Senior Notes, as mentioned in Note 2. The Old Senior Notes holders
who accepted the Companys offer represented 85.5% of the Old Senior Notes, or approximately US$487 million of the principal amount.



The main characteristics of the New Senior Notes issued by the Company are:



|a. | The maturity date is June 30, 2010 with partial amortizations as described below. The New Senior Notes bear interest at an annual rate of 8.0%, payable semi-annually in cash in
arrears, on June 30 and December 30, starting on December 30, 2003.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The following table shows the amortization of the principal of the New Senior Notes:



|                       |  |                                                |   |  |                                                  |  
|---------------------- |  | ---------------------------------------------- | - |  | ------------------------------------------------ | -
|Principal payment date |  | Percentage of originalprincipal amount payable |   |  | Percentage of remainingoriginal principal amount |  
|December 30, 2005      |  | 2.0                                            | % |  | 98.0                                             | %
|June 30, 2006          |  | 2.0                                            | % |  | 96.0                                             | %
|December 30, 2006      |  | 2.0                                            | % |  | 94.0                                             | %
|June 30, 2007          |  | 5.5                                            | % |  | 88.5                                             | %
|December 30, 2007      |  | 5.5                                            | % |  | 83.0                                             | %
|June 30, 2008          |  | 6.5                                            | % |  | 76.5                                             | %
|December 30, 2008      |  | 6.5                                            | % |  | 70.0                                             | %
|June 30, 2009          |  | 6.5                                            | % |  | 63.5                                             | %
|December 30, 2009      |  | 6.5                                            | % |  | 57.0                                             | %
|June 30, 2010          |  | 57.0                                           | % |  |                                                 |  



|b. | The notes may be paid in advance at the Companys option, totally or partially, at any time for an amount equal to 101% of the outstanding principal amount owing.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|c. | In the event of a change in the Companys control structure, for example in the case of the change of partners owning the social parts of the Company and with certain
exceptions, the holders of the New Senior Notes will be entitled to demand that Alestra repurchase the notes in cash, at a price equal to 101% of the principal amount plus unpaid accrued interest.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|d. | The issuance of these new notes includes certain covenants, which among other things, limit the Companys ability in relation to the granting of liens, payment of dividends and
sale of assets at values lower than fair market values and the presentation of financial information at certain dates. In addition, with some exceptions, these covenants limit a merger or spin-off of significant parts of the Company or its
operations.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B) Old senior notes



The Old Senior Notes holders that did not accept the Companys exchange
offer continue to hold the Old Senior Notes in two tranches: seven-year notes maturing on May 15, 2006 in an aggregate principal amount of Ps416,688 (US$37 million) and ten year notes maturing on May 15, 2009 in an aggregate principal amount of
Ps515,732 (US$46 million). Maturing on May 15, 2006 and 2009, respectively, with annual rates of 12.125% and 12.625%, respectively. In November 2003, the Company paid Old Senior Notes holders that did not accept the financial restructuring, past due
interest from December 2002 through June 2003 and accrued interest due in November 2003.



F-23



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##### Table of Contents

The Old Senior Notes maintain some covenants which, among other things, limit the Companys ability
with respect to the granting of guarantees and liens.



|11. | STOCKHOLDERS EQUITY
|--- | --------------------



As part of the senior notes restructuring described in Note 2 and 10, in a resolution adopted outside the meeting held on November 17, 2003,
Alestras stockholders agreed to increase the variable portion of its capital stock by US$100 million (Ps1,117,571 nominal), which were subscribed proportionally to the percentage of ownership of each shareholders; as such 51% of such amount
were subscribed by Onexa and the remaining 49% by AT&T.



On December 1,
2003, the Companys stockholders resolved to (i) reclassify the balance of the restatement of capital stock as of December 31, 2002 in the amount of Ps4,034,704 (Ps3,674,674 nominal) into the variable portion of the capital stock, and (ii)
thereafter, reduce the variable portion of the capital stock for Ps9,339,779 (Ps8,982,284 nominal) and apply Ps1,188,401 (Ps1,142,913 nominal) against accumulated deficit from restatement and Ps8,151,378 (Ps7,839,371 nominal) against accumulated
deficit. The above referenced capital transactions were distributed proportionally to the participation of each stockholder, 51% on Onexa and 49% on AT&T . These transactions did not represent a contribution or payment to the equity holders.



The capital stock of Alestra is variable with a fixed minimum
of Ps300 and an unlimited maximum. As of December 31, 2003, the subscribed and paid-in capital stock at nominal value amounted to Ps1,181,346 (Ps5,371,386 in 2002). It is represented by common, nominative social parts of no par value, and is divided
as follows: (a) Series A, which represents 51% of the social parts, grants full ownership and voting rights, and is restricted to Mexican investors; (b) Series B which represents no more than 49% of the social parts, grants
full ownership and voting rights, and has no ownership restrictions; and (c) Series N, which may represent up to 65% of the total capital stock, grants limited ownership and voting rights in accordance with article 113 of the General Law
of Mercantile Organizations, and may be acquired by Mexican and foreign investors in accordance with the applicable legal regulations.



The Companys capital stock at December 31, 2002, comprises the following:



|                      |  |                            |  |              |           |        |       |               |       |              |    |           |  |    |          
|--------------------- |  | -------------------------- |  | ------------ | --------- | ------ | ----- | ------------- | ----- | ------------ | -- | --------- |  | -- | ---------
|Onexa, S. A. de C. V. |  | AT&T Telecom. México, Inc. |  |             
|Series                |  | Ownership (%)              |  | Contribution |           | Series |       | Ownership (%) |       | Contribution |    | Total    
|A                   |  | 17.85                      |  | Ps           | 958,792   |        | A   |               |      |              | Ps |          |  | Ps | 958,792  
|B                   |  |                           |  |              |          |        | B   |               | 17.15 |              |    | 921,192   |  |    | 921,192  
|N                   |  | 33.15                      |  |              | 1,780,615 |        | N   |               | 31.85 |              |    | 1,710,787 |  |    | 3,491,402
|                      |  |                            |  |              |           |        |       |               |       |              |    |           |  |    |          
|Total                 |  | 51.00                      |  | Ps           | 2,739,407 |        | Total |               | 49.00 |              | Ps | 2,631,979 |  | Ps | 5,371,386
|                      |  |                            |  |              |           |        |       |               |       |              |    |           |  |    |          



F-24



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##### Table of Contents

The Companys capital stock at December 31, 2003, comprises the following:



|                      |  |                            |  |              |         |        |       |               |       |              |    |         |  |    |          
|--------------------- |  | -------------------------- |  | ------------ | ------- | ------ | ----- | ------------- | ----- | ------------ | -- | ------- |  | -- | ---------
|Onexa, S. A. de C. V. |  | AT&T Telecom. México, Inc. |  |             
|Series                |  | Ownership (%)              |  | Contribution |         | Series |       | Ownership (%) |       | Contribution |    | Total  
|A                   |  | 17.85                      |  | Ps           | 210,870 |        | A   |               |      |              | Ps |        |  | Ps | 210,870  
|B                   |  |                           |  |              |        |        | B   |               | 17.15 |              |    | 202,601 |  |    | 202,601  
|N                   |  | 33.15                      |  |              | 391,616 |        | N   |               | 31.85 |              |    | 376,259 |  |    | 767,875  
|                      |  |                            |  |              |         |        |       |               |       |              |    |         |  |    |          
|Total                 |  | 51.00                      |  | Ps           | 602,486 |        | Total |               | 49.00 |              | Ps | 578,860 |  | Ps | 1,181,346
|                      |  |                            |  |              |         |        |       |               |       |              |    |         |  |    |          



At December 31, 2002
the restated figures of stockholders equity were as follows:



|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|----------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ----------- | -- | ---------- | -------------- |  | -- | ---------- | -
|                                                                                    |  | Nominal value |              |   | Restatement |    |            | Restated value | 
|Capital stock:                                                                      |  |               |              |   |             |    |            |                |  |    |            |  
|Fixed                                                                               |  | Ps            | 300          |   |             | Ps | 480        |                |  | Ps | 780        |  
|Variable                                                                            |  |               | 5,371,086    |   |             |    | 4,034,224  |                |  |    | 9,405,310  |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Total capital stock                                                                 |  |               | 5,371,386    |   |             |    | 4,034,704  |                |  |    | 9,406,090  |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Deficit from restatement                                                            |  |               |             |   |             |    | (1,188,401 | )              |  |    | (1,188,401 | )
|Accumulated losses                                                                  |  |               | (6,413,999   | ) |             |    | (1,737,379 | )              |  |    | (8,151,378 | )
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Total accumulated deficit                                                           |  |               | (6,413,999   | ) |             |    | (2,925,780 | )              |  |    | (9,339,779 | )
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Majority interest                                                                   |  |               | (1,042,613   | ) |             |    | 1,108,924  |                |  |    | 66,311     |  
|Minority interest                                                                   |  |               | 2            |   |             |    |           |                |  |    | 2          |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Total stockholders equity                                                          |  |               | (Ps1,042,611 | ) |             | Ps | 1,108,924  |                |  | Ps | 66,313     |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|                                                                                   
|At December 31, 2003, the restated figures of stockholders equity were as follows: | 
|                                                                                    |  | Nominal Value |              |   | Restatement |    |            | Restated value | 
|Capital stock:                                                                      |  |               |              |   |             |    |            |                |  |    |            |  
|Fixed                                                                               |  | Ps            | 300          |   |             | Ps | 12         |                |  | Ps | 312        |  
|Variable                                                                            |  |               | 1,181,046    |   |             |    | 7,329      |                |  |    | 1,188,375  |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Total capital stock                                                                 |  |               | 1,181,346    |   |             |    | 7,341      |                |  |    | 1,188,687  |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Gain from restatement                                                               |  |               |             |   |             |    | 354,975    |                |  |    | 354,975    |  
|Accumulated income                                                                  |  |               | 929,923      |   |             |    | (17,089    | )              |  |    | 912,834    |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Total accumulated income                                                            |  |               | 929,923      |   |             |    | 337,886    |                |  |    | 1,267,809  |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Majority interest                                                                   |  |               | 2,111,269    |   |             |    | 345,227    |                |  |    | 2,456,496  |  
|Minority interest                                                                   |  |               | 2            |   |             |    |           |                |  |    | 2          |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  
|Total stockholders equity                                                          |  | Ps            | 2,111,271    |   |             | Ps | 345,227    |                |  | Ps | 2,456,498  |  
|                                                                                    |  |               |              |   |             |    |            |                |  |    |            |  



F-25



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##### Table of Contents

Net income for the year is subject to the decisions taken at of the General Stockholders Meeting,
to the companys by-laws and to the General Law of Mercantile Organizations, which establishes that in the event of a profit, 5% of such be aimed to increase the legal reserve, until such reserve is equal to 20% of the capital stock.



Dividends paid from the Net Tax Profit Account (NTPA) are not
subject to income tax. For all other dividends, the Company shall pay 34% over the result of multiplying the dividend paid by a factor of 1.5152. The corresponding tax is payable by the company and may be credited against the income tax incurred by
the Company in the three following years. Dividends paid are not subject to any withholding.



|12. | CONTINGENCIES AND COMMITMENTS
|--- | -----------------------------



a. At December 31, 2003 the Company had commitments from agreements to lease office space under operating leases. The leases are subject to escalation
factors based on the NCPI. At December 31, 2003, future minimum lease payments under no cancelable operating leases with terms in excess of one year are as follows:



|                    |  |    |        
|------------------- |  | -- | -------
|2004                |  | Ps | 67,833 
|2005                |  |    | 69,540 
|2006                |  |    | 69,174 
|2007                |  |    | 70,717 
|2008 and thereafter |  |    | 146,745
|                    |  |    |        
|                    |  | Ps | 424,009
|                    |  |    |        



Rental expense was
Ps71,647, Ps67,331 and Ps69,103 for the years ended December 31, 2001, 2002 and 2003, respectively.



b. As of December 31, 2002 and 2003, the Company obtained performance bonds for approximately Ps54,586 and Ps26,083, respectively, in favor of certain
authorities and suppliers to guarantee the Companys compliance with certain obligations incurred.



c. As of December 31, 2002 and 2003 the Company had outstanding commitments to acquire equipment and other capital expenditures related with the
construction of its telecommunications network of approximately US$9.4 million (Ps101,024) and US$12.0 million (Ps135,854) respectively.



d. On October 23, 2002, Alestra promoted a nullity trial before the Federal Court of Fiscal and Administrative Justice, against the resolution issued by
the Cofetel on August 6, 2002, through which it approved the liquidation tariffs applicable to 2002 and 2003 as agreed by Telmex and MCI International.



The Companys attorneys are expecting a favorable resolution to the petition. On January 24, 2003, Alestra entered into an agreement with Telmex in
which, among other things, Alestra settled any potential liabilities it could have had with Telmex as a result of the application of



F-26



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##### Table of Contents

different international liquidations tariffs. It is important to mention that as from that date and up to September 2003, Alestra subscribed with Telmex,
several international liquidation tariffs in order to settle different liabilities. If the motion is lost, Alestra will not be allowed to participate in the negotiation of international tariffs in the future, and the Court would rule in favor of
Cofetel with respect to the legality of international tariffs negotiated by Telmex for 2002 and 2003. Even with an adverse resolution, Alestra would not incur in financial losses derived from the application of the different tariffs in 2002 and 2003
and could even have the right to make additional collections from the other telecommunications companies; therefore, the Company did not record anything in accounting.



e. In September 2003, WRH Global Securities Pooled Trust (WRH) commenced an action against the Company, its
equity holders and the indenture trustee of the indentures governing its 12 1/8% Senior Notes due 2006 (senior notes due 2006) and its 12 5/8% Senior Notes due 2009 (senior notes due 2009, and together with the senior notes
due 2006, the senior notes due 2006 and 2009) in the United States District Court for the Southern District of New York. The complaint sought damages and to enjoin the Company from consummating its exchange offers and consent
solicitations. WRH brought two motions for preliminary injunctions against the Company to prevent the consummation of the exchange offers and consent solicitations. The Court denied the first motion upon finding that certain of WRHs claims
were moot and that WRH was not entitled to the other relief it had sought. The Court denied the second motion upon finding that WRH was not entitled to the relief it sought. The exchange offers and consent solicitations were consummated on November
17, 2003. The Company moved, and WRH cross-moved, for summary judgment on WRHs claim that its senior notes due 2006 and 2009 had been ipso facto accelerated. On November 18, 2003, in an oral ruling the court granted its motion for partial
summary judgment and dismissed WRHs cross-motion. The Court further memorialized its November 18, 2003 ruling in an order dated March 22, 2004. In December 2003, WRH amended its complaint alleging, among other things, that it elected to
accelerate its senior notes due 2009 pursuant to a November 6, 2003 notice. WRH also reasserted its claim that the senior notes due 2006 and 2009 had been ipso facto accelerated. In January 2004, the Company, its equity holders and the indenture
trustee of the indentures governing its senior notes due 2006 and 2009 moved to dismiss the amended complaint. The motion to dismiss the amended complaint is pending.



On October 6, 2003, Eximius filed a request for an insolvency declaration and a Concurso Mercantil (a Mexican
reorganization proceeding) under the LCM against the Company before a court in the State of Nuevo Leon, Mexico.



In its petition, Eximius alleged, among other things, that its senior notes due 2006 and 2009 had been ipso facto accelerated pursuant to the Indentures
dated May 17, 1999, between the Company and the Trustee (U.S. Bank), governing the senior notes due 2006 and 2009. Moreover, Eximius also alleged in its petition that the Company made certain statements in its Prospectus that constituted
an admission in writing of its inability to pay its debts generally, and that therefore the Senior Notes had been ipso facto accelerated under the Indentures.



On October 28, 2003, the Monterrey court sent trial records to Mexico City. The Mexico City Judge thereafter returned the trial records to Monterrey
requesting that the issue be resolved as per Commercial Code rules. The Company sought to have proceedings moved to the Mexico City court on the basis that the Monterrey court lacked jurisdiction. On January 21st, 2004, the Monterrey court ordered
that the records be sent to Mexico City as a consequence of the Monterrey courts lack of jurisdiction and on January 28th, 2004, the 8thFederal District Judge in the Mexico City court accepted the records.



On November 12, 2003, the Company answered the Concurso
Mercantil petition. Among other defenses, the Company argued the lack of a cause of action derived from sections I and II of Article 10 of the LCM, since on the date when the answer was filed, more than 85% of the note holders of the
Indentures had already consented to rescind all of their rights, including the acceleration of such notes.



On February 16, 2004, the Mexico City court appointed an expert to conduct the analysis of its financial situation required in the Concurso
Mercantil process. The experts analysis will determine whether the Company meets the statutory presumptions of Articles 10 and 11 of the LCM and therefore whether the Company meets the financial tests for the Company to be placed in a
Concurso Mercantil, however, the Company does not believe that it meets such presumptions. The Company does not believe that the statutory presumptions of Articles 10 and 11 of the LCM have been met.



f. Servicios Alestra has a contingent liability for indemnities payable to
personnel in case of dismissal under certain circumstances set in forth the Mexican Federal Labor Law.



|13. | SEGMENTS
|--- | --------



The Company operates in four segments, mainly: national long distance, international long distance, data transmission and internet services and local
services. The reported segments of the Company represent the specific types of telecommunications services and products that the company offers and internally analyzes.



F-27



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##### Table of Contents

The Companys management uses the information as to income and costs of sales by segment to evaluate
performance, make general operations decisions and assign resources. Telecommunications services are generally offered using networks owned by the Company and leased (interconnection) networks that make no distinction between the different kinds of
services. As a result, the Company does not assign total assets, administrative and sales expenses, depreciation and amortization and obsolete assets per segment.



Accounting policies of the segments are the same than those described in the summary of significant accounting policies. The information on
the Companys segments for the years ended December 31, 2001, 2002 and 2003 are shown as follows:



|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|----------------------------------- |  | ------------- | --------- | ----------------- | -- | ------------- |  | ----- | ------- |  | -- | ------- |  | -- | ------------ | -
|                                    |  | Long distance |           | Data and Internet |    | Local Service |  | Total |        
|Years ended                         |  | National      |           | International     |    |               | 
|2001                                |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Revenues                            |  | Ps            | 2,136,274 |                   | Ps | 1,551,154     |  | Ps    | 612,165 |  | Ps | 33,575  |  | Ps | 4,333,168    |  
|Costs (excluding depreciation)      |  |               | 921,989   |                   |    | 757,028       |  |       | 176,080 |  |    | 12,020  |  |    | 1,867,117    |  
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Gross profit                        |  | Ps            | 1,214,285 |                   | Ps | 794,126       |  | Ps    | 436,085 |  | Ps | 21,555  |  |    | 2,466,051    |  
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Operating expenses                  |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (2,883,047   | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Operating loss                      |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (416,996     | )
|Comprehensive financial result      |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (250,158     | )
|Other expenses, net                 |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (21,938      | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Loss before provision for asset tax |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (689,092     | )
|Asset tax                           |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (4,654       | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Net loss                            |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (Ps693,746   | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|2002                                |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Revenues                            |  | Ps            | 1,502,046 |                   | Ps | 2,159,463     |  | Ps    | 816,905 |  | Ps | 137,397 |  | Ps | 4,615,811    |  
|Costs (excluding depreciation)      |  |               | 582,084   |                   |    | 1,306,551     |  |       | 206,456 |  |    | 23,327  |  |    | 2,118,418    |  
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Gross profit                        |  | Ps            | 919,962   |                   | Ps | 852,912       |  | Ps    | 610,449 |  | Ps | 114,070 |  |    | 2,497,393    |  
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Operating expenses                  |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (2,658,516   | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Operating loss                      |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (161,123     | )
|Comprehensive financial result      |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (1,281,276   | )
|Other expenses, net                 |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (17,739      | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Loss before provision for asset tax |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (1,460,138   | )
|Asset tax                           |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (4,648       | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  
|Net loss                            |  |               |           |                   |    |               |  |       |         |  |    |         |  |    | (Ps1,464,786 | )
|                                    |  |               |           |                   |    |               |  |       |         |  |    |         |  |    |              |  



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##### Table of Contents

|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|------------------------------------- |  | ------------- | --------- | ----------------- | -- | ------------- |  | ----- | --------- |  | -- | ------- |  | -- | ---------- | -
|                                      |  | Long distance |           | Data and Internet |    | Local Service |  | Total |          
|Years ended                           |  | National      |           | International     |    |               | 
|2003                                  |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|Revenues                              |  | Ps            | 1,243,097 |                   | Ps | 2,977,039     |  | Ps    | 1,084,662 |  | Ps | 219,151 |  | Ps | 5,523,949  |  
|Costs (excluding depreciation)        |  |               | 471,353   |                   |    | 2,078,611     |  |       | 258,957   |  |    | 52,216  |  |    | 2,861,137  |  
|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|Gross profit                          |  | Ps            | 771,744   |                   | Ps | 898,428       |  | Ps    | 825,705   |  | Ps | 166,935 |  |    | 2,662,812  |  
|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|Operating expenses                    |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | (2,367,656 | )
|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|Operating gain                        |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | 295,156    |  
|Comprehensive financial result        |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | (985,597   | )
|Special item                          |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | 1,507,697  |  
|Other income, net                     |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | 99,429     |  
|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|Income before provision for asset tax |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | 916,685    |  
|Asset tax                             |  |               |           |                   |    |               |  |       |           |  |    |         |  |    | (3,851     | )
|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  
|Net income                            |  |               |           |                   |    |               |  |       |           |  |    |         |  | Ps | 912,834    |  
|                                      |  |               |           |                   |    |               |  |       |           |  |    |         |  |    |            |  



The Company does not
have significant assets outside of Mexico. In 2003, 91.8% of the revenue from international long distance services of the Company is generated by AT&T (see Notes 3-1 and 5).



|14. | COSTS OF SPECIAL PROJECTS
|--- | -------------------------



In connection with the liberalization of the Mexican long distance market, the Ministry of Communications authorized Telmex to charge each new long
distance carrier a portion of the infrastructure cost incurred by Telmex to upgrade its system to allow interconnection (Special Project Charges). The Ministry of Communications issued a resolution on May 28, 1997 which set the total
Special Project Charges at US$422 million (Ps4,525,079 at December 31, 2003) which amount increases at a 12% annual rate. The resolution requires the Special Project Charges to be billed on a monthly basis to each new long distance carrier based on
the carriers percentage of total minutes of use, number of lines, number of interconnection ports and the total number of carriers interconnecting with Telmex, over a seven-year period. The current resolution also makes reference to an
undefined maintenance fee to be paid by each new long distance carrier to Telmex.



As a result of a contract signed with Telmex, an December 29, 2000 Alestra agreed that Telmex has the right to recover US$422 million (Ps4,525,079) from interconnected operators as costs of special projects and an
additional amount of US$ 132 million (Ps1,415,428) corresponding to the maintenance of such projects. It was also agreed that these amounts would increase at a 10% annual rate and that Telmex would pay its corresponding proportional part. The
parties agreed that Alestra would make an advance payment of Ps137,432 (US$13.6 million) on December 29, 2000 when the contract was signed. The remaining 85% would be paid at a rate of US$0.0053 per minute of interconnection in addition to the
interconnection rate and until the total amount is paid. The amount that Alestra is obligated to pay varies depending on its call volume and if Alestra does not connect any calls, it would not be obligated to make any special project payment to
Telmex.



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##### Table of Contents

In order to comply with these special projects obligations, the Company has recorded total liabilities of
Ps213,193 (US$19.9 million) and Ps107,889 (US$9.6 million) as of December 31, 2002 and 2003, respectively. The effect on costs for the years ended December 31, 2001, 2002 and 2003 amounted to a charge of Ps127,100 (US$ 12.1 million), Ps110,871
(US$10.7 million) and Ps88,014 (US$8.0 million), respectively.



|15. | INCOME TAX AND ASSET TAX
|--- | ------------------------



Alestra and its subsidiary are subject separately to the payment of income tax and assets tax, which are computed by each legal entity. Tax losses can be
carried forward for up to ten years and offset against any profits that the Company may generate during the period in accordance with the Income Tax Law.



The following items represent the principal differences between income taxes computed at the statutory tax rate and the Companys provision for
income taxes for the years ended December 31, 2001, 2002 and 2003:



|                                                                |  |       |  |       |  |      
|--------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                |  | 2001  |  | 2002  |  | 2003 
|Statutory income tax rate                                       |  | (35%) |  | (35%) |  | 34%  
|Plus (less) permanent nondeductible and accumulated items, net: |  |       |  |       |  |      
|Permanent nondeductible items                                   |  | (1%)  |  | 3%    |  | (2%) 
|Depreciation and amortization                                   |  | 38%   |  | 20%   |  | (37%)
|Other items                                                     |  | 1%    |  |      |  |     
|                                                                |  |       |  |       |  |      
|                                                                |  | 3%    |  | (12%) |  | (5%) 
|Plus (less) temporary nondeductible and accumulated items, net: |  |       |  |       |  |      
|Allowance for doubtful accounts                                 |  | 6%    |  | 4%    |  | 3%   
|Costs and provisions                                            |  | (23%) |  | 10%   |  | 31%  
|Noncumulative                                                   |  | 9%    |  |      |  |     
|                                                                |  |       |  |       |  |      
|                                                                |  | (5%)  |  | 2%    |  | 29%  
|Unapplied (amortization of) tax loss carryforwards              |  | 5%    |  |      |  |     
|Applied tax loss carryforwards                                  |  |      |  | (2%)  |  | (29%)
|                                                                |  |       |  |       |  |      
|Effective income tax rate                                       |  |      |  |      |  |     
|                                                                |  |       |  |       |  |      



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##### Table of Contents

At December 31, 2002 and 2003 the main temporary differences for which deferred income tax was not
recognized due to the Companys tax loss carryforwards are:



|                                             |  |      |             |   |      |    |             |  
|-------------------------------------------- |  | ---- | ----------- | - | ---- | -- | ----------- | -
|                                             |  | 2002 |             |   | 2003 |   
|Noncumulative income                         |  | Ps   | 1,323       |   |      | Ps |            |  
|Allowance for doubtful accounts              |  |      | (998,205    | ) |      |    | (891,971    | )
|Property and equipment, net                  |  |      | 2,889,542   |   |      |    | 2,883,264   |  
|Preoperating expenses, net and other assets  |  |      | 701,779     |   |      |    | 417,595     |  
|Costs and provisions                         |  |      | 1,002,579   |   |      |    | 794,707     |  
|                                             |  |      |             |   |      |    |             |  
|Basis for calculation of deferred income tax |  | Ps   | 3,597,018   |   |      | Ps | 3,203,595   |  
|                                             |  |      |             |   |      |    |             |  
|Tax loss carryforwards                       |  | Ps   | (10,440,782 | ) |      | Ps | (10,157,405 | )
|                                             |  |      |             |   |      |    |             |  



Accumulated losses at
December 31, 2003 may be carried forward after a restatement in conformity with the statutory future inflation rates, as follows:



|     |  |    |           
|---- |  | -- | ----------
|2006 |  | Ps | 4,799,370 
|2007 |  |    | 3,076,802 
|2008 |  |    | 1,328,761 
|2009 |  |    | 117,661   
|2010 |  |    | 790,516   
|2011 |  |    | 25,882    
|2012 |  |    | 18,413    
|     |  |    |           
|     |  | Ps | 10,157,405
|     |  |    |           



In accordance with
current tax law, Mexican companies must pay the higher of income tax or asset tax. Asset tax is determined on the average value of substantially all of the Companys Mexican assets less certain liabilities. The asset tax showed in statement of
income corresponds to Servicios Alestra.



|16. | SPECIAL ITEM
|--- | ------------



As discussed in Note 2 and 10, on November 17, 2003, the Company concluded its debt restructuring process, by extinguishing US$487 million of its US$570 million Old Senior Notes, representing 85.5% of these notes. The
Company issued US$304.2 million in New Senior Notes to exchange for Ps3,208,660 (US$287 million) of the Old Senior Notes and paid Ps1,229,000 (US$110 million) in cash to extinguish Ps2,236,000 (US$200 million) of the Old Senior Notes, resulting in a
gain of Ps816,976 (US$73 million). Additionally, the Old Senior Notes holders that participated in the offer, agreed not to receive accrued and unpaid interest on their tendered Old Senior Notes and agreed that interest payments in the amount of
Ps800,901 million (US$71.4 million) that were scheduled to be made on November 15, 2002 and May 15, 2003 were never due and payable.



In addition, the Company wrote-off capitalized debt issuance cost corresponding to the 85.5% of the Old Senior Notes for an amount of Ps110,180.



F-31



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The special item in the statement of operations for the year ended December 31, 2003, is analyzed as follows:



|                                                                          |  |    |            |  
|------------------------------------------------------------------------- |  | -- | ---------- | -
|Gain on extinguishment of debt                                            |  | Ps | 816,976    |  
|                                                                          |  |    |            |  
|Gain on reversal of accrued interest                                      |  |    |            |  
|2002                                                                      |  |    | 444,951    |  
|2003                                                                      |  |    | 355,950    |  
|                                                                          |  |    |            |  
|                                                                          |  |    | 800,901    |  
|                                                                          |  |    |            |  
|Write-off of capitalized debt issuance cost of exchanged Old Senior Notes |  |    | (Ps110,180 | )
|                                                                          |  |    |            |  
|Total                                                                     |  | Ps | 1,507,697  |  
|                                                                          |  |    |            |  



|17. | FOREIGN CURRENCY POSITION
|--- | -------------------------



As of December 31, 2002 and 2003 assets and liabilities, denominated in foreign currencies (US dollars) were as follows:



|                                      |  |                         |             |   |      |     |             |  
|------------------------------------- |  | ----------------------- | ----------- | - | ---- | --- | ----------- | -
|                                      |  | Thousands of US dollars |            
|                                      |  | 2002                    |             |   | 2003 |    
|Assets                                |  | US$                     | 10,531      |   |      | US$ | 27,235      |  
|Short and long-term liabilities       |  |                         | (654,286    | ) |      |     | (399,114    | )
|                                      |  |                         |             |   |      |     |             |  
|Net                                   |  |                         | (US$643,755 | ) |      |     | (US$371,879 | )
|                                      |  |                         |             |   |      |     |             |  
|Non-monetary assets of foreign origin |  | US$                     | 578,781     |   |      | US$ | 595,988     |  
|                                      |  |                         |             |   |      |     |             |  



Following is a
consolidated summary of the main transactions in foreign currency:



|                   |  |      |            |   |      |     |            |      |  |     |          |  
|------------------ |  | ---- | ---------- | - | ---- | --- | ---------- | ---- |  | --- | -------- | -
|                   |  | 2001 |            |   | 2002 |     |            | 2003 | 
|Revenues           |  | US$  | 125,458    |   |      | US$ | 177,213    |      |  | US$ | 261,750  |  
|Cost of services   |  |      | (60,355    | ) |      |     | (91,983    | )    |  |     | (144,039 | )
|Operating expenses |  |      | (28,492    | ) |      |     | (29,585    | )    |  |     | (22,776  | )
|Interest expense   |  |      | (76,291    | ) |      |     | (79,664    | )    |  |     | (69,366  | )
|Interest income    |  |      | 5,137      |   |      |     | 1,139      |      |  |     | 234      |  
|Special item       |  |      |           |   |      |     |           |      |  |     | 144,148  |  
|Other income, net  |  |      | 4,209      |   |      |     | 1,432      |      |  |     | 11,432   |  
|                   |  |      |            |   |      |     |            |      |  |     |          |  
|Net (expense) gain |  |      | (US$30,334 | ) |      |     | (US$21,448 | )    |  | US$ | 181,383  |  
|                   |  |      |            |   |      |     |            |      |  |     |          |  



The exchange rates at
December 31, 2001, 2002 and 2003, were Ps9.1423, Ps10.3125 and Ps11.2360 per US dollar, respectively, as published by Banco de México (the Mexico central bank).



At March 1, 2004, the date of issuance of the financial statements, the exchange rate was Ps11.0715 per US dollar.



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|18. | FINANCIAL INSTRUMENTS
|--- | ---------------------



The carrying amounts of cash and cash equivalents, current receivables, accounts payable, due from and to related companies and accrued expenses and other
payables, approximate fair value, due to the short term maturity of these instruments.



The fair value of the Companys investment in restricted securities and senior notes are based on quoted market prices. The estimated fair values of these instruments at December 31, 2002 and 2003, are as
follows:



|             |  |                 |  |             |  |            
|------------ |  | --------------- |  | ----------- |  | -----------
|             |  | 2002           
|             |  | Carrying amount |  | Fair value  |  | Difference 
|Senior notes |  | Ps6,112,074     |  | Ps2,078,105 |  | Ps4,033,969
|             |  |                 |  |             |  |            
|             | 
|             |  | 2003           
|             |  | Carrying amount |  | Fair value  |  | Difference 
|Senior notes |  | Ps4,350,691     |  | Ps3,726,244 |  | Ps624,447  
|             |  |                 |  |             |  |            



The notes are thinly
traded financial instruments; accordingly, their market price at any balance sheet date may not be representative of the price which would be derived from a more active market.



|19. | DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP
|--- | ----------------------------------------------



The Companys consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S.
GAAP. The Mexican GAAP consolidated financial statements include the effects of inflation as provided for under Bulletin B-10 and its amendments (see note 3), whereas financial statements prepared under U.S. GAAP are presented on a historical cost
basis. The reconciliation to U.S. GAAP includes a reconciling item for the effect of applying the option provided by the Fifth Amendment for the restatement of equipment of non-Mexican origin because, as described below, this provision of inflation
accounting under Mexican GAAP does not meet the consistent reporting currency requirements of Regulation S-X. The reconciliation does not include the reversal of the other adjustments to the financial statements for the effects of inflation required
under Mexican GAAP because the application of Bulletin B-10 represents a comprehensive measure of the effects of price level changes in the inflationary 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.



Restatement: Alestra has changed the amount previously reported in the U.S. GAAP reconciliation for the Reversal of gain on extinguishment of debt, to properly reflect the application of Statement of Financial
Accounting Standard No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring (SFAS 15). The gain recognized under Mexican GAAP presented in Note 16 should be eliminated under U.S. GAAP and the related
interest cost and debt issue cost should also be adjusted. Due to an inadvertent error, the gain was not properly presented in the U.S. GAAP reconciliation. The restatement does not affect any of the Companys Mexican GAAP financial statements.



For the year ended December 31, 2003, the correction of the
error increases the reported loss under U.S. GAAP by Ps. 352,170 and decreases stockholders equity reported by the same amount.



The principal differences between Mexican GAAP and U.S. GAAP and the effect on consolidated net loss and consolidated stockholders equity are
presented below with an explanation of the adjustments.



F-33



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##### Table of Contents

|                                                 |  |                         |   |  |              |   |  |               |            |  
|------------------------------------------------ |  | ----------------------- | - |  | ------------ | - |  | ------------- | ---------- | -
|                                                 |  | Year ended December 31, |  
|                                                 |  | 2001                    |   |  | 2002         |   |  | 2003          |           
|                                                 |  |                         |   |  |              |   |  | (As restated) |           
|Reconciliation of net (loss) income:             |  |                         |   |  |              |   |  |               |            |  
|Net (loss) income as reported under Mexican GAAP |  | (Ps693,746              | ) |  | (Ps1,464,786 | ) |  | Ps            | 912,834    |  
|                                                 |  |                         |   |  |              |   |  |               |            |  
|U.S. GAAP adjustments:                           |  |                         |   |  |              |   |  |               |            |  
|Reversal of gain on extinguishment of debt       |  |                        |   |  |             |   |  |               | (1,507,697 | )
|Difference in interest expense                   |  |                        |   |  |             |   |  |               | 107,335    |  
|Reversal of debt issuance costs, net             |  |                        |   |  |             |   |  |               | (126,628   | )
|Fifth amendment effect on depreciation expense   |  | (105,055                | ) |  | (105,965     | ) |  |               | (78,208    | )
|Reversal of preoperating expense amortization    |  | 211,284                 |   |  | 211,284      |   |  |               | 211,284    |  
|Depreciation of capitalized comprehensive        |  |                         |   |  |              |   |  |               |            |  
|financing costs under Mexican GAAP               |  | (1,048                  | ) |  | (1,048       | ) |  |               | (1,048     | )
|Depreciation of capitalized interest under       |  |                         |   |  |              |   |  |               |            |  
|U.S. GAAP                                        |  | (6,331                  | ) |  | (6,331       | ) |  |               | (6,331     | )
|                                                 |  |                         |   |  |              |   |  |               |            |  
|Total U.S. GAAP adjustments                      |  | 98,850                  |   |  | 97,940       |   |  |               | (1,401,293 | )
|                                                 |  |                         |   |  |              |   |  |               |            |  
|Net loss under U.S. GAAP                         |  | (Ps594,896              | ) |  | (Ps1,366,846 | ) |  |               | (Ps488,459 | )
|                                                 |  |                         |   |  |              |   |  |               |            |  



|                                                                                             |  |      |            |   |               |    |            |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ------------- | -- | ---------- | -
|                                                                                             |  | 2002 |            |   | 2003          |   
|                                                                                             |  |      |            |   | (As restated) |   
|Reconciliation of stockholders equity:                                                      |  |      |            |   |               |    |            |  
|Total stockholders equity reported under Mexican GAAP                                       |  | Ps   | 66,313     |   |               | Ps | 2,456,498  |  
|                                                                                             |  |      |            |   |               |    |            |  
|U.S. GAAP adjustments:                                                                       |  |      |            |   |               |    |            |  
|Effect on total debt of extinguishment                                                       |  |      |           |   |               |    | (1,400,362 | )
|Effect on debt issuance costs                                                                |  |      |           |   |               |    | (127,893   | )
|Accumulated amortization of debt issuance costs                                              |  |      |           |   |               |    | 1,265      |  
|Fifth amendment effect on real estate and equipment                                          |  |      | 758,136    |   |               |    | 325,358    |  
|Pre-operating expenses                                                                       |  |      | (2,030,627 | ) |               |    | (2,030,627 | )
|Accumulated amortization of preoperating expenses                                            |  |      | 1,130,645  |   |               |    | 1,341,524  |  
|Minority interest under Mexican GAAP                                                         |  |      | (2         | ) |               |    | (2         | )
|Net adjustment for comprehensive financing costs and interest capitalization under U.S. GAAP |  |      | 44,255     |   |               |    | 44,255     |  
|Accumulated depreciation for comprehensive financing costs and interest capitalization       |  |      | (22,122    | ) |               |    | (29,501    | )
|                                                                                             |  |      |            |   |               |    |            |  
|Total U.S. GAAP adjustments                                                                  |  |      | (119,715   | ) |               |    | (1,875,983 | )
|                                                                                             |  |      |            |   |               |    |            |  
|Total stockholders equity under U.S. GAAP                                                   |  |      | (Ps53,402  | ) |               | Ps | 580,515    |  
|                                                                                             |  |      |            |   |               |    |            |  



F-34



---

##### Table of Contents

A summary of the Companys statement of changes in stockholders equity with balances
determined under U.S. GAAP is as follows:



|                               |  |      |            |   |               |    |           |  
|------------------------------ |  | ---- | ---------- | - | ------------- | -- | --------- | -
|                               |  | 2002 |            |   | 2003          |   
|                               |  |      |            |   | (As restated) |   
|Balance at beginning of period |  | Ps   | 1,313,444  |   |               |    | (Ps53,402 | )
|Capital contributions          |  |      |           |   |               |    | 1,122,376 |  
|Net loss for the year          |  |      | (1,366,846 | ) |               |    | (488,459  | )
|                               |  |      |            |   |               |    |           |  
|Balance at end of period       |  |      | (Ps53,402  | ) |               | Ps | 580,515   |  
|                               |  |      |            |   |               |    |           |  



As explained in Note 11, on December
1, 2003, the Companys stockholders resolved to reclassify the balances of the restatement of capital stock, accumulated deficit from restatement and accumulated losses. For U.S. GAAP purposes, reclassifications of this nature are considered to
be a quasi-reorganization and as such the Company may not reclassify a deficit in retained earnings unless certain criteria is met. The Company does not comply with all the criteria and consequently, the stockholders equity as of December 31,
2002 and 2003 is as follows:



|                                           |  |      |            |   |               |    |            |  
|------------------------------------------ |  | ---- | ---------- | - | ------------- | -- | ---------- | -
|                                           |  | 2002 |            |   | 2003          |   
|                                           |  |      |            |   | (As restated) |   
|Capital stock                              |  | Ps   | 9,406,090  |   |               | Ps | 10,528,466 |  
|Accumulated losses                         |  |      | (9,459,492 | ) |               |    | (9,947,951 | )
|                                           |  |      |            |   |               |    |            |  
|Total stockholders equity under U.S. GAAP |  |      | (Ps53,402  | ) |               | Ps | 580,515    |  
|                                           |  |      |            |   |               |    |            |  



The following table
presents summarized statements of income in constant Pesos, including all U.S. GAAP adjustments, for the years ended December 31, 2001, 2002 and 2003:



|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  
|-------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ------------ | ------------- |  | -- | ---------- | -
|                                                                     |  | 2001 |            |   | 2002 |    |              | 2003          | 
|                                                                     |  |      |            |   |      |    |              | (As restated) | 
|Net revenues                                                         |  | Ps   | 4,333,168  |   |      | Ps | 4,615,811    |               |  | Ps | 5,523,949  |  
|Cost of services (excluding depreciation presented separately below) |  |      | (1,867,117 | ) |      |    | (2,118,418   | )             |  |    | (2,861,137 | )
|Administration and selling                                           |  |      | (1,836,318 | ) |      |    | (1,689,078   | )             |  |    | (1,478,189 | )
|Depreciation and amortization                                        |  |      | (947,879   | ) |      |    | (871,498     | )             |  |    | (763,770   | )
|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  
|Operating (loss) income                                              |  |      | (318,146   | ) |      |    | (63,183      | )             |  |    | 420,853    |  
|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  
|Comprehensive financial result:                                      |  |      |            |   |      |    |              |               |  |    |            |  
|Interest income                                                      |  |      | 62,789     |   |      |    | 17,085       |               |  |    | 6,797      |  
|Interest expense                                                     |  |      | (832,497   | ) |      |    | (857,437     | )             |  |    | (555,179   | )
|Exchange gains (losses)                                              |  |      | 272,744    |   |      |    | (797,669     | )             |  |    | (593,729   | )
|Gain from monetary position                                          |  |      | 246,806    |   |      |    | 356,745      |               |  |    | 263,849    |  
|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  
|                                                                     |  |      | (250,158   | ) |      |    | (1,281,276   | )             |  |    | (878,262   | )
|Debt issuance costs, net                                             |  |      |           |   |      |    |             |               |  |    | (126,628   | )
|Other (expense) income, net                                          |  |      | (21,938    | ) |      |    | (17,739      | )             |  |    | 99,429     |  
|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  
|Net loss before asset tax                                            |  |      | (590,242   | ) |      |    | (1,362,198   | )             |  |    | (484,608   | )
|Asset tax                                                            |  |      | (4,654     | ) |      |    | (4,648       | )             |  |    | (3,851     | )
|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  
|Net loss                                                             |  |      | (Ps594,896 | ) |      |    | (Ps1,366,846 | )             |  |    | (Ps488,459 | )
|                                                                     |  |      |            |   |      |    |              |               |  |    |            |  



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Under Mexican GAAP minority interest, the minority interest in consolidated subsidiaries is presented as
a separate component within the stockholders equity section of the balance sheet. For U.S. GAAP purposes, the minority interest is not included in stockholders equity.



Effects of the restructuring of the Old Senior Notes



As mentioned in Note 17, under Mexican GAAP, the effects of the restructuring are recorded as follows:



| |  | A gain of Ps816,976 is recognized for the effect of the extinguishment of the Old Senior Notes.
| | - | -----------------------------------------------------------------------------------------------



| |  | A gain of Ps800,901 for the reversal of accrued and unpaid interest of the Old Senior Notes that were due on November 15, 2002 and May 15, 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Write-off of unamortized debt issuance cost related to the Old Senior Notes of Ps110,180 and the capitalization of Ps127,893 for the debt issuance cost of the New Senior Notes
amortized over the term of the New Senior Notes.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense is determined using the actual interest rate on the New Senior Notes.
| | - | --------------------------------------------------------------------------------------



For U. S. GAAP purposes, the debt restructuring of the old senior notes is considered as a troubled debt restructuring in accordance with
Statement of Financial Accounting Standard No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring and its effects are recorded as follows:



| |  | Since the carrying amount of the old senior notes does not exceed the total future cash payments specified by the new senior notes, no gain on the restructuring was recognized for
the notes that were exchanged.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Debt issuance cost of Ps127,893 incurred in the debt restructuring was recorded as an expense of the period; debt issuance cost of Ps110,180 of the Old Senior Notes, will be
amortized in the new term of the restructured notes.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense is determined using an effective interest rate that equates the present value of the future cash payments specified by the new notes, with the carrying amount of
the old senior notes. As a result, the net effect of the restructuring, including the reversal of accrued and unpaid interest, will be recognized prospectively as a reduction of the interest expense throughout the term of the new notes.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Restatement of Equipment



Effective January 1, 1997, the Company adopted the Fifth Amendment, including the option of restating equipment of a
non-Mexican origin using an index which reflects the inflation in the respective country of origin and the exchange rate of the Mexican Peso against the currency of such country at the balance sheet date. For U.S. GAAP purposes, the use of the index
that contemplates currency exchange movements is not in accordance with the historical cost concept nor does it present financial information in a constant reporting currency.



Pre-operating Expenses



Under Mexican GAAP, pre-operating expenses are permitted to be capitalized and amortized over a period of time estimated to
generate the income necessary to recover such expenses. The Company defined that period as 10 years. Under U.S. GAAP, such costs are expensed as incurred.



Capitalization of Financing Costs



Mexican GAAP permits the capitalization of comprehensive financing costs, including net interest costs, gains or losses from monetary position and foreign
exchange gains or losses, on acquired assets under construction and on pre-operating expenses.



U.S. GAAP requires the capitalization of interest during the construction and installation of qualifying assets. In an inflationary economy, such as Mexico, it is acceptable practice under U.S. GAAP to capitalize
interest net of the monetary gains or losses on the related Mexican Peso debt, but not on U.S. dollar or other stable currency debt. Also, it is not acceptable to capitalize interest income. In addition, U.S. GAAP does not allow the capitalization
of foreign exchange gains or losses or the capitalization of financing costs on deferred expenses.



Deferred Income Taxes and Employees Statutory Profit Sharing



Starting January 1, 2000, the Company adopted the provisions of revised Statement D-4, Accounting Treatment for Income
Tax, Asset Tax and Employees Statutory Profit Sharing, issued by the MIPA. This Statement significantly changes the previous accounting for determining deferred income taxes (the partial liability method), by establishing in its place
the full liability method. Under this method, deferred tax assets and liabilities are recognized for all significant temporary differences between the carrying amounts of existing assets and liabilities as of the balance sheet date and their
respective tax bases.



In the United States, Statement of
Financial Accounting Standard No. 109 (SFAS 109), Accounting for Income Taxes, requires recognition of deferred tax assets and liabilities associated with differences between the carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. A valuation allowance
is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized.



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The tax effects of temporary differences that give rise to significant deferred tax assets and
liabilities, applying SFAS 109, at December 31, 2002 and 2003, are as follows:



|                                            |  |      |           |   |      |    |           |  
|------------------------------------------- |  | ---- | --------- | - | ---- | -- | --------- | -
|                                            |  | 2002 |           |   | 2003 |   
|Deferred tax assets:                        |  |      |           |   |      |    |           |  
|Net operating loss carryforwards            |  | Ps   | 3,646,835 |   |      | Ps | 3,408,035 |  
|Noncumulative income                        |  |      | (463      | ) |      |    |          |  
|Allowance for doubtful accounts             |  |      | 397,930   |   |      |    | 303,270   |  
|Provisions not yet deductible and other     |  |      | (350,902  | ) |      |    | (270,200  | )
|                                            |  |      |           |   |      |    |           |  
|Total deferred tax assets                   |  |      | 3,693,400 |   |      |    | 3,441,105 |  
|                                            |  |      |           |   |      |    |           |  
|Deferred tax liabilities:                   |  |      |           |   |      |    |           |  
|Property and equipment, net                 |  |      | 1,011,340 |   |      |    | 980,310   |  
|Preoperating expenses, net and other assets |  |      | 245,623   |   |      |    | 141,982   |  
|                                            |  |      |           |   |      |    |           |  
|Total deferred tax liabilities              |  |      | 1,256,963 |   |      |    | 1,122,292 |  
|                                            |  |      |           |   |      |    |           |  
|Net deferred tax assets                     |  |      | 2,436,437 |   |      |    | 2,318,813 |  
|Valuation allowance                         |  |      | 2,436,437 |   |      |    | 2,318,813 |  
|                                            |  |      |           |   |      |    |           |  
|Deferred income taxes                       |  | Ps   |          |   |      | Ps |          |  
|                                            |  |      |           |   |      |    |           |  



For financial
statement purposes, based on the weight of available evidence as of the balance sheet dates, valuation allowances were recognized for the amount of the net deferred tax assets as of December 31, 2002 and 2003, that more likely than not will not be
realized.



Cash Flows



Mexican GAAP Bulletin B-12, Statements of Changes in Financial
Position (Bulletin B-12), specifies the appropriate presentation of the statements of changes in financial position. Under Bulletin B-12, the sources and uses of resources are determined based upon differences between beginning and
ending financial statement balances in constant Pesos. Under U.S. GAAP, a statement of cash flows is required, which presents only cash movements and excludes non-cash items.



Presented below are statements of cash flows for the years ended December 31, 2001, 2002 and 2003 prepared, after
considering the impact of U.S. GAAP adjustments. The cash flow statements below present nominal cash flows during the respective periods, adjusted to December 31, 2003 purchasing power.



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|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|----------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ------------ | ------------- |  | -- | ---------- | -
|                                                                              |  | 2001 |            |   | 2002 |    |              | 2003          | 
|                                                                              |  |      |            |   |      |    |              | (As restated) | 
|OPERATING ACTIVITIES:                                                         |  |      |            |   |      |    |              |               |  |    |            |  
|Net loss                                                                      |  |      | (Ps594,896 | ) |      |    | (Ps1,366,846 | )             |  |    | (Ps488,459 | )
|Adjustments to reconcile net loss to cash flows used in operating activities: |  |      |            |   |      |    |              |               |  |    |            |  
|Gain from monetary position                                                   |  |      | (246,806   | ) |      |    | (356,745     | )             |  |    | (263,849   | )
|Unrealized exchange losses                                                    |  |      | 9,490      |   |      |    | 710,263      |               |  |    | 399,156    |  
|Depreciation and amortization                                                 |  |      | 947,879    |   |      |    | 871,498      |               |  |    | 763,770    |  
|Allowance for doubtful accounts                                               |  |      | 131,818    |   |      |    | 174,458      |               |  |    | 35,078     |  
|Provision for special project charges                                         |  |      | 127,112    |   |      |    | 110,903      |               |  |    | 88,014     |  
|Changes in operating assets and liabilities:                                  |  |      |            |   |      |    |              |               |  |    |            |  
|Current assets                                                                |  |      | 82,269     |   |      |    | (160,709     | )             |  |    | 185,011    |  
|Current liabilities                                                           |  |      | (608,578   | ) |      |    | 248,120      |               |  |    | (327,949   | )
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Cash flows (used in) provided by operating activities                         |  |      | (151,712   | ) |      |    | 230,942      |               |  |    | 390,772    |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|INVESTING ACTIVITIES:                                                         |  |      |            |   |      |    |              |               |  |    |            |  
|Purchases of real estate and equipment                                        |  |      | (820,085   | ) |      |    | (240,326     | )             |  |    | (236,120   | )
|Deferred charges and other assets                                             |  |      | (130,908   | ) |      |    | 17,807       |               |  |    | (10,400    | )
|Restricted investment                                                         |  |      | 724,570    |   |      |    | 371,292      |               |  |    |           |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Cash flows (used in) provided by investing activities                         |  |      | (226,423   | ) |      |    | 148,773      |               |  |    | (246,520   | )
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|FINANCING ACTIVITIES:                                                         |  |      |            |   |      |    |              |               |  |    |            |  
|Capital Contributions                                                         |  |      |           |   |      |    |             |               |  |    | 1,122,376  |  
|Payments of bank loans and senior notes                                       |  |      |           |   |      |    | (310,987     | )             |  |    | (1,320,531 | )
|Proceeds from bank loans                                                      |  |      | 365,129    |   |      |    | 51,098       |               |  |    |           |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Cash flows provided by (used in) financing activities                         |  |      | 365,129    |   |      |    | (259,889     | )             |  |    | (198,155   | )
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Net effect of inflation on cash and cash equivalents                          |  |      | 69,467     |   |      |    | (223,162     | )             |  |    | 303,305    |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|(Decrease) increase in cash and cash equivalents                              |  |      | 56,461     |   |      |    | (103,336     | )             |  |    | 249,402    |  
|Cash and cash equivalents, beginning of period                                |  |      | 208,308    |   |      |    | 264,769      |               |  |    | 161,433    |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Cash and cash equivalents, end of period                                      |  | Ps   | 264,769    |   |      | Ps | 161,433      |               |  | Ps | 410,835    |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Non-cash investing and financing activities:                                  |  |      |            |   |      |    |              |               |  |    |            |  
|Acquisition of equipment under capital leases and debt assumed                |  | Ps   | 185,956    |   |      | Ps | 51,098       |               |  | Ps |           |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  
|Interest and taxes paid:                                                      |  |      |            |   |      |    |              |               |  |    |            |  
|Interest paid                                                                 |  | Ps   | 785,993    |   |      | Ps | 24,491       |               |  | Ps | 322,489    |  
|Income taxes paid                                                             |  |      | 4,654      |   |      |    | 3,561        |               |  |    | 3,851      |  
|                                                                              |  |      |            |   |      |    |              |               |  |    |            |  



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In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest
entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). This new model for consolidation applies to an entity which either (1) the equity investors
(if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial support from other parties. In addition, FIN 46
requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period, and it applies to nonpublic enterprises as of the end of the applicable annual period. In December 2003 the FASB
redeliberated certain proposed modifications and revised FIN 46 (FIN 46-R). The revised provisions are applicable no later than the first reporting period ending after March 15, 2004. The Company does not expect that the adoption of FIN
46 and FIN 46-R will have a material impact on its financial statements.



In
April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities (SFAS 149). This statement amends and clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designed after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). This statement affects how an entity measures and reports financial instruments that have characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the consolidated financial statements.



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Signatures



Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, we certify that we meet all of the requirements for filing this report
and have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.



Alestra, S. de R.L. de C.V.By:

/s/ Patricio E. de la GarzaPatricio E. de la Garza Chief Financial and Administrative Officer




Date: December 29, 2004