##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 20-F



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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, 2005

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, and

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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ̈No  x.

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

Item 17 ̈Item 18  x



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TABLE OF CONTENTS



|                                                                                      |  |       
|------------------------------------------------------------------------------------- |  | ------
|                                                                                      | 
|Cautionary statement on forward-looking statements                                    |  | 3     
|                                                                                      | 
|Item 1. Identity of Directors, Senior Management and Advisers                         |  | 4     
|                                                                                      | 
|Item 2. Offer Statistics and Expected Timetable                                       |  | 4     
|                                                                                      | 
|Item 3. Key Information                                                               |  | 5     
|                                                                                      | 
|Item 4. Information on the Company                                                    |  | 21    
|                                                                                      | 
|Item 5. Operating and Financial Review and Prospects                                  |  | 52    
|                                                                                      | 
|Item 6. Directors, Senior Management and Employees                                    |  | 77    
|                                                                                      | 
|Item 7. Major Shareholders and Related Party Transactions                             |  | 82    
|                                                                                      | 
|Item 8. Financial Information                                                         |  | 85    
|                                                                                      | 
|Item 9. The Offer and Listing                                                         |  | 86    
|                                                                                      | 
|Item 10. Additional Information                                                       |  | 86    
|                                                                                      | 
|Item 11. Quantitative and Qualitative Disclosures About Market Risk                   |  | 97    
|                                                                                      | 
|Item 12. Description of Securities Other than Equity Securities                       |  | 98    
|                                                                                      | 
|Item 13. Defaults, Dividend Arrearages and Delinquencies                              |  | 98    
|                                                                                      | 
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 98    
|                                                                                      | 
|Item 15. Controls and Procedures                                                      |  | 99    
|                                                                                      | 
|Items 16A through 16E                                                                 |  | 99-100
|                                                                                      | 
|Item 17. and 18. Financial Statements                                                 |  | 100   
|                                                                                      | 
|Item 19. Exhibits                                                                     |  | 100   
|                                                                                      | 
|Financial Statements                                                                  |  | F-1   



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##### Table of Contents

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, which include statements with respect to our plans, strategies, beliefs and other statements that are not historical facts. These statements are based on our managements assumptions and beliefs in light of the information currently
available to them. These assumptions and beliefs include information concerning us and the Mexican economy and telecommunications industry.

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:



| |  |  | the competitive nature of providing 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 changes to the regulation of the telecommunications industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------



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



| |  |  | general economic conditions in the U.S. and Mexico;
| | - |  | ---------------------------------------------------



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



| |  |  | 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 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.



3



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##### Table of Contents

PART I



|Item 1. | Identity of Directors, Senior Management and Advisers.
|------- | ------------------------------------------------------

Not applicable.



|Item 2. | Offer Statistics and Expected Timetable.
|------- | ----------------------------------------

Not
applicable.



4



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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, 2003, 2004 and 2005 was derived from our audited consolidated financial statements included elsewhere in this annual report. The financial information presented as of and
for the fiscal years ended December 31, 2001 and 2002 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 accounting principles generally accepted in Mexico (Mexican GAAP), which differ in certain significant respects from accounting
principles generally accepted in the United States (U.S. GAAP). Note 20 to the consolidated financial statements provides information relating to the nature and effect of such differences, as they relate to us, and provides a
reconciliation to U.S. GAAP of net income and total stockholders equity.

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, 2005, 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.



|                                           |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|------------------------------------------ |  | ------------------------------------------------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                           |  | As of and for the year ended December 31,         |  
|                                           |  | 2001                                              |   |  | 2002   |   |  | 2003   |   |  | 2004   |   |  | 2005   |  
|                                           |  | (in millions of constant Pesos, excluding ratios) |  
|STATEMENT OF INCOME                        |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|Mexican GAAP:                              |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|Revenues:                                  |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|Long distance services                     |  | 4,008                                             |   |  | 3,980  |   |  | 4,587  |   |  | 3,360  |   |  | 2,156  |  
|Data, internet and local services          |  | 703                                               |   |  | 1,037  |   |  | 1,417  |   |  | 1,670  |   |  | 1,915  |  
|                                           |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total                                      |  | 4,711                                             |   |  | 5,017  |   |  | 6,004  |   |  | 5,030  |   |  | 4,071  |  
|Cost of services (excluding depreciation): |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|Long distance services                     |  | (1,825                                            | ) |  | (2,053 | ) |  | (2,772 | ) |  | (2,031 | ) |  | (1,055 | )
|Data, internet and local services          |  | (205                                              | ) |  | (249   | ) |  | (338   | ) |  | (395   | ) |  | (485   | )
|                                           |  |                                                   |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total                                      |  | (2,030                                            | ) |  | (2,302 | ) |  | (3,110 | ) |  | (2,426 | ) |  | (1,540 | )



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|                                                     |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|---------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|Gross profit: (1)                                    |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Long distance services                               |  | 2,183  |   |  | 1,927  |   |  | 1,815  |   |  | 1,329  |   |  | 1,101  |  
|Data, internet and local services                    |  | 498    |   |  | 788    |   |  | 1,079  |   |  | 1,275  |   |  | 1,430  |  
|                                                     |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total                                                |  | 2,681  |   |  | 2,715  |   |  | 2,894  |   |  | 2,604  |   |  | 2,531  |  
|Administration, selling and other operating expenses |  | (1,995 | ) |  | (1,837 | ) |  | (1,606 | ) |  | (1,473 | ) |  | (1,413 | )
|Depreciation and amortization                        |  | (1,139 | ) |  | (1,054 | ) |  | (967   | ) |  | (944   | ) |  | (941   | )
|Operating (loss) income                              |  | (453   | ) |  | (176   | ) |  | 321    |   |  | 187    |   |  | 177    |  
|Comprehensive financial result                       |  | (272   | ) |  | (1,392 | ) |  | (1,071 | ) |  | (241   | ) |  | (108   | )
|Special item                                         |  |       |   |  |       |   |  | 1,638  |   |  |       |   |  |       |  
|Other (expenses) income                              |  | (24    | ) |  | (20    | ) |  | 108    |   |  | (29    | ) |  | (18    | )
|Asset tax                                            |  | (5     | ) |  | (5     | ) |  | (4     | ) |  | (4     | ) |  | (3     | )
|Net (loss) income                                    |  | (754   | ) |  | (1,593 | ) |  | 992    |   |  | (87    | ) |  | 48     |  
|U.S. GAAP:                                           |  |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Revenues:                                            |  | 4,711  |   |  | 5,017  |   |  | 6,004  |   |  | 5,030  |   |  | 4,071  |  
|Cost of services (excluding depreciation):           |  | (2,030 | ) |  | (2,302 | ) |  | (3,110 | ) |  | (2,426 | ) |  | (1,540 | )
|Gross profit: (1)                                    |  | 2,681  |   |  | 2,715  |   |  | 2,894  |   |  | 2,604  |   |  | 2,531  |  
|Net (loss) income                                    |  | (645   | ) |  | (1,485 | ) |  | (531   | ) |  | 317    |   |  | 427    |  



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|                                    |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|----------------------------------- |  | ------ | - |  | ------- | - |  | ----- | - |  | ----- | - |  | ----- | -
|BALANCE SHEET                       |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Mexican GAAP:                       |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Cash and cash equivalents           |  | 288    |   |  | 175     |   |  | 446   |   |  | 655   |   |  | 920   |  
|Trade receivables                   |  | 580    |   |  | 561     |   |  | 511   |   |  | 373   |   |  | 354   |  
|Property and equipment, net         |  | 6,075  |   |  | 6,136   |   |  | 6,140 |   |  | 5,833 |   |  | 5,240 |  
|Other assets                        |  | 2,480  |   |  | 1,765   |   |  | 1,349 |   |  | 1,136 |   |  | 996   |  
|                                    |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Total assets                        |  | 9,423  |   |  | 8,637   |   |  | 8,446 |   |  | 7,997 |   |  | 7,510 |  
|Senior notes                        |  | 6,224  |   |  | 6,643   |   |  | 4,729 |   |  | 4,507 |   |  | 4,082 |  
|Notes payable and capital leases    |  | 495    |   |  | 226     |   |  | 142   |   |  | 66    |   |  | 78    |  
|                                    |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Total debt                          |  | 6,719  |   |  | 6,869   |   |  | 4,871 |   |  | 4,573 |   |  | 4,160 |  
|Accounts payable                    |  | 692    |   |  | 708     |   |  | 494   |   |  | 519   |   |  | 705   |  
|Other payables                      |  | 812    |   |  | 988     |   |  | 411   |   |  | 356   |   |  | 287   |  
|                                    |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Total liabilities                   |  | 8,223  |   |  | 8,565   |   |  | 5,776 |   |  | 5,448 |   |  | 5,152 |  
|Contributed capital                 |  | 10,224 |   |  | 10,224  |   |  | 1,292 |   |  | 1,292 |   |  | 1,292 |  
|Accumulated losses (income)         |  | (9,024 | ) |  | (10,152 | ) |  | 1,378 |   |  | 1,257 |   |  | 1,066 |  
|                                    |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Total stockholders equity          |  | 1,200  |   |  | 72      |   |  | 2,670 |   |  | 2,549 |   |  | 2,358 |  
|U.S. GAAP:                          |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Property and equipment, net         |  | 7,484  |   |  | 6,985   |   |  | 6,464 |   |  | 6,090 |   |  | 5,670 |  
|Total assets                        |  | 9,650  |   |  | 8,508   |   |  | 8,068 |   |  | 7,782 |   |  | 7,630 |  
|Total stockholders equity          |  | 1,427  |   |  | (58     | ) |  | 630   |   |  | 948   |   |  | 1,372 |  
|CASH FLOW DATA:                     |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Resources (used in) provided by (2) |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Mexican GAAP:                       |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Operating activities                |  | 810    |   |  | (21     | ) |  | 538   |   |  | 946   |   |  | 1,018 |  
|Investing activities                |  | (624   | ) |  | (242    | ) |  | (268  | ) |  | (414  | ) |  | (312  | )
|Financing activities                |  | (125   | ) |  | 150     |   |  | 1     |   |  | (324  | ) |  | (441  | )
|U.S. GAAP:                          |  |        |   |  |         |   |  |       |   |  |       |   |  |       |  
|Operating activities                |  | (164   | ) |  | 250     |   |  | 425   |   |  | 590   |   |  | 745   |  
|Investing activities                |  | (245   | ) |  | 161     |   |  | (268  | ) |  | (329  | ) |  | (403  | )
|Financing activities                |  | 397    |   |  | (282    | ) |  | (215  | ) |  | (71   | ) |  | (97   | )



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|                                                |  |       |  |       |  |       |  |       |  |      
|----------------------------------------------- |  | ----- |  | ----- |  | ----- |  | ----- |  | -----
|OTHER FINANCIAL/OPERATING DATA:                 |  |       |  |       |  |       |  |       |  |      
|(Unaudited):                                    |  |       |  |       |  |       |  |       |  |      
|Capital expenditures (Mexican GAAP)             |  | 1,028 |  | 264   |  | 299   |  | 434   |  | 341  
|Minutes of traffic, domestic long distance      |  | 2,351 |  | 1,749 |  | 1,671 |  | 1,479 |  | 1,628
|Minutes of traffic, international long distance |  | 1,021 |  | 1,507 |  | 1,893 |  | 2,060 |  | 2,362
|Employees (3)                                   |  | 2,067 |  | 1,910 |  | 1,876 |  | 1,952 |  | 1,933
|Residential lines (4)                           |  | 650   |  | 588   |  | 468   |  | 400   |  | 371  
|Business lines (4)                              |  | 111   |  | 95    |  | 80    |  | 80    |  | 68   

---

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



|(2) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Actual number of employees, not in millions.
|--- | --------------------------------------------



|(4) | In thousands, not millions.
|--- | ---------------------------

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
|2001           |  | 9.97                                |  | 8.95  |  | 9.34       |  | 9.16     
|2002           |  | 10.43                               |  | 9.00  |  | 9.66       |  | 10.43    
|2003           |  | 11.41                               |  | 10.11 |  | 10.79      |  | 11.24    
|2004           |  | 11.64                               |  | 10.81 |  | 11.29      |  | 11.15    
|2005           |  | 11.41                               |  | 10.41 |  | 10.89      |  | 10.63    
|               |  |                                     |  |      
|Month          |  |                                     |  |       |  |            |  |          
|September 2005 |  | 10.89                               |  | 10.68 |  | 10.79      |  | 10.79    
|October 2005   |  | 10.94                               |  | 10.69 |  | 10.84      |  | 10.79    
|November 2005  |  | 10.77                               |  | 10.57 |  | 10.67      |  | 10.58    
|December 2005  |  | 10.77                               |  | 10.41 |  | 10.63      |  | 10.63    
|January 2006   |  | 10.64                               |  | 10.44 |  | 10.54      |  | 10.44    
|February 2006  |  | 10.53                               |  | 10.43 |  | 10.48      |  | 10.45    

---

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



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On March 24, 2006 the noon buying rate as provided by The Federal Reserve Bank of New York was Ps. 10.86
per 1.00 U.S. dollar.

The Mexican economy has experienced current account balance of payment deficits, due to higher imported goods than
exported goods, 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 U.S. 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 which require payments in foreign currency, including the senior
notes due 2006, the senior notes due 2009 and the senior notes due 2010 collectively, the senior notes.

B. Capitalization and
Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Factors relating to us

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, further reducing our revenues

We are heavily dependent on
domestic and international long distance services, which accounted for 53.0% of our revenues in 2005, 66.8% of our revenues in 2004 and 76.4% of our revenues in 2003. Average prices for long distance calls in Mexico declined more than 60% in real
terms from 1997 to December 2005. 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.

The SBC Communications Inc. acquisition of AT&T Corp. could have a material adverse effect on our operations and our financial results

On November 17, 2005 SBC Communications Inc. (SBC), completed its acquisition of AT&T Corp. (the
AT&T Acquisition), forming the New AT&T. The New AT&T, either directly or indirectly, is



9



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the second largest shareholder of Telmex, our principal competitor, owning approximately 8.2% of its outstanding shares which shares carry approximately 22%
of voting rights on most matters.

As a result of the AT&T Acquisition, on November 30, 2005, we and our shareholders amended our
Second Amended and Restated Joint Venture Agreement (the Joint Venture Agreement) to modify our corporate governance and certain other provisions. We also amended the Amended and Restated Service Mark License Agreement between AT&T
Corp. and us (the Service Mark License Agreement), the AT&T Global Network Cooperation Agreement between AT&T Corp. and us (the AGN Agreement) and our bylaws (the Bylaws). These amendments, among other
things, modify current conditions concerning: the use of the AT&T brand name, under which we market all of our services; our participation in the AT&T global network, which is important to the growth of our data and internet service
business; international interconnections. We cannot predict the effects it could have on us.

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

As a result of
our decreasing revenues from long distance services and the uncertainty resulting from the expiration in August of 2004 of the proportionate return system for calculating and allocating revenues relating to incoming international long distance
minutes, we have been refocusing our resources and marketing efforts on capturing future growth in local, data, packet switching and internet services in Mexico. 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, which is the dominant provider of
telecommunications services in Mexico and who may be 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;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | new competition from cable TV and terrestrial microwave TV providers, who have been authorized by the Secretaría de Comunicaciones y Transportes, or the SCT, to provide
bi-directional data and internet broadband services to the Mexican public, and to provide the transport of voice services, acting as carrier of carriers, including VoIP services, to other telecommunication concession holders; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the introduction of WiFi/WiMax technology in Mexico, of which Telmex is the main provider, which could allow Telmex to capture even more of the broadband services market and more
spectrum in case the regulator decides to auction available frequencies in the 3.5 GHz band without conditions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Competition in the data and internet services market has significantly increased as our competitors,
including Telmex, Avantel, S.A. (Avantel) and Axtel, S.A. de C.V. (Axtel), among others, have also faced decreasing margins from voice services and shifted their focus to data and internet services. If we are unsuccessful in
our strategy of focusing on the data and internet services market in Mexico, and are unable to obtain the benefits of these higher-margin businesses, our financial results will be materially and adversely impacted and our ability to service our
obligations under our senior notes will be severely impaired.

We rely on the use of the AT&T service mark to market all of our
services to our customers; however, under our amended Service Mark License Agreement, before May 18, 2007, we must develop or license new marks under which we will market our services, and we may not be successful in developing a new brand name

We currently use the AT&T registered service mark to market all of our services. If we are unable to use the AT&T service
mark and are not successful in developing or licensing new service marks, our ability both to attract new customers and to retain existing customers likely would be materially impaired.

Pursuant to the amendments to the Service Mark License Agreement we entered into in connection with the AT&T Acquisition, we are permitted to use the
AT&T brand name until November 17, 2008 and to use the phrase AT&T Global Services for the limited purpose of providing AT&T Global Services within Mexico for the term of the AGN Agreement; provided that we meet certain conditions.
During this time we have an initial 18 month period (the Initial Transition Period) in which we covenant to develop, acquire, position or license new service marks for our services. At the end of the Initial Transition Period, and if we
are in compliance with these requirements, we have an additional 18 month period (the Extended Transition Period) where we have limited use of the AT&T service mark. After 24 months from the AT&T Acquisition we may only use the
AT&T service mark together with our new service marks, and may only use it for reference purposes and always with the prior approval from the New AT&T. The creation of a new brand and service marks is subject to numerous risks, and we may
not be successful in creating a new brand or service marks.



| |  |  | We may not be able to develop a new brand to replace the AT&T brand which could directly and adversely impact our ability to retain customers, to maintain sales and acquire new
customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not be able to use the AT&T service mark in the Extended Transition Period if (i) we do not develop new service marks or obtain a license from a third party to use
new marks in connection with the services we provide; (ii) within the Initial Transition Period, we do not make a public announcement of a new service mark.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The market and our customers may perceive that the change of our brand name will adversely impact the quality of our services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

We cannot predict whether we will be able to continue to use the AT&T service mark or if we will be able to successfully develop our own brand name.
If we are unable to use the AT&T service mark and are unsuccessful in developing our own brand name, our financial condition would be adversely impacted.



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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

In September 2003, WRH Global Securities Pooled
Trust, or WRH, commenced an action against us, our equity holders and the indenture trustee of the indentures governing our senior notes due 2006 and our senior notes due 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. The Court denied WRHs motions and the exchange offers and consent solicitations were consummated on November 17, 2003.
Subsequently, in an oral ruling, the court granted our motion for partial summary judgment on WRHs claim that our senior notes due 2006 and 2009 had been ipso facto accelerated and dismissed WRHs cross-motion for partial summary
judgment. In December 2003, WRH amended its complaint alleging, among other things, that it had 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 WRHs amended complaint. On February 23, 2006 the
litigation was transferred to a new judge who issued an order on March 16, 2006 suggesting the possibility to WRH to file a second amended complaint on or before April 28, 2006; if WRH so elects the defendants will be permitted to amend
their prior motion to dismiss. 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, or if WRH were to succeed on its
elective acceleration claim, then the entire principal amount of our senior notes due 2009 of $45.9 million would become due and payable; we might not have sufficient liquidity available to pay the principal and interest due on those notes or the
senior notes due 2009. In addition, such acceleration might cause a cross default under our other indebtedness, including $298.1 million of the senior notes due 2010.

Our equity holders, the New AT&T and Onexa, may have differing interests

AT&T Telecom
Mexico Inc., (AT&T Mexico), is the direct holder of the New AT&T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. AT&T Mexico is able to elect four of our nine directors. The New AT&T is the second largest shareholder of Telmex, our principal competitor, which may create conflicts of interest between the New AT&T on the one
hand and Onexa or us on the other. The failure of the New 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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As a result of technological and regulatory changes, we may face additional competition in the
future from new market participants, which may result in lower prices for telecommunication services, less margins, and/or a loss of market share

As a result of technological and regulatory changes, cable network operators and Voice over Internet Protocol, or VoIP, providers may enter the Mexican telecommunications market, increasing the level of competition.
Several cable network providers have requested that the Secretaría de Comunicaciones y Transportes, or SCT, modify their concession titles to allow them to offer telephone services directly to the public. So far, the SCT has only passed a
resolution allowing cable network operators to provide only the transport of local and long distance traffic, acting as a Carrier of Carriers, however, it is very likely that cable companies may be authorized in the near future to
offer telephone services directly to the end users. Also, since the SCT has not been able to enforce regulations regarding illegal provision of VoIP services by entities without a concession title, several international VoIP providers have begun to
target the Mexican telecommunications market to illegally offer telephone services through Internet. In a different matter, as a result of the World Trade Organization settlement between Mexico and the United States regarding the disputes over the
U.S. telecommunication companies access to the Mexican telecom market, on August 12, 2005, Cofetel published regulations authorizing the issuance of permits for the resale of national and international long distance public switched
telecommunications services, through the use of minutes obtained from concessionaires and using their infrastructure at all times.

Additionally, the SCT is considering the auctioning of the 3.6  3.7 GHz spectrum band, that could open the market to new concessionaries and technologies, such as WiMax, that could also compete with the services we provide.

The Mexican telecommunications market is already a highly competitive market characterized by declining prices and reduced margins, if new
market participants were to enter the market, it may result in price wars as Telmex, the current market price setter with significant market power, attempts to maintain its dominant market position. If there are further declines in the price of
telecommunication services in Mexico, we may be forced to match those price declines, lowering our margins, or risk losing additional market share, which would adversely affect our operating results and financial position.

We may need additional financing in order to service our indebtedness and fund operations, but such additional financing may not be available due
to our substantial indebtedness

As of December 31, 2005, we had consolidated indebtedness of approximately Ps.4,160.3 million
and shareholders equity, including a minority interest in our consolidated subsidiary, of Ps.2,357.9 million. The high level of our indebtedness has had and may continue to have important consequences. For example, it has:



| |  |  | limited our 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | placed us at a competitive disadvantage compared to our competitors who 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
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | prevented opportunities for additional equity financing.
| | - |  | --------------------------------------------------------

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 target 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 our competitors;
| | - |  | ----------------------------------------------



| |  |  | 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. Our failure to make necessary capital expenditures could impair our ability to accommodate increases in traffic volume, service our existing customers, or implement our data services strategy, which requires more capital expenditures
than we can afford to make at this time.

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 we 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 our
competitors actions. Although we have installed what



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we consider to be 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 the telecommunications market 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, under the Ley Federal de Telecomunicaciones which was
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 provide services to 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. In the past, we have experienced difficulties in obtaining high quality, reliable and
reasonably priced services from Telmex.

If a Long Distance Calling Party Pays system is implemented in Mexico, it could
increase our costs and result in a loss of traffic

Comisión Federal de Telecomunicaciones, or Cofetel, has drafted a policy
to implement a Long Distance Calling Party Pays system, which is an arrangement where mobile telephone subscribers do not pay for incoming calls, but, instead, the customer that originates a domestic or international call, either from a
fixed line or mobile phone, pays the entire fee for placing the call. Even though the person receiving the call on the mobile phone does not pay to receive the call, the network from which the call originates must still compensate the terminating
mobile phone network. If a Long Distance Calling Party Pays system is implemented in Mexico, we will need to increase our long distance rates, including international settlement rates, in order to pay



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the terminating network. This could result in a decline of our revenues, since some users may cease from making calls or migrate their long distance traffic
from fixed to mobile networks. Also, fixed carriers may face an incremental increase in by-pass traffic since some entities may terminate mobile traffic cheaper in their mobile networks.

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

We experience difficulties collecting accounts receivable from some of our subscribers. Some of our customers switch to other carriers without paying
their bills to us, and excluding our VoIP 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. In 2004, we
wrote off approximately Ps.223.8 million in past-due trade receivables, of which Ps.88.0 million related to residential customers and Ps.135.8 million related to business customers. In 2005, we did not write off any amount. At December 31,
2004, our allowance for doubtful accounts was Ps.67.8 million against outstanding receivables of Ps.440.8 million. At December 31, 2005, our allowance for doubtful accounts was Ps.103.1 million against outstanding receivables of Ps.457.0
million. If the proportion of our customers who fail to pay their bills increases, our cash flows will be adversely affected.

In the
past, our results have been negatively impacted by high levels of residential customer attrition

Prior to 2003, we experienced a
high rate of residential customer attrition, or churn, which increased our cost of operations and reduced our revenue. For example, our average monthly 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 customer attrition may have been high 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 return to our prior high rates of customer attrition could adversely affect our competitive position and results from operations.

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, we have lowered our projected capital expenditures for future upgrades, which could adversely impact the quality and reliability of our
network.



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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.

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 are being revised by the Mexican Congress in 2006. Matters relating to commissioners designation, convergence policies, the allocation of
the spectrum, including the possibility that Cofetel would also become regulator of broadcasting (radio and TV), among others, are being considered in the proposed new federal telecommunications law. However, we cannot predict how the SCT or Cofetel
will interpret and implement a new federal telecommunications law. At this time, we cannot predict whether a bill of the federal telecommunications law will be enacted or, if passed, what effect it will have on our business. This uncertainty could
adversely affect our business and subject us to additional legal liability or obligations.

In addition, on January 2, 2006, Cofetel
amended its operating rules. The amendment reorganizes and redistributes resources in Cofetel which could affect concession title granting, spectrum policy and international matters, among other issues. We cannot predict how these new rules could
affect our business.

Furthermore, 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

Our revenues from international long
distance service reflect amounts earned from our customers and our proportion of all settlement payments received from foreign carriers, as well as other international non direct-dialed calls. A portion of all settlement revenues from foreign
carriers is paid in U.S. dollars and accounted for 46.0% of our total revenues in 2003, 35.3% in 2004 and 20.6% in 2005. Settlement agreements, principally with the New AT&T, govern our payment rates to the foreign carriers for the use of their
facilities in interconnecting international calls billed in Mexico and the rates foreign carriers must pay to use our facilities for interconnecting calls billed abroad, but terminating in Mexico.



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Since 1997, the international settlement rates applicable to U.S.-originated international calls have
been decreasing and may decrease further. Most of our traffic exchanged with foreign carriers in 2005 was traffic originated in the United States. Therefore, such reduction has adversely affected our results. Any further reduction in international
settlement rates attributable to U.S.-originated international calls would result in a further decrease in dollar-denominated settlement amounts payable to us by U.S. carriers. If our dollar-denominated revenues decrease and we do not experience an
offsetting increase in volume, we may be unable to meet our dollar-denominated debt and other obligations without incurring substantial exchange risk.

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 Mexican nationals. These restrictions limit our ability to raise equity capital which could be
used to implement our business plan and grow our business.

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;
| | - |  | ---------------



| |  |  | governmental taking;
| | - |  | --------------------



| |  |  | maturity of the concessions; or
| | - |  | -------------------------------



| |  |  | liquidation or bankruptcy.
| | - |  | --------------------------

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

As a foreign private issuer, investors may not be able to obtain as much publicly-available information about
us as they would about U.S. issuers of publicly traded securities. In addition,



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we prepare our financial statements in accordance with Mexican GAAP, which differs from U.S. GAAP in certain significant respects. Therefore, potential
investors may not be able to easily ascertain the risks facing us as they would if we were a U.S. company. See Note 20 to our audited financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable
to us.

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 3.9% in 1999 and 6.6% 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 0.2% in 2001 and grew only at an annual rate of 0.8% 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 1.4% in 2003 and our revenues from domestic long distance traffic decreased at an annualized rate of 17.2% during that period. The Mexican
economy grew at an annualized rate of 4.2% in 2004 and our revenues from domestic long distance traffic decreased at an annualized rate of 20.4% during that period. The Mexican economy grew at an annualized rate of 3.0% in 2005 and our revenues from
domestic long distance traffic decreased at an annualized rate of 9.2% during that period. Any future downturns in the Mexican economy would further adversely affect our operating results and financial condition.

Currency devaluations may impair our ability to service our debt

Changes in the value of the Peso relative to the U.S. dollar have adversely affected and may continue to adversely affect our financial condition and
results of operations. For example, the 9.0% currency devaluation of the Peso against the U.S. dollar that occurred in 2003 generated an exchange loss of Ps.645.4 million. Similarly, the 0.3% currency devaluation of the Peso against the U.S. dollar
that occurred in 2004 generated an exchange loss of Ps.3.9 million, and the 4.9% currency appreciation of the Peso against the U.S. dollar that occurred in 2005 generated an exchange gain of Ps.191.1 million. All of our indebtedness and a portion of
our trade payables are denominated in U.S. dollars, while a majority of our revenues and operating expenses are denominated in Pesos.

The
value of the Peso sharply declined in the 1990s compared to the U.S. dollar. The devaluation of the Peso in the 1990s increased the Peso equivalent of Mexican companies obligations under U.S. 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 our senior
notes, and to make additional capital expenditures.



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Exchange controls may impair our ability to obtain U.S. dollars to make U.S. 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 U.S. 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 our senior 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. Any return to prior high rates of inflation could adversely affect our operating results and financial condition.

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. We
believe that 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 4. | Information on the Company.
|------- | ---------------------------

A. History and
development of the company

Our legal and commercial name is Alestra, S. de R.L. de C.V. We were incorporated on October 13,
1995. We are a sociedad de responsabilidad limitada de capital variable (limited liability variable capital company) organized under the laws of Mexico. Our principal executive office is located at Avenida Lázaro Cárdenas No.2321, Piso
9, Col. Residencial San Agustín, San Pedro Garza García, N.L. 66260, México and our telephone number is 011-5281-8625-2200. Our authorized representative in the United States is Puglisi & Associates, located at 850
Library Avenue, Suite 204, Newark, Delaware 19711, U.S.A. Puglisi & Associates phone number is (302) 738-6680.

We are
a leading provider of competitive telecommunications services in Mexico that we market under the AT&T brand name and carry on our own network. We offer domestic and international long distance services, data and internet services and local
services. We are owned 49% by AT&T Telecom Mexico, Inc., a wholly owned subsidiary of AT&T Inc. and 51% by Onexa, S.A. de C.V., a corporation owned by Alfa, S.A. de C.V. and BBVA Bancomer, S.A.

Beginning in 1997, following the deregulation of the Mexican telecommunications industry, we began the rollout and expansion of our domestic and
international long distance services, and as of December 31, 2005, we had invested more than Ps.7,258.8 million in the construction of our telecommunications network. Our telecommunications network interconnects with 200 cities throughout
Mexico and consists of over 5,900 km. of high-capacity fiber optic lines that connect metropolitan areas, of which over 930 km. of fiber optic lines are in metropolitan areas, and five high-capacity fiber optic lines that cross the U.S. and Mexican
border.

We also have wireless concessions to provide point-to-point connectivity nationwide and point-to-multipoint connectivity primarily
in Mexico City, Guadalajara, Monterrey and surrounding regions. We began providing data services to our customers in May 1997 and internet services in July 1998. We began providing local services in Mexico City, Monterrey and Guadalajara in January
2001 and have since expanded our service to other cities. In recent years, we have provided a significant and growing portion of our services to multinational and domestic businesses.

Our revenues were Ps.6,004.3 million in 2003, Ps.5,030.1 million in 2004 and Ps.4,071.0 million in 2005. Under Mexican GAAP, we had a net income of
Ps.992.2 million in 2003, a net loss of Ps.87.2 million in 2004 and a net income of Ps.48.2 million in 2005. Under U.S. GAAP, we had a net loss of Ps.530.9 million in 2003, a net income of Ps.317.1 million in 2004 and a net income of Ps.426.8
million in 2005.

Capital expenditures

During the past three years, we have concentrated our investments in last-mile access for new customers and new services. Our capital expenditures for 2003, 2004 and 2005 amounted



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Ps.299 million, Ps.434 million and Ps.341 million respectively. In January and February of 2006 we have invested $ 6.5 million, also primarily to
provide last mile access. We do not expect that any single capital expenditure in 2006 will have a material impact on our operations or financial results.

We believe that our cash flow from our operations is sufficient to fund our capital expenditures and the servicing of our short term debt in 2006.

For a discussion of our capital expenditures, see Item 5. Operating and Financial Review and Prospects Liquidity and capital
resources.

B. Business overview

Summary of Material Licenses

Service mark and other fees

AT&T is a service mark registered with the U.S. Patent and Trademark Office and is owned by AT&T Corp. We use the AT&T service mark to
identify and promote our long distance telephone service pursuant to a license agreement with AT&T Corp. Licensing fees are determined based upon the greater of a minimum fee or a dollar amount determined in relation to our profitability.

On November 30, 2005, following the AT&T Acquisition, the New AT&T and us extended the term of the license agreement until
November 17, 2008 subject to us achieving certain milestones. If, during the 18 month period, following the AT&T Acquisition, we either develop new marks or obtain a license from a third party to use new marks, then we may continue to use
the AT&T brand name for an additional 18 months. After 24 months from the consummation of the AT&T Acquisition, we may use the AT&T service mark only together with our new service marks, and may use it for reference purposes only and
always with the prior approval of the New AT&T. Under the amended agreement, we now have the flexibility and freedom to develop new marks for our domestic services. AT&T Corp. has agreed to waive any royalty fee payments under the license
agreement during such period, including the 2005 royalty payment if we invest the funds in marketing and developing our own brand during the Initial Transition Period. In connection with the provision of AT&T Global Network services (AGN
Services), we are allowed a limited use of the phrase AT&T Global Services on a nonexclusive basis until June 2010. The license agreement contains provisions allowing AT&T Corp. to terminate the license agreement in its
sole discretion upon certain changes in our ownership, if we fail to abide by certain quality control standards, or if we misuse the AT&T brand and in certain other circumstances. See Risk Factors  We rely on the use of the AT&T
service mark to market all of our services to our customers; however, under our amended Service Mark License Agreement, before May 18, 2007, we must develop or license new marks under which we will market our services, and we may not be
successful in developing a new brand name.

This year we expect to launch the use of the commercial brand name
Alestra in a corporate and business communications campaign. The purpose of this campaign is to generate revenue for our business units and to make the Alestra name synonymous with the AT&T brand. The campaign which will consist of
mass media advertising activities (including TV, billboards, magazines, radio, etc.) was designed with the goal of allowing a swift transition from the AT&T to the Alestra brands by the end of November 2007.



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Our operations

Domestic and international long distance voice service

Our basic service, the Servicio AT&T de Larga Distancia, provides a telephone connection that enables business and residential customers to place domestic and international long distance calls to every
country and region in the world. This service covers both sent-paid and collect calls to certain countries and destinations. We also provide international switched transit services, which is traffic that does not terminate in our network, to other
international carriers.

As part of our service to our domestic and international long distance customers, we offer advanced voice
services. Our advanced voice services are comprised of the following:



| |  |  | Operator services, home country direct services, calling card services and 800 services.We offer a full range of bilingual operator assistance, direct connections between
customers abroad and Mexico, calling cards services and toll free services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Virtual network services. To our business customers, we offer the AT&T Aria VNS Red Privada Virtual, or AT&T Aria VNS, a virtual network system that permits the
configuration of tailored, private corporate voice networks. This service provides most of the advantages of a private network (i.e. call screening, overflows, flexible routing, authorization codes and private dialing plans) without the
corresponding maintenance and operation costs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global virtual network services. This service is an extension of AT&T Aria VNS domestic service which offers the possibility of interconnecting virtual private networks
for multinational or large national clients in Mexico or the United States with affiliates in Mexico or the United States.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Data and internet services

Our recent growth has come from our data and internet services segment in which we have been
able to offer leading technology services. Our primary data and internet services are comprised of the following:



| |  |  | Internet access and transport. We serve as an internet service provider and offer dial-up internet access to our business and residential customers, leveraging our brand and
network infrastructure, and complementing our service platform. We also provide dedicated internet access to our business customers. The service includes connectivity, e-mail, web-hosting and a domain name server. In addition, we offer transport
services and internet dial-up ports wholesale to internet service providers requiring connectivity to the internet in Mexico and worldwide.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | AT&T Dedicated Internet.This service provides the most reliable, strong and clear access to AT&Ts Worldwide Intelligent Network, one of the largest and most
powerful of the world. Directed mainly to corporate customers, specially large and medium companies from all sectors in the country, this service is a very useful tool for multinational companies, universities and Internet service providers in
Mexico that count with an inside network and requires a dedicated connection to Internet 24 hours a day, 365 days a year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Internet HC (High Capacity).AT&T Internet HC offers bandwidth from E3 (34 Mbps), T3 (45 Mbps) until STM-1 (155 Mbps) in the main cities of the country, through
the following solutions:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On demand.The customer obtains an exclusive access circuit for his Internet service, this can be used at its maximum capacity during any moment, paying only the real usage.
This service is recommended to ISPs, ASPs, data centers and/or organizations with high Internet use and with a variable traffic per month.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fractional.The customers select a bandwidth with increments of defined Mbps until the total capacity of the contract circuit. The increments are managed by the customer,
this lets him to plan his monthly budget with a fixed charge. This solution is recommended to business, financial organizations and educational institutes with stable monthly Internet traffic that occasionally requires of increments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Plain.This solution has a fixed charge which is more convenient than the charge that applies in the highest bandwidth of the charge per usage or fractional solutions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Dial-Up Internet.This service provides reliable, fast and clear access through the New AT&Ts Worldwide Intelligent Network. Its capacity in electronic
mail can include up to 10 or 50 mail accounts for business clients. It offers direct access through a local phone call in 58 Mexican cities and in more than 1,300 cities worldwide.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Virtual ISP.AT&T Virtual ISP is a value added service oriented to ISPs that want to provide dial up services with its own brand but without major investments.
This service has two solutions:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounts Wholesale.This solution offers dialup accounts through a virtual management platform.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Ports Wholesale.This solution offers the infrastructure necessary to provide dialup access.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | AT&Ts Web Hosting.AT&Ts Web Hosting services, responds to each companys specific needs of storage capacity, continual monitoring, security
applications and quality demanded by todays e-commerce operations. It is managed by the Internet Data Center (advanced network infrastructure, hardware and software center) and experienced personnel. AT&Ts Web Hosting
services, provide three hosting modes to answer all kinds of business needs:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Shared.Offers a server with multiple users, which can go from small to mid-sized businesses that require appropriate equipment, applications, knowledgeable, capable and
experienced staff.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dedicated.Offers exclusive servers for each client. This model is a useful option mostly for corporate portals.
| | - |  | ---------------------------------------------------------------------------------------------------------------



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| |  |  | Collocation.Offers network infrastructure, systems, security and personnel at reduced costs. This model is recommended for big corporations with its own equipment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Direct access. We offer businesses the opportunity to have a dedicated access line from the customers premises to our network, without requiring the use of
Telmexs local network. We provide this connection, depending on the customers needs and revenue potential, through either a wireless connection or a fiber-optic connection built out to the customers premises.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Domestic and North American High Capacity Digital Private Lines (E3/T3 to STM1). This service allows customers to set up high speed dedicated circuits between two or more of
the customers offices in Mexico or between two or more of the customers offices in Mexico and the U.S. to satisfy their communication and transmission needs for large volumes of data. Customers may also choose Domestic and North American
Low Capacity Digital Private Lines (64 kbps to 2,048 kbps) for smaller data volumes. North American services may be contracted under a bilateral or a Full Channel scheme which allows the customer to manage a single point of contact for ordering,
provisioning, billing and fault management.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Switched digital services. For some business applications where private line services might not be cost effective or appropriate, we offer switched digital circuits on demand
to customers who require digital links, variable bandwidth and multiple endpoint connectivity at increments of 56/64 Kbps channels (Ix64). This service is suitable for videoconferencing, document, video and audio distribution, voice/data/video
integration, distance learning and telemedicine, remote access to corporate resources, bulk data transfer, peak period overflow and dial back-up.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T frame relay. Frame relay is an information transportation service based on packet switching technology, which has been designed to increase the efficiency of data
transportation between remote localities needing to exchange large amounts of information at high transmission speeds and to optimize the bandwidth used. Frame relay also provides transparency to any application, low latency and mesh connectivity.
The service is available to establish domestic and international circuits under a bilateral or End-to-End scheme jointly with the New AT&T. Through our AT&T frame relay anywhere, users can access their corporate data network from remote
sites through a telephone connection using the Alestra Frame Relay network. Our other frame relay based technology services are AT&T End to End Frame Relay Service Interworking (SIW) and AT&T End to End Internet Protocol enabled Frame Relay.
Each of those services allows our customers to consider the New AT&T the single point of contact for ordering, provisioning, billing and fault management.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T End to End ATM (Asynchronous Transfer Mode or ATM).ATM is a high performance technology that allows the transmission of various types of
applications, such as voice, data and video, using the same means of transmission. Alestra offers different Classes of Service (CoS) for those applications, allowing the customers utilize a common network platform to satisfy all their
telecommunication needs, and assign a different priority to each type of traffic or application. This service is also available under an End to
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | End commercial scheme (mainly for Multinational Segment) that provides a single point of contact for ordering, provisioning, billing and fault management.
(This offer has not been available for new International Customer; the acquisition strategy is on the IP Services like EVPN)
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global switched digital service. This service enables customers to originate and receive switched data calls. It also offers a wide array of business applications, such as
linking a business network with other networks for video, voice and data transmissions, remote WAN/LAN computer networks, back-up lines during peak hours, digital fax and high fidelity audio for radio broadcasting.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T VPN (Virtual Private Network or VPN) Services. Provides reliable and secure IP connectivity in a public carrier class network with the same performance and security
policies as found in the more expensive customer owned private networks, giving the customers the possibility to access their Network in several different ways depending on their individual needs:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Dedicated VPN.Dedicated VPN Service, allows the customers to communicate with their distant offices in a highly secure and fully interconnected network among all
customer sites. This may include links to providers, distributors and internal customers offices (Extranet), integrating data and voice or video applications.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T VPN Remote Access.This solution provides mobile users and remote offices to get connectivity to their corporate VPN using a dial up (modem) access.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T VPN in IDC (Internet Data Center).This model allows the integration of a companys VPN with any of the alternative applications, content and data bases hosted
in the New AT&Ts IDC.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T IPSEC.This solution provides global coverage for remote offices and mobile users because AT&T IPSEC uses the Internet to communicate them to their corporate
VPN. Using the IETF (Internet Engineering Task Force) IPSec standards, the information is encrypted all the way trough the Internet, providing security and confidentiality.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Managed Router Service (MRS).MRS provides a complete solution, from network design, implementation and installation to ongoing network management.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T MRS with Customer Managed Router.Oriented to businesses that supply their own CPE.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | AT&T MRS with Managed Router.Oriented to businesses that would like Alestra to supply and manage the Customer Premises Equipment (CPE), equipment which is installed by
us in our customer offices.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Managed Internet Service (MIS).It is a dedicated Internet access solution that is managed end-to-end by Alestra. There are two service types:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T MIS with Customer Managed Router.Oriented to businesses that supply their own CPE.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | AT&T MIS with Managed Router.Oriented to businesses that would like Alestra to supply and manage the CPE.
| | - |  | ---------------------------------------------------------------------------------------------------------



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| |  |  | AT&T Managed Firewall Service  Network Based (MFS-NB).AT&T MFS-NB provides enhanced security outbound only Internet access for multi-site AT&T Frame Relay
Service customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Managed Firewall Service  Router Based (MFS-RB).AT&T MFS-RB helps protect network perimeters against outside attack through the use of Cisco IOS Firewall
Feature Set.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Managed Firewall Service  Server Based (MFS-SB).AT&T MFS-SB is a fully managed, firewall solution including all hardware and software components,
configuration, installation, day to day management and maintenance and most importantly, expert customer support and proactive network monitoring.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Managed VPN Tunneling Service (MVPNT).MVPNT is a fully managed IP connectivity solution with powerful features designed to provide security at the data layer for
users of IP networks, particularly the public Internet.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Global Services.To comply with all the global or international requirements we are part of the AT&T Global Network (AGN). This gives us an active role in
serving all Multinational Accounts requirements in Mexico by providing Enhanced Virtual Private Network (EVPN) and International Packet Service (IPS) to them. A full set of capabilities are provided through this Global Network assuring the market
that they will experience the same quality and experience of service around the globe.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Voice over Internet Protocol, or
VoIP, service

On February 22, 2005, we launched the MasterNet service. This service, based on VoIP technology, enables customers
to make unlimited local phone calls and international phone calls at the same time they are using a broadband internet service. The VoIP service uses the internet as a transmission device to realize telephone calls, and using the IP protocol through
data packets, enables a connection to the public telephone network.

Local services

We began providing local services in the first quarter of 2001. Local service revenues consist of charges to customers for local services, and our
revenues depend on the number of subscribers for our local services and the rates we charge our subscribers.

AT&T Local Service offers
to the enterprise market, a direct connection to the public switched telephone network (PSTN), enabling local, cellular, long distance or operator assisted calls. AT&T Local Service offers several alternatives depending on the customers
needs:

New service - Smart iPhone (EOY 05):New voice service for local & long distance calls with PBX facilities based
over IP Telephony. The special benefits of this service includes: bringing all sites together in one voice system by just dialing 4-digits, reducing long distance and



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local bills among branches, the ability to use any line (fax or mobil) as a remote office and incorporating web portal access to modify different on-line
functionalities, with this service our customers will keep in touch with their customers from any place at any time with high-end technology from a risk free investment. In November 2005 for small and medium enterprises (SME) over three main cities:
Mexico City, Monterrey and Guadalajara.

AT&T Enlace Digital: This commercial program, offers digital trunks to connect our
customer switchboard directly to the New AT&T network, thereby enabling local, cellular, long distance or operator assisted calls. There are two types of signals that AT&T Enlace Digital supports: CAS-R2 and ISDN PRI. This service can be
offered through digital radio waves or fiber optic lines.

AT&T Enlace Digitalsprincipal features are:



| |  |  | switched digital trunk lines,
| | - |  | -----------------------------



| |  |  | direct dialing numbers,
| | - |  | -----------------------



| |  |  | group numbers,
| | - |  | --------------



| |  |  | caller identification by trunk group, and
| | - |  | -----------------------------------------



| |  |  | customized invoicing.
| | - |  | ---------------------

AT&T Enlace Digitalsbenefits are:



| |  |  | consolidated invoices including local, long distance, 800 free-phone numbers, calling cards and operator assisted calls,
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | flexible digital trunk configuration according to the customers needs,
| | - |  | -----------------------------------------------------------------------



| |  |  | faster decision-making processes with the help of SMART TM (software for monitoring and managing calls), which allows the customer to analyze its call traffic and detail it by
number of contracted lines, by week, by month, by destination or by origin,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | efficient monitoring of the customers local telephone services,
| | - |  | ----------------------------------------------------------------



| |  |  | customer platform growth according to each customers needs through an E1 for voice and data services through one point of access, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | professional and specialized service for the customer through our Business Customer Service Center.
| | - |  | ---------------------------------------------------------------------------------------------------

Currently our AT&T Enlace Digital service is offered in 15 cities throughout Mexico: México City, Monterrey, Guadalajara, Aguascalientes, Cd.
Juárez, León, Puebla, Querétaro, San Luis Potosí, Saltillo, Toluca, Torreón, Tijuana, Nuevo Laredo and Matamoros. Reynosa (16th city on coverage) will available on April 2006. Our management expects that our local
service will continue to grow based on increased business customer demand.

AT&T Línea Empresarial: This commercial
program provides local, long distance, cellular, 800 numbers and operator calls, using Plain Old Telephone Services (POTS) lines. The telephone service is provided by a new wireless technology that offers the customer the chance to integrate data,
voice and internet solutions on one platform. We offer this commercial plan in México City, Monterrey and Guadalajara. An additional three cities are being added to the coverage: Toluca, Saltillo and Reynosa.



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AT&T Línea Empresarialsprincipal features are:



| |  |  | POTS lines,
| | - |  | -----------



| |  |  | direct dialing numbers,
| | - |  | -----------------------



| |  |  | caller identification by line, and
| | - |  | ----------------------------------



| |  |  | customized invoicing.
| | - |  | ---------------------

AT&T Línea
Empresarials benefits are:



| |  |  | consolidated invoices for long distance, local and internet services,
| | - |  | ---------------------------------------------------------------------



| |  |  | conference calling, call waiting and caller ID,
| | - |  | -----------------------------------------------



| |  |  | no local charge for long distance and 800 calls,
| | - |  | ------------------------------------------------



| |  |  | a platform to integrate voice, data and internet according to the customers growing communications needs, and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | specialized attention from an account executive, our business customer care center and technical personnel.
| | - |  | -----------------------------------------------------------------------------------------------------------

AT&T Enlace Total Multiserviciocommercial program provides local, long distance, cellular, 800 number, operator assistance calls and
dedicated internet in a complete bundle offer using IP technology trough a common dedicated IP access. We offer this commercial plan in 15 cities and Reynosa will be the added on April of 2006.

AT&T Enlace Total Multiserviciosprincipal features are:



| |  |  | bundled offer including POTS lines and dedicated internet access,
| | - |  | -----------------------------------------------------------------



| |  |  | multi-service access,
| | - |  | ---------------------



| |  |  | caller identification by line, and
| | - |  | ----------------------------------



| |  |  | customized invoicing.
| | - |  | ---------------------

AT&T Enlace Total
Multiserviciosmain benefits are:



| |  |  | a fixed price according to capacity and number of POTS lines,
| | - |  | -------------------------------------------------------------



| |  |  | no local connection charge for long distance and 800 numbers, and
| | - |  | -----------------------------------------------------------------



| |  |  | specialized technical attention from our business customer care center.
| | - |  | -----------------------------------------------------------------------

Information Security

We have created an Information Security Area with the goal of protecting
our network and clients from growing Information Technology threats and complying with new local regulations related to Information Security.

This area has developed several processes that implement in each Alestra service information Security Controls to protect the integrity, confidentiality and availability of those services.

We started a project in November 2005 in order to obtain the standard ISO27001 on Information Security, and we expect to obtain the certification by the
second quarter of 2007.



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Pricing and promotions

Our pricing for voice and data services offered to business and residential segments varies depending on customer needs. Our business pricing strategy is
based on voice, data and internet bundled offers, mainly represented by the AT&T Enlace Total family. The main commercial programs for voice are AT&T Plus, AT&T Corplan, AT&T Clase Total, AT&T Integra and AT&T Enlace Total.
The commercial programs are tailored to offer value added business solutions through telecommunications integrated services according to the customers needs. For the residential segment, the five basic plans are AT&T Contigo, AT&T
Fácil, AT&T Consentidos, AT&T Destinos, and AT&T Con Tu Negocio. All of our plans are tailored to the customers calling patterns, and are designed to capture and retain long distance customers. We believe that our prices are
competitive with, and our promotions similar to those of our major competitors, Telmex and Avantel. We generally price our long distance services slightly below Telmexs prices and we are highly competitive with Avantel.

Our marketing

We have
developed a comprehensive marketing plan which we have designed to increase revenue and to obtain profitability by fostering brand name awareness and to increase our customer base and customer retention. We have designed our sales and marketing
strategy to attract existing Telmex customers and to encourage customers of Avantel and other carriers to switch to us, as well as to entice new customers created by the growing demand for telecommunications services in Mexico. We have adopted a
segmented marketing approach that distinguishes between business customers and residential customers and further distinguishes within those segments in terms of usage and type of customer.

Business Customers. We have national market coverage through our presence in different cities: 200 for long distance service, 50 for VPN, 26 for
Data/Internet and 15 for Local Service. We have nearly 400 sales, marketing and e-business professionals dedicated to identifying, attracting and retaining business customers. We also have a Value Added Reseller (VAR) program that incorporates more
than 200 agents with more than 950 account executives, extending our presence to 80 cities. In addition to basic services, we offer to business customers a variety of advanced voice and data services to increase revenues per customer and reduce
customer churn. We also deliver customized bundled offers, including the key services and value-added features such as fraud control and reports-on-demand. We mainly target four groups of business customers:



| |  |  | Multinational Corporations and Maquiladoras. We benefit from the New AT&Ts extensive relationships with multinational corporations, many of whom operate
maquiladorafacilities near the U.S.-Mexico border. Our account executives manage these important relationships with multinational corporations in conjunction with the New AT&T global and national account managers, both pre-and post-sale,
by offering a seamless international product portfolio.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Large and Affiliate Mexican Corporations. We characterize large corporations as our top 500 national accounts. Affiliates include corporations such as Alfa, BBVA Bancomer and
their subsidiaries and related entities, with whom we or our shareholders are or have been affiliated. We actively market to these entities and have been successful in attracting these companies as customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Small and Medium-Sized Businesses. Small and medium-sized businesses include those that generate monthly billings of between Ps.2,500 and Ps.100,000. Small
and medium-sized
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | businesses represent the largest part of our business segment in terms of number of accounts and volume. We believe that in most cases these companies are
underserved by Telmex and that we can help them become up to date on the latest telecommunication technology.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wholesale Services. We believe that our state-of-the-art broadband network infrastructure positions us to be a leading provider of wholesale services to other
telecommunications, cable TV and data communications carriers. While such services are typically provided at a low rate per minute, the incremental cost is minimal. This allows us to earn revenues from the excess capacity on our fixed-cost network
infrastructure. Examples of wholesale customers include other competitive long distance carriers, wireless carriers and internet service providers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also target some other important segments, such as government, call centers and hotel chains, providing to each of these segments distinctive bundle offers which we develop to meet the customers specific
telecommunications service needs.

Residential Customers. Our residential marketing strategy is to target high-usage individuals and
distinguish ourselves from other carriers by offering customized services. High-usage individuals tend to be professional or affluent individuals. Depending on their monthly usage, customers are classified as bronze, silver, gold or platinum.
Benefits such as immediate customer service and personalized analysis and advice with respect to calling plans are given to customers based on their classification.

Advertising and Public Relations. We believe that effective advertising stimulates demand for our services. We advertise using television, billboards, radio, Internet, newspapers and specialized business
periodicals as well as direct marketing campaigns. In addition, in the past we have also sponsored sports events and teams, educational programs and cultural activities. We believe that building credibility as an ignition element for any
communication, before demand stimulation is essential to ensure a solid brand reputation and the trust necessary to place our services in the Mexican market. In this sense, our public relations efforts create an informed opinion among third
parties (journalists, leaders of public opinion, government officials, business partners, the financial community, consumers, etc.) in order to multiply messages regarding the promotion of advanced telecommunications solutions and consultancy aimed
at sales activities. In the current year we have developed a new communications campaign which will be signed by both Alestra and the New AT&T brands. The campaign aims to position the brands as the World Class Telecommunications Services
Company before target markets in the multinational companies and for large, medium and small enterprises and heavy users of the consumer segments.

Sales and distribution

Direct sales for business customers.We maintain 19 independent sales offices
throughout Mexico, including the key cities of Mexico City, Monterrey and Guadalajara. Our sales force is highly qualified (both bicultural and bilingual) and knowledgeable about our services. We believe that the training of our sales force will be
an important factor in our success. When marketing our services, our sales force places special emphasis on the quality of our network and our customer service capabilities. Our direct sales force is compensated with salaries, as well as commissions
and bonuses. Our independent telemarketing representatives are compensated with negotiated fees.



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We believe that the focused approach of our direct sales force favorably distinguishes us from Telmex,
Avantel and other telecom providers in Mexico. Sales managers each manage sales representatives and account executives, who specifically focus on existing and potential accounts within a particular region. Our direct sales force has access to
technical personnel for sales support services. We are able to provide our sales force with weekly sales information, and we track the sales of each of our departments against the objectives for each customer segment and account.

Another key aspect on which we focus is our customers experience after signing the contract, but before the service is rendered; we believe that it
is critical to our marketing success that we maintain a constant communication with our customers after our contracts are signed. For the post-sale experience, we have created a service center organized in tiers with dedicated resources for platinum
and gold accounts plus a well managed customer care organization for mid-size businesses.

Telemarketing. For the residential
segment, we use a focused telemarketing effort. Our telemarketing representatives call high-usage residential accounts based on information in our database and other sources. Our customer representatives emphasize the AT&T brand name, the
quality of our customer service and our network, as well as any promotions that we are offering at that time. Currently, we rely on in-house telemarketing efforts and employ in-house telemarketing representatives and contract with third parties for
the services of additional telemarketing representatives for special campaigns. These representatives make outgoing telemarketing calls, which are in addition to inbound customer inquiries handled by our customer care representatives.

Customer service

We have been
able to distinguish ourselves from our main competitors, Telmex and Avantel, by offering superior customer service. We conduct a survey of our Mexican customers in different market segments on a periodic basis. The survey has consistently indicated
that our services are perceived as having higher value than those of our competitors. Our last survey was made in November 2005. By achieving a level of customer service superior to that of our competitors, we believe that we are able to attract new
customers and achieve lower rates of customer attrition. We have two main customer service centers, one for business customers and the other for residential customers, which are designed to provide service and support for each one of the segments.
We also have an operator service center to provide call processing assistance and two help desk service centers to provide technical support, one for Internet and the other for e-services (web hosting). All of our centers operate 24 hours a day, 365
days a year.

At our customer service centers and help desk, customer service representatives receive approximately 220,000 calls per
month. They handle product and general service inquiries, billing inquiries, fault reports and technical support. Around 76,000 additional calls per month are handled by an Interactive Voice Response (IVR) system for residential customers only. We
also have service representatives performing other customer care activities, such as ordering and



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loading new customers information into our database or back office activities, and making changes in customer databases.

Our operator services center receives an average of 177,000 calls per month attended by operator service representatives. These calls consist of
customers requiring person to person or station to station calls, including collect calls, as well as assistance with calling cards or other services.

Our services centers seek high customer satisfaction by providing ongoing training to our customer service representatives and management staff and by keeping services on a level with world-class centers.

Customer activation, billing and collection policies

Activation. At the time a salesperson receives an order for service, the information provided by the prospective customer is checked against our internal customer database and a third-party database to which
all carriers provide information operated by Soluciones Pearson, S.A. de C.V. We ascertain whether a prospective customer has amounts due over 30 days and over Ps.150, or whether the customer has any amount 60 days overdue to the customers
existing long distance carrier. If the customer has a past due balance with another long distance carrier, activation is denied. If the customers credit history is acceptable, a representative from Soluciones Pearson, S.A. de C.V., a
third-party verification entity, is connected into the call to verify the customers order. We believe that this system of third-party verification, which was implemented in February 1998, has significantly reduced slamming practices in Mexico
and reduced churn caused by payment failure.

Billing. Currently, we use an integrated/convergent billing system that includes
network and customer support capabilities. Our customers are billed monthly, and we split our customer billing into 14 billing cycles.

Also, we have installed a state-of-the-art customer care and billing system, which includes, among other features, enhanced call center support for activities such as e-commerce, rapid development and deployment of any new service that we
may add in the future, automated customer request tracking, bundling and integration of multiple data and voice services. We use a fraud management system that allows our fraud center to detect and prevent unauthorized use of our network through the
use of programs that monitor and identify unusual activity. In addition, the fraud center uses an application developed to detect and analyze fraudulent cases using different profile solutions and statistical, financial, payment history, billing,
traffic, and customer information.

Collection. Bills for residential customers may be paid in cash at one of 6,925 bank branches,
or one of more than 6,744 supermarkets, convenience stores, and public telegraph offices. We give customers the option to charge the invoice balance to credit card or checking accounts. Bills for business customers may be paid in cash at banks or
with electronic funds transfer. There is no seasonality in our collection.



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Our collection efforts include personal calls to the customer, voice messages, past due electronic or
physical mailed notices and door-to-door collection, depending on the past due amount showed and the length of time that the account is overdue.

Additional efforts according to certain criteria include partial or complete restriction of the service, external collection agency assignment and legal proceedings.

Sales and revenue by category of activity and geographical markets

See Item 5. Operating and Financial Review and Prospects-Operating results.

Competition

To date, the SCT
has granted concessions to approximately 33 long distance telecommunications companies. Currently, approximately sixteen long distance concessionaires are offering commercial long distance service in Mexico.

The competition is likely to increase throughout the telecommunications market over the next few years as the Mexican telecommunications market continues
to be liberalized and new technologies are integrated. As a result of competition, Cofetel statistics indicate the average revenue per minute for domestic long distance has declined in real terms by approximately 78% from December 1996 to December
2005.

In the consumer market, customer churn has resulted in the loss of future revenues from customers whose service is disconnected.
Because of churn, we are often unable to recoup the costs we incurred in acquiring the customer, typically switching costs, commissions and costs incurred in connection with independent third-party verification. The establishment of a third party
verification service, as well our new focus on high-usage customers, has contributed to a decrease in our churn rate from 18.8% on average per month in the beginning of 1998, to approximately 4.2% per month in 2005. As a result of churn, we
have experienced a net loss of lines from the number of lines we originally obtained during pre-subscription.

In local competition, some
cable operators based on their customer base of Internet services acquired during the last ten years, intend to enter into local service. Therefore in the last two years, cable operators have requested authorization to provide local telephone
service, but SCT has not yet granted them the authorization. In 2004, Cofetel issued a regulation of Carrier of Carriers that limits cable companies to providing last-mile access to local concessionaries; however local service must
be provided and billed by the local concessionaries. Cable operators continue lobbying to obtain local service concessions.



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Our main competitors include Telmex, Avantel, Telefónica and Axtel. The following paragraphs
contain information of our main competitors obtained from Pyramid Research: Communications Market 2006, each companys web site and our own estimates:

Telmex

Telmex, the formerly government-controlled telecommunications monopoly, has historically
dominated the Mexican telecommunications industry. In December 1990, the Mexican government officially began to liberalize the telecommunications industry by selling a controlling portion of Telmexs equity. The Mexican government subsequently
sold the balance of its holdings in Telmex.

At the same time it began the privatization of Telmex in 1990, the Mexican government amended
Telmexs concession for the provision of public, local and domestic and international long distance service throughout Mexico. Telmex was also granted an exclusivity period of six years in order to make the transition to competition in the long
distance market. In August of 1996, the exclusivity period expired and the Mexican long distance telecommunications industry was officially opened to competition, although Telmex was not required to interconnect new carriers networks to its
own networks until January 1, 1997.

Telmex is the biggest competitor in the Mexican industry. It has participated in all fixed
telecom services, with a substantial market share in each of them. Telmex has leveraged into their nationwide coverage, the broad last-mile access network, where Telmex has retained total control. In 2005, according to Pyramid Research,
Telmexs share was approximately 96% in the local lines market and approximately 73% in the long distance market in minutes.

Telmexs dial-up internet services reached 1.20 million accounts, however in the last year the accounts declined to 1.08 million while broadband grew from 0.56 to 1.03 million subscribers. In 2000, Telmex made an
alliance with Microsoft Corporation with the launching T1MSN portal and change of brand to Prodigy. This alliance allowed Telmex to compete with established portals like Terra, Yahoo! and Esmas.com. In 2005, according to Pyramid Research
Telmexs market share in the Mexican dial-up internet business was approximately 65% and 70% in broadband based on subscribers.

In
the data services market, Telmex has leveraged its local coverage to become the market leader in private lines and frame relay services. Pyramid estimates that Telmex data market share is 68% in terms of revenues.

Currently, Telmex continues extending its broadband service to the Small and Medium Enterprises, or SMEs, market through bundle offers with traditional
voice services.

Avantel

Avantel S.A., which is also a competitive provider of telecommunication services in Mexico, started operations in 1996 through a joint venture between MCI International Telecommunications Corp. 45% of shares (Acquired by Verizon) and
Promotora Banamex de Sistemas de Teleinformática y Telecomunicaciones S.A. de C.V. with the remaining 55%. In 1999, Worldcom acquired MCI and joined the Avantel joint venture. In 2001, Citigroup acquired Promotora Banamex de Sistemas de
Teleinformática y Telecomunicaciones S.A. de C.V. and all of its subsidiaries, and is reported to have subsequently divested almost all of its interest in Avantel.



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Avantels long distance backbone reaches 59 cities, and has approximately 5,000 miles of fiber optic
installed. Avantel uses Nortel Networks Inc. and Cisco System Inc. technologies.

According to Pyramid Research, in 2005, in the long
distance market, Avantel obtained 12% of the domestic long distance market share in traffic. Avantels service portfolio includes domestic long distance, international long distance, 800 services, local, VoIP, Data services and Internet
services. Avantel began providing local service in January 2001 in Mexico City, Monterrey and Guadalajara. Avantel has a nationwide concession for local service and currently offers its service in 24 cities.

Avantels data and internet services portfolio include frame relay and private lines which account for 14% of the market share according to Pyramid
Research. Internet services include: dial-up, virtual private network and web-hosting services.

Telefónica

Telefónica, following its expansion strategy in Latin America, has acquired several telecommunications service providers in Mexico. In 1999
Telefónica acquired Infosel, a part of Terra Lycos, and adopted the Terra brand name for its internet and information services. Terra had 128,000 Internet dial-up accounts in 2002, but its business declined to approximately 75,000 accounts as
of June 30, 2004 according to Telefonicas reports, and it exited the dial-up business at the end of 2004 by entering into an alliance with us in which its dial-up customers were absorbed. Terra has reduced its operations drastically and
began focusing on content services, e-commerce, and internet advertising business through the Terra portal.

At the beginning of 2000,
Telefónica acquired Optel. Optel specializes in X.25, frame relay and dedicated internet services. This acquisition has allowed Telefónica to enter into the business data market and introduce its brand name Telefónica
Data. Telefónica also developed new features for its data service and enhanced its network with dark fiber contracts with Marcatel, S.A. de C.V. to increase the coverage of service.

In 2005, Telefónica Móviles México, a subsidiary of Telefónica, focused strongly on mobile telephone services and deployed
aggressive commercial strategy against Telcel. By the end of the third quarter of 2005, Telefónica Móviles Méxicos coverage of mobile telephone service in 189 cities reached approximately 6.1 million active customers,
according to their public reports.

Axtel

Axtel, S.A. de C.V. is a fixed wireless company founded in 1994. Its shareholders are Telinor Telefonia, S. de R.L. de C.V. (59.5%), AIG-GE Capital Latin American Infrastructure Fund L.P. (15.7%), The Blackstone Group
(14.1%) and a group of financial and technological investors (10.7%) (including Tapazeca sprl, New Hampshire Insurance Company, and Nortel Networks).

In December of 2005, Axtel launched its IPO and sell 15% of the shares to the market and obtain $320 Million USD according with Axtels press releases.



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Axtel has several nationwide wireless spectrums: 60 MHz at 10.5 GHz for point-to- multipoint access, 112
MHz at 15 GHz for point-to-point backhaul access, 100 MHz at 23 GHz for point-to-point last-mile access and 50 MHz at 3.4 GHz for fixed wireless access, the last one being the most used for its current local service. Its network includes 14 cities
with local service.

Axtel competes with us mainly in the local market, where it had approximately a 3% of local lines market share in
2005, according to Pyramid Research.

Our other competitors in voice and data markets are Bestel S.A. de C.V., Telereunion, S.A. de C.V.,
Marcatel, S.A. de C.V., Operadora Protel, S.A. de C.V., Iusacell, S.A. de C.V. and Maxcom Telecomunicaciones, S.A. de C.V.

See
Item 5. Operating and Financial Review and Prospects-Customer attrition and trade accounts receivable.

Regulatory
framework and bodies

Telecommunications services in Mexico are governed by the Federal Telecommunications Law, the Ley de
Vías Generales de Comunicaciónenacted in 1940, the Reglamento de Telecomunicacionesenacted in 1990, certain rules promulgated under the Federal Telecommunications Law and international trade agreements entered into by
Mexico and the World Trade Organization (together, the Telecommunications Regulations). The Telecommunications Regulations define the regulatory structure applicable nationwide to the telecommunications infrastructure and the supply of
telecommunications services. They govern, among other things, applications to install, maintain and operate telecommunications networks, the establishment of technical standards for the provision of telecommunications services, and the granting,
revocation and modification of concessions and permits.

The SCT and the Mexican Congress unsuccessfully attempted during 2003, 2004 and
2005 to reach consensus with the industry in order to pass a new communications bill. However, it is possible that a new federal telecommunications bill, issued by main TV broadcasters and approved by the House of Representatives in December 2005,
will be approved by senators in the Mexican Congress this year, depending on the political environment. The new bill considers to replace immediately all the current commissioners, allows TV broadcasters to offer telecommunications services, to
specify and increase Cofetels faculties in order to regulate broadcasting and telecom services. The bill may eliminate for a while the opportunity for a substantive telecommunications reform.

The SCT is the government agency responsible for regulating telecommunications services and was the exclusive authority until August 1996, when the
Mexican government established Cofetel. Cofetel is a specialized regulatory agency within the SCT, consisting of four commissioners appointed by the President of Mexico, created to enforce the Federal Telecommunications Law and to implement the
necessary regulatory framework to guarantee fair, non-discriminatory and lawful competition among telecommunication services providers in Mexico.



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Cofetel and the SCT have the power to monitor our compliance with the telecommunications public network
concession and our wireless concessions. The SCT delegated to Cofetel many of its powers and obligations under the Telecommunications Regulations. The SCT has retained the authority to grant all concessions and permits as well as the imposition of
fines. Cofetel makes recommendations to the SCT on major issues, such as spectrum allocation and granting of new concessions and permits, but the SCT has the final decision making power on these issues.

Under the existing Federal Telecommunications Law, registration before Cofetel is the sole requirement to provide value-added services.

Cofetel is currently primarily responsible for, among other things:



| |  |  | issuing secondary regulations applicable to the telecommunications industry, including determining the specific obligations of the dominant carrier;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recommending the granting, amendment, extension, assignment and revocation of concessions and permits;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | supervising telecommunications service providers;
| | - |  | -------------------------------------------------



| |  |  | resolving any differences among concessionaires in interconnection negotiations;
| | - |  | --------------------------------------------------------------------------------



| |  |  | conducting public biddings of spectrum;
| | - |  | ---------------------------------------



| |  |  | administering the numbering resources and national numbering migrations;
| | - |  | ------------------------------------------------------------------------



| |  |  | defining the different local service areas and mobile regions; and
| | - |  | ------------------------------------------------------------------



| |  |  | administering the Telecommunication Registry, where the rates for telecommunication services offered by the concessionaires are filed.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

The SCT and Cofetel have taken a number of steps to complete the regulatory framework for Mexican telecommunications, although significant issues remain
unresolved or are under judicial scrutiny.

The Telecommunications Regulations contain various provisions designed to increase competition
among providers of Mexican telecommunications services. In general, the SCT is authorized to grant concessions to other parties to provide of any of the services provided by Telmex under its concession. In August 1996, the SCT opened the Mexican
market to competition for domestic and international long distance services.

The SCT issued the initial rules for the interconnection of
other carriers with Telmexs network in July 1994, specifying that, beginning on January 1, 1997 and before 2001, Telmex was obligated to provide interconnection points for 200 cities in accordance with a rollout schedule. The rules also
obligated Telmex to interconnect all the cities of the country which have at least one switch with routing capability in the year 2001. Currently, Telmex has provided interconnection points in 198 local service areas. However, no additional areas
have been added, and Telmex has argued that there is no switch with routing capability left for the remaining 199 local service areas.



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In June 1996, the SCT released rules with respect to the provision of domestic long distance service,
together with basic technical plans for numbering and for signaling, that address a number of technical issues including several relating to the commencement of competition in long distance services. The long distance rules establish the general
framework for competitive long distance services, including rules regarding customer selection of carriers, billing and collection. They also provide for certain consultation and information-sharing mechanisms among service providers and with the
SCT.

In December 1996, Cofetel released rules regarding the provision of international long distance service, which is routed into and out
of Mexico 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.

In October 1997, Cofetel
released rules regarding the provisioning of local service. Such rules, among other issues, focus principally on establishing the mechanisms for interconnection, the interoperability of networks and the continuance of service, with
non-discriminatory and registered tariffs. Additionally, the rules include access to the special codes, emergency numbers and database directory services. The rules for local service also define the program for the calling party pays
service, some obligations for the dominant carrier in terms of information, tariffs and quality of service, and guidelines for the consolidation of local service areas.

On August 11, 2004, the International Telecommunications Rules were issued by Cofetel. Under these new rules the International Long Distance Rules establishing the proportionate return system were eliminated and
the international settlement rates for terminating long distance calls became subject to free market rules. See International Settlement in this Item.

On August 12, 2005, Cofetel published regulations authorizing the issuance of permits for the resale of national and international long distance public switched telecommunications services through the use of
capacity of concessionaires.

In addition, on January the 2nd, 2006, Cofetel has amended its operating rules. The amendment reorganizes and redistributes resources in Cofetel which could affect concession title granting,
spectrum policy and international matters, among other issues. We cannot predict how those new rules could affect our business.

Our
concessions

Telecommunications public network concession. We obtained our telecommunications public network concession on
December 6, 1995. Through this concession we are able to provide long distance telephone service; and by a later amendment, since May 30, 2000 we have been able to provide local services in Mexico City, Monterrey, Guadalajara and other
cities. In accordance with the Federal Telecommunications Law, the term of our telecommunications public network concession is 30 years. The term of our concession may be extended for a period equivalent to the initial term for which it was
originally granted. The telecommunications public network concession specifies, among other things:



| |  |  | the type of services we may provide under the concession (local and long distance);
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | the geographical region in which we may provide the services;
| | - |  | -------------------------------------------------------------



| |  |  | the term of the concession; and
| | - |  | -------------------------------



| |  |  | other rights and obligations affecting us.
| | - |  | ------------------------------------------

Under the
Federal Telecommunications Law and the Ley de Inversión Extranjera(Law of Foreign Investment), concessions may only be granted to Mexican individuals and to Mexican corporations whose foreign investment participation does not exceed
49% of the full voting equity thereof or who are not otherwise controlled by non-Mexicans, except that, in the case of concessions for cellular communications services, foreign investment participation may exceed 49% of the equity thereof with the
prior approval of the Comisión Nacional de Inversiones Extranjeras(National Commission of Foreign Investments). Furthermore, any attempted transfer or subscription of 10% or more of our equity (other than neutral equity) requires
notification and approval of the SCT and, if applicable, the Comisión Federal de Competencia(the Federal Competition Commission). Any equity transfers in violation of these ownership requirements will be invalid under
Mexican law.

The transfer of the telecommunications public network concession rights is subject to a three-year freeze, and such period is
calculated from the date of issuance of the concession. After such period elapses, the SCT, with the prior favorable opinion of the Federal Competition Commission, may authorize the proposed transfer under certain conditions.

Wireless concessions. In June 1998, the SCT granted us two 20 year point-to-point national wireless telecommunications concessions in the 15 and
23 GHz frequency bands, and in September of 1998, three 20 year point-to-multipoint wireless concessions in the 10.5 GHz frequency band covering the regions 4, 6 and 9. These regions comprise Mexico City and the states of Nuevo Leon, Coahuila,
Tamaulipas, Nayarit, Jalisco, Colima, Michoacan, Mexico, Hidalgo and Morelos (except for retained cities).

Under the 10 GHz concessions,
we were asked to provide by the end of September 2000 point-to-multipoint signal coverage to those municipalities or delegations where 30% of the total population in such regions resides. On July 14, 2000, we petitioned the SCT to allow us to
comply with such requirement a year after the original compliance period. On February 28, 2001, the SCT granted us an extension until August 27, 2001 to comply with such requirement. By August 27, 2001, we had installed 10 GHz sites
in regions 4, 6 and 9, which include the urban areas of Mexico City, Monterrey and Guadalajara. The authorities have been properly notified of our progress and compliance.

On July 19, 2002, we filed a report with Cofetel regarding the implementation of a 10 GHz point-to-multipoint radio base station in the city of
Morelia. With this infrastructure and the one discussed above, we fulfilled our commitments to provide signal coverage for 30% of the population residing in regions 4, 6 and 9.



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Concession maintenance requirements. Our telecommunications public network concession and our
wireless concessions may be terminated pursuant to the Federal Telecommunications Law upon:



| |  |  | expiration of their terms;
| | - |  | --------------------------



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



| |  |  | their revocation;
| | - |  | -----------------



| |  |  | governmental taking; or
| | - |  | -----------------------



| |  |  | our liquidation or Mexican bankruptcy/liquidation (quiebra).
| | - |  | ------------------------------------------------------------

Our wireless concessions may also be revoked for the following reasons:



| |  |  | on public interest grounds;
| | - |  | ---------------------------



| |  |  | for national security reasons;
| | - |  | ------------------------------



| |  |  | for the introduction of new technologies;
| | - |  | -----------------------------------------



| |  |  | to solve interference problems; and
| | - |  | -----------------------------------



| |  |  | to fulfill international agreements and treaties subscribed to by the Mexican Federal Government.
| | - |  | -------------------------------------------------------------------------------------------------

In the event of our Mexican bankruptcy/liquidation our concession would be immediately terminated.

In addition, the Federal Telecommunications Law provides that our telecommunications public network concession and our wireless concessions may be
revoked by the SCT prior to the end of their terms under certain circumstances, including:

(1) unauthorized or unjustified interruption of services;

(2) taking of any action that impairs the rights of other concessionaires or permit holders;

(3) failure to comply with the obligations or conditions specified in the telecommunications public network concession or wireless concessions;

(4) failure to provide interconnection services with other holders of telecommunications concessions and permits without just cause;

(5) loss of our Mexican nationality;

(6) unauthorized assignment, transfer
or encumbrance of the telecommunications public network concession or wireless concessions;

(7) failure to pay the Mexican government the fee for the
telecommunications public network concession or wireless concessions;

(8) failure to comply with the terms established by our concessions for a period of
180 days after the concessions were issued.

The SCT may only revoke a concession under the circumstances referred to in clauses (1), (2),
(3) and (7) above after it has imposed sanctions on at least three occasions on the concession holder, and the violation has recurred. In the events described under clauses (4), (5), (6) and (8) above, the revocation is
immediate.

Moreover, our telecommunications public network concession requires us to meet specific geographic coverage targets and our
wireless concessions require us to meet certain buildup targets.



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The Mexican government, through the SCT, may also temporarily seize all assets related to our
telecommunications public network concession or wireless concessions in the event of a natural disaster, war, significant public disturbance or threats to internal peace and for other reasons related to preserving public order and the national
economy. Under Mexican law, the government would be obligated to compensate us in the case of a statutory expropriation or temporary seizure, except in the event of war. If the Mexican government were to temporarily seize or expropriate our assets,
it would have to indemnify us for all direct losses and damages. In the case of an expropriation, appraisers would determine the amount of the compensation. If we disagreed with the appraisal amount, we could initiate judicial action against the
government to dispute such amount. Should no agreement be reached on the amount of the indemnity in the case of a seizure or expropriation, that determination would be made by an independent appraiser, who would be appointed by a competent court.

Local service

On October 15, 1999, we filed a petition with the SCT requesting an amendment to our telecommunications public network concession in order to obtain authorization to provide local service in the local service areas that constitute the
urban zones of the cities of Mexico City, Monterrey and Guadalajara. The authorization was granted on May 30, 2000. Immediately after the amendment was granted, we began negotiations with Telmex for a local-to-local interconnection agreement.
The negotiations were finished and the agreement was signed on December 22, 2000. We began providing local service on December 29, 2000. As part of the concession we were excepted to allow preselected access to long distance carriers for
the next five years beginning from the day in which Alestra began to provide local service in a local service area.

During the first half
of 2001, we entered into local-to-local interconnection agreements with other local concessionaires, such as Axtel, S.A. de C.V., SOS Telecomunicaciones, S.A. de C.V. (Iusacell), Operadora Unefon, S.A. de C.V., Radiomóvil Dipsa, S.A. de C.V.
(Telcel) and Pegaso PCS, S.A. de C.V. (Telefónica). Also during this period, we completed the development of our 10.5 GHz point-to-multipoint microwave radio system network in the cities of Mexico City, Monterrey and Guadalajara, which will
be our main system for reaching the residential market. We will continue to expand our commercial market by the introduction of local service using fiber-optic and point-to-point access to current and new clients.

In addition to the May 30, 2000 resolution that allowed us to begin the deployment and offering of local telecommunications services, on
February 13, 2002 we filed a petition before Cofetel and the SCT in order to obtain an authorization to provide local service in any city in Mexico. As a result of this petition, on December 17, 2002, we received the authorization to offer
a full range of local services throughout Mexico, through a nationwide concession on a regional basis. The modification was an extension of the coverage included in our original authorization to provide local service in Mexico.

During the first semester of 2006, Alestras exception to allow preselected access to long distance carriers will be ended. On January 5, 2006,
Alestra requested Cofetel to extend such exception for three more years.



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In spite of the fact that competitive local carriers -whose exceptions have come to an end- are not
providing equal access to long distance carriers, we can not assure that Cofetel will grant us the pertinent authorization. If Alestra lost its referred exception, our local service clients would be more exposed to our competitors, and the chances
of losing them would increase.

Tariffs, anti-competitive practices and interconnection

Tariffs. Under the Federal Telecommunications Law, tariffs for telecommunications services are generally determined freely by the providers of such
services and are subject to the requirements set forth in the concessions. Tariffs must be registered before Cofetel prior to being implemented. However, Telmex is an exception to this rule because it is required to obtain approval before it sets
rates. Under its concession, beginning in 1999, and every 4 years thereafter, Telmexs price cap regulation is subject to review. Such review allows Telmex to increase prices based on a basket of services including local, domestic and
international long distance services, subject to a cap based on the inflation rate and adjusted by a productivity factor (3% from 2003 through 2006). Within the basket, Telmex is allowed to raise tariffs as long as the price of the basket remains
under the cap, and lower tariffs, provided they remain above the long run incremental cost of each service.

Telmexs tariffs for
domestic long distance declined in real terms more than 70% from December 1996 to June 2005, because either Telmex did not increase its prices to account for inflation or the price decreased due to competitive forces. We believe that the Mexican
telecommunications market will continue to experience tariff pressure.

Anti-competitive practices. Telecommunications service
providers are prohibited by law from adopting discriminatory practices generally, including in the application of tariffs. All tariffs must be based on the following factors:



| |  |  | quality,
| | - |  | --------



| |  |  | competitiveness,
| | - |  | ----------------



| |  |  | security, and
| | - |  | -------------



| |  |  | the length of time the carrier will commit to providing the service.
| | - |  | --------------------------------------------------------------------

Those companies determined by the Federal Competition Commission to have substantial market power pursuant to the provisions of the Ley Federal de Competencia Económica(Federal Law of Economic
Competition), Mexicos antitrust statute, can be regulated so as to prevent anti-competitive practices.

Since Telmex has been
declared a dominant carrier, that is, a carrier holding substantial power in five specific telecommunications markets, we have filed a motion with Cofetel to reapply Telmexs obligations with regard to rates, quality of service and
information, in accordance with the Federal Telecommunications Law. If we are successful and Cofetel reapplies Telmexs obligations, Telmex will be obligated to refrain from anticompetitive practices by, among other things, improving the
quality of our interconnections with their network, submitting



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to the supervision by Cofetel of the rates that they charge, performing separate accounting for the separate divisions of Telmex, and releasing information
regarding their network.

Long distance-to-local and local-to-local interconnections. Under Mexican regulations, local telephone
concessionaires must enter into interconnection agreements with local and long distance concessionaires, pursuant to which the local operator is obligated to route calls from customers to the local or long distance carrier of the customers
choice. The local carrier would be obligated to route those calls to the switches of the call recipient in the same local area of its origination (in the case of a local call). The long distance carrier would be obligated to route those calls to
local switches in the area of the call recipient (in the case of a domestic long distance call) or to the appropriate international network (in the case of an international long distance call).

Our long distance-to-local interconnection agreement with Telmex sets forth the terms and conditions under which we are allowed to
interconnect our long distance network with Telmexs local network.

Our local-to-local interconnection agreement with Telmex sets
forth the terms and conditions under which we are allowed to interconnect our local network with Telmexs local network.

Every year
we and Telmex begin negotiations of the terms and conditions, including rates, applicable for the next year. If we are not able to enter into an agreement, the Federal Telecommunications Law provides that in 60 days Cofetel will resolve any
interconnection disagreement between concessionaires. The interconnection agreements provide, however, that the terms and conditions of the agreements will remain in place until we and Telmex are able to reach a new agreement, which will apply
retroactively. During the last quarter of 2004, we reached a new agreement with Telmex for 2004 and 2005. We are currently negotiating with Telmex in order to reach an agreement on the interconnection rates and some other regulatory and commercial
issues for 2006 and 2007. In the event of not reaching any agreement, we believe that the current cost scheme of our operation will not be threatened.

Among other things, the interconnection agreements may be terminated if we suffer a substantial default under our interconnection agreement with Telmex.

International settlement

On
August 11, 2004, the International Telecommunications Rules were issued by Cofetel. Under these new rules the proportional return and the uniform settlement rate systems (formerly enforced by the International Long Distance Rules-1996) were
eliminated. Under the proportional return system, incoming calls were divided among Mexican carriers in proportion to the outgoing international traffic originated by each of the carriers as determined by a committee composed of all the long
distance carriers. The rates of payment were negotiated with each foreign carrier by the dominant carrier in Mexico, Telmex. Under the new system, the international settlement rates are subject to free market rules which allow for each carrier to
negotiate freely its own rates. We expect that the international settlement rates that leading U.S.



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carriers use to settle accounts with foreign telecommunications carriers will continue to be subject to intense downward pressure due to competition factors.

Interconnection agreements between a Mexican long distance concessionaire and foreign carriers require the approval of Cofetel before
becoming effective.

We are entitled to receive net settlement payments from the New AT&T, the carrier in the U.S. with whom we
interconnect, pursuant to a duly registered interconnection agreement. This agreement, and agreements we have entered into with other carriers, including Teleglobe Canada Inc., Telefónica de España, S.A.U. and British
Telecommunications, Plc., are similar to those agreements other Mexican long distance carriers have with corresponding foreign carriers. These agreements govern the payment rates between Mexican carriers and foreign carriers for the exchange of
international call traffic billed in Mexico, and between foreign carriers and Mexican carriers for the exchange of international call traffic in calls billed abroad.

Pursuant to Cofetel regulations, the only legal way to transport public, internationally switched long distance minutes into Mexico is through long distance concession holders via international ports. 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 bypass
the international ports, a practice deemed illegal by Cofetel. These entities terminate those calls as domestic or local calls, by using different technologies, such as the Internet, thus avoiding the payment of settlement charges.

Off-net charges (Long Distance-to-Long Distance Interconnection)

We pay Telmex a per-minute charge to terminate calls on its network in cities outside of those 200 cities from which we currently originate traffic. These
traffic minutes represented about 9.0% of our total minutes of traffic for 2005.

Our contract with Telmex for off-net services,
Plan Lada Operadores, expired on December 30, 1999. However, we and Telmex continue to operate this traffic under the terms and conditions of the settlement agreement among, Telmex, Telnor, Avantel and us signed on
December 29, 2000. For the period from January 1, 2000, to December 31, 2003, our off-net charges were the lower of 75% of Telmexs lowest rate made available by Telmex in the market for domestic long distance service to its
final users or 75% of the lowest rate applied by Telmex to the termination market for the international long distance switched public traffic service in Mexican national territory. In November 2004, during our negotiations to establish the terms and
conditions for the interconnection rate and other issues for the year 2004 and 2005, we agreed with Telmex to set off-net charges equal to the lowest of Ps0.75 per minute and any rate available by Telmex for domestic long distance service to any
telecommunications public network concessionaire or any rate available by Telmex to US carriers for traffic originated outside Mexico and terminated in Mexican national territory. We are currently negotiating with Telmex in order to establish the
terms and conditions for the interconnection rate and other issues for the year 2006 and 2007.



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Mobile interconnection rates

On March, 10, 2005, Alestra filed before Cofetel an interconnection disagreement with Radio Móvil Dipsa, S.A. de C.V. (Telcel), in
order to obtain a reduction in the mobile interconnection rate that is charged for calls originating in fixed networks and terminating in mobile networks, under the Local Calling Party Pays System. It is due to a tariff distortion derived by the
existence of lower service mobile tariffs than interconnection rates. In addition, we require Cofetel to oblige Telcel, as part of the disagreement, to charge the interconnection rate by seconds, in place of by minutes, and to give information about
the interconnection points between Telmex and Telcel.

It is expected that Cofetel resolves the disagreement dispute this year although an
agreement with Telcel could be reached before.

Third party verification

During 1997, the Mexican long distance telecommunications market experienced rates of churn significantly higher than those experienced in the United
States and similar markets. In response to complaints by the Mexican long distance carriers that a significant portion of this churn rate was due to slamming, the practice of some long distance carriers to switch customers to their service without
the customers knowledge, Cofetel provided for a third-party verification system, similar to that used in the United States and other countries. Since February 6, 1998, every carrier began to submit to the third-party independent
verification company Soluciones Pearson, S.A. de C.V. the name and number of each customer acquired. Pearson then independently called each customer to verify that the customer had voluntarily chosen the carrier who had submitted such
customers name. Since February 1999, a representative of Pearson is now patched into the call while a customer is signing up for new service. As a result of this and other measures, the churn rate has dropped substantially from an average of
18.8% per month in the beginning of 1998, to an average of 2.5% per month in 2003, 2.7% per month for 2004 and 4.2% per month for 2005.

Value-added taxation of telephone services

Billings for telephone services are subject to
value-added tax of 15.0% throughout Mexico, except billings for telecommunication services in cities that border the United States or cities located within certain states or municipalities which are subject to value-added tax of 10.0%. We include
this charge on all Mexican bills and we are obligated to remit this amount monthly to the relevant taxing authority.

C.
Organizational structure

We are owned 49% by the New AT&T and 51% by Onexa. Onexa is owned by Alfa and BBVA Bancomer. The New
AT&T holds its equity in us through its subsidiary AT&T Telecom Mexico.

Alfa is one of Mexicos largest conglomerates. It
comprises four groups that participate in key industries within the Mexican and NAFTA economies, including petrochemicals and



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synthetic fibers, processed food, auto parts and telecommunications. As of December 31, 2005, Alfas total assets amounted to Ps.63.3 billion, with
annual sales of Ps.69.3 billion and operating income of Ps.6.6 billion.

The New AT&T is among the premier voice, video and data
communications companies in the world, serving businesses, consumers, and government. On January 31, 2005, AT&T Corp. and SBC announced that their boards had approved a deal under which SBC would acquire AT&T Corp., and on
November 17, 2005, SBC completed its acquisition of AT&T Corp. See Item 3. Key Information  D. Risk Factors  Factors Relating to us  The AT&T Acquisition could have a material adverse effect on our operations and
our financial results.

Grupo Financiero BBVA Bancomer (BBVA Bancomer or the Group) is the leading private financial
institution in Mexico with 31,199 employees and is the largest in Latin America in terms of deposits and customer base, with total assets of 572,951 million pesos as of December 31, 2005. The Groups main subsidiary is Bancomer, a
leading banking institution with 1,718 branches operating under a universal banking concept, offering products and services to more than 12.2 million clients through a business model of distribution networks segmented by groups of customers.
Additionally, the Group has diversified income sources with non-banking subsidiaries involved in mutual funds, annuities, pension funds, insurance, brokerage, money remittances and asset management. In June 2002, BBVA Bancomer became an affiliate
holding company of Banco Bilbao Vizcaya Argentaria (BBVA), a leading financial group in Spain, which has 94,681 employees catering to 33 million clients in 37 countries, mainly in Europe and Latin America, through a network of 7,410 offices.

On November 14, 2000, we restructured our capital without changing the above referenced ownership proportions as follows: 35% of our
capital is represented by Series A shares and Series B shares and the remaining 65% is represented by Neutral (N) stock. The Series A shares and the Series B shares have full voting and economic rights while the N stock has full economic
rights but limited voting rights. AT&T Telecom Mexico holds 49% of the N stock and Onexa holds the other 51%. Onexa continues to hold 100% of the Series A shares and AT&T Telecom Mexico continues to hold 100% of the B shares. As of
December 31, 2005, AT&T Mexico holds 578,859,772 shares of our common and N stock and Onexa holds 602,486,701 shares of our common and N stock.

Our senior notes are not guaranteed, secured or otherwise supported by our equity holders.

Under the
Federal Telecommunications Law and the Foreign Investment Law, no more than 49.0% of the voting equity of a Mexican corporation holding a concession to provide long distance telecommunications services may be held by non-Mexican nationals.

We have entered into a joint venture agreement with our equity holders, AT&T Corp., Alfa, Onexa and Bancomer, and have adopted bylaws,
each of which governs the relationship between the equity holders and us.



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Our approximately 1,900 employees are employed through our sole subsidiary Servicios Alestra S.A. de
C.V., which is organized under the laws of Mexico. We hold 98.0% of the capital stock of Servicios Alestra. Our employees are paid by that entity with funds provided by us on a monthly basis under a management and services agreement.

D. Property, plants and equipment

Our network

Network components. As of December 31, 2005, we have invested more than Ps.7,258.8 million
in our technologically advanced fiber-optic network. Construction of the original design for our long distance network was completed in 1997. Our average network reliability in 2005 was 100% for our backbone, 100% for last-mile solutions based on
fiber optic equipment and 99.9952% for last mile solutions based on digital microwave transmission equipment. Our network is regularly upgraded and extended using state-of the- art technology. Our network was constructed and is operated in
accordance with the reliability, redundancy and restoration standards of the New AT&Ts U.S. network. The key components of the network, all of which are directly owned by us, include:



| |  |  | Over 5,950 route kilometers of long-distance and intra-city network, mostly with Lucent True Wave fiber-optic underground inter-city facilities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately 930 route kilometers of metropolitan area fiber-optic facilities;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Eight Lucent digital voice switches, plus one which is used for testing purposes;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Next generation Sonus Softswitch and gateways to provide local services; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | Cisco Systems ATM/frame relay switches; carrier-class Cisco Gigabit Switch routers, carrier-class Cisco Systems routers used for data services and internet
connection; an MPLS core for VPN services; and over 11,000 modems for Dial-Up services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have over 3,000 agreements in
place with highways, railroads and utilities companies that provide us with rights-of-way throughout Mexico. We believe these rights-of-way provide barriers to entry for potential facilities-based new competitors in the long distance market.

Our network is expandable and flexible. The conduit comprising the long distance network contains a fiber-optic cable with 24 fiber-optic
strands. In the metropolitan rings, there are three conduits (four in the case of Mexico City), at least one of which contains fiber-optic cable with 36 fiber-optic strands. The new metropolitan infrastructure recently installed in Mexico City,
Monterrey Guadalajara and Ciudad Juarez has a fiber-optic cable with 144 fiber-optic strands. These conduits are generally buried at a depth of 4ft. Most of the metropolitan rings built by us also have at least one empty conduit, allowing for
additional capacity to be deployed in the future at a substantially lower cost.

Fiber-optics. Our inter-and intra-city fiber-optic
network is 5,950 kilometers in length and consists of three fiber-optic inter-city rings with the transmission capabilities of dense wave division multiplexing (DWDM) and Synchronous Digital Hierarchy architecture (SDH). The network is located in
the following areas:



| |  |  | a northern ring that extends from the United States border crossings at Reynosa and Nuevo Laredo through Monterrey;
| | - |  | -------------------------------------------------------------------------------------------------------------------



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| |  |  | a central ring through Guadalajara;
| | - |  | -----------------------------------



| |  |  | a southern ring through Mexico City;
| | - |  | ------------------------------------



| |  |  | two interstate segments on the eastern coast of Mexico that run from the central region to the northern part of the country; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | four border crossings located over the U.S.-Mexico border (Tijuana, Ciudad Juarez, Nuevo Laredo, Reynosa), and another through the use of capacity in submarine cable systems from
Cancun.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to our long distance concession, we are permitted to send domestic traffic through the New AT&Ts
U.S. network facilities to achieve connectivity among our inter-city fiber-optic rings and two border crossings at Tijuana and Ciudad Juarez. We are the only carrier with dual-ring SDH infrastructure in the border with the United States, through San
Antonio, Texas to Nuevo Laredo and Reynosa, Tamaulipas in México; this is a feature that provides diversity and reliability to our customers.

Our network incorporates Lucent True Wave non-zero dispersion shifted fiber-optic cable, which supports SDH and dense wave division multiplexing technology (DWDM). SDH is the industry standard in
transmission technology, similar to SONET, which supports 2.5 gigabit per second transmissions over a single fiber-optic strand. SDH enables the deployment of bi-directional ring architecture, a system that allows for nearly instantaneous rerouting
of traffic in the event of an equipment failure or a fiber-optic cut. We were the first Latin American carrier to use dense wave division multiplexing technology, which enables greatly expanded transmission capacity over the same physical
infrastructure or fiber link through the installation of additional electronics only, thus enabling us to increase significantly our transmission capacity. All of our long distance fiber-optic facilities use dense wave division multiplexing
technology with an effective transmission rate of 40 gigabits per second per pair of fiber-optic strands. We are currently utilizing one pair of fiber-optic strands with a 2.5 gigabit per second capacity and a second pair of fiber-optic strands
using dense wave division multiplexing technology with a capacity of 40 gigabits per second, of which we currently utilize four wavelengths with a capacity of 10 gigabits per second.

Electronics and switching. We have deployed five Lucent 5ESS digital switches to provide long distance services. The switches are located in
Monterrey, Guadalajara, Mexico City, Ciudad Juarez and Tijuana. These switches perform as international and domestic gateways. We have also deployed one 5ESS and two VCDX switches, a compact version of the 5ESS, to provide local services in Mexico
City, Monterrey and Guadalajara. In addition, we have deployed one switch for testing purposes in Monterrey. The Lucent 5ESS switch is an industry-leading universal digital exchange system, with an extraordinary record of availability and
performance, and capable of supporting both voice and data switched services. The 5ESS supports a full range of U.S. and international transport and signaling standards, including interfaces to both the U.S. standard DS-1 (24 channel) and the
European standard E-1 (30 channel) trunking. The 5ESS digital switch can deploy several types and combinations of telecommunications services on a single exchange platform including analog, mixed analog/digital or digital lines and can function as a
local, toll and gateway exchange.



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We have large points of presence, or POPs, in 30 cities within our long distance network, in addition to
metropolitan, junction and regenerator sites. A point of presence is a location where we have installed transmission equipment that serves as a switching center or relay for the larger network. Our points of presence contain
telecommunications equipment (switching and/or transport) and serve as interconnection points between different elements of our network and other networks (including Telmex). Each switch and point of presence is housed in a concrete structure that
is equipped with an advanced power supply, air conditioning, and security and fire protection system.

Our signaling network is connected
to AT&T through international SS7 signaling interfaces. These signaling interfaces allow us to interface with other network and telecommunication services providers, as well as provide us with advanced services.

To support the growing demand for data services, we have deployed an ATM/Frame Relay, an MPLS-VPN, an IP protocol network, and several metropolitan
Ethernet Networks, all of which are based on our DWDM and SDH fiber-optic transmission network. We have deployed Frame Relay switches in Mexico City, Monterrey, Guadalajara, Puebla, Tijuana and Ciudad Juarez which interconnect with the New
AT&Ts Global Frame Relay network. Our Internet (IP) network is supported by carrier class gigabit routers and other high capacity and/or performance routers deployed in key points of presence and switch sites. Our IP protocol network
interconnects with the global internet via the New AT&T internet services. We have deployed 23 Cisco Routers from our VPN infrastructure in the cities of Mexico City, Monterrey, Guadalajara, Tijuana, Ciudad Juarez, Chihuahua, Culiacan, Cancun,
Tampico, Mexicali, Hermosillo, Nogales, Ciudad Obregon, Los Mochis, La Paz, Acapulco, Ciudad del Carmen, Coatzacoalcos, Irapuato, Merida, Oaxaca, Tuxtla and Villahermosa. All of our service networks expand their coverage to the entire country
through our own Transmission Network and through the use of Alternate Access providers.

Direct access. Our direct access facilities
allow our customers to access our network directly and avoid interconnection with local exchange carriers and incumbent networks like Telmexs. We have deployed metropolitan fiber-optic rings consisting of approximately 930 route kilometers in
Monterrey, Mexico City, Guadalajara, Ciudad Juarez, Tijuana, San Luis Potosi, Queretaro, Leon and other cities in Mexico, each of which has been deployed using an SDH ring or asynchronous transfer mode (ATM) architecture. To date, we have 64
metropolitan points of presence (miniPOPs) in our metropolitan rings acting as hubs to connect commercial customers and some corporate buildings to our network, and more are scheduled in 2006 as customer demand increases. In addition, we possess
national and regional licenses for microwave wireless frequencies that allow us to connect many of our business customers directly to our network, reducing our dependence on Telmexs local network.

Wireless facilities. We hold two national point-to-point concessions to provide wireless connectivity to business customers (one in the 15 GHz
band and one in the 23 GHz band). We also hold three point-to-multipoint concessions in the 10 GHz band covering Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacan, Mexico, Hidalgo and Morelos which
provide direct access to our small business customers. We lease wireless frequency capacity from Conectividad Inalambrica 7GHz, S. de R.L., a joint venture



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between our equity holders and a subsidiary of Avantel, which acquired rights to use a concession in the 7 GHz band with national coverage to provide
wireless connectivity to business customers and to expand the network infrastructure. To provide less capital-intensive direct access facilities and network interconnection in selected smaller cities (and for redundancy purposes), we have deployed
63 radio towers in our network. On these towers we have selectively deployed point-to-point and point-to-multipoint digital microwave transmission equipment. Our main suppliers of digital microwave equipment include Alcatel, Alvarion, Marconi,
Microwave Networks and Harris Corporation. A continuous process of evaluation is performed among current and potential technology suppliers.

Leased facilities. To cost-effectively originate and terminate traffic in cities where we do not have a point of presence, we lease facilities from Telmex for an installation fee plus a monthly fixed-cost charge. In this way, we are
able to address a large number of additional end-users efficiently.

Currently, we do not have any material plan to construct or
improve our network, and we believe that there are no environmental issues that may have an impact in our network.

Other
properties

Our other principal properties consist of management and customer service offices in Monterrey, Guadalajara and Mexico
City, and sales offices and network infrastructure sites such as points of presence and regenerators that are located throughout Mexico. We own, or possess pursuant to leases, land totaling approximately 69,000 square meters on which management
offices, sales offices, customer service centers and points of presence are located. Our principal administrative offices are located in Monterrey and Mexico City and our principal operations center is located in Monterrey.



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|Item 5. | Operating and Financial Review and Prospects.
|------- | ---------------------------------------------

A. Operating results

See Item 4. Information on the Company and Item 8. Financial
Information included in this annual report together with the following discussion and analysis of our financial condition and results of operations.

Basis of presentation

We prepare our financial statements in conformity with Mexican GAAP,
which differs in certain significant respects from U.S. GAAP. See Note 20 to our audited consolidated financial statements for information related to the nature and effect of such differences and a quantitative reconciliation to U.S. GAAP of our net
income (loss) reported under Mexican GAAP for the years ended December 31, 2003, 2004 and 2005 and our of total stockholders equity as of December 31, 2004 and 2005.

Mexican GAAP requires that financial statements recognize the effects of inflation. Accordingly, except where otherwise indicated, the consolidated
financial data for all periods have been presented in constant Pesos as of December 31, 2005. Although the restatement of nominal Peso amounts into constant Pesos lessens the distorting effect that inflation has on comparisons of financial
statements over time, the restatement does not wholly eliminate these distortions, and evaluation of period-to-period trends may be difficult.

Beginning January 1, 1997, the Modified Fifth Amendment of Bulletin B-10 (Fifth Amendment) became effective. The Fifth Amendment requires companies to restate machinery and equipment of a non-Mexican origin using an index
which reflects the inflation rate in the respective country of origin and the exchange rate of the Peso against the currency of such country at the balance sheet date. The application of the Fifth Amendment resulted in an increase of Ps.385.8
million and reduction of Ps.33.6 million and Ps.239.2 million in the net book value on our equipment of non-Mexican origin as of December 31, 2003, 2004 and 2005 respectively, which were recorded as a gain (deficit) in the restatement of
capital.

On December 1, 2003, our shareholders resolved to (i) reclassify the balance as of December 31, 2002 of the
restatement of capital stock account into the variable portion of the capital stock in the amount of Ps.4,844.4 million and (ii) reduce the variable portion of the capital stock for Ps.8,860.2 million and Ps.1,291.7 million by reclassifying
these amounts from the accumulated deficit account and the accumulated deficit from restatement account, respectively. As a consequence, the nominal value of our shares was proportionally reduced according to the ownership interest of each of our
shareholders, 51% on Onexa and 49% on AT&T Corp.. These transactions did not represent a contribution or payment to our share holders.

Overview

Our primary business consists of the operation of a public telecommunications network in Mexico offering
domestic and international long distance voice, data, video, internet-related



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services, and local telephone service. In accordance with the terms of our long distance concession and guidelines established by the SCT, on January 1,
1997 we began the gradual rollout and expansion of our long distance services to 60 cities. Our services became available in all 60 cities on June 27, 1997. Currently, we provide long distance origination services from 200 cities in Mexico. In
2003, we had an estimated 11% of the total international long distance market in terms of minutes carried, in 2004, we had an estimated 12% of the total international long distance market in terms of minutes carried. As of December 31, 2003, we
had 548,611 lines in service, as of December 31, 2004, we had 479,297 lines in service and as of December 31, 2005, we had 439,682 lines in service.

Our revenues consist of: (a) charges to customers for long distance calls, which are billed in pesos, (b) billings to foreign carriers for termination of incoming international telephone calls, which are
billed in U.S. dollars, (c) fixed charges to customers for our data and internet services, which are billed mainly in pesos and (d) fixed and variable charges to customers for our local services, which are billed in pesos. Our revenues
depend on the number of subscribers, volume of traffic, rates charged by us to our customers and settlement rates agreed with foreign carriers.

Our cost of service consists primarily of local access charges and resale expenses which are paid on a per-minute basis primarily to Telmex, international settlements payments paid to foreign carriers on a per-minute basis for the
completion of international calls originated in Mexico by us, and fees for leased lines which are typically paid on a per-circuit per-month basis primarily to Telmex.

The following table sets forth certain statistical data regarding our operations:



|                                                                             |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  
|---------------------------------------------------------------------------- |  | --------- |  | ----- | ---- |  | --------- | ---- | ----- | - |  | --------- |  | ----- | -
|                                                                             |  | 2003      |  |       | 2004 |  |           | 2005 |      
|Lines in service at end of period:                                           |  |           |  |       |      |  |           |      |      
|Business                                                                     |  | 80,254    |  |       |      |  | 79,780    |      |       |   |  | 68,372    |  |       |  
|Residential                                                                  |  | 468,357   |  |       |      |  | 399,517   |      |       |   |  | 371,310   |  |       |  
|Minutes of use for the period (1):                                           |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  
|Domestic long distance                                                       |  | 1,670,601 |  | 47    | %    |  | 1,478,654 |      | 42    | % |  | 1,627,513 |  | 41    | %
|International long distance                                                  |  | 1,892,583 |  | 53    | %    |  | 2,060,158 |      | 58    | % |  | 2,361,705 |  | 59    | %
|                                                                             |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  
|Total                                                                        |  | 3,563,184 |  | 100   | %    |  | 3,538,812 |      | 100   | % |  | 3,989,218 |  | 100   | %
|                                                                             |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  
|                                                                             |  |           |  |       |      | 
|(1)    In thousands.                                                         |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  
|                                                                             |  |          
|The following table sets forth information regarding our operating revenues: |  |           |  |       |      | 
|                                                                             |  |           | 
|                                                                             |  | 2003      |  |       | 2004 |  |           | 2005 |      
|Domestic long distance                                                       |  | 1,351.2   |  | 22.5  | %    |  | 1,076.1   |      | 21.4  | % |  | 977.0     |  | 24.0  | %
|International long distance                                                  |  | 3,235.9   |  | 53.9  | %    |  | 2,283.7   |      | 45.4  | % |  | 1,178.9   |  | 29.0  | %
|Data, internet and local services                                            |  | 1,417.2   |  | 23.6  | %    |  | 1,670.3   |      | 33.2  | % |  | 1,915.1   |  | 47.0  | %
|                                                                             |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  
|Total                                                                        |  | 6,004.3   |  | 100.0 | %    |  | 5,030.1   |      | 100.0 | % |  | 4,071.0   |  | 100.0 | %
|                                                                             |  |           |  |       |      |  |           |      |       |   |  |           |  |       |  



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After November 18, 2005, following the AT&T Acquisition, we and our shareholders amended our
Second Amended and Restated Joint Venture Agreement (the Joint Venture Agreement) to modify our corporate governance and certain other provisions. We also amended the Amended and Restated Service Mark License Agreement between AT&T
Corp. and us (the Service Mark License Agreement), the AT&T Global Network Cooperation Agreement between AT&T Corp. and us (the AGN Agreement) and our bylaws (the Bylaws).

Governance Provisions

We and our
shareholders amended the Joint Venture Agreement and the Bylaws to eliminate the requirement that certain corporate actions only be taken on the affirmative vote of each of the partners. The affirmative vote of each of the partners is no longer
required for, among other things:



| |  |  | the approval or modification of our annual budget or business plan,
| | - |  | -------------------------------------------------------------------



| |  |  | the making of significant capital expenditures,
| | - |  | -----------------------------------------------



| |  |  | the election or removal of our chief executive officer,
| | - |  | -------------------------------------------------------



| |  |  | the entering into modification or termination of material contracts,
| | - |  | --------------------------------------------------------------------



| |  |  | any change in regulatory policy,
| | - |  | --------------------------------



| |  |  | the approval of grants under any compensation plan for our chief executive officer and other executive officers (although adoption or modification of the underlying plans is still
subject to approval by an affirmative vote of each of the partners).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the amendment, our board of directors
now has the authority to take the actions described above. In addition, our board of directors may now take action by a simple majority, subject to certain limited exceptions that require the affirmative vote of at least one board member of each of
our partners.

Service Mark License Agreement

The term of the Service Mark License Agreement has been extended. Under the amended Service Mark License Agreement, for a period of 18 months from the date of the consummation of the AT&T Acquisition, subject to
our achieving certain milestones, we may continue to use the AT&T brand name. If we develop or license new marks during that 18-month period, then under the amended Service Mark License Agreement we may refer to the AT&T brand name for an
additional 18 months. After 24 months from the consummation of the AT&T Acquisition, we may use the AT&T service mark only together with our new service marks, and may use it for reference purposes only and always with the prior approval of
the New AT&T. AT&T Corp. has agreed to waive any royalty fee payments under the Service Mark License Agreement during such period, including 2005 royalty payment if we invest the funds in marketing and developing the new marks during the
initial transition period. Under the amended agreement, we now have the flexibility and freedom to develop new marks for our domestic services. In connection with the provision of AT&T Global Network services (AGN Services), we are
allowed a limited use of the phrase AT&T Global Services on a nonexclusive basis until June 2010.



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AGN Agreement

The term of the AGN Agreement has been extended to June 30, 2010. Under the amended AGN Agreement, if our Mexican shareholder, Onexa S.A. de C.V., transfers certain of its interest in us, AT&T Corp.s
obligations under the AGN Agreement will terminate.

Non-Compete Provision

AT&T Corp. has agreed that neither it nor its affiliates (other than jointly or in collaboration with America Móvil, S.A. de C.V.,
Teléfonos de México, S.A. de C.V. or their affiliates (together, TAM)) may compete directly with us in Mexico in the offering of certain specified telecommunications services.

However, AT&T Corp. is no longer required to use its best efforts to promote the use of our services in Mexico.

Insulation from Certain New AT&T Affiliates

Due to the interest New AT&T holds in TAM and its affiliates, AT&T Corp. has agreed that, for so long as New AT&T has the right to designate at least one member to the board of directors or the executive
committee of TAM:



| |  |  | none of the individuals nominated to serve as AT&T Corp.s representatives on our board of directors or steering committee shall have any direct or indirect responsibility
for the New AT&Ts relationship with TAM or serve within twenty-four (24) months of serving on our board of directors on either the TAM board of directors or executive committee; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | none of the officers of AT&T Mexico nor any individuals serving on AT&T Mexicos board of directors shall serve as directors or officers of any New AT&T affiliate
holding any interest in TAM.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the New AT&T must establish and enforce an information policy preventing the
transfer of non-public information regarding us to TAM.

Transfer Restrictions

The Joint Venture Agreement has also been amended to permit certain transfers of indirect interests in us to financially qualified buyers who are not our
competitors, subject to certain rights of first offer. Under certain conditions, there are drag-along rights (that can require the sale of 100% of us) and tag-along rights (that permit the other owner to join in the transfer).

Certain Purchase and Financial Commitments

AT&T Corp. has also agreed that its affiliates will purchase certain telecommunication services from us that generate a cumulative margin after certain third party costs of no less than $164,600,000 (subject to adjustment in certain
circumstances) during the period from January 1, 2006 to June 30, 2010, or else AT&T Corp. will pay the amount of deficiency. These financial commitments are guaranteed by the New AT&T should AT&T Corp. default in its
obligations.



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Additionally, if AT&T Corp. fails to meet certain cumulative margin milestones by June 30, 2012, AT&T Mexico will transfer up to 15% of the
total equity interests in us to Onexa and, in the event such transfer amounts to 10% or more of our total equity interests, the right to nominate one Series B director of Alestra.

Impact of developments in the Mexican economy

The vast majority of our customers are Mexican companies or individuals. Furthermore, all of our operations are located in Mexico. Accordingly, our financial condition and results of operations are significantly
impacted by economic conditions within Mexico.

Beginning in December 1994, Mexico experienced an economic crisis characterized by exchange
rate instability, devaluation of the Peso, high inflation, high domestic interest rates, negative economic growth, reduced consumer purchasing power and high unemployment. The economic crisis resulted in part from a series of internal disruptions
and political events that undermined the confidence of investors in Mexico. These adverse conditions in Mexico also resulted in an increase in the annual rate of inflation from 7.1% as of December 1994 to 52.0% as of December 1995, and a liquidity
crisis affecting the ability of the Mexican government and the banking system to refinance or refund maturing debt issues. Mexican interest rates, which averaged 14.0% per annum for 28-day Cetes, or Mexican treasury bills, during 1994,
increased to an average of 48.7% during 1995. According to government estimates, GDP fell by 6.2% in 1995. Mexicos gross international reserves fell sharply at the end of 1994, from $24.5 billion at December 31, 1993 to $6.1 billion at
December 31, 1994 and were $15.7 billion at December 31, 1995, as reported by the Banco de México.

The following table
summarizes the general economic conditions and inflation in Mexico for the periods specified below:



|                        |  |               |   |  |                     |   |  |                              |    |  |                                                       |             
|----------------------- |  | ------------- | - |  | ------------------- | - |  | ---------------------------- | -- |  | ----------------------------------------------------- | ------------
|Year Ended December 31, |  | InflationRate |   |  | Average28-day Cetes |   |  | Mexican GDPAnnual GrowthRate |    |  | Gross InternationalReserves as of the End ofEach Year
|1996                    |  | 27.7          | % |  | 31.3                | % |  | 5.1                          | %  |  | $                                                     | 17.5 billion
|1997                    |  | 15.7          | % |  | 19.8                | % |  | 6.8                          | %  |  | $                                                     | 28.0 billion
|1998                    |  | 18.6          | % |  | 24.6                | % |  | 4.9                          | %  |  | $                                                     | 30.1 billion
|1999                    |  | 12.3          | % |  | 21.3                | % |  | 3.9                          | %  |  | $                                                     | 30.7 billion
|2000                    |  | 9.0           | % |  | 15.3                | % |  | 6.6                          | %  |  | $                                                     | 35.6 billion
|2001                    |  | 4.4           | % |  | 11.3                | % |  | (0.2                         | )% |  | $                                                     | 44.8 billion
|2002                    |  | 5.7           | % |  | 7.1                 | % |  | 0.8                          | %  |  | $                                                     | 50.7 billion
|2003                    |  | 4.0           | % |  | 6.2                 | % |  | 1.4                          | %  |  | $                                                     | 59.0 billion
|2004                    |  | 5.2           | % |  | 6.8                 | % |  | 4.2                          | %  |  | $                                                     | 64.2 billion
|2005                    |  | 3.3           | % |  | 9.2                 | % |  | 3.0                          | %  |  | $                                                     | 74.1 billion

A portion of our cost of services and a significant portion of our operating expenses are indexed
by inflation. Accordingly, increases in inflation will generally increase our cost of service and operating expenses. We generally have fixed contracts with our customers and in the



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event we are unable to raise our rates to incorporate increases in inflation, our results will be adversely affected.

We also record non-cash gains or losses on monetary position, which represent the erosion of purchasing power resulting from the effect of inflation on
our holdings of monetary assets and liabilities. Our monetary liabilities, consisting primarily of bank debt and accounts payable, have exceeded, and are expected to continue to exceed, our monetary assets, which consist primarily of cash and cash
equivalents and accounts receivable. As a result, inflation will tend to produce gains to monetary position.

Impact of foreign
currency fluctuations

Our principal foreign currency fluctuation risk involves changes in the value of the peso relative to the
U.S. dollar. Although U.S. dollar-denominated revenues and expenses are exposed to foreign currency fluctuations, our financial instruments are most exposed. As of December 31, 2005, the amount of senior notes and notes payable denominated in
U.S. dollars was Ps.4,160.3 million.

Depreciation of the Peso against the U.S. dollar results in increases to our dollar-denominated
revenues and expenses as reported in Peso. Conversely, appreciation in the value of the Peso against the U.S. dollar results in decreases to U.S. dollar-denominated revenues and expenses as reported in Pesos.

Interest expense on our U.S. dollar-denominated debt, as expressed in Pesos in our financial statements, varies with exchange rate movements.
Depreciation of the Peso results in increases in interest expense on a Pesos basis.

We record foreign exchange gains or losses when the
Peso appreciates or depreciates against the U.S. dollar. Because our U.S. dollar-denominated monetary liabilities have exceeded, and are expected to continue to exceed, our U.S. dollar-denominated monetary assets, depreciation of the Peso against
the U.S. dollar will result in foreign exchange losses.

From time to time, we assess our exposure and consider opportunities to manage
this risk, for instance through the use of hedging instruments. In order to minimize the exchange rate risk of the Mexican Peso-U.S. dollar, on December 22, 2005 we entered into a currency hedge to minimize the effect of fluctuations in the
U.S. dollar/Mexican Peso exchange rate. The hedge will be effective through December 29, 2006.

See Item 3. Key Information
Selected Financial Data for a discussion of exchange rates.

Customer attrition and trade accounts receivable

We historically have experienced high rates of churn. Churn results in the loss of future revenue from those customers whose
service is disconnected, as well as the inability to recoup costs incurred in acquiring the customer, such as switching costs, commissions, and costs



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incurred in connection with independent third-party verification. Churn occurs for several reasons, including disconnection by a company for non-payment of
bills and disconnection by the customer who chooses to switch to a competing company or terminate service. In the beginning of 1998 our churn rate was an average of 19% per month. As a result of our new focus on high usage customers and the
establishment of a third-party verification system described below, we were able to lower our churn rate to approximately 4.2% per month in 2005.

Management believes that a significant portion of the churn in 1997 and 1998 was due to slamming, the practice of some long distance carriers to switch customers to their service without the customers knowledge.
In February 1998, a third-party verification system was instituted to limit the practice of slamming. Subsequent to the implementation of the third-party verification system, the churn rate dropped to an average monthly rate of 4.4% from March 1998
to December 2003. During 2003, average monthly churn averaged 2.5%, and for 2004 was 2.7%. For 2005, our average monthly churn rate was 4.2%.

In response to our growing collection problems, we substantially increased our collection efforts by implementing new collection procedures and purchasing new management information systems. Such new procedures included the hiring of
additional collection employees and the retention of external collection agents, allowing for the automatic payment of invoices through credit card charge programs, and the commencement of legal proceedings against customers with large outstanding
unpaid balances. We also began receiving and providing customer credit information to the national credit bureau.

Our collection efforts
are being reinforced by changes in industry practices and the March 1999 implementation of a shared industry database that contains information on customers with unpaid balances. Customers who owe any amounts to a long distance carrier and whose
name appears in the database are now prevented from switching to another long distance carrier.

We still face collection risks relating to
large business customers facing economic difficulties. In particular, we provide wholesale services to other carriers and wireless service providers. Although increased collection efforts have contributed to a reduction in our net receivables from
Ps.373.0 million in 2004 to Ps.353.9 million in 2005, given the difficult economic conditions in Mexico and the liquidity issues faced by the small telecommunications companies to which we provide wholesale services, we may experience payment
defaults.

Asset tax

Under current tax law, as Mexican companies, we and our sole subsidiary, Servicios Alestra, S. A. de C. V., are separately subject to pay the higher between income tax and asset tax. The asset tax is equal to 1.8% of our tax basis which is
the net value of total assets less certain debts. From our inception until 1999 we were exempted from the payment of the asset tax. Since 2000 we have not paid any asset tax because our debt, which includes our senior notes, has been greater than
our total asset value. Since 2004, we have continued to defer our asset tax by using the option of Article 5-A of the Asset Tax Law, which allows us to determine our asset tax using the tax basis of the fourth preceding year instead of the current
year. As a result, we will begin accruing asset tax in 2010 (to be paid in 2011). Our



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sole subsidiary, Servicios Alestra S.A. de C.V., began paying asset tax in 2000. Total asset tax for the years ended December 31, 2003, 2004 and 2005
were Ps.4.2 million, Ps.4.1 million and Ps.3.1 million, respectively.

Regulations

We operate in a highly regulated industry and the services we provide as well as some of the rates we may charge our customers are subject to regulatory
approval. See Item 4. Information on the Company  B. Business Overview  Regulatory framework and bodies.

Results of operations

Fiscal Year ended December 31, 2005 compared to Fiscal Year ended December 31, 2004

Revenues

Total
revenues decreased 19.1%, or Ps.959.1 million, to Ps.4,071.0 million in 2005 from Ps.5,030.1 million in 2004. This result was due to the reduction in our long distance revenues, as a result of lower international long distance rates, which was
partially offset by our increase in data, internet and local services revenues.

Long Distance Services. Revenues from domestic long
distance services for 2005 decreased 9.2%, or Ps.99.1 million, to Ps.977.0 million from Ps.1,076.1 million in 2004. This decrease was mainly the result of lower average revenue per minute. Our average domestic long distance revenue per minute
decreased 17.8% to Ps.0.60 in 2005 from Ps.0.73 in 2004. Domestic long distance volume for 2005 increased 10.1%, or 148.8 million minutes, to 1,627.5 million minutes compared to 1,478.7 million minutes in 2004. Our total lines in
service decreased 8.3%, or 39,615 lines, from 479,297 at December 31, 2004 to 439,682 at December 31, 2005 as a result of our strategy to focus on our business customers and high-usage residential customers. As a percentage of total
revenues, domestic long distance revenues represented 24.0% of our revenue in 2005, compared to 21.4% of our revenue in 2004.

Revenues
from international long distance services for 2005 decreased 48.4%, or Ps.1,104.8 million, to Ps.1,178.9 million from Ps.2,283.7 million in 2004. This reduction in revenues was primarily due to a 55.0% decrease in the average revenue per minute from
Ps.1.11 in 2004 to Ps.0.50 in 2005, which was partially offset by a 14.6% increase in total international volume from 2,060.2 million minutes in 2004 to 2,361.7 million minutes in 2005. The decrease in the average international long
distance revenue per minute was a result of lower international settlement rates. During 2005, international long distance revenues represented 29.0% of total revenues, compared to 45.4% during 2004.

Data, Internet and Local Services.During 2005, data, internet and local service revenues reached Ps. 1,915.1 million, representing a 14.7%
increase over the Ps. 1,670.3 million recorded in 2004. This increased was primarily due to the sustained growth in internet and local services. During 2005, we launched the MasterNet service, which is based on VoIP technology. We currently
offer local service to 15 cities in Mexico. Our data, internet and local service segment



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consistently has increased its share in our revenue portfolio and represented 47.0% of our total revenues in 2005, compared to 33.2% in 2004.

Cost of Services (excluding depreciation)

Cost of services consists primarily of local access charges, resale expenses, paid on a per-minute basis primarily to Telmex, international settlement payments paid to foreign carriers on a per-minute basis for the completion of
international calls originated in Mexico by us and fees for leased lines, typically paid on a per-circuit per month basis primarily to Telmex. Although total traffic for 2005 increased 12.7% compared to 2004, cost of services decreased 36.5% to Ps.
1,540.0 million for 2005, compared to Ps. 2,425.4 million for 2004. The reduction in cost of services was the result of a 48.0% decrease in cost of the long distance services, to Ps. 1,055.4 million for 2005 from Ps.
2,030.2 million recorded in 2004, while the cost of data, internet and local services increased 22.6%, to Ps. 484.6 million for 2005 from Ps. 395.2 million recorded in 2004. The reduction in cost of the long distance services was
primarily due to the reduction in international settlement payments as a result of lower international rates.

Gross Profit

Gross profit, defined as revenues minus cost of services (excluding depreciation), for 2005 decreased 2.8% or Ps. 73.7 million to
Ps. 2,531.0 million from Ps. 2,604.7 million in 2004. The decrease in gross profit is explained by the 19.1% decrease in our total revenues during 2005 partially offset by the decrease in cost of services. Our gross margin, defined as
gross profit as a percentage of total revenues, increased to 62.2% for 2005 compared to 51.8% in 2004. The increase in gross margin is due to a higher participation in revenues of our data, internet and local services, which provide higher gross
margin than long distance services, and lower cost of services due to the reduction of international settlement rates.

Long Distance
Services.Gross profit for long distance services decreased 17.2% or Ps. 229.0 million to Ps. 1,100.6 million in 2005 from Ps. 1,329.6 million in 2004. The decrease in gross profit was driven by the 35.8% reduction in long
distance revenues partially offset with a 48.0% reduction in costs of long distance services.

Data, Internet and Local Services.Gross profit for data, internet and local services increased 12.2% or Ps. 155.4 million to Ps. 1,430.5 million in 2005 from Ps. 1,275.1 million in 2004. The growth in gross profit of our data, internet and local business was
primarily a result of revenue growth of 14.7%.

Administration, selling and other operating expenses

Administration, selling and other operating expenses, decreased 4.1% or Ps.59.9 million, to Ps.1,413.2 million in 2005 from Ps.1,473.1 million in 2004.
This decrease is mainly explained by the reduction of Ps.43.1 million in office operations expenses and Ps.13.5 million decrease in personnel related expenses as a result of the continuous optimization measures. As a percentage of total revenues,
administration, selling and other operating expenses for 2005 were 34.7% compared to 29.3% registered during 2004. This increase was primarily the result of our



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declining revenues, which do not directly result in declining administrative, selling and other operating expenses.

Depreciation and amortization

Depreciation and amortization decreased 0.3% or Ps.3.2 million to Ps.941.1 million in 2005, from Ps.944.3 million in 2004. This decrease is mainly the result of the termination of the depreciation of some assets.

Operating income (loss)

Due to the
factors described above, operating income slightly decreased 5.7% or Ps.10.6 million to Ps.176.7 million in 2005, from Ps.187.3 million in 2004.

Comprehensive financial loss

Our comprehensive financial loss for 2005 was Ps.107.7 million, which represents a 55.4%, or a
Ps.133.6 million, decrease from Ps.241.3 million for 2004. The following table sets forth our comprehensive financial results for the periods under review:



|                                    |  |                                 |   |  |        |  
|----------------------------------- |  | ------------------------------- | - |  | ------ | -
|                                    |  | Year ended December 31,         |  
|                                    |  | 2004                            |   |  | 2005   |  
|                                    |  | (in millions of constant pesos) |  
|Interest expense                    |  | (476.4                          | ) |  | (452.1 | )
|Interest income                     |  | 17.2                            |   |  | 32.1   |  
|Exchange (loss) gain, net           |  | (3.9                            | ) |  | 191.1  |  
|Gain from monetary position         |  | 221.8                           |   |  | 121.2  |  
|                                    |  |                                 |   |  |        |  
|Comprehensive financial result, net |  | (241.3                          | ) |  | (107.7 | )

Since all of our indebtedness is U.S. dollar-denominated and since there was a 4.9% appreciation
of the Peso against the U.S. dollar for the period December 31, 2004 through December 31, 2005, interest expense decreased 5.1%, or Ps.24.3 million, to Ps.452.1 million in 2005, from Ps.476.4 million in 2004.

Interest income increased Ps.14.9 million to Ps.32.1 million in 2005, from Ps.17.2 million in 2004, due to a higher average cash equivalents balance,
which was the result of continuing positive operative results.

Exchange gain in 2005 was Ps.191.1 million compared to an exchange loss of
Ps.3.9 million recorded during 2004. We record a foreign exchange gain or loss with respect to U.S. dollar denominated net monetary position of assets and liabilities when the Peso appreciates or depreciates in relation to the U.S. dollar. Our U.S.
dollar-denominated monetary liabilities, which principally consist of indebtedness and accounts payable, exceed our U.S. dollar-denominated monetary assets, which principally consist of investments in cash equivalents. We have recorded



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a foreign exchange gain during 2005 due to the 4.9% appreciation of the Peso against the U.S. dollar compared to a 0.3% depreciation of the Peso against the
U.S. dollar in 2004.

Gain from monetary position decreased from Ps.221.8 million for 2004 to Ps.121.2 million for 2005. The decrease is
primarily due to a lower Mexican inflation of 3.3% for the year 2005, compared to 5.2% inflation recorded in the previous year, coupled with a slight decrease in our net monetary position.

Income and asset taxes

We and our
sole subsidiary, Servicios Alestra, are subject separately to pay income tax or asset tax, which are computed separately by each entity. We have generated substantial tax losses of approximately Ps.9,969.0 million; accordingly, no income tax
provisions have been included in the income statements for 2005. In order to defer asset tax payments in 2005 we determined our asset tax using the tax basis of the fourth preceding year instead of the current year as is established in the option of
Article 5-A of the Asset Tax Law. On the other hand, for 2005, Servicios Alestra, S. A. de C. V., recorded asset tax of Ps.3.1 million.

Net Income ( loss)

During 2005, we recorded a net income of Ps.48.1 million compared to a net loss of Ps.87.2 million in
2004. While our operating income slightly decreased, our results were positively affected by lower comprehensive financial loss as a result of an exchange gain, as compared with the previous year.

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

Revenues

Total revenues decreased
16.2%, or Ps.974.2 million, to Ps.5,030.1 million in 2004 from Ps.6,004.3 million in 2003.

Long Distance Services. Revenues from
domestic long distance services for 2004 decreased 20.4%, or Ps.275.1 million, to Ps.1,076.1 million from Ps.1,351.2 million in 2003. This decrease was the result of lower domestic long distance volumes and lower average revenue per minute. Domestic
long distance volume for 2004 decreased 11.5%, or 191.9 million minutes, to 1,478.7 million minutes compared to 1,670.6 million minutes in 2003, while our average domestic long distance revenue per minute decreased 9.9%, or Ps.0.08,
to Ps.0.73 in 2004 from Ps.0.81 in 2003. Our total lines in service decreased 12.6%, or 69,314 lines, from 548,611 at December 31, 2003 to 479,297 at December 31, 2004 as a result of our strategy to focus on our business customers and
high-usage residential customers. As a percentage of total revenues, domestic long distance revenues represented 21.4% of our revenue in 2004, compared to 22.5% of our revenue in 2003.

Revenues from international long distance services for 2004 decreased 29.4%, or Ps.952.2 million, to Ps.2,283.7 million from Ps.3,235.9 million in 2003.
This reduction in



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revenues was primarily due to a 35.1%, or Ps.0.60, decrease in the average revenue per minute from Ps.1.71 in 2003 to Ps.1.11 in 2004, which was partially
offset by a 8.9%, or 167.6 million minute, increase in total international volume from 1,892.6 million minutes in 2003 to 2,060.2 million minutes in 2004. The decrease in the average international long distance revenue per minute was
a result of lower international settlement rates and lower tariffs from services such as collect calls, calling card and other international services. As part of our strategy, we directed our efforts on capturing profitable traffic and decided not
to carry some of the international traffic which typically provided higher revenue per minute  and higher cost- than the settlement payments for direct-dialed calls. During 2004, international long distance revenues represented 45.4% of total
revenues, compared to 53.9% during 2003.

Data, Internet and Local Services.During 2004, data, internet and local service revenues
reached Ps. 1,670.3 million, representing a 17.9% increase over the Ps. 1,417.2 million recorded in 2003. This favorable result was due to a moderate growth in internet services and to the sustained growth of local service. During 2004, we
expanded this service in two additional cities, Matamoros and Nuevo Laredo, and launched new local service features such as Smart Web, a traffic analyzer system. As of December 31, 2004, we offer local service to 15 cities in Mexico. Our data,
internet and local service segment represented 33.2% of our total revenues in 2004, compared to 23.6% in 2003.

Cost of Services
(excluding depreciation)

Cost of services consists primarily of local access charges, resale expenses, paid on a per-minute basis
primarily to Telmex, international settlement payments and surcharges paid to foreign carriers on a per-minute basis for the completion of international calls originated in Mexico by us and for services rendered, and fees for leased lines, typically
paid on a per-circuit per month basis primarily to Telmex. While total traffic slightly decreased 0.7%, cost of services decreased 22.0% to Ps. 2,425.4 million for 2004, compared to Ps. 3,110.0 million for 2003. This decrease in cost is
primarily due to the reduction in the international settlement rates and the reduction of surcharges related to other international services no longer provided.

Gross Profit

Gross profit, defined as revenues minus cost of services (excluding depreciation), for
2004 decreased 10.0% or Ps. 289.7 million to Ps. 2,604.7 million from Ps. 2,894.4 million in 2003. The decrease in gross profit is explained by the 16.2% decrease in our total revenues during 2004 partially offset by the decrease in
cost of services. Our gross margin, defined as gross profit as a percentage of total revenues, increased to 51.8% for 2004 compared to 48.2% in 2003. The increase in gross margin is due to a higher participation in revenues of our data, internet and
local services, which provide higher gross margin than long distance services, and lower cost of services as a result of the reduction of international settlement rates.

Long Distance Services.Gross profit for long distance services decreased 26.8% or Ps. 485.8 million to Ps. 1,329.6 million in 2004 from Ps. 1,815.4 million in 2003. The decrease in gross profit
was driven by the 26.8% reduction in long distance revenues partially offset with a 26.8% reduction in costs of long distance services.



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Data, Internet and Local Services.Gross profit for data, internet and local services increased
18.2% or Ps. 196.1 million to Ps. 1,275.1 million in 2004 from Ps. 1,079.0 million in 2003. The growth in gross profit of our data, internet and local business was primarily a result of revenue growth of 17.9%.

Administration, selling and other operating expenses

Administration, selling and other operating expenses, decreased 8.3% or Ps.133.6 million, to Ps.1,473.1 million in 2004 from Ps.1,606.7 million in 2003. This decrease is mainly explained by the reduction of Ps.55.8
million in marketing expenses and Ps.39.7 million decrease in personnel related expenses as a result of the continuous optimization measures. As a percentage of total revenues, administration, selling and other operating expenses for 2004 were 29.3%
compared to 26.8% during 2003.

Depreciation and amortization

Depreciation and amortization decreased 2.3% or Ps.22.5 million to Ps.944.3 million in 2004, from Ps.966.8 million in 2003. This decrease is mainly due to
the depreciation of computer equipment in 2003, which did not occur in 2004.

Operating income (loss)

Due to the factors described above, operating income decreased 41.6% or Ps.133.5 million to Ps.187.3 million in 2004, from Ps.320.8 million in 2003.

Comprehensive financial loss

Our comprehensive financial loss for 2004 was Ps.241.3 million, compared to a comprehensive financial loss of Ps.1,071.3 million for 2003. The following table sets forth our comprehensive financial results for the periods under review:



|                                    |  |                                 |   |  |        |  
|----------------------------------- |  | ------------------------------- | - |  | ------ | -
|                                    |  | Year ended December 31,         |  
|                                    |  | 2003                            |   |  | 2004   |  
|                                    |  | (in millions of constant pesos) |  
|Interest expense                    |  | (720.1                          | ) |  | (476.4 | )
|Interest income                     |  | 7.4                             |   |  | 17.2   |  
|Exchange loss, net                  |  | (645.4                          | ) |  | (3.9   | )
|Gain from monetary position         |  | 286.8                           |   |  | 221.8  |  
|                                    |  |                                 |   |  |        |  
|Comprehensive financial result, net |  | (1,071.3                        | ) |  | (241.3 | )

Interest expense decreased Ps.243.7 million to Ps.476.4 million in 2004, from Ps.720.1 million in
2003, due to the lower interest rate of our senior notes due 2010 as a result of our restructuring process.



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Interest income increased Ps.9.8 million to Ps.17.2 in 2004, from Ps.7.4 million in 2003, due to a higher
average cash equivalents balance.

Exchange loss in 2004 was Ps.3.9 million compared to Ps.645.4 million recorded during 2003. We record a
foreign exchange gain or loss with respect to U.S. dollar denominated net monetary position of assets and liabilities when the Peso appreciates or depreciates in relation to the U.S. dollar. Our U.S. dollar-denominated monetary liabilities, which
principally consist of indebtedness and accounts payable, exceed our U.S. dollar-denominated monetary assets, which principally consist of investments in cash equivalents. We have recorded a lower foreign exchange loss during 2004 due to the 0.3%
depreciation of the Peso against the U.S. dollar compared to a 9.0% depreciation of the Peso against the U.S. dollar in 2003.

Gain from
monetary position decreased from Ps.286.8 million for 2003 to Ps.221.8 million for 2004. Although Mexican inflation for the year 2004 was 5.2%, higher than the 4.0% recorded in the previous year, the decrease is primarily due to a lower level of net
monetary liabilities.

Income and asset taxes

We and our sole subsidiary, Servicios Alestra, are subject separately to pay income tax or asset tax, which are computed separately by each entity. We have generated substantial tax losses of approximately Ps.9,958.7
million; accordingly, no income tax provisions have been included in the income statements for 2004. In order to defer asset tax payments in 2004, we determined our asset tax using the tax basis of the fourth preceding year instead of the current
year as is established in the option of Article 5-A of the Asset Tax Law. On the other hand, for 2004, Servicios Alestra, S. A. de C. V., recorded asset tax of Ps.4.1 million.

Net Income ( loss)

For the reasons
discussed above, we recorded a net loss of Ps.87.2 million for 2004 compared to a net income of Ps.992.2 million in 2003, which included a benefit recorded of Ps.1,638.8 million from the debt restructuring.

Critical accounting policies

We have identified the policies below as critical to our business operations and to understanding the result of our operations. Preparation of our consolidated financial statements requires us to make estimates and assumptions that affect
the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from
those estimates. We believe the following accounting policies used in the preparation of our consolidated financial statements involve significant judgments and estimates.



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Revenue Recognition

Our principal sources of revenue are derived from domestic and international long distance services. Revenues are recognized based on minutes of traffic
processed by us. Since August 11, 2004, the proportional return system was eliminated from the international long distance rules. After this, revenues for international long distance services into Mexico are recognized based mainly on the
minutes that the New AT&T sends to us.

Revenues from international long distance services reflect income obtained under bilateral
contracts between us and foreign operators, as well as those amounts obtained from our clients in Mexico. The aforementioned bilateral contracts set the payment rates from us to foreign operators for the use of their networks in long distance
interconnections invoiced in Mexico and from the foreign operators to us for the use of our network for the interconnection of calls invoiced outside of Mexico. Payment rates subject to these contracts are negotiated with each foreign operator.

Since August 13, 2004, the exchange of traffic between AT&T Corp. and us has been based on negotiated agreements. Effective
January 1, 2005, tariffs are directly negotiated with AT&T Corp. In 2005, we paid to AT&T Corp. approximately $0.04 per minute for traffic terminated in the United States. AT&T Corp. paid us different rates depending on call destination.

Revenues derived from data, internet and local are billed monthly and are recognized when services are provided.

Allowance for doubtful accounts

We take what we believe is a conservative approach toward uncollectible accounts, commonly called the Spindown Method. For all services, this method calculates a certain reserve based on a forecast of amount of customer accounts receivable
that will become uncollectible, defined as residential customers whose accounts are 241 days past due and business customers whose accounts are 271 days past due. To obtain this forecast, an uncollectible rate (the Spindown Rate) is
estimated and applied to each bucket of the accounts receivable. The Spindown Rate applied on each months reserve calculation equals the average Spindown Rate registered on the previous six-month period. Payment is due 25 days after the
issuance of an invoice. We take several different actions to collect past due amounts, including the use of messages, telegrams, collection letters sent to the customer and person-to-person calls. Service is completely suspended when a residential
customer has an account that is more than 30 days past due, or when a business customer has an account that is more than 90 days past due. If the balance for a residential customer is still unpaid 90 days after the due date, we assign the account to
a collection agency. For business customers with an unpaid balance greater than Ps.50, the account is also assigned to a collection agency 120 days after the due date. If the efforts of collection agencies are unsuccessful and the balance is large
enough to make legal proceedings worthwhile, we commence legal proceedings. As of December 31, 2005, our allowance for doubtful accounts was Ps.103.1 million, and we consider this reserve is sufficient to cover the potential risk of
uncollectible accounts; however, we cannot assure that we will not be required to increase the amount of this reserve.

Long-lived
assets

We estimate the useful lives of long-lived assets in order to determine depreciation and amortization expense to be recorded
during any reporting period. The useful life of an asset is estimated at the time the asset is acquired and is based on historical experience with similar



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assets, taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated, or in a
different form than anticipated, the useful lives assigned to these assets may need to be shortened. This would result in the recognition of increased depreciation and amortization expense in future periods. Alternatively, these types of
technological changes could result in the recognition of an impairment charge to reflect the write-down in assets value. We review assets for impairment annually, or when events or circumstances indicate that the carrying amount may not be
recoverable over the remaining lives of the assets. In assessing impairments, we use cash flows, which take into account managements estimates of future operations, estimates of future operations including estimates of revenues, costs,
operating expenses, capital expenditures and debt service. Based in our analysis, no impairment existed at December 31, 2003, 2004 and 2005.

Deferred Taxes

As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes. This process requires us to estimate our certain current tax exposure together with an assessment of temporary differences resulting from the differing treatment of certain items for tax and accounting purposes, such as
depreciation and amortization, cost and provisions, and allowance for doubtful accounts. These differences result in deferred tax assets and liabilities, which are included on our consolidated balance sheet. To the extent we establish a valuation
allowance or we increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In 2005 we recorded a valuation
allowance of Ps.2,825.7 million, due to uncertainty whether we may use certain deferred tax assets, primarily certain net operating losses carried forward and recoverable asset tax, before they expire. We began accumulating net operating loss
carry-forwards beginning in 1996. These net operating loss carry-forwards expire ten years after they accumulate. The valuation allowance is based on financial projections prepared by us that were reviewed by independent consultants. In the event
that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance that could materially impact our financial position and results of operations.

New Accounting Pronouncements Under Mexican GAAP

Beginning June 1, 2004, the Mexican Financial Reporting Standards Board - (CINIF, for its initials in Spanish), assumed the responsibility for setting accounting and reporting standards in Mexico. In compliance
with this responsibility and after due exposure in 2004 and 2005, the CINIF issued several Financial Reporting Standards - (NIFs) that will become effective on January 1, 2006.

The main objective of the NIFs is to achieve the maximum possible harmonization and convergence Mexican accounting and reporting standards and regulation
practices with International Financial Reporting Standards (IFRS).



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The full hierarchy of NIFs, in effect beginning January 1, 2006, is as follows:



| |  |  | NIFs and Interpretations of NIFs issued by the CINIF.
| | - |  | -----------------------------------------------------



| |  |  | Bulletins issued by the Accounting Principles Board of the Mexican Institute of Public Accountants (IMCP) that have not been modified, replaced or repealed by the new NIFs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The supplementary IFRS that are applicable.
| | - |  | -------------------------------------------

The
circulars issued by the Accounting Principles Board will continue to have the status of recommendations and will be part of the NIFs until such time as they are repealed or superseded by NIFs.

Following is a list of the NIFSs issued to date. Being mainly of a general nature, they are not expected to have a significant effect on financial
reporting:

NIF A-1 Structure of Financial Reporting Standards

NIF A-2 Basic postulates

NIF A-3 User needs and objectives of financial statements

NIF A-4
Qualitative features of financial statements

NIF A-5 Basic elements of financial statements

NIF A-6 Recognition and valuation

NIF A-7 Presentation and disclosure

NIF A-8 Supplementary

NIF B-1 Accounting changes and correction of errors

New Accounting Pronouncements under
U.S. GAAP

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB Opinion
No. 29. APB Opinion No. 29, Accounting For Nonmonetary Transactions (SFAS 153). SFAS 153 is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.
SFAS 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have any impact on the Companys current financial condition or results of operations.

In June 2005,
the FASB published SFAS No. 154, Accounting changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which changes the requirements for the accounting for
and reporting of a change in accounting principle and redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. SFAS No. 154 requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to determine the period-specific effects of the cumulative effect of the change. This Statement



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also carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements
and a change in accounting estimate. This Statement does not change the transition provisions of any existing accounting pronouncement. SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.

In June 2005, the FASB issued Emerging Issues Task Force (EITF) Issue No. 05-06,
Determining the Amortization Period for Leasehold Improvements. EITF Issue No. 05-06 indicates that for operating leases, leasehold improvements that are placed in service significantly after and not contemplated at or near the
beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are
purchased. Leasehold improvements acquired in a business combination should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the
date of acquisition. EITF Issue No. 05-06 is effective for leasehold improvements that are purchased or acquired in reporting periods beginning after June 28, 2005. The Company is currently considering the impact that the adoption will have on
its consolidated results and financial position.

In October 2005, the FASB issued FASB Staff Position (FSP) No. FAS 13-1,
Accounting for Rental Costs Incurred during a Construction Period. FSP No. FAS 13-1 requires rental costs associated with operating leases that are incurred during a construction period to be recognized as rental expense. FSP FAS 13-1 is
effective for reporting periods beginning after December 15, 2005. The transition provisions of FSP No. FAS 13-1 permit early adoption and retrospective application of the guidance. The Company is currently considering the impact that the
adoption will have on its consolidated results and financial position.

In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155). SFAS 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation and
separate accounting. An irrevocable election may be made at inception to measure such a hybrid financial instrument at fair value, with changes in fair value recognized through income. Such an election needs to be supported by concurrent
documentation. SFAS 155 is effective for fiscal years beginning after September 15, 2006, with early adoption permitted. The Company is currently considering the impact that adoption will have on its consolidated results and financial position.

U.S. GAAP Reconciliation

Our consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. See Note 20 to our audited consolidated financial statements for
information relating to the nature and effect of such differences. Financial statements prepared under Mexican GAAP recognize the effects of inflation, whereas financial statements prepared under U.S. GAAP are presented on a historical cost basis.
We are not required to reverse many of the Mexican inflation accounting adjustments when reconciling Mexican GAAP to U.S. GAAP, as these adjustments provide a means of



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measuring the effects of price-level changes in the inflationary Mexican economy. Accordingly, these inflation-adjusted figures are considered a more
meaningful presentation than historical cost-based financial reporting for both Mexican and U.S. accounting purposes.

Net (loss) income
under U.S. GAAP amounted to (Ps. 530.9) million in 2003, Ps. 317.1 million in 2004 and Ps. 426.8 million in 2005, compared with net (loss) income under Mexican GAAP of Ps. 992.2 million in 2003, (Ps. 87.2) million in 2004,
and Ps. 48.4 million in 2005.

Stockholders equity under U.S. GAAP amounted to Ps 948.1 million in 2004 and Ps.1,372.2
million in 2005, compared with stockholders equity under Mexican GAAP of Ps. 2,549.4 million in 2004 and Ps. 2,357.9 million in 2005. See Note 20 to our audited consolidated financial statements for a further discussion of the
adjustments under U.S. GAAP.

B. Liquidity and capital resources

During 2005 we generated sufficient cash flow from operations to fund our requirements, including working capital, capital expenditures and our debt
service. In addition, we contracted leasing for $4.9 million to finance our operations.

We continue to focus our capital expenditures on
businesses that we believe may offer more attractive margins and a short-to-medium term return. All capital expenditures are included in a budget which is pre-authorized by our Board of Directors. We do not expect that any single capital expenditure
in 2006 will have a material impact on our operations or financial results. We do not expect to incur any additional indebtedness in 2006 unless it is to refinance existing indebtedness. In 2006, we also plan to pay the principal amortization of our
senior notes due 2006 and 2010. We believe that we will generate positive capital resources from our operations to fund working capital, capital expenditure and debt service needs in 2006.

Our ability to continue generating sufficient cash flow could be affected by the following factors among others:



| |  |  | the general economic conditions in Mexico;
| | - |  | ------------------------------------------



| |  |  | access to the capital markets;
| | - |  | ------------------------------



| |  |  | the continuing decrease in international settlements from foreign carriers;
| | - |  | ---------------------------------------------------------------------------



| |  |  | lower domestic rates resulting from competition; and
| | - |  | ----------------------------------------------------



| |  |  | higher capital expenditure needs to build and maintain our network.
| | - |  | -------------------------------------------------------------------

Current Liquidity

As of December 31, 2004 and 2005, we had Ps.655.0 million and Ps.920.4
million of unrestricted cash and cash equivalents available, respectively. Unrestricted cash and cash equivalents balance increased Ps.265.4 million from December 31, 2004 to December 31, 2005 due mainly to our continuing positive
operating results.

The unrestricted cash and cash equivalents balance consists of cash and temporary investments with original maturities
of three months or less. Our treasury policy is to invest in



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highly liquid temporary cash investments issued by major Mexican banks, U.S. banks and corporations with the highest credit ratings. As of December 31,
2005 we had cash of Ps.103.1 million and temporary investments of Ps.817.3 million, of which Ps.812.3 million were in U.S. dollar-denominated instruments and Ps.5.0 million were in Peso-denominated instruments.

In our opinion, our cash and cash equivalents balance is sufficient for our present requirements.

As of December 31, 2004 and 2005 our ratio of current assets to current liabilities was 1.80x and 1.25x, respectively. Our ratio of current assets
to current liabilities as of December 31, 2005 includes as current liabilities the total principal amortization of the corresponding senior notes due 2006 that will be payable on May 2006 and also the corresponding principal amortization of the
senior notes due 2010 that will be payable on June 2006 and December 2006.

Resources generated from, or used in, operating
activities. Resources provided from operating activities in 2005 were Ps.1,017.9 million compared to resources provided in operating activities of Ps.946.6 million in 2004. This increase was primarily due to a better and efficient use of our
resources.

Resources used in, or generated from, investing activities. Resources used in investing activities were Ps.312.0 million
and Ps.413.7 million in 2005 and 2004, respectively. The decrease was due to a lower amount invested in property and equipment.

Resources used in, or generated from, financing activities. Resources used in financing activities for 2005 were Ps.440.5 million compared to resources used in financing activities of Ps.324.4 million in 2004.The increase was mainly
due to a 4.9% appreciation of the Peso against the U.S. dollar, coupled with the principal amortization of the senior notes due 2010 for Ps.65.2 million.

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.

Given the nature of our revenues derived from international incoming traffic, which are U.S. dollar-denominated, and of our costs and expenses, which are
principally Peso-denominated, we believe we will be only partially insulated from potential exchange rate fluctuations. For this reason, on December 22, 2005 we entered into a currency hedge transaction to minimize the effect of fluctuations in
the U.S. dollar/Mexican Peso exchange rate. This hedge will be effective through December 29, 2006.



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Material Commitments and Funding

The table below describes our current material commitments.



|                                         |  |                              |  |         |  |        
|---------------------------------------- |  | ---------------------------- |  | ------- |  | -------
|                                         |  | Year ending December 31,    
|                                         |  | 2006                         |  | 2007    |  | 2008   
|                                         |  | ( in millions of Pesos (1) )
|Vendor financing                         |  | 30.5                         |  | 2.5     |  |       
|Principal                                |  | 29.2                         |  | 2.5     |  |       
|Interest                                 |  | 1.3                          |  | 0.0     |  |       
|Lease financing                          |  | 18.9                         |  | 18.9    |  | 10.5   
|Principal                                |  | 17.1                         |  | 18.0    |  | 10.4   
|Interest                                 |  | 1.8                          |  | 0.9     |  | 0.1    
|Principal payments on long-term debt (2) |  | 523.6                        |  | 355.7   |  | 420.4  
|Notes interest payments (3)              |  | 336.5                        |  | 297.7   |  | 267.9  
|Operating leases                         |  | 65.9                         |  | 65.8    |  | 68.3   
|Capital expenditures                     |  | 478.4                        |  | 372.1   |  | 382.7  
|                                         |  |                              |  |         |  |        
|Total                                    |  | 1,453.8                      |  | 1,112.7 |  | 1,149.8
|                                         |  |                              |  |         |  |        

---

|(1) | Nominal pesos converted from U.S. dollars at a rate of 10.63 pesos per dollar, which is the noon buying rate provided by The Federal Reserve Bank of New York on December 30,
2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Principal payments on the senior notes.
|--- | ---------------------------------------



|(3) | Interest payments on the senior notes.
|--- | --------------------------------------

Our vendor
financing commitments includes our credit facility with Hewlett Packard Operations México, S. de R.L. de C.V., which matures in January 2007. Our lease financing commitments include a lease contract with The Capita Corporation de
México, S.A. de C.V., which expires in May 2008, and a lease contract with CSI Leasing México, S. de R.L. de C.V., which expires in October 2008. Our principal long term debt commitments for 2006, 2007 and 2008 includes the principal
amortization of our outstanding senior notes due 2006, senior notes due 2009 and senior notes due 2010. The interest commitments include the interest payments of our outstanding senior notes due 2006, senior notes due 2009 and senior notes due 2010
for 2006, 2007 and 2008. Our operating leases commitments include the rent of our operative and administrative buildings and our capital expenditures commitments include an estimate of our capital expenditures needs for each year.

Capital expenditures for 2003, 2004 and 2005 amounted Ps.299 million, Ps.434 million and Ps.341 million, respectively. Although we do not have any
capital expenditure commitment in 2006, we believe that our investments in 2006 will be similar to 2005. In January and February 2006 we invested Ps.69 million ($6.5 million).

We believe that the funds to meet our current material commitments will be provided by internally-generated funds from our operations.

Senior Notes Due 2006 and 2009

In May 1999, we issued a $570 million high yield bond in two tranches of $270 million and $300 million, which pay interest semi-annually in cash in arrears at a rate of 12.125% and 12.625% per annum, respectively, payable on
May 15 and November 15 beginning on



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November 15, 1999. $487.0 million of our senior notes due 2006 and 2009 were retired pursuant to our exchange and cash tender offers completed in 2003.
Due to our restructuring, as of December 31, 2005 we had outstanding $37.1 million of our 12.125% senior notes due in 2006 and $45.9 million of our 12.625% senior notes due in 2009, totaling $83.0 million. In our 2003 exchange offers and cash
tender offers for our senior notes due 2006 and 2009, we also successfully solicited consents for the removal of substantially all of the affirmative and restrictive covenants for those notes, including the limitations on our ability to incur
indebtedness and make restrictive payments.

The New Notes

In November 2003, we completed our exchange and cash tender offers and issued new senior notes due 2010. The new notes pay interest semi-annually in cash
in arrears at a rate of 8% per annum on June 30 and December 30 beginning on December 30, 2003. As of December 31, 2005 we had $298.1 million of senior notes due 2010 outstanding.

The principal amortization of the senior notes due 2010 is payable in semi-annual installments on each June 30 and December 30 occurring on or
after December 30, 3005, according to the following table:



|                       |  |                                                |   |  |                                                  |  
|---------------------- |  | ---------------------------------------------- | - |  | ------------------------------------------------ | -
|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                                           | % |  |                                                 |  

The indenture governing our senior notes due 2010 contains the following covenants, among others,
each subject to certain customary exceptions and carve-outs:



| |  |  | we may not incur indebtedness unless our consolidated leverage ratio would be less than or equal to 4.0 to 1.0;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | we may not make restricted payments, such as dividends, unless we could incur at least one additional dollar of indebtedness, no event of default has occurred, and the sum of all
restricted payments since May 17, 1999 is less than a specified amount; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not incur any liens on any of our properties.
| | - |  | ----------------------------------------------------



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Other indebtedness

The credit facility that we have with Hewlett Packard Operations México, S. de R.L. de C.V. is to fund information technology and telecommunication
equipment and services. As of December 31, 2005, its balance was $3.0 million dollars. Such amount, which is being paid through monthly principal amortizations, is subject to an average annual fixed interest rate of 6.9%. Final maturity of this
facility is in January 2007.

We also have a capital lease contract for telecommunications equipment with The Capita Corporation de
México, S.A. de C.V., with a balance as of December 31, 2005 of $2.3 million dollars, which is subject to an average annual fixed interest rate of 8.8%. Final maturity of this facility is in May 2008.

We have recently signed a new capital lease contract with CSI Leasing México, S. de R.L. de C.V., with a balance as of December 31, 2005 of
$2.0 million dollars. Final maturity of this facility is in October 2008.

Other developments

On February 28, 2006, we entered into an Assigment Agreement (the Agreement) with America Online Latin America, Inc.s
(AOLA) subsidiary in Mexico, AOL, S. de R.L. de C.V. (AOL Mexico). Pursuant to the Agreement, AOL Mexico will assign its monthly and prepaid subscriber base to us.

As consideration for transfer of AOL Mexicos montly subscribers, we will make a payment based on the number of monthly susbscribers who are current
in their payments on date the subscribers are transferred to us and a second payment based on the number of subscribers who are current in their payments to us six months later. We will pay AOL Mexico a fee for each prepaid subscriber who renews on
an Alestra prepaid plan or subscribes to a monthly dial-up or broadband plan. Since we are assuming the obligation to provide services to prepaid subscribers, we will receive a non-cash credit per prepaid subscriber for the number of days on which
such prepaid susbscriber receives services from us. The aggregate amount that we expect to pay under the Agreement is approximately $700,000. However, due to the variability in the rates of renewals by prepaid subscribers and retention and payment
by monthly subscribers and the range of plans to which renewing prepaid subscribers can subscribe, the amount is only an estimate.

The
closing of the Agreement is subject to a number of conditions, including the execution of the license agreement and an operation services agreement with AOL Inc. Due to fact that AOLA is subject to a bankruptcy proceeding before the United States
Bankruptcy Court for the District of Delaware and also that the AOLA is the majority holder of the stock in AOL Mexico, the transaction was also subject to the approval of said Court, which condition was met on March 22, 2006.



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Litigation

Senior Notes Litigation

In September 2003, WRH commenced an action against us, our equity holders
and the trustee of the indentures governing our senior notes due 2006 and our senior notes due 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 WRHs motions and the exchange offers and
consent solicitations were consummated on November 17, 2003. We moved, and WRH cross-moved, for partial 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 for partial summary judgment. 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 had 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, we, our equity holders and the trustee of the indentures governing our senior notes due 2006 and 2009 moved to dismiss WRHs amended complaint. On February 23, 2006 the litigation was
transferred to a new judge, who issued an order on March 16, 2006 suggesting the possibility to WRH to file a second amended complaint on or before April 28, 2006; if WRH so elects, the defendants will be permitted to amend their prior motion
to dismiss. See Risk Factors 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.

Concurso Mercantil

On
October 6, 2003, Eximius Capital Funding, Ltd. (Eximius), an entity related to WRH, filed a request for an insolvency declaration and a Concurso Mercantil(a Mexican reorganization proceeding) under the Ley de Concursos
Mercantiles(the LCM) against us.

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.

Eximius appealed the judgment before the court of appeals. On September 21, 2004 the Court of Appeals (Primer Tribunal Unitario en Materia Civil y Administrativa 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.

On June 9, 2005, the Court of Appeals confirmed the judgment of the Federal District Judge, stating that we do not meet any of the statutory presumptions of the Business Reorganization Act requested by Eximius, and therefore do not
meet the financial test to be placed in a Concurso Mercantil. This resolution puts an end to the suit in Mexico and regards the principal matter in question as concluded. The resolution also oblige Eximius to pay any Court fees and expenses,
including legal and experts fees. We are determining in Court the specific amount to be paid by Eximius.



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

Not applicable.

D. Trend information

An understanding of our financial condition and the results of operations for the periods discussed in this annual report requires
an appreciation of the telecommunications regulatory structure in Mexico. Accordingly, the following discussion should be read in conjunction with the discussion of these and related matters which appear under Item 4. Information on the
Company  Business overview  Regulatory framework.

Our financial results for the periods discussed in this annual report
have been influenced by a variety of other factors not directly related to regulatory structures, including economic conditions in Mexico, government rate-setting policies, and levels of competition. A number of these factors have been particularly
significant to our results in the past, and some of these factors such as the Mexican rate of inflation, exchange rate fluctuation, and the decline of long distance rates, are expected to continue to influence our financial results.

The Mexican Telecom industry is highly influenced by various US industry trends, such as:



| |  |  | the growth in broadband access;
| | - |  | -------------------------------



| |  |  | the convergence of services and industries, as evidenced by the introduction of voice and data bundles in the market;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | multi-service IP services, such as Virtual Private Networks; and
| | - |  | ----------------------------------------------------------------



| |  |  | mobile services.
| | - |  | ----------------

E. Off-balance sheet arrangements

Not applicable

F. Tabular disclosure of contractual obligations



|                                       |  |                            |  |                 |  |           |  |           |  |                 
|-------------------------------------- |  | -------------------------- |  | --------------- |  | --------- |  | --------- |  | ----------------
|                                       |  | (in millions of Pesos) (1)
|                                       |  | Payments due in period    
|Obligation                             |  | Total                      |  | Less than1 year |  | 1-3 years |  | 3-5 years |  | More than5 years
|Long-term debt (2)                     |  | 5,231                      |  | 860             |  | 2,454     |  | 1,917     |  |                
|Vendor and capital lease financing (3) |  | 81                         |  | 49              |  | 32        |  |          |  |                
|Operating lease obligation             |  | 493                        |  | 66              |  | 204       |  | 147       |  | 76              
|Purchase obligations (4)               |  | 111                        |  | 111             |  |          |  |          |  |                
|Total                                  |  | 5,916                      |  | 1,086           |  | 2,690     |  | 2,064     |  | 76              

---

|(1) | Calculated based on an exchange rate of Ps. 10.63 per U.S. dollar, the noon buying rate as provided by The Federal Reserve Bank of New York on December 30, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Notes interest and principal.
|--- | -----------------------------



|(3) | Hewlett Packard Operations México (HP), The Capita Corporation de México (CIT) and CSI Leasing México (CSI) financing facilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(4) | Maintenance contracts.
|--- | ----------------------



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##### Table of Contents

|Item 6. | Directors, Senior Management and Employees.
|------- | -------------------------------------------

A. Directors and senior management

Biographies of Senior Management

Rolando Zubirán Shetler(53) is our Chief Executive Officer. Mr. Zubirán has over 20 years of experience in
telecommunications. He joined us in January 1, 1999. He has served as President and General Manager of Ericsson in Argentina, as Managing Director of Sistemas Ericsson in Mexico, as Managing Director of Ericsson Business Communications in
Brazil and various other positions in business planning. Mr. Zubirán holds a Bachelor of Science Degree in Industrial Engineering from Universidad Nacional Autónoma de México and a Master of Science Degree in Operations
Research from the University of Southern California.

Bernardo García (47) is the Vice-President of our Consumer
Small Business Market. Mr. García has been with us since our start in 1996 and has held several positions, including marketing director, enterprise sales director and commercial strategy director. Before joining us, he also served in
several positions in Grupo Alfa, including one in the team that negotiated the joint venture agreement with AT&T to form our company. Mr. García holds a Bachelors Degree in Industrial and Systems Engineering from the Instituto
Tecnológico de Estudios Superiores de Monterrey, a Masters Degree in International Trade from Universidad de Monterrey and an MBA from IMD in Switzerland.

Eduardo Morali (53) is the Vice-President of our Business Market Unit. He joined us in 2000 and has over 25 years of experience in the Information Technology Industry. He has served as President and
Chief Executive Officer of NCR Mexico and as Vice President of Latin American sales of the Computer Systems Group of NCR Corporation. He also served in IBM de Mexico as Sales Manager of the Financial Sector, as Sales Manager of the South East
territory, as Marketing Plans & Control Manager and as Business Financial Manager. Mr. Morali holds a Bachelors Degree in Business Administration from Universidad La Salle and a Degree in Finance from Instituto Tecnológico
Autónomo de Mexico.

Raúl Ortega (49) is our Chief Public Affairs and Legal Officer. From 1993 to 1996,
Mr. Ortega was a Public Affairs Director with AT&T. Mr. Ortega has been with us since our start in 1996. He has substantial experience as an advisor in international telecommunications, as well as trade politics, policy and regulation
in the U.S. and Mexico. Before joining AT&T, Mr. Ortega served as Managing Director of an alliance of Mexican private sector organizations formed to promote expanded trade between the U.S., Mexico and Canada, particularly in the context of
the North American Free Trade Agreement. Mr. Ortega also has seven years of experience with



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Consejo Empresarial Mexicano para Asuntos Internacionales as a representative of Mexican business interests in Washington, D.C. He holds accounting degree
from the Universidad Iberoamericana and a graduate degree in Political Economics.

Alejandro Irigoyen (53) is our Chief
Operations and Systems Officer. Mr. Irigoyen has over 20 years of human resources experience in various Alfa subsidiaries and corporate organizations. Mr. Irigoyens expertise is focused in the areas of labor relations and
compensation. Prior to his assignment with us, he served as Director of Administrative Staff and Services at Alfas Corporate Headquarters where he held various managerial positions in Human Resources. Mr. Irigoyen joined us in 1996.
Mr. Irigoyen has a Bachelor of Science Degree in Mechanical Engineering from the Universidad Autónoma de Nuevo León, a Master of Science Degree in Economics, majoring in Human Resources Administration, from the University of Utah,
and he attended the Instituto para la Alta Dirección de Empresas. He has also been a consultant at the Instituto Tecnológico de Estudios Superiores de Monterrey and at the Universidad Autónoma de Nuevo León.

Patricio de la Garza (51) is our Chief Financial and Administrative Officer. Mr. de la Garza has over 20 years of experience
in services and finance. Prior to his assignment with us, he worked for 10 years at Grupo Alfa where he held various managerial positions. Mr. de la Garza has been with us since our inception in 1995, starting as Treasurer, and his
responsibilities included our notes issuance. Mr. de la Garza has a Bachelor of Accounting Degree and an MBA from the Instituto Tecnológico de Estudios Superiores de Monterrey. He also attended the Instituto para la Alta Dirección
de Empresas.

Biographies of Directors

Armando Garza Sada (48) is the President of the Board of Directors of Alestra and currently is the Corporate Development President for Alfa. Prior to taking his current position, Mr. Garza was
President of Sigma from 1993-1999. Before Sigma, he held other executive positions, including Vice-President of Planning in Alfas holding company and President of Polioles and Selther. Mr. Garza is a member of the Board of Alfa, Femsa,
Coca Cola Femsa, Gigante, Lamosa, Liverpool, MVS, Pyosa, Farmacias Benavides, ITESM and Vitro Vidrio Plano. He served as Chairman of CAINTRA (Nuevo Leon Chamber of the Manufacturing Industry) and CEESP (a private sector economic think-tank). He is
also a member of the Board of CCE (Corporate Coordination Council), the Stanford Business School Alumni Association, Rabobanks North American Agribusiness Advisory Board, and the Deans Advisory Council of MITs Sloan School of
Management. Mr. Garza has a B.S. in Management from the Massachusetts Institute of Technology and a MBA from the Stanford Graduate School of Business.

Mr. Garza, who is a nominee of Onexa, has been a director of Alestra since October, 2001.

Alejandro Elizondo Barragán (53) is the Chief Financial and Planning Officer for ALFA. Prior to taking his current position, Mr. Elizondo was the Chief Executive Officer of Hylsamex. He has over 30 years experience in
ALFA where he has held various executive positions. Mr. Elizondo is a member of the Board of Directors of Embotelladoras Arca, Hylsamex and Banco Regional de Monterrey. He has a Bachelor ́s Degree in Mechanical Engineering from the Instituto
Tecnológico de Monterrey and a MBA from Harvard University.



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Mr. Elizondo, who is a nominee of Onexa, has been a director of Alestra since March, 2006.

Jorge Bustamante García Moreno(51) is the Treasurer for ALFA. He has held several positions, including the
Vice-President of Finance and Planning, at different subsidiaries of ALFA, specifically at Nemak, Alestra, DAK Amerikas, AKRA and Versax. Mr. Bustamante obtained his Bachelors Degree in Actuarial Sciences from the Anáhuac
University. He holds a Master Degree from Standford University and also a Master Degree from the Insead.

Mr. Bustamante, who is a
nominee of Onexa, has been a director of Alestra since April, 2001.

Gerardo Gimeno Griño (47) is the
Vice-President of the Risk Management and Credit Collection Department of the Financial Group BBVA. Prior to this positions, Mr. Gimeno has held several positions at BBVA, including Vice-President of the Risk Department in Cataluña,
Vice-President of the Credit Risk for the Central Administration, Vice-President of the Frankfurt branch in Germany, among others. He has studies of the PhD Degree in Economics and Business Sciences from the Barcelona University and has received a
Top Management diploma from the IESE and also from the ESADE.

Mr. Gimeno, who is a nominee of Onexa, has been a director
of Alestra since September, 2005.

Héctor Rangel Domene (58) joined Grupo Financiero BBVA Bancomer in 1991 and
since that date has headed the International Division, the Corporate and Investment Bank, and the Electronic Banking Division, among others. As of October 2004, he is Chairman of the Board of Grupo Financiero BBVA Bancomer and its subsidiaries.
Mr. Rangel is also member of the Board of Directors of Grupo Industrial Maseca S.A. and Universidad Iberoamericana A.C. He obtained his Bachelors Degree in Industrial Engineering from Purdue University and a MBA from Stanford University.

Mr. Rangel, who is a nominee of Onexa, has been a director of Alestra since December, 2004.

Michael G. Antieri (49) is the Group Executive of Product Management at AT&T. He is responsible for driving world-class capability
development and service realization for AT&Ts product portfolio. This includes the full portfolio of global products, enterprise networking, integrated service and network products, and IT and application networking capabilities.



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Mr. Antieri and his team work in tight partnership with AT&Ts Global Networking Technology Services and the Worldwide Customer Service
organizations to ensure that world-class services are developed, deployed, and managed to meet and exceed their customers expectations. He holds a Master of Sciences Degree in Management from the Massachusetts Institute of Technology (MIT), a
Master of Sciences Degree in Telecommunications Management from the Polytechnic University in New York, and a B.S. degree in Systems Planning from Stevens Institute of Technology in New Jersey.

Mr. Antieri, who is a nominee of AT&T Telecom Mexico, has been a director of Alestra since December, 2004.

Geoffrey Stephen Webster (39) as Vice-President, Commercial, of AT&T Global Services, Mr. Webster has overall responsibility
for all AT&Ts non-U.S. commercial activities. These activities include managing the investments in, and the commercial interfaces with, Alestra, AT&T Latin America, Navlink and the Shanghai Symphony Telecom Pudong venture, as well as
executing and managing future international investments as the new international strategies unfold. Prior to the formal launch of Concert as the AT&T BT global joint venture in January 2000, Mr. Webster served as Chief Counsel for the
predecessor Concert organization. During much of his time with Concert, he also managed the business interface with MCI WorldCom. Mr. Webster is a graduate of the Law School at the University of Bristol in the U.K. and is a member of the
English Law Society.

Mr. Webster, who is a nominee of AT&T Telecom Mexico, has been a director of Alestra since March, 2002.

Eric R. Weinbrom (44) is the Financial Vice-President, Business Planning and International, responsible for financial
planning and analysis for the AT&T Business Services enterprise. His responsibilities include preparing the annual operating budget and monthly outlook forecasts, as well as preparing ad hoc analyses of results and other opportunities to improve
performance. In addition to managing FP&A activities, he remains responsible for all financial and statutory compliance for AT&Ts international operations. Mr. Weinbrom is a graduate of the Pennsylvania State University with a
B.S. in Health Planning and Administration. He also holds a Master Degree in Finance from Xavier University and a graduate certificate in Accounting from Fairleigh Dickinson University.

Mr. Weinbrom, who is a nominee of AT&T Telecom Mexico, has been a full director of Alestra since December, 2004 and an alternate since January,
2004.

Phillip Johnson is the Regional Vice President, Southwest Region at AT&T. Mr. Johnson leads the Southwest Region
of AT&Ts retail sales teams, including the states of Texas and Oklahoma. His organization provides a full range of networking, integration and IT solutions, including voice, local, data, Internet, hosting, managed services, professional
services and outsourcing. Mr. Johnson began his career with AT&T in 1985 as an Account Executive, Financial Services in New York City. Since then, he has held a variety of assignments including network operations, product management, marketing,
and sales management.

Mr. Johnson is a member of the Dallas Chamber of Commerce Technology Council and has served on the Trustee Board of
the Houston Grand Opera, the Board of Directors of the Galleria Chamber of Commerce and the Economic Development Advisory Committee for the Greater Houston Partnership. He received his Bachelor of Arts, History, from C.W. Post College, Long Island
University, Brookville, New York and a Master of Business Administration, Management, from Our Lady of the Lake University, San Antonio, Texas.

Mr. Johnson, who is a nominee of AT&T Telecom Mexico, has been a director of Alestra since March, 2006.



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B. Compensation

For the year ended December 31, 2005, we paid aggregate annual compensation of approximately Ps.35.3 million to our executive officers as a group for
services in all capacities. As of December 31, 2005, we have accrued pension benefit and similar liabilities of Ps.103.8 million.

We
annually pay a performance bonus of up to four months salary to our officers and up to two months salary to our managers. The amount is determined by our results and individual performance, which is determined by our Board of Directors.
Individual objectives are established at the beginning of the year and are evaluated in January of the following year.

C. Board
Practices

Our direct equity holders are AT&T Telecom Mexico and Onexa. Under the amended joint venture agreement, the number of
directors on our board of directors is fixed at nine. AT&T Telecom Mexico may nominate four of these directors, while Onexa may nominate the remaining five. Unless otherwise provided in our JVA or our by-laws any vote by the board of directors
requires a majority for approval, except that the affirmative vote of at least one director appointed by each of the holders of the series A social part and the series B social part shall be required for the election of the Secretary and alternate
Secretary and the approval of any matter decided by the Board relating to a decision that we should commence bankruptcy, liquidation or similar proceedings. No director may be removed during his or her term without the consent of the party that
nominated that director. For our directors and senior management, there is no expiration date for their term of office. In addition, we have no service contracts that provide for benefits upon termination of employment. The period during which each
director has served on Alestras board is set forth at Item 6. Directors, Senior Management and Employees - A. Directors and senior management - Biographies of Directors.

We currently do not have a separate audit committee. We are not required under the Sarbanes-Oxley Act of 2002, to have a separate audit committee as we
delisted from The New York Stock Exchange.

D. Employees

At December 31, 2005, we employed 1,933 people through our only subsidiary, Servicios Alestra, S.A. de C.V. Our employees are distributed as follows:



|                               |  |          
|------------------------------ |  | ---------
|Direction                      |  | Employees
|Officers and Staff             |  | 10       
|Administration                 |  | 133      
|Human Resources                |  | 36       
|Engineering and Operations     |  | 363      
|Business Sale Unit             |  | 458      
|Residential Sale Unit          |  | 786      
|Systems                        |  | 98       
|Strategic Planning             |  | 10       
|Legal and Government Relations |  | 34       
|Communications                 |  | 5        
|Total                          |  | 1,933    



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In addition, Servicios Alestra, S.A. de C.V. has also contracted with third-party agencies for the
services less than 190 additional temporary employees. Only one labor union, Sindicato Nacional de Trabajadores del Transporte Público y Comunicaciones (National Union of Workers of Public Transportation and Communications), which operates as
an autonomous workers union, represents our employees. It represents less than 100 Servicios Alestra employees. Relations with the union are governed by a collective bargaining agreement between us and the union. Under Mexican law, collective
bargaining agreements are reviewed annually with regard to salaries, and biannually with regard to fringe benefits. To date, we have not experienced any work stoppages and our management believes that our relationship with our employees and the
union is good.

E. Share Ownership

Not applicable.



|Item 7. | Major shareholders and related party transactions.
|------- | --------------------------------------------------

A. Major Shareholders

We are owned 49% by the New AT&T and 51% by Onexa. Onexa is owned by Alfa and BBVA
Bancomer. The New AT&T holds its equity in us through its subsidiary AT&T Telecom Mexico.

On November 14, 2000, we
restructured our capital without changing the above referenced ownership proportions as follows: 35% of our capital is represented by Series A shares and Series B shares and the remaining 65% is represented by Neutral (N) stock. The
Series A shares and the Series B shares have full voting and economic rights while the N stock has full economic rights but limited voting rights. AT&T Telecom Mexico holds 49% of the N stock and Onexa holds the other 51%. Onexa continues to
hold 100% of the Series A shares and AT&T Telecom Mexico continues to hold 100% of the B shares. As of December 31, 2005, AT&T Mexico holds 578,859,772 shares of our common and N stock and Onexa holds 602,486,701 shares of our common
and N stock.

Alfa is one of Mexicos largest conglomerates. It comprises four groups that participate in key industries within the
Mexican and NAFTA economies, including petrochemicals and synthetic fibers, processed food, auto parts and telecommunications. As of December 31, 2005, Alfas total assets amounted to Ps.63.3 billion, with annual sales of Ps.69.3 billion
and operating income of Ps.6.6 billion.



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The New AT&T is among the premier voice, video and data communications companies in the world,
serving businesses, consumers, and government. The New AT&T runs the largest, most sophisticated communications network in the U.S., backed by the research and development capabilities of the New AT&T Labs. A leading supplier of data,
internet and managed services for the public and private sectors, the New AT&T offers outsourcing and consulting to large businesses and government. The New AT&T is a market leader in local, long distance and internet services, as well as
transaction-based services like prepaid cards, collect calling and directory assistance. On January 31, 2005, AT&T Corp. and SBC announced that their boards had approved a deal under which SBC will acquire AT&T Corp., and on
November 17, 2005, the New AT&T completed its acquisition of AT&T Corp. See Item 3. Key Information  D. Risk Factors  Factors Relating to us  The SBC Communications acquisition of AT&T Corp. could have a
material adverse effect on our operations and our financial results.

Grupo Financiero BBVA Bancomer (BBVA Bancomer or the Group) is
the leading private financial institution in Mexico. It employs 31,199 people and is the largest bank in Latin America in terms of deposits and customer base, with total assets of 572,951 million pesos as of December 31, 2005. The
Groups main subsidiary is Bancomer, a leading banking institution with 1,718 branches operating under a universal banking concept. Bancomer offers products and services to more than 12.2 million clients through a segment network
distribution. Additionally, the Group has diversified income sources with non-banking subsidiaries involved in mutual funds, annuities, pension funds, insurance, brokerage, money remittances and asset management. In June 2002, BBVA Bancomer became
an affiliate holding company of Banco Bilbao Vizcaya Argentaria (BBVA), a leading financial group in Spain. BBVA has 94,681 employees and caters to 33 million clients in 37 countries through a network of 7,410 offices mainly in Europe and Latin
America.

Under the Federal Telecommunications Law and the Foreign Investment Law, no more than 49.0% of the voting equity of a Mexican
corporation holding a concession to provide long distance telecommunications services may be held by non-Mexican nationals. Onexa, a Mexican national, holds 51% of our voting equity.

We have entered into a joint venture agreement with our equity holders, AT&T Corp., Alfa, Onexa and Bancomer, and have adopted certain bylaws which
govern the relationship between the equity holders and us.

As part of the senior notes restructuring, on November 17, 2003 our equity
holders resolved to increase the variable portion of our capital stock by $100 million Ps.1,117.6 million, which was subscribed and paid for by each equity holder in proportion to its participation in the capital of the company, i.e., 51% by Onexa
and 49% by AT&T Corp.

In order to reconcile our capital with Mexican GAAP, reflect inflationary gain, and absorb accumulated losses,
on December 1, 2003 our equity holders resolved to (i) reclassify the balance as of December 31, 2002 of our restatement of capital stock account into the variable portion of our capital stock in the amount of Ps.4,844.4 million, and
(ii) reduce the variable portion of the capital stock for Ps.8,860.3 million and Ps.1,291.8 million by reclassifying these



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amounts from our accumulated deficit account and our accumulated deficit from restatement account, respectively. As a consequence, the nominal value of the
shares was proportionally reduced according to the ownership interest of each of the shareholders, 51% on Onexa and 49% on AT&T Corp. These transactions did not represent a contribution or payment to the equity holders.

B. Related party transactions

See Exhibit 10.1 Financial Statements  Note 5. Accounts receivable and payable and transactions with affiliates and other related parties.

C. Interests of experts and counsel

Not applicable.



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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.

Our shareholders joint venture agreement provides that our shareholders, subject to their vote and to
applicable provisions of our senior notes due 2009 (or any of our other indebtedness restricting our ability to pay dividends), have agreed to declare annual distributions of fifty percent of our after tax net income, determined in accordance with
Mexican GAAP. Notwithstanding the foregoing, we will declare distributions only (x) in an amount which does not exceed the lesser of (i) earnings on which Mexican taxes have been paid so that no additional Mexican tax is payable as a
result of the distribution, and (ii) our net cash flow, (y) after such time as all scheduled capital contributions have been made and (z) after all requirements of Mexican law for the declaration and payment thereof have been
satisfied. As of today, we have not declared any dividends.

B. Significant changes

Not Applicable



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|Item 9. | The Offer and Listing.
|------- | ----------------------

A. Offer and listing
details

Not applicable.

B. Plan of distribution

Not applicable.

C. Markets

Our senior notes
due 2006 and 2009 are listed on the Freiverkehr (Regulated Unofficial Market) of the Frankfurt Stock Exchange. Our senior notes due 2010 are listed on the Luxembourg Stock Exchange.

D. Selling shareholders

Not
applicable.

E. Dilution

Not applicable

F. Expenses of the issue

Not applicable.



|Item 10. | Additional Information.
|-------- | -----------------------

A. Share capital

Not applicable.

B. Memorandum and articles of association

Our deed of incorporation and bylaws were previously filed as Exhibit 3.1
on Form F-4, Registration No.333-11084 filed with the Securities and Exchange Commission (the SEC) on November 9, 1999 (our Registration Statement). Our bylaws were amended by the minutes to the General Partners
Meeting on November 14, 2000, which were filed as Exhibit 3.2 to Form F-4, Registration No.333-100075 filed with the SEC on February 12, 2003. Our bylaws were further amended by the minutes to the General Partners Meeting on
November 4, 2005, which are being filed as part of this Form 20-F as Exhibit 1.3. Our joint venture agreement was filed as Exhibit 10.1 to the Registration Statement. Our joint venture was further amended on November 30, 2005, which
amendment is being filed as part of this Form 20-F as Exhibit 4.1. The following discussion and Item 6 above summarize some of the important aspects of our joint venture agreement and our bylaws.



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Director controls.Members of our board of directors (Board of Directors) cannot be
our employees. A shareholder may disqualify any nominee for director should the shareholder believe that the nominee is in a position of conflict of interest by virtue of the nominees membership on the board of a competitor. Shareholders pay
for the travel and lodging expenses of the directors they have nominated. We do not compensate directors for their services.

If a director
has an interest in an action we are considering, the director is required to disclose that interest before discussion and vote on the matter. Once the interest is disclosed, the director generally is not prohibited from participating in a discussion
of the merits of the action or from voting on it. However, if we are involved in a legal action or arbitration with a shareholder, only directors not nominated by that shareholder are permitted to vote on resolutions regarding the matter.

Stock rights.Our capital is represented by the following classes:



| | (a) | Common. This stock has full voting and economic rights at all shareholders meetings. Its holders have one vote for each 0.1% capital contribution to our capital
classified as common; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Limited voting rights. This stock has full economic rights but limited voting rights. Its holders have one vote on certain company actions for each 0.1% capital
contribution. This class of stock is not included in the determination of the percentage of foreign investment in the capital of our company.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have issued and outstanding three classes of common stock. Class A and Class B have full economic and voting rights. Class N has limited voting rights as described in (b) above. Class A stock may
only be held by Mexican investors. Unlike in the United States where there are no such limits, as discussed above, Mexican nationals must always control at least 51.0% of our voting stock. Class B and N stock may be held by any investor of any
nationality. The three classes of stock have no par value.

Our fixed capital, which is not subject to withdrawal rights, is constituted as
follows:



| |  |  | Class A  Ps.53,550
| | - |  | -------------------



| |  |  | Class B  Ps.51,450
| | - |  | -------------------



| |  |  | Class N  Ps.195,000
| | - |  | --------------------

Our organizational documents
do not set forth any special dividend or liquidation rights.

Shareholder rights and change of control. Our shareholders have
no current right to withdraw capital. Such right can only be exercised in the year 2085. Currently, Onexa, holder of our Class A stock, has the right to nominate five of the nine members of our board of directors. AT&T Mexico has the right
to nominate the other four directors. Shareholders may be called upon for capital increases, and if they fail to do so, the other shareholder may contribute for the defaulting shareholder.



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Except as provided for in the amended joint venture agreement and in our by-laws for the transmission of
stock by our shareholders as permitted in clause 11 of the amended by-laws or with respect to a merger or acquisition of a company by us, and as described in the following paragraphs, a shareholder may sell or otherwise dispose of its stock only
upon approval of the other shareholders, and approval may be withheld without cause. Also, as discussed above, Mexican law currently restricts foreign ownership to 49.0% of the voting equity of a Mexican corporation holding a concession to provide
long distance telecommunications services. This impedes a change of control brought about by a purchase of stock by a non-Mexican national. For a detailed reference as to how our shareholders may transfer their stock please refer to the amendment of
the joint venture or the amendment to our by-laws.

Each shareholder may cause an indirect transfer of its stock to a financially qualified
buyer without the prior consent of the remaining partner(s), provided that (i) any such transfer complies with the applicable provisions of amended joint venture agreement, (ii) the transferee is not a telecom competitor, Telmex or America
Movil or an affiliate of a telecom competitor, Telmex or America Movil or any person acting on behalf of or deliberately in concert with a telecom competitor, Telmex or America Movil; (iii) the transferee is eligible under Mexican law to hold
the social part; and (iv) the transferee agrees to be bound by all of the provisions of the amended joint venture agreement, as if such transferee had been an original party to such agreement.

Any additional interest in Telmex or America Movil acquired by New AT&T, shall not constitute an Acquisition of Control (as defined in our joint
venture as amended) or be subject to the provisions of the amended joint venture agreement.

So long as New AT&T has the right to
designate at least one member to the board of directors or the executive committee of Telmex or America Movil, the New AT&T has agreed that none of the individuals nominated to serve as the New AT&Ts representatives on the board of
directors or steering committee shall have any direct or indirect responsibility for New AT&Ts relationship with Telmex or America Movil or serve (or for twenty-four (24) months after serving on our board of directors serve) on either
the Telmex or America Movil board of directors or executive committee. In addition, New AT&T shall establish and enforce a policy against the transfer of non-public information about us to Telmex or America Movil.

Class N shareholders are allowed to attend shareholders meetings and exercise their voting rights if any of the following matters are contemplated:



| |  |  | extension of our term of duration,
| | - |  | ----------------------------------



| |  |  | our anticipated dissolution,
| | - |  | ----------------------------



| |  |  | change of our corporate purpose,
| | - |  | --------------------------------



| |  |  | change of our corporate form, and
| | - |  | ---------------------------------



| |  |  | our merger with another company.
| | - |  | --------------------------------

All of the resolutions
taken at a shareholders meeting regarding the above-mentioned matters require a quorum of 51% of our Class A stockholders and 51% of our Class B stockholders.



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Shareholder meetings. Shareholder meetings can be called by:



| |  |  | the Board of Directors, in which case the signature of the Secretary of the Board is required,
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | any of the members of the Board of Directors,
| | - |  | ---------------------------------------------



| |  |  | the examiner, or
| | - |  | ----------------



| |  |  | shareholders representing at least 26% of the Class A or Class B stock.
| | - |  | -----------------------------------------------------------------------

At these meetings, our shareholders may:



| |  |  | examine our annual report, and determine the direction we will take the following year,
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | decide upon the application of the results of operation,
| | - |  | --------------------------------------------------------



| |  |  | elect the chairman of the Board of Directors,
| | - |  | ---------------------------------------------



| |  |  | resolve to redeem stock with income that, according to law, may be used to pay dividends,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | name our Chief Executive Officer and examiner,
| | - |  | ----------------------------------------------



| |  |  | decide the issuance of preferred stock,
| | - |  | ---------------------------------------



| |  |  | decide to increase or reduce our fixed or variable capital,
| | - |  | -----------------------------------------------------------



| |  |  | pay dividends, if any,
| | - |  | ----------------------



| |  |  | approve changes to our bylaws,
| | - |  | ------------------------------



| |  |  | determine our dissolution, if applicable,
| | - |  | -----------------------------------------



| |  |  | permit the issuance of bonds,
| | - |  | -----------------------------



| |  |  | approve the admission of new shareholders, except for transmission of stock permitted in clause 11 of the amended by-laws or with respect to a merger or acquisition of a company by
us,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approve the execution or modification of any transaction not exceeding $3 million with any shareholder or a holding of a shareholder or an affiliate of either such entity, but in no
event shall we enter into a transaction with a shareholder or any of its affiliates if the effect thereof is to materially and adversely affect the series B shareholder or adversely affect any contractual right of the series B shareholder or its
affiliates,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approve annual financial statements with or without audit,
| | - |  | ----------------------------------------------------------



| |  |  | approve any incentive, deferred compensation or any similar compensation plan for the Chief Executive Officer and any other executive,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approve or modify the authority delegated to the Chief Executive Officer,
| | - |  | -------------------------------------------------------------------------



| |  |  | decide to introduce any service outside Mexico, provided that we can offer voice services over internet in any way as authorized by our shareholders,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | resolve waiver of non-competition obligations of shareholders,
| | - |  | --------------------------------------------------------------



| |  |  | subject to clause 6 paragraph VI and to the provisions set forth in clause 15 subsection 28 of our by-laws, decide to acquire a competing business or strategic service and set the
purchase price,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | modify our financial policy,
| | - |  | ----------------------------



| |  |  | subject to clause 6 paragraph VI and to the provisions set forth in clause 15 subsection 33 of our by-laws, approve the entry into a transaction involving an acquisition of any
other person or certain assets,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | resolve the amendment of any concession granted which results in an additional restriction of our operating conditions or which imposes additional risk or potential liability for
our shareholders,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create subsidiaries and amend their bylaws, and
| | - |  | -----------------------------------------------



| |  |  | discuss and approve decisions relating to the exercise of corporate rights at shareholder meetings of subsidiaries.
| | - |  | -------------------------------------------------------------------------------------------------------------------



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Certain provisions set forth above (clause 15 of the by-laws) shall not be applicable if an affiliate of
our shareholder with a position in series B ceases to have the right to designate at least one member to the board of directors or the executive committee of Telmex or America Movil, and certain provisions are set forth in clause 15 of the by-laws
for each of these provisions which may become non applicable. For a detailed reference of these provisions please refer to clause 15 of our by-laws.

Certain AT&T Corp. rights or obligations included in the amended by-laws and in the amended joint venture, are contingent to, and therefore shall be null and void and shall not be enforceable if New AT&T no
longer has the right to designate at least one member of the board of directors or executive committee of Telmex or America Movil and neither New AT&T nor any of New AT&Ts Affiliates are (at the time of the determination) seeking, or
planning to seek, new customers for the same telecommunications services jointly with Telmex within the Territory that are directly substitutable for those services that we provide.

C. Material contracts

After
November 18, 2005, following the AT&T Acquisition, we and our shareholders amended our Second Amended and Restated Joint Venture Agreement (the Joint Venture Agreement) to modify our corporate governance and certain other
provisions. We also amended the Amended and Restated Service Mark License Agreement between AT&T Corp. and us (the Service Mark License Agreement), the AT&T Global Network Cooperation Agreement between AT&T Corp. and us (the
AGN Agreement) and our bylaws (the Bylaws).

Governance Provisions

We and our shareholders amended the Joint Venture Agreement and the Bylaws to eliminate the requirement that certain corporate actions only be taken on
the affirmative vote of each of the partners. The affirmative vote of each of the partners is no longer required for, among other things:



| |  |  | the approval or modification of our annual budget or business plan,
| | - |  | -------------------------------------------------------------------



| |  |  | the making of significant capital expenditures,
| | - |  | -----------------------------------------------



| |  |  | the election or removal of our chief executive officer,
| | - |  | -------------------------------------------------------



| |  |  | the entering into modification or termination of material contracts,
| | - |  | --------------------------------------------------------------------



| |  |  | any change in regulatory policy,
| | - |  | --------------------------------



| |  |  | the approval of grants under any compensation plan for our chief executive officer and other executive officers (although adoption or modification of the underlying plans is still
subject to approval by an affirmative vote of each of the partners).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the amendment, our board of directors
now has the authority to take the actions described above. In addition, our board of directors may now take action by a simple majority, subject to certain limited exceptions that require the affirmative vote of at least one board member of each of
our partners.



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Service Mark License Agreement

The term of the Service Mark License Agreement has been extended. Under the amended Service Mark License Agreement, for a period of 18 months from the
date of the consummation of the AT&T Acquisition, subject to our achieving certain milestones, we may continue to use the AT&T brand name. If we develop or license new marks during that 18-month period, then under the amended Service Mark
License Agreement we may refer to the AT&T brand name for an additional 18 months. After 24 months from the consummation of the AT&T Acquisition, we may use the AT&T service mark only together with our new service marks, and may use it
for reference purposes only and always with the prior approval of AT&T. AT&T Corp. has agreed to waive any royalty fee payments under the Service Mark License Agreement during such period, including 2005 royalty payment if we invest the
funds in marketing and developing the new marks during the initial transition period. Under the amended agreement, we now have the flexibility and freedom to develop the new marks for our domestic services. In connection with the provision of
AT&T Global Network services (AGN Services), we are allowed a limited use of the phrase AT&T Global Services on a nonexclusive basis until June 2010.

AGN Agreement

The term of the AGN
Agreement has been extended to June 30, 2010. Under the amended AGN Agreement, if our Mexican shareholder, Onexa S.A. de C.V., transfers certain of its interest in us, AT&T Corp.s obligations under the AGN Agreement will terminate.

Non-Compete Provision

AT&T Corp. has agreed that neither it nor its affiliates (other than jointly or in collaboration with America Móvil, S.A. de C.V., Teléfonos de México, S.A. de C.V. or their affiliates (together, TAM)
may compete directly with us in Mexico in the offering of certain specified telecommunications services.

However, AT&T Corp. is no
longer required to use its best efforts to promote the use of our services in Mexico.

Insulation from Certain New AT&T Affiliates

Due to the interest New AT&T holds in TAM and its affiliates, AT&T Corp. has agreed that, for so long as New AT&T has the
right to designate at least one member to the board of directors or the executive committee of TAM:



| |  |  | none of the individuals nominated to serve as AT&T Corp.s representatives on our board of directors or steering committee shall have any direct or indirect responsibility
for the New AT&Ts relationship with TAM or serve within twenty-four (24) months of serving on our board of directors on either the TAM board of directors or executive committee; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | none of the officers of AT&T Mexico nor any individuals serving on AT&T Mexicos board of directors shall serve as directors or officers of any New AT&T affiliate
holding any interest in TAM.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In addition, the New AT&T must establish and enforce an information policy preventing the transfer of
non-public information regarding us to TAM.

Transfer Restrictions

The Joint Venture Agreement has also been amended to permit certain transfers of indirect interests in us to financially qualified buyers who are not our
competitors, subject to certain rights of first offer. Under certain conditions, there are drag-along rights (that can require the sale of 100% of us) and tag-along rights (that permit the other owner to join in the transfer).

Certain Purchase and Financial Commitments

AT&T Corp. has also agreed that its affiliates will purchase certain telecommunication services from us that generate a cumulative margin after certain third party costs of no less than $164,600,000 (subject to adjustment in certain
circumstances) during the period from January 1, 2006 to June 30, 2010, or else AT&T Corp. will pay the amount of deficiency. These financial commitments are guaranteed by the New AT&T should AT&T Corp. default in its
obligations. Additionally, if AT&T Corp. fails to meet certain cumulative margin milestones by June 30, 2012, AT&T Mexico will transfer up to 15% of the total equity interests in us to Onexa and, in the event such transfer amounts to
10% or more of our total equity interests, the right to nominate one Series B director of Alestra.

D. Exchange controls

Capital controls

The Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert Pesos into U.S. dollars or other currencies. Banco de México, except for the period from September 1
through December 20, 1982, has made foreign currency available to private sector companies. The foreign currency we need to service our foreign currency obligations, including our outstanding securities, has been available in the open market.

E. Taxation

United States taxation

The following is a discussion under present law of the material United States federal income
tax consequences of the ownership and disposition of the registered senior notes to purchasers of the registered senior notes in the original offering at the issue price. The discussion is based on the Internal Revenue Code of 1986, as amended and
the regulations, rulings, judicial decisions and administrative pronouncements thereunder in effect on the date hereof, which may change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income
taxation that may be relevant to a particular holder, some of which,



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(such as tax-exempt organizations, dealers, financial institutions and life insurance companies, traders that elect to mark the registered senior notes to
market and persons holding a registered senior note as part of a hedge, straddle, conversion or integrated transaction) may be subject to special rules. This discussion also does not address any aspect of state, local or foreign taxation. Investors
are urged to consult their own tax advisors concerning the United States federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction.

Interest

The gross amount of
interest (including additional amounts paid in respect of Mexican withholding taxes) accrued or received in respect of the registered senior notes generally will be includible in the gross income of U.S. holders in accordance with their regular
method of tax accounting and original issue discount, if any, will be included on a yield to maturity basis. Such income generally will be treated as foreign source income for United States federal income tax purposes. In general, a U.S. holder may
elect to claim, subject to certain generally applicable limitations, either a deduction or a credit in computing its United States federal income tax liability for Mexican taxes withheld from interest and from additional amounts paid on the
registered senior notes. Interest paid on the registered senior notes will constitute income from sources outside the United States, but, with certain exceptions, for taxable years beginning on or before December 31, 2006, will be
passive or financial services income, which is treated separately from other types of income for purposes of computing the foreign tax credit allowable to a United States Holder under the United States federal income tax
laws. For taxable years beginning after December 31, 2006, such income generally will constitute passive category income or, in the case of certain U.S. holders, general category income, for foreign tax credit purposes. The
rules relating to the calculation and timing of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions, involves the application of complex rules that depend upon a U.S.
holders particular circumstances.

Investors are urged to consult their tax advisors regarding the availability of the foreign tax
credit in light of their particular circumstances.

Sale exchange, retirement or redemption

Gain or loss realized on the sale, exchange, retirement or redemption of a registered senior note (other than any amount in respect of accrued but unpaid
interest) will generally be capital gain or loss. U.S. Holders should consult their tax advisors about U.S. federal income tax treatment of capital gain or loss. Gain or loss (other than loss attributable to accrued but unpaid interest) generally
will be U.S. source gain or loss for purposes of the foreign tax credit limitation.

Information reporting and backup withholding

Amounts paid in respect of registered senior notes and the proceeds from the sale, exchange, or redemption of registered senior notes
may be reported to the United States Internal Revenue Service and a backup withholding tax may apply to such amounts unless the holder (i)



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is a domestic corporation (which may be required to establish its exemption by providing its status on U.S. Internal Revenue Service Form W-9), (ii) in
the case of a U.S. holder other than a corporation, provides an accurate taxpayer identification in the manner required by applicable law, or otherwise, (iii) establishes a basis for exemption. The amount of any backup withholding from a
payment to a U.S. holder generally will be allowed as a credit against the U.S. holders United States federal income tax liability.

United States/Mexico tax treaty

A Convention for the Avoidance of Double Taxation and Prevention of Fiscal Evasion,
together with a related Protocol (collectively, the Tax Treaty), between Mexico and the United States took effect on January 1, 1994. Certain provisions of the Tax Treaty that may affect the taxation of certain U.S. holders are
discussed below under Mexican Taxation. The United States and Mexico have also entered into an agreement that covers the exchange of information with respect to tax matters.

Mexican taxation

General

The following is a summary of the principal consequences, under the Ley del Impuesto Sobre la Renta(Mexicos income tax
law, or the Law), regulations thereto and rules thereunder as currently in effect, and under the Tax Treaty, of the purchase, ownership and disposition of the registered notes by a holder that is not a resident of Mexico for tax purposes
and that will not hold notes or a beneficial interest therein in connection with the conduct of a trade or business through a permanent establishment in Mexico (a Non-Mexican Holder). An individual is a resident of Mexico if such person
has established his or her dwelling house in Mexico. When said person also has a house abroad, they shall be deemed a resident of Mexico if their vital center of interests is located in national territory. For these purposes, the vital center of
interests is in Mexico when, among other cases, any of the following takes place: (i) more than 50% of the aggregate amount of revenues obtained by such person in the calendar year has a Mexican source of wealth, or (ii) such persons
principal center of professional activities is located in Mexico. A legal entity is a resident of Mexico if it is established under Mexican law or if it maintains the principal administration of its business or the effective location of its
management in Mexico. A Mexican citizen is presumed to be a resident of Mexico unless such person can demonstrate the contrary. A permanent establishment of a foreign person will be regarded as a resident of Mexico, and such permanent establishment
will be required to pay taxes in Mexico in accordance with applicable law, for income attributable to such permanent establishment.

Each
Non-Mexican Holder should consult its own tax advisor as to the particular Mexican or other tax consequences to such Non-Mexican Holder of holding outstanding debt securities, including the applicability and effect of any state, local or foreign tax
laws.



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Interest and principal

Payments of interest (including original issue discount which is deemed interest under the Law) with respect to our outstanding debt securities to a
Non-Mexican Holder will generally be subject to a Mexican withholding tax assessed at a rate of 10.0% because the outstanding debt securities are registered in the Special Section of the Registro Nacional de Valores e Intermediarios (National
Registry of Securities, or RNV). However, the withholding tax rate on such interest payments generally is 4.9% if, besides registering the outstanding debt securities as set forth above, the Non-Mexican Holder is the effective
beneficiary of the interest payment and resides in a country that has entered into a treaty for avoidance of double taxation with Mexico which is in effect, and satisfies the conditions and requirements for obtaining benefits under such treaty.
Non-Mexican Holders residing in the United States may qualify for the 4.9% rate under the Tax Treaty. Other Non-Mexican Holders should consult their tax advisors regarding whether they reside in a country that has entered into a treaty for avoidance
of double taxation with Mexico which is effective, and, if so, the conditions and requirements for obtaining benefits under that treaty.

However, if the beneficial owner, either directly or indirectly, individually or jointly with related parties, of more than 5% of the interest derived from the related securities, is any of the following:



| |  |  | a shareholder of the issuer who owns, directly or indirectly, individually or jointly with related parties, more than 10% of voting shares of the issuer; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a legal entity 20% of whose stock is owned, directly or indirectly, individually or jointly with related parties, by the issuer, then, the withholding tax rate will be 29% (28% in
2007 and subsequent years).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Notwithstanding the foregoing, under Rule 3.23.8. published in the Diario Oficial de la
Federación (the Official Register of the Federation) on May 30, 2005 which is subject to amendment or repeal but is expected to remain in effect until April 30, 2006 (the Reduced Rate Rule), payments of interest made
where:

(1) the outstanding debt securities are registered in the Special Section of the RNV, and copies of the approval of such registration are provided
to the Secretaría de Hacienda y Crédito Público(the Secretary of the Treasury and Public Credit, or SHCP);

(2) we
timely file with the SHCP certain information relating to the issuance of the outstanding debt securities;

(3) we timely file with the SHCP, on a
quarterly basis, information representing that no party related to Alestra (as such terms are detailed in the Reduced Rate Rule), jointly or individually, directly or indirectly, is the effective beneficiary of 5.0% or more of the aggregate amount
of each such interest payment; and

(4) we maintain records which evidence compliance with items (1), (2) and (3) above.

To date, we have met such conditions. Accordingly, we expect to withhold Mexican tax from interest payments on the outstanding debt securities made to
Non-Mexican Holders at the 4.9% rate during the effectiveness of such rule. No assurances can be given that the Reduced Rate Rule will be extended or that an equivalent rule will be enacted.



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The Mexican withholding tax rate applicable to interest payments on the outstanding debt securities made
to U.S. holders eligible for benefits under the Tax Treaty is 4.9% beginning on January 1, 1999.

Under the Law, payments of interest
we make with respect to the outstanding debt securities to non-Mexican pension or retirement funds are exempt from Mexican withholding taxes, provided that the fund:

(1) is the effective beneficiary of the interest;

(2) is duly organized pursuant to the laws of its country of origin
(regardless of the type of organization);

(3) is exempt from income tax in such country; and

(4) is registered with the SHCP for such purposes.

We have
agreed, subject to certain exceptions and limitations, to make any payment under or with respect to the outstanding debt securities, free and clear of the above-mentioned Mexican withholding taxes to holders of the outstanding debt securities.

Holders or beneficial owners of notes may be requested, subject to specified exceptions and limitations, to provide certain information or
documentation necessary to enable us to establish the Mexican withholding tax rate applicable to such holders or beneficial owners with respect to interest payments under the outstanding debt securities. In the event that the specified information
or documentation concerning the holder or beneficial owner, if requested, is not provided prior to the payment of any interest to such holder or beneficial owner, we may withhold Mexican tax from such interest payment to such holder or beneficial
owner at the maximum applicable rate (currently 10.0%), but our obligation to make any payment free and clear with respect to such withholding taxes will be limited as set forth under the outstanding debt securities.

A Non-Mexican Holder is not subject to any Mexican withholding or similar taxes in connection with payments of principal we make in connection with the
outstanding debt securities.

Dispositions

Under Mexican law, any capital gains resulting from the sale or other disposition of notes by a Non-Mexican Holder will be deemed to be interest and subject to tax as per the preceding paragraphs.

Other taxes

A Non-Mexican Holder
will not be liable for Mexican estate, gift, inheritance or similar taxes with respect to its holding, nor will it be liable for Mexican stamp, registration or similar taxes.



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F. Dividends and Paying Agents

Not applicable.

G. Statement by
Experts

Not applicable.

H. Documents on Display

We have filed annual reports as required by the Securities Exchange Act of 1934. We have
also filed quarterly information statements with the SEC as required by the indentures governing the notes.

You may read a copy of our
annual reports and any other document we file at the SECs public reference room at 450 Fifth Street, N.W. Washington, D.C. 20549. These documents are also available at the public reference rooms at the SECs regional offices in New York,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.

I.
Subsidiary Information

Not applicable.



|Item 11. | Quantitative and Qualitative Disclosures About Market Risk.
|-------- | -----------------------------------------------------------

Our business activities require the holding or issuing of financial instruments which expose us to market risks related to changes in interest rates and foreign currency exchange rates.

We do not hold or issue financial instruments for trading purposes.

Interest Rate Risk

We currently believe that increases in interest rates in the international markets are not likely to
have a direct adverse impact on our financial results or cash flows because our total debt is U.S. dollar-denominated and bears fixed rates of interest. Our results and cash flows could be impacted if additional financing is required in the future
when interest rates are high in relation to current market conditions.

Foreign Exchange Risk

Our principal foreign currency fluctuation risk involves changes in the value of the peso relative to the U.S. dollar. Although U.S. dollar-denominated
revenues and expenses are exposed to foreign currency fluctuations, our financial instruments are more highly impacted. As of December 31, 2005, the amount of senior notes and notes payable denominated in U.S. dollars was Ps.4,160.3 million.



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Depreciation of the Peso against the U.S. dollar resulted in increases to our dollar-denominated revenues
and expenses as reported in Peso. Conversely, appreciation in the value of the Peso against the U.S. dollar resulted in decreases to U.S. dollar-denominated revenues and expenses as reported in Pesos.

Interest expense on our U.S. dollar-denominated debt, as expressed in Pesos in our financial statements, varies with exchange rate movements.
Depreciation of the Peso results in increases in interest expense on a Pesos basis.

We record foreign exchange gains or losses when the
Peso appreciates or depreciates against the U.S. dollar. Because our U.S. dollar-denominated monetary liabilities have exceeded, and are expected to continue to exceed, our U.S. dollar-denominated monetary assets, depreciation of the Peso against
the U.S. dollar will result in foreign exchange losses.

From time to time, we assess our exposure and consider opportunities to manage
this risk, through, for example, the use of hedging instruments. In order to minimize the exchange rate risk of the Mexican Peso-U.S. dollar, on December 22, 2005 we entered into a currency hedge to minimize the effect of fluctuations in the
U.S. dollar/Mexican Peso exchange rate. The hedge will be effective through December 29, 2006.

The potential loss in value of
financial instruments held at December 31, 2005 which total Ps.4,160.3 million that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in the Peso-dollar exchange rate would have been approximately Ps.416.0
million. Such a change in currency exchange rates would also have resulted in additional interest expense of approximately Ps.37.3 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in
Pesos of servicing U.S. dollar-denominated indebtedness. However, the potential impact of changes in the Peso-dollar exchange rate on interest expense would be mostly offset, due to the U.S. dollar-denominated revenues that are generated by
international incoming traffic, and the hedge instruments we entered into mentioned above.



|Item 12. | Description of Securities Other Than Equity Securities.
|-------- | -------------------------------------------------------

Not applicable.

PART II



|Item 13. | Defaults, Dividend Arrearages and Delinquencies.
|-------- | ------------------------------------------------

Not applicable.



|Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds.
|-------- | -----------------------------------------------------------------------------

Not applicable



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

Evaluation of
disclosure controls and procedures

The conclusions of our Chief Executive Officer and Chief Financial Officer about the
effectiveness of our disclosure controls and procedures, based on their evaluation of these controls and procedures as of December 31, 2005, are as follows:

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us is recorded, processed, summarized and reported within required timeframes. Our disclosure controls and
procedures include without limitation controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Based on their assessments of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and
procedures have functioned effectively and that the consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.

Changes in internal controls

There has been no change in our internal control over financial reporting during 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|Item 16. | Reserved.
|-------- | ---------



| | Item 16. A. | Audit Committee Financial Expert
| | ----------- | --------------------------------

At this time, we do not have an audit committee. Our board of directors has determined that it does not have a financial expert meeting the requirements of Item 16A. We do not have a financial expert in our board of directors because
we are a privately owned company and Mexican law does not require us to have a financial expert on our board of directors. See Item 3. Key Information  D. Risk Factors  Factor relating to the Mexican regulatory
environment.



| | Item 16. B. | Code of Ethics
| | ----------- | --------------

We have
adopted a code of ethics, as defined in the Sarbanes-Oxley Act, applicable to our employees, principal executive officer, principal financial officer, and principal accounting officer. Our code of ethics is available for consultation at our web site
at www.alestra.com.mx.



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| | Item 16. C. | Principal Account Fees and Services
| | ----------- | -----------------------------------

The aggregate fees billed by PricewaterhouseCoopers, S.C., or PwC, Alestras independent auditor, for professional services in 2004 and 2005 were as follows:



|                         |  |                        |  |        
|------------------------ |  | ---------------------- |  | -------
|                         |  | (in millions of pesos)
|                         |  | 2004                   |  | 2005   
|Audit Fees (1)           |  | Ps. 5.5                |  | Ps. 5.1
|Audit  Related Fees (2) |  | 0.6                    |  | 1.2    
|Tax Fees (3)             |  |                       |  |       
|                         |  |                        |  |        
|Total                    |  | Ps. 6.1                |  | Ps. 6.3
|                         |  |                        |  |        



|(1) | Audit fees include fees associated with the annual audit of Alestras consolidated financial statements and reviews of Alestras quarterly reports for statutory purposes.
Audit fees also include fees associated with various audit requirements of Alestra and for reviews of registration statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Audit-related fees include amounts paid to PricewaterhouseCoopers for the audit of Cofetel reports, statutory social security and housing report, transfer pricing and other
statutory reports.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Tax fees include fees principally incurred for assistance with compliance matters.
|--- | ----------------------------------------------------------------------------------



| | Item 16. D. | Exemptions from the Listing Standards for Audit Committees
| | ----------- | ----------------------------------------------------------

Not applicable.



| | Item 16. E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers
| | ----------- | ----------------------------------------------------------------------

Not applicable.

PART III



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

See pages F-1 through F-41
incorporated herein by reference.



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



| | 1.1 | Deed of Incorporation and By-Laws (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 33-11084 on November 4,
1999).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1.2 | Amendment to the Deed of Incorporation and By-Laws dated November 14, 2000 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4,
Registration Number 333-100075 on February 12, 2003).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1.3 | Amendment to the By-Laws dated November 4, 2005.
| | --- | ------------------------------------------------



| | 4.1 | Addendum to the Second Amended and Restated Joint Venture Agreement, dated November 30, 2005.
| | --- | ---------------------------------------------------------------------------------------------



| | 4.2 | Addendum to the Amended and Restated Service Mark License Agreement, dated November 30, 2005.
| | --- | ---------------------------------------------------------------------------------------------



| | 4.3 | Addendum to the AT&T Global Network Cooperation Agreement, dated November 30, 2005.
| | --- | -----------------------------------------------------------------------------------



| | 12.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 12.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 13.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 13.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



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INDEX TO THE FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Content                                                                                                         |  | Page
|Report of Independent Registered Public Accounting Firm                                                         |  | F-2 
|Consolidated Balance Sheets as of December 31, 2004 and 2005                                                    |  | F-3 
|Consolidated Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005                      |  | F-4 
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2003, 2004 and 2005 |  | F-5 
|Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 2003, 2004 and 2005   |  | 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, 2004 and 2005, and the related consolidated statements of operations, changes in stockholders equity and changes in
financial position for the years ended December 31, 2003, 2004 and 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with the 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, 2004 and 2005, and the consolidated results of their operations, changes in
stockholders equity and changes in their financial position for the years ended December 31, 2003, 2004 and 2005, in conformity with accounting principles generally accepted in Mexico.

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 20 to the consolidated financial statements.

PricewaterhouseCoopers
S.C.

Monterrey, Nuevo León, México

March 30, 2006



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##### Table of Contents

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

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2004 AND 2005

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2005)



|                                                                                      |  |      |           |      |    |           |  
|------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | -- | --------- | -
|                                                                                      |  | 2004 |           | 2005 |   
|Assets                                                                                |  |      |           |      |    |           |  
|Current Assets:                                                                       |  |      |           |      |    |           |  
|Cash and cash equivalents                                                             |  | Ps   | 654,965   |      | Ps | 920,386   |  
|Trade receivables, net (Note 4)                                                       |  |      | 373,014   |      |    | 353,899   |  
|Due from affiliates and other related parties (Note 5)                                |  |      | 142,631   |      |    | 223,716   |  
|Recoverable taxes                                                                     |  |      | 3,478     |      |    | 232       |  
|Other receivables                                                                     |  |      | 48,143    |      |    | 49,196    |  
|Prepaid expenses (Note 6)                                                             |  |      | 21,744    |      |    | 35,966    |  
|Other current assets                                                                  |  |      |          |      |    | 21,422    |  
|                                                                                      |  |      |           |      |    |           |  
|Total current assets                                                                  |  |      | 1,243,975 |      |    | 1,604,817 |  
|Property and equipment, net (Note 7)                                                  |  |      | 5,833,474 |      |    | 5,240,358 |  
|Deferred charges, net (Note 8)                                                        |  |      | 919,165   |      |    | 643,769   |  
|Intangible asset derived from the actuarial computation of labor obligation (Note 11) |  |      |          |      |    | 20,788    |  
|                                                                                      |  |      |           |      |    |           |  
|Total assets                                                                          |  | Ps   | 7,996,614 |      | Ps | 7,509,732 |  
|                                                                                      |  |      |           |      |    |           |  
|Liabilities and stockholders equity                                                  |  |      |           |      |    |           |  
|Current liabilities:                                                                  |  |      |           |      |    |           |  
|Accounts payable to Telmex and other carriers                                         |  | Ps   | 134,858   |      | Ps | 196,499   |  
|Other accounts payable                                                                |  |      | 114,363   |      |    | 212,514   |  
|Senior notes (Notes 2 and 10)                                                         |  |      |          |      |    | 527,555   |  
|Notes payable and capital leases (Note 9)                                             |  |      | 31,778    |      |    | 46,689    |  
|Due to affiliates and other related parties (Note 5)                                  |  |      | 122,844   |      |    | 113,680   |  
|Other accounts payable and accrued expenses                                           |  |      | 285,424   |      |    | 183,126   |  
|                                                                                      |  |      |           |      |    |           |  
|Total current liabilities                                                             |  |      | 689,267   |      |    | 1,280,063 |  
|Long-term liabilities:                                                                |  |      |           |      |    |           |  
|Senior notes (Notes 2 and 10)                                                         |  |      | 4,507,212 |      |    | 3,554,642 |  
|Notes payable and capital leases (Note 9)                                             |  |      | 34,749    |      |    | 31,411    |  
|Due to affiliates and other related parties (Note 5)                                  |  |      | 146,865   |      |    | 181,853   |  
|Estimated liabilities for seniority premiums and pension plans (Note 11)              |  |      | 69,128    |      |    | 103,824   |  
|                                                                                      |  |      |           |      |    |           |  
|Total liabilities                                                                     |  |      | 5,447,221 |      |    | 5,151,793 |  
|                                                                                      |  |      |           |      |    |           |  
|STOCKHOLDERS EQUITY (Note 12):                                                       |  |      |           |      |    |           |  
|Majority interest:                                                                    |  |      |           |      |    |           |  
|Nominal capital stock                                                                 |  |      | 1,181,346 |      |    | 1,181,346 |  
|Restatement of capital stock                                                          |  |      | 110,718   |      |    | 110,718   |  
|                                                                                      |  |      |           |      |    |           |  
|Contributed capital                                                                   |  |      | 1,292,064 |      |    | 1,292,064 |  
|Retained earnings                                                                     |  |      | 1,257,327 |      |    | 1,066,426 |  
|                                                                                      |  |      |           |      |    |           |  
|Total majority interest                                                               |  |      | 2,549,391 |      |    | 2,358,490 |  
|Total minority interest                                                               |  |      | 2         |      |    | (551      | )
|                                                                                      |  |      |           |      |    |           |  
|Total stockholders equity                                                            |  |      | 2,549,393 |      |    | 2,357,939 |  
|CONTINGENCIES AND COMMITMENTS (Note 13)                                               |  |      |           |      |    |           |  
|                                                                                      |  |      |           |      |    |           |  
|Total liabilities and stockholders equity                                            |  | Ps   | 7,996,614 |      | Ps | 7,509,732 |  
|                                                                                      |  |      |           |      |    |           |  

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, 2003, 2004 AND 2005

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2005)



|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | --- | ---------- | ---- |  | -- | ---------- | -
|                                                     |  | 2003 |            |   | 2004 |     |            | 2005 | 
|REVENUES (Note 14)                                   |  |      |            |   |      |     |            |      |  |    |            |  
|Long distance services                               |  | Ps   | 4,587,144  |   |      | Ps  | 3,359,795  |      |  | Ps | 2,155,920  |  
|Data, internet and local services                    |  |      | 1,417,200  |   |      |     | 1,670,289  |      |  |    | 1,915,114  |  
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|                                                     |  |      | 6,004,344  |   |      |     | 5,030,084  |      |  |    | 4,071,034  |  
|OPERATING EXPENSES:                                  |  |      |            |   |      |     |            |      |  |    |            |  
|Cost of services (excluding depreciation  Note 14)  |  |      |            |   |      |     |            |      |  |    |            |  
|Long distance services                               |  |      | (2,771,724 | ) |      |     | (2,030,180 | )    |  |    | (1,055,362 | )
|Data, internet and local services                    |  |      | (338,234   | ) |      |     | (395,222   | )    |  |    | (484,640   | )
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|                                                     |  |      | (3,109,958 | ) |      |     | (2,425,402 | )    |  |    | (1,540,002 | )
|Administration, selling and other operating expenses |  |      | (1,606,742 | ) |      |     | (1,473,059 | )    |  |    | (1,413,208 | )
|Depreciation and amortization                        |  |      | (966,820   | ) |      |     | (944,320   | )    |  |    | (941,083   | )
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|Operating gain                                       |  |      | 320,824    |   |      |     | 187,303    |      |  |    | 176,741    |  
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|COMPREHENSIVE FINANCIAL RESULT:                      |  |      |            |   |      |     |            |      |  |    |            |  
|Interest expense (Note 17)                           |  |      | (720,130   | ) |      |     | (476,448   | )    |  |    | (452,058   | )
|Interest income                                      |  |      | 7,388      |   |      |     | 17,246     |      |  |    | 32,106     |  
|Exchange (loss) gain, net                            |  |      | (645,364   | ) |      |     | (3,895     | )    |  |    | 191,103    |  
|Gain from monetary position, net                     |  |      | 286,796    |   |      |     | 221,758    |      |  |    | 121,206    |  
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|                                                     |  |      | (1,071,310 | ) |      |     | (241,339   | )    |  |    | (107,643   | )
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|SPECIAL ITEM (Note 17)                               |  |      | 1,638,815  |   |      |     |           |      |  |    |           |  
|OTHER INCOME (EXPENSES), NET (Note 5-h)              |  |      | 108,076    |   |      |     | (28,998    | )    |  |    | (17,810    | )
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|Gain (loss) before provision for asset tax           |  |      | 996,405    |   |      |     | (83,034    | )    |  |    | 51,288     |  
|Asset tax (Note 16)                                  |  |      | (4,186     | ) |      |     | (4,132     | )    |  |    | (3,105     | )
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|Net consolidated income (loss) (Note 12)             |  |      | 992,219    |   |      |     | (87,166    | )    |  |    | 48,183     |  
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|Net loss corresponding to minority interest          |  |      |           |   |      |     |           |      |  |    | 205        |  
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  
|Net income (loss) of majority interest               |  | Ps   | 992,219    |   |      | (Ps | 87,166     | )    |  | Ps | 48,388     |  
|                                                     |  |      |            |   |      |     |            |      |  |    |            |  

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, 2003, 2004 AND 2005

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2005)



|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----- | -------- | ---------------------------- | ----------- | - | ------------------------------- | ------------ | - | ------------------------------------ | ------------ | ----------------------------- |  | ------- | ----------------- | ------------ | - | ----------------- | ----------- | - | -------------------------- | -- | ------ | - |  | ----------- | -
|                                                                                                                              |  |               |       |          |                              |             |   | Accumulated (deficit) income    |              |   |                                      |              |                               |  |         |                   |              |  
|                                                                                                                              |  | Capital stock |       |          | Restatement of capital stock |             |   | (Deficit) gain from restatement |              |   | Effect onequityfrom laborobligations |              | Net income (loss) of the
year |  |         | Majority Interest |              |   | Minority interest |             |   | Total Stockholders equity |   
|                                                                                                                              |  | Fixed         |       | Variable |                              |             |   |                                 |              |   |                                      |             
|Balance at December 31, 2002                                                                                                  |  | Ps            | 300   |          | Ps                           | 5,371,086   |   |                                 | Ps 4,852,713 |   |                                      | (Ps1,291,751 | )                             |  | Ps     |                   | (Ps8,860,269 | ) |                   | Ps 72,079   |   |                            | Ps | 2      |   |  | Ps 72,081   |  
|Changes in 2003:                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Increases in variable capital stock                                                                                           |  |               |       |          |                              | 1,117,571   |   |                                 | 102,414      |   |                                      |              |                               |  |         |                   |              |   |                   | 1,219,985   |   |                            |    |        |   |  | 1,219,985   |  
|Decrease in capital stock applied against accumulated deficit from restatement and accumulated losses as of December 31,
2003 |  |               |       |          |                              | (5,307,611  | ) |                                 | (4,844,409   | ) |                                      | 1,291,751    |                               |  |         |                   | 8,860,269    |   |                   |            |   |                            |    |       |   |  |            |  
|Net income                                                                                                                    |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   | 992,219      |   |                   | 992,219     |   |                            |    |        |   |  | 992,219     |  
|Gain from restatement                                                                                                         |  |               |      |          |                              |            |   |                                 |             |   |                                      | 385,845      |                               |  |         |                   |             |   |                   | 385,845     |   |                            |    |       |   |  | 385,845     |  
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Comprehensive income                                                                                                          |  |               |      |          |                              |            |   |                                 |             |   |                                      | 385,845      |                               |  |        |                   | 992,219      |   |                   | 1,378,064   |   |                            |    |       |   |  | 1,378,064   |  
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Balance at December 31, 2003                                                                                                  |  |               | 300   |          |                              | 1,181,046   |   |                                 | 110,718      |   |                                      | 385,845      |                               |  |        |                   | 992,219      |   |                   | 2,670,128   |   |                            |    | 2      |   |  | 2,670,130   |  
|Changes in 2004:                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Net loss                                                                                                                      |  |               |      |          |                              |            |   |                                 |             |   |                                      |             |                               |  |         |                   | (87,166      | ) |                   | (87,166     | ) |                            |    |       |   |  | (87,166     | )
|Deficit from restatement                                                                                                      |  |               |      |          |                              |            |   |                                 |             |   |                                      | (33,571      | )                             |  |         |                   |             |   |                   | (33,571     | ) |                            |    |       |   |  | (33,571     | )
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Comprehensive loss                                                                                                            |  |               |      |          |                              |            |   |                                 |             |   |                                      | (33,571      | )                             |  |        |                   | (87,166      | ) |                   | (120,737    | ) |                            |    |       |   |  | (120,737    | )
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Balance at December 31, 2004                                                                                                  |  |               | 300   |          |                              | 1,181,046   |   |                                 | 110,718      |   |                                      | 352,274      |                               |  |        |                   | 905,053      |   |                   | 2,549,391   |   |                            |    | 2      |   |  | 2,549,393   |  
|Changes in 2005:                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Net income                                                                                                                    |  |               |      |          |                              |            |   |                                 |             |   |                                      |             |                               |  |         |                   | 48,388       |   |                   | 48,388      |   |                            |    | (205   | ) |  | 48,183      |  
|Additional minimum pension liability                                                                                          |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  | 2,741   |                   |              |   |                   | 2,741       |   |                            |    |        |   |  | 2,741       |  
|Deficit from restatement                                                                                                      |  |               |      |          |                              |            |   |                                 |             |   |                                      | (242,030     | )                             |  |        |                   |             |   |                   | (242,030    | ) |                            |    | (348   | ) |  | (242,378    | )
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Comprehensive loss                                                                                                            |  |               |      |          |                              |            |   |                                 |             |   |                                      | (242,030     | )                             |  | 2,741   |                   | 48,388       |   |                   | (190,901    | ) |                            |    | (553   | ) |  | (191,454    | )
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  
|Balance at December 31, 2005                                                                                                  |  |               | Ps300 |          |                              | Ps1,181,046 |   |                                 | Ps 110,718   |   |                                      | Ps 110,244   |                               |  | Ps2,741 |                   | Ps 953,441   |   |                   | Ps2,358,490 |   |                            |    | (Ps551 | ) |  | Ps2,357,939 |  
|                                                                                                                              |  |               |       |          |                              |             |   |                                 |              |   |                                      |              |                               |  |         |                   |              |   |                   |             |   |                            |    |        |   |  |             |  

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



F-5



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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, 2003, 2004 AND 2005

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2005)



|                                                                                                    |  |            |   |  |            |   |  |            |  
|--------------------------------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                                                                    |  | 2003       |   |  | 2004       |   |  | 2005       |  
|OPERATING ACTIVITIES:                                                                               |  |            |   |  |            |   |  |            |  
|Net income (loss)                                                                                   |  | Ps 992,219 |   |  | (Ps87,166  | ) |  | Ps 48,388  |  
|Adjustments to reconcile net income (loss) to resources (used in) provided by operating activities: |  |            |   |  |            |   |  |            |  
|Special item (Note 17)                                                                              |  | (1,638,815 | ) |  |           |   |  |           |  
|Cost of labor obligations                                                                           |  | 10,749     |   |  | 10,772     |   |  | 13,852     |  
|Amortization of capitalized expenses from issuance of senior notes                                  |  | 140,866    |   |  | 26,750     |   |  | 27,098     |  
|Depreciation and amortization                                                                       |  | 966,820    |   |  | 944,320    |   |  | 941,083    |  
|                                                                                                    |  |            |   |  |            |   |  |            |  
|                                                                                                    |  | 471,839    |   |  | 894,676    |   |  | 1,030,421  |  
|Changes in working capital:                                                                         |  |            |   |  |            |   |  |            |  
|Trade receivables, net                                                                              |  | 48,812     |   |  | 138,628    |   |  | 19,115     |  
|Due from affiliates and other related parties                                                       |  | 106,211    |   |  | (43,830    | ) |  | (81,085    | )
|Recoverable taxes and other receivables                                                             |  | (9,076     | ) |  | 2,609      |   |  | 1,987      |  
|Prepaid expenses                                                                                    |  | 4,673      |   |  | (3,451     | ) |  | (14,222    | )
|Accounts payable to Telmex and other carriers                                                       |  | (259,106   | ) |  | (97,531    | ) |  | 159,792    |  
|Due to affiliates and other related parties                                                         |  | 45,333     |   |  | 122,522    |   |  | 25,824     |  
|Intangible asset and other current assets                                                           |  |           |   |  |           |   |  | (21,422    | )
|Other accounts payable and expenses accrued                                                         |  | 270,282    |   |  | (67,007    | ) |  | (102,470   | )
|                                                                                                    |  |            |   |  |            |   |  |            |  
|Resources provided by operating activities                                                          |  | 678,968    |   |  | 946,616    |   |  | 1,017,940  |  
|                                                                                                    |  |            |   |  |            |   |  |            |  
|INVESTING ACTIVITIES:                                                                               |  |            |   |  |            |   |  |            |  
|Purchase of property and equipment                                                                  |  | (256,655   | ) |  | (383,683   | ) |  | (298,467   | )
|Deferred charges                                                                                    |  | (11,305    | ) |  | (30,054    | ) |  | (13,512    | )
|                                                                                                    |  |            |   |  |            |   |  |            |  
|Resources used in investing activities                                                              |  | (267,960   | ) |  | (413,737   | ) |  | (311,979   | )
|                                                                                                    |  |            |   |  |            |   |  |            |  
|FINANCING ACTIVITIES:                                                                               |  |            |   |  |            |   |  |            |  
|Capital contributions                                                                               |  | 1,219,985  |   |  |           |   |  |           |  
|Decrease of senior notes                                                                            |  | (224,316   | ) |  | (248,591   | ) |  | (452,113   | )
|Notes payable and capital leases, net                                                               |  | (1,135,587 | ) |  | (75,887    | ) |  | 11,573     |  
|                                                                                                    |  |            |   |  |            |   |  |            |  
|Resources provided by (used in) financing activities                                                |  | (139,918   | ) |  | (324,478   | ) |  | (440,540   | )
|                                                                                                    |  |            |   |  |            |   |  |            |  
|Increase in cash and cash equivalents                                                               |  | 271,090    |   |  | 208,401    |   |  | 265,421    |  
|Cash and cash equivalents, beginning of period                                                      |  | 175,474    |   |  | 446,564    |   |  | 654,965    |  
|                                                                                                    |  |            |   |  |            |   |  |            |  
|Cash and cash equivalents, end of period                                                            |  | Ps 446,564 |   |  | Ps 654,965 |   |  | Ps 920,386 |  
|                                                                                                    |  |            |   |  |            |   |  |            |  

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



F-6



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##### Table of Contents

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AT DECEMBER 31, 2004 AND 2005

(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2005)



|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, 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. Alestra did not make any
payments to the Ministry of Communications in relation to this concession. 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 200 cities as of December 31, 2005.

On May 30, 2000, the Ministry of Communications amended Alestras telecommunication 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.

On November 17, 2005 SBC Communications Inc. (SBC), completed the acquisition of AT&T Corp. (the AT&T Acquisition),
forming the New AT&T.

As a result of the AT&T Acquisition, on November 30, 2005, Alestra and its shareholders
amended their Second Amended and Restated Joint Venture Agreement (the Joint Venture Agreement) to modify corporate governance and certain other provisions. Alestra also amended the Amended and Restated Service Mark License Agreement
with AT&T Corp. (the Service Mark



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License Agreement), the AT&T Global Network Cooperation Agreement between AT&T Corp. and us (the AGN Agreement) and its bylaws.
Pursuant to the amendments to the Service Mark License Agreement Alestra entered into in connection with the AT&T Acquisition, Alestra is permitted to use the AT&T brand name until November 17, 2008 and to use the phrase AT&T Global
Services (AGN Services) for the limited purpose of providing AT&T Global Services within Mexico for the term of the AGN Agreement; provided that Alestra meets certain conditions. During this time, Alestra has an initial 18 month period (the
Initial Transition Period) in which Alestra covenants to develop, acquire, license or position new service mark for its services. At the end of the Initial Transition Period, in specified circumstances, and if Alestra is in compliance
with these requirements, Alestra has an additional 18 month period (the Extended Transition Period) where Alestra has limited use of the AT&T service mark. After 24 months of the AT&T Acquisition, Alestra may only use the
AT&T service mark together with its new service mark, and may only use it for reference purposes and always with the prior approval from the New AT&T. In connection with the provision the AGN Services, Alestra is allowed a limited use of the
phrase AT&T Global Services on a nonexclusive basis until June 2010. The license agreement contains provisions allowing the New AT&T to terminate the license agreement in its sole discretion upon certain changes in
Alestra ́s ownership, if Alestra fails to abide by certain quality control standards, or if Alestra misuses the AT&T brand and in certain other circumstances.



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

During November 2003, the
Company successfully concluded the restructuring of its Old Senior Notes. As a result of the debt restructuring, the Company extinguished, 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 issued. As a consequence, the Company issued Ps3,712,797 (US$304 million) of new senior notes bearing an interest of 8% due in 2010 (the New Senior
Notes) in exchange of Ps3,487,704 (US$287 million) of the Old Senior Notes and paid Ps1,336,751 (US$110 million) as a cash tender offer to extinguished Ps2,430,455 (US$200 million) of the Old Senior Notes.

In addition, the Company paid Ps182,874,090 (US$16,401,848) of accrued interest to the remaining noteholders of the Old Senior Notes, representing
14.5.%, who did not accept the terms of the Companys debt restructuring.



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|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 20.

Alestra has reclassified certain amounts in prior-period financial statements to conform to the current periods presentation.

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

The consolidated financial statements include those of Alestra and its subsidiary, Servicios Alestra, of which Alestra holds 98.00% 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 dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.

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 for the year ended December 31, 2005, 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, 2005 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, 2005 |  
|2003 |  | 3.98                          | % |  | 12.5                                                              | %
|2004 |  | 5.19                          | % |  | 8.52                                                              | %
|2005 |  | 3.33                          | % |  | 3.33                                                              | %



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



| |  |  | Restatement of non-monetary assets:
| | - |  | -----------------------------------

As set forth in note
3-d, property and equipment, net, is restated using NCPI factors, except for equipment of non-Mexican origin which 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.



| |  |  | Restatement of stockholders equity:
| | - |  | ------------------------------------

The
restatement of capital stock, contributed capital and accumulated (deficit) income 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. (Deficit) gain from restatement of capital represents the difference between the cost value of equipment of non-Mexican origin as indicated in the above paragraph and the
restated cost value using the NCPI. In 2003, the Companys stockholders decided to apply the accumulated deficit and the accumulated deficit from restatement against the restatement of capital stock at December 31, 2002 (See Note 12).



| |  |  | 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.



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d. Property and equipment, net (Note 7)

Property 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), property and equipment and the related accumulated depreciation are stated at cost and restated by applying factors derived from the NCPI, except for Telephone network 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 application of the Fifth Amendment resulted in a reduction of Ps33,571 and Ps242,030 in the net book value of non-Mexican origin equipment as of
December 31, 2004 and 2005, respectively, which was recorded as a deficit in the restatement of capital (See Note 12).

Replacements,
maintenance and repairs which do not improve or extend the life of the respective asset are expensed as incurred.

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       

e. Deferred charges, net

Deferred charges 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 depreciated using the straight-line method over the
estimated useful life of the property or the life of the lease, whichever is shorter.

Internal use software costs are amortized over three
years.



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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 property and 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 2005 and 2004, 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 accordingly, the Company has not recognized any impairment loss.

On January 1, 2004 the Company adopted the provisions of Bulletin C-15 Impairment of Long-Lived Assets and Assets to be Disposed of issued by the Mexican Institute of Public Accountants. This Statement contains general standards covering the identification, determination and, where appropriate, recording of losses due to impairment or reduction in value of long-lived
assets, tangible or intangible, including goodwill. Due to the fact that the Company had been applying the concepts of this Bulletin before it became effective, its adoption did not have any effect.

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, these latter were effective until August 2004.



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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 2003 and 2004, certain incoming international telephone traffic and in calls attempted
allocated to the Company pursuant to the proportional return system was processed by Telmex and other long distance carriers.

Until July
2004, 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.

In August 2004, the
Cofetel issued new telecommunication rules in order to support competition, replacing the old system, which was effective since 1996. The new rules eliminate the proportional return and allow each carrier to negotiate the settlements rates within
free market.

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 until August 11, 2004, 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 with each foreign operator and are recorded by Cofetel.

Telmex, MCI International and AT&T Corp. reached an agreement to reduce the settlement rates between Mexico and the United States for the period from March 1 to December 31, 2003 and for the year 2004. Under this agreement, a
differentiated settlement rate scheme was applied, depending on the city of termination in Mexico and the rates were US$0.055, US$0.0850 and US$0.1175 per minute. Mexican carriers paid US$0.055 per minute for traffic terminated in the United States.
Cofetel authorized the rates that were used by the Company during 2003 and 2004.

As previously mentioned, the new rules issued by Cofetel
in August 2004 eliminated the proportional return system. Effective January 1, 2005, tariffs are directly negotiated with AT&T Corp.

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

Revenues derived from date, internet and local services are billed monthly and are recognized when services are provided.



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##### Table of Contents

i. Transactions in foreign currency and exchange differences (Note 18)

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 16)

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 differences between accounting and tax values of assets and liabilities. Valuation allowances are provided if based upon the weight of
available evidence it is more likely than not that some or all the deferred tax assets will not be realizable.

l. Risk
concentrations

Financial instruments (see Note 19) which potentially subject the Company to significant concentrations of credit risk
consist primarily of cash and cash equivalents, trade accounts receivable and receivables from domestic operators.

The Company maintains
its cash and cash equivalents with various major financial institutions, including BBVA Bancomer (a related party), and are 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 91.8%,
83.6% and 72.5% of the Companys income related to international long distance services for the years ended December 31, 2003, 2004 and 2005, respectively, were generated from telephone traffic exchanged between AT&T Corp. (a related
party) and the Company.

In order to service its customers, the Company 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 the Company must pay Telmex are filed with Cofetel. For the years ended December 31, 2003, 2004 and 2005, interconnection
costs amounted



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##### Table of Contents

to Ps976,104 (including charges related to special projects by Ps93,837), Ps856,210 and Ps697,201, respectively.

m. Pension and seniority premiums (Note 11)

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.

Bulletin D-3 was revised and became effective in 2004 with respect to post-retirement benefits, while the provisions related to valuation and disclosure requirements of severance payments paid to employees upon
dismissal were not effective until January 1, 2005. Bulletin D-3s transitional provisions allow companies to either recognize a cumulative effect of the entire unrecognized severance liability into earnings upon adoption or amortize the
initial unrecognized liability over the expected employee relationship period. The Company has opted to amortize the initial liability, which was actuarially determined to be Ps 22,846, over the expected employee relationship period (12.5 years) and
for the year ended December 31, 2005, has recognized a charge to earnings amounting to totaling Ps 2,058.

n. Comprehensive income
(loss)

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 loss or income.

o. Derivative financial instruments

The Group uses derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in foreign exchange rates. Under Bulletin
C-2, which was effective through December 31, 2004, derivative financial instruments that qualify for hedge accounting are recorded in the balance sheet, on the same basis of the hedged assets or liabilities, and changes in value are recorded
in each period in the income statement. Derivative financial instruments that do not qualify for hedge accounting are recorded in the balance sheet at their fair value and changes in the fair value are recorded in each period in the income
statement.

In February 2004, the MIPA issued Bulletin C-10, Derivative Financial Instruments and Hedge Operations, which
become effective on January 1, 2005. Bulletin C-10 establishes accounting and reporting standards requiring that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet
as either an asset or a liability measured at its fair value. The effect of adopting this Bulletin did not have any material effect on Alestras financial position or result of operations.



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##### Table of Contents

p. New accounting pronouncements

Beginning June 1, 2004, the Mexican Financial Reporting Standards Board - (CINIF, for its initials in Spanish), assumed the responsibility for
setting accounting and reporting standards in Mexico. In compliance with this responsibility and after due exposure in 2004 and 2005, the CINIF issued several Financial Reporting Standards - (NIFs) that will become effective on January 1, 2006.

The main objective of the NIFs is to achieve the maximium possible harmonization and convergence Mexican accounting and reporting
standards and regulation practices with International Financial Reporting Standards (IFRS).

The full hierachy of NIFs, in effect beginning
January 1, 2006, is as follows:



| |  |  | NIFs and Interpretations of NIFs issued by the CINIF.
| | - |  | -----------------------------------------------------



| |  |  | Bulletins issued by the Accounting Principles Board of the Mexican Institute of Public Accountants (IMCP) that have not been modified, replaced or repealed by the new NIFs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The supplementary IFRS that are applicable.
| | - |  | -------------------------------------------

The
circulars issued by the Accounting Principles Board will continue to have the status of recommendations and will be part of the NIFs until such time as they are repealed or superseded by NIFs.

Following is a list of the NIFSs issued to date. Being mainly of a general nature, they are not expected to have a significant effect on financial
reporting:

NIF A-1 Structure of Financial Reporting Standards

NIF A-2 Basic postulates

NIF A-3 User needs and objectives of financial statements

NIF A-4
Qualitative features of financial statements

NIF A-5 Basic elements of financial statements

NIF A-6 Recognition and valuation

NIF A-7 Presentation and disclosure

NIF A-8 Supplementary

NIF B-1 Accounting changes and correction of errors



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

As of December 31,
2004 and 2005, trade receivables, net consist of the following:



|                                      |  |      |         |   |      |    |          |  
|------------------------------------- |  | ---- | ------- | - | ---- | -- | -------- | -
|                                      |  | 2004 |         |   | 2005 |   
|Trade receivables                     |  | Ps   | 440,797 |   |      | Ps | 457,002  |  
|Less: allowance for doubtful accounts |  |      | (67,783 | ) |      |    | (103,103 | )
|                                      |  |      |         |   |      |    |          |  
|                                      |  | Ps   | 373,014 |   |      | Ps | 353,899  |  
|                                      |  |      |         |   |      |    |          |  



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##### Table of Contents

For the years ended December 31, 2003, 2004 and 2005, the allowance for doubtful accounts is
analyzed as follows:



|                                                             |  |            |   |  |            |   |  |            |  
|------------------------------------------------------------ |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                             |  | 2003       |   |  | 2004       |   |  | 2005       |  
|Balance at beginning of year                                 |  | (Ps544,854 | ) |  | (Ps258,974 | ) |  | (Ps67,783  | )
|Provision charges                                            |  | (37,348    | ) |  | (32,662    | ) |  | (20,825    | )
|Write off of receivables (Nominal value)                     |  | 316,645    |   |  | 212,909    |   |  | (16,681    | )
|Restatement effect in constant pesos as of December 31, 2005 |  | 6,583      |   |  | 10,944     |   |  | 2,186      |  
|                                                             |  |            |   |  |            |   |  |            |  
|Balance at end of year                                       |  | (Ps258,974 | ) |  | (Ps67,783  | ) |  | (Ps103,103 | )
|                                                             |  |            |   |  |            |   |  |            |  

The Company accounts for an allowance for doubtful accounts based on forecast of the
customers accounts receivable that will become uncollectible (residential customers 241 days past due and business customers 271 days past due).



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

As of December 31, 2004 and 2005, balances due from and due to affiliates and others related parties were as follows:



|                                |  |      |         |      |    |        
|------------------------------- |  | ---- | ------- | ---- | -- | -------
|                                |  | 2004 |         | 2005
|Due from:                       |  |      |         |      |    |        
|AT&T Corporation and affiliates |  | Ps   | 123,894 |      | Ps | 183,399
|BBVA Bancomer and affiliates    |  |      | 4,842   |      |    | 3,896  
|Alfa and affiliates             |  |      | 13,895  |      |    | 36,421 
|                                |  |      |         |      |    |        
|                                |  | Ps   | 142,631 |      | Ps | 223,716
|                                |  |      |         |      |    |        
|Due to:                         |  |      |         |      |    |        
|AT&T Corporation and affiliates |  | Ps   | 122,844 |      | Ps | 113,680
|                                |  |      |         |      |    |        
|Short-term accounts payables    |  | Ps   | 122,844 |      | Ps | 113,680
|                                |  |      |         |      |    |        
|AT&T Corporation and affiliates |  | Ps   | 59,879  |      | Ps | 74,369 
|Onexa                           |  |      | 86,986  |      |    | 107,484
|                                |  |      |         |      |    |        
|Long-term accounts payables (1) |  | Ps   | 146,865 |      | Ps | 181,853
|                                |  |      |         |      |    |        



|(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 until 2007,
in order to increase liquidity and as part of the financial restructuring process.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

During 2003, 2004 and 2005, the main transactions carried out with affiliates and other related parties
were as follows:



|                                                   |  |      |           |      |    |           |  |    |        
|-------------------------------------------------- |  | ---- | --------- | ---- | -- | --------- |  | -- | -------
|                                                   |  | 2003 |           | 2004 |    | 2005     
|International long distance settlement revenue (a) |  | Ps   | 2,996,366 |      | Ps | 1,909,804 |  | Ps | 854,469
|International long distance settlement cost (a)    |  |      | 1,888,518 |      |    | 1,156,552 |  |    | 264,249
|Administrative services received (b)               |  |      | 41,616    |      |    | 65,337    |  |    | 59,340 
|Internet services costs (c)                        |  |      | 3,819     |      |    | 55,228    |  |    | 53,981 
|Interest income (d)                                |  |      | 2,530     |      |    | 4,199     |  |    | 3,706  
|Trade and service marks license fee (e)            |  |      | 35,904    |      |    | 35,904    |  |    | 32,133 
|Technical services expenses (f)                    |  |      | 4,904     |      |    |          |  |    | 485    
|Rent expense (g)                                   |  |      | 3,452     |      |    | 4,260     |  |    | 239    
|Other income (h)                                   |  |      | 103,300   |      |    |          |  |    |       



|(a) | These amounts represent mainly the income and expenses derived from the liquidation of international traffic between AT&T Corp. 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 Corp. During the year ended December 31, 2003, the Company wrote off
approximately Ps29,109 (US$2.5 million) on the conclusion of agreements entered into with AT&T Corp. in relation to a the dispute about the billing and costumer care platform provided by AT&T Corp. and in respect of the successful conclusion
of the Companys debt restructuring.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(e) | The Company entered into a trade and service mark license agreement with AT&T Corp., which allows the Company to use certain trade and service marks of AT&T Corp. in
exchange for a minimum payment of Ps35,904 (US $3.0 million). Under the Amended and Restated Service Mark License Agreement commented in Note 1, AT&T Corp. has agreed to waive any royalty fee payments under the license agreement during such
period, including the 2005 royalty payment if Alestra invests the funds in marketing and developing its own brand during the Initial Transition Period.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) | AT&T Corp. 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(h) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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

Prepaid expenses
and other assets as of December 31, 2004 and 2005, consist primarily of prepaid expenses for systems maintenance, insurances, bonds and advertising time.



|7. | PROPERTY AND EQUIPMENT, NET
|-- | ---------------------------

As of
December 31, 2004 and 2005, property and equipment, net, consists of the following:



|                                                |  |      |            |   |      |    |            |  
|----------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                                |  | 2004 |            |   | 2005 |   
|Buildings                                       |  | Ps   | 111,839    |   |      | Ps | 111,839    |  
|Furniture, fixtures and other                   |  |      | 252,921    |   |      |    | 250,446    |  
|Hardware equipment                              |  |      | 395,555    |   |      |    | 366,923    |  
|Transportation equipment                        |  |      | 23,386     |   |      |    | 22,760     |  
|Telephone network                               |  |      | 7,334,628  |   |      |    | 7,258,823  |  
|Billing and customer care software              |  |      | 495,656    |   |      |    | 485,297    |  
|                                                |  |      |            |   |      |    |            |  
|                                                |  |      | 8,613,985  |   |      |    | 8,496,088  |  
|Less: accumulated depreciation and amortization |  |      | (3,124,356 | ) |      |    | (3,598,620 | )
|                                                |  |      |            |   |      |    |            |  
|                                                |  |      | 5,489,629  |   |      |    | 4,897,468  |  
|                                                |  |      |            |   |      |    |            |  
|Land                                            |  |      | 152,514    |   |      |    | 152,514    |  
|Constructions in progress                       |  |      | 191,331    |   |      |    | 190,376    |  
|                                                |  |      |            |   |      |    |            |  
|Total                                           |  | Ps   | 5,833,474  |   |      | Ps | 5,240,358  |  
|                                                |  |      |            |   |      |    |            |  

On December 2004, the Company wrote-off billing and customer care software amounting to Ps703,525
that was fully depreciated.

Amortization of billing and customer care software charged to income was Ps96,091, Ps72,020 and Ps70,115 for
the years ended December 31, 2003, 2004 and 2005, respectively.

Depreciation charged to income, not including amortization of the
billing and customer care software mentioned above was Ps565,017, Ps584,857 and Ps581,831 for the years ended December 31, 2003, 2004 and 2005, respectively.

Property and equipment as of December 31, 2005 includes net capitalized financing costs of Ps111,019 (Ps116,888 in 2004). Constructions in progress as of December 31, 2004 and 2005 consists mainly of
investments to connect the end customer to Alestras network.

As of December 31, 2004 and 2005, property and equipment include assets
acquired under capital leases amounted to Ps198,524 and Ps208,688, respectively.



F-19



---

##### Table of Contents

|8. | DEFERRED CHARGES, NET
|-- | ---------------------

As of
December 31, 2004 and 2005, deferred charges consist of the following:



|                                                               |  |      |            |   |      |    |            |  
|-------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                                               |  | 2004 |            |   | 2005 |   
|Pre-operating expenses (a)                                     |  | Ps   | 2,207,222  |   |      | Ps | 2,207,222  |  
|Capitalized expenses derived from issuance of senior notes (b) |  |      | 187,897    |   |      |    | 187,897    |  
|Frequency bands (c)                                            |  |      | 161,507    |   |      |    | 161,507    |  
|Leasehold improvements                                         |  |      | 133,166    |   |      |    | 138,627    |  
|Software (d)                                                   |  |      | 518,956    |   |      |    | 550,595    |  
|Other assets                                                   |  |      | 124,816    |   |      |    | 127,951    |  
|                                                               |  |      |            |   |      |    |            |  
|                                                               |  |      | 3,333,564  |   |      |    | 3,373,799  |  
|Less: accumulated amortization                                 |  |      | (2,414,399 | ) |      |    | (2,730,030 | )
|                                                               |  |      |            |   |      |    |            |  
|Total deferred charges                                         |  | Ps   | 919,165    |   |      | Ps | 643,769    |  
|                                                               |  |      |            |   |      |    |            |  

Amortization charged to income was Ps305,711, Ps320,805 and Ps316,235 for the years ended,
December 31, 2003, 2004 and 2005, respectively.

a. Pre-operating expenses consist of the following:



|                             |  |               |          
|---------------------------- |  | ------------- | ---------
|                             |  | 2004 and 2005
|Wages, salaries and benefits |  | Ps            | 1,077,470
|Advertising and promotion    |  |               | 640,278  
|Professional fees            |  |               | 94,000   
|Other                        |  |               | 395,474  
|                             |  |               |          
|                             |  | Ps            | 2,207,222
|                             |  |               |          

b. Debt issuance costs consists of the following:



|                               |  |      |         |   |      |    |         |  
|------------------------------ |  | ---- | ------- | - | ---- | -- | ------- | -
|                               |  | 2004 |         |   | 2005 |   
|Fees and expenses to agents:   |  |      |         |   |      |    |         |  
|Old Senior Notes (1)           |  | Ps   | 41,404  |   |      | Ps | 41,404  |  
|New Senior Notes (2)           |  |      | 146,493 |   |      |    | 146,493 |  
|                               |  |      |         |   |      |    |         |  
|                               |  |      | 187,897 |   |      |    | 187,897 |  
|Less: accumulated amortization |  |      | (51,812 | ) |      |    | (79,280 | )
|                               |  |      |         |   |      |    |         |  
|Total capitalized expenses     |  | Ps   | 136,085 |   |      | Ps | 108,617 |  
|                               |  |      |         |   |      |    |         |  



|(1) | During 2003, the Company expensed as a Special Item Ps119,761 (see Note 17) corresponding to the proportional capitalized debt issuance costs of the Old Senior Notes
with respect the noteholders that accepted to exchange their Old Senior Notes for the New Senior Notes. The remaining Ps18,737 (net of Ps22,667 accumulated amortization at December 31, 2003) 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------



F-20



---

##### Table of Contents

Amortization charged to income for the years ended December 31,2003, 2004 and 2005 amounted to
Ps1,991, Ps27,074 and Ps27,468, respectively.

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 bands amortization expense for the years ended
December 31, 2003, 2004 and 2005 amounted to Ps8,186 for each year.

d. Software

Software costs consist of purchased software licenses for internal. Software licenses amortization expense for the years ended December 31, 2003,
2004 and 2005, amounted to Ps67,307, Ps50,453 and Ps28,520, respectively.



|9. | NOTES PAYABLE AND CAPITAL LEASES
|-- | --------------------------------

As of
December 31, 2004 and 2005, notes payable and capital leases consist of the following:



|                                                                                                                                                                                                                                                                                               |  |      |           |   |      |    |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -- | ------- | -
|                                                                                                                                                                                                                                                                                               |  | 2004 |           |   | 2005 |   
|Notes payable to Hewlett Packard de México, S. A. de C. V. of US$19.2 million at a 6.90% annual interest rate for the supply of
equipment for telecommunications projects with a maturity date in 2007. At December 31, 2005, the amount payable was US$3.0 million (US$ 5.5 million in 2004). |  | Ps   | 64,606    |   |      | Ps | 31,975  |  
|                                                                                                                                                                                                                                                                                               |  |     
|Capital lease contracts with The Capita Corporation de México, S.A. de C. V., for US$7.0 and US$2.8 million for telecommunications
equipment. At December 31, 2004 and 2005 the amounts due were US$164 thousands and US$2.3 million. (1)                                                      |  |      | 1,921     |   |      |    | 24,913  |  
|Capital lease contract with CSI Leasing México, S. de R.L., for US$2.1 million for telecommunications equipment. At December 31,
2005 the amount due was US$2.0 millions. (2)                                                                                                                  |  |      |          |   |      |    | 21,212  |  
|                                                                                                                                                                                                                                                                                               |  |      |           |   |      |    |         |  
|                                                                                                                                                                                                                                                                                               |  |      | 66,527    |   |      |    | 78,100  |  
|Current portion of notes payable and capital leases                                                                                                                                                                                                                                            |  |      | (31,778   | ) |      |    | (46,689 | )
|                                                                                                                                                                                                                                                                                               |  |      |           |   |      |    |         |  
|Long term debt                                                                                                                                                                                                                                                                                 |  |      | Ps 34,749 |   |      | Ps | 31,411  |  
|                                                                                                                                                                                                                                                                                               |  |      |           |   |      |    |         |  



F-21



---

##### Table of Contents

On March 22, 2004 the remaining balance of the notes payable to Hewlett Packard de México, S.
A. de C. V. was restructured to lower the interest rate from 10.08% to 6.9% and extend the maturity date from January 30, 2005, to January 30, 2007.



|(1) | The long term capital lease contract entered into to acquire telecommunications equipment which is denominated in US dollars amounted to Ps24,913 (US$2,304) as of December 31,
2005 and bears interest at a 8.82%. This capital lease is payable in 36 monthly payments of Ps 776 (US$77) each, maturing in April and May 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The long term capital lease contract entered into to acquire telecommunications and computer equipment which is denominated in US dollars amounted to Ps21,212 (US$2,096) as of
December 31, 2005 and bears interest at a 7.9%. This capital lease is payable in 36 monthly payments of Ps621 (US$58) each, maturing in October 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | SENIOR NOTES
|--- | ------------

At December 31, 2004 and 2005,
the senior notes consist of the following:



|                                                          |  |      |           |      |    |           |  
|--------------------------------------------------------- |  | ---- | --------- | ---- | -- | --------- | -
|                                                          |  | 2004 |           | 2005 |   
|A) New Senior Notes                                       |  | Ps   | 3,427,034 |      | Ps | 3,193,353 |  
|B) Old Senior Notes                                       |  |      | 934,809   |      |    | 888,844   |  
|Restatement effect in constant pesos of December 31, 2005 |  |      | 145,369   |      |    |          |  
|                                                          |  |      |           |      |    |           |  
|                                                          |  |      | 4,507,212 |      |    | 4,082,197 |  
|Current portion of Senior Notes                           |  |      |          |      |    | (527,555  | )
|                                                          |  |      |           |      |    |           |  
|Long-term Senior Notes                                    |  | Ps   | 4,507,212 |      | Ps | 3,554,642 |  
|                                                          |  |      |           |      |    |           |  



|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 terms of the New Senior Notes issued by the Company are:



|a. | 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. The
maturity date is June 30, 2010 with partial amortizations as described below.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-22



---

##### Table of Contents

|                       |  |                                                |   |  |                                                  |  
|---------------------- |  | ---------------------------------------------- | - |  | ------------------------------------------------ | -
|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.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 with annual rate of 12.125% in an aggregate principal amount of Ps430,689 (US$37 million) and ten year
notes maturing on May 15, 2009 with annual rates of 12.625% in an aggregate principal amount of Ps508,015 (US$46 million). In November 2003, the Company paid to the noteholders that did not accept the financial restructuring, past due interest
from May 2002 through November 2003.

In the Companys 2003 exchange offers and cash tender offers for the Old Senior Notes, the
Company solicited consents for the removal of substantially all of the affirmative and restrictive covenants for those notes.



|11. | ESTIMATED LIABILITIES FOR SENIORITY PREMIUMS, PENSION PLANS AND POST-RETIREMENT BENEFITS
|--- | ----------------------------------------------------------------------------------------

The valuation of the liabilities for employee retirement plans both formal and informal, covers all employees and is based primarily on their years of
service, their present age and their remuneration at date of retirement.

Pensions and seniority premiums

The components of net seniority premium and pension plan cost, using December 31 as a measurement date, consist of the following:



|                                          |  |      |        |   |      |    |        |      |  |    |       
|----------------------------------------- |  | ---- | ------ | - | ---- | -- | ------ | ---- |  | -- | ------
|                                          |  | 2003 |        |   | 2004 |    |        | 2005
|Services cost                             |  | Ps   | 7,350  |   |      | Ps | 7,406  |      |  | Ps | 8,483 
|Interest cost                             |  |      | 2,864  |   |      |    | 2,930  |      |  |    | 3,789 
|Amortization of net transition obligation |  |      | 582    |   |      |    | 579    |      |  |    | 579   
|Amortization of net (gain) loss           |  |      | (47    | ) |      |    | (143   | )    |  |    | 124   
|                                          |  |      |        |   |      |    |        |      |  |    |       
|Net cost                                  |  | Ps   | 10,749 |   |      | Ps | 10,772 |      |  | Ps | 12,975
|                                          |  |      |        |   |      |    |        |      |  |    |       

Actuarial assumptions used in the calculation of benefit obligations, net seniority premium and
pension plan costs as of December 31 are:



|                                         |  |      |   |  |      |  
|---------------------------------------- |  | ---- | - |  | ---- | -
|                                         |  | 2004 |   |  | 2005 |  
|Weighted real discount rate              |  | 5.0  | % |  | 5.0  | %
|Rates of increase in compensation levels |  | 1.5  | % |  | 1.5  | %

The combined seniority premium and pension plan liability as of December 31 is as follows:



|                                                             |  |      |         |   |      |    |         |  
|------------------------------------------------------------ |  | ---- | ------- | - | ---- | -- | ------- | -
|                                                             |  | 2004 |         |   | 2005 |   
|Accumulated benefit obligation                               |  | Ps   | 60,539  |   |      | Ps | 74,391  |  
|                                                             |  |      |         |   |      |    |         |  
|                                                             |  |      |         |   |      |    |         |  
|Unfunded accumulated benefit obligation                      |  | Ps   | 60,539  |   |      | Ps | 74,391  |  
|                                                             |  |      |         |   |      |    |         |  
|                                                             |  |      |         |   |      |    |         |  
|Projected benefit obligation                                 |  | Ps   | 76,058  |   |      | Ps | 91,768  |  
|Items to be amortized over the following 19 years:           |  |      |         |   |      |    |         |  
|Unamortized transition obligation                            |  |      | (11,652 | ) |      |    | (11,073 | )
|Unamortized actuarial (gain) loss, net                       |  |      | 1,809   |   |      |    | (2,145  | )
|                                                             |  |      |         |   |      |    |         |  
|Unfunded accrued seniority premiums and pension cost         |  |      | 66,215  |   |      |    | 78,550  |  
|Additional liability                                         |  |      | 2,913   |   |      |    | 2,970   |  
|                                                             |  |      |         |   |      |    |         |  
|Estimated liability for seniority premiums and pension plans |  | Ps   | 69,128  |   |      | Ps | 81,520  |  
|                                                             |  |      |         |   |      |    |         |  

Post-retirement benefits

Effective January 1, 2005, the Company adopted the amendments to Bulletin D-3 which established an obligation to recognize a reserve for post-retirement benefits and to include the supplemental payments as a part of
the Companys other post-retirement benefits obligation.

The components of post- retirement benefits expense consist of the
following:



|                                          |  |      |       
|----------------------------------------- |  | ---- | ------
|                                          |  | 2005
|Services cost                             |  | Ps   | 3,295 
|Interest cost                             |  |      | 1,008 
|Amortization of net transition obligation |  |      | 1,918 
|Effect of reduction and extinguishment    |  |      | 4,858 
|                                          |  |      |       
|Net cost                                  |  | Ps   | 11,079
|                                          |  |      |       

The Company paid Ps9,563 from its reserves.

Actuarial assumptions used in the calculation of post retirement benefits obligations, as of December 31 are:



|                                         |  |      |  
|---------------------------------------- |  | ---- | -
|                                         |  | 2005 |  
|Weighted real discount rate              |  | 5.0  | %
|Rates of increase in compensation levels |  | 1.5  | %

The post-retirement benefits liability as of December 31, 2005 is as follows:



|                                                   |  |      |         |  
|-------------------------------------------------- |  | ---- | ------- | -
|                                                   |  | 2005 |        
|Accumulated benefit obligation                     |  | Ps   | 22,304  |  
|                                                   |  |      |         |  
|                                                   |  |      |         |  
|Unfunded accumulated benefit obligation            |  | Ps   | 22,304  |  
|                                                   |  |      |         |  
|                                                   |  |      |         |  
|Projected benefit obligation                       |  | Ps   | 23,767  |  
|Items to be amortized over the following 11 years: |  |      |         |  
|Unamortized transition obligation                  |  |      | (21,689 | )
|Unamortized actuarial (gain) loss                  |  |      | (561    | )
|                                                   |  |      |         |  
|Unfunded accrued post-retirement benefits          |  |      | 1,517   |  
|Additional liability                               |  |      | 20,787  |  
|                                                   |  |      |         |  
|Estimated liability for post-retirement benefits   |  | Ps   | 22,304  |  
|                                                   |  |      |         |  



F-23



---

##### Table of Contents

|12. | 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 ownership of each of the shareholders; as such 51% of such amount was contributed and subscribed by Onexa and the remaining 49% by AT&T Corp.

On December 1, 2003, the Companys stockholders resolved to (i) reclassify the balance as of December 31, 2002 of the restatement of
capital stock account into the variable portion of the capital stock in the amount of Ps4,844,409 and (ii) reduce the variable portion of the capital stock for Ps8,860,269 and Ps1,291,751 by reclassifying these amounts from the accumulated
deficit account and the accumulated deficit from restatement account, respectively. As a consequence, the nominal value of the shares was proportionally reduced according to the ownership interest of each of the shareholders, 51% on Onexa and 49% on
AT&T Corp. These transactions did not represent a contribution or payment to the equity holders.



F-24



---

##### Table of Contents

The capital stock of Alestra is variable with a fixed minimum of Ps300 and an unlimited maximum. As of
December 31, 2004 and 2005, the subscribed and paid-in capital stock at nominal value amounted to Ps1,181,346. 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, 2003, 2004 and 2005, consists of 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, 2004 the restated figures of stockholders equity were as follows:



|                           |  |               |              |             |    |                |  |    |             
|-------------------------- |  | ------------- | ------------ | ----------- | -- | -------------- |  | -- | ------------
|                           |  | Nominal Value |              | Restatement |    | Restated value
|Capital stock:             |  |               |              |             |    |                |  |    |             
|Fixed                      |  | Ps            | 300          |             | Ps | 39             |  | Ps | 339         
|Variable                   |  |               | 1,181,046    |             |    | 110,679        |  |    | 1,291,725   
|                           |  |               |              |             |    |                |  |    |             
|Total capital stock        |  |               | 1,181,346    |             |    | 110,718        |  |    | 1,292,064   
|                           |  |               |              |             |    |                |  |    |             
|Gain from restatement      |  |               |             |             |    | 352,274        |  |    | 352,274     
|Accumulated income         |  |               | 834,201      |             |    | 70,852         |  |    | 905,053     
|                           |  |               |              |             |    |                |  |    |             
|Total accumulated income   |  |               | 834,201      |             |    | 423,126        |  |    | 1,257,327   
|                           |  |               |              |             |    |                |  |    |             
|Majority interest          |  |               | 2,015,547    |             |    | 533,844        |  |    | 2,549,391   
|Minority interest          |  |               | 2            |             |    |               |  |    | 2           
|                           |  |               |              |             |    |                |  |    |             
|Total stockholders equity |  |               | Ps 2,015,549 |             |    | Ps 533,844     |  |    | Ps 2,549,393
|                           |  |               |              |             |    |                |  |    |             



F-25



---

##### Table of Contents

At December 31, 2005 the restated figures of stockholders equity were as follows:



|                                        |  |               |           |   |             |    |         |                |  |    |           |  
|--------------------------------------- |  | ------------- | --------- | - | ----------- | -- | ------- | -------------- |  | -- | --------- | -
|                                        |  | Nominal Value |           |   | Restatement |    |         | Restated value | 
|Capital stock:                          |  |               |           |   |             |    |         |                |  |    |           |  
|Fixed                                   |  | Ps            | 300       |   |             | Ps | 39      |                |  | Ps | 339       |  
|Variable                                |  |               | 1,181,046 |   |             |    | 110,679 |                |  |    | 1,291,725 |  
|                                        |  |               |           |   |             |    |         |                |  |    |           |  
|Total capital stock                     |  |               | 1,181,346 |   |             |    | 110,718 |                |  |    | 1,292,064 |  
|                                        |  |               |           |   |             |    |         |                |  |    |           |  
|Gain from restatement                   |  |               |          |   |             |    | 110,244 |                |  |    | 110,244   |  
|Effect on equity from labor obligations |  |               |           |   |             |    | 2,741   |                |  |    | 2,741     |  
|Accumulated income                      |  |               | 882,092   |   |             |    | 71,349  |                |  |    | 953,441   |  
|                                        |  |               |           |   |             |    |         |                |  |    |           |  
|Total accumulated income                |  |               | 882,092   |   |             |    | 184,334 |                |  |    | 1,066,426 |  
|                                        |  |               |           |   |             |    |         |                |  |    |           |  
|Majority interest                       |  |               | 2,063,438 |   |             |    | 295,052 |                |  |    | 2,358,490 |  
|Minority interest                       |  |               | (203      | ) |             |    | (348    | )              |  |    | (551      | )
|                                        |  |               |           |   |             |    |         |                |  |    |           |  
|Total stockholders equity              |  | Ps            | 2,063,235 |   |             | Ps | 294,704 |                |  | Ps | 2,357,939 |  
|                                        |  |               |           |   |             |    |         |                |  |    |           |  

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. In accordance with the General Law of Mercantile Organizations, the legal reserve must be increased annually by 5 % of annual net profits until it
reaches 20 % of the fully paid capital stock amount.

Dividends paid from retained earnings which have not previously been taxed are
subject to an income tax payable by the Company, which may be credited against the income tax payable by the Company in the year in which the dividends are paid and in the two following years.



|13. | CONTINGENCIES AND COMMITMENTS
|--- | -----------------------------

a. At
December 31, 2005 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, 2005, future minimum lease payments under no
cancelable operating leases with terms in excess of one year are as follows:



|                    |  |    |        
|------------------- |  | -- | -------
|2006                |  | Ps | 65,966 
|2007                |  |    | 66,143 
|2008                |  |    | 68,613 
|2009                |  |    | 70,647 
|2010 and thereafter |  |    | 302,565
|                    |  |    |        
|                    |  | Ps | 573,934
|                    |  |    |        

Rental expense was Ps75,112, Ps77,274 and Ps73,472 for the years ended December 31, 2003,
2004 and 2005, respectively.

b. As of December 31, 2004 and 2005, the Company obtained performance bonds for approximately Ps69,216
and Ps30,377 respectively, in favor of certain authorities and suppliers to guarantee the Companys compliance with certain obligations incurred.



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c. As of December 31, 2004 and 2005 the Company had outstanding commitments to acquire equipment and
other capital expenditures related with the construction of its telecommunications network of approximately US$11.0 million (Ps128,043) and US$10.0 million (Ps107,626) 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 different international liquidations tariffs. It is important to mention that since 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 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 recognize any charge.

e.
In September 2003, WRH Global Securities Pooled Trust, or WRH, commenced an action against Alestra, its equity holders and the indenture trustee of the indentures governing Alestras senior notes due 2006 and Alestras senior notes due
2009 in the United States District Court for the Southern District of New York. The complaint sought damages and to enjoin Alestra from consummating its exchange offers and consent solicitations. The Court denied WRHs motions and the exchange
offers and consent solicitations were consummated on November 17, 2003. Subsequently, in an oral ruling, the court granted its motion for partial summary judgment on WRHs claim that Alestras senior notes due 2006 and 2009 had been ipso
facto accelerated and dismissed WRHs cross-motion for partial summary judgment. In December 2003, WRH amended its complaint alleging, among other things, that it had elected to accelerate Alestras 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, Alestra, its equity holders and the indenture trustee of the indentures governing Alestras senior
notes due 2006 and 2009 moved to dismiss WRHs amended complaint. On February 23, 2006 the litigation was transferred to a new judge who issued an order on March 16, 2006 suggesting the possibility to WRH to file a second amended complaint on
or before April 28, 2006; if WRH so elects the defendants will be permitted to amend their prior motion to dismiss. If WRH were to succeed on its ipso facto acceleration claim, then the entire principal amount of Alestras senior notes due 2006
and 2009 of $83.0 million would become due and payable, or if WRH were to succeed on its elective acceleration claim, then the entire principal amount of Alestras senior notes due 2009 of $45.9 million would become due and payable; Alestra
might not have sufficient liquidity available to pay the principal and interest due on those notes or the senior notes due 2009. In addition, such acceleration might cause a cross default under Alestras other indebtedness, including $298.1
million of the senior notes due 2010. While Alestra cannot make assurances regarding the outcome, Alestra has vigorously contested the U.S. litigation.



|14. | SEGMENTS
|--- | --------

The reported segments of the Company
represent the specific types of telecommunications services and products that the Company offers and internally analyzes.

Until December
2003 the Company operated in four segments: domestic long distance, international long distance, data transmission and internet services and local services. During 2004 the Company re-evaluated its internal segment reporting structure and decided to
report only two segments: long distance (domestic and international) and data, internet and local. Prior years segment information has been restated to conform to the Companys current internal reporting structure.

The Companys management uses the information as to income and costs of services (excluding depreciation) 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, administration selling and other operating expenses, depreciation and amortization per segment.



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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, 2003, 2004 and 2005 is as follows:



|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|------------------------------------------ |  | ------------- | ---------- | - | ----------------------- | -- | --------- | ----- |  | -- | ---------- | -
|Years ended                                |  | Long distance |            |   | Data, Internetand Local |    |           | Total | 
|2003                                       |  |               |            |   |                         |    |           |       |  |    |            |  
|Revenues                                   |  | Ps            | 4,587,144  |   |                         | Ps | 1,417,200 |       |  | Ps | 6,004,344  |  
|Costs of services (excluding depreciation) |  |               | (2,771,724 | ) |                         |    | (338,234  | )     |  |    | (3,109,958 | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Gross profit                               |  | Ps            | 1,815,420  |   |                         | Ps | 1,078,966 |       |  |    | 2,894,386  |  
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Operating expenses                         |  |               |            |   |                         |    |           |       |  |    | (2,573,562 | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Operating income                           |  |               |            |   |                         |    |           |       |  |    | 320,824    |  
|Comprehensive financial result             |  |               |            |   |                         |    |           |       |  |    | (1,071,310 | )
|Special item                               |  |               |            |   |                         |    |           |       |  |    | 1,638,815  |  
|Others income, net                         |  |               |            |   |                         |    |           |       |  |    | 108,076    |  
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Income before provision for asset tax      |  |               |            |   |                         |    |           |       |  |    | 996,405    |  
|Asses tax                                  |  |               |            |   |                         |    |           |       |  |    | (4,186     | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Net income                                 |  |               |            |   |                         |    |           |       |  | Ps | 992,219    |  
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|                                           |  |               |           
|2004                                       |  |               |            |   |                         |    |           |       |  |    |            |  
|Revenues                                   |  | Ps            | 3,359,795  |   |                         | Ps | 1,670,289 |       |  | Ps | 5,030,084  |  
|Costs of services (excluding depreciation) |  |               | (2,030,180 | ) |                         |    | (395,222  | )     |  |    | (2,425,402 | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Gross profit                               |  | Ps            | 1,329,615  |   |                         | Ps | 1,275,067 |       |  |    | 2,604,682  |  
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Operating expenses                         |  |               |            |   |                         |    |           |       |  |    | (2,417,379 | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Operating income                           |  |               |            |   |                         |    |           |       |  |    | 187,303    |  
|Comprehensive financial result             |  |               |            |   |                         |    |           |       |  |    | (241,339   | )
|Other expense, net                         |  |               |            |   |                         |    |           |       |  |    | (28,998    | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Loss before provision for asset tax        |  |               |            |   |                         |    |           |       |  |    | (83,034    | )
|Asset tax                                  |  |               |            |   |                         |    |           |       |  |    | (4,132     | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  
|Net loss                                   |  |               |            |   |                         |    |           |       |  |    | (Ps87,166  | )
|                                           |  |               |            |   |                         |    |           |       |  |    |            |  



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|                                           |  |    |            |   |  |    |           |   |  |    |            |  
|------------------------------------------ |  | -- | ---------- | - |  | -- | --------- | - |  | -- | ---------- | -
|                                           |  |    |           
|2005                                       |  |    |            |   |  |    |           |   |  |    |            |  
|Revenues                                   |  | Ps | 2,155,920  |   |  | Ps | 1,915,114 |   |  | Ps | 4,071,034  |  
|Costs of services (excluding depreciation) |  |    | (1,055,362 | ) |  |    | (484,640  | ) |  |    | (1,540,002 | )
|                                           |  |    |            |   |  |    |           |   |  |    |            |  
|Gross profit                               |  | Ps | 1,100,558  |   |  | Ps | 1,430,474 |   |  |    | 2,531,032  |  
|                                           |  |    |            |   |  |    |           |   |  |    |            |  
|Operating expenses                         |  |    |            |   |  |    |           |   |  |    | (2,354,291 | )
|                                           |  |    |            |   |  |    |           |   |  |    |            |  
|Operating income                           |  |    |            |   |  |    |           |   |  |    | 176,741    |  
|Comprehensive financial result             |  |    |            |   |  |    |           |   |  |    | (107,643   | )
|Other expense, net                         |  |    |            |   |  |    |           |   |  |    | (17,810    | )
|                                           |  |    |            |   |  |    |           |   |  |    |            |  
|Income before provision for asset tax      |  |    |            |   |  |    |           |   |  |    | 51,288     |  
|Asset tax                                  |  |    |            |   |  |    |           |   |  |    | (3,105     | )
|                                           |  |    |            |   |  |    |           |   |  |    |            |  
|Net income                                 |  |    |            |   |  |    |           |   |  |    | (Ps 48,183 | )
|                                           |  |    |            |   |  |    |           |   |  |    |            |  

The Company does not have assets outside of Mexico. In 2005, 83.6% of the revenue from
international long distance services of the Company was generated by AT&T Corp. (see Notes 3-1 and 5).



|15. | 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 (Ps4,912,176 at December 31, 2003) and increasing at an annual rate of
12%. 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, on December 29, 2000 Alestra agreed that Telmex has the right to recover US$422 million (Ps4,912,176)
from interconnected operators as costs of special projects and an additional amount of US$ 132 million (Ps1,536,509)



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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 Ps158,307 (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.

On November 24, 2004, Telmex and Alestra entered into an agreement under which the
parties agreed to settle all outstanding amounts in relation to special projects, which as of December 31, 2003 amounted to Ps117,270 (US$ 9.6 million). The effect on costs for the years ended December 31, 2003 and 2004 amounted to a charge of
Ps93,837 (US$8.0 million) and Ps88,677 (US$7.4 million). Charge for the year 2004 was offset by the liability set up as of December 31, 2003.



|16. | 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, 2003, 2004 and 2005:



|                                                         |  |      |    |  |      |    |  |      |   
|-------------------------------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | --
|                                                         |  | 2003 |    |  | 2004 |    |  | 2005 |   
|Statutory income tax rate                                |  | 34   | %  |  | 33   | %  |  | 30   | % 
|Less permanent nondeductible and accumulated items, net: |  |      |    |  |      |    |  |      |   
|Permanent nondeductible items                            |  | (2   | %) |  | (2   | %) |  | (2   | %)
|Depreciation and amortization                            |  | (37  | %) |  | (37  | %) |  | (37  | %)
|                                                         |  |      |    |  |      |    |  |      |   
|                                                         |  | (5   | %) |  | (6   | %) |  | (9   | %)
|Plus temporary nondeductible and accumulated items, net: |  |      |    |  |      |    |  |      |   
|Allowance for doubtful accounts                          |  | 3    | %  |  | 3    | %  |  | 3    | % 
|Costs and provisions                                     |  | 31   | %  |  | 31   | %  |  | 31   | % 
|                                                         |  |      |    |  |      |    |  |      |   
|                                                         |  |      |    |  |      |    |  |      |   
|                                                         |  | 29   | %  |  | 28   | %  |  | 25   | % 
|                                                         |  |      |    |  |      |    |  |      |   
|Applied tax loss carryforwards                           |  | (29  | %) |  | (28  | %) |  | (25  | %)
|                                                         |  |      |    |  |      |    |  |      |   
|Effective income tax rate                                |  |     |    |  |     |    |  |     |   
|                                                         |  |      |    |  |      |    |  |      |   

As a result of the amendments to the Income Tax Law released on December 1, 2004, beginning
in 2005 the income tax rate will be 30% and will be reduced annually to a nominal rate of 28% in 2007.



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The tax effects of temporary differences that give rise to significant deferred tax assets and
liabilities at December 31, 2004 and 2005, are as follows:



|                                            |  |      |            |   |      |    |            |  
|------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                            |  | 2004 |            |   | 2005 |   
|Deferred tax asset:                         |  |      |            |   |      |    |            |  
|Tax loss carryforwards                      |  | Ps   | 2,709,674  |   |      | Ps | 2,791,327  |  
|Allowance for doubtful accounts             |  |      | 257,338    |   |      |    | 296,974    |  
|Costs and provisions                        |  |      | 157,044    |   |      |    | 107,859    |  
|                                            |  |      |            |   |      |    |            |  
|Total deferred tax assets                   |  |      | 3,124,056  |   |      |    | 3,196,160  |  
|                                            |  |      |            |   |      |    |            |  
|Deferred tax liabilities:                   |  |      |            |   |      |    |            |  
|Property and equipment, net                 |  |      | 845,240    |   |      |    | 348,457    |  
|Preoperating expenses, net and other assets |  |      | 37,905     |   |      |    | 21,945     |  
|                                            |  |      |            |   |      |    |            |  
|Total deferred tax liabilities              |  |      | 883,145    |   |      |    | 370,402    |  
|                                            |  |      |            |   |      |    |            |  
|Net deferred tax assets                     |  |      | 2,240,911  |   |      |    | 2,825,758  |  
|Valuation allowance                         |  |      | (2,240,911 | ) |      |    | (2,825,758 | )
|                                            |  |      |            |   |      |    |            |  
|Deferred income taxes                       |  | Ps   |           |   |      | Ps |           |  
|                                            |  |      |            |   |      |    |            |  

Due to the uncertainty of realizing the benefit of the loss carryforwards, valuation allowance has
been recognized in full.

Accumulated tax losses at December 31, 2005 may be carried forward after a restatement in conformity with
the statutory future inflation rates, as follows:



|     |  |    |          
|---- |  | -- | ---------
|2006 |  | Ps | 3,691,966
|2007 |  |    | 3,579,677
|2008 |  |    | 1,545,566
|2009 |  |    | 134,875  
|2010 |  |    | 919,287  
|2011 |  |    | 28,894   
|2012 |  |    | 14,810   
|2013 |  |    | 21,450   
|2014 |  |    | 22,191   
|2015 |  |    | 10,310   
|     |  |    |          
|     |  | Ps | 9,969,026
|     |  |    |          

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. Asset tax has been expensed due to
the Companys recurring losses.



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|17. | 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 Ps3,487,704 (US$287 million) of the Old Senior Notes and paid Ps1,335,882 (US$110 million) in cash to extinguish Ps2,430,455 (US$200 million) of the Old Senior Notes, resulting in a gain of Ps934,121 (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 Ps915,742 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 Ps119,761.

The special item in the statement of
operations for the year ended December 31, 2003, consist of the following:



|                                                                          |  |    |           |  
|------------------------------------------------------------------------- |  | -- | --------- | -
|Gain on extinguishment of debt                                            |  | Ps | 888,025   |  
|Gain on reversal of accrued interest                                      |  |    |           |  
|2002                                                                      |  |    | 483,646   |  
|2003                                                                      |  |    | 386,905   |  
|                                                                          |  |    |           |  
|                                                                          |  |    | 870,551   |  
|                                                                          |  |    |           |  
|Write-off of capitalized debt issuance cost of exchanged Old Senior Notes |  |    | (119,761  | )
|                                                                          |  |    |           |  
|Total                                                                     |  | Ps | 1,638,815 |  
|                                                                          |  |    |           |  



|18. | FOREIGN CURRENCY POSITION
|--- | -------------------------

As of December 31,
2004 and 2005 assets and liabilities, denominated in foreign currencies (U.S. dollars) were as follows:



|                                      |  |                           |          |   |      |     |          |  
|------------------------------------- |  | ------------------------- | -------- | - | ---- | --- | -------- | -
|                                      |  | Thousands of U.S. dollars |         
|                                      |  | 2004                      |          |   | 2005 |    
|Assets                                |  | US$                       | 76,778   |   |      | US$ | 96,904   |  
|Short and long-term liabilities       |  |                           | (436,288 | ) |      |     | (418,064 | )
|                                      |  |                           |          |   |      |     |          |  
|Net                                   |  | US$                       | (359,510 | ) |      | US$ | (321,160 | )
|                                      |  |                           |          |   |      |     |          |  
|Non-monetary assets of foreign origin |  | US$                       | 548,993  |   |      | US$ | 525,396  |  
|                                      |  |                           |          |   |      |     |          |  

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



|                   |  |      |          |   |      |     |         |      |  |     |         |  
|------------------ |  | ---- | -------- | - | ---- | --- | ------- | ---- |  | --- | ------- | -
|                   |  | 2003 |          |   | 2004 |     |         | 2005 | 
|Revenues           |  | US$  | 261,750  |   |      | US$ | 193,592 |      |  | US$ | 134,290 |  
|Cost of services   |  |      | (144,039 | ) |      |     | (98,110 | )    |  |     | (28,696 | )
|Operating expenses |  |      | (22,776  | ) |      |     | (22,701 | )    |  |     | (26,159 | )
|Interest expense   |  |      | (69,366  | ) |      |     | (38,023 | )    |  |     | (38,498 | )
|Interest income    |  |      | 234      |   |      |     | 645     |      |  |     | 2,213   |  
|Special item       |  |      | 144,148  |   |      |     |        |      |  |     |        |  
|Other income, net  |  |      | 11,432   |   |      |     | 5,798   |      |  |     | 2,158   |  
|                   |  |      |          |   |      |     |         |      |  |     |         |  
|Net (expense) gain |  | US$  | (181,383 | ) |      | US$ | 41,201  |      |  | US$ | 45,308  |  
|                   |  |      |          |   |      |     |         |      |  |     |         |  



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The exchange rates at December 31, 2003, 2004 and 2005, were Ps11.2360, Ps11.2648 and Ps10.7109 per
U.S. dollar, respectively, as published by Banco de México (the Mexico central bank).

At March 30, 2006, the date of issuance
of the financial statements, the exchange rate was Ps10.9510 per U.S. dollar.



|19. | 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.

At December 31, 2004 and 2005, the estimated fair values of the senior notes are as follows:



|                |  |             |  |            
|--------------- |  | ----------- |  | -----------
|                |  | 2004        |  | 2005       
|Carrying amount |  | Ps4,507,212 |  | Ps4,082,197
|Fair value      |  | 4,020,006   |  | 4,074,055  
|                |  |             |  |            
|Difference      |  | 487,206     |  | 8,142      

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.



|20. | DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP
|--- | ----------------------------------------------

The Companys consolidated financial statements are prepared in accordance with Mexican GAAP, which differ 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



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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.

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.



|                                                                                                                                                  |  |                         |            |   |      |     |         |      |  |    |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | --- | ------- | ---- |  | -- | -------- | -
|                                                                                                                                                  |  | Year ended December 31, |           
|                                                                                                                                                  |  | 2003                    |            |   | 2004 |     |         | 2005 | 
|Reconciliation of net (loss) income:                                                                                                              |  |                         |            |   |      |     |         |      |  |    |          |  
|Net (loss) income as reported under Mexican GAAP                                                                                                  |  | Ps                      | 992,219    |   |      | (Ps | 87,166  | )    |  | Ps | 48,183   |  
|                                                                                                                                                  |  |                         |            |   |      |     |         |      |  |    |          |  
|U.S. GAAP adjustments:                                                                                                                            |  |                         |            |   |      |     |         |      |  |    |          |  
|Reversal of gain on extinguishment of debt                                                                                                        |  |                         | (1,638,815 | ) |      |     |        |      |  |    |         |  
|Difference in interest expense                                                                                                                    |  |                         | 116,670    |   |      |     | 274,089 |      |  |    | 281,492  |  
|Reversal of debt issuance costs, net of amortization                                                                                              |  |                         | (137,640   | ) |      |     | (4,080  | )    |  |    | 3,675    |  
|Fifth amendment effect on depreciation expense                                                                                                    |  |                         | (85,015    | ) |      |     | (87,386 | )    |  |    | (107,387 | )
|Reversal of preoperating expense amortization                                                                                                     |  |                         | 229,659    |   |      |     | 229,659 |      |  |    | 229,659  |  
|Reversal of depreciation of capitalized comprehensive financing costs under Mexican GAAP and depreciation of capitalized interest under U.S.
GAAP |  |                         | (8,016     | ) |      |     | (8,016  | )    |  |    | (8,016   | )
|Severance payments                                                                                                                                |  |                         |           |   |      |     |        |      |  |    | (20,788  | )
|                                                                                                                                                  |  |                         |            |   |      |     |         |      |  |    |          |  
|Total U.S. GAAP adjustments                                                                                                                       |  |                         | (1,523,157 | ) |      |     | 404,266 |      |  |    | 378,635  |  
|                                                                                                                                                  |  |                         |            |   |      |     |         |      |  |    |          |  
|Net (loss) income under U.S. GAAP                                                                                                                 |  | (Ps                     | 530,938    | ) |      | Ps  | 317,100 |      |  | Ps | 426,818  |  
|                                                                                                                                                  |  |                         |            |   |      |     |         |      |  |    |          |  



|                                                                                        |  |      |            |   |      |    |            |  
|--------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                                                                        |  | 2004 |            |   | 2005 |   
|Reconciliation of stockholders equity:                                                 |  |      |            |   |      |    |            |  
|Total stockholders equity reported under Mexican GAAP                                  |  | Ps   | 2,549,393  |   |      | Ps | 2,357,939  |  
|                                                                                        |  |      |            |   |      |    |            |  
|U.S. GAAP adjustments:                                                                  |  |      |            |   |      |    |            |  
|Effect on total debt of extinguishment                                                  |  |      | (1,248,057 | ) |      |    | (966,565   | )
|Effect on debt issuance costs                                                           |  |      | (146,493   | ) |      |    | (139,015   | )
|Accumulated amortization of debt issuance costs                                         |  |      | 4,773      |   |      |    | 970        |  
|Fifth amendment effect on property and equipment                                        |  |      | 299,843    |   |      |    | 429,901    |  
|Pre-operating expenses                                                                  |  |      | (2,207,222 | ) |      |    | (2,207,222 | )
|Reversal of preoperating expenses amortization                                          |  |      | 1,687,849  |   |      |    | 1,917,508  |  
|Adjustment for comprehensive financing cost and interest capitalization under U.S. GAAP |  |      | 8,016      |   |      |    |           |  
|Severance payments                                                                      |  |      |           |   |      |    | (20,788    | )
|Minority interest under Mexican GAAP                                                    |  |      | (2         | ) |      |    | (551       | )
|                                                                                        |  |      |            |   |      |    |            |  
|Total U.S. GAAP adjustments                                                             |  |      | (1,601,293 | ) |      |    | (985,762   | )
|                                                                                        |  |      |            |   |      |    |            |  
|Total stockholders equity under U.S. GAAP                                              |  | Ps   | 948,100    |   |      | Ps | 1,372,177  |  
|                                                                                        |  |      |            |   |      |    |            |  



F-34



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##### 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:



|                                     |  |      |         |      |    |           |  
|------------------------------------ |  | ---- | ------- | ---- | -- | --------- | -
|                                     |  | 2004 |         | 2005 |   
|Balance at beginning of period       |  | Ps   | 631,000 |      | Ps | 948,100   |  
|Net income for the year              |  |      | 317,100 |      |    | 426,818   |  
|Additional minimum pension liability |  |      |        |      |    | (2,741    | )
|                                     |  |      |         |      |    |           |  
|Balance at end of period             |  | Ps   | 948,100 |      | Ps | 1,372,177 |  
|                                     |  |      |         |      |    |           |  

As explained in Note 12, 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 under U.S. GAAP as of December 31, 2004 and 2005 is as follows:



|                                           |  |      |             |   |      |    |             |  
|------------------------------------------ |  | ---- | ----------- | - | ---- | -- | ----------- | -
|                                           |  | 2004 |             |   | 2005 |   
|Capital stock                              |  | Ps   | 11,444,083  |   |      | Ps | 11,444,083  |  
|Accumulated losses                         |  |      | (10,495,983 | ) |      |    | (10,071,906 | )
|                                           |  |      |             |   |      |    |             |  
|Total stockholders equity under U.S. GAAP |  | Ps   | 948,100     |   |      | Ps | 1,372,177   |  
|                                           |  |      |             |   |      |    |             |  

The following table presents summarized balance sheets and statements of income in constant Pesos,
including all U.S. GAAP adjustments, as of December 31, 2004 and 2005 for the years ended December 31, 2003, 2004 and 2005:



|                                 |  |      |             |   |      |    |             |  
|-------------------------------- |  | ---- | ----------- | - | ---- | -- | ----------- | -
|                                 |  | 2004 |             |   | 2005 |   
|Cash and cash equivalents        |  | Ps   | 654,965     |   |      | Ps | 920,386     |  
|Trade receivables                |  |      | 373,012     |   |      |    | 353,899     |  
|Property and equipment, net      |  |      | 6,090,525   |   |      |    | 5,670,259   |  
|Other assets                     |  |      | 663,892     |   |      |    | 685,557     |  
|                                 |  |      |             |   |      |    |             |  
|Total assets                     |  |      | 7,782,394   |   |      |    | 7,630,101   |  
|                                 |  |      |             |   |      |    |             |  
|                                 |  |      |             |   |      |    |             |  
|Senior notes                     |  |      | 5,894,284   |   |      |    | 5,187,777   |  
|Notes payable and capital leases |  |      | 66,527      |   |      |    | 78,100      |  
|Accounts payables                |  |      | 518,930     |   |      |    | 704,546     |  
|Other payables                   |  |      | 354,553     |   |      |    | 287,501     |  
|                                 |  |      |             |   |      |    |             |  
|Total liabilities                |  |      | 6,834,294   |   |      |    | 6,257,924   |  
|                                 |  |      |             |   |      |    |             |  
|Contributed capital              |  |      | 11,444,083  |   |      |    | 11,444,083  |  
|Accumulated losses               |  |      | (10,495,983 | ) |      |    | (10,071,906 | )
|                                 |  |      |             |   |      |    |             |  
|Total stockholders equity       |  |      | 948,100     |   |      |    | 1,372,177   |  
|                                 |  |      |             |   |      |    |             |  
|                                 |  | Ps   | 7,782,394   |   |      | Ps | 7,630,101   |  
|                                 |  |      |             |   |      |    |             |  



F-35



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##### Table of Contents

|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  
|-------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -- | ---------- | ---- |  | -- | ---------- | -
|                                                                     |  | 2003 |             |   | 2004 |    |            | 2005 | 
|Net revenues                                                         |  | Ps   | 6,004,344   |   |      | Ps | 5,030,084  |      |  | Ps | 4,071,034  |  
|Cost of services (excluding depreciation presented separately below) |  |      | (3,109,958  | ) |      |    | (2,425,405 | )    |  |    | (1,540,002 | )
|Administration, selling and other operating expenses                 |  |      | (1,606,741  | ) |      |    | (1,473,056 | )    |  |    | (1,433,996 | )
|Depreciation and amortization                                        |  |      | (830,192    | ) |      |    | (810,063   | )    |  |    | (826,827   | )
|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  
|Operating income                                                     |  |      | 457,453     |   |      |    | 321,560    |      |  |    | 270,209    |  
|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  
|Comprehensive financial result:                                      |  |      |             |   |      |    |            |      |  |    |            |  
|Interest income                                                      |  |      | 7,388       |   |      |    | 17,246     |      |  |    | 32,106     |  
|Interest expense                                                     |  |      | (603,460    | ) |      |    | (202,359   | )    |  |    | (170,566   | )
|Exchange (loss) gain                                                 |  |      | (645,364    | ) |      |    | (3,895     | )    |  |    | 191,103    |  
|Gain from monetary position                                          |  |      | 286,795     |   |      |    | 221,758    |      |  |    | 121,206    |  
|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  
|                                                                     |  |      | (954,641    | ) |      |    | 32,750     |      |  |    | 173,849    |  
|Debt issuance costs, net                                             |  |      | (137,640    | ) |      |    | (4,080     | )    |  |    | 3,675      |  
|Other income (expense), net                                          |  |      | 108,076     |   |      |    | (28,998    | )    |  |    | (17,810    | )
|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  
|Net (loss) income before asset tax                                   |  |      | (526,752    | ) |      |    | 321,232    |      |  |    | 429,923    |  
|Asset tax                                                            |  |      | (4,186      | ) |      |    | (4,132     | )    |  |    | (3,105     | )
|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  
|Net (loss) income                                                    |  |      | (Ps 530,938 | ) |      | Ps | 317,100    |      |  | Ps | 426,818    |  
|                                                                     |  |      |             |   |      |    |            |      |  |    |            |  

Effects of the restructuring of the Old Senior Notes

As mentioned in Note 16, under Mexican GAAP, the effects of the restructuring are recorded as follows:



| |  |  | A gain of Ps 888,025 is recognized for the effect of the extinguishment of the Old Senior Notes.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | A gain of Ps870,551 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 Ps119,761 and the capitalization of Ps146,493 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.
| | - |  | --------------------------------------------------------------------------------------



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##### Table of Contents

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 Ps146,493 incurred in the debt restructuring was recorded as an expense of the period; debt issuance cost of Ps119,761 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fifth amendment effect on property and equipment, net

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 comprehensive 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.

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.



F-37



---

##### Table of Contents

Severance payments

As more fully disclosed in Note 2(m.), effective January 1, 2005, the Company adopted the provisions related to severance indemnity liabilities as
established by revised Bulletin D-3. Under Mexican GAAP, severance payments should be accounted in a manner similar to other post-retirement benefits. The Company opted for the transitional method of recognizing the actuarially determined severance
liability of Ps22,846 over the remaining expected employee service period and consequently, as of December 31, 2005 has recognized a total liability and charge to earnings of Ps2,058. Prior to the adoption of revised Bulletin D-3, such
severance costs were recognized as incurred.

For the purposes of the December 31, 2005 reconciliation of earnings and equity, the
Company has recorded for U.S. GAAP purposes the remaining expense not yet recognized under Mexican GAAP which totals Ps20,788. Alestra has determined that the impact on reported results and net assets for periods presented are not materially
misstated as a result of not having recognized the annual cost and cumulative liability associated with these benefits in prior years.

Minority interest

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

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.

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.



F-38



---

##### Table of Contents

The tax effects of temporary differences that give rise to significant deferred tax assets and
liabilities, applying SFAS 109, at December 31, 2004 and 2005, are as follows:



|                                            |  |      |            |   |      |    |            |  
|------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                            |  | 2004 |            |   | 2005 |   
|Deferred tax assets:                        |  |      |            |   |      |    |            |  
|Tax loss carryforwards                      |  | Ps   | 2,709,674  |   |      | Ps | 2,791,327  |  
|Allowance for doubtful accounts             |  |      | 257,338    |   |      |    | 296,974    |  
|Costs and provisions                        |  |      | 157,044    |   |      |    | 107,859    |  
|Preoperating expenses, net and other assets |  |      | 94,009     |   |      |    | 64,724     |  
|                                            |  |      |            |   |      |    |            |  
|Total deferred tax assets                   |  |      | 3,218,065  |   |      |    | 3,260,884  |  
|                                            |  |      |            |   |      |    |            |  
|Deferred tax liabilities:                   |  |      |            |   |      |    |            |  
|Property and equipment, net                 |  |      | 917,212    |   |      |    | 468,830    |  
|                                            |  |      |            |   |      |    |            |  
|Total deferred tax liabilities              |  |      | 917,212    |   |      |    | 468,830    |  
|                                            |  |      |            |   |      |    |            |  
|Net deferred tax assets                     |  |      | 2,300,853  |   |      |    | 2,792,054  |  
|Valuation allowance                         |  |      | (2,300,853 | ) |      |    | (2,792,054 | )
|                                            |  |      |            |   |      |    |            |  
|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, 2004 and 2005, that more likely than not will not be realized.

Additional disclosures requirements:

Pursuant to the requirements of SFAS No. 132, the following tables present a reconciliation of the beginning and ending balances the accumulated benefit obligation.



|                                        |  |           |   |  |           |  
|--------------------------------------- |  | --------- | - |  | --------- | -
|                                        |  | 2004      |   |  | 2005      |  
|Seniority Premiums and Pension Benefits |  |           |   |  |           |  
|                                        |  |          
|Benefit obligation at beginning of year |  | Ps 58,810 |   |  | Ps 76,058 |  
|Services cost                           |  | 7,406     |   |  | 8,483     |  
|Interest cost                           |  | 2,930     |   |  | 3,789     |  
|Actuarial (gain) loss                   |  | 7,457     |   |  | 4,079     |  
|Benefits paid                           |  | (545      | ) |  | (639      | )
|                                        |  |           |   |  |           |  
|Benefit obligation at end of year       |  | Ps 76,058 |   |  | Ps 91,770 |  
|                                        |  |           |   |  |           |  



|                                           |  |           |  
|------------------------------------------ |  | --------- | -
|                                           |  | 2005      |  
|Post-retirement benefit                    |  |           |  
|                                           |  |           |  
|                                           | 
|Benefit obligation at beginning of year    |  | Ps 23,607 |  
|Services cost                              |  | 3,295     |  
|Interest cost                              |  | 1,008     |  
|Actuarial (gain) loss                      |  | 620       |  
|Benefits paid                              |  | (9,563    | )
|Effect of curtailment on benefitobligation |  | 4,800     |  
|                                           |  |           |  
|Benefit obligation at end of year          |  | Ps 23,767 |  
|                                           |  |           |  

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, 2003, 2004 and 2005 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, 2005
purchasing power.



F-39



---

##### Table of Contents

|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|----------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | -------- | ---- |  | -- | -------- | -
|                                                                              |  | 2003 |            |   | 2004 |    |          | 2005 | 
|OPERATING ACTIVITIES:                                                         |  |      |            |   |      |    |          |      |  |    |          |  
|Net (loss) income                                                             |  | (Ps  | 530,938    | ) |      | Ps | 317,100  |      |  | Ps | 426,818  |  
|Adjustments to reconcile net loss to cash flows used in operating activities: |  |      |            |   |      |    |          |      |  |    |          |  
|Gain from monetary position                                                   |  |      | (286,795   | ) |      |    | (221,758 | )    |  |    | (121,206 | )
|Unrealized exchange losses                                                    |  |      | 433,872    |   |      |    | (2,087   | )    |  |    | (180,729 | )
|Depreciation and amortization                                                 |  |      | 830,192    |   |      |    | 810,063  |      |  |    | 826,827  |  
|Allowance for doubtful accounts                                               |  |      | 38,129     |   |      |    | 12,016   |      |  |    | 20,824   |  
|Difference in interest expense                                                |  |      | (116,670   | ) |      |    | (274,089 | )    |  |    | (281,492 | )
|Provision for special project charges                                         |  |      | 95,669     |   |      |    |          |      |  |    |          |  
|Other provision                                                               |  |      | 39,192     |   |      |    | 59,693   |      |  |    | 85,635   |  
|Changes in operating assets and liabilities:                                  |  |      |            |   |      |    |          |      |  |    |          |  
|Current assets                                                                |  |      | 201,101    |   |      |    | (27,285  | )    |  |    | (132,210 | )
|Current liabilities                                                           |  |      | (395,661   | ) |      |    | (83,875  | )    |  |    | 100,043  |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Cash flows provided by operating activities                                   |  |      | 308,091    |   |      |    | 589,778  |      |  |    | 744,510  |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|INVESTING ACTIVITIES:                                                         |  |      |            |   |      |    |          |      |  |    |          |  
|Purchases of property and equipment                                           |  |      | (256,655   | ) |      |    | (383,683 | )    |  |    | (438,044 | )
|Sales of property and equipment                                               |  |      |            |   |      |    |          |      |  |    | 35,035   |  
|Deferred charges and other assets                                             |  |      | (11,304    | ) |      |    | 54,525   |      |  |    |         |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Cash flows used in investing activities                                       |  |      | (267,959   | ) |      |    | (329,158 | )    |  |    | (403,009 | )
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|FINANCING ACTIVITIES:                                                         |  |      |            |   |      |    |          |      |  |    |          |  
|Capital Contributions                                                         |  |      | 1,219,985  |   |      |    |         |      |  |    |          |  
|Payments of notes payable, capital leases and senior notes                    |  |      | (1,318,703 | ) |      |    | (71,162  | )    |  |    | (97,253  | )
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Cash flows used in financing activities                                       |  |      | (98,718    | ) |      |    | (71,162  | )    |  |    | (97,253  | )
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Net effect of inflation on cash and cash equivalents                          |  |      | 329,681    |   |      |    | 18,943   |      |  |    | 21,173   |  
|Increase in cash and cash equivalents                                         |  |      | 271,095    |   |      |    | 208,401  |      |  |    | 265,421  |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Cash and cash equivalents, beginning of period                                |  |      | 175,469    |   |      |    | 446,564  |      |  |    | 654,965  |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Cash and cash equivalents, end of period                                      |  | Ps   | 446,564    |   |      | Ps | 654,965  |      |  | Ps | 920,386  |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Non-cash investing and financing activities:                                  |  |      |            |   |      |    |          |      |  |    |          |  
|Acquisition of equipment under capital leases and debt assumed                |  | Ps   | 53,750     |   |      | Ps |         |      |  | Ps | 46,125   |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  
|Interest and taxes paid:                                                      |  |      |            |   |      |    |          |      |  |    |          |  
|Interest paid                                                                 |  | Ps   | 25,762     |   |      | Ps | 422,265  |      |  | Ps | 393,878  |  
|Income taxes paid                                                             |  | Ps   | 3,746      |   |      | Ps | 2,918    |      |  | Ps | 2,037    |  
|                                                                              |  |      |            |   |      |    |          |      |  |    |          |  

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB Opinion No. 29. APB Opinion
No. 29, Accounting For Nonmonetary Transactions (SFAS 153). SFAS 153 is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends Opinion
No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial



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substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have any impact on the Companys current financial condition or results of operations.

In June 2005, the FASB published SFAS No. 154, Accounting changes and Error Corrections a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (SFAS No. 154), which changes the requirements for the accounting for and reporting of a change in accounting principle and redefines restatement as the revising of previously issued financial statements
to reflect the correction of an error. SFAS No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine the period-specific effects of the
cumulative effect of the change. This Statement also carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting
estimate. This Statement does not change the transition provisions of any existing accounting pronouncement. SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company is currently considering the impact that adoption will have on its consolidated results and financial position.

In June 2005, the FASB issued Emerging Issues Task Force (EITF) Issue No. 05-06, Determining the Amortization Period for Leasehold Improvements. EITF Issue No. 05-06 indicates that for operating leases, leasehold
improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and
renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Leasehold improvements acquired in a business combination should be amortized over the shorter of the useful life of the assets or a term that
includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition. EITF Issue No. 05-06 is effective for leasehold improvements that are purchased or acquired in reporting periods beginning after
June 28, 2005. The Company is currently considering the impact that adoption will have on its consolidated results and financial position.

In October 2005, the FASB issued FASB Staff Position (FSP) No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period. FSP No. FAS 13-1 requires rental costs associated with operating leases that
are incurred during a construction period to be recognized as rental expense. FSP FAS 13-1 is effective for reporting periods beginning after December 15, 2005. The transition provisions of FSP No. FAS 13-1 permit early adoption and
retrospective application of the guidance. The Company is currently considering the impact that adoption will have on its consolidated results and financial position.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155). SFAS 155 permits fair value measurement for any hybrid
financial instrument that contains an embedded derivative that would otherwise require bifurcation and separate accounting. An irrevocable election may be made at inception to measure such a hybrid financial instrument at fair value, with changes in
fair value recognized through income. Such an election needs to be supported by concurrent documentation. SFAS 155 is effective for fiscal years beginning after September 15, 2006, with early adoption permitted. The Company is currently
considering the impact that adoption will have on its consolidated results and financial position.



|21. | SUBSEQUENT EVENT
|--- | ----------------

On February 28, 2006, Alestra
entered into an Assignment Agreement (the Agreement) with America Online Latin America, Inc.s (AOLA) subsidiary in Mexico, AOL, S. de R.L. de C.V. (AOL Mexico). Pursuant to the Agreement, AOL Mexico will
assign its monthly and prepaid subscriber base to Alestra.

As consideration for transfer of AOL Mexicos monthly subscribers, Alestra
will make a payment based on the number of monthly subscribers who are current in their payments on date the subscribers are transferred to Alestra and a second payment based on the number of subscribers who are current in their payments to Alestra
six months later. Alestra will pay AOL Mexico a fee for each prepaid subscriber who renews on an Alestra prepaid plan or subscribes to a monthly dial-up or broadband plan. Since Alestra are assuming the obligation to provide services to prepaid
subscribers, Alestra will receive a non-cash credit per prepaid subscriber for the number of days on which such prepaid subscriber receives services from Alestra. The aggregate amount that Alestra expects to pay under the Agreement is approximately
$700,000. However, due to the variability in the rates of renewals by prepaid subscribers and retention and payment by monthly subscribers and the range of plans to which renewing prepaid subscribers can subscribe, the amount is only an estimate.

The closing of the Agreement is subject to a number of conditions, including the execution of the license agreement and an operation
services agreement with AOL Inc. Due to fact that AOLA is subject to a bankruptcy proceeding before the United States Bankruptcy Court for the District of Delaware and also that the AOLA is the majority holder of the stock in AOL Mexico, the
transaction was also subject to the approval of said Court, which condition was met on March 22, 2006.



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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 annual report and have duly caused this annual 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 GarzaChief Financial and Administrative Officer


Date: April 3, 2006