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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003



Commission file number: 333-11084



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

(Exact
name of Registrant as specified in its charter)



ALESTRA

(Translation of Registrants name into English)



United Mexican States

(Jurisdiction of incorporation or organization)



Ave. Lázaro Cárdenas No. 2321, 9th Floor

Col. Residencial San Agustín

Garza García N.L. 66260 México

(Address of principal executive offices)



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

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

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



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

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

8% senior notes due 2010

(Title of Class)



Indicate the number of
outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report: none



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈.



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



Item 17 ̈Item 18 x



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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.                                                    |  | 22 
|                                                                                       | 
|Item 5. Operating and Financial Review and Prospects.                                  |  | 49 
|                                                                                       | 
|Item 6. Directors, Senior Management and Employees.                                    |  | 71 
|                                                                                       | 
|Item 7. Major Shareholders and Related Party Transactions.                             |  | 75 
|                                                                                       | 
|Item 8. Financial Information.                                                         |  | 77 
|                                                                                       | 
|Item 9. The Offer and Listing.                                                         |  | 77 
|                                                                                       | 
|Item 10. Additional Information.                                                       |  | 78 
|                                                                                       | 
|Item 11. Quantitative and Qualitative Disclosures About Market Risk.                   |  | 85 
|                                                                                       | 
|Item 12. Description of Securities Other than Equity Securities.                       |  | 86 
|                                                                                       | 
|Item 13. Defaults, Dividend Arrearages and Delinquencies.                              |  | 86 
|                                                                                       | 
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. |  | 86 
|                                                                                       | 
|Item 15. Controls and Procedures.                                                      |  | 87 
|                                                                                       | 
|Items 16A through 16E.                                                                 |  | 87 
|                                                                                       | 
|Item 17. and 18. Financial Statements.                                                 |  | 88 
|                                                                                       | 
|Item 19. Exhibits.                                                                     |  | 88 
|                                                                                       | 
|Financial Statements                                                                   |  | F-1



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



Cautionary statement on forward-looking statements



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



PART I



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



Not applicable.



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



Not applicable.



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



A. Selected Financial Data



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



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



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



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



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|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|---------------------------------------------------- |  | ------------------------------------------------- |  | ------ | - |  | --- |  | ------ | - |  | --- |  | ------ | - |  | --- |  | ------ | - |  | --- |  | ------ | -
|                                                     |  | As of and for the year ended December 31,         | 
|                                                     |  |                                                   |  | 1999   |   |  |     |  | 2000   |   |  |     |  | 2001   |   |  |     |  | 2002   |   |  |     |  | 2003   |  
|                                                     |  | (in millions of constant Pesos, excluding ratios) | 
|STATEMENT OF INCOME                                  |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Mexican GAAP:                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Revenues:                                            |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  | Ps.                                               |  | 2,017  |   |  | Ps. |  | 2,217  |   |  | Ps. |  | 2,136  |   |  | Ps. |  | 1,502  |   |  | Ps. |  | 1,243  |  
|International long distance                          |  |                                                   |  | 2,673  |   |  |     |  | 2,636  |   |  |     |  | 1,551  |   |  |     |  | 2,160  |   |  |     |  | 2,977  |  
|Data and internet services                           |  |                                                   |  | 252    |   |  |     |  | 383    |   |  |     |  | 612    |   |  |     |  | 817    |   |  |     |  | 1,085  |  
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 34     |   |  |     |  | 137    |   |  |     |  | 219    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 4,942  |   |  |     |  | 5,236  |   |  |     |  | 4,333  |   |  |     |  | 4,616  |   |  |     |  | 5,524  |  
|Cost of services (excluding depreciation):           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | (1,151 | ) |  |     |  | (1,616 | ) |  |     |  | (922   | ) |  |     |  | (582   | ) |  |     |  | (471   | )
|International long distance                          |  |                                                   |  | (1,438 | ) |  |     |  | (1,119 | ) |  |     |  | (757   | ) |  |     |  | (1,307 | ) |  |     |  | (2,079 | )
|Data and internet services                           |  |                                                   |  | (139   | ) |  |     |  | (134   | ) |  |     |  | (176   | ) |  |     |  | (206   | ) |  |     |  | (259   | )
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | (12    | ) |  |     |  | (23    | ) |  |     |  | (52    | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | (2,728 | ) |  |     |  | (2,869 | ) |  |     |  | (1,867 | ) |  |     |  | (2,118 | ) |  |     |  | (2,861 | )
|Gross profit: (1)                                    |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | 866    |   |  |     |  | 601    |   |  |     |  | 1,214  |   |  |     |  | 920    |   |  |     |  | 772    |  
|International long distance                          |  |                                                   |  | 1,235  |   |  |     |  | 1,517  |   |  |     |  | 794    |   |  |     |  | 853    |   |  |     |  | 898    |  
|Data and internet services                           |  |                                                   |  | 113    |   |  |     |  | 249    |   |  |     |  | 436    |   |  |     |  | 611    |   |  |     |  | 826    |  
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 22     |   |  |     |  | 114    |   |  |     |  | 167    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 2,214  |   |  |     |  | 2,367  |   |  |     |  | 2,466  |   |  |     |  | 2,498  |   |  |     |  | 2,663  |  
|Administrative, selling and other operating expenses |  |                                                   |  | (1,857 | ) |  |     |  | (1,786 | ) |  |     |  | (1,836 | ) |  |     |  | (1,689 | ) |  |     |  | (1,479 | )
|Depreciation and amortization                        |  |                                                   |  | (821   | ) |  |     |  | (893   | ) |  |     |  | (1,047 | ) |  |     |  | (970   | ) |  |     |  | (889   | )
|Operating (loss) income                              |  |                                                   |  | (464   | ) |  |     |  | (312   | ) |  |     |  | (417   | ) |  |     |  | (161   | ) |  |     |  | 295    |  
|Comprehensive financial result                       |  |                                                   |  | (29    | ) |  |     |  | (229   | ) |  |     |  | (250   | ) |  |     |  | (1,281 | ) |  |     |  | (985   | )
|Special item                                         |  |                                                   |  |       |   |  |     |  |       |   |  |     |  |       |   |  |     |  |       |   |  |     |  | 1,508  |  
|Other income (expenses)                              |  |                                                   |  | 4      |   |  |     |  | (41    | ) |  |     |  | (22    | ) |  |     |  | (18    | ) |  |     |  | 99     |  
|Asset tax                                            |  |                                                   |  |       |   |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (4     | )
|Net (loss) income                                    |  |                                                   |  | (489   | ) |  |     |  | (587   | ) |  |     |  | (694   | ) |  |     |  | (1,465 | ) |  |     |  | 913    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|U.S. GAAP:                                           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Revenues:                                            |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  | Ps.                                               |  | 2,017  |   |  | Ps. |  | 2,217  |   |  | Ps. |  | 2,136  |   |  | Ps. |  | 1,502  |   |  | Ps. |  | 1,243  |  
|International long distance                          |  |                                                   |  | 2,673  |   |  |     |  | 2,636  |   |  |     |  | 1,551  |   |  |     |  | 2,160  |   |  |     |  | 2,977  |  
|Data and internet services                           |  |                                                   |  | 252    |   |  |     |  | 383    |   |  |     |  | 612    |   |  |     |  | 817    |   |  |     |  | 1,085  |  
|Local and other services                             |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 34     |   |  |     |  | 137    |   |  |     |  | 219    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 4,942  |   |  |     |  | 5,236  |   |  |     |  | 4,333  |   |  |     |  | 4,616  |   |  |     |  | 5,524  |  
|Cost of services (excluding depreciation):           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | (1,151 | ) |  |     |  | (1,616 | ) |  |     |  | (922   | ) |  |     |  | (582   | ) |  |     |  | (471   | )
|International long distance                          |  |                                                   |  | (1,438 | ) |  |     |  | (1,119 | ) |  |     |  | (757   | ) |  |     |  | (1,307 | ) |  |     |  | (2,079 | )
|Data and internet services                           |  |                                                   |  | (139   | ) |  |     |  | (134   | ) |  |     |  | (176   | ) |  |     |  | (206   | ) |  |     |  | (259   | )
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | (12    | ) |  |     |  | (23    | ) |  |     |  | (52    | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | (2,728 | ) |  |     |  | (2,869 | ) |  |     |  | (1,867 | ) |  |     |  | (2,118 | ) |  |     |  | (2,861 | )
|Gross profit: (1)                                    |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Domestic long distance                               |  |                                                   |  | 866    |   |  |     |  | 601    |   |  |     |  | 1,214  |   |  |     |  | 920    |   |  |     |  | 772    |  
|International long distance                          |  |                                                   |  | 1,235  |   |  |     |  | 1,517  |   |  |     |  | 794    |   |  |     |  | 853    |   |  |     |  | 898    |  
|Data and internet services                           |  |                                                   |  | 113    |   |  |     |  | 249    |   |  |     |  | 436    |   |  |     |  | 611    |   |  |     |  | 826    |  
|Local services                                       |  |                                                   |  |       |   |  |     |  |       |   |  |     |  | 22     |   |  |     |  | 114    |   |  |     |  | 167    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total                                                |  |                                                   |  | 2,214  |   |  |     |  | 2,367  |   |  |     |  | 2,466  |   |  |     |  | 2,498  |   |  |     |  | 2,663  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|                                                     |  | As of and for the year ended December 31,         | 
|                                                     |  |                                                   |  | 1999   |   |  |     |  | 2000   |   |  |     |  | 2001   |   |  |     |  | 2002   |   |  |     |  | 2003   |  
|Administrative, selling and other operating expenses |  |                                                   |  | (1,857 | ) |  |     |  | (1,786 | ) |  |     |  | (1,836 | ) |  |     |  | (1,689 | ) |  |     |  | (1,479 | )
|Depreciation and amortization                        |  |                                                   |  | (689   | ) |  |     |  | (784   | ) |  |     |  | (948   | ) |  |     |  | (871   | ) |  |     |  | (764   | )
|Operating (loss) income                              |  |                                                   |  | (332   | ) |  |     |  | (203   | ) |  |     |  | (318   | ) |  |     |  | (62    | ) |  |     |  | 421    |  
|Financial expenses, net                              |  |                                                   |  | (29    | ) |  |     |  | (229   | ) |  |     |  | (250   | ) |  |     |  | (1,281 | ) |  |     |  | (653   | )
|Other income (expenses)                              |  |                                                   |  | 4      |   |  |     |  | (41    | ) |  |     |  | (22    | ) |  |     |  | (18    | ) |  |     |  | 99     |  
|Asset tax                                            |  |                                                   |  |       |   |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (5     | ) |  |     |  | (4     | )
|Net loss                                             |  | Ps.                                               |  | (357   | ) |  | Ps. |  | (478   | ) |  | Ps. |  | (595   | ) |  | Ps. |  | (1,367 | ) |  | Ps. |  | (136   | )
|BALANCE SHEET                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Mexican GAAP:                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Cash and cash equivalents                            |  | Ps.                                               |  | 1,249  |   |  | Ps. |  | 208    |   |  | Ps. |  | 265    |   |  | Ps. |  | 161    |   |  | Ps. |  | 411    |  
|Trade receivables                                    |  |                                                   |  | 763    |   |  |     |  | 812    |   |  |     |  | 533    |   |  |     |  | 516    |   |  |     |  | 471    |  
|Real estate and equipment, net                       |  |                                                   |  | 5,989  |   |  |     |  | 5,831  |   |  |     |  | 5,589  |   |  |     |  | 5,645  |   |  |     |  | 5,649  |  
|Other assets                                         |  |                                                   |  | 4,518  |   |  |     |  | 3,274  |   |  |     |  | 2,282  |   |  |     |  | 1,625  |   |  |     |  | 1,240  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total assets                                         |  |                                                   |  | 12,519 |   |  |     |  | 10,125 |   |  |     |  | 8,669  |   |  |     |  | 7,947  |   |  |     |  | 7,771  |  
|Senior notes                                         |  |                                                   |  | 6,786  |   |  |     |  | 6,278  |   |  |     |  | 5,726  |   |  |     |  | 6,112  |   |  |     |  | 4,351  |  
|Bank loans and notes payable                         |  |                                                   |  |       |   |  |     |  | 18     |   |  |     |  | 455    |   |  |     |  | 208    |   |  |     |  | 131    |  
|Total debt                                           |  |                                                   |  | 6,786  |   |  |     |  | 6,296  |   |  |     |  | 6,181  |   |  |     |  | 6,320  |   |  |     |  | 4,482  |  
|Accounts payable                                     |  |                                                   |  | 2,380  |   |  |     |  | 992    |   |  |     |  | 637    |   |  |     |  | 651    |   |  |     |  | 454    |  
|Other payables                                       |  |                                                   |  | 404    |   |  |     |  | 678    |   |  |     |  | 747    |   |  |     |  | 909    |   |  |     |  | 378    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total liabilities                                    |  |                                                   |  | 9,570  |   |  |     |  | 7,966  |   |  |     |  | 7,565  |   |  |     |  | 7,880  |   |  |     |  | 5,314  |  
|Contributed capital                                  |  |                                                   |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 1,189  |  
|Accumulated losses                                   |  |                                                   |  | (6,457 | ) |  |     |  | (7,247 | ) |  |     |  | (8,302 | ) |  |     |  | (9,339 | ) |  |     |  | 1,268  |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total stockholders equity                           |  |                                                   |  | 2,949  |   |  |     |  | 2,159  |   |  |     |  | 1,104  |   |  |     |  | 67     |   |  |     |  | 2,457  |  
|U.S. GAAP:                                           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Cash and cash equivalents                            |  | Ps.                                               |  | 1,249  |   |  | Ps. |  | 208    |   |  | Ps. |  | 265    |   |  | Ps. |  | 161    |   |  | Ps. |  | 411    |  
|Trade receivables                                    |  |                                                   |  | 763    |   |  |     |  | 812    |   |  |     |  | 533    |   |  |     |  | 516    |   |  |     |  | 471    |  
|Real estate and equipment, net                       |  |                                                   |  | 6,950  |   |  |     |  | 6,894  |   |  |     |  | 6,886  |   |  |     |  | 6,426  |   |  |     |  | 5,945  |  
|Other assets                                         |  |                                                   |  | 2,995  |   |  |     |  | 1,960  |   |  |     |  | 1,194  |   |  |     |  | 724    |   |  |     |  | 705    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total assets                                         |  |                                                   |  | 11,957 |   |  |     |  | 9,874  |   |  |     |  | 8,878  |   |  |     |  | 7,827  |   |  |     |  | 7,532  |  
|Senior notes(2)                                      |  |                                                   |  | 6,786  |   |  |     |  | 6,278  |   |  |     |  | 5,726  |   |  |     |  | 6,112  |   |  |     |  | 5,636  |  
|Bank loans and notes payable                         |  |                                                   |  |       |   |  |     |  | 18     |   |  |     |  | 455    |   |  |     |  | 208    |   |  |     |  | 131    |  
|Total debt                                           |  |                                                   |  | 6,786  |   |  |     |  | 6,296  |   |  |     |  | 6,181  |   |  |     |  | 6,320  |   |  |     |  | 5,767  |  
|Accounts payable                                     |  |                                                   |  | 2,380  |   |  |     |  | 992    |   |  |     |  | 637    |   |  |     |  | 651    |   |  |     |  | 454    |  
|Other payables                                       |  |                                                   |  | 404    |   |  |     |  | 678    |   |  |     |  | 748    |   |  |     |  | 909    |   |  |     |  | 378    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total liabilities                                    |  |                                                   |  | 9,570  |   |  |     |  | 7,966  |   |  |     |  | 7,565  |   |  |     |  | 7,880  |   |  |     |  | 6,599  |  
|Contributed capital                                  |  |                                                   |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 9,406  |   |  |     |  | 10,528 |  
|Accumulated losses                                   |  |                                                   |  | (7,019 | ) |  |     |  | (7,498 | ) |  |     |  | (8,093 | ) |  |     |  | (9,459 | ) |  |     |  | (9,595 | )
|                                                     |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Total stockholders equity                           |  |                                                   |  | 2,387  |   |  |     |  | 1,908  |   |  |     |  | 1,313  |   |  |     |  | (53    | ) |  |     |  | 933    |  
|                                                     |  |                                                   |  |        |   |  |     |  |        |  
|CASH FLOW DATA:                                      |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Resources (used in) provided by (3)                  |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Mexican GAAP:                                        |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Operating activities                                 |  | Ps.                                               |  | (442   | ) |  | Ps. |  | (662   | ) |  | Ps. |  | 745    |   |  | Ps. |  | (19    | ) |  | Ps. |  | 495    |  
|Investing activities                                 |  |                                                   |  | (1,855 | ) |  |     |  | 111    |   |  |     |  | (574   | ) |  |     |  | (223   | ) |  |     |  | (247   | )
|Financing activities                                 |  |                                                   |  | 3,400  |   |  |     |  | (489   | ) |  |     |  | (115   | ) |  |     |  | 138    |   |  |     |  | 1      |  
|Cash flows (used in) provided by (3)                 |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|U.S. GAAP:                                           |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|                                                     | 
|                                                     |  | As of and for the year ended December 31,         | 
|                                                     |  |                                                   |  | 1999   |   |  |     |  | 2000   |   |  |     |  | 2001   |   |  |     |  | 2002   |   |  |     |  | 2003   |  
|Operating activities                                 |  | Ps.                                               |  | (84    | ) |  | Ps. |  | (1,479 | ) |  | Ps. |  | (152   | ) |  | Ps. |  | 231    |   |  | Ps. |  | 391    |  
|Investing activities                                 |  |                                                   |  | (2,689 | ) |  |     |  | 190    |   |  |     |  | (226   | ) |  |     |  | 149    |   |  |     |  | (247   | )
|Financing activities                                 |  |                                                   |  | 4,008  |   |  |     |  |       |   |  |     |  | 365    |   |  |     |  | (260   | ) |  |     |  | (198   | )
|OTHER FINANCIAL/OPERATING DATA:                      |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|(Unaudited):                                         |  |                                                   |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |   |  |     |  |        |  
|Capital expenditures (Mexican GAAP)                  |  | Ps.                                               |  | 456    |   |  | Ps. |  | 661    |   |  | Ps. |  | 946    |   |  | Ps. |  | 243    |   |  | Ps. |  | 275    |  
|Minutes of traffic, domestic long distance           |  |                                                   |  | 1,401  |   |  |     |  | 1,926  |   |  |     |  | 2,351  |   |  |     |  | 1,749  |   |  |     |  | 1,671  |  
|Minutes of traffic, international long distance      |  |                                                   |  | 811    |   |  |     |  | 1,051  |   |  |     |  | 1,021  |   |  |     |  | 1,507  |   |  |     |  | 1,893  |  
|Employees(4)                                         |  |                                                   |  | 1,856  |   |  |     |  | 1,922  |   |  |     |  | 2,067  |   |  |     |  | 1,910  |   |  |     |  | 1,876  |  
|Residential lines(5)                                 |  |                                                   |  | 707    |   |  |     |  | 686    |   |  |     |  | 650    |   |  |     |  | 588    |   |  |     |  | 468    |  
|Business Lines(5)                                    |  |                                                   |  | 89     |   |  |     |  | 98     |   |  |     |  | 111    |   |  |     |  | 95     |   |  |     |  | 80     |  

---

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



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



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



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



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



Exchange Rate Information



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



|               |  |                                    |  |       |  |            |  |          
|-------------- |  | ---------------------------------- |  | ----- |  | ---------- |  | ---------
|               |  | Noon Buying Rate(Pesos per dollar)
|Year           |  | High                               |  | Low   |  | Average(1) |  | PeriodEnd
|1994(2)        |  | 5.75                               |  | 3.11  |  | 3.48       |  | 5.00     
|1995           |  | 8.05                               |  | 5.27  |  | 6.53       |  | 7.74     
|1996           |  | 8.05                               |  | 7.33  |  | 7.64       |  | 7.90     
|1997           |  | 8.41                               |  | 7.72  |  | 7.97       |  | 8.07     
|1998           |  | 10.63                              |  | 8.04  |  | 9.25       |  | 9.90     
|1999           |  | 10.60                              |  | 9.24  |  | 9.56       |  | 9.48     
|2000           |  | 10.09                              |  | 9.18  |  | 9.46       |  | 9.62     
|2001           |  | 9.97                               |  | 8.95  |  | 9.33       |  | 9.14     
|2002           |  | 10.43                              |  | 9.00  |  | 9.66       |  | 10.43    
|               |  |                                    |  |      
|Month          |  |                                    |  |       |  |            |  |          
|September 2003 |  | 11.04                              |  | 10.77 |  | 10.92      |  | 11.00    
|October 2003   |  | 11.32                              |  | 10.97 |  | 11.18      |  | 11.06    
|November 2003  |  | 11.40                              |  | 10.98 |  | 11.15      |  | 11.40    
|December 2003  |  | 11.40                              |  | 11.17 |  | 11.25      |  | 11.24    
|January 2004   |  | 11.10                              |  | 10.81 |  | 10.92      |  | 11.01    
|February 2004  |  | 11.25                              |  | 10.91 |  | 11.03      |  | 11.06    



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



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



On March 26,
2004 the noon buying rate as provided by The Federal Reserve Bank of New York was Ps. 11.05 per 1.00 U.S. dollar.





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



B. Capitalization and Indebtedness



Not applicable.



C. Reasons for the Offer and Use of Proceeds



Not applicable.



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D. Risk Factors



Factors relating to Alestra



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



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



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



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



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In October 2003, Eximius Capital Funding, an entity related to WRH, filed a request for an insolvency
declaration and a Concurso Mercantil under the Ley de Concursos Mercantiles (the LCM) against us before a court in the State of Nuevo Leon, Mexico. In its petition, Eximius alleged, among other things, that our senior notes
due 2006 and 2009 had been accelerated. Eximius arguments before the Mexican courts are substantially identical to WRHs arguments in the U.S. proceedings. On February 16, 2004, the Mexico City court appointed an expert to conduct the
analysis of our financial situation. The experts analysis will determine whether we meet the statutory presumptions of Articles 10 and 11 of the LCM and therefore whether we meet the financial tests for us to be placed in a Concurso
Mercantil. However, we do not believe that the statutory presumptions of Articles 10 and 11 of the LCM have been met. If Eximius is successful and we are subject to a Concurso Mercantil, we cannot predict the duration of the proceeding or
its outcome. A reorganization would be likely to result in significant changes to our existing obligations, including our senior notes, which could include the cancellation or rescheduling of all or part of the obligations. During the pendency of
any such proceeding our ability to operate or manage our business, to retain employees, to maintain existing or create new client relationships, to continue to collect payment for our services or to obtain any type of funding or financing would
likely be materially adversely affected. Moreover, in the event of a Mexican bankruptcy/liquidation (quiebra) case, our operating concessions and our agreements for the use of the AT&T service mark, which is critical to our business, may
be subject to termination. While we cannot assure you of the outcome, we intend to vigorously contest both the U.S. litigation and the petition for a Concurso Mercantil.



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



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



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If the proportionate return system for calculating revenues for incoming international long
distance calls is terminated, we expect the average price of our international long distance services to decline significantly, thereby reducing our revenues



The potential expiration during 2004 of the proportionate return system for calculating and allocating traffic related to
incoming international long distance calls is expected to increase competition in the international long distance market. We believe that our revenues from long distance services could decline further if the proportionate return system for
calculating and allocating incoming international long distance minutes is terminated. Upon the dissolution of the proportionate return system, Mexican telecommunications providers will be able to compete freely on price for incoming international
long distance traffic. As a result, we expect that the rates we will be able to charge foreign telecommunications providers for completing incoming international calls will decline substantially. We believe that this decline may begin to occur
during 2004 or the beginning of 2005. While we currently terminate a significant portion of AT&Ts incoming long distance traffic, AT&T has no obligation to continue to terminate traffic through us and may choose a different Mexican
telecommunications provider to terminate its traffic if another telecommunications provider offers AT&T a lower settlement rate or for any other reason. Unless we are able to obtain increased volumes of incoming traffic sufficient to compensate
for the expected decline in per-minute rates, our revenues from long distance services will decline. In 2001, incoming international long distance traffic accounted for 17.5% of our revenues and in 2002, incoming international long distance traffic
accounted for 33.1% of our revenues. For 2003, incoming international long distance traffic accounted for 46.0% of our revenues.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Factors relating to the Mexican regulatory environment



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Factors relating to Mexico



Downturns in the Mexican economy adversely affect us



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



Currency devaluations may impair our ability to service our debt



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



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



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



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



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



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



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



Political developments in Mexico may adversely affect us



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



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



|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



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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 19715, 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 Corp. 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, 2003, we had invested more than Ps. 6,661.1 million
in the construction of our telecommunications network. Our telecommunications network interconnects with 198 cities throughout Mexico and consists of over 5,800 km. of high-capacity fiber optic lines that connect metropolitan areas, of which over
820 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. 4,333.2 million in 2001, Ps. 4,615.8 million in 2002 and Ps. 5,523.9 million in 2003. Our net losses
were Ps. 693.7 million in 2001, Ps. 1,464.8 million in 2002 and a net income of Ps. 912.8 million in 2003 under Mexican GAAP and Ps. 594.9 million in 2001, Ps. 1,366.8 million in 2002 and Ps. 136.3 million in 2003 under U.S. GAAP.



Capital expenditures



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



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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. Licensing fees are determined based upon the greater of a minimum fee or a dollar amount determined in relation to our
profitability. The license agreement is for a nine-year term expiring on October 16, 2004 and may be renewed by mutual agreement for additional five-year terms. AT&T may terminate the license agreement in its sole discretion upon certain changes
in ownership, if we fail to abide by certain quality control standards, 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, and permission to use the
service mark may be withdrawn.



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/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 to other international carriers, combining all of our direct interconnections and alliances to compete in the international market both in traditional and
special transit.



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 (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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Local services



We began providing local services in the first quarter of 2001 in the cities of Mexico City, Monterrey and Guadalajara and
began invoicing our customers for local services in the third quarter of 2001. We primarily provide our local services to our business customers, since the high level of usage by business customers provides an adequate return on the investment
required to connect these customers to our network. We charge our customers a monthly fee for our local service which varies depending on the amount of their actual usage.



Our number of local service customers has grown significantly over the last year. On June 30, 2001 we had approximately 50
local service customers. That number had grown to approximately 200 by December 31, 2001, 500 by December 31, 2002 and 879 by December 31, 2003.



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 is offered in different alternatives depending on the customers needs:



1. AT&T Enlace Digital: AT&Ts commercial program, offering digital trunks to connect the switchboard directly to the AT&T network, enabling
local, cellular, long distance or operator assisted calls. There are two types of signaling 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 features:



| |  | switched digital trunk lines;
| | - | -----------------------------



| |  | DIDs  Direct dialing numbers;
| | - | -------------------------------



| |  | group numbers;
| | - | --------------



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



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



AT&T Enlace Digital benefits are as follows:



| |  | 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 process with the help of SMART (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;
| | - | ----------------------------------------------------------------



| |  | the customers platform may grow according to its needs through an E1 for voice and data services through one point of access; and,
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | professional and specialized service for the customer through AT&Ts Business Customer Service Center.
| | - | ------------------------------------------------------------------------------------------------------



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During 2003, AT&T Local service was expanded to Mexicos 13 main cities: México,
Monterrey, Guadalajara, Aguascalientes, Cd. Juárez, León, Puebla, Querétaro, San Luis Potosí, Saltillo, Toluca, Torreón and Tijuana.



2. AT&T Línea Empresarial: AT&Ts commercial program provides local, long distance, cellular, 800 numbers and
operator calls, using 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. This commercial plan is available in México
City, Monterrey and Guadalajara.



AT&T Línea Empresarial
benefits are as follows:



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



| |  | no PBX expenses;
| | - | ----------------



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



| |  | a platform is offered 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.
| | - | -----------------------------------------------------------------------------------------------------------



Data and internet services



We believe that a substantial part of our growth in the future will come
from the data and internet services segment. 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 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Web services. Our web services include: AT&T Internet always on, AT&T Internet high capacity, AT&T Web-hosting, AT&T Web Fácil, AT&T Email,
Bulletin, Chat, Chat with moderator, Contact Form, Forums, Guestbook and Polling and e-Consulting.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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 specially 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 delay times and mesh
connectivity. The service is available to establish domestic and international circuits under a bilateral or an End to End scheme jointly with 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)andAT&T End to End Internet
Protocol enabled FR. Each of these services allows our customers to consider AT&T the single point of contact for ordering, provisioning, billing and fault management.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | AT&T End to End ATM (Asynchronous Transfer Mode). ATM is a high performance technology that allows the transmission of various types of applications, such as voice, data,
video and multimedia, using the same means of transmission. Alestra offers different Classes of Service (CoS) for those applications, allowing the customer to utilize a common network platform to satisfy all his telecommunication needs, and to
assign a different priority to each type of traffic. This service is also available under an End to End commercial scheme that provides a single point of contact for ordering, provisioning, billing and fault management.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 Virtual private network services. This service provides reliable and secure IP connectivity in a public carrier class network with the same performance
and security options found in the more expensive customer-owned private networks. This service allows customers to access their network via AT&T Dedicated VPN, AT&T VPN Remote Access, AT&T VPN in IDC (Internet Data Center)orAT&T IPSEC.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 they are highly competitive with Avantels prices.



Alestras marketing



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



Business
Customers. Alestra has national market coverage through its presence in different cities: 198 for long distance service, 50 for VPN, 26 for Data/Internet and 13 for Local Service. Alestra has nearly 400 sales, marketing and e-business
professionals dedicated to identifying, attracting and retaining business customers. Alestra also has a value added reseller (VAR) program that incorporates more than 200 agents with more than 950 account executives, extending Alestras
presence to 80 cities. In addition to basic services, Alestra offers to business customers a variety of advanced voice and data services to increase revenues per customer and reduce customer churn. Alestra also delivers customized bundled offers,
including the key services and value-added features such as fraud control and reports-on-demand. Alestra targets mainly four groups of business customers:



| |  | Multinational Corporations and Maquiladoras. Alestra benefits from AT&Ts extensive relationships with multinational corporations, many of whom operate
maquiladora facilities near the U.S.-Mexico border. Alestras account executives manage these important relationships with multinational corporations in conjunction with AT&T global and national account managers, both pre-and
post-sale.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Large and Affiliate Mexican Corporations. Alestra characterizes large corporations as those accounts with a monthly consumption above Ps. 100,000. Affiliates include
corporations such as Alfa, BBVA Bancomer and their subsidiaries and related entities, with whom Alestra or its shareholders are or have been affiliated. Alestra actively markets to these entities and has been successful in attracting these companies
as customers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | 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
businesses represent the largest part of our business segment in terms of number of accounts and volume. Alestra believes that in most cases these companies are underserved by Telmex.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Wholesale Services. Alestra believes that its state-of-the-art broadband network infrastructure positions it 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 Alestra to earn revenues from the excess capacity on its fixed-cost
network infrastructure. Examples of wholesale customers include other competitive long distance carriers, wireless carriers and internet service providers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Alestra also targets 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. Alestras residential marketing strategy is to target high-usage individuals and distinguish itself 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 accrue to customers based on their classification.



Advertising and Public Relations. Alestra believes that effective advertising stimulates demand for its services. Alestra believes that the high level of
brand name recognition of AT&T in Mexico as of January 2004, as determined by market research commissioned by Alestra, demonstrates in part the success of this promotional campaign. Alestra advertises using television, radio, newspapers and
specialized business periodicals. In the past, Alestra has hired well-known Mexican celebrities as spokespersons, including members of the national soccer and Olympic teams and actors. In addition, Alestra also sponsored sports events and teams,
educational programs and cultural activities. Currently a substantial part of our advertising materials are produced in conjunction with AT&T, using AT&T corporate TV advertising, allowing for both a more integrated image and substantial
cost reduction. On the other hand, Alestra also believes that credibility as an ignition element for any communication, before demand stimulation ensures the consistency and believability of the brands reputation and its services
in the Mexican market. In this sense, Alestras public relations efforts are directed to 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.



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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 and knowledgeable about our services. When marketing our services, the 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.



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



Telemarketing. For the residential segment, we use a focused
telemarketing effort. The 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 third parties for the majority of our telemarketing efforts and employ in-house telemarketing representatives and contract with third parties for the
services of additional telemarketing representatives. These representatives make outgoing telemarketing calls, which are in addition to inbound customer inquiries handled by our customer care representatives. During 2003, we stopped our
telemarketing efforts as a cost containment measure.



Customer service



We have been able to
distinguish ourselves from our main competitors, Telmex and Avantel, by offering superior customer service. A survey is conducted on a periodical basis with Mexican customers in different market segments. The survey has consistently indicated that
our services are perceived as having higher value than those of our competitors. The last survey was made in November 2003. By achieving a level of customer service superior to that of our competitors, we believe that we will 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, as well as an operator service center to
provide call processing assistance and two help desk (technical support) service centers, one for Internet and the other for e-Services. All centers operate 24 hours a day, 365 days a year.



At our customer service centers, customer service representatives receive
approximately 150,000 calls per month, and handle product and general service inquiries, billing inquiries, fault reports and technical support (help desk). Around 46,000 additional calls per month are handled by an IVR system for residential
customers only. We also have service representatives performing other activities related to customer care, such as ordering and loading new customers information into our database or back office activities, and changes in customer databases.



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Our operator services center receives an average of 174,000 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 operator services center seeks high
customer satisfaction by providing ongoing training to our operators 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. Furthermore, we access a third-party database to which all carriers provide information and which is operated by NCS de México S.A. de C.V. to ascertain whether a
prospective customer has amounts due over 30 days and over Ps. 150, or 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 must be
denied. If the credit history is acceptable, a representative from NCS de México 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 (multi-service/product) that includes network and customer support
capabilities. Customers are billed monthly, and we have 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 6,824 bank branches, or one of more than 4,000 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.



Our collection efforts include recorded phone messages, past
due mailed notices, telegrams to un-contacted accounts, personal calls to the customer and door to door collection, depending on the balance of the past due amount and the amount of time that the amount is overdue. Service is completely suspended
when a residential customer has an account that is



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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 lower than Ps. 500, the account is also assigned to a collection agency 150 days following the due date. If the efforts of
collection agencies are unsuccessful and if the balance is large enough to make legal process worthwhile, we commence 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 30 long distance
telecommunications companies in addition to Telmex and Teléfonos del Noroeste S.A. de C.V. or Telnor. Currently, approximately fifteen long distance concessionaires are offering commercial long distance service in Mexico.



The current level of competition is likely to increase throughout the
telecommunications market over the next few years as the Mexican telecommunications market continues to be liberalized and as new technologies are applied to the telecommunications industry. As a result of competition, prices for long distance calls
have declined in real terms by approximately 70% from December 1996 to December 2003.



As a result of competition in the consumer market, customer attrition to other telecommunications service providers, or 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 6.1% from 1999 to 2003. As a result of churn, we have
experienced a net loss of lines from the number of lines we originally obtained during pre-subscription. Among our business customers, the churn rate is less than 2.5%.



Recently, the SCT issued a proposed regulation that would allow cable companies to provide bidirectional data transmission
services. If the proposed regulation becomes effective, the cable companies (more than 600 companies in Mexico) could provide broadband internet access to compete with us. Also, it is not unlikely that in the future cable companies, as well as the
terrestrial microwave television companies, will be allowed to compete in the local and long distance telephone market; such action would represent a serious threat to our business and have an adverse effect on our market share and revenues.



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Our main competitors are:



Telmex



Telmex, the formerly government-controlled telecommunications monopoly, has historically dominated the Mexican telecommunications industry. In December
1990, the Mexican government officially began the liberalization of 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 as 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 has marketed its long distance services under its LADA brand. Telmexs image in the marketplace has been associated in the past with delays, poor transmission quality and poor customer service, which has been reflected in the
high number of claims filed against Telmex at the Procuraduría Federal del Consumidor (a Mexican public consumer protection agency serving a similar function as the U.S. Better Business Bureau). Telmex has spent significant sums on
advertising to improve its brand image.



In the data and
internet services market, Telmex has focused on services with higher market value such as internet dial-up and broadband services recently. Telmexs initial strategy was based on the acquisition of the Prodigy brand and its operation rights in
Latin America under which Telmex launched its internet dial-up service at the end of 1999. At the end of 2003, Telmex reported approximately 1.2 million Prodigy dial-up accounts. The Prodigy line of business was bolstered by its alliance with
Microsoft and the launching of T1MSN in 2000. This alliance and launching allowed Telmex to compete with established portals like Terra and Esmas.com.



In the core data services market, Telmex has prevented competition in the business sector by exercising its monopolistic powers over the direct access
local loop market and by protecting the long distance private lines and frame relay while developing new services such as its virtual private network. In the frame relay market, Telmex has promoted frame relay technology, which has a major customer
base in Mexico.



Telmexs new strategy is to launch DSL
Broadband service nationwide, which it started in Mexico City, Monterrey and Guadalajara. By the end of 2003, Telmex reported approximately 179,000 broadband accounts This service represents direct competition for dedicated internet in some market
segments.



Avantel



Avantel started operations in 1996 through a joint venture between MCI
International Telecommunications Corp. (45%) and Promotora Banamex de Sistemas de Teleinformática y



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Telecomunicaciones S.A. de C.V. (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.



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



In the
long distance market, Avantel has implemented a low price strategy in order to capture market share. Avantels portfolio of services are domestic long distance, international long distance, 800 services, and local service. Avantel began
providing local service in January 2001 in Mexico City, Monterrey and Guadalajara. Avantel has a nationwide concession for local service and at present has coverage in 11 cities.



Avantels data and internet services portfolio are frame relay, long distance private lines, local private lines,
dedicated internet, internet dial-up, virtual private network and web-hosting services. Recently, Avantel has begun deploying some Wi-Fi hotspots in order to capture some of the market. Its initial efforts have been carried out in the Mexico City
airport, but it is expected to expand its services in the near future.



Avantel is a direct competitor of Alestra.



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 has 128,000 Internet dial-up accounts and expanded its services launching prepaid dial-up cards. Terra implemented e-commerce initiatives and services such as shared hosting and unified messaging, and entered the 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. This acquisition has allowed Telefónica to enter into the business data market and introduce its brand name Telefónica Data.



Telefónica data developed new features for its data
service and enhanced its network with dark fiber contracts with Marcatel to increase the coverage of service.



In the third quarter of 2003, Telefónica Móviles México, a subsidiary of Telefónica, focused strongly on driving GSM services
and increasing its commercial activity by expanding its distribution channel to more than 3,600 points of sale. By the end of the third quarter, Telefónica Móviles México offered GSM service in 17 cities; a total of 56 cities
were already covered and Telefónica Móviles Mexico had 2.7 million active customers.



Telefónica is a direct competitor of Alestra in the data and internet services market.



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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 Comunicación enacted in 1940, the Reglamento de Telecomunicaciones enacted 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 attempted during 2003 to reach consensus with the industry in order to pass a new communications bill, but they were
unsuccessful. It is possible that a new federal telecommunications bill will be submitted to a vote in the Mexican Congress later this year, depending on the political environment.



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.



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.



During the last quarter of 2003, the SCT published a draft of both SCT and Cofetel operative rules in order to amend their
structure, responsibilities and faculties. We cannot be sure how those new rules could affect our business. At this time, the new rules are being reviewed by the Presidency.



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



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Cofetel is primarily responsible for:



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



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



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



| |  | resolving any differences amongst 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, among other responsibilities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 introduce competition in the provision of telecommunications services. In
general, the SCT is authorized to grant concessions to other parties for the provision 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 stated that Telmex was obligated 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 200 local service areas.



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 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



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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.



Alestras 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, 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 that are the subject matter of the concession (local and long distance);
| | - | ---------------------------------------------------------------------------------------------



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



| |  | the term of the telecommunications public network 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 for the assignee.



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 GHz frequency band covering the regions 4, 6 and 9
that contain Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacan, Mexico, Hidalgo and Morelos except for retained cities.



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Under the 10 GHz concessions, we were asked to provide point-to-multipoint signal coverage to those
municipalities or delegations where 30% of the total population in such regions resides by the end of September 2000. 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 of the term 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, Alestra filed a report before 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,
Alestra has fulfilled its commitments to provide signal coverage for 30% of the population residing in the municipalities or delegations or regions 4, 6 and 9.



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).
| | - | ------------------------------------------------------------



A wireless concession 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;
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



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|(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 the 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 the wireless concessions require us to meet certain buildup targets. Under the terms of the telecommunications public network concession, by December 31, 2000, we were required to provide
services in nine additional cities with our own infrastructure. Based on the conditions of the market, during 2000, we filed a petition to SCT asking for authorization to replace those cities. The SCT, acting upon the recommendation of Cofetel, is
the only body with the authority to modify the geographical coverage requirements in the telecommunications public network concession. As of July 13, 2001, SCT granted our petition authorizing such modification without any sanction.



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
or for imminent harm to the national economy. Under Mexican law, the government would be obligated to compensate Alestra 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 amount appraised, 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 the 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



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interconnection agreement. The negotiations were finished and the agreement was signed on December 22, 2000. We began providing local service on December 29,
2000.



During the first half of 2001, we entered into
local-to-local interconnection agreements with other local concessionaires, such as Axtel, Iusacell, Unefon, Telcel and Pegaso (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 driver to reach the residential market. We will continue to expand our commercial market by the introduction of our 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 our 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. The modification of our concession includes an additional obligation for us to participate in the Mexican Governments e-Mexico Program
by providing free 50 Mbps internet access distributed in the Centros Comunitarios Digitales (Digital Community Centers) located in 12 different towns during the next four years.



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 (4.5% from 1999
through 2002). Within the basket, Telmex is allowed to move the tariffs up as long as the price of the basket remains under the cap and to move tariffs down, provided they remain above the long run incremental cost of each service. Cofetel reviewed
the Telmex price cap recently and has determined a productivity factor of 3% from 2003 to 2006.



Telmexs tariffs for domestic long distance declined in real terms more than 70% from December 1996 to December 2003, either because Telmex did not
increase its prices to account for inflation or, in some cases, through price decreases 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;
| | - | --------



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| |  | 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, Alestra has 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 the
Federal Competition Commission 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 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 their 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. This interconnection agreement has an initial term that expired on January 1, 1999. The interconnection agreement provides, however, that the terms and
conditions of the agreement will remain in place until we and Telmex are able to reach a new agreement, which will apply retroactively.



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. The interconnection agreement had an initial term that expired on September 15, 2002. The interconnection agreement provides, however, that the terms and conditions of the agreement will remain in place until we and
Telmex are able to reach a new agreement, which will apply retroactively. We reached a new agreement with Telmex in January of 2003 which extended the rates charged by Telmex in 2002 through 2003. At this time, we are negotiating the applicable
rates for this year.



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Among other events, the interconnection agreements may be terminated if we suffer a substantial default
under the interconnection agreement.



During 2001, we, as a
local and long distance provider, entered into interconnection agreements with other local and long distance providers.



International settlement



The international settlement rates that leading U.S. carriers use to settle accounts with foreign telecommunications carriers have been subject to intense
downward pressure due to competition and to regulatory factors, including initiatives by the United States and other regulators. Telmex negotiated with AT&T rates for 1998 of $0.37 per minute, $0.31 per minute for the first half of 1999 and
$0.19 starting on July 1, 1999 until December 31, 2000 (an average of $0.25 in 1999). For 2001 through 2003 Telmex originally negotiated the applicable settlement rates with MCI International Inc. and IBD Worldcom Services, Inc. ($0.155 for 2001,
$0.135 for 2002 and $0.10 for 2003). We challenged those rates. In 2002, Telmex, MCI International Inc., IBD Worldcom Services, Inc. and AT&T reached an agreement for the settlement rates applicable to 2002 and 2003. Alestra has agreed with
AT&T to apply the same rates. The agreed rates are: (i) from January 1 to February 28, 2002, $0.135, (ii) from March 1, 2002 to December 31, 2003, a differentiated settlement rate scheme applies depending of the city of termination in Mexico,
and the rates are $0.055, $0.085 and $0.1175. For traffic terminated in the U.S., a settlement rate of $0.055 is applied. On August 8, 2002, Cofetel approved the new agreement for international rates. Currently, Telmex is negotiating the applicable
rates for 2004. The United States Trade Representative (USTR) continues to press for the elimination of the 1996 international long distance rules and has initiated a case before the World Trade Organization (WTO). A final report was issued on March
12, 2004, and a public version of the report is expected to be released in April 2004



Interconnection agreements between a Mexican long distance concessionaire and foreign carriers require the approval of Cofetel before becoming effective. Pursuant to the international long distance rules issued by
Cofetel in December 1996, the concessionaires that route traffic into and out of Mexico must apply uniform settlement rates and proportionate return systems. Proportionate return system is a methodology for allocation of
incoming international long distance calls from other countries among the various Mexican carriers, which is determined by the proportion of the total calls each carrier generated.



We are entitled to receive net settlement payments from 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 and British Telecom, are similar to others that
each Mexican long distance carrier has with corresponding foreign carriers. These agreements govern the rates of payment by Mexican carriers to the foreign carriers for the exchange of international traffic in connecting international calls billed
in Mexico, and by the foreign carriers to Mexican carriers for the exchange of international traffic in connecting international calls billed abroad. Mexican regulation provides that these rates must be uniform among the Mexican carriers, and must
be negotiated by the carrier that has the highest market share in each international route.



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Under the international long distance rules, Cofetel adopted rules providing for proportionate return
among the various Mexican carriers. A committee composed of Mexican long distance carriers determines on a monthly basis the proper allocation of incoming long distance call attempts from a specific country for the next month for each Mexican
carrier, based upon each Mexican carriers percentage of outbound international calls (based on revenues) to a specific country during the month ending one month earlier.



The international long distance rules establish that the proportionate return system regime can be revised. Cofetel may
allow international inbound traffic volumes to be settled outside of the proportionate return system under some specific conditions. This would require a change in the international long distance rules.



Pursuant to Cofetel regulations, the only legal way to transport public
international switched long distance minutes into Mexico is via the international settlement rate system described in the previous paragraph. 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 settlement rate system, a practice deemed illegal by Cofetel. These entities
terminate those calls as domestic calls, thus avoiding the payment of settlement charges. On December 29, 2000, as part of a settlement agreement, we, Telmex, Telnor and Avantel signed an agreement to seek to eliminate traffic that bypasses the
international settlement rate system. This part of the settlement agreement became effective on January 1, 2001 and since that day we have been working to eliminate the so called bypass traffic.



Off-net charges



We pay Telmex a per-minute charge to terminate calls on its network in
cities outside of the 198 cities from which we currently originate traffic. These traffic minutes represented about 14% of our revenues and total minutes of traffic for 2003.



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. For the period from January 1, 2000, to September 30, 2000, our off-net charges were Ps. 1.00 per minute.



For the period from October 1, 2000, to December 31, 2001, the 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. On December, 2001, during the negotiations to establish the terms and conditions for the interconnection rate and other issues for the year 2002, we agreed with Telmex to
continue off-net charges at the lower of 75% of Telmexs lowest rate available 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



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national territory. We agreed with Telmex to apply these rates in 2003 and we are negotiating the rates for 2004.



Third party verification



During 1997, the Mexican long distance telecommunications market experienced
rates of churn significantly in excess of 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 NCS de México, S.A. de C.V. the name and number of each customer such carrier acquired. NCS then independently called each customer to verify that the customer
had voluntarily chosen the carrier who submitted such customers name. Since February 1999, a representative of NCS has been 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 7.1% per month in 2002 and 2.5% for 2003; and we believe it will continue to decrease.



Value-added taxation of telephone services



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



C. Organizational structure



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



Alfa is one of Mexicos largest conglomerates. It comprises five groups
that participate in key industries within the Mexican and NAFTA economies, including petrochemicals and synthetic fibers, steel manufacturing, processed food, auto parts and telecommunications. As of December 31, 2003, Alfas total assets
amounted to Ps. 80.6 billion, with annual sales of Ps. 46.8 billion and operating income of Ps. 4.7 billion.



AT&T is among the premier voice, video and data communications companies in the world, serving businesses, consumers, and government. AT&T runs
the largest, most sophisticated communications network in the U.S., backed by the research and development capabilities of AT&T Labs. A leading supplier of data, internet and managed services for the public and private sectors, AT&T offers
outsourcing and consulting to large businesses and government. 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.



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Grupo Financiero BBVA Bancomer (BBVA Bancomer or the Group) is the leading private financial
institution in Mexico with 29,476 employees and is the largest in Latin America in terms of deposits and customer base, with total assets of 499,719 million pesos as of December 31, 2003. The Groups main subsidiary is Bancomer, a leading
banking institution with 1,653 branches operating under a universal banking concept, offering products and services to more than 9 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 almost 86,000 employees catering to 35 million clients in 37 countries, mainly in Europe and Latin America, through a network of approximately 7,000 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, 2003, 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
Alestras 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, Alfa, Onexa and Bancomer, and have adopted bylaws, each of which governs the relationship between the equity holders and us.



Our approximately 1,900 employees are employed through our sole subsidiary Servicios Alestra S.A. de C.V. (Servicios Alestra), which is organized under
the laws of Mexico. We hold 99.99% 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. We have invested more than Ps. 6,661.1
million in our technologically advanced fiber-optic network. Construction of the original design for our long



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distance network was completed in 1997. The network reliability in 2003 was 100% for our backbone, 100% for last-mile solutions based on fiber optic
equipment and 99.9991% for last-mile solutions based on digital microwave transmission equipment. Our network is regularly upgraded and extended using state-of-the-art technology. The network was constructed and is operated in accordance with the
reliability, redundancy and restoration standards of AT&Ts U.S. network. The key components of the network include:



| |  | over 5,830 route kilometers of long-distance and intra-city network, mostly with Lucent True Wave fiber-optic underground inter-city facilities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | approximately 820 route kilometers of metropolitan area fiber-optic facilities;
| | - | -------------------------------------------------------------------------------



| |  | seven Lucent 5ESS digital switches (one of which is used for testing purposes);
| | - | ---------------------------------------------------------------------------------



| |  | six switches to provide local services; and
| | - | -------------------------------------------



| |  | twelve Cisco Systems ATM/frame relay switches; six carrier-class Cisco Gigabit Switch routers, twelve carrier-class Cisco Systems routers used for data
services and internet connection; three routers 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 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 and 3 industrial
parks in Ciudad Juarez has a fiber-optic cable with 144 fiber-optic strands. These conduits are generally buried more than one meter below ground. Most of the metropolitan rings built by Alestra 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 5,830 kilometers in length and consists of three fiber-optic inter-city rings with the transmission capabilities of dense wave division
multiplexing and Synchronous Digital Hierarchy architecture, known as 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;
| | - | -------------------------------------------------------------------------------------------------------------------



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



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



| |  | two interstate segments in 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Pursuant to our long distance concession, we are permitted to send domestic traffic through
AT&Ts U.S. network to facilitate connectivity among our inter-city fiber-optic rings and two border crossings at Tijuana and Ciudad Juarez. Alestra is 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. SDH is the industry standard in transmission technology, 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 through the installation of additional electronics. 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 three wavelengths with a capacity of 5 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 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.



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 among our and others networks (including Telmex). Each switch and point of presence is housed in a concrete structure that is
equipped with advanced power supply, air conditioning, and security and fire protection systems.



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



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To support the growing demand for data services, we have deployed an ATM/frame relay, VPN and an internet
protocol network on our fiber-optic network. We have deployed twelve frame relay switches in Mexico City, Monterrey, Guadalajara, Puebla, Tijuana and Ciudad Juarez, which interconnect with AT&Ts global frame relay network. Our internet
protocol network is supported by six carrier class gigabit routers and twelve carrier class routers deployed in key points of presence and switch sites. Our internet protocol network interconnects with the global internet via AT&Ts
WorldNet internet services. Also our VPN infrastructure covering the cities of Mexico, 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 provides access in these cities to Alestras VPN backbone with 23 Cisco routers.



Direct access. Our direct access facilities allow our customers to access our network directly and to avoid
interconnection with local exchange carriers such as Telmexs network. We have deployed metropolitan fiber-optic rings consisting of approximately 820 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 48 metropolitan points of presence in our metropolitan rings acting as
hubs to connect commercial customers and some corporate buildings to our network, and 11 more are to be deployed in 2004. 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 to
provide direct access to our small business customers. We lease wireless frequency capacity from Conectividad Inalambrica 7GHz, S. de R.L., a joint venture 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 44 radio towers in our network. On these towers, we have selectively deployed point-to-point and point-to-multipoint digital microwave transmission equipment. Our suppliers of digital
microwave equipment include Alcatel, NEC, Marconi and Harris Corporation Telecommunication Systems and Services. 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. In this way, we are able to address a large number of additional end-users efficiently. Capacity leased in this manner is paid as an installation fee on a
monthly fixed-cost basis.



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Other properties



Our other principal properties consist of management and customer service offices located 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.



|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 important respects from U.S. GAAP. See Note 19 to the audited financial statements for a reconciliation to U.S. GAAP of net loss reported under
Mexican GAAP for the years ended December 31, 2001, 2002 and 2003 and of total stockholders equity as of December 31, 2002 and 2003.



Mexican GAAP requires that financial statements recognize 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, 2003. Although the restatement of nominal Peso amounts into constant Pesos lessens the distorting effect that an inflationary environment has on comparisons of financial
statements over time, such restatement does not wholly eliminate these distortions, and evaluation of period-to-period trends may be difficult.



Beginning January 1, 1997, Mexican GAAP has required 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. This restatement resulted in reductions in the net book value of equipment of Ps. 1,615.8
million, Ps. 1,188.4 million, and Ps. 833.4 million as of December 31, 2001, 2002 and 2003, respectively with corresponding accumulated deficit to stockholders equity. On December 1, 2003 our equity holders resolved to (i) reclassify the
balance of the restatement of capital stock as of December 31, 2002 in the amount of Ps. 4,032.2 million (Ps. 3,674.7 million nominal) into variable portion of the capital stock, and (ii) thereafter, reduce our variable portion of the capital stock
for Ps. 9,339.8 million (Ps. 8,982.3 million nominal) and applied Ps. 1,188.4 million (Ps. 1,142.9 million nominal) against accumulated deficit from restatement and Ps. 8,151.4 million (Ps. 7,839.4 million nominal) against accumulated deficit. The
above referenced capital transactions were distributed proportionally to the participation of each equity holder in our capital, i.e., 51% on Onexa and 49% on AT&T. These transactions did not represent a contribution or payment to the equity
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 the 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 198 cities in Mexico. In
2001, we had an estimated 16% of the total international long distance market in terms of minutes carried; in 2002, we had an estimated 18% of the total international long distance market in terms of minutes carried and in 2003 we had an estimated
11% of the total international long distance market in terms of minutes carried. As of December 31, 2001, we had 760,639 lines in service. As of December 31, 2002, we had 683,374 lines in service. As of December 31, 2003, we had 548,611 lines in
service.



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



|                                   |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|---------------------------------- |  | --------- |  | --- | ---- |  | --------- | ---- | --- | - |  | --------- |  | --- | -
|                                   |  | 2001      |  |     | 2002 |  |           | 2003 |    
|Lines in service at end of period: |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|Business                           |  | 110,800   |  |     |      |  | 94,885    |      |     |   |  | 80,254    |  |     |  
|Residential                        |  | 649,839   |  |     |      |  | 588,489   |      |     |   |  | 468,357   |  |     |  
|Minutes of use for the period (1): |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|Domestic long distance             |  | 2,350,923 |  | 70  | %    |  | 1,748,742 |      | 54  | % |  | 1,670,601 |  | 47  | %
|International long distance        |  | 1,020,527 |  | 30  | %    |  | 1,506,899 |      | 46  | % |  | 1,892,583 |  | 53  | %
|                                   |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|Total                              |  | 3,371,450 |  | 100 | %    |  | 3,255,641 |      | 100 | % |  | 3,563,184 |  | 100 | %
|                                   |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  



|(1) | In thousands.
|--- | -------------



The following table sets forth information regarding our operating revenues:



|                            |  |             |  |       |      |  |             |      |       |   |  |             |  |       |  
|--------------------------- |  | ----------- |  | ----- | ---- |  | ----------- | ---- | ----- | - |  | ----------- |  | ----- | -
|                            |  | 2001        |  |       | 2002 |  |             | 2003 |      
|Domestic long distance      |  | Ps. 2,136.3 |  | 49.3  | %    |  | Ps. 1,502.0 |      | 32.5  | % |  | Ps. 1,243.1 |  | 22.5  | %
|International long distance |  | 1,551.2     |  | 35.8  | %    |  | 2,159.5     |      | 46.8  | % |  | 2,977.0     |  | 53.9  | %
|Data and Internet services  |  | 612.2       |  | 14.1  | %    |  | 816.9       |      | 17.7  | % |  | 1,084.7     |  | 19.6  | %
|Local Service               |  | 33.6        |  | 0.8   | %    |  | 137.4       |      | 3.0   | % |  | 219.2       |  | 4.0   | %
|                            |  |             |  |       |      |  |             |      |       |   |  |             |  |       |  
|Total                       |  | Ps. 4,333.3 |  | 100.0 | %    |  | Ps. 4,615.8 |      | 100.0 | % |  | Ps. 5,524.0 |  | 100.0 | %
|                            |  |             |  |       |      |  |             |      |       |   |  |             |  |       |  



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 and 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



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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 13.8% per annum for 28-day Cetes, or Mexican treasury bills, during 1994, increased to an average of 48.3%
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:



|                             |  |                |   |  |                      |   |  |                                |    |  |                                               |             
|---------------------------- |  | -------------- | - |  | -------------------- | - |  | ------------------------------ | -- |  | --------------------------------------------- | ------------
|                             |  | Inflation Rate |   |  | Average 28-day Cetes |   |  | Mexican GDP Annual Growth Rate |    |  | GrossInternational Reserves as of December 31
|Year ended December 31, 1996 |  | 27.7           | % |  | 31.3                 | % |  | 5.1                            | %  |  | $                                             | 17.5 billion
|Year ended December 31, 1997 |  | 15.7           | % |  | 19.8                 | % |  | 6.8                            | %  |  | $                                             | 28.0 billion
|Year ended December 31, 1998 |  | 18.6           | % |  | 24.5                 | % |  | 4.9                            | %  |  | $                                             | 30.1 billion
|Year ended December 31, 1999 |  | 12.3           | % |  | 21.5                 | % |  | 3.8                            | %  |  | $                                             | 30.7 billion
|Year ended December 31, 2000 |  | 9.0            | % |  | 15.3                 | % |  | 6.9                            | %  |  | $                                             | 35.6 billion
|Year ended December 31, 2001 |  | 4.4            | % |  | 11.3                 | % |  | (0.3                           | )% |  | $                                             | 44.8 billion
|Year ended December 31, 2002 |  | 5.7            | % |  | 7.1                  | % |  | 0.9                            | %  |  | $                                             | 50.7 billion
|Year ended December 31, 2003 |  | 4.0            | % |  | 6.2                  | % |  | 1.3                            | %  |  | $                                             | 59.0 billion



Impact of
foreign currency fluctuations



See Item 3. Key
Information Selected Financial Data for a discussion of exchange rates and the impact of fluctuations of exchange rates on our company.



Customer attrition and trade accounts receivable



We historically have experienced high rates of churn. Churn results in the loss of future revenue from customers whose service is disconnected and the
inability to recoup costs incurred in acquiring the customer, typically switching costs, commissions and costs 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 either 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 change of focus toward
high usage customers and the establishment of a third-party verification system, described below, we were able to lower our churn rate to approximately 6.1% per month from 1999 to 2003.



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 6.2% from March 1998 to



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December 2002. During 2002, average monthly churn averaged 7.1%. For 2003, our average monthly churn rate was 2.5%.



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 implementation in March 1999 of a shared industry database that contains information on reported 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 that face 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. 515.6 million in 2002 to Ps. 470.7 million in 2003, given the difficult economic conditions in Mexico and
the liquidity issues faced by small telecommunications companies to which we provide wholesale services, we may experience payment defaults.



Asset taxes



Under current tax law, Mexican companies must pay the higher of an income tax or an asset tax. The asset tax is an amount equal to 1.8% of total assets.
As a start-up we have benefited from a grace period from the asset tax, and as a result, we were exempted from the asset tax from our inception through 1999. Since 2000 we have not paid any asset taxes because we have an asset tax reduction stemming
from accelerated depreciation booked in 1996 and 1997 which allowed us to offset the asset tax. This asset tax reduction expired at the end of 2002. In order to defer the 2003 asset tax payment, we applied the option established in Article 5-A of
the Asset Tax Law. As a result we may commence paying asset tax in 2007. Our only subsidiary, Servicios Alestra S.A. de C.V., began paying asset tax in 2000. Total asset tax for the years ended December 31, 2001, 2002 and 2003 were Ps. 4.7 million,
Ps. 4.6 million and Ps. 3.9 million, respectively.



Results of operations



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



Revenues



Total revenues increased 19.7%, or
Ps. 908.1 million, to Ps. 5,523.9 million in 2003 from Ps. 4,615.8 million in 2002.



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Domestic Long Distance. Revenues from domestic long distance services for 2003 decreased 17.2% or
Ps. 258.9 million, to Ps. 1,243.1 million from Ps. 1,502.0 million in 2002. Domestic long distance volume for 2003 decreased 4.5% compared to 2002 while the average revenue per minute decreased 13.4% to Ps. 0.74 in 2003 from Ps. 0.86 in 2002.
Total lines in service decreased 19.7% from 683,374 at December 31, 2002 to 548,611 at December 31, 2003 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 22.5% during 2003 compared to 32.5% during 2002.



International Long Distance. Revenues from international long distance services for 2003 increased Ps. 817.6 million, to Ps. 2,977.0 million from Ps. 2,159.5 million in 2002. This increase in revenues was
primarily due to a 25.6% increase in total international volume from 1,506.9 million minutes in 2002 to 1,892.6 million minutes in 2003, coupled with a 9.8% increase in the average revenue per minute from Ps. 1.43 in 2002 to Ps. 1.57 in 2003 as a
result of higher share of traffic from services such as collect calls, calling card and other international services, which typically provide higher revenue per minute to us than we receive in settlement payments for direct-dialed calls. During
2003, international long distance revenues represented 53.9% of total revenues compared to 46.8% during 2002.



Data and Internet Services. Data and internet service revenues, which primarily consist of internet, frame relay, private lines and direct access,
reached Ps. 1,084.7 million in 2003, a 32.8% increase over the Ps. 816.9 million recorded during 2002. The increase is mainly due to a continuous growth of the data and internet services market.



Local Services. Local service revenues reached Ps. 219.2 million in
2003, a 59.5% increase compared to the Ps. 137.4 million recorded during 2002. Local service revenues represented 4.0% and 3.0% of our total revenues during 2003 and 2002, respectively. We continue to increase our customer-base for this segment as
the roll-out of this service continues.



Cost of Services
(excluding depreciation)



Cost of services consists
primarily of local access charges, special projects charges, resale expenses, which are 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, which are typically paid on a per-circuit per month basis primarily to Telmex. Cost of services increased 35.1% to Ps. 2,861.1 million for 2003, compared to Ps. 2,118.4
million for 2002. This increase is primarily due to the 9.4% increase in total volume, measured in minutes of use, and particularly by the increase in the international long distance segment, which provided higher revenue but also higher cost.



Gross Profit



Gross profit, defined as revenues minus cost of services (excluding
depreciation), for 2003 increased 6.6% or Ps. 165.4 million to Ps. 2,662.8 million from Ps. 2,497.4 million in 2002. The increase in gross profit is explained by the 19.7% increase in our total revenues during 2003



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partially offset by the increase in cost of services. Our gross margin, defined as gross profit as a percentage of total revenues, decreased to 48.2% for
2003 compared to 54.1% in 2002. The decrease in gross margin is due to higher cost of services as a result of the increased participation of international services revenues in our total revenues which carry higher cost.



Domestic Long Distance.Gross profit for domestic long distance
services decreased 16.1% or Ps. 148.2 million to Ps. 771.7 million in 2003 from Ps. 920.0 million in 2002. The decrease in gross profit was driven by the 17.2% reduction in domestic long distance revenues.



International Long Distance.Gross profit for international long
distance services increased 5.3% or Ps. 45.5 million to Ps. 898.4 million in 2003 from Ps. 852.9 million in 2002. This increase in gross profit is driven by the increase in international volume.



Data and Internet.Gross profit for data and internet services
increased 35.3% or Ps. 215.3 million to Ps. 825.7 million in 2003 from Ps. 610.4 million in 2002. The growth in gross profit of our data and internet business was primarily a result of revenue growth of 32.8%.



Local Service.Gross profit for local service increased 46.3% or Ps.
52.9 million to Ps. 166.9 million in 2003, from Ps. 114.1 million in 2002. The increase in gross profit of our local business was primarily the result of the increase in our local revenues.



Administration, selling and other operating expenses



Administration, selling and other operating expenses, decreased 12.5% or Ps.
210.9 million, to Ps. 1,478.2 million in 2003 from Ps. 1,689.1 million in 2002. This decrease is mainly explained by the 41.9% or Ps. 81.9 million reduction in marketing expenses and a 9.3% or Ps. 76.2 million decrease in personnel related expenses
as a result of the measures taken to address our liquidity problems and in accordance with the current difficult economic environment. As a percentage of total revenues, administration, selling and other operating expenses for 2003 were 26.8%
compared to 36.6% registered during 2002.



Depreciation and
amortization



Depreciation and amortization decreased 8.2%
or Ps. 80.0 million to Ps. 889.5 million in 2003, from Ps. 969.4 million in 2002. This decrease is primarily due to the accelerated depreciation of our previous billing and customer care platform included in this expense until the first quarter of
2002.



Operating income (loss)



Due to the factors described above, operating income reached Ps. 295.2
million in 2003 compared to an operating loss of Ps. 161.1 million in 2002.



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Comprehensive financial loss



Our comprehensive financial loss for 2003 was Ps. 985.6 million, compared to a comprehensive financial loss of Ps. 1,281.3
million for 2002. The following table sets forth our comprehensive financial results for the periods under review:



|                                    |  |                                |   |  |        |  
|----------------------------------- |  | ------------------------------ | - |  | ------ | -
|                                    |  | Year ended December 31,        |  
|                                    |  | 2002                           |   |  | 2003   |  
|                                    |  | (in millions ofconstant pesos) |  
|Interest expense                    |  | (857.4                         | ) |  | (662.5 | )
|Interest income                     |  | 17.1                           |   |  | 6.8    |  
|Exchange loss, net                  |  | (797.7                         | ) |  | (593.7 | )
|Gain from monetary position         |  | 356.7                          |   |  | 265.8  |  
|                                    |  |                                |   |  |        |  
|Comprehensive financial result, net |  | (1,281.3                       | ) |  | (985.6 | )



Interest expense
decreased Ps. 194.9 million to Ps. 662.5 million in 2003, from Ps. 857.4 million in 2002, due to the lower interest rate of the new notes as a result of our restructuring process. The interest rate for the new notes is 8%, compared to the 12.125%
for the $270 million of existing notes previously due in 2006 and 12.625% for the $300 million of existing notes previously due in 2009. Interest on the new notes began accruing on June 30, 2003 and is payable semi-annually in arrears on June 30 and
December 30 starting on December 30, 2003.



Exchange loss in
2003 was Ps. 593.7 million compared to Ps. 797.7 million recorded during 2002. 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 2003 due to the 9.0% depreciation of the Peso against the U.S. dollar compared to a 12.8% depreciation of the Peso against the U.S. dollar in 2002.



Gain from monetary position decreased from Ps. 356.7 million for 2002 to Ps.
265.8 million for 2003. This decrease is primarily due to a lower Mexican inflation rate of 4.0% for 2003 compared to 5.7% for 2002 coupled with a lower monetary liabilities base.



Income and asset taxes



We and our sole subsidiary, Servicios Alestra, are subject separately to the payment of income tax and asset tax, which are computed by each legal entity.
We did not pay asset taxes because we have an asset tax credit stemming from accelerated depreciation booked in 1996 and 1997, which allowed us to offset the asset tax. For 2002 and 2003 Servicios Alestra recorded asset tax of Ps. 4.6 million and
Ps. 3.9 million, respectively. We have generated substantial tax losses of approximately Ps. 10,157.4 million; accordingly, no income tax provisions have been included in the income statements for 2003.



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Special Item



In November 17, 2003 we concluded our debt restructuring process, in which we obtained 85.5% participation, representing
$487 million of our $570 million senior notes. We issued $304.2 million in new notes and paid $110 million in cash, resulting in a debt write off of Ps817.0 million ($73 million). Additionally, holders that participated in the offers, agreed not to
receive accrued and unpaid interest on their tendered notes and agreed that interest payments in the amount of Ps800.9 million ($71.4 million) that were scheduled to be made on November 15, 2002 and May 15, 2003, were never due and payable.



When we issued our senior notes in 1999, we incurred fees and
expenses that were capitalized and were being amortized over the term of the senior notes. We wrote off, as a special item, an amount of Ps. 110.2 million capitalized debt issuance cost corresponding to the 85.5% of holders that exchanged their old
notes for new notes.



A summary of the special item breakdown
is as follows:



|                                                              |  |             |  
|------------------------------------------------------------- |  | ----------- | -
|                                                              |  | Ps. million |  
|Gain on extinguishment of debt                                |  | 817.0       |  
|Gain on reversal of accrued and unpaid interest               |  |             |  
|2002                                                          |  | 444.9       |  
|2003                                                          |  | 356.0       |  
|                                                              |  |             |  
|                                                              |  | 800.9       |  
|Write-off of capitalized debt issuance cost of tendered notes |  | (110.2      | )
|                                                              |  |             |  
|Total                                                         |  | Ps. 1,507.7 |  



Net Income (loss)



For the reasons discussed above, including the benefit of
the debt restructuring, we recorded a net income of Ps912.8 million compared to a net loss of Ps1,464.8 million recorded during 2002.



Fiscal Year ended December 31, 2002 compared to Fiscal Year ended December 31, 2001



Revenues



Total revenues were Ps4,615.8 million in 2002, a 6.5% increase from the Ps4,333.2 million recorded during 2001.



Domestic Long Distance. Revenues from domestic long distance services
for 2002 decreased 29.7% or Ps634.2 million, to Ps1,502.0 million from Ps2,136.3 million in the same period in 2001. Domestic long distance service revenues represented 32.5% of total revenues during 2002 compared to 49.3% in the same period of
2001. This decrease was primarily caused by a 25.6% reduction in domestic long distance volume from 2,351 million minutes in 2001 to 1,749 million minutes in 2002, combined with a decrease in the average revenue per minute from Ps0.91 in 2001 to
Ps0.86 in 2002. The decrease in volume is attributable to several factors, including:



| |  | the economic slowdown in Mexico which started in the latter part of 2001 and continued throughout 2002;
| | - | -------------------------------------------------------------------------------------------------------



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| |  | lower traffic from large customers, including long distance carriers, that may have been affected by a decrease in the amount of bypass traffic related to the decrease in
international settlement rates (see discussion of International Long Distance below); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a 10.2% reduction in our total lines in service from 760,639 at December 31, 2001 to 683,374 at December 31, 2002.
| | - | ------------------------------------------------------------------------------------------------------------------



The decrease in the average revenue per minute was attributable primarily to
a shift in traffic mix toward business customers, which typically benefit from volume discounts.



International Long Distance. Revenues from international long distance services increased 39.2% or Ps. 608.3 million, to Ps. 2,159.5 million from
Ps. 1,551.2 million in 2001. This increase in revenues was primarily due to a 47.7% increase in total international volume from 1,021 million minutes in 2001 to 1,507 million minutes in 2002, which was partially offset by a decrease in the average
revenue per minute from Ps. 1.52 in 2001 to Ps. 1.43 in 2002.



The increase in international long distance volume is attributable to organic growth in the overall market for southbound U.S.-Mexico international voice traffic, an increase in traffic flowing through the international settlements system
in 2002 that we believe replaced traffic routed in 2001 as bypass traffic and our successful efforts to capture a higher share of traffic from other services such as collect calls, calling card calls and other international services. We believe that
this shift in volume out of domestic long distance and into international long distance during 2002 is a result of the reduction in settlement rates, which decreased the opportunities for carriers to arbitrage the difference between settlement rates
and termination rates for domestic traffic. Settlement rates for traffic between Mexico and the U.S. in 2002 were as follows: for January and February of 2002, $0.1350 for northbound and southbound traffic, and since March 1, 2002, it has been
$0.055 per minute for calls originated in the U.S. and terminated in Mexico City, Guadalajara and Monterrey, $0.085 per minute for calls originated in the U.S. and terminated in most other large or medium cities and $0.1175 per minute for calls
originated in the U.S. and terminated in all other cities in Mexico. Since March 1, 2002, we have paid $0.055 per minute for outgoing international traffic terminated in the U.S.



The decrease in the average revenue per minute on international traffic was attributable primarily to lower international
settlement rates.



International long distance revenues
represented 46.8% of total revenues during 2002 compared to 35.8% during 2001. The current international settlement rates represent a continuing trend of declining rates which has persisted since we began operations. Since 1998, rates have fallen
78.2% from $0.395 per minute to their current levels as described above with a current weighted average of approximately $0.087 per minute.



Data and Internet Services. Data and internet service revenues, which primarily consist of internet, frame relay, private lines and direct access,
increased 33.4%, or Ps. 204.7 million to Ps. 816.9 million in 2002 from Ps. 612.2 million in 2001. Data and internet service revenues



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represented 17.7% of total revenues during 2002 as compared to 14.1% during 2001. The increase in data and internet service revenue was a result of organic
growth in the data and internet service market in Mexico, which has comparatively low penetration rates as compared with the U.S., as well as the success of our marketing campaigns and the introduction of new services.



Local Services. We started offering local service in Mexico City,
Monterrey and Guadalajara in the first quarter of 2001. Local service revenues were Ps. 137.4 million in 2002, compared to the Ps. 33.6 million in 2001. Local service revenues represented 3.0% of total revenues during 2002 compared to less than 1.0%
in 2001. The increase in local service revenue is a result of an increase in local service call volume related primarily to the roll-out of local service to certain of our existing long distance customers as well as to new customers.



Cost of services (excluding depreciation)



Cost of services amounted to Ps. 2,118.4 million, or 45.9% of revenues,
increasing 13.5% or Ps. 251.3 million, from Ps. 1,867.1 million, or 43.1% of revenues, for 2001. The increase was primarily due to a 72.6% increase in the international cost of services due to the higher international call volume, partially offset
by a 36.9% decrease in domestic cost of services due to the combined effects of lower domestic long distance volume and a reduction in the interconnection rates to access Telmexs local network from $0.0125 per minute in 2001 to $0.00975 per
minute, which became effective on January 1, 2002.



Average
cost of services per minute of domestic traffic (which includes per-minute as well as per-month cost elements) declined from Ps. 0.39 in 2001 to Ps. 0.33 in 2002 due to the reduction in the Telmex local network interconnection charge, as well as the
following:



| |  | Beginning on January 1, 2002, Telmex lowered the rate it charges to competitive telecommunications providers, including us, for interconnection leased lines and co-location fees to
55% of the lowest rate that Telmex charges to any of its customers.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Telmex maintained its off-network charges, which are the resale tariffs that Telmex charges for terminating or originating calls outside of the cities in which we have our own
network facilities, at 75% of the lowest rate that Telmex registers with Cofetel or charges or invoices to any customer or carrier for domestic or international long distance traffic.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Beginning in January 1, 2002, Telmex lowered the rate it charges to competitive telecommunications providers for private leased lines, giving them a volume discount.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



In January of 2003, we agreed with Telmex to
apply these rates in 2003.



Average cost of services per minute
of international traffic increased from Ps. 0.74 in 2001 to Ps. 0.87 in 2002 due to a shift in the mix of international traffic carried by us.



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Gross profit



Gross profit, defined as revenues minus cost of services, for 2002 totaled Ps. 2,497.4 million, a 1.3% increase from the Ps.
2,466.1 million recorded during the same period of 2001. The increase in gross profit is explained by the 6.5% increase in revenues. Our gross margin, which is gross profit divided by revenue, decreased to 54.1% during 2002 from 56.9% in 2001.



Domestic Long Distance. Gross profit for domestic long
distance services for 2002 decreased 24.2% or Ps. 294.3 million to Ps. 920.0 million from Ps. 1,214.3 million recorded during 2001. This 24.2% decline in gross profit was driven by the 29.7% decrease in domestic long distance revenues which was only
partially offset by the reduction in local interconnection rates, leased lines, co-location fees, and off-network rates charged by Telmex.



International Long Distance. Gross profit for international long distance services for 2002 increased 7.4% or Ps. 58.8 million to Ps. 852.9 million from
Ps. 794.1 million recorded during 2001. The increased gross profit of our international long distance business is explained by the increase in revenues, which was partially offset by higher cost of services as previously explained.



Data and Internet Services. Gross profit for data and internet services for
2002 increased 40.0% or Ps. 174.4 million to Ps. 610.5 million from Ps. 436.1 million recorded during 2001. The increase in gross profit of our data and internet business was primarily a result of revenue growth of 33.4%.



Local Service. Gross profit for local service during 2002 increased Ps. 92.5
million to Ps. 114.1 million from Ps. 21.6 million recorded during 2001. The increase in gross profit of our local business was primarily a result of our continued customer acquisition and roll-out of this service.



Administration, selling and other operating expenses



Administration, selling and other operating expenses, which consist
primarily of wages, salaries and benefits, consulting fees, billing and collection fees, building maintenance, advertising expenses, and the allowance for doubtful accounts, decreased 8.0% to Ps. 1,689.1 million for the year ended December 31, 2002
from Ps. 1,836.3 million during 2001. This reduction in administration, selling and other operating expenses was primarily due to our efforts to control costs which include lowering headcount and cutting marketing, training and other discretionary
expenses.



Depreciation and amortization



In 2002, depreciation and amortization decreased 7.4% or Ps. 77.3 million,
to Ps. 969.4 million, from Ps. 1,046.7 million in 2001. During 2001 there was an accelerated depreciation of the previous billing and customer care platform which was included until the first quarter of 2002.



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Operating loss



Due to the factors described above, operating loss decreased 61.4% or Ps. 255.9 million in 2002, to Ps. 161.1 million from
Ps. 417.0 million recorded during 2001.



Comprehensive
financial loss



The comprehensive financial loss was Ps.
1,281.3 million for 2002, compared to a comprehensive financial loss of Ps. 250.2 million for 2001. The following table sets forth our comprehensive financial results for the periods under review:



|                                    |  |                                |   |  |          |  
|----------------------------------- |  | ------------------------------ | - |  | -------- | -
|                                    |  | Year ended December 31,        |  
|                                    |  | 2001                           |   |  | 2002     |  
|                                    |  | (in millions ofconstant pesos) |  
|Interest expense                    |  | (832.5                         | ) |  | (857.4   | )
|Interest income                     |  | 62.8                           |   |  | 17.1     |  
|Exchange gain (loss), net           |  | 272.7                          |   |  | (797.7   | )
|Gain from monetary position         |  | 246.8                          |   |  | 356.7    |  
|                                    |  |                                |   |  |          |  
|Comprehensive financial result, net |  | (250.2                         | ) |  | (1,281.3 | )



Exchange loss for 2002
was Ps. 797.7 million compared to an exchange gain of Ps. 272.7 million in 2001. We record a foreign exchange gain or loss with respect to U.S. dollar-denominated monetary assets or 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 U.S. dollar-denominated indebtedness and accounts payable, exceed our U.S. dollar-denominated monetary assets, which principally consist of investments
in cash equivalents. As a result, we have recorded a foreign exchange loss during 2002 due to the 12.8% depreciation of the Peso against the U.S. dollar compared to a foreign exchange gain during 2001 due to the 4.8% appreciation of the Peso against
the U.S. dollar. Gain from monetary position increased Ps. 110.0 million from Ps. 246.8 million in 2001 to Ps. 356.7 million for the year ended December 31, 2002. This increase is primarily due to a higher Mexican inflation rate of 5.7% for 2002,
compared to 4.4% for 2001. Interest income decreased Ps. 45.7 million, to Ps. 17.1 million for 2002 from Ps. 62.8 million in 2001. This decrease is mainly attributable to lower interest earnings generated by the reduction in the interest reserve
account created as collateral for the existing notes. Interest expense increased 3.0% or Ps. 25.0 million from Ps. 832.5 million during 2001 to Ps. 857.4 million for the year ended December 31, 2002.



Income and asset taxes



We and our sole subsidiary, Servicios Alestra, are subject separately to the
payment of income taxes and asset taxes, which are computed by each legal entity. During the 2002 fiscal year, we did not pay asset taxes because we have an asset tax credit stemming from accelerated depreciation booked in 1996 and 1997, which
allowed us to offset the asset tax. During 2002, Servicios Alestra recorded asset taxes of Ps. 4.6 million. We have generated substantial tax losses of approximately Ps. 10,440.8 million; accordingly, no income tax provisions have been included in
the income statements for 2002.



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Net loss



For the reasons discussed above, we recorded a net loss of Ps. 1,464.8 million for 2002 compared to a net loss of Ps. 693.7 million during 2001.



Critical accounting policies



We have identified the policies below as critical to our business operations
and the understanding of our results of operations. Our preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, 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.



Revenue Recognition



Our principal sources of revenues are derived from domestic and international long distance services. Revenues are recognized based on minutes of traffic processed by us. Revenues from international long distance services into Mexico are
recognized on the basis of the international long distance rules which include the proportional return system. Under the proportional return system, incoming call attempts are 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. Revenues for incoming international traffic are recognized based on the number of call attempts converted to estimated
minutes in conformity with our experience and the authorized rates. Estimated minutes are adjusted to actual minutes once actually known by us.



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



In 2001,
Telmex, MCI International Inc., IDB Worldcom Services Inc. and AT&T reached an agreement for the settlement rates applicable for 2001, 2002 and 2003. From January 1 to February 28, 2002, the settlement rate was $0.135 per minute. In 2002,
Telmex, MCI International and AT&T reached a new agreement to reduce the settlements rates between Mexico and the United States for the remaining 2002-2003 period starting in March of 2002. Under this agreement, the carriers reduced settlement
rates depending on the destination of the call. For calls originating in the United States and terminating in Mexico City, Monterrey and Guadalajara, the settlement rate was $0.055 per minute. For traffic between the United States and the equal
access cities other than Mexico City, Monterrey and Guadalajara, the settlement rate was $0.0850 per minute and for all other cities in Mexico, the settlement rate was $0.1175



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per minute. Mexican carriers paid $0.055 per minute for traffic terminated in the United States. We agreed with AT&T to apply the same rates.



At present, Telmex is trying to reach a new agreement with the U.S.
carriers for the exchange of traffic between Mexico and United States for 2004. Alestra intends to apply the settlement rates as agreed for 2003, but will require AT&Ts agreement in order to do so.



Allowance for doubtful accounts



We take a conservative approach in connection with our policy for
uncollectible accounts. For domestic voice services, on the first day after the invoice is past due, the total amount is reserved. For data and internet services, the total amount is reserved after 120 days past due. Payment is due 25 days after the
issuance of the 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 lower than Ps. 500, the account is also assigned to a collection agency 120 days following the due date. If the efforts of collection agencies are unsuccessful and if the balance is
large enough to make legal proceedings worthwhile, we commence legal proceedings. We consider our reserve to be sufficient to cover the potential risk of doubtful 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 the amount of 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 assets
as well as 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, resulting 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
value of the asset. We review these types of 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. Based in our analysis, no impairment existed at December 31, 2001, 2002 and 2003.



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 actual current tax exposure together with an assessment of temporary differences resulting from the differing treatment of items, such as depreciation and amortization, cost and provisions and allowance for doubtful



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accounts, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated
balance sheet. To the extent we establish a valuation allowance or 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 in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of Ps. 2,318.8 million during 2003, due to uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward and recoverable asset tax, before they expire. We began accumulating net operating loss carried forwards beginning in 1996. These net operating loss carried forwards expire ten
years after they are accumulated. 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 which could materially impact our financial position and results of operations.



Deferred Charges



Our deferred charges reflect an expense capitalization during the preoperative period, which was made in accordance with Mexican GAAP.



For U.S. GAAP, the above-mentioned preoperative expenses were not
capitalized; therefore, the total amount of the deferred charges item reflects an adequate use under U.S. GAAP, mainly including items such as: software, bond issuance expenses, installation expenses for leased lines and concessions for frequency
bands.



New Accounting Pronouncements Under Mexican GAAP



In 2003, the MIPA issued new Statement C-12,
Financial Instruments Qualifying as Liabilities, Capital or Both (Statement C-12), which highlights the differences between liabilities and stockholders equity from the viewpoint of the issuer, as a basis for
identifying, classifying and recording the liability and capital components of combined financial instruments in their initial recognition.



The new Statement C-12 establishes the methodology for separating liabilities and stockholders equity from the price received from the placement of
combined financial instruments. That methodology is based on the residual nature of stockholders equity and avoids the use of fair values affecting stockholders equity in initial transactions. Additionally, it establishes that beginning
on January 1, 2004, the initial costs resulting from the issuance of the combined instruments are assigned to liabilities and stockholders equity in the same proportion as the amounts of the components recognized as liabilities and
stockholders equity; that the losses and incomes related to financial instrument components classified as liabilities are recorded in overall financing; and the yield distributions to owners of financial instrument components classified as
stockholders equity are charged directly to a capital account other than the income account for the year.



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Although this Statement C-12 became effective on January 1, 2004, it is not required when restating
information for prior periods or when recognizing an initial accrued effect on the income for the year it is adopted, in accordance with the provisions established in the transitory paragraph of the Statement C-12. The adoption of this Statement
will not have a material effect on the consolidated financial statements.



The MIPA issued Statement C-15, Impairment of Long-Lived Assets and Their Disposal (Statement C-15), which will be effective as of January 1, 2004, although early adoption is recommended.
Statement C-15 provides specific criteria in determining when there is an impairment in the value of long-lived assets, for both tangible and intangible assets. Furthermore, Statement C-15 established a methodology for calculating and recording
losses arising from the impairment of assets and their reversal. Also, Statement C-15 provides presentation and disclosure requirements for assets whose value has been impaired and the disclosure in the case that there is subsequent reversal of the
impairment. In addition, Statement C-15 provided guidance for the accounting, presentation and disclosure for discontinued operations. We are currently evaluating the impact that the adoption of this statement will have on our consolidated financial
statements.



New Accounting Pronouncements under U.S.
GAAP



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



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



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



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B. Liquidity and capital resources



Current Liquidity



As of December 31, 2002 and December 31, 2003 we had Ps. 161.4 million and
Ps. 410.8 million of unrestricted cash available, respectively. Unrestricted cash balance increased Ps. 249.4 million from December 31, 2002 to December 31, 2003 due mainly to the improvement in our operating results combined with the reduction in
our interest expense.



Unrestricted cash balance consists of
cash and temporary investments with original maturities of three months or less. Our treasury policy is to invest in highly liquid temporary cash investments issued by Mexican major banks and U.S. banks and corporations with the highest credit
ratings. As of December 31, 2003 we had cash of Ps. 26.2 million and temporary investments of Ps. 384.6 million, of which Ps. 292.8 million are in U.S. dollar-denominated instruments and Ps. 91.8 million are in Peso-denominated instruments.



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



As of December 31, 2002 and 2003, our ratio of
current assets to current liabilities was 0.59x and 1.27x, respectively. Our ratio of current assets to current liabilities increased from December 31, 2002 to December 31, 2003 due to the increase in our unrestricted cash balance.



Resources generated from, or used in, operating activities. Resources
provided from operating activities in 2003 were Ps. 495.1 million compared to resources used in operating activities of Ps. 18.5 million in 2002. This increase was primarily due to the improvement in the companys operating performance
resulting in a net income of Ps. 912.8 million in 2003 compared to a net loss of Ps. 1,464.8 million during 2002.



Resources used in, or generated from, investing activities. Resources used in investing activities were Ps. 246.5 million and Ps. 222.5 million in 2003
and 2002, respectively. The increase was due to a higher amortization of deferred charges.



Resources used in, or generated from, financing activities. Resources provided by financing activities for 2003 were Ps. 0.9 million compared to resources provided by financing activities of Ps. 137.7 million in 2002.
Resources provided by financing activities for 2003 includes the $100.0 million capital contribution from our shareholders to fund our debt restructuring, and the reduction of our long term debt by $183 million due to our debt restructuring.



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.



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We are not currently engaged in any hedging activity to minimize the risk of changes in the value of Peso
relative to the dollar. Given the nature of our revenues derived from international incoming traffic, which are 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. We may use hedging activities to minimize currency risks in the future.



Material Commitments and Funding



The table below describes our current material commitments.



|                                        |  |                            |  |       |  |        
|--------------------------------------- |  | -------------------------- |  | ----- |  | -------
|                                        |  | Year ending December 31,  
|                                        |  | 2004                       |  | 2005  |  | 2006   
|                                        |  | (in millions of Pesos (1))
|Vendor financing                        |  | 91.2                       |  | 9.7   |  |       
|Principal                               |  | 85.7                       |  | 9.1   |  |       
|Interest                                |  | 5.5                        |  | 0.6   |  |       
|Lease financing                         |  | 20.2                       |  | 1.9   |  |       
|Principal                               |  | 19.3                       |  | 1.9   |  |       
|Interest                                |  | 0.9                        |  |      |  |       
|Principal payments on long-term debt(2) |  |                           |  | 68.4  |  | 553.6  
|Notes interest payments(3)              |  | 389.2                      |  | 389.2 |  | 114.0  
|Operating leases                        |  | 67.9                       |  | 69.6  |  | 69.2   
|Capital expenditures                    |  | 403.6                      |  | 415.1 |  | 450.4  
|                                        |  |                            |  |       |  |        
|Total                                   |  | 918.9                      |  | 976.4 |  | 1,219.5
|                                        |  |                            |  |       |  |        

---

|(1) | Nominal pesos converted from U.S. dollars at a rate of 11.24 pesos per dollar, which is the
noon buying rate provided by The Federal Reserve Bank of New York on December 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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The Existing Notes



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 November 15, 1999. $487.0 million of the existing notes were retired pursuant to our exchange and cash tender
offers as described below. Due to our restructuring, as of December 31, 2003 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 million.



The New Notes



In November 2003, we completed our exchange and cash tender offers. 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. We have already made the December 30, 2003 interest payment from our internally-generated funds. As of December
31, 2003 we had $304 million of new notes outstanding.



Other indebtedness



We still have
outstanding our credit facility obtained from Hewlett Packard de México, S.A. de C.V. to fund information technology and telecommunication equipment and services. As of December 31, 2003, the balance of such facility was $9.8 million. Such
amount, which is payable within the next two years, is subject to an average annual fixed interest rate of 10.08%. 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, 2003 of $1.9 million, payable within the next eighteen months.



Debt Restructuring Process



On August 21, 2003, we commenced exchange and cash tender offers (the Offers) for all of our then-outstanding 12 1/8% Senior Notes due 2006
and 12 5/8% Senior Notes due 2009 (the Existing Notes) and solicited acceptances to a U.S. prepackaged plan of reorganization.



On November 5, 2003, we announced the satisfaction of our minimum tender condition and the expiration of the Offers on November 4, 2003. $232,920,000
principal amount of our 12 1/8% Senior Notes due 2006 and $254,200,000 principal amount of our 12 5/8% Senior Notes due 2009 were tendered in the Offers. These amounts in the aggregate represented 85.5% of the Existing Notes.



On November 17, 2003 we publicly announced the consummation of the offers .
We delivered our new Senior Notes due 2010 (the New Notes) amounting to $304.2 million, as well as a cash payment of $110 million, to the Depository Trust Company (DTC) for distribution to the holders of the Notes who
tendered in the Offers. The New Notes which are listed on the New York Stock Exchange, began trading on the New York Stock Exchange on November 18, 2003 and are traded through DTC. Also, on November 17, 2003, we paid all interest amounts due on the
remaining Existing Notes that were not tendered in the Offers.



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The New Notes are due on June 30, 2010 and bear interest at the rate of 8%. The other terms of the New
Notes are similar to those of the Existing Notes in effect prior to the consummation of the Offers. As part of the Offers, various terms of the Existing Notes were amended.



Litigation



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



Concurso Mercantil



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



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



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



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lack of jurisdiction and on January 28th, 2004, the 8thFederal District Judge in the Mexico City court accepted the records.



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



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



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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 also 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 are expected to continue to influence our financial results.



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 |  | 1-3years |  | 3-5years |  | More than5 years
|Long-term debt(2)                                                       |  | 6,479                     |  | 480             |  | 2,068    |  | 3,931    |  |                
|Capital (finance) lease obligations                                     |  | 22                        |  | 20              |  | 2        |  |         |  |                
|Operating lease obligation                                              |  | 278                       |  | 68              |  | 210      |  |         |  |                
|Purchase obligations                                                    |  | 1,752                     |  | 390             |  | 1,362    |  |         |  |                
|Other Long-term liabilities as reflected on the companys balance sheet |  |                          |  |                |  |         |  |         |  |                
|Total                                                                   |  | 8,531                     |  | 958             |  | 3,642    |  | 3,931    |  |                

---

|(1) | Calculated based on an exchange rate of Ps. 11.24 per U.S. dollar, the noon buying rate as provided by The Federal Reserve Bank of New York on December 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Interest and principal.
|--- | -----------------------



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



A. Directors and senior management



Biographies of Senior Management



Rolando Zubirán Shetler(51) 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
other various 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 (45) 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 (51) 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 with one year in telecommunications. 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 he got a Degree in Finance from Instituto Tecnológico Autónomo de Mexico.



Raúl Ortega (47) 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 and 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 Consejo Empresarial Mexicano para Asuntos Internacionales as a representative of Mexican business interests in Washington, D.C., with an
accounting degree from the Universidad Iberoamericana and a graduate degree in Political Economics.



Alejandro Irigoyen (51) 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



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Services at Alfas Corporate Headquarters where he had 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 (49) 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 had 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 and he also
attended the Instituto para la Alta Dirección de Empresas.



Biographies of Directors



Armando
Garza Sada (46) 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 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 (Private Sectors 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 BS 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.



Alfonso González Migoya
(59) is the Chief Financial Officer for ALFA, a position he has held since he joined ALFA in 1995. Prior to ALFA, Alfonso González served as Executive Vice-president of Finance and Administration in Bancomer (1993-1995). Before that, for 24
years he held several positions at Cydsa, serving as the Chief Financial Officer (1976-1985), and President of the Chemicals Division (1985-1993). Alfonso Gonzalez is currently a member of the Boards of Confederacion Patronal de la Republica
Mexicana (COPARMEX), COPARMEX Nuevo Leon, Universidad de Monterrey, Banco Regional de Monterrey, Liceo de Monterrey, Pronatura, the National Program for Financing Micro Entrepreneurs and the National Council for the Research and Development of norms
for Finance Information. He holds an MBA from Stanford University and a BS degree from the Tecnologico de Monterrey. He completed Duke Universitys Chemistry for Executives Program and has received a Top Management diploma from the IPADE.



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Mr. González, who is a nominee of Onexa, has been a director of Alestra since January, 2004.



Leopoldo Marroquín Morales (64) has been
ALFAs Chief Legal Counsel and Secretary of the Board since 1986. He previously occupied different positions, including Chief Legal Counsel and Chief Projects Officer at ALFA, and Chief Development Officer at Vitro Industrias Basicas. Mr.
Marroquín Morales earned the title of attorney-at-law at Escuela Libre de Derecho, Mexico City.



Mr. Marroquín, who is a nominee of Onexa, has been a director of Alestra since January, 2004.



Manuel Sánchez Rodríguez (38) is the General
Director of Risk Management of BBVA Bancomer, and representative of BBVA Bancomer to the Boards of Alestra, Cintra, Hoteles Presidente and Bancomer Transfer Services. Prior to his current position, he served as Director of the New York office of
BBVA and as Corporate Banking Director of BBVA Paris. He holds a Bachelor of Political and Economic Sciences from Yale, a Master of Sciences Degree from the London School of Economics and a Master of Arts from The European College of Belgium.



Mr. Sánchez, who is a nominee of Onexa, has been a
director of Alestra since January, 2004.



Eduardo Osuna
Osuna (34) has been an officer of BBVA Bancomer for 10 years; he currently acts as Corporate Director of Credit Collection. His experience includes heading the capital and restructuring transactions desk and representing BBVA Bancomer as a
member of the Boards of Cintra, Grupo Zapata and Grupo Canada. He is a Telecommunications Engineer and holds an MBA from La Salle University and IPADE, respectively.



Mr. Osuna, who is a nominee of Onexa, has been a director of Alestra since January, 2004.



Justin Sims (39) has been the vice president of AT&Ts
Global Services business since January 2003, with responsibility for one of the worlds largest data and IP businesses, serving more than 7,000 multi-national customers around the world. The Global Services business manages the operation of the
AT&T Global Network and product set, provides customer care for global customers and sells directly to retail businesses internationally.



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



Geoffrey Stephen Webster, (37) as Vice President, Commercial,
AT&T Global Services, 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 strategy unfolds. Prior to the formal launch of Concert as the AT&T BT global joint venture in January 2000,
Mr. Webster



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served as Chief Counsel for the predecessor Concert organization. During much of his time with Concert, he also managed the overall 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.



Edward Dwyer (47) is the Vice President and Treasurer of
AT&T responsible for managing the financial assets of the business including supporting AT&Ts capital requirements and financing activities. He is responsible for all traditional treasury and risk management activities. In addition,
Mr. Dwyer oversees the management of $35 billion of employee benefit assets and its Investor Relations efforts.



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



John Finnegan (48) is the Sales Vice President for SCG
responsible for all sales teams and sales activities outside of the U.S. He currently has a team of AT&T sales people in Mexico and throughout the CALA Region who support AT&Ts largest customers. He reports to Ron Spears and has been
with AT&T for more than 18 years, primarily in International and Data Networking Sales. He worked extensively with Alestra during the first several years of its business representing AT&Ts Venture Support organization.



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



B. Compensation



For the year ended December 31, 2003, we paid an
aggregate compensation of approximately Ps. 28.7 million to our executive officers and directors as a group for services in all capacities. As of December 31, 2003, we have accrued pension benefit and similar liabilities of Ps. 54.0 million.



C. Board Practices



Our direct equity holders are AT&T Telecom Mexico and Onexa. Under the
joint venture agreement as amended, 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. Any vote by the board of directors
requires a majority for approval, including an affirmative vote from at least one director nominated by each of AT&T Telecom Mexico and Onexa. 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.



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We currently do not have any organized audit or remuneration committees.



D. Employees



At December 31, 2003, we employed approximately 1,900 people through our
only subsidiary, Servicios Alestra, S.A. de C.V. In addition, Servicios Alestra, S.A. de C.V. has also contracted with third-party agencies for services of additional 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 management believes that our relationship with our employees and union is good.



E. Share Ownership



Not applicable.



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



A. Major Shareholders



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



Alfa is one of Mexicos largest
conglomerates. It comprises five groups that participate in key industries within the Mexican and NAFTA economies, including petrochemicals and synthetic fibers, steel manufacturing, processed food, auto parts and telecommunications. As of December
31, 2003, Alfas total assets amounted to Ps. 80.6 billion, with annual sales of Ps. 46.8 billion and operating income of Ps. 4.7 billion.



AT&T is among the premier voice, video and data communications companies in the world, serving businesses, consumers, and government. AT&T runs
the largest, most sophisticated communications network in the U.S., backed by the research and development capabilities of AT&T Labs. A leading supplier of data, internet and managed services for the public and private sectors, AT&T offers
outsourcing and consulting to large businesses and government. 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.



Grupo Financiero BBVA Bancomer (BBVA Bancomer or the Group) is the leading
private financial institution in Mexico with 29,476 employees and is the largest in Latin America in terms of deposits and customer base, with total assets of 499,719 million pesos as of



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December 31, 2003. The Groups main subsidiary is Bancomer, a leading banking institution with 1,653 branches operating under a universal banking
concept, offering products and services to more than 9 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 almost 86,000 employees, catering to 35 million clients in 37 countries, mainly in Europe and Latin America, through a network of approximately 7,000 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, 2003, 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.



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, Alfa, Onexa and Bancomer, and have adopted bylaws, each of which governs
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.



On December 1, 2003 our equity holders resolved to (i) reclassify the balance of the restatement of capital stock as of December 31, 2002 in the amount of Ps. 4,032.2 million (Ps. 3,674.7 million nominal) into
variable portion of the capital stock, and (ii) thereafter, reduce our variable portion of the capital stock for Ps. 9,339.8 million (Ps. 8,982.3 million nominal) and applied Ps. 1,188.4 million (Ps.1,142.9 million nominal) against accumulated
deficit from restatement and Ps. 8,151.4 million (Ps. 7,839.4 million nominal) against accumulated deficit. The above referenced capital transactions were distributed proportionally to the participation of each equity holder in our capital, i.e.,
51% on Onexa and 49% on AT&T. These transactions did not represent a contribution or payment to the equity holders.





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B. Related party transactions



See Exhibit 19 Financial Statements  Note 5. Accounts receivable
and payable and transactions with affiliates and other related parties.



In order to finance the restructuring of the senior notes that we closed on November 17, 2003, our equity holders provided $100 million to us (51% by Onexa and 49% by AT&T). In addition to this provision of
equity, AT&T made an $8.5 million payment to us under the Settlement Release Agreement.



C. Interests of experts and counsel



Not applicable.



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



A. Consolidated statements and other financial information



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



B. Significant changes



Not Applicable



|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 New York Stock Exchange, and an application to list the Senior Notes due 2010 on the Luxembourg Stock Exchange may be made.



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D. Selling shareholders



Not applicable.



E. Dilution



Not applicable



F. Expenses of the issue



Not applicable.



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



A. Share capital



Not applicable.



B. Memorandum and articles of association



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 joint venture agreement was filed as Exhibit 10.1 to the registration statement. The following discussion summarizes some of the important aspects of our joint venture agreement
and bylaws.



Director controls. Members of our board of
directors (Board of Directors) cannot be our employees. A shareholder may disqualify any nominee for director in the event that the shareholder believes that the nominee is in a position of conflict of interest by virtue of the
nominees membership on the board of a competitor telecom. 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 to take, 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 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, granting to its holders one vote for each 0.1% of capital contribution to
our capital classified as common; and
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(b) | Limited voting rights. This stock has full economic rights but limited voting rights, granting to its holders one vote on certain company actions for each 0.1% of
capital contribution to our capital. This class of stock is not included for 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 rights and voting
rights. Class N has limited voting rights as described in (b) above. Class A stocks may only be held by Mexican investors. As discussed above, Mexican nationals must always control at least 51.0% of our voting stocks. Class B and N stock may be held
by any investor of any nationality. The three classes of stocks 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; and
|- | -------------------------



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



However, the withdrawal rights cannot be currently exercised, as discussed below. Our organizational documents do not set forth any special dividend or
liquidation rights.



Shareholder rights and change of
control. 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 member 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.



A shareholder may sell or otherwise dispose of its stocks only upon the
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.



Class N shareholders are allowed to attend a shareholders meeting and exercise their vote 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 Class A stockholders and 51%
of Class B stockholders,



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except in the case in which we are to admit new shareholders. In the latter case, a quorum of 100% of the shareholders is required.



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 the increases or reductions of 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;
| | - | ------------------------------------------



| |  | approve the annual budget and/or substantial modifications as well as annual objectives;
| | - | ----------------------------------------------------------------------------------------



| |  | approve the business plan and/or substantial modifications as well as annual objectives;
| | - | ----------------------------------------------------------------------------------------



| |  | approve a capital disbursement or a series of related capital disbursements equal to or exceeding $10 million, disbursements equal to or exceeding $20 million that are not foreseen
in the annual budget or disbursements equal to or exceeding $30 million that are foreseen in the annual budget;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | approve the execution or modification of any transaction with any shareholder or a holding of a shareholder or an affiliate of said entities except transactions, not exceeding $5
million;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 grant or award under such plans;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | approve the initiation, prosecution and/or settlement of any claim, action, litigation, arbitration or other legal proceeding initiated by or against us involving an amount in
excess of $1 million;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | resolve amendments to or termination of contracts with our customers;
| | - | ---------------------------------------------------------------------



| |  | approve our technical/architectural plans and policy;
| | - | -----------------------------------------------------



| |  | approve or modify our regulatory policy;
| | - | ----------------------------------------



| |  | decide to permit a shareholder of an affiliate to introduce, promote and maintain any business plan service;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | decide to introduce a strategic service by the shareholders;
| | - | ------------------------------------------------------------



| |  | decide to introduce a complementary business plan service by shareholders;
| | - | --------------------------------------------------------------------------



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



| |  | decide to acquire a competing business or strategic service and set the purchase price;
| | - | ---------------------------------------------------------------------------------------



| |  | permit a shareholder to make a public offering of its stock in certain markets;
| | - | -------------------------------------------------------------------------------



| |  | modify our financial policy;
| | - | ----------------------------



| |  | approve the entry into a transaction involving an acquisition of any other person or certain assets;
| | - | ----------------------------------------------------------------------------------------------------



| |  | resolve the selection or modification of our accounting practices;
| | - | ------------------------------------------------------------------



| |  | resolve the amendment of any concession granted;
| | - | ------------------------------------------------



| |  | approve capital contributions;
| | - | ------------------------------



| |  | decide upon trade or service marks;
| | - | -----------------------------------



| |  | approve retirement, withdrawal or resignation of a shareholder;
| | - | ---------------------------------------------------------------



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



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



C. Material contracts



Not applicable



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 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



The
following is a discussion under present law of the material United States federal income tax consequences of the purchase, ownership and disposition of the registered senior



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notes. The discussion is based on the Internal Revenue Code of 1986, as amended and the regulations, rulings, judicial decisions and administrative
pronouncements there under 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, (such as tax-exempt organizations, dealers, financial institutions and life insurance companies and persons holding an old 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.



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 34% (33% in 2004 and 32% in 2005 and subsequent years)



Notwithstanding the foregoing, under Rule 3.25.15 published in
the Diario Oficial de la Federación (the Official Register of the Federation) on March 31, 2003, which rule is subject to amendment or repeal but is expected to remain in effect until March 31, 2004 (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.
|--- | --------------------------------------------------------------------------------



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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.



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.



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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.



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 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 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.



Our principal foreign currency exchange risk involves changes in the value of the Peso relative to the dollar.



As of December 31, 2003, the amount of senior notes and notes payable
denominated in dollars was Ps. 4,481.7 million.



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From time to time, we assess our exposure and monitor opportunities to manage these risks, for instance
through the use of hedging instruments. As of the date of the submission of this annual report, however, we have not used financial instruments to manage our market risk.



The potential loss in fair value of financial instruments held at December 31, 2003 that would have resulted from a
hypothetical, instantaneous and unfavorable 10% change in the Peso-dollar exchange rate would have been approximately Ps. 418.9 million. Such a change in currency exchange rates would also have resulted in additional interest expense of
approximately Ps. 39.7 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in Pesos of servicing 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 dollar-denominated revenues that are generated by international incoming traffic.



|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.
|-------- | -----------------------------------------------------------------------------



On November 17, 2003, the terms of our senior notes due 2006 and 2009 were amended to eliminate substantially all of the
covenants contained in the indentures for the senior notes due 2006 and 2009, including the limitations on indebtedness; the payment of dividends, the making of investments and the granting of loans; dividend and other payment restrictions on
subsidiaries; transactions with affiliates; asset sales; and certain mergers, as well as the requirements to make an offer to purchase upon a change of control or with the proceeds from certain asset sales.



The amendments to the indentures for the senior notes due 2006 and 2009 also
eliminated events of default that would have been triggered if, among other things, we had failed to comply with any of the covenants and provisions described above; we or any of our significant subsidiaries had defaulted under our or our
subsidiarys debt obligations; or we or any of our significant subsidiaries had a final judgment rendered against us or them.



The amendments also increased the percentage of the principal amount of each series of Notes that is required to accelerate the senior notes due 2006 and
2009 from 25% to 75%, and eliminated the ability of the trustee to accelerate the senior notes due 2006 and 2009 absent instructions from the holders of the senior notes due 2006 and 2009.



-86-



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##### Table of Contents

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



Alestras management is responsible for establishing and maintaining adequate internal control over financial reporting for Alestra and its
consolidated subsidiary. In order to do so, Alestra will implement a process to evaluate the effectiveness of Alestras internal control over financial reporting, as required by paragraph (c) of 17 CFR 240.13a-15 and 240.15d-15. Based upon that
evaluation and its conclusions, the Chief Executive Officer and Chief Financial Officer will have to certificate the effectiveness of our controls and procedures in timely alerting them of material information required to be included in our Exchange
Act filings.



The Company intends to review and evaluate the
design and effectiveness of its disclosure controls and procedures on an ongoing basis and to improve its controls and procedures over time and to correct any deficiencies that may be discovered in the future in order to ensure that senior
management has timely access to all material financial and non-financial information concerning the Alestras business. While management believes that the present design of the Companys disclosure controls and procedures is effective to
achieve these results, future events affecting the Companys business may cause management to modify its disclosure controls and procedures.



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



Item 16. A.    Audit Committee Financial Expert





At this time, Alestra does not have an audit committee. The board of
directors of Alestra has determined that it does not have a financial expert meeting the requirements of Item 16A.



Item 16. B.    Code of Ethics



Alestra is not required to adopt a code of ethics, but is required to disclose whether or not it has done so, and if not, the reasons why it has not.
Alestra has not yet adopted a code of ethics, as defined in the Sarbanes-Oxley Act, applicable to its principal executive officer, principal financial officer, or principal accounting officer. Alestra is currently drafting a Spanish-language code of
ethics and, therefore, does not have an English-language code of ethics available.



Item 16.C.    Principal Accountant Fees and Services



The aggregate fees billed by PricewaterhouseCoopers S.C. (PwC), Alestras independent auditor, for professional services in 2003 and 2002 were as
follows:



|                      |  |                        |  |         
|--------------------- |  | ---------------------- |  | --------
|                      |  | (in millions of pesos)
|                      |  | 2002                   |  | 2003    
|Audit Fees(1)         |  | Ps.  8.4               |  | Ps. 11.8
|Audit-Related Fees(2) |  | 0.8                    |  | 0.6     
|Tax Fees(3)           |  | 0.1                    |  | 0.1     
|                      |  |                        |  |         
|Total                 |  | Ps. 9.3                |  | Ps. 12.5



|(1) | Audit fees include fees associated with the annual audit of Alestras consolidated financial statements and reviews of Alestras quarterly reports on Form
6-K. 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The Board will pre-approve all audit services and all permissible non-audit
services (including the fees and terms thereof) to be performed for Alestra by its independent auditors. From time to time, the Board may delegate its authority to pre-approve non-audit services to one or more Board members. Any such approvals shall
be reported to the full Board at the next meeting.



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.
|---------------- | ---------------------



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



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



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



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

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS



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



F-1



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



To the Stockholders of

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



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



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alestra, S. de R.
L. de C. V. and its subsidiary as of December 31, 2002 and 2003, and the consolidated results of their operations, changes in stockholders equity and changes in their financial position for the years ended December 31, 2001, 2002 and 2003, in
conformity with accounting principles generally accepted in Mexico.



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



Generally accepted accounting principles in Mexico vary in certain significant respects from accounting principles generally accepted in the United States. The application of accounting principles generally accepted
in the United States would have affected the determination of consolidated net loss for the years ended December 31, 2001 and 2002 and net income for the year ended December 31, 2003 and the determination of consolidated stockholders equity as
of December 31, 2002 and 2003 to the extent summarized in Note 19 to the consolidated financial statements.



PricewaterhouseCoopers



Miguel Angel Puente
Buentello

Public Accountant

Monterrey, Nuevo León,
México

March 1, 2004



F-2



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##### Table of Contents

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



CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2002 AND 2003



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



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



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



F-3



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##### Table of Contents

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



CONSOLIDATED STATEMENTS OF OPERATIONS

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

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



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



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



F-4



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##### Table of Contents

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



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

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

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



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



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



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



CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

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

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



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



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



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



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AT DECEMBER 31, 2002 AND 2003

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



a. Basis of presentation



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



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



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.



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



b. Recognition of the effects of inflation



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



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



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



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



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



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



Restatement of non-monetary assets:



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



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Restatement of stockholders equity:



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



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Gain from monetary position:



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



c. Cash and cash
equivalents



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



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



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



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



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



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



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



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e. Deferred charges and other assets, net



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



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



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



f. Capitalized financing costs



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



g. Long-lived assets



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



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



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



h. Revenue recognition



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



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



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



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



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



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



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



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



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



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



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



All other revenues are recorded when services are rendered.



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



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



j. Advertising



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



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



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



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l. Risk concentrations



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



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



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



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



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



m. Pension and seniority premiums



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



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



n. Comprehensive income (loss)



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



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o. New accounting principles



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



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



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



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



F-16



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



F-17



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



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



F-18



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



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



F-19



---

##### Table of Contents

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



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



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



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



a. Pre-operating expenses



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



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



b. Debt issuance costs



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



F-20



---

##### Table of Contents

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



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



c. Frequency bands



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



d. Software



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



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



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



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



F-21



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



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



F-22



---

##### Table of Contents

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



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



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



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



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



B) Old senior notes



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



F-23



---

##### Table of Contents

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



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



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



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



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



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



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



F-24



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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##### Table of Contents

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



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



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



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



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



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



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



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



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



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



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##### Table of Contents

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



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



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



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##### Table of Contents

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



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



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



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



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



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##### Table of Contents

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



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



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



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



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



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##### Table of Contents

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



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



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



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



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



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



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



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



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---

##### Table of Contents

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



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



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



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



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



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



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



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



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



F-32



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##### Table of Contents

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



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



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



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



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



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



The Companys consolidated financial statements are prepared in accordance with Mexican GAAP, which 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 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.



F-33



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##### Table of Contents

|                                                                         |  |                         |   |  |              |   |  |      |            |  
|------------------------------------------------------------------------ |  | ----------------------- | - |  | ------------ | - |  | ---- | ---------- | -
|                                                                         |  | Year ended December 31, |  
|                                                                         |  | 2001                    |   |  | 2002         |   |  | 2003 |           
|Reconciliation of net (loss) income:                                     |  |                         |   |  |              |   |  |      |            |  
|Net (loss) income as reported under Mexican GAAP                         |  | (Ps693,746              | ) |  | (Ps1,464,786 | ) |  | Ps   | 912,834    |  
|                                                                         |  |                         |   |  |              |   |  |      |            |  
|U.S. GAAP adjustments:                                                   |  |                         |   |  |              |   |  |      |            |  
|Reversal of gain on extinguishment of debt recognizedunder Mexican GAAP: |  |                         |   |  |              |   |  |      |            |  
|Reversal of gain on extinguishment of debt                               |  |                        |   |  |             |   |  |      | (816,976   | )
|Interest expense on restructured debt, net                               |  |                        |   |  |             |   |  |      | (324,232   | )
|Debt issuance cost, net                                                  |  |                        |   |  |             |   |  |      | (33,612    | )
|Fifth amendment effect on depreciation expense                           |  | (105,055                | ) |  | (105,965     | ) |  |      | (78,208    | )
|Reversal of preoperating expense amortization                            |  | 211,284                 |   |  | 211,284      |   |  |      | 211,284    |  
|Depreciation of capitalized comprehensive                                |  |                         |   |  |              |   |  |      |            |  
|financing costs under Mexican GAAP                                       |  | (1,048                  | ) |  | (1,048       | ) |  |      | (1,048     | )
|Depreciation of capitalized interest under                               |  |                         |   |  |              |   |  |      |            |  
|U.S. GAAP                                                                |  | (6,331                  | ) |  | (6,331       | ) |  |      | (6,331     | )
|                                                                         |  |                         |   |  |              |   |  |      |            |  
|Total U.S. GAAP adjustments                                              |  | 98,850                  |   |  | 97,940       |   |  |      | (1,049,123 | )
|                                                                         |  |                         |   |  |              |   |  |      |            |  
|Net loss under U.S. GAAP                                                 |  | (Ps594,896              | ) |  | (Ps1,366,846 | ) |  |      | (Ps136,289 | )
|                                                                         |  |                         |   |  |              |   |  |      |            |  



|                                                                                             |  |      |            |   |      |    |            |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                                                                             |  | 2002 |            |   | 2003 |   
|Reconciliation of stockholders equity:                                                      |  |      |            |   |      |    |            |  
|Total stockholders equity reported under Mexican GAAP                                       |  | Ps   | 66,313     |   |      | Ps | 2,456,498  |  
|                                                                                             |  |      |            |   |      |    |            |  
|U.S. GAAP adjustments:                                                                       |  |      |            |   |      |    |            |  
|Reversal of gain on extinguishment of debt recognizedunder Mexican GAAP:                     |  |      |            |   |      |    |            |  
|Reversal of gain on extinguishment of debt                                                   |  |      |           |   |      |    | (816,976   | )
|Interest expense on restructured debt, net                                                   |  |      |           |   |      |    | (324,232   | )
|Debt issuance cost, net                                                                      |  |      |           |   |      |    | (33,612    | )
|Fifth amendment effect on real estate and equipment                                          |  |      | 758,136    |   |      |    | 325,358    |  
|Pre-operating expenses                                                                       |  |      | (2,030,627 | ) |      |    | (2,030,627 | )
|Accumulated amortization of preoperating expenses                                            |  |      | 1,130,645  |   |      |    | 1,341,524  |  
|Minority interest under Mexican GAAP                                                         |  |      | (2         | ) |      |    | (2         | )
|Net adjustment for comprehensive financing costs and interest capitalization under U.S. GAAP |  |      | 44,255     |   |      |    | 44,255     |  
|Accumulated depreciation for comprehensive financing cost and interest capitalization        |  |      | (22,122    | ) |      |    | (29,501    | )
|                                                                                             |  |      |            |   |      |    |            |  
|Total U.S. GAAP adjustments                                                                  |  |      | (119,715   | ) |      |    | (1,523,813 | )
|                                                                                             |  |      |            |   |      |    |            |  
|Total stockholders equity under U.S. GAAP                                                   |  |      | (Ps53,402  | ) |      | Ps | 932,685    |  
|                                                                                             |  |      |            |   |      |    |            |  



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:



|                               |  |      |            |   |      |    |           |  
|------------------------------ |  | ---- | ---------- | - | ---- | -- | --------- | -
|                               |  | 2002 |            |   | 2003 |   
|Balance at beginning of period |  | Ps   | 1,313,444  |   |      |    | (Ps53,402 | )
|Capital contributions          |  |      |           |   |      |    | 1,122,376 |  
|Net loss for the year          |  |      | (1,366,846 | ) |      |    | (136,289  | )
|                               |  |      |            |   |      |    |           |  
|Balance at end of period       |  |      | (Ps53,402  | ) |      | Ps | 932,685   |  
|                               |  |      |            |   |      |    |           |  



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



|                                           |  |      |            |   |      |    |            |  
|------------------------------------------ |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                           |  | 2002 |            |   | 2003 |   
|Capital stock                              |  | Ps   | 9,406,090  |   |      | Ps | 10,528,466 |  
|Accumulated losses                         |  |      | (9,459,492 | ) |      |    | (9,595,781 | )
|                                           |  |      |            |   |      |    |            |  
|Total stockholders equity under U.S. GAAP |  |      | (Ps53,402  | ) |      | Ps | 932,685    |  
|                                           |  |      |            |   |      |    |            |  



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



|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|-------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ------------ | ---- |  | -- | ---------- | -
|                                                                     |  | 2001 |            |   | 2002 |    |              | 2003 | 
|Net revenues                                                         |  | Ps   | 4,333,168  |   |      | Ps | 4,615,811    |      |  | Ps | 5,523,949  |  
|Cost of services (excluding depreciation presented separately below) |  |      | (1,867,117 | ) |      |    | (2,118,418   | )    |  |    | (2,861,137 | )
|Administration and selling                                           |  |      | (1,836,318 | ) |      |    | (1,689,078   | )    |  |    | (1,478,189 | )
|Depreciation and amortization                                        |  |      | (947,879   | ) |      |    | (871,498     | )    |  |    | (763,770   | )
|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|Operating (loss) income                                              |  |      | (318,146   | ) |      |    | (63,183      | )    |  |    | 420,853    |  
|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|Comprehensive financial result:                                      |  |      |            |   |      |    |              |      |  |    |            |  
|Interest income                                                      |  |      | 62,789     |   |      |    | 17,085       |      |  |    | 6,797      |  
|Interest expense                                                     |  |      | (832,497   | ) |      |    | (857,437     | )    |  |    | (329,637   | )
|Exchange gains (losses)                                              |  |      | 272,744    |   |      |    | (797,669     | )    |  |    | (593,729   | )
|Gain from monetary position                                          |  |      | 246,806    |   |      |    | 356,745      |      |  |    | 263,849    |  
|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|                                                                     |  |      | (250,158   | ) |      |    | (1,281,276   | )    |  |    | (652,720   | )
|Other (expense) income, net                                          |  |      | (21,938    | ) |      |    | (17,739      | )    |  |    | 99,429     |  
|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|Net loss before asset tax                                            |  |      | (590,242   | ) |      |    | (1,362,198   | )    |  |    | (132,438   | )
|Asset tax                                                            |  |      | (4,654     | ) |      |    | (4,648       | )    |  |    | (3,851     | )
|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  
|Net loss                                                             |  |      | (Ps594,896 | ) |      |    | (Ps1,366,846 | )    |  |    | (Ps136,289 | )
|                                                                     |  |      |            |   |      |    |              |      |  |    |            |  



F-35



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##### Table of Contents

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



Effects of the restructuring of the Old Senior Notes



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



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



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



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



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



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



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



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



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



The following table analyzes the differences between Mexican
GAAP and US GAAP:



|                                                                         |  |              |   |  |            |   |  |             |  
|------------------------------------------------------------------------ |  | ------------ | - |  | ---------- | - |  | ----------- | -
|                                                                         |  | Mexican GAAP |   |  | US GAAP    |   |  | Difference  |  
|Gain on extinguishment of the old senior notes                           |  | Ps816,976    |   |  |           |   |  | (Ps816,976  | )
|Interest expense, net of gain on reversal of accrued and unpaid interest |  | Ps157,052    |   |  | (Ps167,180 | ) |  | (Ps324,232  | )
|Debt issuance cost associated with troubled debt restructuring           |  | (Ps116,019   | ) |  | (Ps149,631 | ) |  | (Ps  33,612 | )



F-36



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##### Table of Contents

Restatement of Equipment



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



Pre-operating Expenses



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



Capitalization of Financing Costs



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



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



Deferred Income Taxes and Employees Statutory Profit Sharing



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



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



F-37



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##### 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, 2002 and 2003, are as follows:



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



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



Cash Flows



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



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



F-38



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##### Table of Contents

|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|----------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ------------ | ---- |  | -- | ---------- | -
|                                                                              |  | 2001 |            |   | 2002 |    |              | 2003 | 
|OPERATING ACTIVITIES:                                                         |  |      |            |   |      |    |              |      |  |    |            |  
|Net loss                                                                      |  |      | (Ps594,896 | ) |      |    | (Ps1,366,846 | )    |  |    | (Ps136,289 | )
|Adjustments to reconcile net loss to cash flows used in operating activities: |  |      |            |   |      |    |              |      |  |    |            |  
|Gain from monetary position                                                   |  |      | (246,806   | ) |      |    | (356,745     | )    |  |    | (263,849   | )
|Unrealized exchange losses                                                    |  |      | 9,490      |   |      |    | 710,263      |      |  |    | 399,156    |  
|Depreciation and amortization                                                 |  |      | 947,879    |   |      |    | 871,498      |      |  |    | 763,770    |  
|Allowance for doubtful accounts                                               |  |      | 131,818    |   |      |    | 174,458      |      |  |    | 35,078     |  
|Provision for special project charges                                         |  |      | 127,112    |   |      |    | 110,903      |      |  |    | 88,014     |  
|Changes in operating assets and liabilities:                                  |  |      |            |   |      |    |              |      |  |    |            |  
|Current assets                                                                |  |      | 82,269     |   |      |    | (160,709     | )    |  |    | 185,011    |  
|Current liabilities                                                           |  |      | (608,578   | ) |      |    | 248,120      |      |  |    | (680,119   | )
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Cash flows (used in) provided by operating activities                         |  |      | (151,712   | ) |      |    | 230,942      |      |  |    | 390,772    |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|INVESTING ACTIVITIES:                                                         |  |      |            |   |      |    |              |      |  |    |            |  
|Purchases of real estate and equipment                                        |  |      | (820,085   | ) |      |    | (240,326     | )    |  |    | (236,120   | )
|Deferred charges and other assets                                             |  |      | (130,908   | ) |      |    | 17,807       |      |  |    | (10,400    | )
|Restricted investment                                                         |  |      | 724,570    |   |      |    | 371,292      |      |  |    |           |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Cash flows (used in) provided by investing activities                         |  |      | (226,423   | ) |      |    | 148,773      |      |  |    | (246,520   | )
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|FINANCING ACTIVITIES:                                                         |  |      |            |   |      |    |              |      |  |    |            |  
|Capital Contributions                                                         |  |      |           |   |      |    |             |      |  |    | 1,122,376  |  
|Payments of bank loans and senior notes                                       |  |      |           |   |      |    | (310,987     | )    |  |    | (1,320,531 | )
|Proceeds from bank loans                                                      |  |      | 365,129    |   |      |    | 51,098       |      |  |    |           |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Cash flows provided by (used in) financing activities                         |  |      | 365,129    |   |      |    | (259,889     | )    |  |    | (198,155   | )
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Net effect of inflation on cash and cash equivalents                          |  |      | 69,467     |   |      |    | (223,162     | )    |  |    | 303,305    |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|(Decrease) increase in cash and cash equivalents                              |  |      | 56,461     |   |      |    | (103,336     | )    |  |    | 249,402    |  
|Cash and cash equivalents, beginning of period                                |  |      | 208,308    |   |      |    | 264,769      |      |  |    | 161,433    |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Cash and cash equivalents, end of period                                      |  | Ps   | 264,769    |   |      | Ps | 161,433      |      |  | Ps | 410,835    |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Non-cash investing and financing activities:                                  |  |      |            |   |      |    |              |      |  |    |            |  
|Acquisition of equipment under capital leases and debt assumed                |  | Ps   | 185,956    |   |      | Ps | 51,098       |      |  | Ps |           |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  
|Interest and taxes paid:                                                      |  |      |            |   |      |    |              |      |  |    |            |  
|Interest paid                                                                 |  | Ps   | 785,993    |   |      | Ps | 24,491       |      |  | Ps | 322,489    |  
|Income taxes paid                                                             |  |      | 4,654      |   |      |    | 3,561        |      |  |    | 3,851      |  
|                                                                              |  |      |            |   |      |    |              |      |  |    |            |  



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



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



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



F-40



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##### Table of Contents

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 Garza Chief Financial and Administrative Officer




Date: March 30, 2004