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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   Form 20-F [   ]
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
OF THE SECURITIES EXCHANGE ACT OF 1934OR[X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the
fiscal year ended December 31, 2003OR[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934for the transition period from
                     to
 COMMISSION FILE NUMBER 033-79254   Grupo Iusacell Celular, S.A. de C.V. (Exact name of Registrant as specified in its charter)
 Iusacell Cellular Group(Translation of Registrants name into English) United Mexican States(Jurisdiction of incorporation or organization) Montes Urales 460
Colonia Lomas de Chapultepec
Delegacion Miguel Hidalgo
11000 Mexico, D.F.(Address of principal executive offices)   Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registered
 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: 10% Senior Notes due 2004




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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: Shares of common stock
    
    75,098 shares
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or15(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 PagePART I
    
    
    
    
    1ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    13ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    33ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    49ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    53ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    57ITEM 9.
    
    THE OFFER AND LISTING
    
    
    59ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    59ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    69ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    70PART II
    
    
    
    
    71ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    71ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    71ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    71ITEM 16.
    
    RESERVED
    
    
    71ITEM 16A
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    71ITEM 16B
    
    CODE OF ETHICS
    
    
    71ITEM 16C
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    72ITEM 16D
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    72ITEM 16E
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    72PART III
    
    
    
    
    73ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    73ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    73ITEM 19.
    
    EXHIBITS
    
    
    73PURCHASE AND SALE AGREEMENTSECOND AMENDED AND RESTATED MASTER LEASE AGREEMENTTRANSLATION OF CELLULAR CONCESSION FOR REGION 8AGREEMENT WITH MR. ELIZONDOCOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESLIST OF SUBSIDIARIESCERTIFICATIONCERTIFICATIONCERTIFICATION




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FORWARD-LOOKING INFORMATION This Annual Report contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Act),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), including statements regarding, among other things, the
financial performance and operating plans for Grupo Iusacell Celular, S.A. de
C.V.These statements are based upon the current beliefs of our management, as
well as on assumptions made by management based upon information currently
available to it. The words believe, expect, likely and anticipate and
similar expressions identify some of these forward-looking statements. These
statements are subject to various risks and uncertainties and other factors
which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Should managements
assumptions prove incorrect, actual results may vary materially and adversely
from those anticipated or projected. Readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of their
respective dates. We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Factors described in this Annual Report under Item 3, Key
InformationRisk Factors, could cause actual results to differ materially from
such forward-looking statements. *   *   * Iusacell Celular meansGrupo Iusacell Celular, S.A. de C.V.This
company was formerly known asGrupo Iusacell, S.A. de C.V.Unless the context
otherwise requires, we, our or us refers to Iusacell Celular and its
subsidiaries. Iusacell meansGrupo Iusacell, S.A. de C.V.This company was formerly
known asNuevo Grupo Iusacell, S.A. de C.V.Iusacell owns 100% of the capital
stock of Iusacell Celular. Certain terms are defined the first time they are used in this Annual
Report. The Glossary of Telecommunications Terms that begins immediately
following Item 19, Exhibits provides definitions of certain technical terms
used herein. On July 29, 2003, MovilAccess, S.A. de C.V.(MovilAccess), a Mexican
telecommunications company subsidiary of Biper, S.A. de C.V.(Biper), a
paging company, acquired through a tender offer in Mexico and the United States
74.6% of Iusacells capital, and became Iusacells principal shareholder.
Biper, MovilAccess, Unefon S.A. de C.V., a fixed and mobile telephony company,
Grupo Elektra S.A. de C.V., an electronic appliance retailer, and TV Azteca
S.A. de C.V., a Mexican television network, are all part of a group of
companies controlled, directly or indirectly, by Mr. Ricardo B. Salinas Pliego. The term Verizon in this Annual Report refers to Verizon Communications
Inc. or its subsidiaries, and to Bell Atlantic Corporation(in connection with
events prior June 2000, when Verizon was formed), as the context requires. The
term Vodafone in this Annual Report refers to Vodafone Group Plcor its
subsidiaries, as the context requires. Postpaid figures in this Annual Report include public and rural telephony,
unless otherwise indicated. Iusacell Celular has publicly-traded debt securities. Iusacell Celular
does not have any publiclytraded equity securities. Unless otherwise specified, all references to U.S. dollars, U.S.
Dollars, dollars, U.S.$ or $ are to United States dollars, and
references to Ps. and pesos are to Mexican pesos. We publish our financial
statements in pesos that are adjusted to reflect changes in purchasing power
due to inflation. Thus, unless otherwise specified, our financial data is
presented in constant pesos with purchasing power as of December 31, 2003.
Actual amounts may vary from amounts presented in this Annual Report due to
rounding.




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We will provide without charge to each person to whom this Annual Report
is delivered, upon written or oral request, a copy of any or all of the
documents incorporated by reference into this Annual Report (not including the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents). Written requests for such copies should be
directed to Grupo Iusacell Celular, S.A. de C.V., Montes Urales 460, Colonia
Lomas de Chapultepec, 11000 Mexico, D.F., Attention: Jose Luis Riera Kinkel,
Chief Financial Officer. E-mail requests may be directed to
investor.relations@iusacell.com.mx. Telephone requests may be directed to
011-52-55-5109-5927.




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS A. DIRECTORS AND SENIOR MANAGEMENT Not applicable. B. ADVISERS Not applicable. C. AUDITORS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE A. OFFER STATISTICS Not applicable. B. METHOD AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA The following tables present selected consolidated financial data of
Iusacell Celular and its consolidated subsidiaries. We have derived this data
from the audited consolidated financial statements of Iusacell Celular as of
and for each of the years ended December 31, 2003, 2002, 2001, 2000 and 1999.
The financial information presented for fiscal years ended December 31, 2003,
2002 and 2001 was derived from our audited consolidated financial statements,
which we refer to as the Consolidated Financial Statements, appearing elsewhere
in this Annual Report, and you should read this information in conjunction with
the Consolidated Financial Statements. The Consolidated Financial Statements have been prepared in accordance
with Mexican generally accepted accounting principles, which we refer to as
Mexican GAAP, which differs in certain significant respects from United States
generally accepted accounting principles, which we refer to as U.S. GAAP.
Pursuant to Mexican GAAP, we have prepared the Consolidated Financial
Statements and the selected financial data presented below in accordance with
Bulletin B-10 of the Mexican Institute of Public Accountants (MIPA), which
provides for the recognition of certain effects of inflation. Throughout the periods presented in this Annual Report, Bulletin B-10 has
required Iusacell Celular to restate non-monetary assets using the National
Consumer Price Index (Indice Nacional de Precios al Consumidor), also referred
to as the INPC. Throughout the periods presented in this Annual Report,
Bulletin B-10 has also required Iusacell Celular to restate the components of
shareholders equity using the INPC and to record gains or losses in purchasing
power from holding monetary liabilities or assets. In addition, Bulletin B-10 requires restatement of all financial
statements to constant pesos as of the date of the most recent balance sheet
presented. Accordingly, we have restated all data in the Consolidated
Financial Statements and in the selected financial data set forth below in
constant pesos with purchasing power as of December 31, 2003. Note 18 to the Consolidated Financial Statements presents the principal
differences, other than inflation accounting, between Mexican GAAP and U.S.
GAAP applicable to us and contains a reconciliation of Iusacell Celulars net
profit (loss) and stockholders equity to U.S. GAAP. We have not reversed the
effect of these inflation 1




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accounting principles discussed above in the reconciliation of Iusacell
Celulars net profit (loss) and stockholders equity to U.S. GAAP. We have never paid dividends, nor do we contemplate paying dividends in
the foreseeable future. Accordingly, we have not included in these tables a
line item for dividends declared per share. We have made distributions to
Iusacell in the form of loans from time to time for the purpose of payment of
debt obligations. As of and for the Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(Thousands of constant pesos as of December 31, 2003,
    
    (Thousands ofexcept operating data)(1)
    
    U.S. dollars,except operatingdata)(2)Income Statement Data:Mexican GAAP:Revenues:Services
    
    
    4,710,509
    
    
    
    5,716,253
    
    
    
    6,244,566
    
    
    
    5,188,345
    
    
    
    4,217,280
    
    
    
    375,136Telephone equipment sales and other
    
    
    546,304
    
    
    
    581,092
    
    
    
    667,278
    
    
    
    615,439
    
    
    
    545,897
    
    
    
    48,559Total revenues
    
    
    5,256,813
    
    
    
    6,297,345
    
    
    
    6,911,844
    
    
    
    5,803,784
    
    
    
    4,763,177
    
    
    
    423,695Cost of sales:Cost of services
    
    
    1,342,994
    
    
    
    1,609,168
    
    
    
    1,622,879
    
    
    
    1,611,219
    
    
    
    1,530,784
    
    
    
    136,166Cost of telephone equipment sales
and other(3)
    
    
    336,927
    
    
    
    391,264
    
    
    
    415,550
    
    
    
    507,241
    
    
    
    899,616
    
    
    
    80,023Total cost of sales
    
    
    1,679,921
    
    
    
    2,000,432
    
    
    
    2,038,429
    
    
    
    2,118,460
    
    
    
    2,430,400
    
    
    
    216,189Gross profit
    
    
    3,576,892
    
    
    
    4,296,913
    
    
    
    4,873,415
    
    
    
    3,685,324
    
    
    
    2,332,777
    
    
    
    207,506Operating expenses
    
    
    1,805,978
    
    
    
    2,107,519
    
    
    
    2,440,218
    
    
    
    1,854,574
    
    
    
    1,872,774
    
    
    
    166,587Depreciation and amortization(3)
    
    
    1,780,792
    
    
    
    2,616,839
    
    
    
    2,823,164
    
    
    
    2,206,050
    
    
    
    1,953,687
    
    
    
    173,785Other operating income
    
    
    
    
    
    
    
    
    
    
    338,388
    
    
    
    95,257
    
    
    
    85,984
    
    
    
    7,648Operating loss
    
    
    (9,878
    )
    
    
    (427,445
    )
    
    
    (51,579
    )
    
    
    (280,043
    )
    
    
    (1,407,700
    )
    
    
    (125,218
    )Intangible assets write-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (216,820
    )
    
    
    (19,287
    )Valuation of abandoned fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (404,700
    )
    
    
    (35,999
    )Other expense, net
    
    
    (28,823
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307,161
    )
    
    
    (27,323
    )Integral financing cost (gain):Interest expense, net
    
    
    335,951
    
    
    
    560,293
    
    
    
    424,126
    
    
    
    399,966
    
    
    
    359,615
    
    
    
    31,989Foreign exchange (gain) loss, net
    
    
    (231,089
    )
    
    
    21,504
    
    
    
    (105,282
    )
    
    
    527,331
    
    
    
    386,835
    
    
    
    34,408Gain from monetary position
    
    
    (826,573
    )
    
    
    (411,472
    )
    
    
    (181,376
    )
    
    
    (229,414
    )
    
    
    (165,633
    )
    
    
    (14,733
    )Total
    
    
    (721,711
    )
    
    
    170,325
    
    
    
    137,468
    
    
    
    697,883
    
    
    
    580,817
    
    
    
    51,664Equity participation in net (loss)
profit of associated companies
    
    
    (59,525
    )
    
    
    2,723
    
    
    
    7,164
    
    
    
    (10,129
    )
    
    
    (17,544
    )
    
    
    (1,561
    )Income (loss) before assets tax,
income tax, minority interest and
extraordinary item
    
    
    623,485
    
    
    
    (595,047
    )
    
    
    (181,883
    )
    
    
    (988,055
    )
    
    
    (2,934,742
    )
    
    
    (261,052
    )Provisions for:Asset tax
    
    
    165,838
    
    
    
    171,823
    
    
    
    160,908
    
    
    
    116,051
    
    
    
    103,854
    
    
    
    9,238Income tax
    
    
    507,447
    
    
    
    
    
    
    
    
    
    
    
    9,214
    
    
    
    163,170
    
    
    
    14,514Total
    
    
    673,285
    
    
    
    171,823
    
    
    
    160,908
    
    
    
    125,265
    
    
    
    267,024
    
    
    
    23,752Loss from continuing operations
before minority interest and
extraordinary item
    
    
    (49,800
    )
    
    
    (766,870
    )
    
    
    (342,791
    )
    
    
    (1,113,320
    )
    
    
    (3,201,766
    )
    
    
    (284,804
    )Minority interest
    
    
    22,421
    
    
    
    18,091
    
    
    
    22,745
    
    
    
    10,149
    
    
    
    17,964
    
    
    
    1,598Loss from continuing operations
before extraordinary item
    
    
    (27,379
    )
    
    
    (748,779
    )
    
    
    (320,046
    )
    
    
    (1,103,171
    )
    
    
    (3,183,802
    )
    
    
    (283,206
    )Extraordinary item(4)
    
    
    507,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,517
    
    
    
    1,380Cumulative effect of the adoption of
the new accounting pronouncement and
change in accounting policy(3)
    
    
    
    
    
    
    
    
    
    
    (7,120
    )
    
    
    
    
    
    
    (159,015
    )
    
    
    (14,144
    )(Loss) gain from discontinued
operations(5)
    
    
    (1,921
    )
    
    
    9,743
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net profit (loss)
    
    
    478,149
    
    
    
    (739,036
    )
    
    
    (327,166
    )
    
    
    (1,103,171
    )
    
    
    (3,327,300
    )
    
    
    (295,970
    )
 2




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As of and for the Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(Thousands of constant pesos as of December 31, 2003,
    
    (Thousands ofexcept operating data)(1)
    
    U.S. dollars,except operatingdata)(2)U.S. GAAP:Total revenues
    
    
    5,256,813
    
    
    
    6,297,344
    
    
    
    6,405,970
    
    
    
    5,318,804
    
    
    
    4,471,006
    
    
    
    397,706Operating (loss) profit
    
    
    (104,796
    )
    
    
    (417,701
    )
    
    
    (463,979
    )
    
    
    (209,694
    )
    
    
    (1,633,333
    )
    
    
    (145,288
    )Net (loss)
    
    
    (359,249
    )
    
    
    (732,559
    )
    
    
    (631,762
    )
    
    
    (934,411
    )
    
    
    (3,093,398
    )
    
    
    (275,164
    )Balance Sheet Data:Mexican GAAP:Working capital
    
    
    (657,622
    )
    
    
    (1,535,001
    )
    
    
    (310,813
    )
    
    
    227,119
    
    
    
    (4,578,654
    )
    
    
    (407,281
    )Property and equipment, net
    
    
    8,465,490
    
    
    
    9,074,855
    
    
    
    9,738,040
    
    
    
    8,893,303
    
    
    
    6,906,450
    
    
    
    614,344Total assets
    
    
    15,424,894
    
    
    
    15,179,648
    
    
    
    15,598,667
    
    
    
    13,784,954
    
    
    
    10,401,936
    
    
    
    925,725Total debt
    
    
    5,740,919
    
    
    
    4,742,756
    
    
    
    4,309,531
    
    
    
    4,641,739
    
    
    
    4,667,429
    
    
    
    415,178Total stockholders equity
    
    
    7,625,487
    
    
    
    8,591,565
    
    
    
    9,356,014
    
    
    
    8,115,365
    
    
    
    4,710,144
    
    
    
    418,977Capital stock
    
    
    14,145,469
    
    
    
    14,145,469
    
    
    
    14,145,674
    
    
    
    16,558,729
    
    
    
    16,558,729
    
    
    
    1,472,934U.S. GAAP:Working capital
    
    
    (912,439
    )
    
    
    (1,834,095
    )
    
    
    (530,364
    )
    
    
    62,705
    
    
    
    (4,683,238
    )
    
    
    416,584Property and equipment, net
    
    
    8,231,321
    
    
    
    8,840,684
    
    
    
    9,477,257
    
    
    
    8,692,152
    
    
    
    6,745,360
    
    
    
    600,014Total assets
    
    
    15,970,952
    
    
    
    15,710,459
    
    
    
    16,255,618
    
    
    
    14,834,288
    
    
    
    11,587,711
    
    
    
    1,030,752Total debt
    
    
    5,740,919
    
    
    
    4,742,756
    
    
    
    4,309,531
    
    
    
    4,641,739
    
    
    
    4,667,429
    
    
    
    415,178Minority interest
    
    
    (30,911
    )
    
    
    27,962
    
    
    
    130,970
    
    
    
    (7,013
    )
    
    
    82,105
    
    
    
    (7,303
    )Total stockholders equity
    
    
    7,566,123
    
    
    
    8,266,800
    
    
    
    8,412,757
    
    
    
    7,681,827
    
    
    
    4,588,429
    
    
    
    408,151Other Financial Data:Mexican GAAP:Capital expenditures(6)
    
    
    2,139,666
    
    
    
    2,223,520
    
    
    
    1,811,827
    
    
    
    600,401
    
    
    
    191,000
    
    
    
    16,990Interest expense, net
    
    
    335,951
    
    
    
    560,293
    
    
    
    424,126
    
    
    
    399,966
    
    
    
    359,615
    
    
    
    31,989Ratio of earnings to fixed
charges(7)
    
    
    2.59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Data:Covered POPs(8)
    
    
    67,591,791
    
    
    
    68,376,034
    
    
    
    78,585,938
    
    
    
    79,843,313
    
    
    
    80,921,198
    
    
    
    80,921,198Subscribers(9)Postpaid
    
    
    352,289
    
    
    
    442,594
    
    
    
    403,988
    
    
    
    351,782
    
    
    
    314,493
    
    
    
    314,493Prepaid
    
    
    970,509
    
    
    
    1,238,625
    
    
    
    1,450,709
    
    
    
    1,692,511
    
    
    
    930,738
    
    
    
    930,738Total subscribers
    
    
    1,322,798
    
    
    
    1,681,219
    
    
    
    1,854,697
    
    
    
    2,044,293
    
    
    
    1,245,231
    
    
    
    1,245,231Gross subscriber additions
    
    
    788,438
    
    
    
    1,092,895
    
    
    
    1,050,620
    
    
    
    1,080,683
    
    
    
    567,646
    
    
    
    567,646Average subscribers(10)
    
    
    1,290,558
    
    
    
    1,637,481
    
    
    
    1,721,053
    
    
    
    2,073,085
    
    
    
    1,771,424
    
    
    
    1,771,424Average monthly postpaid churn(11)
    
    
    2.96
    %
    
    
    3.51
    %
    
    
    3.77
    %
    
    
    3.55
    %
    
    
    3.25
    %
    
    
    3.25
    %Penetration(12)
    
    
    1.96
    %
    
    
    2.46
    %
    
    
    2.36
    %
    
    
    2.56
    %
    
    
    1.54
    %
    
    
    1.54
    %Average monthly MOUs per
subscriber(13)
    
    
    85
    
    
    
    78
    
    
    
    84
    
    
    
    63
    
    
    
    74
    
    
    
    74Nominal average monthly mobile
telephony revenue per
subscriber (ARPU)(14)
    
    
    311
    
    
    
    267
    
    
    
    267
    
    
    
    190
    
    
    
    190
    
    
    
    16.89Nominal cost to acquire a new
subscriber(15)
    
    
    3,277
    
    
    
    3,270
    
    
    
    2,677
    
    
    
    2,419
    
    
    
    3,004
    
    
    
    267.21
   (1)
    
    In accordance with Mexican GAAP, financial data for all periods
covered by the Consolidated Financial Statements, as well as the other
financial data presented in this Annual Report, unless otherwise
indicated, has been restated in constant pesos with purchasing power as
of December 31, 2003. Restatement of peso amounts is made by
multiplying the relevant nominal peso amount for the relevant period by
the inflation index for the period from the end of the period to which
such nominal peso amount relates through December 31, 2003. The
inflation indices used in this Annual Report are 1.2503 for 1999, 1.1475
for 2000, 1.0991 for 2001 and 1.0398 for 2002 figures.(2)
    
    Peso amounts were converted to U.S. dollars at the noon buying rate
reported by the Federal Reserve Bank of New York for December 31, 2003,
which was Ps.11.242 per U.S.$1.00. Such conversions should not be
construed as representations that the peso amounts actually represent
such U.S. dollar amounts or could be converted into U.S. dollars at the
rate indicated, or at all.In determining the peso amounts of our U.S. dollar-denominated obligations
at December 31, 2003 in the Consolidated Financial Statements under
Mexican GAAP, however, we applied the exchange rate which was accessible
to us, based on market quotes, on December 31, 2003, which was Ps.11.23
per U.S.$1.00. The difference between the noon buying rate reported by
the Federal Reserve Bank of New York and the exchange rate which was
accessible to us causes certain inconsistencies between references to U.S.
dollar amounts in this Annual Report and the actual outstanding U.S.
dollar amounts of our U.S. dollar-denominated obligations. For example,
at December 31, 2003, our actual total debt outstanding, excluding trade
notes payable, was U.S.$415.6 million. In preparing the Consolidated
Financial Statements, we multiplied this dollar amount by Ps.11.23 (the
exchange rate which was accessible to us at
 3




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December 31, 2003) to arrive at Ps.4,667.4 million of total debt,
excluding trade notes payable. For purposes of this Annual Report, we
have converted this peso amount to U.S. dollars for the convenience of the
reader by dividing it by Ps.11.242 (the noon buying rate reported by the
Federal Reserve Bank of New York at December 31, 2003) to arrive at
U.S.$415.2 million of total debt, excluding trade notes payable.As a result of the combined effect of the restatement of the financial
data in constant pesos with purchasing power as of December 31, 2003 and
the translation of peso amounts into U.S. dollars, the amounts shown for
certain balance sheet items are not equal to the actual amounts
outstanding.(3)
    
    Until September 30, 2003, we amortized the cost of handsets sold or
given to our postpaid customers under exclusive service contracts on the
basis of the term of such contracts to match costs with the timing of
earned revenues. The average amortization period was twelve months.On September 30, 2003, we changed this accounting policy. As a result, we
now record the full cost of such handsets in our income statement under
cost of telephone equipment sales and other at the moment the contract
is signed. The cumulative effect of this change in our accounting policy
resulted in a loss for the year 2003 of Ps.159.0 million. This amount
represents the remaining balance of unamortized cost of handsets as of
September 30, 2003 and is included under cumulative effect of the
adoption of new accounting pronouncement and change in accounting policy,
in our consolidated income statement for the year 2003.(4)
    
    For 1999, the extraordinary item represents the utilization of tax
loss carryforwards available to us which, under Mexican GAAP, in effect
at the time, was required to be classified as an extraordinary item.
Under U.S. GAAP, the utilization of tax loss carryforwards is recorded
as a component of tax expense.On May 29, 2003 we reached an agreement with Santander Serfin, S.A.
to repay the remaining balance of U.S.$3.0 million under a refinanced
credit facility. Under this agreement, we and Santander agreed to settle
the remaining amount for U.S.$1.5 million. We recognized the difference as
an early extinguishment of debt under Mexican GAAP Bulletin C-9 and we
recorded this amount as an extraordinary gain for the year ended December
31, 2003.(5)
    
    In December 1998, we discontinued the operations of our subsidiary
Cellular Solutions de México, S.A. de C.V., which sold cellular handset
accessories. This subsidiary transferred all of its existing
inventories as of December 31, 1998 to another one of our subsidiaries
and terminated all of its employees during January and February 1999.
Under U.S. GAAP, the closing of this subsidiary does not constitute a
discontinued operation under Accounting Principles Board Opinion (APB
Opinion) No. 30. Accordingly, the gain (loss) from discontinued
operations is recorded as operating income (expense).(6)
    
    Capital expenditures include fixed asset purchases, capitalized labor
costs, the capitalization of interest costs related to long-term debt
incurred in connection with the acquisition of property, plant and
equipment, trade-in credits received from Lucent Technologies for
exchanging our previous analog network for a digital and analog network
supplied by Lucent Technologies and, in some cases, the net value of
long distance fiber acquired in swaps for our long distance fiber. In
1999 and 2000, pursuant to a waiver from its bank lenders, and beginning
in 2001, pursuant to the terms of its senior refinancing secured loan,
Iusacell Celular excluded capitalized interest cost from capital
expenditures in determining its compliance with capital expenditure
limitations set forth in its debt covenants. Pursuant to waivers
obtained from its lenders, Iusacell Celular excluded Lucent trade-in
credits from capital expenditures in determining its compliance with the
capital expenditures limitations set forth in its debt covenants. See
Item 5, Operating and Financial Review and Prospects  Liquidity and
Capital Resources  Capital Expenditures.(7)
    
    The ratio of earnings to fixed charges covers continuing operations.
For this purpose, earnings are calculated as income or loss before taxes
plus (i) integral financing cost, including amortization of capitalized
interest, (ii) the interest portion of annual rent expense and (iii)
losses from less than 50%-owned affiliates. Fixed charges include the
expensed and capitalized portions of integral financing cost. Earnings
were insufficient to cover fixed charges in 2000, 2001, 2002 and 2003.
The fixed charge coverage deficiency for the years ended December 31,
2000, 2001, 2002 and 2003 amounted to Ps.509.8 million, Ps.84.9 million,
Ps.1,464.0 million and Ps.3,389.6 million, respectively.(8)
    
    Covered POPs is the aggregate number of POPs in the geographic
regions in which we have concessions for wireless services and whom we
therefore have the potential to serve. POPs means points of presence,
or population, for a given area based on census data published by
Mexicos National Institute of Statistics, Geography and Information
Processing (Instituto Nacional de Estadística, Geografía e Informática).(9)
    
    Unless otherwise indicated, subscribers refers to the total number of
mobile wireless customers included in our subscriber base in the
geographic regions we cover at the end of the respective periods. A
prepaid customer is included as a subscriber if, at the end of the
period, such customers telephone number has not yet been deactivated.
See Item 4, Information on the Company  Business Overview  Mobile
Wireless Services  Prepaid Customers. Postpaid figures include public
and rural telephony.(10)
    
    Average subscribers represents the rolling monthly average number of
subscribers for the respective periods.
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(11)
    
    Average monthly postpaid churn for a given period is calculated by
dividing the sum of all postpaid subscribers disconnected during such
period by the sum of the beginning-of-month postpaid subscribers for
each of the months in such period, expressed as a percentage. See Item
4, Information on the Company  Business Overview  Mobile Wireless
Services  Postpaid Customers and Item 5, Operating and Financial
Review and Prospects  Results of Operations.(12)
    
    Penetration represents the end-of-period subscribers divided by the
end-of-period population in the geographic regions we cover, expressed
as a percentage.(13)
    
    Effective January 1, 2000, we changed the methodology by which we
determine average monthly minutes of use (MOUs). Under the current
methodology, average monthly MOUs per subscriber for a given period are
calculated by dividing total MOUs (which includes minutes of use from
incoming calls to postpaid customers, which had previously been
excluded) for the period by the sum of the monthly average number of
subscribers for each of the months in such period. Average monthly MOUs
for 1999, which were 77 under the methodology used in 1999, have been
restated under the current methodology. See Item 5, Operating and
Financial Review and Prospects  Results of Operations. When reporting
average monthly MOUs per subscriber, we include incoming calls only
prepaid subscribers and the MOUs they generate.(14)
    
    Effective January 1, 2000, we changed the methodology by which we
determine nominal average monthly mobile telephony revenue per
subscriber (ARPU). Under the current methodology, ARPU for a given
period is calculated by dividing the sum of the nominal monthly revenues
and other mobile telephony revenues (excluding revenues generated from
the sale of handsets and accessories to postpaid customers) for each of
the months in the period by the sum of the monthly average mobile
telephony subscribers for each of the months in such period. ARPU for
1999, which was Ps.356.8 under the methodology used in 1999, has been
restated under the current methodology. See Item 5, Operating and
Financial Review and Prospects  Results of Operations. When reporting
ARPU, we include incoming calls only prepaid subscribers and the
revenue they generate.(15)
    
    Through December 31, 1999, nominal cost to acquire a new subscriber
represented sales, marketing and advertising costs associated with
postpaid plans, plus the costs of cellular phones we gave to postpaid
customers, for the respective period (in nominal pesos) divided by the
gross postpaid customer additions for such period. Effective January 1,
2000, we changed the methodology by which we determine nominal cost to
acquire a new subscriber and more accurately reflect postpaid customer
acquisition costs. The new methodology includes only handset subsidies
and sales commissions and excludes allocations of advertising and
overhead costs. Nominal cost to acquire a new subscriber for 1999,
which was Ps.3,667.4 under the old methodology, has been restated under
the new methodology.
 Exchange Rates Unless otherwise specified, this Annual Report contains translations of
peso amounts into U.S. dollars solely for the convenience of the reader based
on the exchange rate reported by the Federal Reserve Bank of New York as its
noon buying rate for pesos, which we refer to as the Noon Buying Rate. At
December 31, 2003, the Noon Buying Rate was Ps.11.242 per U.S.$1.00. These
currency conversions should not be construed as representations that the peso
amounts actually represent such dollar amounts. Additionally, these
conversions should not be construed as representations that these peso amounts
have been, could have been or could be converted into U.S. dollars at those or
any other rates of exchange. The following table sets forth the high, low and average Noon Buying Rates
expressed in nominal pesos per U.S. dollar for each of the years ended December
31, 1999, 2000, 2001, 2002 and 2003. The Noon Buying Rate on June 28, 2004 was
Ps.11.4230 per U.S.$1.00. Noon Buying Rate(1)Year ended December 31,
    
    High
    
    Low
    
    Average(2)1999
    
    
    10.600
    
    
    
    9.240
    
    
    
    9.5622000
    
    
    10.087
    
    
    
    9.183
    
    
    
    9.4592001
    
    
    9.972
    
    
    
    8.946
    
    
    
    9.3372002
    
    
    10.425
    
    
    
    9.000
    
    
    
    9.6642003
    
    
    11.410
    
    
    
    10.110
    
    
    
    10.797
   (1)
    
    Source: Federal Reserve Bank of New York.(2)
    
    Average of month-end rates for annual data.
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The following table sets forth the high and low Noon Buying Rates expressed in
nominal pesos per U.S. dollar for each of the previous six months. Noon Buying Rate(1)Month
    
    High
    
    LowDecember 2003
    
    
    11.41
    
    
    
    11.17January 2004
    
    
    11.10
    
    
    
    10.81February 2004
    
    
    11.25
    
    
    
    10.91March 2004
    
    
    11.23
    
    
    
    10.92April 2004
    
    
    11.44
    
    
    
    11.16May 2004
    
    
    11.64
    
    
    
    11.38
   (1)
    
    Source: Federal Reserve Bank of New York.
 B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS Risk Factors Relating to our Liquidity There is substantial doubt as to our ability to continue as a going concern due
to our high level of leverage and recurring losses In its Report of Independent Registered Public Accounting Firm dated March
26, 2004, PricewaterhouseCoopers, S.C. stated that we are highly leveraged and
have suffered recurring losses from operations that raise substantial doubt as
to our ability to continue as a going concern. As of December 31, 2003, our
total consolidated indebtedness, including trade notes payable, was Ps.4,667.4
million, or approximately 49.4% of our total capitalization. For the years
ended December 31, 2002 and December 31, 2003, our earnings were insufficient
to cover our fixed charges by Ps.1,464.0 million and Ps.3,389.6 million,
respectively. We are also currently in default under substantially all of our
indebtedness for, among other things, failure to make principal and/or interest
payments. We believe that if our financial situation does not improve, we will be
unable to recommence the servicing of our debt and operate as a viable company.
We may be forced to file for bankruptcy, liquidate or reorganize, which would
materially adversely affect the value and market price of our equity and debt
securities and the claims of our equity or debt holders, who could lose some or
all of their investment. For a description of some of our obligations and
liabilities, see Item 5, Operating and Financial Review and
ProspectsLiquidity and Capital Resources. According to the Mexican Companies Law (Ley General de Sociedades
Mercantiles), an interested party may file a claim for dissolution and force us
into a liquidation process (Proceso de Concurso Mercantil) of our assets if
during any fiscal year the accumulated losses exceed two-thirds of our
contributed capital. In 2003, our accumulated losses exceeded two thirds of
our contributed capital by Ps.102.9 million. We are in default of our obligations under our senior notes and the senior
refinancing secured loan, and our repayment obligations have been accelerated We did not make the July 15, 2003 U.S.$7.5 million interest payment due on
our U.S.$150.0 million 10% senior notes due 2004, which we refer to as Iusacell
Celular senior notes. In response to this nonpayment, on 6




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September 11, 2003, holders representing over 50% of the senior notes
notified us that they had elected to accelerate the principal payment of the
notes. In addition, we failed to make the U.S.$265.6 million principal payment
on the senior refinancing secured loan which was due on March 31, 2004 because
of the automatic acceleration of the maturity date of the loan as a result of
our failure to refinance the Iusacell Celular senior notes by such date. We do not have the cash resources to repay such amounts. Due to the
depressed state of the value of telecommunication assets, it is doubtful that
the value of our assets and the assets of our subsidiaries will be sufficient
to satisfy the claims of our creditors. In addition, Iusacell and Iusacells
principal shareholder are under no obligation to provide financial resources to
us, and have not indicated that they are prepared to do so. Therefore, unless
we can successfully restructure our consolidated debt, we believe that we will
be unable to satisfy our obligations. As a result of the failure to pay all
amounts due under our indebtedness, we may be forced to file for bankruptcy,
liquidate or reorganize, which could materially adversely affect the value and
market price of our equity and debt securities and the claims of our equity or
debt holders, who could lose some or all of their investment. If we are unable to restructure our indebtedness, we may also face a
substantial risk of Mexican bankruptcy-related proceedings and the suspension
or termination of all or a portion of our business under our concessions Since we and our parent company Iusacell defaulted on our respective debt
obligations, some or all of our creditors have the option of taking legal
action against us, including instituting bankruptcy proceedings in Mexico.
Further, we may choose to institute a voluntary bankruptcy proceeding under
Mexican law. If any such proceedings were to be instituted, we could not
predict their duration or outcome. We are not aware of any regulated company
of our size that has successfully completed a restructuring under the new
Mexican bankruptcy law since it was passed in May 2000. The current Mexican bankruptcy law is based on the largely untested
Bankruptcy Law (Ley de Concursos Mercantiles)enacted in May 2000 which
provides for two different and separate proceedings: conciliation and
bankruptcy. The conciliation phase lasts up to 185 days, absent protracted
litigation. This initial term is subject to extension for two 90-day periods.
The objective of the conciliation phase is to reach an agreement between the
debtor and its creditors to restructure the indebtedness of the debtor. The
bankruptcy phase does not have a specific term within which it must be
concluded. We believe that these proceedings are likely to require
significantly more time and be significantly more unpredictable than a
reorganization or bankruptcy proceeding under U.S. bankruptcy laws. If we were
to be declared subject to the Bankruptcy Law, the holders of our debt
securities would have to file a claim in Spanish against our estate in a
federal district court in Mexico City. Upon the courts recognition of a
holder of a Iusacell Celular senior note as a creditor of Iusacell, that
holders claim would be unsecured and would rank equally with all other
unsecured claims filed against our estate. A conciliation proceeding is likely to result in significant changes to
our and our subsidiaries existing obligations, which could include the
cancellation or rescheduling of all or part of those obligations. During any
such proceeding, our operation of our business would be subject to the
supervision of a bankruptcy trustee. Moreover, in the event of our bankruptcy,
our operating concessions, which are critical to our business, may be subject
to termination. See item 4, Information on the CompanyB. Business
OverviewConcessions and Permits. There can be no assurance that the holders
of our debt securities would receive any meaningful recovery from a bankruptcy
proceeding. We may be unable to fund our capital expenditure programs which are critical
for us to compete, or pursue business opportunities In order to implement our operating strategy and be able to compete in the
Mexican market through 2006, we will have to incur significant capital
expenditures. We expect our aggregate capital expenditures for 2004, 2005 and
2006, not including capitalized interest, to total approximately U.S.$252.8
million. We anticipate that approximately U.S.$90.2 million of such capital
expenditures will need to be invested during 2004 to make additional
investments in the central regions and expand the advance data network
capabilities into other key cities, among other things. As we make additional
investments in our mobile telephony network and pursue long distance and data
transmission opportunities, we will also be likely to need additional external
funding in 2005 and beyond. Furthermore, the investments required to keep pace
with technological change, such as extended coverage on third-generation
wireless telecommunication equipment, will require additional capital
resources. Historically, our cash generated from operating activities has not been
sufficient to meet our debt service, working capital and capital expenditure
requirements. In the past, we have relied on the capital markets for new 7




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equity and debt financing, on vendor financing, and on borrowings and
equity contributions from our shareholders to meet such funding needs. Given
our current critical financial condition, it is highly unlikely that we will be
able to obtain funding for these planned capital expenditures without first
completing a successful restructuring of our existing indebtedness. In
addition, Iusacell, our parent company, and Iusacells principal shareholder
are under no obligation to provide financial resources to us, and have not
indicated that they are prepared to do so. The failure to obtain funding for capital expenditures will materially
adversely affect our ability to compete effectively against better capitalized
competitors and to withstand downturns in our business or in the Mexican
economy generally. Furthermore, this would limit our ability to pursue
business opportunities that may be in our interest. We may be unable to continue to sell towers to MATC Celular and use our assets
as collateral for future indebtedness assumed by us In order to improve our short-term liquidity, since 2001 we have been
selling towers to MATC Celular, S. de R.L. de C.V. (MATC Celular) and leasing
back space to install our equipment. From 2001 to December 19, 2003, we sold 311 towers.
In December 2003, we entered into a new series of agreements with MATC Celular
that, among other things, gave MATC Celular the right to acquire up to 143
additional towers for up to U.S.$31.4 million. As of May 31, 2004, we had sold
69 of these towers. We cannot assure you that MATC Celular will exercise its
right to purchase the additional towers not yet sold to them. As a result, we
may be unable to make future sales of towers, thus restricting our ability to
raise short-term liquidity. Certain holders of the Iusacell Celular senior notes initiated an action
in a New York state court against us Among other things, such holders are
seeking injunctive relief to bar Iusacell Celular from selling, transferring or
otherwise encumbering its assets. If the Court grants such injunctive relief,
we would not be able to sell additional towers to MATC or otherwise use our
assets as collateral in future indebtedness assumed by us. See Item 8,
Financial InformationA. Consolidated Statements and Other Financial
InformationLegal ProceedingsIusacell Celular Senior Noteholders. Risk Factors Relating to Our Business We face increasing competition which may reduce our operating margins Competition in the Mexican wireless industry is substantial. We face
significant competition, mainly from Telcel, in our core mobile telephony
services business in each region in which we operate. As a subsidiary of
América Móvil, S.A. de C.V., a company spun off from Teléfonos de México, S.A.
de C.V., the former state telephone monopoly known as Telmex, Telcel has
significantly greater internal financial and operational resources than those
available to us, nationwide cellular and PCS concessions, a nationwide cellular
network and the ability to use Telmexs installed telecommunications systems.
We also face competition from Telefónica Móviles S.A. de C.V.(Telefónica)
and Operadora Unefon, S.A. de C.V.(Unefon), one of our affiliates. Both
these service providers own concessions in all nine wireless service regions in
Mexico and have begun to provide service in Mexicos principal cities. We also
face increasing competition in certain cities from Nextel de México, S.A. de
C.V., a provider of enhanced specialized mobile radio services. In long
distance, we face increasing competition from nine other concession holders. In addition, the Mexican government may grant additional concessions to
other companies to provide services similar to or the same as those that we
provide. Competition may lead to increases in advertising and promotional spending,
along with higher subsidies, increased demands on access to distribution
channels and reduced prices per minute. These factors may lead to smaller
operating margins, greater choices for customers and increasing movement of
customers between competitors, which may make it difficult for us to retain
customers or add new customers. Because of their resources and, in some cases,
ownership by larger companies, some of our competitors are financially stronger
than we are, which may enable them to offer services to customers at prices
that are below the prices at which we can offer comparable services. If we
cannot compete effectively based on the price of our service offerings, our
revenues and growth may be adversely affected. In the past, competitive
pressures have not always allowed us to implement price increases to keep pace
with inflation and have occasionally caused us to implement price rollbacks and
reductions. 8




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The technology we use may be made obsolete by advancements in technology All companies in the global telecommunications industry must adapt to
rapid and significant changes in technology. The technology that we have
selected in our wireless business may rapidly become obsolete by market demand
for new or improved digital technologies supporting wireless service or other
services in the near future. Some of the most significant changes which the
wireless communications industry is experiencing 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;
    
    development of data and high bandwidth network capabilities;
    
    migration to next-generation services; and
    
    expanded availability and functionality of Wi-Fi services and other new wireless technologies. Alternative technologies may develop that may provide wireless
communications service or alternative service superior to that available from
us, or that enable voice communication over unregulated frequencies. Technological changes may require substantial new capital expenditures
and/or require write-downs of obsolete technology. They may also materially
adversely affect our operations and our competitive position to the extent we
are not able to react quickly to these changes. See We may be unable to fund
our capital expenditure programs which are critical for us to compete, or
pursue business opportunities. If our wireless service offerings do not meet customer expectations, we could
be limited in our ability to attract and retain customers Customer acceptance of the services we offer is and will continue to be
affected by technology-based differences and by the operational performance,
quality, reliability and coverage of our wireless networks. We may have
difficulty attracting and retaining customers if we are unable to meet customer
expectations for, or otherwise unable to resolve quality issues relating to,
our wireless networks, billing systems, or customer care or if those issues
limit our ability to expand our network capacity or subscriber base, or
otherwise place us at a competitive disadvantage to other wireless service
providers in our markets. We rely on roaming arrangements with other carriers, which we may be unable to
obtain or maintain in the future on terms that are acceptable to us Our customers automatically can access another providers analog cellular
or digital system only if the other provider allows our customers to roam on
its network. We rely on agreements to provide roaming capability to our
customers in many areas outside our service area, within and outside Mexico,
and to improve coverage within our network footprint. Some competitors may be able to obtain lower roaming rates than we do
because they have larger call volumes or because of their affiliations with, or
ownership of, wireless providers, or may be able to reduce roaming charges by
providing service principally over their own network. In addition, the quality
of service that a wireless provider delivers during a roaming call may be
inferior to the quality of service we or our affiliates provide, and our
customers may not be able to use some of the advanced features, such as
voicemail notification, that the customers enjoy when making calls within our
network. Our roaming partners may also migrate their current technology to a
technology that is incompatible with ours. In such case, we would no longer be
able to offer roaming services to our customers through such carriers. See
"The technology we use may be made obsolete by advancements in technology. 9




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Equipment failure, power outages, natural disasters, terrorist acts, or other
breaches of network or information technology security may adversely affect our
business A major equipment failure, power outage, natural disaster, terrorist act,
or other breach of network or information technology security that affects our
mobile telephony switching offices, information systems, microwave links,
third-party owned local and long distance networks on which we rely, our cell
sites or other equipment or the networks of other providers on which our
subscribers roam could have a material adverse effect on our operations. While
we have insurance coverage for some of these events, our inability to operate
our wireless system or access our information systems even for a limited time
period, or the loss of subscriber data, may result in a loss of subscribers or
impair our ability to serve our subscribers or attract new subscribers, which
would have a material adverse effect on our business, results of operations and
financial condition. A significant portion of our accounts receivable is represented by a small
number of distributors. Our three largest distributors accounted for 60% and 52% of our net trade
accounts receivable as of December 31, 2003 and 2002, respectively. We have
established certain measures to reduce the risk associated with this
concentration, such as certain guarantees and liens. Our results of operations
could be materially adversely affected, at least in the short-term, if any
payment defaults occur with respect to these distributors or if any of these
distributors were to enter into bankruptcy or other reorganization proceedings
or terminate their relationship with us. Iusacells controlling stockholder is able to influence our business and
affairs As of December 31, 2003, MovilAccess beneficially owned about 74.6% of the
outstanding common stock of Iusacell, our parent company, and is Iusacells
single largest stockholder. MovilAccess is controlled directly or indirectly
by Ricardo B. Salinas Pliego, our Chairman of the Board of Directors and
Executive Director, who also holds directly 4.6% of Iusacells outstanding
common stock. As a result, Mr. Salinas Pliego controls our business, policies
and affairs, including the election of at least the majority of our directors
and all major corporate transactions and could cause or prevent a change of
control. Mr. Salinas Pliegos interests may not be fully aligned, and could
conflict, with the interest of debtholders. We have significant transactions with affiliates that create potential
conflicts of interest We regularly engage in transactions with entities owned or controlled by
the controlling shareholder of Iusacell, our parent company. These
transactions include telemarketing and advertising campaigns, paging
operations, sale and distribution of our products, operation of our customer
sales and service centers, collections from customers and banking services. In
particular, we have entered into an airtime exchange and roaming agreement with
Unefon, a mobile telephony competitor. In addition, some of the members of our
Board of Directors, as well as some of our executives, serve on the Boards of
Directors of TV Azteca, Unefon, Biper, our paging competitor, and/or Elektra, a
distributor of our products. In addition, some of our executives also hold
offices in other companies controlled by Mr. Salinas Pliego. See Item 7,
Major Shareholders and Related Party TransactionsB. Related Party
Transactions and Item 6, Directors, Senior Management and EmployeesA.
Directors and Senior Management. Transactions with affiliates may create the potential for conflicts of
interest. To guard against these potential conflicts of interest, Iusacell has
established a Related Party Transactions Committee of its Board of Directors
made up of independent Directors to provide an independent review of Iusacells
and its subsidiaries (including us) transactions with affiliates to determine
whether these transactions are related to our business and are consummated on
terms that are at least as favorable to us as terms that would be obtainable in
a similar transaction entered into on an arms-length basis with an unrelated
third party. Nevertheless, conflicts of interest may arise and could have a
negative effect on our results of operations and financial condition. We have experienced significant turnover in our top management and our Board of
Directors In recent years we have experienced significant turnover in our top
management ranks. Frequent changes in our top management and Board of
Directors negatively affect our ability to develop and implement successful
business philosophies, strategies and policies. Most recently in July 2003, as
a result of the acquisition of Iusacell by MovilAccess, our top management and
Board of Directors were replaced wholesale, with the majority of new executives
and directors coming from companies. This wholesale and immediate change has
resulted in the 10




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substantial loss of the institutional memory that companies typically draw
from in evaluating projects and opportunities and in developing business
strategies and policies. Our new management has implemented substantial changes to our business
operations and strategies. For example, we have changed our sales, marketing
and distribution approach, including the format of our customer sales and
service centers, in an effort to maximize synergies with other companies
controlled by Mr. Salinas Pliego and control costs. See Item 4, Information
on the CompanyB. Business OverviewSales, Marketing and Distribution. We
have also revised our deactivation policy for prepaid customers, which resulted
in the turnover of approximately 425,000 customers in the third quarter of
2003. See Item 4, Information on the CompanyB. Business OverviewChurn and
TurnoverPrepaid Turnover. Furthermore, we have reevaluated the feasibility
of certain projects based on our current financial condition and have made
corresponding accounting adjustments that could have a negative effect on our
results of operations and financial condition. See Item 5, Operating and
Financial Review and ProspectsA. Operating ResultsRecent Changes in Our
Accounting Policies. We cannot assure you that these changes will be
successful. We may be unable to hire or retain key personnel Our success depends in part upon our ability to hire and retain
highly-skilled and qualified key personnel. The competition for
highly-qualified management personnel in the telecommunications industry is
intense. In addition, our critical financial condition makes it more difficult
for us to attract such personnel. Accordingly, we cannot assure you that we
will be able to hire and retain the key personnel necessary for our success. We are subject to various litigations We are a defendant in certain litigations and legal proceedings involving
claims for substantial amounts of money. We have made provisions for some of
these contingencies. The ultimate resolutions of these actions could have a
material adverse effect on our operations and financial condition. See Item 8,
Financial InformationFinancial StatementsLegal Proceedings. Risk Factors Relating to Doing Business in Mexico The Mexican government may impose additional conditions on our concessions or
may take them away We provide our services pursuant to concessions granted by the Mexican
government. Our activities are subject to significant government regulation
and supervision. The concessions may be subject to additional conditions for
renewal or may not be renewed when they expire. The conditions for renewal,
however, are not fully defined. Our concessions may be revoked prior to the
end on their respective terms if we fail to comply with specified obligations
and conditions. The Mexican government also reserves the right to revoke,
temporarily seize or expropriate concessions or assets related to a concession
for reasons, among others, of public interest, such as war, national disaster
or significant public disturbances. Moreover, the Mexican government may grant
additional concessions to potential competitors to provide services similar to
those that we provide. Any of these developments or other government action
could reduce the value of our concessions and adversely affect our financial
condition and results of operations. See Item 4, Information on the Company 
B. Business Overview  Concessions and Permits. The Mexican government may enact new laws or adopt new interpretations to
existing laws that could negatively affect our operations and profitability The Mexican government may enact new laws or adopt new interpretations to
existing laws that could negatively affect our operations and profitability.
In particular, in the past the Mexican government has sought to impose a 10%
excise tax on mobile telephony services. This tax has since been derogated.
However, we cannot assure you that the Mexican government will not seek to
enact new taxes. If such taxes are imposed, or any new laws are enacted or new
interpretations to existing laws are adopted that result in increased costs, we
may be unable to pass on such costs to our customers, or demand may decrease if
we do pass on such costs. 11




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Our financial statements may not give you the same information as financial
statements prepared under U.S. generally accepted accounting principles We prepare our financial statements in accordance with Mexican GAAP.
Mexican GAAP differs in certain significant respects from U.S. GAAP, including,
but not limited to, the treatment of minority interest, purchase accounting,
deferred income taxes, accounting for derivative financial instruments, gains
from the exchange of non-monetary assets, the provisioning for the
consolidation of facilities and sale-leaseback transactions. In particular,
companies using Mexican GAAP must incorporate the effects of inflation directly
in their accounting records and in published financial statements. The effects
of inflation accounting under Mexican GAAP are not eliminated in the
reconciliation to U.S. GAAP, as these inflation-adjusted figures are considered
a more meaningful presentation than historical cost-based financial reporting
for both Mexican and U.S. accounting purposes. For this and other reasons, the
presentation of financial statements and reported earnings of Mexican companies
may differ from that of companies in other countries. See Note 18 to our
Consolidated Financial Statements. The general political and economic conditions in Mexico may adversely affect
our business, financial condition and results of operations We are a Mexican company, and most of our operations are in Mexico. As a
result, our business, financial condition and results of operations may be
significantly affected by the general condition of the Mexican economy, by a
devaluation of the peso, by inflation and high interest rates in Mexico, or by
political or economic developments in Mexico. The Mexican economy grew at an
annual rate of only 0.9% in 2002 and 1.3% in 2003. The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities in general and on us in particular,
and on market conditions, prices and returns on Mexican securities, including
our securities. In the past, Mexico has experienced economic crises, caused by internal
and external factors, characterized by exchange rate instability, high
inflation, high domestic interest rates, economic contraction, a reduction of
international capital flows, a reduction of liquidity in the banking sector and
high unemployment. These economic conditions substantially reduced the
purchasing power of the Mexican population and, as a result, the demand for
mobile telephony services. Crises such as these could adversely affect our
financial condition and results of operations and the market value of our
securities. If the Mexican government imposes exchange controls, we may not be able to
purchase imported goods or make dividend, principal and interest payments in
U.S. dollars In the past, the Mexican economy has experienced balance of payment
deficits and shortages in foreign exchange reserves. While the Mexican
government does not currently restrict the ability of Mexican or foreign
persons or entities to convert pesos to foreign currencies generally, and U.S.
dollars in particular, it has done so in the past and could do so again in the
future. We cannot assure you that the Mexican government will not institute a
restrictive exchange control policy in the future. Any such restrictive
exchange control policy could prevent or restrict access to U.S. dollars or
other foreign currencies to purchase imported goods and to meet our U.S. dollar
obligations, such as the payment of dividends or principal and interest under
our debt securities. Payment of judgments entered against us in Mexico will be in pesos, which may
expose holders of our debt securities to exchange rate risk If a proceeding to enforce our obligations under any debt securities is
brought in Mexico, Mexican law permits us to pay a resulting judgment in pesos.
Under the Mexican Monetary Law, an obligation payable in Mexico in a currency
other than pesos may be satisfied in pesos at the exchange rate in effect on
the date when payment is made. If a Mexican court declares us to be in bankruptcy (concurso mercantil),
our obligations under any debt securities:  
    
    would be converted into pesos at the exchange rate prevailing
at the time of the courts declaration of bankruptcy and then to
Unidades de Inversión, which are denominated in pesos and adjusted 12




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periodically for inflation by the Bank of Mexico, and payment would
occur at the time claims of the court-recognized creditors are
satisfied subject to the priority established by law; and
    
    would not be otherwise adjusted to take into account
devaluation of the peso against the U.S. dollar occurring after the
courts declaration.  High inflation rates in Mexico may result in a decrease in demand for our
services and may negatively affect our profit margin In recent years, Mexico has experienced high levels of inflation. The
annual rate of inflation, as measured by the Mexican National Consumer Price
Index, was 4.4%, 5.7% and 4.0% in 2001, 2002 and 2003, respectively, and was
1.6% for the three-month period ended March 31, 2004. High inflation rates may
adversely affect demand for mobile telephony services. In addition, the
overall state of the Mexican economy and competitive pressures may not allow us
to increase our prices in line with the inflation rate, thus negatively
affecting our profit margin. Depreciation or devaluation of the peso relative to the U.S. dollar may
adversely affect our financial condition and results of operations While our sales are almost entirely denominated in pesos, the vast
majority of our obligations are denominated in U.S. dollars. As a result, we
are exposed to the risk of devaluation of the peso relative to the U.S. dollar.
The peso depreciated by 13.9% and 7.6% relative to the U.S. dollar during 2002
and 2003, respectively. In the past, the peso has depreciated substantially
against the U.S. dollar and may depreciate significantly in the future. Declines in the value of the peso relative to the U.S. dollar could
adversely affect our financial condition and results of operations and our
ability to meet U.S. dollar-denominated obligations. In particular, a
devaluation could affect our capacity for future investments because the prices
for equipment are set in U.S. dollars. In addition, any devaluation of the
peso may negatively affect the value of the securities of a Mexican company
with sales in pesos and debt denominated in U.S. dollars, such as our company. It may be difficult to enforce civil liabilities against us or our directors,
officers and controlling persons We are organized under the laws of Mexico, and most of our directors,
officers and controlling persons reside outside the United States. In
addition, a substantial portion of our assets and their assets are located in
Mexico. As a result, it may be difficult for investors to effect service of
process within the United States on such persons or to enforce judgments
against them, including in any action based on civil liabilities under the U.S.
federal securities laws. There is doubt as to the enforceability against such
persons in Mexico, whether in original actions or in actions to enforce
judgments of U.S. courts, of liabilities based solely on the U.S. federal
securities laws. 
 ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY Grupo Iusacell Celular, S.A. de C.V., which was known as Grupo Iusacell,
S.A. de C.V.until February 29, 2000, is a sociedad anónima de capital variable
with indefinite life organized under the laws of Mexico on October 6, 1992.
Grupo Iusacell, S.A. de C.V., which was known as Nuevo Grupo Iusacell, S.A. de
C.V.until February 29, 2000, our holding company, is a sociedad anónima de
capital variablewith indefinite life organized under the laws of Mexico on
August 6, 1998. We are the principal operating subsidiary of Iusacell. We market our products under the Iusacell brand name. We currently
operate primarily in Mexico under Mexican legislation, including, among others,
the 1995 Telecommunications Law (Ley Federal de Telecomunicaciones), and the
Mexican Companies Law (Ley General de Sociedades Mercantiles). See B.
Business OverviewGovernment Regulation for a discussion of the principal
regulations to which we are subject. We are primarily engaged in the wireless telecommunications business and
hold concessions to operate cellular telephone systems in five contiguous
market regions in central and southern Mexico, and to provide long distance
service nationwide. 13




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On July 29, 2003, MovilAccess, a Mexican telecommunications service
provider controlled by Mr. Salinas Pliego and a subsidiary of Biper, completed
a public tender offer in Mexico and the United States, pursuant to which it
acquired 74.6% of all outstanding capital stock of Iusacell. Verizon and
Vodafone, the then principal shareholders of Iusacell, tendered all their
shares. Over the last three fiscal years, excluding the effects of inflation
accounting, capitalized interest and certain non-cash trade-in credits, we have
invested approximately U.S.$273.4 million in capital expenditures, primarily
for our cellular communications network, long distance network and billing,
customer care and administrative systems. See Item 5, Operating and Financial
Review and ProspectsB. Liquidity and Capital ResourcesCapital Expenditures. During the first quarter of 2004, we invested approximately U.S.$8.0
million in our cellular regions to expand our coverage. In 2004, we plan to
invest a total of approximately U.S.$90.2 million in capital expenditures, not
including capitalized interest, to increase the coverage and improve the
quality of and enhance the features available through our cellular and long
distance networks, and to improve our billing and customer care systems. All
of this capital equipment will be deployed in Mexico. Our ability to carry out
these capital expenditures depends on obtaining sufficient funds. It is
unclear whether we will be able to obtain the required funds from operations
and vendor and other financing. In particular, we cannot assure you that we
will be able to complete a successful restructuring of our indebtedness. See
Item 3, Key InformationD. Risk FactorsRisk Factors Relating to our
LiquidityWe may be unable to fund our capital expenditure programs which are
critical for us to compete or pursue business opportunities and Item 5,
Operating and Financial Review and ProspectsLiquidity and Capital
ResourcesCapital Expenditures. Our principal executive offices are located at Montes Urales 460, Colonia
Lomas de Chapultepec, Delegacion Miguel Hidalgo, 11000, Mexico, D.F., which is
also where we are domiciled. Our telephone number is (5255) 5109-4400. Our
agent in the United States is Puglisi & Associates, 850 Library Avenue, Suite
204, P.O. Box 885, Newark, Delaware 19715. Our Internet website address is
www.iusacell.com. The information on our website is not incorporated into this
Annual Report. B. BUSINESS OVERVIEW We are a wireless telecommunications services provider in Mexico with
nearly 1.2 million mobile wireless customers at December 31, 2003,
approximately 74.7% of which are prepaid customers. We hold concessions in the
800 megahertz (MHz) band to provide cellular wireless services in five
contiguous geographic regions comprising all of central and southern Mexico.
Our service regions include Mexico City, one of the worlds most populous
cities, and the cities of Guadalajara, León, Puebla, Cancún and Mérida, which
when combined represent approximately 81 million POPs comprising 80% of
Mexicos total population. We provide digital service using Code Division Multiple Access (CDMA)
technology, the highest-capacity commercial digital technology available in the
800 MHz frequency band in most of the regions we operate. In January 2003, we
launched the countrys first CDMA2000 1XRTT voice and high-speed data network
in Mexico City. With this advanced network, we increased voice capacity and
are able to offer subscribers new data services such as high-speed instant
messaging, e-mail and Internet access at speeds of up to 144 kilobits per
second (kbps). In addition to our core mobile telephony services, we also
provide a wide range of other telecommunications services, including long
distance, wireless local telephony and data transmission services. Our subscriber base as of December 31, 2003 was 1,245,231. Of these
subscribers, 314,493 were postpaid customers who purchase mobile telephony
services pursuant to fixed-term contracts, and the remaining 930,738 were
prepaid customers who pay for their mobile telephony services in advance
primarily through the purchase of prepaid airtime. Since July 29, 2003, our parent company Iusacell has been under the
management control of MovilAccess. MovilAccess consultants and personnel have
been integrally involved in managing our day-to-day operations and defining and
implementing our business strategy. MovilAccess currently holds 74.8% of
Iusacells capital. See Item 7, Major Shareholders and Related Party
TransactionsA. Major Shareholders. Prior to the acquisition by MovilAccess
of its equity interest in Iusacell, Iusacell had been under the management
control of Verizon and Vodafone. 14




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The Telecommunications Industry in Mexico Mobile Telephony Services The Mexican government initiated its efforts to liberalize the
telecommunications industry in 1989, dividing Mexico into nine geographic
regions for the provision of cellular service. In order to provide an
alternative for cellular customers, two concessions were granted in each
region, one to Telcel, the cellular subsidiary of Telmex, and the other to an
independent operator. In addition, Telmex was required to interconnect all
cellular operators to its network in an effort to facilitate competition. The nine geographic regions are described in the table below. RegionNumber
    
    Geographical Coverage
    
    Major Cities in the Region1
    
    The states of Baja
California and Baja
California Sur and
the municipality of
San Luis Río Colorado
in northwestern
Sonora state.
    
    Tijuana, Mexicali, Ensenada, Tecate
and La Paz.2
    
    The states of Sonora
and Sinaloa (except
for the municipality
of San Luis Río
Colorado in
northwestern Sonora).
    
    Hermosillo, Ciudad Obregón, Culiacán
and Mazatlán.3
    
    The states of
Chihuahua and Durango
and the
municipalities of
Torreón, Francisco I.
Madero, Matamoros,
San Pedro and Viesca
in the state of
Coahuila.
    
    Ciudad Juárez, Chihuahua, Durango,
Gómez Palacio and Torreón.4
    
    The states of
Tamaulipas, Nuevo
León and Coahuila
(except for the
municipalities of
Torreón, Francisco I.
Madero, Matamoros,
San Pedro and
Viesca).
    
    Monterrey, Saltillo, Tampico, Ciudad
Victoria, Nuevo Laredo, Reynosa and
Matamoros.5
    
    The states of Colima,
Jalisco (except for
12 municipalities in
northeastern
Jalisco), Michoacán
and Nayarit.
    
    Guadalajara (Mexicos second largest
city), Morelia, Tepic, Colima and
Manzanillo.6
    
    The states of
Aguascalientes,
Guanajuato,
Querétaro, San Luis
Potosí and Zacatecas
and 12 municipalities
in northeastern
Jalisco.
    
    Aguascalientes, León, Querétaro, San
Luis Potosí and Zacatecas.7
    
    The states of
Guerrero, Oaxaca,
Puebla, Tlaxcala and
Veracruz.
    
    Puebla, Acapulco, Veracruz and Oaxaca.8
    
    The states of
Yucatán, Quintana
Roo, Campeche,
Chiapas and Tabasco.
    
    Mérida, Cancún, Villahermosa,
Campeche, Tuxtla Gutiérrez and San
Cristobal de las Casas.9
    
    The states of Mexico,
Hidalgo and Morelos
and the Federal
District.
    
    Mexico City, Toluca, Cuernavaca and
Pachuca.
 In December 1990, the Mexican government initiated the privatization of
Telmex, which was then the sole provider of landline local and long distance
service and competing in Cellular B-band cellular services, when it sold 20.4%
of the equity and 50.1% of the voting power in Telmex to a private consortium
for U.S.$1.76 billion. The winning consortium consisted of Grupo Carso, S.A.
de C.V., a Mexican conglomerate which owns or otherwise controls a majority of
the consortiums voting interest, SBC Communications Inc.and France Telecom
S.A.Subsequent to the original privatization, the Mexican government further
reduced its holdings in Telmex through additional transactions and completed
the sale process in June 1994. In 2001, Telcel and other wireless
international subsidiaries of Telmex were spun-off from Telmex to form a new
company named América Móvil, S.A. de C.V., which is known as América Móvil. Telcel holds the Cellular B-band and PCS D-band concessions in each of the
nine cellular regions and is Mexicos largest mobile wireless operator. Our
subsidiaries hold the Cellular A-band concession in Regions 5, 6, 7, 8 and 9.
Our affiliate Iusacell PCS, S.A. de C.V.(Iusacell PCS) hold PCS E-band
concessions for Regions 1 and 4. Telefónica holds, through subsidiaries, the
Cellular A-band concessions for Regions 1, 2, 3 and 4 and PCS band concessions
nationwide. Unefon, our affiliate, has a nationwide PCS band concession. 15




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Underserved Telecommunications Market Despite the significant increase in wireline and wireless penetration in
Mexico in recent years, we believe that there remains a substantial unmet
demand for telephone services in Mexico. According to the Mexican
Telecommunications Agency (Comisión Federal de Telecomunicaciones)(COFETEL),
as of December 31, 2003, there were approximately 15.7 wireline telephone lines
per 100 inhabitants in Mexico, which is lower than the teledensity of some
other Latin American countries and substantially lower than those of developed
countries such as the United States. Due to the relatively low wireline
penetration in developing countries such as Mexico, increases in the level of
wireless penetration in these countries may be partly attributable to users who
purchase wireless services as a principal means of telecommunications. The following table presents, for selected countries, including Latin
American countries and the United States, the number of subscribers of wireless
telephone services per 100 inhabitants as of December 31, 2002 and December 31,
2003: Selected Wireless Telephony Penetration Wireless subscribersper 100 inhabitants (1)Country
    
    2002
    
    2003Spain
    
    
    82.3
    
    
    
    91.6Portugal
    
    
    81.9
    
    
    
    90.4United States
    
    
    48.8
    
    
    
    54.3Chile
    
    
    42.8
    
    
    
    42.8
    (2)Mexico
    
    
    25.5
    
    
    
    29.1Brazil
    
    
    20.1
    
    
    
    26.4Venezuela
    
    
    25.6
    
    
    
    25.6
    (2)Argentina
    
    
    17.8
    
    
    
    17.8
    (2)
   (1)
    
    Source:International Telecommunication Union 2004 Website, except
for 2003 figures for Mexico, which are derived from COFETEL.(2)
    
    2002 figures.
 On May 1, 1999, Mexico implemented the calling party pays modality, or
CPP, which has been implemented in most Latin American and European countries.
Calling party pays is a wireless telephony payment structure in which the party
that places a call to a wireless telephone is billed for interconnection
access, and the recipient is not billed for the airtime charges corresponding
to that call. The introduction of CPP triggered growth in wireless
penetration, particularly in the prepaid segment and wireless traffic. Our Mobile Telephony Services History and Overview We became the first Mexican provider of cellular telecommunications
services in 1989, when we commenced operations of our Cellular A-band network
in Region 9. Through a series of transactions from 1990 to 2002, we acquired
100% beneficial ownership interests in the entities which hold the Cellular
A-band concessions in Regions 5, 6, 7, and 8. The regions we serve cover a
contiguous geographic area comprising all of the regions in central and
southern Mexico, which allows Iusacell to achieve economies of scale. Iusacells service regions are home to a variety of industries. Region 9
includes Mexico City, which has the greatest concentration of service and
manufacturing industries in Mexico and is also the center of Mexicos public
and financial services sectors. Region 5 includes Guadalajara, Mexicos second
largest city and the commercial and service center of western Mexico, which has
also developed as a center for the maquiladora industry. Region 6 includes
León, Querétaro, Aguascalientes and San Luis Potosí and has historically been
dominated by the agricultural sector, although it has also developed as an
automobile manufacturing and high technology center. 16




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Region 7 includes Puebla, Acapulco, Veracruz and Oaxaca and contains major
operations of the Mexican petrochemical and automotive industries and
significant tourist resorts and attractions. Region 8 includes Mérida,
Villahermosa, Cancún, Campeche and Tuxtla Gutiérrez and contains major
operations of the Mexican petroleum industry and significant tourist resorts
and attractions. We offer wireless communications services in a variety of plans, which are
divided into two basic groups: either postpaid, where the customer is billed
monthly for usage during the previous month based on a fixed-term contract, or
prepaid, where the customer pays in advance for a specified volume of usage
over a specified period. Postpaid Services As of December 31, 2003, postpaid subscribers (including public and rural
telephony) totaled 314,493, including public and rural telephony, comprising
25.3% of our customer base. Nominal average monthly mobile telephony revenue
per subscriber (ARPU) in this segment was Ps.682 for 2003. We offer a number of value-added services designed specifically to fulfill
the demands of postpaid subscribers, such as voicemail, call forwarding, call
waiting, three-way calling and secretarial services. We also provide financial
news reporting, emergency services, entertainment information, reservations
services and sports reports. Moreover, CDMA digital postpaid customers have
available caller identification, short message service and data transmission
services. We believe that these value-added services help increase postpaid
subscriber usage and also enhance our market image as a full service mobile
telephony provider. Prepaid Services As of December 31, 2003, prepaid customers totaled 930,738, comprising
74.7% of our customer base. Prepaid ARPU was Ps.7.8 for 2003. In contrast to postpaid subscribers, prepaid customers typically generate
lower levels of usage, have access to a limited number of value-added services,
or may choose to purchase a handset with preloaded minutes. Prepaid customers
often are unwilling to make a fixed financial commitment or do not have the
credit profile to purchase postpaid plan mobile telephony services. Customers
may purchase airtime credit with cash or credit or debit card. Customers may
make their purchases at a distributors point of sale, at our customer sales
and service centers, through automated teller machines, through our website or
by phone. The prepaid program markets four different prepaid cards, each of which
credits a specific peso denomination worth of airtime usage over a specified
period of time. We charge for outgoing calls, as well as long distance
incoming calls and roaming services. A prepaid customer ceases to be considered a customer of Iusacell when a
specified period of time has elapsed since the customer purchased and
activated, or last added credit to, his or her last prepaid card. The
customers telephone number is then deactivated, and the customer is considered
to have turned over. Roaming Through our roaming agreements with other operators, we offer nationwide
roaming service to our prepaid and postpaid mobile telephony subscribers, and
international service only to our postpaid subscribers. Through these
agreements, subscribers can make calls from any location in Mexico served by a
Cellular A-band operator, and can receive a call made to the subscribers
number (automatic call delivery) regardless of the region in Mexico in which
the subscriber is located. We also provide mobile telephony services to all
subscribers of our roaming partners in Mexico while such subscribers are
temporarily located in a region served by us. An operator (a host operator) providing service to a subscriber of another
operator (the home operator) temporarily located in the host operators service
region (an in-roamer) earns usage revenue. We bill the home operator of an
in-roamer for the in-roamers usage in our service region. In the case of
roaming by an Iusacell Celular subscriber in the region of a host operator (an
out-roamer), Iusacell Celular is billed by the host operator for the
subscribers usage. We remit the billed amount to the host operator and bill
our own customer, the out-roamer. As a result, we retain the collection risk
for roaming charges incurred by our own subscribers. Conversely, roaming 17




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charges billed by Iusacell Celular for in-roaming usage by subscribers of
other operators are the responsibility of those operators. Roaming charges
between wireless operators are settled monthly. Interconnection charges owed to Telmex and long-distance charges owed to
long distance carriers as a result of roaming are the responsibility of the
host operator. In-roaming fees and usage revenue represented 3.1% of our total
revenues during 2003. Out-roaming charges represented 3.7% of our total
revenues during 2003. We have more than 60 agreements with U.S., Canadian, Latin American and
other foreign operators to provide our subscribers with international roaming
capabilities. These operators include Verizon Wireless, AT&T Wireless, Sprint
and Cingular Wireless, among others. In addition, we provide, through the
National Automatic Cellular Network, automatic call delivery throughout most of
the United States, including Puerto Rico, whereby our subscribers may receive
telephone calls from Mexico without the caller having to dial access codes.
Currently, our customers are able to roam in over 2,000 municipalities in the
United States and Canada, as well as in more than 150 other countries in the
Americas, Europe, Asia, Africa and the Pacific. In 2003, we launched the
international short message services with the main carriers in the U.S. and
Canada, enabling our customers to send and receive messages to and from their
customers. Our Long Distance Services In August 1996, we became one of Telmexs first competitors in long
distance service when we began to provide long distance services to our mobile
telephony subscribers in Mexico pursuant to a 30-year concession. We currently provide long distance service using our own switches and
transmission equipment and a combination of fiber optic lines, microwave links
and lines leased from Telmex and other carriers. At December 31, 2003, we
provided long distance service in 52 cities to 1,287,589 customers,
substantially all of which were existing customers of our mobile telephony
services. We obtained an exemption from the COFETEL that allows us not to make
available to our mobile telephony customers the services of other long distance
carriers. We cannot assure you that the COFETEL will not rescind this
exemption in the future. Revenues related to long distance services
represented 6.9% of our total revenues for 2003, not including dark fiber optic
cable sales. We have been able to reduce our capital investment for our long distance
business by entering into fiber optic cable swaps with three other long
distance companies between 1998 and 2002. We acquired fibers in the long
distance fiber optic networks built by Marcatel, S.A de C.V., Bestel, S.A de
C.V.,and Telereunión S.A de C.V,in central, northern and eastern Mexico, in
exchange for fibers in the long distance fiber optic network we completed in
central and western Mexico. As a result, we obtained redundancy in central
Mexico and access to the United States border and eastern Mexico at minimal
cost. We also exchange international long distance traffic with AT&T and
Teleglobe USA, Inc. These arrangements give us two alternative routes to
deliver international long distance traffic. In March 2002, the United States
Federal Communications Commission granted to Iusatel USA Inc., our U.S.
subsidiary, a Section 214 authorization that allows us to provide
facilities-based and resale telecommunications services within the United
States. We have international termination traffic contracts with U.S.
carriers. Our Other Services Paging On December 14, 1995, Iusacell Celular and Infomin, S.A. de C.V., which we
refer to as Infomin, formed Infotelecom, S.A. de C.V., which we refer to as
Infotelecom, as a joint venture to market national and international paging
services. Iusacell Celular owns 49% of Infotelecom. See Government
RegulationPaging. At December 31, 2003, Infotelecom had 4,344 paging customers and provided
service in 30 cities including Mexico City, Guadalajara, Monterrey, Puebla,
Cuernavaca, Toluca, Querétaro, León, and Ciudad Juárez. Our revenues from
paging services represented less than 0.5% of total revenues for 2003. We do
not consider paging to be an area of growth because of competition from short
message services. See Item 7, Major Shareholders and Related Parties
TransactionsB. Related Party TransactionsBipercomm Paging Services
Operation. 18




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Public and Rural Telephony and Fixed Local Wireless Telephony We operate public and rural telephony programs, using available cellular
capacity. These programs provide telecommunications services through cellular
telephones in phone booths, intercity buses and rural areas. The provision of
services in this way fulfills the terms of our concessions for the provision of
cellular telephony service and uses our cellular network to provide
telecommunications coverage in areas with little or no basic service. As of
December 31, 2003, we had 46,230 cellular telephones in service under our
public and rural telephony programs. We also provide, on a trial basis pending approval from the SCT, fixed
local wireless service in the 450 MHz frequency band in selected markets in
Region 9. As of December 31, 2003, we had 4,721 customers. See Concessions
and PermitsFixed Local Wireless Telephony. Data Transmission We provide mobile and fixed data transmission services. We offer three
types of services: (i) private lines such as E-1, E3/DS3 and STM1 directly to
carriers and large corporate customers; (ii) Internet access to carriers and
Internet service providers; and (iii) digital multiservices connection to
customers private branch exchanges (PBX) to reduce costs for mobile
telephony and long distance calls to corporate customers. In January 2003, we commercially launched Mexicos first CDMA2000 1XRTT
voice and high-speed mobile data network in Mexico City. With this advanced
network, we have increased our voice capacity and are able to offer subscribers
new data services such as high-speed access for internet, intranet, e-mail,
instant messaging, and multiple download for multimedia applications and M2M
solutions at speeds of up to 144 kilobits per second (kbps). Our target is to
complete the network upgrade to this technology in the main cities of our
service regions in the second half of 2004. During the latter part of 2003 and
early 2004, we completed the technical testing stage of different platforms to
offer voice over IP services in the modality of groups, commercially known as
push to talk features. We plan to develop a commercial strategy and
implement such features in the second half of 2004. Seasonality Our business is not materially affected by seasonality. Sales, Marketing and Distribution Our marketing strategy is directed to achieve profitable growth, focused
primarily on our mobile telephony business. We have focused our sales and
marketing strategy on innovative products and value-added services for digital
postpaid and prepaid customers, defined as the person who utilizes and depends
on mobile telephony communications on a daily basis. Our mobile telephony
subscribers are classified according to five different usage profiles. We are
implementing distribution, advertising, customer service support and pricing
plans targeted to each specific customer segment and to increase airtime usage. We currently target the various segments of our subscriber base through
various sales and distribution channels. Our sales force plan provides for
continuous training, a basic salary and monetary incentives to encourage our
sales force to activate profitable and loyal accounts, cross-sell the full
complement of our service offerings and maintain our standards in advertising,
promotions and customer service. Customer Sales and Service Centers Our customer sales and service centers offer one-stop-shopping for a
variety of mobile wireless services and accessories. Walk-in customers can
subscribe to mobile telephony service postpaid plans, purchase prepaid cards,
sign up for long distance service and purchase equipment such as handsets and
accessories. Certain of our stores also offer face-to-face customer service.
We currently have a total of 111 customer sales and service centers throughout
our cellular regions, 103 of which are managed by Elektra and eight of which
continue to be managed by us. In an effort to control costs, during 2003 we closed 17 centers. Our
affiliate Elektra, a retail house appliances chain with significant experience
in the operation of retail points of sale, has assumed the operations of 103 of
our centers and also offers some of its products in the premises. However, we
are evaluating on an ongoing basis 19




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whether Iusacell should again operate and manage some or all of these
centers. See Item 7, Major Shareholders and Related Party TransactionsB.
Related Party TransactionsElektra Operation and Management of our Customer
Sales and Service Centers. Corporate Sales Force To service the needs of our corporate customers, we have created a direct
sales force, which, at December 31, 2003, included 22 full-time sales
representatives. These direct sales representatives are distributed along our
service regions to deliver personalized service. This group of trained
representatives seeks to increase sales by:  
    
    aggressively pursuing sales opportunities in the corporate
segment;
    
    bundling combinations of services into customized packages
designed to meet customers requirements;
    
    developing and marketing new services to satisfy the demands of such customers; and
    
    educating corporate purchasing managers about alternative pricing plans and services. In an effort to control costs, during 2003 we reduced our full-time
corporate sales force by more than two-thirds. To compensate for this, we now
allow our independent distributors to offer corporate plans. Since March 2004
we have been hiring sales representatives and currently have a sales force of
35 sales representatives. Independent Distributors In order to broaden our market, we maintain relationships with a broad
network of exclusive distributors and national retailers. At December 31,
2003, these distributors and retailers sold all of our products at 1,315 points
of sale in Mexico, down from 1,548 points of sale a year before. This decrease
was due primarily to the reduction in our sales and our critical financial
condition. Our prepaid cards were distributed at an additional 59,540 points
of sale, up from 55,837 points of sale a year before. The increase in prepaid
cards points of sale is mainly due to the commencement of the distribution of
our prepaid cards by Elektra in August 2003 and Coppel in September 2003, two
national retail house appliances chains. See Item 7, Major Shareholders and
Related Party TransactionsB. Related Party TransactionsElektra Marketing and
Sales Services. In order to ensure that our standards are maintained at all distribution
points, we provide assistance to our distributors in training, promotions and
advertising. We also provide them with information on our customer base to
allow the distributors to service our customers effectively. In particular, in
May 2004 we launched a web site for our exclusive distributors which enables
them to offer almost all of the current services that we provide at our
customer sales and service centers such as prepaid and postpaid activations,
upgrades, payments, copies of invoices and changes to user plans. Commission Sales Agents In the past, we retained commission agents as a flexible sales force in
all of our mobile telephony regions. The agents functioned as mobile telephony
service brokers for us, working out of their own premises. These agents
provided additional distribution outlets with minimal support from us. We plan
to redeploy this channel of distribution during the second half of 2004. Telemarketing From time to time, we engage telemarketing service providers as a direct
marketing mechanism or to follow up on targeted outbound calls and receive
calls through an 800 number. In recent months, we have used telemarketing as a
tool to reach out to prospective customers. Prospective customers are assigned
to our corporate sales force when more than 20 lines are requested and to an
exclusive distributor when less than 20 lines are requested. Our policy is to
call the prospective customers within 24 hours after we receive the call at our
800 number asking for information about our products. The telemarketing force
is knowledgeable as to our products specifications, but our corporate sales
force or the exclusive distributor close the sale. See Item 7, Major
Shareholders and Related Party TransactionsB. Related Party
TransactionsTeleactivos Call Center Services. 20




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Electronic Means We have implemented four electronic tools for the sale of prepaid airtime
without the purchase of a prepaid card:  
    
    sales through automated teller machines,
    
    sales over the phone by dialing *AIRE,
    
    sales through our website  www.iusacell.com, and
    
    sales through specific points of sale. Sales at ATM machines are charged against our customers bank account by
using a personal identification number. We have implemented ATM sales at Banco

Azteca, Banamex-Citibank, BBVA Bancomer, HSBC and Bancrecer. Sales using *AIRE
and our website are charged to our customers credit card. Sales through specific points of sales are made in two different ways.
Customers can purchase airtime at certain exclusive distributors by simply
giving their phone number. Customers can also use credit card terminals
installed at our exclusive distributors  ́ premises that print an electronic
ticket with the personal identification number that the customer must dial in
order to charge the airtime. Advertising From time to time, we launch advertising campaigns that emphasize the
benefits of our products and services, which we believe strengthen our brand
name. See Item 7, Major Shareholders and Related Party TransactionsB.
Related Party TransactionsAdvertising Services. Customer Service Postpaid customers can access dedicated support by dialing *611, while
prepaid customers can access support by dialing *VIVA. In the fourth quarter
of 2003, we outsourced our call center operations to an affiliate of
MovilAccess, Iusacells controlling shareholder. This outsourcing has enabled
us to reduce operational costs. See Item 7, Major Shareholders and Related
Parties TransactionsB. Related Parties TransactionTeleactivos Call Center
Services. Customer service representatives are equipped to answer questions
regarding services and products 24 hours a day. We train customer service
representatives to ensure that each customer receives prompt attention,
informed answers to any inquiries and satisfactory resolution of any concerns.
In May 2003, we redesigned our compensation plan to motivate our customer
service force by compensating it based on performance, rather than having only
a fixed salary structure, as was the case before. We also implemented a loyalty and retention program. This program
includes welcome calls, first invoice calls and periodic calls to customers to
ensure satisfaction. We also make outreach calls to customers whose contracts
are ending or who choose to terminate service, offering them a range of
alternative service plans based on their profile to encourage contract renewal.
Recently, we implemented a points rewards program for postpaid and prepaid
customers to encourage loyalty. We plan to implement during the second half of 2004 a software application
that will reduce complexities in providing customer service by avoiding
interaction with multiple applications, and will compile customer contact
history information under one single system. This application will allow us to
provide better customer service. Pricing General We offer a variety of flexible pricing options for our mobile telephony
customers. The primary components of the postpaid pricing plans include
monthly fees, additional per-minute usage charges and a number of included 21




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minutes per month. The prepaid program markets cards which credit peso
amounts to a customers account. The cards can be used for a period of 30
days. See Item 4, Information on the CompanyBusiness OverviewMobile
Wireless ServicesPrepaid Customers. Most of the postpaid plans include a
selection of free handsets. The prepaid plans do not provide free handsets. We continually review market pricing in order to maintain a competitive
offer and attract customers from our target market. As a result, constant
adjustments to meet market and competitive conditions may require that we
increase or decrease prices over short periods of time. In the past, we have
been unable to increase prices to match increases in inflation due to
competitive pressures. Postpaid Plans The postpaid pricing plans are designed to target primarily high and
moderate usage postpaid subscribers. High-usage customers are typically
willing to pay higher monthly fees in exchange for larger blocks of minutes,
value-added services, a free high-end handset and lower per minute airtime
charges. Moderate and lower-usage subscribers typically prefer pricing options
which have a lower monthly charge, fewer minutes included, a less expensive
handset (but still with subsidy) and higher per minute airtime charges than
those options chosen by high-usage customers. In December 2003, we launched a new set of postpaid value plans aimed to
position us as the best alternative for the high-value market segment. These
new postpaid plans were designed according to the needs of targeted consumer
segments and are supported by advertising and marketing campaigns. We also offer multi-line plans designed to fit the communication needs of
small groups of users. Finally, in Region 8, we offer local plans with
competitive per minute pricing. For our corporate customers, we offer either a flexible combination of our
various service packages at a volume rate or a large pool of minutes that can
be shared among all users at a competitive per minute price. Prepaid Plans In contrast to postpaid subscribers, prepaid customers typically generate
lower levels of airtime usage, have access to a limited number of value-added
services, often already own a handset and often are unwilling to make a fixed
financial commitment or do not have the credit profile to purchase postpaid
plan services. Our prepaid services, which we market as VIVA plans, provide for
automated reactivation and value-added services such as voice-messaging. We
currently offer our VIVA prepaid cards in denominations of Ps.100.0, Ps.150.0,
Ps.200.0 and Ps.300.0. We also offer virtual airtime in denominations of
Ps.500 and Ps.1,000 through automated teller machines and in stores operated by
Elektra and Salinas y Rocha, S.A. de C.V., national retail chains that are our
affiliates. In February 2003, we introduced new prepaid cards with an
aggressive price per minute structure designed to avoid becoming subject to a
new tax on prepaid mobile telephony services imposed by Mexican tax
authorities. This tax has since been rescinded pursuant to an injunction.
However, since our competitors instituted similar price structures, we have
been unable to roll back these price decreases because of competitive
pressures. Hybrid Plans In 2000, we launched a hybrid plan which featured elements of postpaid and
prepaid plans targeted at high school and university-aged youths who want the
status of a mobile telephony phone but want to control their usage. In March
2003, we discontinued the hybrid plans because of the high level of churn
experienced. However, due to demand from customers, we reintroduced hybrid
plans, known as Control Plan and Facilito, in January 2004. We have
increased the monthly fees charged for hybrid plans in an effort to minimize
churn. Activation, Billing and Collection Procedures We can activate a phone within 15 minutes or less for any prepaid and
postpaid customers through the use of new technologies such as Over The Air
Service Provisioning. For postpaid customers who intend to pay their monthly
charges either with a credit card or in cash there is an automatic credit
scoring process prior to the delivery 22




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and activation of a mobile telephone. The deposit requirements are
determined automatically based on the risk profile resulting from the credit
scoring. We have also implemented a system to monitor MOU levels and the number of
calls to certain geographic areas in order to identify abnormal usage by
postpaid subscribers. When abnormal usage is detected, we contact the
subscriber to determine whether such usage has been authorized. We believe
that these procedures are effective in reducing the number of billing disputes
with subscribers and losses due to fraud. Billing is currently administered using five different billing systems,
including:  
    
    a mobile telephony customer care and billing system provided
by Schlumberger Distribution Mexico, S.A. de C.V., which we also use
for our 450 MHz fixed local wireless business,
    
    one point of sale system that provides billing, administration and control features,
    
    a proprietary residential long distance system,
    
    a proprietary system for high-volume business long distance customers, and
    
    a system for paging customers. We compile billing information from our switches by electronic transfer on
a half-hour basis for processing by our billing systems. We have measures in
place that enable us to recover billing information that may be lost as a
result of disasters. We invoice our postpaid customers at the end of each month for the
previous months service. All customers have 21 credit days, after which they
receive an overdue balance notification, except for a select number of postpaid
customers distinguished by volume, which customers are allowed 36 credit days.
Our payment policy stipulates that after 60 days of non-payment, lines are
suspended, and after 120 days of nonpayment, these lines are disconnected and
considered as delinquent accounts. We mitigate our credit exposure in seven ways:  
    
    by obtaining a credit report from the National Credit Bureau
(Buró Nacional de Crédito), a Mexican affiliate of TransUnion
Corporation for those customers not found in our internal database;
    
    by performing an automatic credit scoring and depending on
the risk profile, we may require our customers to prepay a certain
number of monthly fees or even the cost of the handset;
    
    by requiring payment to be made by credit card;
    
    by establishing credit limits and portfolio segmentation, according to customers credit quality;
    
    by requiring full payment at the time of purchase of a handset;
    
    by offering prepaid services, which eliminate all credit risk; and
    
    by applying additional collection procedures according to a customers prior payment behavior. For 2003 we reserved approximately 3.6% of our revenues for doubtful
accounts. We record a revenue provision for those postpaid customers who have
fallen behind on their payments and whose service had been partially suspended.
We permit incoming call service and continue to charge monthly fees to
suspended customers for an additional two months, but reserve a substantial
portion of the monthly fees as a revenue provision. 23




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Churn and Turnover Postpaid Churn Postpaid churn measures both voluntarily and involuntarily disconnected
subscribers. Average monthly postpaid churn for a given period is calculated
by dividing the sum of all postpaid subscribers disconnected during such period
by the sum of the beginning-of-month postpaid subscribers for each of the
months in such period, expressed as a percentage. Voluntarily disconnected
subscribers encompass subscribers who choose not to continue with Iusacell
postpaid services or choose to migrate to one of our prepaid options.
Involuntarily disconnected subscribers encompass customers whose service is
terminated after failing to meet Iusacells payment requirements. Average monthly postpaid churn for 2003 was 3.3%. To reduce churn, we
have implemented retention and loyalty program that includes the proactive
calling of customers as well as the development of specific retention offers to
address specific problems. Prepaid Turnover We evaluate alternative methods of determining prepaid customer turnover
on an ongoing basis, as the current method is dependent upon, among other
things, the number of days of use we permit before deactivating a phone number. Under our current policy, prepaid customers have 30 or 60 days, depending
on the prepaid plan, to use an activated prepaid card, activate a new card or
otherwise recharge the airtime in their account. If the customer has not
activated a new card or recharged the airtime in its account at the end of 30
or 60 days, the balance of the customers account becomes zero, and the
customer loses the ability to make outgoing calls for an additional period of
90 days. During this 90-day period, a prepaid customer will be able to receive
incoming calls, but not to make outgoing calls. Once the 90-day period lapses,
and unless the customer has activated a new card, recharged the airtime in its
account or received incoming calls, the customers telephone number is
deactivated. In the third quarter of 2003, we made certain changes to our activation
and turnover policies aimed at providing greater transparency and focusing on
active customers. We reduced the period during which a prepaid customer can
receive incoming calls but cannot make outgoing calls from 305 and 275 days
(depending on the amount of airtime charged) to the current 90 days. Through
this policy change, in the third quarter of 2003 we identified and wrote off
approximately 425,000 existing prepaid customers who had not utilized our
service nor received income calls for more than 90 days. In the fourth quarter
of 2003, we wrote off approximately 131,000 additional lines. We also reduced the initial period for spending an activated prepaid card
and activating a new card from 60 or 90 days, depending on the prepaid plan, to
the current 30 and 60 days. Network, Equipment and Information Technology Our cellular network utilizes Lucent Technologies CDMA digital
technology. As of December 31, 2003, our integrated wireless network was
comprised of six cellular switches, 599 cellular cell sites, 131 repeaters
covering 47 million inhabitants or 50% of Mexicos total population in our
concessioned regions. During 2003, we added 17 new cellular cell sites. We also have 701 microwave links, all of which are owned by us, with
either SDH or PDH technology. We have also leased lines located mainly in
Region 8. We have swapped our rights to certain short-haul microwave frequency
links for long-haul frequency links in northern Mexico held by an affiliate of
Telefónica, the Cellular A-band provider. In addition, in April 2004, we
obtained the right to install long-haul microwave links using Bestel  ́s
frequencies. Our long distance network consists of 5,176 kilometers of fiber optic
backbone (including fiber optic cable obtained through swaps), in both
metropolitan and long distance segments, using SDH (STM16 capacity in the
backbone) and two switches. We have introduced Dense Wavelength Division
Multiplexing (DWDM) technology in several high-traffic segments of our fiber
optic network to increase capacity. In 2003, we started the process to upgrade
our long distance network by acquiring three Nortel Passport 15000 switches
that will be located in Leon, 24




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Monterrey and Toluca. These switches will enable us to offer advanced
voice and data services based on packet technology. We have a network operations and control center (NOCC) in Mexico City
which oversees, manages and provides technical support to all our cellular
regions. In addition, we have another center for network operations in Toluca
that provides an alternative monitoring capability for the network in the event
an emergency occurs at the NOCC in Mexico City. In 2002, we started providing two-way short message service (SMS), and
since January 2003, we have been providing packet switched data (PSD) services
using 3G-1XRTT standard. Currently, we provide 1XRTT services in Mexico City,
Toluca, Cuernavaca and Valle de Bravo and plan to expand our coverage to all
our regions during the second half of 2004. 1XRTT improves efficiency in
spectrum use and allows users to get higher data speed connections. In recognition of the need to upgrade our technology and to improve
internal financial processes, in the second half of 2003 we began to implement
various accounting and administrative modules of the SAP system, which we have
already completed. New modules such as the Human Resources and Fixed Assets
Control are expected to be implemented during the second half of 2004. To improve the internal flow of information, we intend to implement a
corporate data warehouse system in 2004. This repository system will contain
all data related to business processes and will be updated on a regular basis.
We believe the implementation will be completed in the second half of 2004. Competition Mobile telephony systems compete principally on the basis of quality of
telecommunications services, customer service, price, breadth of coverage area,
roaming capabilities and value-added services. Operators are largely free to
set their own rates, provided such rates are set on the basis of cost. The
offering of mobile telephony services in Mexico is highly competitive, with one
operator, Telcel, commanding a significant share of the market. We face competition from the following companies:  
    
    Telcel, which is the largest wireless communications
provider. Telcel holds the Cellular B-band and the PCS D-band
nationwide concessions.
    
    Telefónica, which provides services in the 1.9 GHz (PCS)
spectrum in at least 96 cities in Mexico. Telefónica also operates
Cellular A-band concessions in the northern part of Mexico.
    
    Unefon, our affiliate, holds the PCS E-band nationwide
concessions. Unefon currently provides fixed and mobile wireless
services in Mexico City, Guadalajara, Monterrey, Toluca, Acapulco
and 18 other cities in Mexico. We also face competition from companies providing mobile wireless
telecommunications services using alternative existing technologies. Nextel de
México, S.A. de C.V.began marketing its enhanced specialized mobile radio
services in 1998 and currently covers 30 cities in Mexico. In long distance services, we face competition from nine other concession
holders, including primarily Telmex, Alestra S.A. de C.V.and Avantel S.A. de
C.V., the latter two of which are joint venture companies in which AT&T and MCI
WorldCom, respectively, have beneficial ownership interests. In data
transmission services, we compete for customers with Telmex, state-owned
Telecomunicaciones de Méxicoand long distance companies to form a highly
competitive market with more than 20 participants. In addition, we believe
that the current Mexican data transmission industry includes over 1,000 private
networks that provide data transmission services. Government Regulation Telecommunications systems in Mexico are regulated by the SCT and by
COFETEL, a decentralized regulatory body within the SCT, pursuant to the 1995
Telecommunications Law (Ley Federal de Telecomunicaciones), which became
effective on June 8, 1995. Regulations governing international long distance,
domestic long distance, local 25




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telephony, mobile and other telecommunications services have been
promulgated under the 1995 Telecommunications Law. However, some rules from
the prior Law of General Means of Communication (Ley de Vías Generales de
Comunicación) and the rules promulgated under such law, including, without
limitation, the Telecommunications Rules (Reglamento de Telecomunicaciones)
which we collectively refer to as the Original Communications Laws, generally
remain effective if they are not inconsistent with the 1995 Telecommunications
Law and the rules promulgated under that law. These laws and regulations define the regulatory structure applicable to
the nationwide telecommunications infrastructure and the provision of
telecommunications services. They govern, among other things:  
    
    applications to obtain concessions to install, maintain and operate telecommunications systems;
    
    the establishment of technical standards for the provision of telecommunications services;
    
    the grant, revocation and modification of concessions and permits; and
    
    the auction of spectrum. The terms and conditions of concessions and permits granted under the
Original Communications Laws, which is the case for the cellular concessions
and permits granted to Iusacell and its subsidiaries, are governed by the
Original Communications Laws and respected under the new regulatory regime
until their expiration. The 1995 Telecommunications Law may grant rights
enhancing those set forth in the Original Communications Laws. For instance,
rates charged by holders of concessions and permits granted under the Original
Communications Laws no longer require prior approval from the SCT, but only
require registration with COFETEL. Concessions and Permits To provide public telecommunications services in Mexico through a public
network, the service provider must first obtain a concession from the SCT.
Pursuant to the 1995 Telecommunications Law, concessions for public networks
may not exceed a term of 30 years, and concessions for radioelectric spectrum
may not exceed a term of 20 years. Concessions may be extended for a term
equivalent to the term for which the concession was originally granted, but not
to exceed such 20- or 30-year limit, as the case may be. Concessions specify,
among other things:  
    
    the type of network, system or service;
    
    the allocated spectrum, if applicable;
    
    the geographical region in which the holder of the concession may provide the service;
    
    the required capital expenditure program;
    
    the term during which such service may be provided;
    
    the payment, where applicable, required to be made to acquire
the concession, including, where applicable, the participation of
the Mexican government in the revenues of the holder of the
concession; and
    
    any other rights and obligations affecting the concession
holder. In addition to concessions, the SCT may also grant permits for (i)
establishing, operating or exploiting telecommunications services not
constituting a public network (i.e., reselling) and (ii) installing, operating
or exploiting transmission-ground stations. There is no specified maximum term
for permits. Under the 1995 Telecommunications Law, only registration with the
SCT is required to provide value-added telecommunications services. Under the 1995 Telecommunications Law and the 1993 Foreign Investment Law
(Ley de Inversión Extranjera), concessions may only be granted to Mexican
individuals and to Mexican corporations in which non-Mexicans hold 26




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no more than 49% of their voting shares or which are not otherwise
controlled by non-Mexicans, except that, in the case of concessions for
cellular communications services, foreign investment participation may exceed
49% with the prior approval of the Mexican Foreign Investment Commission of the
Mexican Ministry of Economy (formerly the Ministry of Commerce and Industrial
Development). There are no foreign investment participation restrictions with
respect to operations conducted under permits. A concession or a permit may be terminated pursuant to the 1995 Telecommunications Law upon:  
    
    expiration of its term;
    
    resignation by the concession holder or the permit holder;
    
    revocation;
    
    expropriation; or
    
    dissolution or bankruptcy of the concession holder or the permit holder. A concession or a permit may be revoked prior to the end of its term under certain circumstances, such as:  
    
    unauthorized or unjustified interruption of service;
    
    the taking of any action that impairs the rights of other concessionaires or permit holders;
    
    failure to comply with the obligations or conditions specified in the concession or permit;
    
    failure to provide interconnection services to other holders
of telecommunications concessions and permits;
    
    loss of the concession or permit holders Mexican nationality
in instances in which Mexican nationality is legally required;
    
    unauthorized assignment, transfer or encumbrance of the
concession or permit, of any rights under the concession or permit
or of assets used for the exploitation of the concession or permit;
    
    failure to pay to the Mexican government its fee for the
concession or permit or, where applicable, its participation in the
revenues of the holder of the concession or permit; or
    
    participation of any foreign government in the capital stock
of the holder of the concession or permit. In addition, the SCT may establish for any concession further events which
could result in revocation of that concession. The Mexican government, through the SCT, may also temporarily seize all
assets related to a concession or permit in the event of a natural disaster,
war, significant public disturbance or threats to internal peace and for other
reasons related to preserving public order or for economic reasons. In
addition, the Mexican government has the statutory right to expropriate a
concession and assets related to its exploitation for public interest reasons.
Under Mexican law, the Mexican government is obligated to compensate the owner
of the assets in the case of a statutory expropriation or temporary seizure,
except in the event of war. If the Mexican government temporarily seizes such
assets, it must indemnify the concession or permit holder for all losses and
damages, including lost revenues. In the case of an expropriation, the amount of the compensation is to be
determined by appraisers. If the party affected by the expropriation disagrees
with the amount appraised, it may initiate judicial action against the Mexican
government. Should no agreement be reached on the amount of the indemnity in
the case of a seizure or expropriation, the determination will be made by an
independent appraiser. Iusacell is not aware of any instance in which the SCT
has exercised any of these powers in connection with a cellular company. 27




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The Original Concession Our right to provide radiotelephony, local wireless and data transmission
services nationwide, as well as cellular service in Region 9, is based upon a
concession granted on April 1, 1957, as amended, which we refer to as the
Original Concession, to Servicio Organizado Secretarial, S.A., which merged
into SOS Telecomunicaciones, S.A. de C.V., one of our wholly-owned
subsidiaries, which we refer to as SOS. The term of the Original Concession is
50 years, and it expires on April 1, 2007. The Original Concession may,
however, be revoked prior to such date in the event that SOS fails to comply
with its terms or applicable law. The Original Concession is renewable upon
timely application to the SCT, provided that SOS has complied with all of the
requirements of the Original Concession and agrees to any new terms and
conditions established by the SCT at the time of renewal. In consideration for the Original Concession, SOS must make payments to
the Mexican government equal to 5% of all gross revenues derived from services
provided through its Region 9 cellular network and payments in an amount equal
to the greater of (i) 4% of all gross revenues and (ii) 10% of net income, in
either case, derived from services provided through its nationwide radio
communications network. Under the terms of the Original Concession, SOS must continually modernize
its services. In updating its services, SOS must submit technical and economic
plans for approval by the SCT. In determining whether to approve these plans,
the SCT is authorized to consider whether the plans sufficiently address
factors such as the public interest (including, without limitation,
teledensity) and efficiency and uniformity in telecommunications throughout
Mexico. Initially, the Original Concession authorized only the installation and
commercial operation of nationwide mobile (vehicle-installed) radiotelephone
public service in the 132-144 MHz frequency range. Since then, however, the
Original Concession has been amended numerous times, allowing us to expand the
types of telecommunications services which we may offer. In 1978, the Original
Concession was amended to grant SOS an additional allocation in the 440-450 MHz
and 485-495 MHz frequency ranges in return for yielding a portion of its
132-144 MHz frequency range allocation. SOS retained the frequencies between
138 and 144 MHz. Between 1986 and 1989, the Original Concession was further amended to
enable SOS to provide fixed rural radiotelephony service, to offer telex and
data transmission with the obligation to link its subscribers to the network
owned by Telecom, and to interconnect its radiocommunications ground stations
through satellite. In 1989, SOS was authorized to install, operate and maintain a mobile
public radiocommunications network with cellular technology in the 825-835 MHz
and 870-880 MHz frequency bands in Region 9. In 1990, SOS was authorized to
carry intra-regional cellular-to-cellular communications throughout Region 9
without being required to interconnect with the long distance carrier. In
1992, SOS was authorized to provide public data transmission service nationwide
through its radio communications networks without the obligation to link its
subscribers to the Telecom network. In 1993, SOS was granted an additional 5 MHz band in the 800 MHz frequency
range for the provision of cellular service, due to the high volume of cellular
traffic experienced in Region 9. In the same year, SOS was authorized to
improve its radiocommunications public service in the 440-450 MHz and 485-495
MHz frequency ranges by utilizing digital technology and to interconnect its
telecommunications systems through fiber optic, satellite and microwave
technologies. The SCT also clarified the ability, and indeed the obligation,
of SOS to interconnect customers of its nationwide radio communications network
regardless of whether such customers use fixed, mobile or portable telephones. Cellular Concessions Mexico is divided into nine cellular regions. The SCT has allocated
cellular telephone system frequencies in each region in the Cellular A-band and
the Cellular B-band. In each region, Telcel holds the Cellular B-band
concession and its cellular competitor in each region holds the Cellular A-band
concession. In Region 9, we hold the right to provide cellular service pursuant to an
authorization granted to SOS by the SCT in 1989 under the Original Concession.
In Regions 5, 6, 7 and 8, we hold the right to provide cellular service through
our wholly-owned subsidiaries Comunicaciones Celulares de Occidente, S.A. de
C.V., known as Comcel, Sistemas Telefónicos Portátiles Celulares, S.A. de C.V.,
known as Portacel, Telecomunicaciones del Golfo, S.A. de 28




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C.V., known as Telgolfo, and Portatel del Sureste, S.A. de C.V.known as
Portatel, respectively. Comcel, Portacel, Telgolfo and Portatel each holds a
20-year concession expiring in 2010 which authorizes these subsidiaries to
install, operate, maintain and exploit mobile public radiotelephone networks
with cellular technology for commercial use in the Cellular A-band. In
consideration for these authorizations and concessions, the subsidiaries made
initial payments to the Mexican government and, in addition, must make payments
as follows: Percent of Gross Revenues Payable ToSubsidiary
    
    Mexican GovernmentComcel
    
    
    8
    %Portacel
    
    
    7
    %Telgolfo
    
    
    8
    %Portatel
    
    
    6
    %SOS
    
    
    5
    %
 By the terms of their concessions, Comcel, Portacel, Telgolfo and Portatel
must continually modernize their services after receiving approval of their
technical and economic plans from the SCT. In determining whether to approve
these plans, the SCT is authorized to consider whether the plans sufficiently
address factors such as the public interest (including, without limitation,
teledensity) and efficiency and uniformity in telecommunications throughout
Mexico. These concessions may be revoked or terminated prior to their
expiration dates in the event the concession holder fails to comply with the
conditions established in the concessions or applicable law. The concessions
may, however, be renewed for a term equal to the original term upon timely
application to the SCT, provided that the concession holder had complied with
all of the requirements of its concession and agrees to any new terms and
conditions established by the SCT at the time of such renewal. Paging On December 14, 1995, Iusacell Celular and Infomin formed Infotelecom as a
joint venture to market national and international paging services. Infomin
has a concession, which expires on July 20, 2009, to provide nationwide paging
services in Mexico. The joint venture agreement between Iusacell Celular and
Infomin contemplates that Infomin will ultimately transfer its paging
concession to Infotelecom. Infotelecom is required to make monthly payments to Infomin equal to 5% of
all gross revenues for the preceding month. This payment represents the amount
which Infomin as concession holder must pay to the SCT for the right to provide
paging service. In 2000, Infomin received governmental approval to transfer
its paging concession to Infotelecom. Long Distance Our right to provide international long distance services is based upon a
long distance concession granted by the SCT to Iusatel, on October 16, 1995.
The term of the long distance concession is 30 years and may be renewed upon
timely application to the SCT, for an equal period of time, provided that
Iusatel complies with certain requirements. Upon our application, the SCT and
COFETEL modified this concession on December 17, 1997, authorizing a change in
the coverage requirements and increasing flexibility in the choice of
transmission technology. Pursuant to the modified concession, Iusatel is required to comply with
technical specifications and had to serve using its own infrastructure a
minimum of 11 specified cities by July 31, 1998, 26 additional specified cities
by December 31, 1999 and another 13 additional specified cities by December 31,
2000. Iusatel complied with its coverage commitments in all cities except for
Saltillo in Region 4. Therefore, in 2001 the SCT substituted Tlaxcala for
Saltillo in our coverage commitment, and we are currently in compliance with
all our coverage commitments. Fixed Local Wireless Telephony We believe our right to provide fixed local wireless telephony service is
derived from the Original Concession. The Original Concession, as granted,
permitted SOS to provide radiocommunications service to vehicle-mounted
terminal equipment nationwide. In 1986, the SCT amended the Original
Concession to authorize SOS to provide fixed public radiotelephony service in
rural areas nationwide in accordance with plans to be approved by the SCT. We
have never received SCTs approval of our technical and economic plans for
local wireless service in the 450 29




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MHz frequency band. However, we have reached an agreement with the SCT on
a technical process by which we can provide local wireless service in the 450
MHz frequency band in some of the existing service regions and has received a
right of first refusal to acquire the concessions to provide local wireless
service in such regions. In September 1998, we determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of our investment in 450 MHz TDMA
technology had occurred. As a result, we recorded a substantial non-cash
write-down of our investment in the 450 MHz fixed local wireless project. Value-Added Services Permit On June 17, 1993, SOS was granted a permit to provide through its public
network the following value-added telecommunications services to its cellular
subscribers:  
    
    secretarial service;
    
    voice mail; and
    
    data transmission. The term of this permit is the same as that of the authorization for using
the Region 9 cellular network through which the value-added services are to be
provided. Under this permit SOS is required to make annual payments to the
Mexican government equal to 5% of all gross revenues derived directly from the
provision of these services. In October 1994, Comcel, Telgolfo and Portacel
were each granted a permit to provide secretarial services under the same terms
granted to SOS, including the making of the annual payments to the Mexican
government. Foreign Ownership Restrictions Pursuant to the 1995 Telecommunications Law and the 1993 Foreign
Investment Law, holders of concessions to provide telecommunications services
in Mexico, excluding providers of cellular service, cannot have a majority of
their voting shares owned by, and cannot be otherwise controlled by, foreign
persons. In February 1997, the Mexican Foreign Investment Commission
conditioned its approval of Verizon assuming management control over Iusacell
upon the requirement that Iusacell would transfer at least 51% of the voting
shares of Iusatelecomunicaciones and Iusatel to Mexican investors on terms
acceptable to the Mexican Foreign Investment Commission. In November 1998, we complied with this requirement by transferring 51% of
the voting shares of these two subsidiaries to Mr. Elizondo by means of a
subscription to capital. We retained 49% of the voting shares of these
subsidiaries, representing 4.9% of their capital. We also held an additional
90% of the capital of these subsidiaries through the ownership of neutral
limited voting stock (inversión neutra) that does not constitute voting shares
for purposes of the Mexican foreign investment laws. Consequently, we hold a
94.9% equity interest in these two subsidiaries. To participate in the auctions for concessions for microwave frequencies
concluded in September 1997, we formed a separate joint venture company with
Mr. Elizondo. The Mexican Foreign Investment Bureau approved a capital
structure substantially similar to that authorized for Iusatel and
Iusatelecomunicaciones for the joint venture companies. Moreover, in December 1998 Mr. Elizondo acquired a 2% interest in
Infotelecom from us. As a result, we currently hold only 49% of this entity,
complying with the condition precedent then necessary to allow its partner,
Infomin, to transfer its paging concession to Infotelecom. As a consequence of the acquisition by MovilAccess of 74.6% of the capital
stock of Iusacell in July 2003, we are no longer subject to foreign ownership
restrictions. On November 3, 2003, we reached an agreement with Mr. Elizondo
to take, within a period of two years, all the necessary actions to buy out Mr.
Elizondos full participation in Iusatel, Iusatelecomunicaciones, Punto-a-Punto
Iusacell and Infotelecom. See Item 10, Additional InformationC. Material
Contracts. 30




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Rates for Telecommunications Services Under the Original Communications Laws, SCT approval was required for
rates charged for all basic and certain value-added cellular services and for
data transmission services. Historically, the SCT permitted rate increases
based on the cost of service, the level of competition, the financial situation
of the carrier and macroeconomic factors. Carriers were not allowed to
discount the rates authorized by the SCT, although operators occasionally
waived activation fees on a promotional basis. Interconnection rates were also
authorized by the SCT. All terms of interconnection (such as point of
interconnection) other than interconnection rates were negotiated between the
regional cellular carriers and Telmex under the SCTs supervision. Rates for
dedicated circuit services through microwave networks, and dedicated circuits
and private networks through satellites were not regulated under the Original
Communications Laws. Under the 1995 Telecommunications Law, rates for telecommunications
services, including cellular and long distance services, are now freely
determined by the providers of such services. Providers are prohibited from
adopting discriminatory practices in the application of rates. In addition,
the SCT is authorized to impose specific rate requirements on those companies
determined by the Federal Competition Commission to have substantial market
power. All tariffs for telecommunications services, other than value-added
services, must be registered with COFETEL prior to becoming effective. In January 2001, we negotiated a rate reduction with Telmex that decreased
both long distance and local cellular interconnection charges from U.S.$0.0330
to U.S.$0.0125 per minute. Additionally, we negotiated with Telmex the terms
regarding payment for the projects Telmex undertook to prepare its long
distance network for competition. We paid Telmex a fixed payment of
approximately U.S.$13.0 million and agreed to pay a U.S.$0.0053 per minute
surcharge to the local wireline interconnection rate for four years for long
distance calls terminated in Telmexs local networks. In December 2001, Telmex, Alestra and Avantel reached an agreement to
further reduce the interconnection rate from U.S.$0.0125 per minute to
U.S.$0.00975 per minute. We negotiated similar terms with Telmex for both our
long distance business and local interconnection rate through December 31,
2003. United States Regulation Until July 2003, we were subject to certain U.S. telecommunications
regulation by reason of being a Verizon subsidiary. As a result of the
MovilAccess acquisition, we are no longer subject to such regulation. In 2002, Iusatel USA, Inc., a subsidiary of Iusatel, applied for and
received authorization under Section 214 of the Communications Act to become a
facilities-based provider of international long distance services from the
United States. As a result, Iusatel USA, Inc.is subject to the regulatory
oversight of the U.S. Federal Communications Commission. C. ORGANIZATIONAL STRUCTURE We are a wholly-owned subsidiary of Grupo Iusacell, S.A. de C.V. For a
description of Iusacells current principal shareholder, MovilAccess, see Item
7, Major Shareholders and Related Party TransactionsMajor Shareholders. The
following table shows our active direct and indirect subsidiaries, their
principal lines of business, their countries of incorporation and the
percentages of our ownership interest and voting power as of December 31, 2003. 31




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% direct and
    
    % direct andindirect
    
    indirectCountry of
    
    economic
    
    votingSubsidiary
    
    Line of Business
    
    Incorporation
    
    interest
    
    interestSOS Telecomunicaciones, S.A. de C.V
    
    Region 9 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Comunicaciones Celulares de Occidente,
S.A. de C.V.(1)
    
    Region 5 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Sistemas Telefónicos Portátiles
Celulares, S.A. de C.V.
    
    Region 6 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Telecomunicaciones del Golfo,
S.A. de C.V.
    
    Region 7 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusacell, S.A. de C.V.
    
    Sales and marketing
    
    Mexico
    
    
    100.0
    
    
    
    100.0Sistecel, S.A. de C.V.
    
    Administrative services
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusatel, S.A. de C.V.
    
    Long distance
    
    Mexico
    
    
    94.9
    
    
    
    49.0Iusatel USA, Inc.(2)
    
    Long distance U.S.
    
    United States
    
    
    94.9
    
    
    
    49.0Iusatelecomunicaciones, S.A. de C.V.
    
    Local wireless
    
    Mexico
    
    
    94.9
    
    
    
    49.0Punto-a-Punto Iusacell, S.A. de C.V.
    
    Microwave transmission
    
    Mexico
    
    
    94.9
    
    
    
    49.0Infotelecom, S.A. de C.V.
    
    Paging
    
    Mexico
    
    
    49.0
    
    
    
    49.0Inmobiliaria Montes Urales 460,
S.A. de C.V.
    
    Real estate
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusanet, S.A. de C.V.
    
    Services
    
    Mexico
    
    
    100.0
    
    
    
    100.0Editorial Celular, S.A. de C.V.
    
    Publishing
    
    Mexico
    
    
    40.0
    
    
    
    40.0Grupo Portatel, S.A. de C.V.
    
    Region 8 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Portatel del Sureste,
S.A. de C.V.(3)
    
    Region 8 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Mexican Cellular Investment, Inc.
    
    Holding company forComunicacionesCelulares deOccidente, S.A. deC.V.
    
    United States
    
    
    100.0
    
    
    
    100.0
 (1)
    
    Held through Mexican Cellular Investment, Inc.(2)
    
    Held through Iusatel, S.A. de C.V.(3)
    
    Held through Grupo Portatel, S.A. de C.V.
 All of the above companies, including those in which we own directly or
indirectly a minority voting interest, except for Editorial Celular, S.A. de
C.V., are consolidated with our financial statements. See Note 3 to the
Consolidated Financial Statements. D. PROPERTY, PLANT AND EQUIPMENT As of December 31, 2003, we operated in our service regions a total of 599
cellular cell sites, 131 repeaters, 14 fixed local wireless 450 MHz cell sites,
69 paging antennas, six switches for cellular service, one switch for local
wireless service and three switches for long distance service. We generally own our wireless network equipment. Our cellular equipment
is subject to liens under certain of our indebtedness. We own our principal offices which are located in Montes Urales 460,
Colonia Lomas de Chapultepec, 11000, Mexico City, Mexico. We generally lease the land and cellular tower space where our cell sites,
antennas, microwave transmission equipment and switching centers are located.
We own and lease administrative offices in Mexico City as well as in
Guadalajara, León, Puebla and Mérida. Over the last three years, we sold 344 of our towers to MATC Celular. In
turn, we lease site space in such towers from MATC Celular. As of May 31,
2004, we had sold 36 additional towers to MATC Celular. See Item 5, Operating
and Financial Review and ProspectsA. Operating ResultsTower Monetization. 32




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements included elsewhere in this Annual Report.
Unless otherwise indicated, all financial information in this Annual Report is
presented in constant pesos with purchasing power as of December 31, 2003. The
U.S. dollar translations provided in this Annual Report are, unless otherwise
indicated, calculated at the Noon Buying Rate at December 31, 2003, which was
Ps.11.242 per U.S.$1.00. Sums may not add due to rounding. A. OPERATING RESULTS General The following discussion and analysis is intended to help you understand
and assess the significant changes and trends in our historical consolidated
results of operations and financial condition and the factors affecting our
financial resources. The Consolidated Financial Statements have been prepared in accordance
with Mexican GAAP, which differs in certain significant respects from U.S.
GAAP. Note 18 to the Consolidated Financial Statements provides a description
of the principal differences between Mexican GAAP and U.S. GAAP as they relate
to us, and provides a reconciliation to U.S. GAAP of our net loss for the years
ended December 31, 2001, 2002 and 2003 and of stockholders equity as of
December 31, 2002 and 2003. As a Mexican company, we maintain our financial records in pesos.
Pursuant to Bulletin B-10, Recognition of the Effects of Inflation on
Financial Information, and Bulletin B-12, Statement of Changes in Financial
Position, issued by MIPA, our financial statements are reported in period-end
pesos to adjust for the inter-period effects of inflation. The presentation of
financial information in period-end, or constant, currency units is intended to
eliminate the distorting effect of inflation on the financial statements and to
permit comparisons in comparable monetary units. Bulletin B-10 requires us to
restate non-monetary assets, non-monetary liabilities and the components of
stockholders equity using the INPC. We have not eliminated the effects of
these inflation accounting principles in the reconciliation to U.S. GAAP. See
Note 18 to the Consolidated Financial Statements. Except where otherwise indicated, financial data for all periods in the
Consolidated Financial Statements and throughout this Annual Report have been
restated in constant pesos as of December 31, 2003, in accordance with the
fifth amendment to Bulletin B-10. References in this Annual Report to real
amounts are to inflation-adjusted pesos and references to nominal amounts are
to unadjusted historical pesos. In calendar years 2001, 2002 and 2003, the
rates of inflation in Mexico, as measured by changes in the INPC, were 4.4%,
5.7% and 4.0%, respectively. The inflation indices used are 1.0968 for 2001
figures and 1.0398 for 2002 figures. In reporting under Mexican GAAP and in accordance with Bulletin B-10, we
are required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes, integral
financing cost (gain) refers to the combined financial effects of:  
    
    net interest expense or income;
    
    net foreign exchange gains or losses; and
    
    net gains or losses on monetary position. Net foreign exchange gains or losses reflect the impact of changes in
foreign exchange rates on monetary assets and liabilities denominated in
currencies other than pesos. A foreign exchange loss arises if a liability is
denominated in a foreign currency which appreciates relative to the peso
between the time the liability is incurred and the date it is repaid, as the
appreciation of the foreign currency results in an increase in the amount of
pesos required to repay the specified amount of the foreign currency liability.
We incurred a foreign exchange loss in 2002 and 2003 on our U.S.
dollar-denominated debt as the peso depreciated against the U.S. dollar. A
foreign exchange gain arises if a liability is denominated in a foreign
currency which depreciates relative to the peso between the time the liability
is incurred and the date it is repaid, as the depreciation of the foreign
currency results in a decrease in the amount of pesos required to repay the
specified amount of the foreign currency liability. In 33




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2001, we incurred a foreign exchange gain on our U.S. dollar-denominated
debt as the peso appreciated against the U.S. dollar. The gain or loss on monetary position refers to the gains and losses
realized from holding net monetary liabilities or assets and reflects the
impact of inflation on monetary liabilities and assets. For example, a gain on
monetary position results from holding net monetary liabilities during periods
of inflation, such as in 2001, 2002 and 2003, as the purchasing power of the
peso declines over time. Devaluation and Inflation In the past, the Mexican economy has been subject to significantly high
levels of inflation and currency devaluation. For example, Mexico experienced
a severe economic crisis following the devaluation of the peso in December
1994, when the Mexican government allowed the peso to fluctuate freely against
the U.S. dollar. The value of the peso generally continued to decline during
subsequent years, depreciating by 54.8% relative to the U.S. dollar in 1995 and
by 22.7% in 1998. In recent years, the peso depreciated by 13.7% and 7.6%
against the U.S. dollar in 2002 and 2003, respectively, and appreciated by 4.8%
in 2001. Depreciation of the value of the peso has contributed to sharp increases
in inflation. Inflation, which had been 7.1% in 1994 as measured by changes in
the INPC, increased to 52.0% and 27.7% in 1995 and 1996, respectively. In
recent years, the inflation was 4.4% in 2001, 5.7% in 2002 and 4.0% in 2003. The general economic conditions in Mexico resulting from the devaluation
of the peso and the resulting inflation have had, and may have, the following
impact on our results of operations:  
    
    Peso devaluations result in a decrease in the purchasing power of
Mexican consumers, resulting in a decrease in the demand for all goods
and services, including mobile telephony and other wireless services;
    
    Due to competitive market conditions and the overall state of the
Mexican economy, we have not been able to increase our prices in line
with the inflation rate, in fact, we have reduced prices;
    
    Significant inflation leads to an upward restatement of our assets,
resulting in a substantial increase in depreciation and amortization
expense; and
    
    Given our net U.S. dollar liability position, devaluation of the
peso as compared to the U.S. dollar results in the recording of net
foreign exchange losses, and appreciation of the peso as compared to
the U.S. dollar results in the recording of net foreign exchange gains. Recent Changes in Our Accounting Policies Upon the takeover of Iusacell, our parent company, by MovilAccess on July
29, 2003, our new management conducted an analysis of our assets and developed
a new business strategy in line with the critical financial condition of the
company. As a result, in the third quarter of 2003, we changed some of our
accounting policies, in accordance with Mexican GAAP.  
    
    Until September 30, 2003, we amortized the cost of handsets sold or
given to our postpaid customer under exclusive service contracts on the
basis of the term of such contracts to match costs with the timing of
earned revenues. The average amortization period was twelve months.
The cost of such handsets was included under recoverable assets and
other, in our consolidated balance sheet, net of accumulated
amortization. Such cost did not exceed market value.Since September 30, 2003, the cost of such handsets is recorded in our
income statement under cost of telephone equipment sales and others
at the moment the contract is signed. The cumulative effect of this
change in our accounting policies resulted in a loss of Ps.159.0
million for 2003. This amount represents the remaining balance of
unamortized cost of handsets as of September 30, 2003 and is included
under cumulative effect of the adoption of new accounting
pronouncement and change in accounting policy in our income statement
for 2003. 34




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In addition, we reclassified as cost of telephone equipment sales and
other Ps.226.0 million of the amortization for the period from
January 1 to September 30, 2003 which had originally been recorded as
depreciation and amortization. If this reclassification had been
made for 2001 and 2002, our cost of telephone equipment sales and
other would have been Ps.1,578.6 million and Ps.925.9 million,
respectively, and the depreciation and amortization would have been
Ps.1,660.1 million and Ps.1,787.4 million, respectively.
    
    We adopted Bulletin C-8 Intangible assets issued by the MIPA
beginning January 1, 2003. This statement requires intangible assets
to be recognized on the balance sheet as long as they are identifiable,
provide expected economic benefits and the company has control over
such benefits. It also provides that intangible assets with an
indefinite useful life should not be amortized and intangible assets
with a definite life should be amortized systemically, based on the
best estimate of their useful life as determined in accordance with the
expected future economic benefits. These assets are subject to an
annual evaluation of their recoverable value, to identify impairment
losses.During the third quarter of 2003, we wrote off assets for Ps.181.6
million. These assets mainly consisted of (i) pre-operating expenses
originated by the start-up operations of our long distance and
microwave lease business, (ii) certain payments made by us to Telmex
related to the special projects implemented by Telmex to permit
competition in long distance telephony. See Note 9c to our financial
statements. We wrote-down Ps.35.2 million related to our handsets
leasing business goodwill. We recorded these write-offs in our
consolidated income statement for 2003 as a special item under
intangible assets write-offs.
    
    In the third quarter 2003, we wrote-off installation expenses of
Ps.307.4 million and advance payments of Ps.86.9 million. The
installation expenses related to improvements to (i) our former
headquarters, (ii) our current headquarters that has since undergone
new remodeling, and (iii) customer sales and service centers that are
now operated by Elektra. The advance payments related to expenses we
incurred while obtaining long-term financing, which were reclassified
to current liabilities during 2003. These write-offs are presented
under other expenses, net in our consolidated income statement for
2003.
    
    During 2003, our management performed a study of our
telecommunications equipment. Based on this study and on our new
business plan, we wrote-down certain telecommunications equipment.
This resulted in a charge to income of Ps.404.7 million, presented as a
special item under valuation of abandoned fixed assets in our
consolidated income statement for 2003.
    
    We increased our net deferred tax asset valuation allowance, which
was mainly originated by the effect of our tax loss carry forwards,
reflecting uncertainty as to our ability to continue as a going
concern. The realization of the net deferred tax asset depends on our
ability to generate sufficient taxable income prior to the expiration
of the tax loss carry forwards. Our management estimates that,
considering our present critical financial condition, the realization
of the tax loss carry forwards cannot be assured through the generation
of sufficient taxable income during the applicable period. Tower Monetization In December 1999, we entered into a series of agreements with MATC
Celular. These agreements, which were amended in May 2002, among other things,
gave MATC Celular the right to acquire approximately 350 existing towers.
In December 2003, we entered into a new series of agreements with MATC
Celular that, among other things, gave MATC Celular the right to acquire up to
143 additional towers for up to U.S.$31.4 million. During 2001, 2002 and 2003 we sold, and leased back space in, 244, 67 and 33
cellular towers, respectively, to MATC Celular. As of May 31, 2004 we had
sold 36 additional towers. See Item 3, Key Information  D. Risk Factors 
Risk Factors Relating to Our Business  We may be unable to continue to sell
towers to MATC Celular and use our assets as collateral for future indebtedness
assumed by us. In 2003, 2002 and 2001, we recorded other operating income of Ps.86.0
million, Ps.95.3 million and Ps.338.4 million in connection with our sale to
MATC Celular of 33, 67 and 244 towers, respectively. However, the leasing 35




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of the towers from MATC Celular results in an increase in our operating
expenses over the same periods. Under U.S. GAAP, the gain was deferred and
recognized on a pro-rata basis over the life of the lease. See Note 18 to the
Consolidated Financial Statements for a further discussion. Results of Operations The following table presents results of operations data for the years
ended December 31, 2002 and 2003. Year Ended December 31,2002
    
    2003
    
    ChangePs.
    
    Ps.
    
    %(In millions of constant December 31, 2003,pesos except percentages)Total revenues
    
    
    5,803.8
    
    
    
    4,763.2
    
    
    
    (17.9
    )Cost of sales
    
    
    (2,118.5
    )
    
    
    (2,430.4
    )
    
    
    14.7Operating expenses
    
    
    (1,854.6
    )
    
    
    (1,872.8
    )
    
    
    1.0Depreciation and amortization
    
    
    (2,206.1
    )
    
    
    (1,953.7
    )
    
    
    (11.4
    )Other operating income
    
    
    95.3
    
    
    
    86.0
    
    
    
    (9.7
    )Operating loss
    
    
    (280.0
    )
    
    
    (1,407.7
    )
    
    
    (402.7
    )Special items
    
    
    
    
    
    
    (621.5
    )
    
    
    (100.0
    )Other expenses, net
    
    
    
    
    
    
    (307.2
    )
    
    
    (100.0
    )Integral financing costs
    
    
    (697.9
    )
    
    
    (580.8
    )
    
    
    (16.8
    )Net loss
    
    
    (1,103.2
    )
    
    
    (3,327.3
    )
    
    
    (201.6
    )
 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues Total revenues consist of service revenues and telephone equipment and
other revenues. Our service revenues are principally derived from the
provision of mobile telephony service in Mexico. Our service revenues also
include revenues attributable to in-roaming and long distance service revenue
generated by our mobile telephony subscribers, revenues from the provision of
telecommunication services in Mexico other than mobile telephony service,
including long distance service revenues from non-mobile subscribers and
revenues from the provision of data transmission, and paging services. Our
service revenues include all Bulletin B-10 inflation adjustments on all service
revenue line items, whether mobile telephony service revenues or other service
revenues. Telephone equipment and other revenues consist primarily of revenues
from the sales of mobile telephone equipment and accessories, as well as
revenues attributable to out-roaming and revenues from the sale of dark fiber
optic cable. Revenues attributable to out-roaming are passed through to the
applicable host operator. The following table presents the sources of our revenues for the years
ended December 31, 2002 and 2003: Year Ended December 31,2002
    
    2003
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Service revenues
    
    
    5,188.4
    
    
    
    89.4
    
    
    
    4,217.3
    
    
    
    88.5
    
    
    
    (18.7
    )Telephone equipment and other revenues
    
    
    615.4
    
    
    
    10.6
    
    
    
    545.9
    
    
    
    11.5
    
    
    
    (11.3
    )Total revenues
    
    
    5,803.8
    
    
    
    100.0
    
    
    
    4,763.2
    
    
    
    100.0
    
    
    
    (17.9
    )
 36




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Service Revenues.The table below presents service revenues by source for the
years ended December 31, 2002 and 2003: Year Ended December 31,2002(1)
    
    2003(1)
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Airtime(2)
    
    
    2,736.2
    
    
    
    52.8
    
    
    
    2,146.7
    
    
    
    50.8
    
    
    
    (21.5
    )Monthly fees
    
    
    1,578.1
    
    
    
    30.4
    
    
    
    1,335.0
    
    
    
    31.7
    
    
    
    (15.4
    )Long distance
    
    
    453.6
    
    
    
    8.7
    
    
    
    327.6
    
    
    
    7.8
    
    
    
    (27.8
    )Value-added services and in-roaming(3)
    
    
    351.6
    
    
    
    6.8
    
    
    
    359.5
    
    
    
    8.5
    
    
    
    2.3Other(4)
    
    
    68.9
    
    
    
    1.3
    
    
    
    48.5
    
    
    
    1.2
    
    
    
    (29.6
    )Total service revenues
    
    
    5,188.4
    
    
    
    100.0
    
    
    
    4,217.3
    
    
    
    100.0
    
    
    
    (18.7
    )
   (1)
    
    Figures include intercompany eliminations.(2)
    
    Airtime includes amounts billed to other carriers for incoming
minutes under the calling party pays modality, additional outgoing
postpaid minutes to those included in the package contracted for and
prepaid outgoing minutes net of unbilled minutes. Incoming and outgoing
airtime is charged on a per-minute basis.(3)
    
    Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacells
cellular magazines, as well as in-roaming service revenue. Does not
include charges for related airtime. Customers using short messaging
value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore
included in airtime.(4)
    
    Includes revenues from administrative services provided to our parent
company, Iusacell. Service revenues decreased 18.7% in 2003 as compared to 2002. This
decrease results mainly from increased competition in the market, lower prices
and our inability, due to severe financial constraints, to react appropriately
to this increased competition. In order to control costs, in 2003 we were
forced to make significant cuts in our sales, marketing and distribution
operations. In addition, we had to scale back our plans to build out and
upgrade our wireless network. Postpaid customers declined by 10.6%, from 351,782 in 2002 to 314,493 in
2003. This decrease was due to lower gross postpaid additions in 2003.
Prepaid customers decreased by 45.0%, from 1,692,511 customers in 2002 to
930,738 in 2003. The decline in 2003 reflects primarily (i) the disconnections
related to the reduction of the period in which a prepaid customer can receive
incoming calls but cannot make outgoing calls from 305 and 275 days (depending
on the amount of airtime previously charged) to 90 days (see Item 4,
Information on the Company  B. Business Overview  Churn and Turnover) and
(ii) lower gross prepaid additions in 2003. Gross additions for 2003 totaled 567,646 customers, which represents a
47.5% decline from 2002. This decline resulted mainly from the significant
cuts we were forced to make in our sales, marketing and distribution operations
due to our critical financial condition, as well as to a shift in strategy
towards sales of higher-value added products, rather than the low value prepaid
segments. Postpaid subscriber churn decreased from an average monthly level of 3.6%
in 2002 to 3.3% in 2003, as we adopted stricter collection procedures to reduce
bad debt and implemented new loyalty and retention programs. However, our
overall average monthly churn for the year increased to 6.3% in 2003 from 3.4%
in 2002 primarily because of the substantial turnover that resulted from our
decision to shorten the incoming calls only period of our prepaid customers. As a result of the 47.5% decline in gross additions, the higher churn
rates and the changes in our policy for turning over prepaid customers, we
registered a net reduction of 799,062 customers in 2003, as compared to net
additions of 189,596 customers in 2002. This includes the removal during the
second half of 2003 of approximately 556,000 customers who were determined to
be inactive users under our new prepaid turnover policy. 37




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Monthly fees, airtime revenues and long distance revenues each decreased
in 2003 as compared to 2002 primarily because of the reduction in postpaid
subscribers. Blended average MOUs for 2003 increased 22.2%, from 63 minutes to 74
minutes, primarily due to (i) a higher proportion of postpaid customers in our
subscriber base, and (ii) aggressive promotions aimed at increasing usage by
offering lower per minute prices. Average monthly MOUs for postpaid customers
increased 22.9%, to 263 minutes in 2003 from 214 minutes in 2002, while average
monthly MOUs for prepaid customers increased 3.9%, from 29 minutes in 2002 to
30 minutes in 2003. Overall, ARPU decreased 0.5% from Ps.191 in 2002 to Ps.190 in 2003, as a
result of a variety of promotions that involved lower per minute prices.
Postpaid ARPU decreased 1.6% from Ps.693 in 2002 to Ps.682 in 2003, while
prepaid ARPU declined 5.0% from Ps.80 in 2002 to Ps.76 in 2003. Telephone Equipment and Other Revenues. Telephone equipment and other
revenues decreased 11.3% in 2003, from Ps.615.4 million in 2002 to Ps.545.9
million in 2003. This decrease was primarily due to lower postpaid handset
sales, larger handset subsidies, lower revenues from out-roaming and lower
sales of dark fiber in 2003. Cost of Sales Cost of Services. Cost of services includes taxes and fees on revenues
payable to the Mexican government, interconnection costs, and technical costs
such as maintenance, repair costs, lease expenses, salaries of technical
personnel and utilities on a pro-rata basis. Our cost of services declined
5.0% to Ps.1,530.8 million in 2003 as compared to Ps.1,611.2 million in 2002,
primarily as a result of the implementation in the second half of 2003 of a
stringent cost control policy. As a percentage of total revenues, cost of
services increased to 32.1% in 2003 from 27.8% in 2002, because of the 17.9%
decrease in total revenues in 2003. Cost of Telephone Equipment and Other. Cost of telephone equipment and
other includes that portion of handset and accessory costs that are not
capitalized, handset and accessory inventory obsolescence charges and the cost
of dark fiber optic cable sold. Cost of telephone equipment increased 77.4%
from Ps.507.2 million in 2002 to Ps.899.6 million in 2003 primarily due to (i)
a change in accounting policy implemented in the third quarter of 2003 whereby
we now expense immediately the cost of the handsets we give to our customers,
instead of amortizing it over the life of the customers contract (See  
Recent Changes in Our Accounting Policies) and (ii) a more aggressive handset
purchase campaign. These factors were offset in part by a decrease in
purchases of dark fiber in 2003 as compared to 2002. Operating Expenses Operating expenses increased 1.0% to Ps.1,872.8 million in 2003 from
Ps.1,854.6 million in 2002. As a percentage of total revenues, operating
expenses increased to 39.3% in 2003 from 32.0% in 2002 because of the 17.9%
decrease in total revenues in 2003. Sales and advertising expenses decreased 7.5% from Ps.1,418.9 million in
2002, to Ps.1,312.5 million in 2003, primarily because of lower commission
expenses due to lower gross additions, partially offset by an increase in
advertising expenses in the second half of 2003. General and administrative
expenses increased 28.6% to Ps.560.3 million from Ps.435.7 million in 2002, due
mainly to severance payments made as a result of headcount reductions. Other Operating Income We had other income of Ps.86.0 million in 2003 mainly as a result of the
sale of 33 towers to MATC Celular, while in 2002, we had other income of
Ps.95.3 million from the sale of 67 towers. See  Tower Monetization. Depreciation and Amortization Depreciation and amortization expenses decreased 11.4% from Ps.2,206.1
million in 2002 to Ps.1,953.7 million in 2003, primarily due to a change in

accounting policy implemented in the third quarter of 2003 whereby we now
expense immediately the cost of the handsets we sell or give to our customers
instead of amortizing it over the life of a customers contract. See  
Recent Changes in our Accounting Policies. Had we reclassified the
amortization of handsets for 2002, we would have reported depreciation and
amortization of Ps.1,787.4 million. 38




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##### Table of Contents



Special Items For 2003, we recorded a write-off of Ps.216.8 million corresponding to
intangible assets and goodwill, a charge of Ps.404.7 million for the valuation
of abandoned fixed assets and a write-off of Ps.394.3 million corresponding to
installation expenses and capitalized debt issuance expenses. See a more
detailed explanation in   Recent Changes in Accounting Policies. Tax Provisions Our tax provisions increased 113.1%, or Ps.141.7 million in 2003, due to
the increase in our valuation allowance related to a deferred tax asset from
our tax loss carry forwards. We decided to increase the valuation allowance by
Ps.163.2 million due to uncertainty about the realization of tax loss carry
forwards. See   Recent Changes in Accounting Policies). Integral Financing Cost Our integral cost of financing decreased by 16.8%, from Ps.697.9 million
in 2002 to Ps.580.8 million in 2003. This decrease was mainly due to (i) a
Ps.140.5 million decrease in foreign exchange losses in 2003 as a result of the
effect of a lower rate of devaluation of the peso as compared to the U.S.
dollar, our currency of indebtedness, in such year and (ii) a Ps.40.4 million
decrease in 2003 in our net interest expense because of a Ps.130.3 million
decrease in our debt resulting mainly from the payment of notes payable to
Banco Santander Mexicano, S.A. (see Note 10d of our Consolidated Financial
Statements). These decreases were offset in part by a Ps.63.8 million decrease in gain
from monetary position in 2003 because of the effect of a lower rate of
inflation in such year on our net monetary liability position. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenues The following table presents the sources of our revenues for the years
ended December 31, 2001 and 2002: Year Ended December 31,2001
    
    2002
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Service revenues
    
    
    6,244.5
    
    
    
    90.3
    
    
    
    5,188.4
    
    
    
    89.4
    
    
    
    (16.9
    )Telephone equipment and other revenues
    
    
    667.3
    
    
    
    9.7
    
    
    
    615.4
    
    
    
    10.6
    
    
    
    (7.8
    )Total revenues
    
    
    6,911.8
    
    
    
    100.0
    
    
    
    5,803.8
    
    
    
    100.0
    
    
    
    (16.0
    )
 Service revenues. The table below presents service revenues by source for the
years ended December 31, 2001 and 2002: Year Ended December 31,2001(1)
    
    2002(1)
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Airtime(2)
    
    
    3,122.1
    
    
    
    50.0
    
    
    
    2,736.2
    
    
    
    52.8
    
    
    
    (12.4
    )Monthly fees
    
    
    1,915.7
    
    
    
    30.7
    
    
    
    1,578.1
    
    
    
    30.4
    
    
    
    (17.6
    )Long Distance
    
    
    713.7
    
    
    
    11.4
    
    
    
    453.6
    
    
    
    8.7
    
    
    
    (36.5
    )Value-added services and in-roaming(3)
    
    
    493.0
    
    
    
    7.9
    
    
    
    351.6
    
    
    
    6.8
    
    
    
    (28.7
    )Other(4)
    
    
    
    
    
    
    
    
    
    
    68.9
    
    
    
    1.3
    
    
    
    100.0Total service revenues
    
    
    6,244.5
    
    
    
    100.0
    
    
    
    5,188.4
    
    
    
    100.0
    
    
    
    (16.9
    )
 39




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(1)
    
    Figures include intercompany eliminations.(2)
    
    Airtime includes amounts billed to other carriers for incoming
minutes under calling party pays modality, additional outgoing postpaid
minutes to those included in the package contracted for and prepaid
outgoing minutes net of unbilled minutes. Incoming and outgoing airtime
is charged on a per-minute basis.(3)
    
    Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacells
cellular magazines, as well as in-roaming service revenue. Does not
include charges for related airtime. Customers using short messaging
value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore
included in airtime.(4)
    
    Includes revenues from administrative services provided to our parent
company, Iusacell. Service revenues decreased 16.9% in 2002 as compared to 2001. This
decrease results mainly from increased competition in the market, lower prices
and our inability, due to severe financial constraints, to react appropriately
to this increased competition. In 2002, postpaid customers declined by 12.9%, from 403,988 in 2001 to
351,782 in 2002, due to lower gross postpaid additions. Prepaid customers
increased by 16.7% from 1,450,709 customers in 2001 to 1,692,511 in 2002. The
increase in 2002 reflects our efforts at that time to expand that segment.
Incoming calls only prepaid customers, the substantially majority of whom
generate little traffic, grew by 51.3% from 768,076 customers in 2001 to
1,162,188 in 2002. Gross additions for 2002 totaled 1,080,683 customers, which represents a
2.9% increase over 2001. These additions were mainly derived from the
strategic focus on prepaid additions during the first half of 2002. During the
second half of 2002, however, we implemented a strategic shift, which triggered
sales of higher-value products through changes in the commission structure, but
actually resulted in a decrease in gross additions during the second half of
2002, particularly in the low value prepaid segments. Average monthly churn for the year declined from 3.9% in 2001 to 3.4% in
2002, although churn increased during the second half of the year as we
actively sought to remove non- or low-revenue producing prepaid customers.
Postpaid subscriber churn decreased from an average monthly level of 3.8% in
2001 to 3.6% in 2002 as a result of the adoption of strict collection
procedures to reduce bad debt and the implementation of new activation policies
and retention programs. As a result of higher gross additions and lower average churn, net
additions increased 9.0%, from 173,947 customers in 2001 to 189,596 in 2002.
This includes the extraordinary removal during the third quarter of 2002 of
44,506 customers who were determined to be inactive prepaid customers and were
not taken into consideration in the blended churn rate for the year. Monthly fees decreased primarily due to fewer postpaid customers and an
increase in the number of hybrid subscribers as a proportion of the total
postpaid base, particularly during the first half of 2002. Airtime revenues
decreased primarily as a result of fewer postpaid subscribers. Long distance
revenue decreased mainly due to fewer postpaid subscribers and a higher
proportion of incoming only subscribers in the prepaid subscriber base. Blended average monthly minutes of use (MOUs) for 2002 decreased 25.0%,
from 84 minutes to 63 minutes, primarily due to a higher proportion of prepaid
customers in our subscriber base. Average monthly MOUs for postpaid customers
decreased 14.4%, from 250 minutes in 2001 to 214 minutes in 2002, mainly due to
the increased proportion of hybrid customers who had lower consumption patterns
than the remainder of the postpaid customer base. Average MOUs increased 3.6%
among prepaid customers, from 28 minutes in 2001 to 29 minutes in 2002,
primarily due to promotions aimed at increasing use by higher value customers
in the prepaid customer base. ARPU decreased, 28.5% from Ps.267.0 in 2001 to Ps.191.0 in 2002, as a
result of lower average MOUs and the higher proportion of prepaid customers in
our customer base. Postpaid ARPU decreased 13.2% from Ps.798.0 in 2001 to
Ps.693.0 in 2002, primarily as a result of a higher proportion of hybrid
customers in our customer base. Prepaid ARPU declined 11.1% from Ps.90.0 in
2001 to Ps.80.0 in 2002, due to a higher proportion of lower revenue generating
customers in the customer base during the first half of the year. 40




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Telephone Equipment and Other Revenues. Telephone equipment and other
revenues decreased 7.1% in 2002, from Ps.667.3 million in 2001 to Ps.615.4
million in 2002. This decrease was primarily due to lower postpaid handset
sales and lower revenues from out-roaming in 2002. Cost of Sales Cost of Services. Our cost of services declined by 0.7% to Ps.1,611.2
million in 2002 as compared to Ps.1,622.9 million in 2001. This decrease
resulted from stringent financial controls we implemented in 2002, despite
higher lease costs associated with an increased number of non-strategic towers
sold to and leased back from MATC Celular during the year. See   Tower
Monetization. As a percentage of total revenues, cost of services increased
to 27.8% in 2002 from 23.5% in 2001, primarily because of the 16.0% decrease in
total revenues in 2002. Cost of Telephone Equipment and Other. Cost of telephone equipment and
other increased 22.1% in 2002 from Ps.415.6 million in 2001 to Ps.507.2 million
primarily due to partial subsidizing of telephones sold to prepaid customers
and higher cost of dark fiber optic sales. Until September 30, 2003, the cost
of a handset given to a postpaid customer was amortized over 12 months, the
average length of our service contract, instead of being immediately expensed
in the period in which the customer receives the handset. Operating Expenses Operating expenses decreased 24.0% from Ps.2,440.2 million in 2001 to
Ps.1,854.6 million in 2002. As a percentage of total revenues, operating
expenses decreased from 35.3% in 2001 to 32.0% in 2002. Sales and advertising expenses decreased 21.9%, from Ps.1,817.2 million in
2001 to Ps.1,418.9 million in 2002, primarily because of higher television
advertising rates as well as expenses incurred in association with the
consolidation of Region 8 cellular service into our business in 2001. General
and administrative expenses decreased 30.1% from Ps.623.0 million in 2001 to
Ps.435.7 million in 2002, due to the implementation in 2002 of stringent cost
controls, lower headcount and restructured compensation plans. Other Operating Income We had other income of Ps.95.3 million in 2002 mainly from the sale of 67
towers to MATC Celular. In 2001, we had other income of Ps.338.4 million from
the sale of 244 towers. See   Tower Monetization. Depreciation and Amortization Depreciation and amortization expenses decreased 21.9% from Ps.2,823.2
million in 2001 to Ps.2,206.1 million in 2002, primarily due to a reduced level
of capital expenditures during the period, lower handset amortization expenses
attributable to lower postpaid gross additions, more cost-effective handset
purchases and better targeted handset subsidies for high-value customers. Integral Financing Results Our integral cost of financing increased from Ps.137.5 million in 2001 to
Ps.697.9 million in 2002. This increase was mainly due to Ps.527.3 million in
foreign exchange losses recorded in 2002 as compared to a Ps.105.3 million gain
in 2001, resulting from a change from a 4.8% appreciation of the peso in
relation to the U.S. dollar in 2001 to a 13.8% devaluation in 2002. This increase was offset in part by (i) a Ps.48.0 million increase in gain
from monetary position in 2002 because of the effect of a higher rate of
inflation in such year on our net monetary liability position, and (ii) a
Ps.24.2 million decrease in net interest expense in 2002 mainly due to a higher
interest income in 2002. Income Tax, Asset Tax and Employees Profit Sharing Beginning January 1, 1999, as a result of Mexican Income Tax Law
amendments, we must limit our tax consolidation to 60% of all our subsidiaries,
except for four entities (Iusatel, S.A. de C.V., Iusatelecomunicaciones, S.A.
de C.V., Infotelecom, S.A. de C.V.and Punto-a-Punto Iusacell, S.A. de C.V.)
which are not included in our annual consolidated income tax return (although
they are consolidated for financial reporting purposes), because we 41




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##### Table of Contents



do not hold more than 50% of the voting shares of such subsidiaries. We
plan to acquire at least 51% of the capital stock of three of these
subsidiaries by not later than the fourth quarter of 2005. Once we do, we will
be able to include these subsidiaries in our tax consolidation. See Item 10,
Additional Information  C. Material Contracts  Acquisition of Equity
Interests in Certain Subsidiaries for a description of these planned
acquisitions. In December 2000, the Mexican Finance Ministry (Secretaría de Hacienda y
Crédito Público) ruled that we could prepare consolidated tax returns for
ourselves and the subsidiaries in which we hold a majority of voting shares and
thereby apply our net operating loss carry forwards against our and such
subsidiaries profits. In April 2001, the Mexican Finance Ministry ruled that
Iusacell Celulars net operating loss carry forwards could be transferred to
Iusacell, so that Iusacell could apply such net operating loss carry forwards
against its and its majority-owned subsidiaries tax result. Iusacell Celular and its subsidiaries pay an alternative net asset tax,
which is levied on the average value of substantially all assets less certain
liabilities. This tax, which is 1.8% of the taxable base, is required to be
paid if the amount of the asset tax exceeds the computed income tax liability.
We recorded provisions of Ps.160.9 million, Ps.116.1 million and Ps.103.9
million for asset tax for 2001, 2002 and 2003 respectively. These taxes may be
applied in subsequent years against income tax payments, to the extent income
tax liabilities for such years exceed the net asset tax calculation. Due to
net losses, we paid no income taxes in 2001, 2002 and 2003 and paid the asset
taxes specified above. In 2002, due to the change in the statutory income tax rate which became
effective in 2003, Iusacell Celular and its subsidiaries reduced the deferred
tax asset in 2002, resulting in a provision of deferred income tax of Ps.9.2
million. During 2003, we decided to increase the net deferred asset valuation
allowance which is mainly originated by the effect of the tax loss carry
forwards, reflecting the uncertainty about our ability to continue as an
ongoing concern. The realization of the net deferred tax asset heavily depends
on generating sufficient taxable income prior to expiration of the tax loss
carry forwards. Our management estimates that, considering our present
critical financial condition, the realization of the tax loss carry forwards
cannot be assured through the generation of sufficient taxable income during
the applicable period. See  Recent Changes in our Accounting Policies and
note 18 to the Consolidated Financial Statements for a discussion of our tax
loss carry forwards. We and our subsidiaries are required under Mexican law to pay their
employees, in addition to their required compensation and benefits, profit
sharing in an aggregate amount equal to 10% of the taxable income of the
relevant subsidiary (calculated without reference to inflation adjustments or
amortization of tax loss carry forwards). There was no statutory profit
sharing in any periods presented. Critical Accounting Policies and Estimates We have identified certain key accounting policies on which our
consolidated financial condition and results of operations are dependent.
These key accounting policies most often involve complex matters or are based
on subjective judgments or decisions that require management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. We base our estimates on historical
experience, where applicable, and other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions. In the opinion of our
management, our most critical accounting policies under both Mexican GAAP and
U.S. GAAP are those that require management to make estimates and assumptions
that affect the reported amounts related to the accounting for revenue
recognition, allowance for doubtful accounts, the evaluation of long-lived
assets, property plant and equipment, goodwill, and deferred taxes. For a full
description of all of our accounting policies, see Notes 4 and 18 to the
Consolidated Financial Statements included in this Annual Report. There are certain critical estimates that we believe require significant
judgment in the preparation of our consolidated financial statements. We
consider an accounting estimate to be critical if:  
    
    It requires us to make assumptions because information was not
available at the time or it included matters that were highly uncertain
at the time we were making the estimate, and
    
    Changes in the estimate or different estimates that we could have
selected would have had a material impact on our financial condition or
results of operations. 42




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Revenue Recognition Mobile telephony airtime is recorded as revenue as service is provided.
Until December 31, 2001, revenue from the sale of prepaid cards was recognized
at the date of sale. We had recognized the revenue on the sale of prepaid
cards at the date of sale rather than on a deferred basis because the length of
the average consumption period for such prepaid cards was not significant,
i.e., approximately one to one-and-a-half months, and it was not material to
results of operations for 2001 and 2000. Starting January 1, 2002, we started
to recognize revenue from the sale of the prepaid cards as service is provided
because of the increasing length of the average consumption period for such
prepaid cards. Revenues from the sale of prepaid cards associated with
services that have not been provided are deferred until the services are
provided and are included in the line item taxes and other payables in the
accompanying consolidated balance sheets. Sales and cost of sales of equipment
and related services are recorded when goods are delivered and services are
provided. Cellular access charges are billed in advance and recognized when
the services are provided. Other revenues, mainly from paging and long
distance services, are recognized when the related services are provided. Allowance for Doubtful Accounts The allowance for doubtful accounts represents our estimate of losses
resulting from the failure or inability of our customers to make required
payments. We consider a number of factors in determining the proper level of
the allowance including historical collection experience, current economic
trends, the aging of the accounts receivable portfolio and changes in the
credit-worthiness of our customers. Systems to detect fraudulent call activity
are in place within our network, but if these systems fail to identify such
activity, we may realize a higher degree of uncollectible accounts. While we
believe that our estimates are reasonable, changes in our customers trends or
any of the above mentioned factors could materially affect our bad debt
expense. Evaluation of Long-Lived Assets We recognize on our balance sheets
certain long-lived assets and
capitalized costs including goodwill and property, plant and
equipment. These assets are assigned
useful lives which impact annual depreciation and amortization expense, the
assignment of which involves significant judgments and estimates. These
long-lived assets are evaluated for impairment on a periodic basis and we
recognize an impairment to the extent we believe that the carrying value is no
longer recoverable from future cash flows. Factors we take into consideration
include the future undiscounted cash flows to be generated by the assets and
the possible impact that inflation may have on our ability to generate cash
flow since, with inflation accounting, the carrying value is restated for
inflation prior to performing an impairment analysis. Key assumptions we
evaluate in preparing an undiscounted cash flow analysis include inflation,
currency fluctuations and future revenue growth. The use of different
estimates or assumptions within our undiscounted cash flow model could result
in undiscounted cash flows lower than the current carrying value of our assets,
therefore requiring the need to compare the carrying values to their fair
values. Our estimates and assumptions take into consideration all relevant
business and market factors which are known to us at the time, some of which
may change in future periods due to factors outside of our control (including
shareholder strategic decisions). Should these factors adversely change in
future periods, we would be required to reevaluate the carrying value of our
long-lived assets and cash flow impairment calculations could possibly change. During 2003 we wrote-off some long-lived assets in light of the current
situation of the Company as follows:  a.
    
    As discussed in Note 4n. to our Consolidated Financial Statements,
during 2003 we wrote down intangible assets for Ps.181.6 million that
mainly consisted of: (i) Pre-operating expenses originated by our long
distance and microwave lease business start-up operations in Mexico and
(ii) certain payments made by the Group to Telmex related to the
special projects implemented by Telmex to permit competition in long
distance telephony (see Note 12c to our Consolidated Financial
Statements). This write down of intangible assets is presented as a
special item in our consolidated income statement for 2003.b.
    
    During the third quarter of 2003, we wrote-off installation
expenses for Ps.307.4 million and advance payments for Ps.86.9 million,
these advance payments related to the expenses in which we incurred
while obtaining long-term financing, which were reclassified to current
liabilities during 2003. This write-off is presented in the other
expenses, net, line in our consolidated income statement for 2003. 43




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Property, Plant and Equipment We depreciate property, plant and equipment and other intangible assets
with a definite life using straight-line methods over the period of time we
estimate we will benefit from each asset. The cost of mobile wireless telephones given to customers under exclusive
service contracts was amortized on a straight-line basis until September 30,
2003. During 2001, we reduced the amortization period of mobile wireless
telephones from an average of 18 months to 12 months. The term of service
contracts varies on a customer by customer basis. Due to the
cost-ineffectiveness of tracking phones on an individual contract basis for
amortization purposes, we estimate the average term of our contracts based on
current trends. During the third quarter of 2003, we changed the accounting policy for the
telephones given to our customers under exclusive service contracts. As a
result, the cost of such telephones is recorded in the income statement at the
moment when the contract is signed and such cost is included as a part of the
cost of equipment sales and other, in the consolidated statement of income.
The cumulative effect of this change in accounting policy resulted in a loss
for the year for 2003 of Ps.159.0 million related to the remaining balance of
telephones being amortized as of that date, amount that is included in the line
cumulative effect of the adoption of the new accounting pronouncement and
change in accounting policy, in our consolidated income statement for the year
ended December 31, 2003. In addition to the effect of this change, we reclassified Ps.226.0 million
of the amortization for the period from January to September 2003, which was
originally recorded in depreciation and amortization for the period, in the
line item to cost of telephone equipment sales and other. If this
reclassification had been made for the years ended December 31, 2002 and 2001,
the cost of telephone equipment sales and other would have been of Ps.925.9
million and Ps.1,578.6 million, respectively, and the depreciation and
amortization would have been Ps.1,787.4 million and Ps.1,660.1 million,
respectively. Goodwill Under Mexican GAAP, we amortize goodwill on a straight-line basis over a
period of 20 years. We cancelled goodwill for Ps.35.2 million during the
fourth quarter of 2003 related to our handset leasing business. This amount 44




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is recorded under Intangible assets write-off. For a discussion of
goodwill under U.S. GAAP, see Note 18g to the Consolidated Financial
Statements. Deferred Taxes At December 31, 2002, we had recorded a net deferred tax asset mainly
reflecting the benefit of tax loss carry forwards. However, during the third
quarter of 2003, we increased our valuation allowance due to changes
in our business plan and estimates brought by our change of control. The
realization of the net deferred tax asset depends on generating sufficient
taxable income prior to the expiration of the tax loss carry forwards.
Considering the present financial situation of Iusacell, we cannot assure you
that we will generate sufficient taxable income during the following years to
realize our tax loss carry forwards. Our estimates and assumptions take into
consideration all relevant business and market factors which are known to us at
the time, some of which may change in the future due to factors outside our
control (including shareholder strategic decisions). Should these factors
adversely change in the future, we may be required to record a deferred tax
liability. B. LIQUIDITY AND CAPITAL RESOURCES General Our liquidity requirements include working capital, purchases of network
equipment, interest and principal payments on outstanding indebtedness and
acquisitions of and strategic investments in businesses. We have financed our
growth to date through equity contributions from our previous principal
shareholders, public offerings and private placements of debt and equity
securities, bank debt and vendor financing. Funds from operating activities and other sources have not been sufficient
to enable us to make:  
    
    the U.S.$7.5 million interest payment on our 10% senior notes due
2004 which was due on July 15, 2003 and the U.S.$150.0 million
principal payment and accrued interest which became due upon
acceleration on September 11, 2003,
    
    the U.S.$265.6 million principal payment on our senior refinancing
secured loan which was due on March 31, 2004 because of the automatic
acceleration of the maturity date of the loan as a result of our
failure to refinance the Iusacell Celular senior notes by such date,
and
    
    the U.S.$7.0 million principal payment on a promissory note due to
Elektra on October 30, 2003. In addition, funds will not be sufficient to meet our debt service and
principal amortization requirements, working capital requirements and capital
expenditure needs for our existing businesses through 2004. Our future
operating performance and ability to service and repay our indebtedness will be
subject to many factors, including a successful debt restructuring, future
economic and competitive conditions and to financial, business and other
factors, many of which are beyond our control. Capital Expenditures We plan capital expenditures for 2004, 2005 and 2006 to total
approximately U.S.$252.8 million, not including capitalized interest. We
anticipate that approximately U.S.$90.2 million of such capital expenditures
will need to be invested during 2004, in order to make investments in the
central regions and expand the advance data network capabilities into other key
cities, among other things. As we make additional investments in our mobile telephony network and
pursue long distance and data transmission opportunities, we will also need
additional external funding in 2005 and beyond. Furthermore, the investments
required to keep pace with technological change, such as extended coverage on
third-generation wireless telecommunication equipment, will require additional
capital resources. During the first quarter of 2004, we invested approximately
U.S.$8.0 million in our cellular regions to expand our coverage. The degree and timing of capital expenditures will remain strongly
dependent on the nature, timing and success of our debt restructuring efforts,
the competitive environment and economic developments in Mexico, including 45




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inflation and exchange rates, the timing of regulatory actions and on the
availability of new funding from suitable debt and/or equity financing. The failure to obtain funding for capital expenditures will materially
adversely affect our ability to compete effectively against better capitalized
competitors and to withstand downturns in our business or in the Mexican
economy generally. Furthermore, this would limit our ability to pursue
business opportunities that may be in our interest. In
2003, the total amount of our capital expenditures was U.S.$17.0 million,
which we invested to maintain our coverage and improve our information
systems. Our total capital expenditures in 2002 were U.S.$63.4 million. Of this
amount, approximately U.S.$58.2 million was used primarily for the development
of the cellular network in the central regions and to construct new and remodel
existing customer and sales services centers. The balance of U.S.$5.2 million
was primarily used to develop and increase the quality of our cellular network
in Region 8 in southern Mexico. Our total capital expenditures in 2001 were U.S.$193.0 million, of which
approximately U.S.$189.8 million were used primarily for the development of the
cellular network and to construct new and remodel existing customers and sales
services centers. Our Indebtedness As of December 31, 2003, our total consolidated indebtedness, including
trade notes payable, was Ps.4,667.4 million. As described below, we are in
default under substantially all of our indebtedness for, among other things,
our failure to make interest and/or principal payments. We believe that if our
financial situation does not improve or we are unable to restructure our debt,
we will be unable to recommence the servicing of our debt and operate as a
viable company. We may be forced to file for bankruptcy, liquidate or
reorganize, which would materially adversely affect the value and market price
of our equity and debt securities and the claims of our equity or debt holders,
who could lose some or all of their investment. See Item 3, Key Information
 Risk Factors  Factors Relating to our Liquidity and Financial Condition. The following is a description of our principal indebtedness. Senior Refinancing Secured Loan On March 29, 2001, we completed the refinancing of our senior secured
credit facility by entering into a U.S.$265.6 million Amended and Restated
Senior Secured Credit Loan Agreement, which we refer to as the senior
refinancing secured loan, which consists of:  
    
    a Tranche A Loan in an aggregate principal amount of U.S.$189.8
million for the purpose of refinancing existing indebtedness under the
senior secured credit facility and under a certain bridge loan, the
proceeds of which were used to make a principal amortization payment
under the senior secured credit facility in January 2001; and
    
    a Tranche B Loan in an aggregate principal amount of U.S.$75.8
million for the purpose of paying existing indebtedness under certain
Eximbank facilities and under a certain bridge loan, the proceeds of
which were used to make a principal amortization payment under the
Eximbank facilities in January 2001. The senior refinancing secured loan bears interest at a rate per annum
equal to one-, two-, three- or six-month LIBOR (at Iusacell Celulars option)
plus a spread ranging from 1.75% to 2.25%, depending on Iusacell Celulars
leverage ratio. Iusacell Celulars obligations under the senior refinancing
secured loan are unconditionally guaranteed, jointly and severally, by the
principal operating subsidiaries of Iusacell Celular and its subsidiaries
holding cellular concessions and are secured by a pledge of substantially all
the capital stock and equity interests held by Iusacell Celular and
substantially all assets used in connection with or related to such cellular
concessions. The senior refinancing secured loan provides for principal payments in
equal quarterly installments beginning on May 31, 2004 and maturing on February
28, 2006. However, the loan also provides that in the event that the 46




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Iusacell Celular senior notes have not been refinanced by March 31, 2004,
the maturity date for the loan would be accelerated to such date. Since the
refinancing of the Iusacell Celular senior notes has not occurred, the
outstanding amount under the senior refinancing secured loan has been
automatically accelerated. We failed to make the U.S.$265.6 million principal
payment on March 31, 2004. We are also not in compliance with certain financial covenants. Iusacell Celular Senior Notes In July 1997, we issued U.S.$150.0 million of its 10% Senior Notes due
2004, under an indenture dated as of July 25, 1997 among Iusacell Celular, the
subsidiaries of Iusacell Celular guaranteeing the Iusacell Celular senior notes
and First Union National Bank (now Wachovia Bank National Association), as
trustee. Substantially all of the Iusacell Celular senior notes were exchanged
in January 1998 for identical 10% Senior Notes due 2004, which are also
governed by the indenture, pursuant to an exchange offer registered with the
SEC. The indenture limits, among other things, our ability to make dividend
payments to Iusacell (our parent company), to incur indebtedness and make
certain investments. In addition, all amounts due under the Iusacell Celular
senior notes are secured by a second priority lien on its cellular concessions
and certain equipment. We failed to make a U.S.$7.5 million interest payment on July 15, 2003.
On September 11, 2003, we were notified by holders representing over 50% of the
senior notes outstanding that they had elected to accelerate the principal
payment of the notes. On January 14, 2004, certain holders of the notes
initiated an action in a New York state court seeking payment and other
remedies. We have not made any principal or interest payments since we failed
to make payment on July 15, 2003. We are also not in compliance with certain financial covenants. Debt Restructuring In December 2002, our parent company, Iusacell, engaged Morgan Stanley as
financial advisor to assist us in developing a comprehensive debt restructuring
plan. In July 2003, we terminated the mandate with Morgan Stanley and
appointed a team of executives and advisors from companies controlled by Mr.
Salinas Pliego to continue the effort of developing a comprehensive
restructuring plan. In March 2004, Iusacell hired Hill Street Capital as new
financial advisors. We are still in the process of developing a comprehensive
restructuring proposal and building the different communications channels with
our creditors. We cannot assure you that we will be able to complete a
successful restructuring or that we will be able to achieve it on a timely
basis. Hedging Activities We currently do not carry out any hedging activities. Changes in Financial Position Historically, our cash generated from operating activities has not been
sufficient to meet our debt service, working capital and capital expenditure
requirements. We have relied on the capital markets for new equity and debt
financing, vendor financing and borrowings and equity contributions from our
principal shareholders to meet such funding needs. For the years ended 2001,
2002 and 2003, our earnings were insufficient to cover our fixed charges by
Ps.84.9 million, Ps.1,464.0 million and Ps.3,389.6 million, respectively. Our total consolidated debt, including notes payable to suppliers, was
Ps.4,667.4 million at December 31, 2003. At December 31, 2003, our ratio of
debt to total capitalization was 49.4% compared to 36.4% at December 31, 2002. Cash Flows From Operating Activities We used cash flows from operating activities of Ps.79.1 million, Ps.530.8
million, and Ps.2,457.6 million in 2003, 2002 and 2001, respectively. The
decrease in 2003 was primarily due to higher inventory purchases and
a greater net loss in 2003 compared to 2002, offset by
efficiencies in cash flow management that increased the turnover on
accounts payable, increases in our accounts receivable and the
non-payment of interest due under our indebtedness in 2003. 47




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Cash Flows from Financing Activities Net cash provided by financing activities was Ps.25.7 million, compared to
Ps.332.2 million in 2002 and Ps.548.9 million in 2001. The decrease in 2003
was mainly attributable to a decrease in proceeds from long-term debt and in
trade notes payable, offset in part by principal payments of long-term debt
made in 2002. Cash Flows Used for Investing Activities Net cash used in investing activities was Ps.96.8 million in 2003,
compared to Ps.840.0 million in 2002. This decrease is primarily attributable
to our critical financial condition, which has not allowed us to raise
sufficient funds to invest in the build out and upgrade of our wireless
network. In 2001, net cash used in investing activities was Ps.3,196.4
million. C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. Iusacell Celular does not undertake research and development activities. D. TREND INFORMATION In addition to the events and developments identified elsewhere in this
Item 5, Operating and Financial Review and Prospects, our financial condition
and results of operations could also be materially affected by the following
events and developments: Regulatory Developments Calling Party Pays We are currently discussing with COFETEL and Telmex the possibility of
extending the calling party pays (CPP) modality to all incoming long distance
calls. If CPP is extended to all incoming long distance calls, we believe
that this change would have a positive impact on our long distance revenues.
We cannot assure you that COFETEL and Telmex will agree to implement this
change. International Long Distance Service In 1996, COFETEL established a uniform rates and proportional return
system for international traffic. In June 2004, as a result of a complaint
under the World Trade Organization, Mexico agreed to eliminate the proportional
return system and permit free negotiations between international carriers to
terminate their calls. At this moment, COFETEL is in the process of drafting
the new rules. We believe that free negotiations between international
carriers will result in a reduction of the price of long distance calls. We
cannot predict whether such reduction will have a positive impact on our long
distance revenues by generating a greater volume of calls, or a negative impact
resulting from a loss of business to competitors which could offer better
prices than us. Service and Technological Developments Short Message Service (SMS) In December 2003, Iusacell signed an agreement with other mobile companies
to allow our respective customers to exchange short messages. Iusacell cannot
predict whether short messages will have an adverse impact on the volume of
voice calls and its final impact over revenues. Multimedia Message Service (MMS) In the second half of 2004, Iusacell will launch several applications of
MMS such as music, sounds and photos. We cannot predict whether it will be
possible to exchange MMS between carriers. We believe that MMS may have a
positive impact on our revenues. 48




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Voice over Internet Protocol (VoIP) In recent years, the market started to accept the VoIP telephone service
as a close substitute of long distance service. As a result of this
competition, we anticipate a strong reduction in long distance rates and the
introduction of monthly flat rates for unlimited calls. We believe that these
changes may have a negative impact on our long distance revenues. E. OFF-BALANCE SHEET ARRANGEMENTS We currently do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS Iusacell Celular Contractual Obligations The following table outlines our obligations for payments under our
consolidated indebtedness, operating leases and purchase obligations for the
periods indicated using balances as of December 31, 2003. The following table does not reflect as current the effects of our default
under certain of our obligations that have not yet been declared immediately
due and payable. Depending on subsequent events and the progress of our
restructuring efforts, we expect our payment obligations to change. Payments due by Period (Figures in thousands of U.S. Dollars as of December 31, 2003) Indebtedness(1)
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalSenior refinancing secured loan(2)
    
    
    265,622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,622Senior notes due 2004
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Total indebtedness
    
    
    415,622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    415,622
 Operating Leases(3)
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalMATC Celular
    
    
    31,863
    
    
    
    33,224
    
    
    
    34,643
    
    
    
    36,124
    
    
    
    122,779
    
    
    
    258,633Buildings and others
    
    
    3,666
    
    
    
    3,845
    
    
    
    4,037
    
    
    
    4,238
    
    
    
    11,081
    
    
    
    26,867Total operating leases
    
    
    35,529
    
    
    
    37,069
    
    
    
    38,680
    
    
    
    40,362
    
    
    
    133,860
    
    
    
    285,500]
 Acquisitions
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalJose Ramon Elizondo
    
    
    1,421
    
    
    
    5,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,515Total Contractual Obligations
    
    
    452,572
    
    
    
    42,163
    
    
    
    58,680
    
    
    
    40,362
    
    
    
    133,860
    
    
    
    707,637
   (1)
    
    These amounts are principal payments.(2)
    
    The principal payments under this loan were automatically accelerated
to March 31, 2004.(3)
    
    These amounts include minimum lease payments. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT Directors Our by-laws provide that our Board of Directors must consist of no less
than five and no more than twenty Directors. Resolutions of the Board of
Directors will be valid when approved by a majority vote of the members 49




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present, except for certain matters that require an unanimous vote. The
Chairman of the Board has the tie-breaking vote. Mr. Ricardo B. Salinas Pliego
is the Chairman of the Board of Directors. See Item 7, Major Shareholders and
Related Party Transactions  Major Shareholders  Governance for a
description of Iusacells by-laws. Our by-laws authorize alternate directors to serve on the Board of
Directors in place of directors who are unable to attend meetings or otherwise
participate in the activities of the Board of Directors. On April 30, 2004, Iusacell elected new directors who will hold office for
a period of one year and until the election of their successors at a duly
convened general ordinary shareholders meeting. The following table presents information with respect to our directors as
of the date hereof: Name
    
    Age
    
    Position(s)Ricardo Benjamín Salinas Pliego
    
    
    48
    
    
    Chairman of the Board of DirectorsPedro Padilla Longoria
    
    
    38
    
    
    Vice Chairman of the Board of DirectorsGustavo Guzmán Sepúlveda
    
    
    50
    
    
    DirectorLuis Jorge Echarte Fernández
    
    
    59
    
    
    DirectorJoaquin Arrangoiz Orvañanos
    
    
    47
    
    
    Director
 Upon the acquisition by MovilAccess of a 74.6% equity interest in Iusacell
on July 29, 2003, and through MovilAccesss ownership of Iusacell, the then
Board of Directors of Iusacell Celular was replaced wholesale with new members,
the majority of whom are current members of the Board. All the members of the
Board are also Directors and/or executive officers of other companies
controlled by Mr. Salinas Pliego. Executive Officers The following table presents information relating to our executive
officers as of the date hereof: Name
    
    Age
    
    Position(s)Gustavo Guzmán Sepúlveda
    
    
    50
    
    
    Chief Executive OfficerJosé Luis Riera Kinkel
    
    
    38
    
    
    Chief Financial OfficerRicardo Benjamín Salinas Pliego
    
    
    48
    
    
    Executive DirectorPedro Padilla Longoria
    
    
    38
    
    
    Executive DirectorEduardo Kuri Romo
    
    
    34
    
    
    Director, SystemsAlejandra Ibargüengoitia
Vázquez Aldana
    
    
    34
    
    
    Director, MarketingNéstor Bergero Faustinelli
    
    
    46
    
    
    Director, TechnologyFederico Bellot Castro
    
    
    61
    
    
    Director, SalesJulián Aldeco Correa
    
    
    28
    
    
    Director, Postpaid ProductsPatricio Medina Moya
    
    
    33
    
    
    Director, Prepaid ProductsAlexander Elgqvist Payró
    
    
    31
    
    
    Director, Logistics and DistributionFernando José Cabrera García
    
    
    39
    
    
    General Counsel and Secretary
non-member of the Board
 Upon the acquisition by Movil Access of a 74.6% equity interest in
Iusacell on July 29, 2003, and through MovilAccesss ownership of Iusacell, the
then management of Iusacell Celular was replaced wholesale with new executive
officers, the majority of whom are our current officers. Biographies Ricardo B. Salinas Pliego. Mr. Salinas Pliego has been Chairman of the
Board and Executive Director of Iusacell Celular since July 29, 2003. Mr.
Salinas Pliego has also been Chairman of the Board and Executive Director of
Iusacell since July 29, 2003, Chairman of the Board of Directors of TV Azteca
since 1993, Chairman of the Board of Grupo Elektra since 1993, Director of
Unefon since 1999 and President of Unefon since 1998. Mr. Salinas Pliego also
serves on the Board of Directors of numerous other Mexican companies, including
Azteca Holdings, Grupo Dataflux, Biper, Cosmofrecuencias and Todito. Mr.
Salinas Pliego received a degree in accounting from the Instituto Tecnologico
de Estudios Superiores Monterrey and received an MBA from the Freeman School of
Business at Tulane University. 50




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Pedro Padilla Longoria. Mr. Padilla has been a member of the Board of
Directors and Executive Director of Iusacell Celular since July 29, 2003. Mr.
Padilla has also been a member of the Board of Directors and an Executive
Director of Iusacell since July 29, 2003 and a Director of TV Azteca since
1993. Mr. Padilla is also the Chief Executive Officer of TV Azteca. Mr.
Padilla also serves on the Board of Directors of Azteca Holdings, Grupo
Elektra, Biper, Unefon and Cosmofrecuencias. Mr. Padilla received a degree in
law from the Universidad Nacional Autónoma de Mexico. Gustavo Guzmán Sepúlveda.Mr. Guzmán has been a member of the Board of
Directors of Iusacell Celular and its Chief Executive Officer since July 29,
2003. Mr. Guzmán has also been a member of the Board of Directors and the
Chief Executive Officer of Iusacell since July 29, 2003, and the Director of
the Soccer Division of TV Azteca since 1993. Mr. Guzmán was the General
Director of Sales, Local Stations and Special Events of TV Azteca from 1993 to
July 2003. Mr. Guzmán received a bachelors degree in communication from the
Instituto Tecnologico de Estudios Superiores Monterrey. Luis J. Echarte Fernández. Mr. Echarte has been a member of the Board of
Directors of Iusacell Celular since July 29, 2003. Mr. Echarte has also served
as a member of the Board of Directors of Iusacell since July 29, 2003, and as a
Director of TV Azteca since November 1999. Prior to joining TV Azteca, Mr.
Echarte was Grupo Elektras Chief Financial Officer. He joined Grupo Elektra
in 1994. Mr. Echarte also serves as Chief Executive Officer of Azteca
International and on the Boards of Directors of Biper, Azteca International
Corporation and Foamex International Inc. Mr. Echarte holds undergraduate
degrees from Memphis State University and the University of Florida and has
completed the Executive Management Program at Stanford University. Joaquin Arrangoiz Orvañanos. Mr. Arrangoiz has been a member of the Board
of Directors of Iusacell Celular since April 30, 2004. Mr. Arrangoiz has also
served as a member of the Board of Directors of Iusacell since October 17,
2003, as a Director of TV Azteca since 1998 and Co-General Director of Sales of
TV Azteca since 1993. Mr. Arrangoiz received a degree in administration from
Anahuac University. José Luis Riera Kinkel.Mr. Riera has served as Chief Financial Officer
of Iusacell Celular since July 29, 2003. Mr. Riera has also been the Chief
Financial Officer of Iusacell since July 29, 2003. Prior to joining Iusacell
Celular, Mr. Riera held several positions, including the positions of General
Director of Corporate Finance of Elektra and Chief Financial Officer of Unefon
from March 1998 to July 2003. Mr. Riera received an engineering degree from
Universidad Panamericana and a master degree in business administration from
Instituto Panamericano de Alta Dirección de Empresas (IPADE). Eduardo Kuri Romo. Mr. Kuri has served as Systems Director of Iusacell
Celular since July 29, 2003. Mr. Kuri has also been the Systems Director of
Iusacell since July 29, 2004. Prior to joining Iusacell Celular, Mr. Kuri
worked at TV Azteca as Engineering and Systems Director from June 1998 to July
2000, as General Director of Signal Distribution from January 1997 to June
1998, as Technical Support and National Network Director from April 1996 to
January 1997 and as Technical Support Manager from May 1995 to April 1996. Mr.
Kuri received an engineering degree in electronics and systems from Universidad
La Salle and also has completed a High Management Seminar Program from the
IPADE. Alejandra Ibargüengoitia Vazquez Aldana. Ms. Ibargüengoitia has served as
Marketing Director of Iusacell Celular since January 2004. Ms. Ibargüengoitia
has also been a Marketing Director of Iusacell since January 2004. From July
2003 to January 2004, Ms. Ibargüengoitia served as Corporate Sales and
Marketing Services Director of Iusacell. Ms. Ibargüengoitia worked at TV
Azteca as Promotions Director from December 2001 to July 2003, as Promotions
Manager from March 2000 to December 2001, as Sales Manager from December 1996
to March 2000, and as Sales Executive from January 1995 to December 1996.
Previously, Ms. Ibargüengoitia worked in areas related to marketing in
different companies such as Seagram de México, SA de C.V.Ms. Ibargüengoitia
received a marketing degree from Instituto Tecnológico de Estudios Superiores
de Occidente (ITESO) and has also completed seminar programs in Marketing and
Management from Instituto Tecnológico de Estudios Superiores de Monterrey
(ITESM). Néstor Bergero Faustinelli. Mr. Bergero was appointed Director of
Technology of Iusacell Celular in July 29, 2003. Mr. Bergero has been
responsible for Iusacell Celular Technology division since January 2003. Mr.
Bergero has also been the Director of Technology of Iusacell since July 29,
2003. Prior to these appointments, Mr. Bergero served as Chief Technology
Officer and as a member of the Board of Directors of CTI Movil in Argentina
since June 2000. Mr. Bergero served in a variety of engineering, planning and
network positions in CTI Movil for over nine years. Previously he served as
Engineering Manager of Telecom, S.A.and in a variety of management positions 51




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in companies such as Telintar, S.A., the Government of Córdoba, Argentina,
and Sancor Cooperativas Unidas Limitadas in Argentina. He holds a degree with
honors in electronic and electrical engineering from the Universidad Nacional
de Córdoba, and he completed a management development program at the
Universidad Austral in Argentina. Federico Bellot Castro. Mr. Bellot has served as Sales Director of
Iusacell Celular since July 29, 2003. Mr. Bellot also serves as Sales Director
of Iusacell since July 29, 2003. Prior to joining Iusacell Celular, Mr. Bellot
served as Regional Sales Director at Unefon from September 1998 to July 2003,
where he was responsible for increasing the sales of telecommunications
services in all the regions of the country. Mr. Bellot served as General
Director of Radio Cel, S.A. de C.V., a trunking services company, from 1991 to
1993. Mr. Bellot has also worked in areas related to management in different
companies and industries such as Ranver, S.A., Productora Nacional de Redes,
Ocean Garden Products and FIPESCO (Brazil). Mr. Bellot received an accounting
degree from Universidad del Valle de Mexico and a masters degree in marketing
from Fundação Getulio Vargas (Río de Janeiro, Brazil). Julián Gerardo Aldeco Correa. Mr. Aldeco has served as Director of
Postpaid Products since May 2004. Mr. Aldero also serves as Director of
Postpaid Products of Iusacell since May 2004. Before assuming these positions,
Mr. Aldeco served as Customer Service Director of Iusacell from October 2003 to
March 2004. Mr. Aldeco also served as Loyalty and Retention Operations
Director of Iusacell from November 2002 to September 2003. Before joining
Iusacell, Mr. Aldeco served as Loyalty Operations Manager for the Mexican
affiliate of DirecTV, an entertainment company, from November 2000 to October
2002. Mr. Aldeco also served as Customer Relationship Center Process
Engineering and Quality Sub-Director at Citibank N.A.from January 1999 to
October 2000. Mr. Aldeco holds a degree in economics from Universidad
Iberoamericana in Mexico. Patricio Medina Moya. Mr. Medina has served as Director of Prepaid
Products of Iusacell Celular since February 2003. Mr. Medina has also been the
Director of Prepaid Products of Iusacell since February 2003. Before joining
Iusacell Celular, Mr. Medina was a Senior Management Telecommunications
Consultant at NGC  Cap Gemini Ernst & Youngs affiliate in Argentina from
October 1999 to December 2002, where he was responsible for managing key
accounts in the telecommunications business and for new business development
projects for both wireless and wireline service providers in Chile, Argentina
and Mexico. Mr. Medina holds an engineering and finance degree from Escuela
Politécnica del Ejército (ESPE) in Quito, Ecuador and he completed a management
executive program at Universidad Argentina de la Empresa (UADE) in Buenos
Aires, Argentina. Alexander Elgqvist Payró. Mr. Elgqvist has served as Director of
Logistics and Distribution of Iusacell Celular since July 2003. Mr. Elgqvist
has also been the Director of Logistics and Distribution of Iusacell since July
2003. Prior to joining Iusacell Celular, Mr. Elgqvist worked at Elektra as
Mobile Phone Product and Purchasing Director from September 2003 to June 2004,
as Mobile Phone Product and Purchasing Manager from January 2000 to September
2003, and as assistant to the Chief Executive Officer during 1998 and 1999.
During the years 1998 and 1999, Mr. Elgqvist also worked as assistant to the
Chief Executive Officer at Unefon. Mr. Elgqvist participated in the launching
of the mobile phone business in Elektra, starting with Unefon in 2000 and
Telcel, Pegaso, Movistar and Iusacell in the following years. Mr. Elgqvist
received a masters in business administration degree from the University of
Texas at Austin, a bachelor in business administration degree and a
telecommunications and technology degree, both from Instituto Tecnológico y de
Estudios Superiores de Monterrey in Mexico City (ITESM). Mr. Elgqvist has
completed a management program at Instituto Panamericano de Alta Dirección de
Empresas (IPADE). Fernando José Cabrera García. Mr. Cabrera has served as general counsel
of Iusacell Celular since July 29, 2003 and as Secretary non-member of the
Board of Directors since October 2003. Mr. Cabrera has also been the general
counsel of Iusacell since July 29, 2003. Prior to joining Iusacell Celular,
from January 1998 to July 2003, Mr. Cabrera served as legal director of the
Sports, News and Entertainment Division at TV Azteca. Mr. Cabrera served as
corporate associate for over eight years in multinational law firms such as
Cole Corette & Abrutyn (based in Washington D.C.), Basham Ringe & Correa
(Mexico City) and Baker & Mckenzie, where he became a partner of the Mexico
City Office in 1997. B. COMPENSATION The aggregate compensation (including, without limitation, base salary and
benefits) paid by us to all executive officers in 2003 was Ps.98.0 million,
compared to Ps.64.5 million in 2002. These aggregate amounts exclude any
amounts paid by Verizon and Vodafone to their employees who were directors and
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Celular until July 29, 2003. Our other Directors do not receive
compensation. Iusacell Celular does not provide benefits to Directors upon
termination of their directorships. As part of Iusacell Celulars general compensation policy, we conduct
periodic reviews of our management and employees to determine bonus
compensation. Iusacell Celular also provides executive officers with use of an
automobile and gas stamps (up to 200 liters per month). C. BOARD PRACTICES Iusacell Celular does not have committees. Our Board of Directors
effectively acts as an Audit Committee. D. EMPLOYEES As of December 31, 2003, Iusacell Celular and its controlled affiliates
had an aggregate of 1,912 full-time and part-time employees, including 758
temporary employees, all of whom were based in Mexico. At December 31, 2002,
Iusacell Celular and its subsidiaries had an aggregate of 1,685 full-time and
part-time employees, including 96 temporary employees and 5 full-time Verizon
seconded employees or consultants. At December 31, 2001, Iusacell Celular and
its subsidiaries had an aggregate of 2,643 full-time and part-time employees,
including 129 temporary employees and 8 full-time Verizon seconded employees or
consultants. The significant reduction in our employee ranks since 2001 is due
to the deterioration of our financial condition. Approximately 33.6% of our full-time employees at December 31, 2003 were
members of a labor union. We have never experienced a work stoppage and we
consider our relationship with our employees to be good. The majority of our employees render services to us through legal entities
and are not our direct employees. The table below presents a breakdown of our full-time and part-time
employees by area. EmployeesAreas
    
    2001
    
    2002
    
    2003Sales, Customer Care and
Marketing
    
    
    1,471
    
    
    
    1,100
    
    
    
    1,531Finance and Administrative
    
    
    547
    
    
    
    205
    
    
    
    171Technology
    
    
    625
    
    
    
    380
    
    
    
    210Total
    
    
    2,643
    
    
    
    1,685
    
    
    
    1,912
 E. SHARE OWNERSHIP Iusacell owns 100% of our shares. Our directors and officers do not own any of our shares. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS We are a wholly-owned subsidiary of Iusacell. Iusacells principal
shareholder is MóvilAccess, a subsidiary of Biper, controlled by Mr. Salinas
Pliego. Mr. Salinas Pliego is our Chairman of the Board and Executive
Director. No other shareholder owns more than 5% of Iusacells shares. All our
shares and Iusacells shares have the same voting rights. At May 31, 2004,
based on information made available to us, Iusacells shareholders ownership
interests were as follows: 53




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Shareholders
    
    Common Shares
    
    %MovilAccess(1)
    
    
    69,666,552
    
    
    
    74.8Ricardo B. Salinas Pliego(1)
    
    
    4,319,270
    
    
    
    4.6Public float(2)
    
    
    19,115,418
    
    
    
    20.5Total
    
    
    93,101,240
    
    
    
    100.0
   (1)
    
    Shareholding information provided by MovilAccess and Mr. Salinas
Pliego on Schedule 13D filed on April 6, 2004.(2)
    
    The number presented includes 174,370 shares held in a trust that
served as part of Iusacell stock option plan and 15 shares held in
Iusacells treasury. On October 17, 2003, Iusacell conducted a reorganization of its capital
structure in order to eliminate the existing shares series, creating a capital
structure with only one single class of shares, among other things. As a
consequence, Iusacell conducted a parallel reorganization in our capital
structure pursuant to which all our outstanding Series A and Series B shares
were cancelled and replaced by a new single class of common shares. B. RELATED PARTY TRANSACTIONS General Policy Iusacell, our parent company, has a Related Party Transactions Committee
that reviews any material transaction between Iusacell or any of its
subsidiaries, including us, and any related party to verify that its terms are
at least as favorable to Iusacell as the terms that would be obtainable at the
time for a comparable transaction or series of similar transactions in
arms-length dealings with an unrelated third person. Since the acquisition by MovilAccess of a controlling interest in Iusacell
in July 2003, we and our subsidiaries have entered into a number of
transactions with companies controlled, directly or indirectly, by Mr. Salinas
Pliego. The objective behind these transactions is to control costs by
outsourcing certain operations and/or to exploit synergies with other companies
under the control of Mr. Salinas Pliego. The following is a description of our
related party transactions. Elektra and Salinas y Rocha Retail Space Leasing and Promotion Services On August 5, 2003, Iusacell, S.A. de C.V.(Iusacell S.A.), our Sales and
Marketing subsidiary, entered into an agreement with Elektra and Salinas y
Rocha, S.A. de C.V.(SyR), two national retail chains controlled by Mr.
Salinas Pliego, whereby Elektra and SyR agreed to provide us with space in
their stores to set up points of sale and promote our services. Iusacell S.A.
agreed to pay Elektra and SyR for the leasing of the space U.S.$2.5 million in
four equal payments on October 30, 2003, November 28, 2003, December 31, 2003
and April 30, 2004. This agreement expires on August 4, 2004. On August 5, 2003, Iusacell S.A., Elektra, and SyR entered into a second
agreement, whereby Elektra and SyR agreed to include our advertising materials
in their advertising campaigns to promote the services offered by us at their
respective stores. Iusacell S.A. agreed to pay Elektra and SyR for the sales
promotion services a total of U.S.$5.0 million in four equal payments on
October 30, 2003, November 28, 2003, December 31, 2003 and April 30, 2004.
This agreement expires on December 31, 2004. Elektra Marketing and Sales Services and Operation and Management of our
Customer Sales and Service Centers On August 2, 2003, Iusacell S.A. and Elektra entered into a ten-year sales
commission contract whereby Elektra agreed to act as commission agent for us.
As such, Elektra agreed to market and sell our prepaid products at its chain of
stores distributed throughout Mexico. On October 1, 2003, Iusacell S.A. and Elektra entered into a master
agreement whereby we granted Elektra the right to operate and manage 103 of our
111 customer sales and service centers. To increase traffic flow at these
centers, Elektra is permitted to use a portion of the space to electronic
appliance products normally sold at its Elektra 54




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stores. Upon assuming the management of our customer sales and service
centers, Elektra has purchased handsets (net of subsidy) in the amount of
Ps.304.0 million and airtime in the amount of Ps.16.0 million. Iusacell S.A. pays Elektra a commission based on a percentage of sales
made by Elektra (the applicable percentage varies depending on the product) for
Elektras marketing, sales and operation and management services. Elektra, in
turn, reimburses Iusacell S.A. for costs related to the customer sales and
service centers such as for the lease and maintenance of the stores, use of
computer systems, furniture and fixtures, administrative and personnel costs. In 2003, we recorded expenses due Elektra of an aggregate of Ps.22.1
million in commissions and Ps.7.5 million in expenses, and revenues of Ps.44.5
million for reimbursement of costs related to the customer sales and service
centers. We are evaluating on an ongoing basis whether we should again operate and
manage some or all of our centers. Purchase of Handsets from Elektra In 2003, we purchased handsets from Elektra in an amount of Ps.450.0
million. Elektra Current Account Arrangement On August 1, 2003, Iusacell S.A. and Elektra entered into a current
account contract for the purpose of streamlining, controlling and recording the
transfer of funds between the two companies under the different commercial
arrangements described above. This contract, which has an indefinite term,
provided for the opening of reciprocal Ps.80.0 million current accounts. To
guarantee its obligations, we issued a U.S.$7.0 million promissory note in
favor of Elektra, which was payable on October 30, 2003. We have failed to
make payment on this note. Elektra has initiated legal proceedings in a
Mexican court to obtain payment. See Item 8, Financial Information  A.
Consolidated Statements and Other Financial Information  Legal Proceedings 
Elektra Promissory Note. Bipercomm Paging Services Operation Bipercomm, an affiliate of MovilAccess, purchased paging equipment from us
in the amount of Ps.1.0 million in 2003. We consider that paging is not an
area of growth given competition from short message services. SECSA Collection and Payment Services On October 6, 2003, each of our operating subsidiaries and Servicios
Eficientes de Cartera, S. de R.L. de C.V.(SECSA) a MovilAccess subsidiary,
entered into a ten-year services agreements pursuant to which SECSA agreed to
collect from our customers payments related to the provision of our services.
SECSA also agreed to manage payments to our suppliers and creditors. In 2003,
we paid SECSA Ps.4.9 million for these services. Teleactivos Call Center Services On September 1, 2003, Iusacell S.A. and Teleactivos, S.A. de C.V.
(Teleactivos), a MovilAccess affiliate, entered into a services agreement
pursuant to which Teleactivos agreed to provide basic customer service to our
customers via its own call center, including, among others, renewal services,
billing and collection support and technical failures reports. On November 3, 2003, Iusacell S.A. and Teleactivos entered into an
operation services agreement pursuant to which Teleactivos agreed to provide
additional value-added services via its own call center, such as, among others,
secretarial services, news, traffic reports. Teleactivos receives a monthly payment from Iusacell S.A. for its
services, based mainly on the number of calls processed. Both agreements have
an indefinite term and may be terminated by any party with a 30 days notice.
In 2003, we recorded expenses for these services of Ps.3.9 million. 55




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Unefon Airtime Exchange and Roaming In April 23, 2004, we entered into an airtime exchange and roaming
agreement with Unefon, a nationwide fixed and mobile telephony provider
controlled by Mr. Salinas Pliego, whereby both parties agreed to exchange
airtime and allow for roaming in certain cities. On August 14, 2003, we entered into an interconnection agreement with
Unefon for the rendering of short message services under terms and conditions
similar to those agreed with Telcel and Telefónica Móviles. Such
interconnection agreement permits the exchange of short messages between our
respective customers. The operator that generates the message pays an
interconnection fee. In 2003, the activity and fees paid under this agreement
were not significant. On June 9, 2000, we entered into an interconnection agreement with Unefon,
which at that time was not a related party. Interconnection rate under this
agreement is Ps.1.90 per minute of traffic, and this agreement has an
indefinite term. We received Ps.10.0 million and we paid Ps.14.4 million in
interconnection fees under this agreement in 2003. Advertising Services On July 1, 2003, Iusacell S.A. entered into an advertising agency
agreement with a non-affiliated third party, pursuant to which we receive
advertising services from TV Azteca, S.A. de C.V., a Mexican television network
controlled by Mr. Salinas Pliego and several other media companies. In 2003,
we paid to the non-affiliated third party Ps.288.9 million under this
agreement. This agreement expires on December 31, 2004. Banco Azteca Banking Services Banco Azteca S.A., a bank controlled by Mr. Salinas Pliego, renders
banking services to us, including current accounts and payroll services. We
pay standard banking fees for these services. Provision of Telecommunications Services In 2003, we provided telecommunications services to companies controlled
by Mr. Salinas in an amount of Ps.0.2 million. Directorships in Affiliated Companies Some of the members of our Board of Directors, as well as some of our
executives, serve on the Board of Directors of Unefon, a mobile telephony
competitor, Biper, a paging competitor, and/or Elektra, a distributor of our
products. See Item 6, Directors, Senior Management and Employees-A. Directors
and Senior Management-Biographies. Verizon and Vodafone Consulting and Secondment Services Iusacell Celular, Verizon and Vodafone had entered into a series of
consulting and secondment agreements pursuant to which Verizon and Vodafone
agreed, for an indefinite term, to provide Iusacell Celular with management,
technical, marketing, legal and other consulting services and seconded
employees. On July 2003, and as a result of MovilAccess acquisition of a
controlling interest in Iusacell, Iusacell Celular, Verizon and Vodafone
terminated these agreements. In 2003, we paid to Verizon and Vodafone
approximately Ps.29.6 million. GTE Roaming GTE Telecommunications Services, Inc., a Verizon subsidiary, which we
refer to as TSI, provided clearinghouse services for roaming arrangements. In
2003, we paid TSI U.S.$1.3 million for such services and billed TSI for
U.S.$11.8 million for services rendered to international carriers. 56




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Interests of Directors Mr. Javier Martínez del Campo, our director until July 2003, and Mr.
Ignacio Gómez Morin, our director until July 2003, are members of the law firm
of De Ovando y Martínez del Campo, S.C., which, in 2003, provided legal
services to us in the amount of Ps.1.1 million. Mr. Héctor Rojas, our director from July 2003 to April 2004, is a member
of the law firm Jáuregui, Navarrete, Nader y Rojas, S.C., which in 2003
provided legal services to us in the aggregate amount of approximately Ps.7.7
million. Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Financial Statements See page F-1 for a list of financial statements filed under Item 18. Legal Proceedings Iusacell Celular Senior Noteholders On January 14, 2004, certain holders of our senior notes initiated an
action in a New York state court. These holders claim that they are entitled
to payment of certain amounts outstanding under the Iusacell Celular senior
notes plus interest, which in their amended complaint is alleged to be in
excess of U.S.$45.0 million. We moved to dismiss the portion of the complaint
that requested the court to declare that the holders are entitled to the
benefit of liens senior to or at least equal in priority to liens held by other
creditors. We moved to dismiss that claim based on various grounds, including
the impropriety of the relief requested and forum non conveniens. In response to the motion to dismiss, the holders amended their complaint,
deleting the claim for declaratory relief and adding a claim for specific
performance of our alleged obligation to provide the holders with the benefit
of liens senior to or at least equal in priority to liens held by other
creditors. The holders are also seeking injunctive relief barring us from
selling, transferring or otherwise encumbering the assets pending decision on
the merits of their claim for specific performance. On June 18, 2004, the court
held a hearing on the matter. We expect that the court will reach a decision on
the injunctive relief in the next few days. Telemedic In March 2002, Telemedic S.A de C.V., a provider of healthcare services by
phone, filed a lawsuit in Mexico City against Iusacell S.A. seeking
compensatory damages in the amount of U.S.$8 million related to an alleged
breach of contract. In its claim, Telemedic alleges that Iusacell S.A.
breached a contractual obligation to automatically enroll its customers in
Telemedics healthcare-by-phone services. We responded that an amendment to
the consumer protection laws forbids us from automatically enrolling our
customers. The first instance court ruled in favor of Iusacell S.A., but
Telemedic appealed and the appellate court reversed the decision. Iusacell
S.A. filed an injunctive action (amparo)against the appellate court decision,
which is currently pending. Injunctive action against additional 10% excise tax On January 1, 2002, the Mexican Congress approved a surcharge that
assessed an additional 10% federal excise tax on certain wireless
telecommunications services. The tax resulted in a 10% increase in the monthly
bills of postpaid mobile wireless customers and in the cost of prepaid cards in
denominations of Ps.200.0 or more for the year 2002. In February 2002, we
filed an injunctive action (amparo) challenging the Mexican governments
implementation of the tax. In October 2002, we received a preliminary ruling
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the Mexican government subsequently filed an appeal. In June 2003,
Mexicos Supreme Court rejected the appeal and affirmed the ruling in our
favor. In 2003, the Mexican government implemented a modified version of the
additional 10% excise tax on certain wireless telecommunications services,
which was approved by the Mexican Congress. In March 2003, we filed an
injunctive action (amparo) challenging this implementation. Until this
injunctive action is resolved, we will continue to pay the full modified
additional 10% excise tax to the Finance Ministry. Elektra Promissory Note On August 1, 2003, Iusacell S.A. and Elektra entered into a current
account contract for the purpose of streamlining, controlling and recording the
transfer of funds between the two companies under the different commercial
arrangements described under Item 7, Major Shareholders and Related Party
Transactions-B. Related Party Transactions. This contract, which has an
indefinite term, provided for the opening of reciprocal Ps.80.0 million current
accounts. To guarantee its obligations, we issued a U.S.$7.0 million
promissory note in favor of Elektra, which was payable on October 30, 2003. We
have failed to make payment on this note. Elektra has initiated legal
proceedings in a Mexican court against us to obtain payment on this note. Ingran Lawsuit In May 2003, Comercializadora Ingran, S.A. de C.V., a former distributor,
filed a lawsuit against Iusacell S.A., seeking compensatory and consequential
damages in the amount of U.S.$25 million in Mexico City. Ingran alleged that
we breached our payment obligation under our distribution agreement. The court
of first instance ruled in our favor affirming that we did not owe any payments
to Ingran. Ingran appealed the decision and the appellate court affirmed the
decision in our favor with prejudice in June 2004. BBDO In June 2004, BBDO de México, S.A. de C.V., an advertising agency that
rendered advertising services to us from 2001 to 2003, filed a lawsuit against
Iusacell S.A. in Mexico seeking payment of Ps.23.4 million. BBDO alleges that
we have defaulted on our payment obligations for services rendered to us. We
are contesting this claim. Cortina Facilities In September 2003, Cortina Facilities, S.A. de C.V.,a provider of
cleaning services, filed a lawsuit against Iusacell Celular in Mexico seeking
payment of Ps.6 million. Cortina Facilities alleges that we defaulted on our
payment obligations for cleaning services rendered to us. Currently, the
lawsuit is in the discovery stage. Labor claims We are subject to labor claims that arise in the ordinary course of our
business. At December 31, 2003, there were 103 such claims for an aggregate
amount of Ps. 50.0 million. We recorded a contingency reserve for these claims
of Ps.37.0 million. Dividend Policy We have never paid dividends, and we currently have no plans to initiate
dividend payments. We have made distributions to Iusacell in the form of loans
from time to time for the purpose of payment of debt obligations. The
agreements governing our indebtedness limit our ability to pay dividends. B. SIGNIFICANT CHANGES The senior refinancing secured loan provides that in the event that the
Iusacell Celular senior notes have not been refinanced by March 31, 2004, the
maturity date for the loan would be accelerated to such date. Since the
refinancing of the Iusacell Celular senior notes has not occurred, the
outstanding amount under the senior refinancing secured loan has been
automatically accelerated. 58




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On January 14, 2004, certain holders of our senior notes initiated an
action in a New York state court seeking, among other things, payment of
certain amounts outstanding under the Iusacell Celular senior notes plus
interest. See Item 8, Financial Information-A. Consolidated Statements and
Other Financial Information-Legal Proceedings-Iusacell Celular Senior
Noteholders. See Item 13, Defaults, Dividend Arrearages and Delinquencies, for a description of these defaults. 
 ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS Iusacell Celular does not currently have, and does not currently intend to
apply to have, any securities listed on any stock exchange or other regulated
markets. Iusacell Celulars series D and L shares had been listed on the Mexican
Stock Exchange until their delisting on February 29, 2000. ADSs representing 10
Iusacell Celular series D shares had been listed on the New York Stock Exchange
from June 21, 1994 until their delisting on August 10, 1999 and traded under
the symbol CEL.d. ADSs representing 10 Iusacell Celular series L shares had
been listed on the New York Stock Exchange from June 21, 1994 until their
delisting February 29, 2000 and traded under the symbol CEL until August 4,
1999 and thereafter, until February 29, 2000 under the symbol CEL.y. B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Iusacell Celular does not currently have, and does not currently intend to
apply to have, any securities listed on any stock exchange or other regulated
markets. See -Offer and Listing Details. 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 General Iusacell Celular was incorporated on October 6, 1992 as a variable capital
corporation (sociedad anónima de capital variable) established under the laws
of Mexico. Iusacell Celular was registered in the Public Registry of Commerce
of the Federal District of Mexico under Commercial Number 168528 on November 3,
1998. Iusacell Celulars corporate purpose is found under Article Two of its
by-laws. Iusacell Celulars primary purpose is to act as a holding company.
The duration of the company according to our by-laws is indefinite. 59




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Directors Under Mexican law and Iusacell Celulars by-laws, any member of the Board
of Directors who has a conflict of interest with Iusacell Celular in any
transaction must disclose such fact to the other members of the Board of
Directors and abstain from voting on such matter at the relevant meeting of the
Board of Directors. Any member of the Board of Directors who violates such
provision may be liable for damages caused to us. Additionally, members of the
Board of Directors may not represent any shareholder at any shareholders
meeting. Voting Rights and Shareholders Meetings We are a wholly-owned subsidiary of Iusacell. Each share entitles the
holder thereof to one vote at any shareholders meeting of Iusacell Celular. Under Mexican law and Iusacell Celulars by-laws, any shareholder or group
of shareholders holding Iusacell Celular shares representing at least 10% of
the total capital stock of Iusacell Celular shall be entitled to designate one
director. General shareholders meetings may be ordinary or extraordinary meetings.
General extraordinary meetings are those held to consider the matters specified
under Article 182 of the Mexican Law of Commercial Companies (Ley General de
Sociedades Mercantiles). A general extraordinary meeting may be held in order
to modify the fixed capital sock, liquidation, merger, transformation and any
amendments to the by-laws such as issuance of preferred capital stock,
amendments to the corporate purpose or nationality. The mandatory quorum on a first call for a general extraordinary
shareholders meeting is 75% of the outstanding shares. If such quorum is not
available on the first call, a second meeting may be called and convened,
provided that at least 50% plus one share of the aggregate of the outstanding
shares are present. Whether the general extraordinary meeting is held on a
first or second call, in order for a resolution to be validly adopted, the
favorable vote of the holders of a majority of the outstanding shares present
is required. General ordinary shareholders meetings may be called to consider all
other matters. A general ordinary shareholders meeting of Iusacell Celular
must be held at least annually within the four months following the end of each
fiscal year to consider matters specified in Article 181 of the Mexican Law of
Commercial Companies, including, principally, the approval of the report of the
Board of Directors regarding the performance of Iusacell Celular, the approval
of the financial statements of Iusacell Celular for the preceding fiscal year,
appointment of directors and statutory auditors and determination of their
compensation, and the declaration of dividends. Under our by-laws, the mandatory quorum on a first call for a general
ordinary shareholders meeting is at least 50% plus one share of the
outstanding shares. If such quorum is not available on the first call, a
second meeting may be called and validly held regardless of the number of
shares represented. In order for a resolution of the general ordinary
shareholders meeting to be validly adopted as a result of a first or subsequent
call, the favorable vote of the holders of a majority the shares present is
required. Under Mexican law, holders of at least 20% of our outstanding capital
stock may have any shareholder action that violates our by-laws or applicable
law set aside by filing a complaint with a Mexican court of competent
jurisdiction within 15 days after the close of the general shareholders
meeting at which such action was taken, by showing that the challenged action
violates Mexican law or our by-laws. Relief under these provisions is only
available to holders:  
    
    whose shares were not represented when the action was taken
or, if represented, were voted against it; and  
    
    whose complaint makes reference to the clause of the by-laws
or the legal provision that was infringed. Shareholders meetings may be called by the Board of Directors, any of the
statutory auditors or any Mexican court of competent jurisdiction. In
addition, the Board of Directors or any of the statutory auditors may be
required to call a shareholders meeting upon the written request of holders of
at least 10% of the outstanding capital stock. In addition, the Board of
Directors or the statutory auditors must call a shareholders meeting at the
written request of 60




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any shareholder if no ordinary general shareholders meeting has been held
for two consecutive years or if the shareholders meetings held during such
period have not considered the items mentioned in Article 181 of the Mexican
Law of Commercial Companies discussed above. Notice of a meeting must be
published in the Official Gazette of the Federation (Diario Oficial de la
Federación) and/or in a newspaper of general circulation in Mexico City at
least 15 days prior to the meeting. In order to attend a shareholders
meeting, a shareholder must request and obtain an admission card by furnishing,
at least 48 hours before the time set for holding the shareholders meeting,
appropriate evidence of its ownership of shares or depositing such shares with
our corporate secretary of the Board of Directors or with an institution
authorized to accept such deposit. If so entitled to attend the meeting, a
shareholder may be represented by proxy signed before two witnesses. Under Mexican law, shareholders holding at least 10% of the outstanding
shares of Iusacell Celular may request that the voting of a specific matter at
a shareholders meeting be delayed if such shareholders do not have sufficient
information on the matter subject to voting. Under Mexican law, an action for civil liabilities against members of the
Board of Directors may be initiated by a shareholders resolution taken at a
general shareholders meeting. In the event shareholders decide to bring such
an action, the persons against whom such action is brought will immediately
cease to be members of the Board of Directors. In case the shareholders
resolve not to take action against the Director(s) at such meeting,
shareholders representing not less than 15% of the outstanding shares of
Iusacell Celular may directly take such action against members of the Board of
Directors, provided that (i) such shareholders have not voted in favor of a
resolution approved at the relevant general shareholders meeting pursuant to
which it was resolved not to take any action against the directors who are to
be sued, and (ii) the claim in question covers damages alleged to have been
caused to Iusacell Celular and not only to the individual shareholders
interests. Shareholder Conflicts of Interest Under Mexican law, any shareholder that has a conflict of interest in
connection with any transaction must abstain from voting at the relevant
shareholders meeting. A shareholder that votes on a business transaction in
which his interest conflicts with that of Iusacell Celular may be liable for
damages if the transaction would not have been approved without such
shareholders vote. Dividend Rights All shares have the same dividend rights. The declaration and payment of
such dividends will depend upon Iusacell Celulars results of operations,
financial conditions, cash requirements, future prospects and other factors
deemed relevant by the shareholders. In addition, Mexican law provides that
Mexican companies may only pay dividends from retained earnings included in the
year-end financial statements that have been approved by their shareholders.
Dividends may be paid only after all losses for previous years have been paid
for, a legal reserve equal to 20% of paid-in capital has been achieved and
shareholders have approved the dividend payment. Iusacell Celular has
outstanding debt obligations limit the amount of dividends that can be paid in
any given year or prohibit dividends entirely. Under Mexican law, shareholders approve the declaration and payment of
dividends generally, but not necessarily, upon the recommendation of the Board
of Directors. At the annual general ordinary shareholders meeting of Iusacell Celular,
the Board of Directors will generally submit the financial statements of
Iusacell Celular for the previous fiscal year, together with a report by the
Board of Directors, to the shareholders for their approval. Upon the approval
of the financial statements, the shareholders will determine the allocation of
Iusacell Celulars net profits for such fiscal year. At least 5% of such net
profits must be allocated to a legal reserve until the amount of the legal
reserve equals 20% of Iusacell Celulars capital stock. Such reserve is not
available for distribution except as a stock dividend. Additional amounts may
be allocated to other reserve funds as the shareholders determine including a
reserve to repurchase shares. The remaining balance of net profits, if any, is
available for distribution as dividends but only after losses, if any, of
previous years have been paid for. All shares outstanding at the time a dividend or other distribution is
declared are entitled to share pro rata in such dividend or other distribution.
Partially-paid shares participate in any distribution to the extent that such
shares have been paid at the time of the distribution. 61




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The covenants contained in the Iusacell Celular indenture and in the terms
of the senior refinancing secured loan limit Iusacell Celulars ability to
declare and distribute dividends to Iusacell. Liquidation In the event that we are liquidated, one or more liquidators must be
appointed at an extraordinary general shareholders meeting to wind up our
affairs. All outstanding shares would be entitled to participate equally in
any distribution upon liquidation. Partially-paid shares participate in any
distribution to the extent that such shares have been paid at the time of the
distribution. Changes in Share Capital and Rights of Shareholders An increase of capital stock may be done through the issuance of new
shares for payment in cash or in kind, by capitalization of indebtedness or by
capitalization of certain items of shareholders equity. No increase of
capital stock may be done until all previously issued shares of capital stock
have been fully paid. A reduction of capital stock may be done to absorb
losses, to make reimbursements to shareholders, or to release shareholders from
payments not made. A reduction of capital stock to absorb losses may be done
by reducing the value of all outstanding shares. A reduction of capital stock
shall also be done on a pro rata basis. Shareholders may also approve the redemption of fully-paid shares with
retained earnings. Such redemption would be effected by a repurchase of shares
by lot. The fixed portion of our capital stock may only be increased or decreased
by resolution of a general extraordinary shareholders meeting and an amendment
to the by-laws, whereas the variable portion of our capital stock may be
increased or decreased by resolution of a general ordinary shareholders meeting
        . Preemptive Rights In the event of a capital increase through the issuance of new shares for
payment in cash or in kind, a holder of existing shares has a preferential
right to subscribe for a sufficient number of new shares to maintain the
holders existing proportionate holdings of shares. Under Mexican Law and our
by-laws, preemptive rights must be exercised within the period and under the
conditions established for such purpose by the shareholders. In no case may
such period be less than 15 days and no greater than 30 days following the
publication of notice of the capital increase in the Official Gazette of the
Federation or following the date of the shareholders meeting at which the
capital increase was approved if all shareholders were represented. Otherwise,
such rights will lapse. Under Mexican law, preemptive rights may not be waived in advance by a
shareholder, and cannot be represented by an instrument that is negotiable
separately from the corresponding share. Other Provisions Fixed and Variable Capital As a sociedad anónima de capital variable, we may issue shares
representing fixed capital and/or variable stock. The issuance of variable
capital shares, unlike the issuance of fixed capital shares, does not require
an amendment of our by-laws, although it does require approval of the general
ordinary shareholders meeting. No shares of Iusacell Celular representing variable capital are currently
outstanding. Outstanding variable capital shares may be fully or partially
withdrawn. In contrast, the minimum fixed capital required by law cannot be
withdrawn. A holder of variable capital shares that wishes to effect a total
or partial withdrawal of such shares would be required to notify us in an
authenticated written notice to that effect. If we received that notice prior
to the last quarter of the fiscal year, the withdrawal would become effective
at the end of the fiscal year in which the notice was given. Otherwise, the
withdrawal would become effective at the end of the following fiscal year. Redemption of variable capital shares of Iusacell Celular would be made at
the book value per variable capital share as calculated from our financial
statements for the fiscal year at the end of which the withdrawal were to
become effective, as approved by our shareholders at an ordinary general
meeting. Any such amount to be paid by 62




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Iusacell Celular would become due on the day following the general
ordinary meeting approving the financial statements. The covenants contained in the Iusacell Celular indenture and the senior
credit refinancing secured loan limit Iusacell Celulars ability to issue
variable capital shares. Forfeiture of Shares As required by Mexican law, Iusacell Celulars by-laws provide that
current or future foreign shareholders of the Company agree with the Ministry
of Foreign Relations to consider themselves as Mexican nationals with respect
to the shares that they may acquire or of which they may be owners, and
therefore not to invoke the protection of their governments with respect to
such shares under penalty, should they violate this agreement, of forfeiting
for the benefit of the Nation the shares that they may have acquired. We understand that under this provision, a non-Mexican shareholder is
deemed to have agreed not to invoke the protection of his own government by
requesting such government to interpose a diplomatic claim against the Mexican
government with respect to its rights as a shareholder, but is not deemed to
have waived any other rights it may have with respect to its investment in
Iusacell Celular, including any rights under U.S. securities laws (the
enforceability of which may be challenged in Mexico). If the shareholder should invoke such governmental protection in violation
of this agreement, its shares could be forfeited to the Mexican government.
Mexican law requires that such a provision be included in the by-laws of all
Mexican corporations unless such by-laws prohibit ownership of capital stock by
foreign investors. Repurchase and Cross ownership Restriction Under Iusacells by-laws and according to Mexican law, we and our
subsidiaries are not allowed to own directly or indirectly any of the capital
stock of Iusacell. Also, we are not allowed to own any capital stock of any
controlling shareholder of Iusacell. The covenants contained in the Iusacell Celular indenture and in the terms
of the senior refinancing secured loan limit Iusacell Celulars ability to
repurchase its own shares. Appraisal Rights Whenever the shareholders approve a change of corporate purpose, change of
nationality, spin-off or transformation from one type of corporate form to
another, any shareholder entitled to vote on such change or transformation who
has voted against it has the right to withdraw from Iusacell Celular and
receive an amount generally equivalent to the book value of our shares (in
accordance with our last balance sheet approved by a shareholders meeting),
provided such shareholder exercises its right to withdraw within 15 days
following the adjournment of the meeting at which the change, spin-off or
transformation was approved. Foreign Investment Regulation Foreign investment in capital stock of Mexican corporations in certain
economic sectors, including telephone and cellular services, is regulated by
the 1993 Foreign Investment Law, as amended, and the regulations issued under
that law in 1998, which we refer to as the 1998 Regulations. Under the 1993
Foreign Investment Law, foreign investment is defined in general as the
participation of foreign investors in the voting capital stock of Mexican
corporations and in activities which are regulated by the 1993 Foreign
Investment Law. Foreign investors are defined as non-Mexican individuals,
non-Mexican legal entities and foreign entities without legal personality. The Mexican Foreign Investment Commission, the Mexican Foreign Investment
Bureau and the Mexican National Registry of Foreign Investment are responsible
for the administration of the 1993 Foreign Investment Law and the 1998
Regulations. In order to comply with foreign investment restrictions, Mexican
companies that are engaged in specified restricted industries typically limit
particular classes of their stock to ownership by Mexican individuals and by
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As a general rule, the 1993 Foreign Investment Law allows foreign
investments in up to 100% of the capital stock of Mexican companies, except for
those engaged in specified restricted industries, such as basic telephone
service, where foreign investments are limited to 49% of the voting capital
stock. Foreign investors may, however, participate in excess of 49% of the
voting capital stock of a Mexican corporation engaged in the cellular telephone
business with the prior approval of the Mexican Foreign Investment Commission. Foreign states and foreign governments are prohibited under the 1995
Telecommunications Law from holding a concession or permit to provide
telecommunications services, from receiving any such concession or permit as a
guarantee or from being the beneficiary of any such guarantee, or from directly
or indirectly owning shares of Mexican companies, including Iusacell. C. MATERIAL CONTRACTS Concessions We conduct our mobile telephony and other services pursuant to concessions
granted by the Mexican government. For a description of these concessions, see
Item 4, Information on the Company-B. Business Overview-Concessions and
Permits. Indebtedness We are debtors under credit agreements and note issuances, which we
describe in Item 5, Operating and Financial Review and Prospects-B. Liquidity
and Capital Resources-Our Indebtedness. Tower Monetization We sell our towers to, and lease back space in such towers from, MATC
Celular. See Item 5, Operating and Financial Review and Prospects-A.
Operating Results-Tower Monetization for a description of the agreements
governing these sales and leases. Acquisition of Equity Interests in Certain Subsidiaries On November 3, 2003, we entered into an agreement with Mr. Jose Ramon
Elizondo to take, within a period of two years, all the necessary actions to
buy out Mr. Elizondos (i) 5.1% equity interest and 51% voting interest in each
of Iusatelecomunicaciones, Iusatel and Punto-a-Punto Iusacell, our respective
local wireless, long distance and microwave transmission subsidiaries, and (ii)
2% equity interest in our paging joint venture company, Infotelecom. The
agreement also provides for the purchase by Iusacell of Mr. Elizondos 5.1%
equity interest and 51% voting interest in Iusacell PCS, Iusacells Region 1
and 4 PCS subsidiary. In exchange for such interests, we and Iusacell agreed
to pay Mr. Elizondo an aggregate amount of U.S.$11.2 million, payable in
U.S.$0.1 million weekly installments. We have been paying such weekly
installments since November 3, 2003. See Item 4, Information on the
Company-B. Business Overview-Foreign Ownership Restrictions. D. EXCHANGE CONTROLS There are currently no exchange controls in Mexico. However, Mexico has
imposed foreign exchange controls in the past. Pursuant to the provisions of
the North American Free Trade Agreement and in the event Mexico experiences
serious balance of payment difficulties or the threat thereof in the future,
Mexico remains free to impose foreign exchange controls on investments made in
Mexico, including those made by U.S. and Canadian investors. E. TAXATION General The following is a general summary of material U.S. and Mexican federal
income tax consequences of the acquisition, ownership and disposition of our
10% senior notes due 2004 (the Note or the Notes) by U.S. holders. 64




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For purposes of this summary, a U.S. holder is any holder of any of such
securities that is, for United States federal income tax purposes:  
    
    an individual who is a citizen or resident of the United States;  
    
    a corporation, or other entity treated as a corporation, created or
organized in or under the laws of the United States, or any political
subdivision thereof;  
    
    an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of source; or  
    
    a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust. In the case of a holder of Notes that is, or is treated as, a partnership
for United States tax purposes, each partner thereof will take into account its
allocable share of income or loss from the Notes and will take such income or
loss into account under the rules of taxation applicable to such partner,
taking into account the activities of the partner and the partnership. This summary does not constitute, and should not be construed as, legal or
tax advice to holders of Notes. This summary does not purport to consider all
the possible U.S. or Mexican federal income tax consequences of the purchase,
ownership and disposition of the Notes and is not intended to reflect the
individual tax position of any beneficial owner thereof. The summary is based
upon Mexican federal tax laws, their regulations and administrative rules
issued by the Mexican Ministry of Finance and Public Credit, the Tax Treaty
mentioned below and the Internal Revenue Code of 1986, as amended (the Code),
U.S. Treasury regulations promulgated thereunder, published rulings by the U.S.
Internal Revenue Service (IRS) and court decisions, all as in effect as of
the date hereof, all of which authorities are subject to change or differing
interpretations, which changes or differing interpretations could apply
retroactively. Readers are cautioned that this is not a complete analysis or
listing of all potential tax effects that may be relevant to a decision to
purchase, hold or dispose of the Notes. This summary of U.S. federal income tax consequences is limited to
investors who hold the Notes as capital assets within the meaning of section
1221 of the Code (i.e., generally, property held for investment) and does not
purport to deal with investors in special tax situations, such as financial
institutions, tax exempt organizations, insurance companies, regulated
investment companies, dealers or brokers in securities or currencies, traders
in securities or commodities that elect mark-to-market treatment, persons
holding notes as a hedge against currency risks or as a position in a
straddle, conversion transaction, or constructive sale transaction for
tax purposes, persons owning (actually or constructively) 10% or more of the
voting shares of the company, persons whose functional currency (as defined in
section 985 of the Code) is not the U.S. dollar or persons subject to the
alternative minimum tax. Holders and prospective purchasers of the Notes should consult their own
tax advisors concerning the application of Mexican and U.S. federal income tax
laws to their particular situations as well as any consequences of the
purchase, ownership and disposition of the Notes arising under the laws of any
state, locality or foreign government or other taxing jurisdiction. Mexico and the United States have signed and ratified a Convention for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income and related Protocols (collectively, the Tax Treaty). The
Tax Treaty is currently in effect and provisions of the Tax Treaty that may
affect holders of Notes are summarized below. Holders should consult with
their tax advisors as to their entitlement to the benefits afforded by the Tax
Treaty. Mexico has also executed treaties to avoid double taxation with other
countries as well as agreements providing for the exchange of information with
respect to tax matters, some of which presently are in force. The following
summary does not take into account the effect of any such treaties. Readers
should consult their tax advisors as to their entitlement to the benefits
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United States Tax Consequences to Holders of Notes Payments of Interest and Additional Amounts Generally, payments of interest and any additional amounts (i.e.,
gross-up payment) paid by us (the Additional Amounts) will be taxable to a
U.S. holder as ordinary income at the time such payments are accrued or are
received, in accordance with the U.S. holders regular method of accounting for
Federal income tax purposes. Market Discount If a U.S. holder purchases a Note for less than its principal amount, the
difference will be treated as a market discount for U.S. federal income tax
purposes subject to a de minimisexception. Under the market discount rules, a U.S. holder will be required to treat
any payment on a Note, or any gain on its sale, exchange, retirement or other
disposition, as ordinary income to the extent of the accrued market discount
which was not previously included in income. If the Note is disposed of in a
non-taxable transaction (other than a non-recognition transaction described in
section 1276(c) of the Code), accrued market discount will be includible as
ordinary income to the U.S. holder as if it had sold the Note at its fair
market value. In addition, a U.S. holder may be required to defer, until the
maturity of a Note or its earlier disposition (including a non-taxable
transaction other than a transaction described in section 1276(c) of the
Internal Revenue Code), the deduction of all or a portion of the interest
expense in respect of any indebtedness incurred or continued to purchase or
carry the Note. Market discount will be considered to accrue on a
straight-line basis during the period from the date of acquisition to the
maturity date of the Note, unless the U.S. holder elects to accrue on a
constant-yield basis. A U.S. holder of a Note may elect to include market discount in income as
it accrues on either a ratable or a constant yield basis. If a U.S. holder
makes this election, the rules regarding the treatment of gain upon the
disposition of the Note and upon the receipt of certain cash payments as
ordinary income and regarding the deferral of interest deductions will not
apply. Currently, if a U.S. holder elects to include market discount in income
as it accrues, the election will apply to all market discount obligations
acquired during or after the first taxable year to which the election applies.
Currently this election may not be revoked without the consent of the Internal
Revenue Service. U.S. holders should consult their own tax advisors before
making this election. Amortizable Bond Premium If a U.S. holder purchases a Note for more than the amount payable at
maturity (or on an earlier call date), that excess will be considered an
amortizable bond premium. This holder may elect to amortize the premium to
offset the interest and Additional Amounts from the Note such holder would
otherwise be required to include in income (subject to special rules for early
redemption provisions). In any tax year, the holder can only use as much of
the premium as the constant yield method would allocate to that year. The U.S.
holders basis in the Note will be reduced by the amount of bond premium offset
against interest and Additional Amounts. Currently, if a U.S. holder elects to
amortize the premium to offset the interest from a Note, the election will
apply to all debt instruments acquired during or after the first taxable year
to which the election applies. Currently, this election may not be revoked
without the consent of the Internal Revenue Service. U.S. holders should
consult their own tax advisors before making this election. Sale, Exchange or Retirement of a Note Except as discussed above, upon the sale, exchange or retirement of a
Note, a U.S. holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement and
such U.S. holders adjusted tax basis in the Note. For this purpose, the
amount realized does not include any amount attributable to accrued interest on
the Note (which will be taxable as such). A U.S. holders adjusted tax basis
in a new note will generally be the cost of the Note plus the market discount,
if any, the U.S. holder previously included in income minusany amortizable
bond premium and any payments other than payments of stated interest made on
the Note. Such gain or loss generally will be long-term capital gain or loss
if the Note has been held for more than one year at the time of such sale,
exchange or retirement. The deductibility of capital losses is subject to
limitations. Gain or loss recognized by a U.S. holder on a sale or other
disposition of a Note generally will be treated as from sources within the
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Foreign Tax Credit and Effect of Withholding Taxes Interest and Additional Amounts paid on Notes will constitute income from
sources outside the United States for United States federal income tax
purposes, and, with certain exceptions, will be grouped together with other
items of passive income (or, in the case of some holders, financial services
income), for purposes of computing the foreign tax credit allowable to a U.S.
holder. A U.S. holder will be required to include foreign withholding taxes, if
any, imposed on payments on a Note (including any Additional Amounts payable by
us) in gross income as interest income. Such treatment will be required
regardless of whether, as will generally be true, we are required to pay
additional amounts so that the amount of Mexican withholding taxes does not
reduce the net amount actually received by the holder of the Note. Subject to certain limitations, a U.S. holder may be entitled to a credit
against its United States Federal income tax liability, or a deduction in
computing its United States Federal taxable income, for foreign income taxes
withheld by us (which, as described above, would include amounts withheld on
Additional Amounts paid by us with respect to Mexican taxes). The foreign tax
credit provisions are complex, and U.S. holders are urged to consult their own
tax adviser as to the availability, if any, of a tax credit or deduction to
them. Information Reporting and Backup Withholding For each calendar year in which the Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of
a beneficial owner of a Note and each paying agent making payments in respect
of a Note will generally be required to provide the IRS with certain
information, including such beneficial owners name, address and taxpayer
identification number (either such beneficial owners Social Security number or
its employer identification number, as the case may be), and the aggregate
amount of interest, principal and Additional Amounts paid to such beneficial
owner during the calendar year. These reporting requirements, however, do not
apply with respect to certain beneficial owners, including corporations,
securities broker-dealers, other financial institutions, tax-exempt
organizations, qualified pension and profit sharing trusts and individual
retirement accounts. Generally, a U.S. holder will provide such certification
on IRS Form W-9 (Request for Taxpayer Identification Number and Certification)
or a substitute Form W-9. In the event that a beneficial owner of a Note fails to establish its
exemption from such information reporting requirement or is subject to the
reporting requirements described above and fails to supply its correct taxpayer
identification number in the manner required by applicable law, or underreports
its tax liability, as the case may be, a holder may be subject to backup
withholding at the rate of 28% (increased to 31% for taxable years 2011 and
thereafter) of each payment of interest, principal and Additional Amounts with
respect to Notes. This backup withholding tax is not an additional tax and
will be allowed as a refund or credit against the beneficial owners United
States Federal income tax liability if the required information is furnished to
the IRS. Prospective purchasers of Notes are advised to consult their own tax
advisers as to the consequences of acquiring and disposing of the Notes,
including, without limitation, (i) the applicability and effect of any state,
local or non-U.S. tax laws to which they may be subject, and of any legislative
or administrative changes in law, (ii) the United States Federal income tax
consequences of the withholding of foreign taxes by us (and of the payment by
us of Additional Amounts with respect thereto) and (iii) the availability of a
credit or deduction for foreign withholding taxes. Mexican Tax Consequences to Holders of Notes The following is a summary of the principal consequences under current
Mexican federal tax law, their regulations and administrative rules issued by
the Mexican Ministry of Finance and Public Credit and the Tax Treaty, in force
as of the date of this report, of the purchase, ownership and disposition of
Notes by a Foreign Holder. A Foreign Holder is a holder who (i) is not a
resident of Mexico for tax purposes and (ii) will not hold Notes or a
beneficial interest in Notes in connection with the conduct of a trade or
business through a permanent establishment in Mexico. 67




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Taxation of Payments of Interest and Principal Under the Mexican Income Tax Law, payments of interest made by us to a
Foreign Holder in respect of their respective Notes will be subject to Mexican
withholding taxes assessed at a rate of 4.9% if, (i) the Notes have been placed
through banks or brokers in a country with which Mexico has executed a treaty
to avoid double taxation and such treaty is in force, (ii) the Notes have been
registered in the Special Section of the National Registry of Securities (the
Special Section), and (iii) as has been the case in the past, the issuer
provides the information required under general rules issued by the Ministry of
Finance and Public Credit (the Reduced Rate Regulation), which is described
below. Otherwise, payments of interest made by us to a Foreign Holder in
respect of their respective Notes will be subject to Mexican withholding taxes
assessed at a rate of 10%. In addition, Mexican withholding taxes will also be
assessed at a rate of 10% if the beneficiary of the interest, directly or
indirectly, receives more than 5% of the interest paid and is regarded as a
related party pursuant to the definition provided by the Mexican Income Tax
Law. The information requirements under the Reduced Rate Regulation are
generally described below:  
    
    that we have timely filed with the Mexican Ministry of Finance and
Public Credit information relating to the registration of their
respective Notes in the Special Section and to the issuance of their
respective Notes; and  

    
    that we timely file each quarter of the calendar year with the
Mexican Ministry of Finance and Public Credit information representing
that no party related to us, directly or indirectly, is the effective
beneficiary of 5% or more of the aggregate amount of the interest
payment, and we maintain records evidencing compliance with this
requirement. Under the Mexican Income Tax Law and the Reduced Rate Regulation any of
the following would be a related party to us: (1) shareholders that own,
directly or indirectly, individually or collectively with related persons
(within the meaning of the Mexican Income Tax Law and the Reduced Rate
Regulation) more than 10% of our voting stock, or (2) corporations if more than
20% of their stock is owned directly or indirectly, individually or
collectively by a party related to us. Apart from the Reduced Rate Regulation, other special rates of Mexican
withholding income tax may apply. In particular, under the Tax Treaty, the
Mexican withholding tax is reduced to 4.9% (the Treaty Rate) for some holders
that are residents of the United States within the meaning of the Tax Treaty
provided they satisfy the circumstances contemplated in the Tax Treaty and
provided that the Notes are considered to be regularly and substantially traded
on a recognized securities market, which is not expected to be the case.
During 2004, the Tax Treaty is not expected, generally, to have any material
effect on the Mexican tax consequences to holders of Notes because, as
described above, with respect to a Foreign Holder, we will be entitled to
withhold taxes in connection with interest payments under their respective
Notes at the Reduced Rate so long as the Reduced Rate Regulation requirements
described above are met. Otherwise, holders of the Notes should consult their
tax advisors as to the possible application of the Treaty Rate. Interest paid on Notes held by a non-Mexican pension or retirement fund
will be exempted from Mexican withholding tax if the fund (i) has been duly
incorporated as a fund pursuant to the laws of its country of origin, (ii) is
the effective beneficiary of the interest paid, (iii) is registered before the
Mexican Ministry of Finance and Public Credit for that purpose, and (iv) the
relevant interest income is exempt from taxes in that country. We have agreed, subject to the exceptions and limitations contained in the
indenture under which the Notes were issued, to pay additional amounts in
respect of the Mexican withholding taxes mentioned above to the holders of the
Notes. Payment of these additional amounts with respect to the Notes will be
subject to Mexican withholding tax at the same rate generally applicable to
interest paid in the Notes. Under the Mexican Income Tax Law, a Foreign Holder will not be subject to
any Mexican income taxes in respect of payments of principal made by us in
connection with the Notes. Taxation of the Sale and other Disposition of the Notes No Mexican income tax will be levied upon the sale of the Notes. 68




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Transfer and other Taxes There are no Mexican stamp, registration, or similar taxes payable by a
Foreign Holder in connection with the purchase ownership or disposition of the
Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift,
inheritance or similar tax with respect to the Notes, although gratuitous
transfers of the Notes may in some circumstances cause a Mexican income tax to
be imposed on the recipient. F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY We file Annual Reports with and furnish other information to the SEC as
may be applicable from time to time. You may read and copy any documents filed
or furnished by Iusacell Celular at the SECs public reference rooms in
Washington, D.C., 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 Interest Rate Risk As of December 31, 2003, Ps.2,982.9 million of our consolidated
indebtedness had a variable interest rate. The following table summarizes the debt obligations that are sensitive to
changes in interest rates held by us as of December 31, 2003. The table
presents principal payment obligations that exist by maturity date and the
related average interest rate, and does not reflect as current the effects of
our default under certain of our obligations that have not yet been declared
immediately due and payable. Average interest rates for liabilities are
calculated based on weighted averages. Dollar-denominated amounts have been
converted to Mexican pesos based on the market exchange rate at December 31,
2003, which was U.S.$1.00 = Ps.11.23. As of December 31, 2003 - Expected Maturity Date2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair Valuein millions of Mexican pesosFixed rate debt
    
    
    1,684.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,684.5
    
    
    
    943.3Weighted-average interest rate
    
    
    10.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Variable rate debt (1)
    
    
    2,982.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,982.9
    
    
    
    2,982.9Weighted-average interest rate
    
    
    3.53
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Average floor rate
    
    
    0.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
   (1)
    
    To determine the weighted-average interest rate for variable rate
debt, we have assumed LIBOR interest rate of 1.28% for 2004, 2.44% for
2005, 3.0% for 2006, 3.75% for 2007 and 4.0% for 2008. We currently do not have any interest rate derivative instruments. Foreign Currency Risk As of December 31, 2003, Ps.4,667.4 million of our consolidated
indebtedness was denominated in U.S. dollars. 69




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The following table summarizes our consolidated debt that is sensitive to
changes in foreign currency exchange rates as of December 31, 2003. The table
presents principal payment obligations that exist by maturity date and the
related average interest rate, and does not reflect as current the effects of
our default under certain of our obligations that have not yet been declared
immediately due and payable. Average interest rates for liabilities are
calculated based on weighted average. Dollar-denominated amounts have been
converted to Mexican pesos based on the market exchange rate at December 31,
2003, which was U.S.$1.00 = Ps.11.23. As of December 31, 2003 - Expected Maturity Date2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair ValueIn millions of Mexican PesosU. S. Dollar denominated debt
    
    
    4,667.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,667.4
    
    
    
    3,926.3Weighted average interest
rate(1)
    
    
    5.87
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
   (1)
    
    Note: To determine the weighted-average interest rate for variable
rate debt, we have assumed LIBOR interest rate of 1.28% for 2004, 2.44%
for 2005, 3.0% for 2006, 3.75% for 2007 and 4.0% for 2008. We currently do not have any forward exchange derivative instruments. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A. DEBT SECURITIES Not applicable. B. WARRANTS AND RIGHTS Not applicable. C. OTHER SECURITIES Not applicable. D. AMERICAN DEPOSITARY SHARES Not applicable. 70




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES We have defaulted on the following payment obligations:  
    
    the U.S.$7.5 million interest payment on the Iusacell Celular
10% senior notes due 2004 which was due on July 15, 2003 and the
U.S.$150.0 million principal payment and accrued interest which
became due upon acceleration on September 11, 2003,  
    
    the U.S.$265.6 million principal payment on Iusacell
Celular  ́s senior refinancing secured loan which was due on March 31,
2004 because of the automatic acceleration of the maturity date of
the loan as a result of our failure to refinance the Iusacell
Celular senior notes by such date, and  
    
    the U.S.$7.0 million principal payment on a promissory note
due to Elektra on October 30, 2003. We have also incurred in non-payment defaults under some of these
agreements. See Item 5, Operating and Financial Review and Prospects-B.
Liquidity and Capital Resources-Our Indebtedness. 
  ITEM 14.
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS None. 
 ITEM 15. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures.The Chief Executive
Officer and Chief Financial Officer of Iusacell Celular have evaluated the
effectiveness of Iusacell Celulars disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the December 31, 2003 (the Evaluation Date). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, Iusacell Celulars
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports Iusacell
Celular files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required. Changes in Internal Controls.After a series of improvements in the
internal procedures performed in the later part of 2003 and since the
Evaluation Date, there have not been any other significant changes in Iusacell
Celulars internal controls or in other factors that could significantly affect
such controls. No significant deficiencies and material weaknesses were
identified that required corrective actions. 
 ITEM 16. RESERVED 
 ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT For purpose of this Item 16A and in accordance with Section 3(a)(58) of
the Exchange Act, the term Audit Committee means our entire Board of
Directors. Iusacell Celulars Audit Committee does not have a financial expert
serving on the Audit Committee. We are currently in the process of searching
for a financial expert for our Audit Committee. 
 ITEM 16B CODE OF ETHICS Iusacell Celular had a code of ethics established by Verizon. Upon the
acquisition by MovilAccess of a controlling interest in Iusacell in July 2003,
the Verizon code of ethics was terminated. We are currently working on the
development of a new code of ethics. 71




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ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit and Non-Audit Fees PricewaterhouseCoopers, which has been appointed by Iusacell Celulars
Board of Directors, has served as Iusacell Celulars independent public
accountants for each of the fiscal years in the three-year period ended
December 31, 2003. The following table presents the aggregate fees for professional audit
services and other services rendered by PricewaterhouseCoopers to Iusacell
Celular in 2003 and 2002. Fees Paid to PricewaterhouseCoopers 2002
    
    2003(in thousands of Mexican pesos)Audit Fees(1)
    
    
    8,762
    
    
    
    7,359Audit-related Fees(2)
    
    
    3,351
    
    
    
    448Tax Fees(3)
    
    
    1,135
    
    
    
    1,944All Other Fees(4)
    
    
    1,044
    
    
    
    Total
    
    
    14,292
    
    
    
    9,751
   (1)
    
    Audit fees include services performed by the independent accountant
to comply with generally accepted accounting standards in Mexico and the
United States. Audit fees also include fees for services provided by
the independent accountants in connection with statutory and regulatory
filings or engagements and assistance with and review of documents filed
with the SEC.(2)
    
    Audit-related fees include accounting
consultations and consultation concerning financial accounting and reporting standards.(3)
    
    Tax fees include fees for tax compliance, tax planning and tax
advice. Tax compliance generally involves claims for refund and tax payment-planning
services. Tax planning and tax advice encompass assistance with tax
audits and appeals and requests for rulings or
technical advice from taxing authorities.(4)
    
    All other fees include mainly services related to the purchasing
information system implementation and design. Audit Committee Pre-Approval Policies and Procedures For purpose of this Item 16C and in accordance with Section 3(a)(58) of
the Exchange Act, the term Audit Committee means our entire Board of
Directors. The general authority to pre-approve the engagement of our
independent auditors to render non-audit services is under the purview of our
Audit Committee. Accordingly, the Audit Committee has established pre-approval
procedures to control the provision of all audit and non-audit services by our
independent auditors (the Pre-Approval Policy). Under the Pre-Approval
Policy, the engagement of our independent auditors to provide audit and
non-audit services must be pre-approved by the Audit Committee, either in the
form of a special approval or through the inclusion of the services in question
in a list adopted by the Audit Committee of pre-approved services. The
Pre-Approval Policy is detailed as to the particular services to be provided.
Additionally, the Pre-Approval Policy affirms that the Audit Committees
responsibilities under the Exchange Act are not delegated to management. 
 ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 
  ITEM 16E
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS Not applicable. 72




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PART III 
 ITEM 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of responding to this Item 17. 
 ITEM 18. FINANCIAL STATEMENTS See pages F-1 to S-II. 
 ITEM 19. EXHIBITS Documents filed as exhibits to this Annual Report. ExhibitNo.
    
    Exhibit1.1
    
    By-laws (estatutos) of Grupo Iusacell Celular, S.A. de C.V., effective
April 4, 2001, together with an English translation (incorporated herein by
reference to Exhibit 1 of Iusacell Celulars Annual Report on Form 20-F for
fiscal year 2002-File No. 033-79254).2.1
    
    Indenture dated as of July 25, 1997 among Grupo Iusacell Celular, S.A. de
C.V., certain subsidiaries of Iusacell Celular, S.A. de C.V.and First
Union National Bank, as trustee (incorporated herein by reference to
Exhibit 4.1 of the Registration Statement F-4-Registration Number
333-37431).4.1
    
    Agreement for Equipment, Furnish and Installation for Iusacells Cellular
Network, dated as of December 10, 1997, among Grupo Iusacell Celular, S.A.
de C.V., Lucent Technologies World Services, Inc. and Lucent Technologies
de México, S.A. de C.V. (incorporated herein by reference to Exhibit A of
Iusacell Celulars Annual Report on Form 20-F for fiscal year 1997).4.2
    
    Amended and Restated Credit Agreement, dated as of July 25, 1997, as
amended and restated as of March 29, 2001 among Grupo Iusacell Celular,
S.A. de C.V.and JP Morgan, as sole Bookrunner and Lead Arranger, and The
Chase Manhattan Bank, as Administrative Agent and Collateral Agent, BNP
Paribas, Citibank N.A., The Toronto-Dominion Bank and BBVA Bancomer S.A.,
as Arrangers (incorporated herein by reference to Exhibit 4(b) of
Iusacells Annual Report on Form 20-F for fiscal year 2000-File No.
001-14938).4.3
    
    Amended and Restated Master Lease Agreement (English version), dated as of
May 16, 2002, among MATC Celular, S. de R.L. de C.V., Grupo Iusacell
Celular, S.A. de C.V.and Iusacell Arrendadora, S.A. de C.V.(incorporated
herein by reference to Exhibit 4.3 of Iusacells Annual Report on Form 20-F
for fiscal year 2002-File No. 001-14938).4.4
    
    Amended and Restated Master Lease Agreement (English version), dated as of
May 16, 2002, between MATC Celular, S. de R.L. de C.V.and Grupo Iusacell
Celular, S.A. de C.V., for and on behalf of itself and its affiliates
(incorporated herein by reference to Exhibit 4.4 of Iusacells Annual
Report on Form 20-F for fiscal year 2002-File No. 001-14938).4.5
    
    Amended and Restated Build-to-Suit and Site Development Agreement, dated as
of May 16, 2002, between MATC Celular, S. de R.L. de C.V.and Grupo
Iusacell Celular, S.A. de C.V., for and on behalf of itself and its
affiliates (incorporated herein by reference to Exhibit 4.5 of Iusacells
Annual Report on Form 20-F for fiscal year 2002-File No. 001-14938).4.6*
    
    Purchase and Sale Agreement, dated as of December 19, 2003, among Grupo
Iusacell Celular, SA de C.V., Sistemas Telefónicos Portátiles Celulares,
S.A. de C.V., Telecomunicaciones del Golfo, S.A. de C.V., Communicaciones
Celulares de Occidente,
 73




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ExhibitNo.
    
    ExhibitS.A. de C.V., Iusatelecomunicaciones, S.A. de C.V.,
SOS Telecomunicaciones S.A. de C.V., Portatel del Sureste, S.A. de C.V. and
Iusacell PCS, S.A. de C.V. and MATC Digital, S. de R. L. de C.V.4.7*
    
    Second Amended and Restated Master Lease Agreement (for Purchased sites)
(English version), dated as of December 19, 2003, among MATC Celular, S. de
R.L. de C.V., Grupo Iusacell Celular, S.A. de C.V., Iusacell Arrendadora,
S.A. de C.V., MATC Digital, S. de R.L. de C.V.,and Grupo Iusacell S.A. de
C.V.4.8
    
    First Amendment and Waiver, dated as of December 7, 2001, to the Amended
and Restated Credit Agreement, dated as of July 25, 1997, as amended and
restated as of March 29, 2001 among Grupo Iusacell Celular, S.A. de C.V.,
the lenders party thereto, and JP Morgan Chase Bank as Administrative Agent
and Collateral Agent (incorporated herein by reference to Exhibit 4.3 of
Grupo Iusacells Annual Report on Form 20-F for fiscal year 2001-File No.
001-14938).4.9
    
    Second Amendment and Waiver, dated as of April 28, 2003, to the Amended and
Restated Credit Agreement, dated as of July 25, 1997, as amended and
restated as of March 29, 2001 among Grupo Iusacell Celular, S.A. de C.V.,
the lenders party thereto, and JP Morgan Chase Bank as Administrative Agent
and Collateral Agent (incorporated herein by reference to Exhibit 4.7 of
Iusacells Annual Report on Form 20-F for fiscal year 2002-File No.
001-14938).4.10
    
    First Amendment to the Second Amendment and Waiver, dated as of April 28,
2003, to the Amended and Restated Credit Agreement, dated as of July 25,
1997, as amended and restated as of March 29, 2001 among Grupo Iusacell
Celular, S.A. de C.V., the lenders party thereto, and JP Morgan Chase Bank
as Administrative Agent and Collateral Agent (incorporated herein by
reference to Exhibit 4.8 of Iusacells Annual Report on Form 20-F for
fiscal year 2002-File No. 001-14938).4.11
    
    Second Amendment, dated as of June 10, 2003, to the Second Amendment and
Waiver dated as of April 28, 2003, to the Amended and Restated Credit
Agreement, dated as of July 25, 1997, as amended and restated as of March
29, 2001 among Grupo Iusacell Celular, S.A. de C.V., the lenders party
thereto, and JP Morgan Chase Bank as Administrative Agent and Collateral
Agent (incorporated herein by reference to Exhibit 4.9 of Iusacells Annual
Report on Form 20-F for fiscal year 2002-File No. 001-14938).4.12
    
    English translation of long distance concession dated October 16, 1995
(incorporated herein by reference to Exhibit 10.1 of the Registration
Statement F-1-Registration Number 333-10504).4.13
    
    English translation of cellular concession for Region 9 dated October 3,
1989 (incorporated herein by reference to Exhibit 10.1 of the Registration
Statement F-4-Registration Number 333-95547).4.14
    
    English translation of cellular concession for Region 5 dated July 17, 1990
(incorporated herein by reference to Exhibit 10.2 of the Registration
Statement F-4-Registration Number 333-95547).4.15
    
    English translation of cellular concession for Region 6 dated July 14, 1990
(incorporated herein by reference to Exhibit 10.3 of the Registration
Statement F-4-Registration Number 333-95547).4.16
    
    English translation of cellular concession for Region 7 dated July 14, 1990
(incorporated herein by reference to Exhibit 10.4 of the Registration
Statement F-4-Registration
 74




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##### Table of Contents



ExhibitNo.
    
    ExhibitNumber 333-95547).4.17*
    
    English translation of cellular concession for Region 8 dated July 17, 1990.4.18
    
    English translation of Point to Point Microwave Link Concessions dated June
4, 1998 (incorporated herein by reference to Exhibit 10.5 of the
Registration Statement F-4-Registration Number 333-95547).4.19*
    
    English translation of agreement with Mr. Jose Ramon Elizondo Anaya, dated
November 3, 2003, relating to the buy out of Mr. Elizondos equity interest
in certain of our subsidiaries.7.1*
    
    Computation of ratio of earnings to fixed charges.8.1*
    
    List of subsidiaries.31.1*
    
    Rule 13a-14/15(d)-14(a) Certification (Chief Executive Officer)31.2*
    
    Rule 13a-14/15(d)-14(a) Certification (Chief Financial Officer)32*
    
    Section 1350 Certification
 *Filed herewith 75




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##### Table of Contents



GLOSSARY OF TELECOMMUNICATIONS TERMS 1XRTT:
    
    A member of CDMA 2000 which is a family of standards that defines the radio
interface allowing a smooth transition from CDMA (1S-95) systems. This
family of standards involve some variants and the services, offerings, such
as voice and packet data on a single carrier (1XRTT), data only (1X-DO).Analog:
    
    A transmission method employing a continuous electrical signal that varies in
amplitude or frequency in response to changes in sound, light, position,
etc., impressed on a transducer in the sending device.ARPU:
    
    Average monthly mobile telephony revenue per subscriber.Band:
    
    A range of frequencies between two defined limits.CDMA:
    
    Code Division Multiple Access, the highest-capacity commercial digital
standard available. CDMA increases capacity by transmitting a large number
of simultaneous conversations over a single channel, assigning unique codes
that can be re-assembled at the receiving end.Cellular A-band:
    
    The range of frequencies used to provide cellular wireless service between
825-835 MHz and between 870-880 MHz of the radio spectrum.Cellular B-band:
    
    The range of frequencies used to provide cellular wireless service between
835-845 MHz and between 880-890 MHz of the radio spectrum.Channel:
    
    A pathway for the transmission of information between a sending point and a
receiving point.Covered POPS:
    
    The number of POPs in a defined area for whom a cellular signal is accessible.CPP:
    
    Calling Party Pays is a cellular telephony payment structure in which the
party that places a call to a cellular telephone is billed for
interconnection access, and the recipient is not billed for the airtime
charges corresponding to the call.Digital:
    
    A method of storing, processing and transmitting information through the use
of distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies employ a sequence of
discrete, distinct pulses to represent information, as opposed to the
continuous analog signal.E-1:
    
    A digital telephony format that carries data at the rate of 2.048 Mbps (DS-1
level). E-1 is the European and Latin American version of North American T-1,
although T-1 is 1.544 Mbps.E3/DS3:
    
    Digital signal X is a term for the series of standard digital transmission
rates or levels based on DS0, a transmission rate of 64 Kbps, the bandwidth
normally used for one telephone voice channel. Both the North American
T-carrier system and the European E-carrier system of transmission operate
using the DS series as a base multiple. The digital signal is what is
carried inside the carrier system. DS3, the signal in the T-3 carrier,
carries a multiple of 28 DS1 signals or 672 DS0s or 44.736 Mbps.Hertz:
    
    The unit measuring the frequency with which an alternating electromagnetic
signal cycles through the zero-value state between lowest and highest states.
One hertz (abbreviated Hz) equals one cycle per second; KHz (kilohertz)
stands for thousands of hertz; MHz (megahertz) stands for millions of hertz;
and GHz (gigahertz) stands for billions of hertz.
 76




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##### Table of Contents



IMTS:
    
    Improved mobile telephone service; IMTS systems are analog mobile telephone
systems that employ a single powerful radio base station to communicate with
IMTS mobile telephones that are within approximately a 25-mile radius.LATA:
    
    Local access and transport area; an area in which a local exchange carrier is
permitted to provide service as designated by the 1982 United States federal
court decree resulting from antitrust litigation brought by the United States
Department of Justice against AT&T corporation.MOU:
    
    Monthly minutes of use.PCS:
    
    Personal communications services. PCS represents a digital wireless
communications service with the ability to provide features such as voice,
video and data applications, short messaging, voicemail, caller
identification, call conferencing and call forwarding.PCS A-band:
    
    The range of frequencies used to provide PCS wireless services between
1.850-1.865 GHz and between 1.930-1.945 GHz of the radio spectrum.PCS B-band:
    
    The range of frequencies used to provide PCS wireless services between
1.870-1.885 GHz and between 1.950-1.965 GHz of the radio spectrum.PCS D-band:
    
    The range of frequencies used to provide PCS wireless services between
1.865-1.870 GHz and between 1.945-1.950 GHz of the radio spectrum.PCS E-band:
    
    The range of frequencies used to provide PCS wireless services between
1.885-1.890 GHz and between 1.965-1.970 GHz of the radio spectrum.PDH:
    
    A transmission system for voice communication using plesiochronous
synchronization. PDH is the conventional multiplexing technology for network
transmission systems.Penetration Rate:
    
    A cellular operators subscribers within a defined area derived by total POPs
within that area.POPs:
    
    The population for a particular area based on the 2000 Mexican census.
Population figures for 1996, 1997, 1998 and 1999 have been calculated by
applying the forecast annual population growth rate for 1995, as published by
the Instituto Nacional de Estadística, Geografía e Informática(the National
Institute of Statistics, Geography and Information Processing, INEGI) to
the official 1990 census figures. Population figures for 2002 have been
calculated by applying the forecast annual population growth rate for 2002 to
the data derived from the 2000 Mexico census. Where the population
information is set forth without reference to a year, the information given
is as of December 31, 2003. The SCT divides Mexico into nine geographic
Regions for the provision of cellular service (individually a Region and
collectively the Regions). Information regarding the numbers of POPs
within a given Region has been calculated using the national population
growth rate, as published by INEGI. Information regarding the number of POPs
within a given city has been calculated using the growth rate for that city,
as published by INEGI, which may not be the same as the national growth rate
published by INEGI. The number of POPs in any Region or other geographic
area should not be confused with the current number of users of wireless
services in that Region or other geographic area and is not indicative of the
number of users of wireless services in the future.Roaming:
    
    A service offered by mobile communications providers which allows a
subscriber to use his or her telephone while in the service area of another
carrier.
 77




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SDH:
    
    Synchronous digital hierarchy (SDH). It refers to a group of fiber-optic
transmission rates that can transport digital signals with different
capacities.STM1:
    
    Synchronous Transport Module Digital signal X is a term for the series of
standard digital transmission. STM1 is the signal that carries 155 Mbps.Switch:
    
    A device that opens or closes circuits or selects the paths or circuits to be
used for transmission of information. Switching is the process of
interconnecting circuits to form a transmission path between users.TDMA:
    
    Time division multiple access, a standard of digital cellular technology,
which provides more call carrying capacity than analog, but less than CDMA,
by interlacing conversations on a single channel through time-sharing
methods.Wi-Fi:
    
    Wireless Fidelity is the popular term for a high-frequency wireless local
area network (WLAN). The Wi-Fi technology is rapidly gaining acceptance in
many companies as an alternative to a wired LAN. It can also be installed
for a home network.
 78




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##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. GRUPO IUSACELL CELULAR, S.A. DE C.V. By: /s/ GUSTAVO GUZMÁN SEPÚLVEDA    By: /s/ JOSÉ LUIS RIERA KINKEL    Date: June 30, 2004 79




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##### Table of Contents



INDEX CONTENTS
    
    PAGEReport of Independent Accountants
    
    
    F-2Consolidated Balance Sheets-Fiscal Years Ended December 31, 2003 and 2002
    
    
    F-5Consolidated Income Statements-Fiscal Years Ended December 31, 2003,
2002 and 2001
    
    
    F-6Consolidated Statements of Changes in Stockholders Equity-Fiscal Years
Ended December 31, 2003, 2002 and 2001
    
    
    F-7Consolidated Statements of Changes in Financial Position-Fiscal Years
Ended December 31, 2003, 2002 and 2001
    
    
    F-8Notes to the Consolidated Financial Statements
    
    
    F-9Schedule II-Valuation and Qualifying Accounts
    
    S-II
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS Mexico City, March 26, 2004, except for Notes 2 and 10a.
for which the date is April 19, 2004 The Board of Directors and Stockholders of
Grupo Iusacell Celular, S.A. de C.V.: We have audited the accompanying consolidated balance sheets of Grupo Iusacell
Celular, S.A. de C.V. and its subsidiaries (the Company) as of December 31,
2003 and 2002, and the related consolidated statements of income, of changes in
stockholders equity and of changes in financial position for each of the three
years in the period ended December 31, 2003. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America) and auditing standards
generally accepted in Mexico. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in Note 4n. to the consolidated financial statements, for the year
ended December 31, 2003 the Company adopted Bulletin C-8 Intangible Assets
issued by the Mexican Institute of Public Accountants, with the effects
described in such note. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grupo Iusacell
Celular, S. A. de C. V. and its subsidiaries as of December 31, 2003 and 2002,
and the results of its operations, changes in stockholders equity and changes
in its financial position for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Mexico. F-2




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##### Table of Contents



Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 18 and 19 to the consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the Company
did not make the scheduled interest payments under its Secured Senior Notes Due
2004 and this is considered as an event of default under the indenture
governing the Companys Secured Senior Notes Due 2004 which entitled the
holders of the notes with the right to claim, request or demand the
acceleration of the due date of such Secured Senior Notes Due 2004. Additionally, the Company exceeded the permitted leverage ratio under its
Amended and Restated Senior Secured Credit Loan Agreement. The Company and its
lenders entered into a temporary amendment and waiver which was extended
several times and, in October 2003, was not further extended. As a result, the
Company is in default and the lenders under the Amended and Restated Senior
Secured Credit Loan Agreement were entitled with the right to request the
acceleration of the due date of such Amended and Restated Senior Secured Credit
Loan Agreement. Furthermore, as discussed in Note 1 to the consolidated financial statements,
Companys two largest shareholders sold all of their shares to an unrelated
party. Under the indenture governing the Secured Senior Notes Due 2004 and the
contract governing the Amended and Restated Senior Secured Credit Loan
Agreement, this constituted a change of control under which the holders of the
Secured Senior Notes Due 2004 and the lenders under the Amended and Restated
Senior Secured Credit Loan Agreement were entitled with the right to claim,
request or demand the acceleration of the due date of these loans. Finally, on January 14, 2004, a group of holders of the Secured Senior Notes
Due 2004 filed a lawsuit in a New York Court against the Company for the
immediate payment of the indebtedness under such loan, and alleging breach of
the Secured Senior Notes Due 2004 indenture requesting that the Court declare
that the holders of the notes are pari-passu with the lenders under the Amended
and Restated Senior Secured Credit Loan Agreement. On April 19, 2004, this
group of holders of the notes filed an amended complaint and now is also
seeking injunctive relief barring the Company from selling, transferring or
otherwise encumbering the assets pending decision on the merits of their claim
for specific performance. F-3




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##### Table of Contents



As a result of the above, the Secured Senior Notes Due 2004 and the Amended and
Restated Senior Secured Credit Loan Agreement have been classified as
short-term liabilities, and as a result, current liabilities exceed current
assets by Ps.4,578,654,000. Operating results of the Company have deteriorated
and also, the Company has accumulated losses of Ps.11,142,089,000 representing
more than two thirds of its capital stock and, in accordance with Mexican law,
this is a cause of dissolution, which any interested party may request be
declared by Court. Additionally, the Company might be instituted in a
reorganization proceeding under the Concurso Mercantil Law in Mexico. These
conditions, among others, raise substantial doubt about the Companys ability
to continue as a going concern. These matters and managements plans are more
fully discussed in Note 2 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. PricewaterhouseCoopers José S. Oropeza de la Cruz
Audit Partner F-4




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##### Table of Contents



GRUPO IUSACELL CELULAR, S. A. DE C. V. AND SUBSIDIARIES
(subsidiary of Grupo Iusacell, S. A. de C. V.) CONSOLIDATED BALANCE SHEETS
(Notes 1, 2, 3 and 4) Expressed in thousands of
constant Mexican pesos as of December 31, 2003 December 31,Assets
    
    2003
    
    2002CURRENT ASSETS:Cash and cash equivalents (Note 4f.)
    
    Ps.
    4,157
    
    
    Ps.
    154,397Accounts receivable:Trade, net of Ps.267,081 and Ps.97,328 of allowance for doubtful accounts in
2003 and 2002, respectively (Note 4h.)
    
    
    498,790
    
    
    
    663,533Due from related parties (Note 5)
    
    
    
    
    
    
    63,291Recoverable taxes and other
    
    
    353,542
    
    
    
    463,747852,332
    
    
    
    1,190,571Inventories  Net (Note 6)
    
    
    255,995
    
    
    
    37,119Total current assets
    
    
    1,112,484
    
    
    
    1,382,087Investments (Note 7)
    
    
    14,194
    
    
    
    35,791Property and equipment  Net (Note 8)
    
    
    6,906,450
    
    
    
    8,893,303Other assets  Net (Note 9)
    
    
    656,794
    
    
    
    1,520,200Goodwill  Net of accumulated amortization of Ps.1,091,779 in 2003 and
Ps.998,231 in 2002 (Note 4m.)
    
    
    1,712,014
    
    
    
    1,953,573Total assets
    
    Ps.
    10,401,936
    
    
    Ps.
    13,784,954Liabilities and Stockholders EquityCURRENT LIABILITIES:Current portion of long-term debt (Note 10)
    
    Ps.
    4,667,429Notes payable (Note 10d.)
    
    
    
    
    
    Ps.
    130,258Trade accounts payable
    
    
    360,935
    
    
    
    282,578Due to related parties (Note 5)
    
    
    22,645
    
    
    
    114,967Taxes and other payables
    
    
    640,129
    
    
    
    574,442Income tax (Note 11)
    
    
    
    
    
    
    52,723Total current liabilities
    
    
    5,691,138
    
    
    
    1,154,968Long-term debt (Note 10)
    
    
    
    
    
    
    4,511,481Other accounts payable, long-term (Notes 4g. and 4r.)
    
    
    654
    
    
    
    3,140Total liabilities
    
    
    5,691,792
    
    
    
    5,669,589Commitments and contingencies (Note 12)
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Contributed capital (Note 13):Capital stock
    
    
    16,558,729
    
    
    
    16,558,729Capital contributed
    
    
    102,027
    
    
    
    102,02716,660,756
    
    
    
    16,660,756Earned capital (Note 14):Accumulated (losses) profits:Legal reserve
    
    
    29,485
    
    
    
    29,485For prior years
    
    
    (7,844,274
    )
    
    
    (6,741,103
    )For the year
    
    
    (3,327,300
    )
    
    
    (1,103,171
    )(11,142,089
    )
    
    
    (7,814,789
    )Accumulated other comprehensive income
    
    
    (730,602
    )
    
    
    (730,602
    )Total majority stockholders equity
    
    
    4,788,065
    
    
    
    8,115,365Minority interest
    
    
    (77,921
    )
    
    
    Total stockholders equity
    
    
    4,710,144
    
    
    
    8,115,365Total liabilities and stockholders equity
    
    Ps.
    10,401,936
    
    
    Ps.
    13,784,954
 The accompanying nineteen notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



GRUPO IUSACELL CELULAR, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Notes 1, 2, 3 and 4) Expressed in thousands of
constant Mexican pesos as of December 31, 2003 Years endedDecember 31,2003
    
    2002
    
    2001Revenues:Services
    
    Ps.
    4,217,280
    
    
    Ps.
    5,188,345
    
    
    Ps.
    6,244,566Telephone equipment sales and other
    
    
    545,897
    
    
    
    615,439
    
    
    
    667,2784,763,177
    
    
    
    5,803,784
    
    
    
    6,911,844Cost of sales:Cost of services
    
    
    1,530,784
    
    
    
    1,611,219
    
    
    
    1,622,879Cost of telephone equipment sales and other
    
    
    899,616
    
    
    
    507,241
    
    
    
    415,5502,430,400
    
    
    
    2,118,460
    
    
    
    2,038,429Gross profit
    
    
    2,332,777
    
    
    
    3,685,324
    
    
    
    4,873,415Operating expenses
    
    
    1,872,774
    
    
    
    1,854,574
    
    
    
    2,440,218Depreciation and amortization
    
    
    1,953,687
    
    
    
    2,206,050
    
    
    
    2,823,164Other operating income (Note 8c.)
    
    
    85,984
    
    
    
    95,257
    
    
    
    338,388Operating loss
    
    
    (1,407,700
    )
    
    
    (280,043
    )
    
    
    (51,579
    )Intangible assets write-off (Note 4o.)
    
    
    216,820
    
    
    
    
    
    
    
    Abandoned fixed assets write-off (Note 8d.)
    
    
    404,700
    
    
    
    
    
    
    
    Other expenses  Net (Note 9d.)
    
    
    307,161
    
    
    
    
    
    
    
    Integral financing cost:Interest expense  Net
    
    
    359,615
    
    
    
    399,966
    
    
    
    424,126Foreign exchange loss (gain)  Net
    
    
    386,835
    
    
    
    527,331
    
    
    
    (105,282
    )Gain from monetary position
    
    
    (165,633
    )
    
    
    (229,414
    )
    
    
    (181,376
    )580,817
    
    
    
    697,883
    
    
    
    137,468Equity participation in net loss (profit) of associated companies and net loss
(gain) on sale of equity investments (Notes 3 and 7)
    
    
    17,544
    
    
    
    10,129
    
    
    
    (7,164
    )Loss from continuing operations before income tax and minority interest
    
    
    (2,934,742
    )
    
    
    (988,055
    )
    
    
    (181,883
    )Provision for income tax (Note 11)
    
    
    267,024
    
    
    
    125,265
    
    
    
    160,908Loss from continuing operations before minority interest
    
    
    (3,201,766
    )
    
    
    (1,113,320
    )
    
    
    (342,791
    )Minority interest
    
    
    17,964
    
    
    
    10,149
    
    
    
    22,745Loss from continuing operations before extraordinary item
    
    
    (3,183,802
    )
    
    
    (1,103,171
    )
    
    
    (320,046
    )Extraordinary item for the early extinguishment of debt, net of taxes (Note 10d.)
    
    
    15,517
    
    
    
    
    
    
    
    Loss after extraordinary item
    
    
    (3,168,285
    )
    
    
    (1,103,171
    )
    
    
    (320,046
    )Cumulative effect of the adoption of the new accounting pronouncement and
change in accounting policy, net of taxes (Notes 4j. and 4g.)
    
    
    159,015
    
    
    
    
    
    
    
    7,120Net loss for the year
    
    (Ps.3,327,300)
    
    (Ps.1,103,171)
    
    (Ps.327,166)
 The accompanying nineteen notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



GRUPO IUSACELL CELULAR, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Notes 1, 2, 3 and 4) Expressed in thousands of constant Mexican pesos as of December 31, 2003 Accumulated profits (losses)Contributionsfor futureCapital
    
    
    
    
    
    capitalstock
    
    Capital
    
    stock
    
    Legalsubscribed
    
    contributions
    
    increases
    
    reserve
    
    For prior years
    
    For the yearBalance at December 31, 2000
    
    Ps.
    14,145,469
    
    
    Ps.
    102,027
    
    
    Ps.
    1,431,161
    
    
    Ps.
    29,485
    
    
    (Ps.5,674,901)
    
    (Ps.739,036)Application of 2000 net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (739,036
    )
    
    
    739,036Increase in capital stock from the
capitalization of stockholders debt
    
    
    121Decrease in capital stock from the
effects of the reverse stock split
    
    
    (266
    )Increase in capital stock
    
    
    352Contribution for future capital stock increases
    
    
    
    
    
    
    
    
    
    
    981,892Increase in minority interest
Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (327,166
    )Balance at December 31, 2001
    
    
    14,145,676
    
    
    
    102,027
    
    
    
    2,413,053
    
    
    
    29,485
    
    
    
    (6,413,937
    )
    
    
    (327,166
    )Application of 2001 net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (327,166
    )
    
    
    327,166Capitalization of
contributions for
future
capital stock increases
    
    
    2,413,053
    
    
    
    
    
    
    
    (2,413,053
    )Decrease in minority interest
Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,103,171
    )Balance at December 31, 2002
    
    
    16,558,729
    
    
    
    102,027
    
    
    
    
    
    
    
    29,485
    
    
    
    (6,741,103
    )
    
    
    (1,103,171
    )Application of 2002 net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,103,171
    )
    
    
    1,103,171Decrease in minority interest
Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,327,300
    )Balance at December 31, 2003
    
    Ps.
    16,558,729
    
    
    Ps.
    102,027
    
    
    Ps.
    
    
    
    Ps.
    29,485
    
    
    (Ps.7,844,274)
    
    (Ps.3,327,300)
   [Continued from above table, first column(s) repeated] Accumulatedother
    
    
    
    
    
    Totalcomprehensive
    
    Minority
    
    stockholders'income
    
    interest
    
    equityBalance at December 31, 2000
    
    (Ps.730,602)
    
    Ps.
    27,962
    
    
    Ps.
    8,591,565Application of 2000 net loss
    
    
    
    
    
    
    
    
    
    
    Increase in capital stock from the
capitalization of stockholders debt
    
    
    
    
    
    
    
    
    
    
    121Decrease in capital stock from the
effects of the reverse stock split
    
    
    
    
    
    
    
    
    
    
    (266
    )Increase in capital stock
    
    
    
    
    
    
    
    
    
    
    352Contribution for future capital stock increases
    
    
    
    
    
    
    
    
    
    
    981,892Increase in minority interest
    
    
    
    
    
    
    109,517
    
    
    
    109,517Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    (327,166
    )Balance at December 31, 2001
    
    
    (730,602
    )
    
    
    137,479
    
    
    
    9,356,015Application of 2001 net loss
    
    
    
    
    
    
    
    
    
    
    Capitalization of
contributions for
future
capital stock increases
    
    
    
    
    
    
    
    
    
    
    Decrease in minority interest
    
    
    
    
    
    
    (137,479
    )
    
    
    (137,479
    )Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    (1,103,171
    )Balance at December 31, 2002
    
    
    (730,602
    )
    
    
    
    
    
    
    8,115,365Application of 2002 net loss
    
    
    
    
    
    
    
    
    
    
    Decrease in minority interest
    
    
    
    
    
    
    (77,921
    )
    
    
    (77,921
    )Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    (3,327,300
    )Balance at December 31, 2003
    
    (Ps.730,602)
    
    (Ps.77,921)
    
    Ps.
    4,710,144
 The accompanying nineteen notes are an integral part of these consolidated financial statements. F-7




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GRUPO IUSACELL CELULAR, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Notes 1, 2, 3 and 4) Expressed in thousands of constant
Mexican pesos as of December 31, 2003 Years endedDecember 31,Operating activities:
    
    2003
    
    2002
    
    2001Loss from continuing operations
    
    (Ps.3,183,802)
    
    (Ps.1,103,171)
    
    (Ps.320,046)Items not requiring the use of resources:Depreciation and amortization
    
    
    1,953,687
    
    
    
    2,206,050
    
    
    
    2,823,164Intangible assets write-off
    
    
    216,820
    
    
    
    
    
    
    
    Other long-term assets write-offs
    
    
    394,337
    
    
    
    
    
    
    
    Abandoned fixed assets write-off
    
    
    404,700
    
    
    
    
    
    
    
    Equity participation in net loss (profit) of associated companies
and net loss (gain) on sale of equity investments
    
    
    17,544
    
    
    
    10,129
    
    
    
    (7,164
    )Deferred income tax
    
    
    163,170
    
    
    
    9,214
    
    
    
    Minority interest
    
    
    (17,964
    )
    
    
    (10,149
    )
    
    
    (22,745
    )(51,508
    )
    
    
    1,112,073
    
    
    
    2,473,209Resources provided by (used for) operating activities:Trade accounts receivable
    
    
    164,743
    
    
    
    (9,273
    )
    
    
    75,095Related parties
    
    
    (29,027
    )
    
    
    (77,429
    )
    
    
    13,946Recoverable taxes and other
    
    
    110,205
    
    
    
    122,848
    
    
    
    (2,168
    )Inventories
    
    
    (218,876
    )
    
    
    226,405
    
    
    
    37,206Trade accounts payable
    
    
    78,357
    
    
    
    (457,585
    )
    
    
    68,255Taxes and other payables
    
    
    65,681
    
    
    
    (319,103
    )
    
    
    (277,677
    )Income tax
    
    
    (52,723
    )
    
    
    (7,174
    )
    
    
    17,550Employee profit sharing
    
    
    
    
    
    
    (2,933
    )
    
    
    2,928Other
    
    
    (2,484
    )
    
    
    (57,026
    )
    
    
    56,408Resources provided by (used for) operating activities before extraordinary
item and cumulative effect of the adoption of the new accounting
pronouncement and change in accounting policy
    
    
    64,368
    
    
    
    530,803
    
    
    
    2,464,752Extraordinary item for the early extinguishment of debt
    
    
    15,517
    
    
    
    
    
    
    
    Cumulative effect of the adoption of the new accounting
pronouncement and change in accounting policy
    
    
    (159,015
    )
    
    
    
    
    
    
    (7,120
    )Resources (used for) provided by operating activities
    
    
    (79,130
    )
    
    
    530,803
    
    
    
    2,457,632Financing activities:Proceeds from long-term debt
    
    
    155,948
    
    
    
    322,885
    
    
    
    2,676,910Principal payments on long-term debt
    
    
    
    
    
    
    
    
    
    
    (3,098,752
    )(Decrease) increase in notes payable
    
    
    (130,258
    )
    
    
    9,323
    
    
    
    (11,383
    )Contribution for future capital stock increases
    
    
    
    
    
    
    
    
    
    
    981,892Increase in capital stock
    
    
    
    
    
    
    
    
    
    
    352Decrease in capital stock
    
    
    
    
    
    
    
    
    
    
    (266
    )Increase in capital stock from the capitalization of stockholders debt
    
    
    
    
    
    
    
    
    
    
    121Resources provided by financing activities
    
    
    25,690
    
    
    
    332,208
    
    
    
    548,874Investing activities:Purchase of property and equipment
    
    
    (96,800
    )
    
    
    (622,910
    )
    
    
    (1,756,057
    )(Purchase) sale of common stock of associated companies
    
    
    
    
    
    
    (192,581
    )
    
    
    4,370Acquisition of Portatel, net of cash
    
    
    
    
    
    
    
    
    
    
    (544,390
    )Increase in telephones to be amortized
    
    
    
    
    
    
    
    
    
    
    (573,475
    )(Purchase) disposal of other assets
    
    
    
    
    
    
    (24,510
    )
    
    
    (326,886
    )Resources used for investing activities
    
    
    (96,800
    )
    
    
    (840,001
    )
    
    
    (3,196,438
    )Net (decrease) increase in cash and cash equivalents
    
    
    (150,240
    )
    
    
    23,010
    
    
    
    (189,932
    )Cash and cash equivalents at the beginning of the year
    
    
    154,397
    
    
    
    131,387
    
    
    
    321,319Cash and cash equivalents at the end of the year
    
    Ps.
    4,157
    
    
    Ps.
    154,397
    
    
    Ps.
    131,387
 The accompanying nineteen notes are an integral part of these consolidated financial statements. F-8




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GRUPO IUSACELL CELULAR, S. A. DE C. V. AND SUBSIDIARIES
(subsidiary of Grupo Iusacell, S. A. de C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001 Except as otherwise noted, expressed
in thousands of constant Mexican pesos as of December 31, 2003.
Amounts expressed in U.S. Dollars are in thousands. NOTE 1  ENTITY, NATURE OF BUSINESS AND PRINCIPAL STOCKHOLDERS: Entity and nature of business: Grupo Iusacell Celular, S. A. de C. V. is a holding company incorporated on
October 6, 1992, and as mentioned in the following paragraph, starting August
4, 1999, is subsidiary of Grupo Iusacell, S. A. de C. V. (Iusacell). On March
1, 2000, changed its name from Grupo Iusacell, S.A. de C. V. to Grupo Iusacell
Celular, S. A. de C. V. (Iusacell Celular or the Company). As a part of the recapitalization and restructuring plan of Iusacell Celular,
a new holding company, Iusacell, was incorporated on August 6, 1998 to acquire
and hold all of the outstanding shares of Iusacell Celular. In July 1999 and
February 2000, Iusacell launched public offers to exchange its two series of
common stock for the four series of common stock of Iusacell Celular then
outstanding on a one for one basis. As a result of these offers, Iusacell
acquired 99.99% of Iusacell Celular shares. Later, in June 2000, Iusacell
launched a private purchase offer under which it expected to purchase the
remaining Iusacell Celular shares not tendered during the two previous offers.
When this offer expired only 0.002% of the total outstanding shares of Iusacell
Celular as of December 31, 2000 were not owned by Iusacell. Finally, on March 30, 2001, Iusacell Celulars stockholders approved a 30,000
to 1 reverse stock split. Upon implementation of the reverse split in May 2001,
Iusacell increased its ownership in Iusacell Celular to 100.00%. All references
to the number of shares, per share amounts and any other reference to shares in
the consolidated financial statements and the accompanying notes to the
consolidated financial statements, unless otherwise noted, have been adjusted
to reflect the reverse split on a retroactive basis (Note 13). Iusacell Celular and its subsidiaries are referred collectively herein as the
Group. F-9




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##### Table of Contents



Iusacell Celulars subsidiaries are primarily engaged in the wireless
telecommunications business and hold concessions to operate cellular telephone
systems in five market areas (each a Region) in Mexico. Iusacell Celular
through its subsidiaries, holds the non-wireline cellular concessions for
Region 5 (Guadalajara), Region 6 (Leon), Region 7 (Puebla), a cellular
authorization for Region 9 (Mexico City), and in 2001, acquired the company
that holds the concession for Region 8 (Mérida) (Note 3). Iusacell Celular
subsidiaries also hold concessions to provide long distance services and
nationwide and international paging services. Principal stockholders: In February 1997, after execution of a definitive agreement between Iusacell
Celulars principal stockholders and approval by the Mexican government, Bell
Atlantic Corporation (Bell Atlantic) assumed management control of Iusacell
Celular from Carlos Peralta and companies and individuals controlled by or
related to him (together, the Peralta Group). After the incorporation of
Iusacell, Bell Atlantic also had management control of Iusacell. On June 30,
2000, Bell Atlantic and GTE Corporation completed their merger, creating
Verizon Communications Inc. (Verizon). On April 4, 2001, after obtaining the authorization of the Mexican regulatory
agencies and the finalization of a stockholders agreement between the Peralta
Group and Vodafone Group Plc (Vodafone), the Peralta Group and Vodafone closed
the transaction under which the Peralta Group sold its 34.50% ownership in
Iusacell to Vodafone. On June 13, 2003, Movil Access, S.A. de C.V. (Movil Access) a Mexican
telecommunications service provider, which is a part of a group of companies
controlled by Ricardo B. Salinas Pliego, announced an agreement to acquire, at
least, the outstanding shares of Iusacell owned by Verizon and Vodafone,
through a public tender offer. When the offer expired, on July 28, 2003, Movil
Access acquired 74.63% of the outstanding shares of Iusacell and the management
control of Iusacell. NOTE 2  FINANCIAL SITUATION: As mentioned in Note 10, the Group is in default under some of the agreements
governing its loans and as a result, the lenders under such loans were entitled
with the right to declare the acceleration of the due date of the indebtedness
under such loans. As mentioned in the same Note 10, a group of holders of the Secured Senior
Notes Due 2004 filed a lawsuit in a New York Court against the Company
demanding the immediate payment of the indebtedness under that loan, and
alleging breach of the Secured Senior Notes Due 2004 indenture requesting that
the Court declare that the holders of the notes are pari-passu with the lenders
under the Amended and Restated Senior Secured Credit Loan Agreement. On April
19, 2004, this group of holders of the notes filed an amended complaint and now
is also seeking injunctive relief barring the Company from selling,
transferring or otherwise encumbering the assets pending decision on the merits
of their claim for specific performance. F-10




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During 2003, the Group did not make interest payments under some of these loans
and as of the issuance date of these financial statements, interest payments
overdue amounted to Ps.169,750 (U.S.$15,116). The Group does not expect to have
sufficient future cash flows to make these payments, unless it receives
additional funds from external sources. Additionally, the Group has incurred in accumulated losses that have originated
that as of December 31, 2003 has lost more than two thirds of its capital
stock, and, as of the same date, that the consolidated current liabilities
exceed the consolidated current assets by Ps.4,578,654. Furthermore, the
Company might be instituted in a reorganization proceeding under the Concurso
Mercantil Law in Mexico. Under these circumstances, Accounting Principles Generally Accepted in Mexico
(Mexican GAAP) require that these loans be presented as current liabilities.
The Group classified these loans as current liabilities as of December 31,
2003. In order to turn around this situation and to maintain the Groups viability,
the Companys management has changed its business strategy and has implemented
some short-term measures that will result in cost savings. Some key elements of
this strategy include the restructuring of its debts, a reduction in personnel
and other expenses and the optimization of capital expenditures. The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. NOTE 3  ACQUISITIONS, DISPOSITIONS AND COMPANY STRUCTURE: During 2001, the Company incorporated Iusatel USA, Inc. to be engaged in the
long distance business in the United States of America. Iusatel USA started
operations in December, 2002. On March 22, 2001, the Company sold its 65.00% equity interest in Satelitrón,
S. A. de C. V. As a result of the sale, the Company recorded a gain of
Ps.4,370 (U.S.$429) before taxes. During 2002, Inflight Phone de México, S.A. de C.V. and Promotora Celular, S.A.
de C.V., were merged into Iusacell, S.A. de C.V. The three companies are
wholly-owned subsidiaries. The merger was recorded as of July 31, 2002. Acquisition of Grupo Portatel, S. A. de C. V.: On October 19, 2001, the Company completed the acquisition of a 78.34%
ownership in Grupo Portatel, S. A. de C. V. and its subsidiaries (Portatel) for
Ps.574,299 (U.S.$56,588). The Company also reached an agreement to acquire the
remaining 21.66% ownership in Portatel for Ps.163,904 (U.S.$16,150). The
Company closed the acquisition of this remaining ownership on February 8, 2002.
Portatel is engaged in the wireless communications business and holds the
concession to operate cellular telephone systems in the Region 8, which covers
the Mexican states of Yucatan, Campeche, Quintana Roo, Chiapas and Tabasco in
the southeast of Mexico. F-11




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##### Table of Contents



The consolidated income statements of the Company and its subsidiaries include
the consolidated results of Portatel beginning October 19, 2001. The assets
acquired and liabilities assumed were recorded at estimated fair values as
determined by the Companys management based on information currently
available, on current assumptions as to future operations and independent
appraisals. A summary of the assets acquired and liabilities assumed in the
acquisition is as follows: Estimated fair values:Assets acquired
    
    Ps.
    724,256Liabilities assumed
    
    
    (214,417
    )Goodwill (amortized by the straight-line method
over the remaining life of the concession)
    
    
    228,364Purchase price
    
    Ps.
    738,203
 Group Structure: Under the laws established by the Mexican government, due to Verizons control
of Iusacell, Iusacell may not own the majority of the voting stock of Mexican
companies that hold concessions to provide telecommunications services other
than cellular service. As of November 1998, the Company and Jose Ramon
Elizondo, a then director of Iusacell (the Mexican National), entered into a
joint venture formation agreement (the Agreement) pursuant to which they agreed
to participate together in the microwave frequencies leasing, long distance,
local telephony, PCS and paging businesses. The Company and the Mexican National agreed that the Company would own 94.90%
of the economic interest and 49.00% of the voting shares of Iusatel, S. A. de
C. V. (Iusatel), the Companys long distance concessionaire,
Iusatelecomunicaciones, S. A. de C. V. (Iusatelecomunicaciones), the Companys
fixed wireless local telephony operation, Punto-a-Punto Iusacell, S. A. de C.
V. (Punto-a-Punto Iusacell), a microwave frequencies concessionaire and
Iusacell PCS, S. A. de C. V. (Iusacell PCS), which holds concessions for 1.9GHz
frequencies in Regions 1 and 4. The Mexican National would own 5.10% of the
economic interest and 51.00% of the voting shares of these companies.
Additionally, the Mexican National would acquire 2.00% of the voting shares of
Infotelecom, S.A. de C.V., the Companys subsidiary that provides national and
international paging services (Infotelecom) and which is the result of a joint
venture agreement between the Company and Infomin, S.A. de C.V. (Infomin), a
Mexican company which holds a fifteen-year concession to provide nationwide and
international paging services through July 2009. As of December 31, 2003,
Infotelecom is owned 49.00%, 49.00% and 2.00%, by the Company, Banorte, S. A.
(which acquired Infomins interest in Infotelecom in exchange for the
retirement of debt) and the Mexican National, respectively. Iusatel, Iusatelecomunicaciones, Punto-a-Punto Iusacell and Infotelecom (and
until 2000 Iusacell PCS which was acquired by Iusacell) are each referred
herein as a Non-Cellular Subsidiary and together, the Non-Cellular
Subsidiaries. F-12




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##### Table of Contents



Under the Agreement, the Mexican National did not have the unilateral right to
approve actions at the shareholder or board level of the Non-Cellular
Subsidiaries. Under each Non-Cellular Subsidiaries by-laws, all shareholder
or board action had to be approved by the majority of the shares held by the
Company (or Iusacell) or a majority of the board members designated by the
Company (or Iusacell), respectively. The Agreement, together with each joint
venture companys by-laws, enable the Company or Iusacell, as the case may be,
to have management control over the day-to-day operations and financial
administration of the Non-Cellular Subsidiaries. The Mexican National cannot
alone, among other things, select, terminate or determine the compensation of
management or establish operating and capital decisions in the ordinary course
of business. Finally, as a part of the Agreement, Iusacell and the Mexican National provide
each other with a put and call option on the shares of the Non-Cellular
subsidiaries owned by the Mexican National. On October 2, 2003, the Mexican National notified Iusacell that he was
exercising its put option on the Non-Cellular Subsidiaries shares owned by him,
based on the Agreement. As a result, on November 3, 2003, Iusacell and the
Mexican National signed an agreement under which Iusacell PCS (affiliated
company) will pay to the Mexican National, on its own and/or on behalf of any
of the Non-Cellular Subsidiaries, a total amount of U.S.$11,194, net of income
taxes, resulting from the capital stock refunds originated by the cancellation
of the shares owned by the Mexican National in the Non-Cellular Subsidiaries
over a period of two years. This amount will be paid through weekly variable
installments of at least, U.S.$100 each, starting on November 3, 2003. The
unpaid amount bears interest at a fixed annual rate of 14.00%. As of December
31, 2003 and as of the issuance date of these financial statement, the Group
and affiliated companies of the Group, have paid the Mexican National U.S.$900
and U.S.$2,200, respectively. Pursuant to the agreement, during two years or until the full amount has been
paid to the Mexican National, the shares described in the agreement will be
deposited in a trust, and the voting rights of such shares will be exercised by
the trust, under the instructions of Iusacell. In the event that Iusacell PCS
failed to make four payments, the trust will exercise the voting rights under
the instructions of the Mexican National. Additionally, this agreement
establishes that under certain circumstances, including the failure to make
four payments, among others, the amounts paid by Iusacell as of that date may
be retained by the Mexican National as a penalty for breaching the agreement,
and the shares deposited in the trust will revert to the Mexican National. F-13




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##### Table of Contents



The subsidiaries of the Company, which are included in the consolidated
financial statements, are as follows: Economic Interest(direct or indirect,as of December 31)Subsidiary
    
    2003
    
    2002(%)
    
    (%)S.O.S. Telecomunicaciones, S. A. de C. V. (Región 9)
    
    
    100.00
    
    
    
    100.00Iusacell, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Sistecel, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Comunicaciones Celulares de Occidente, S. A. de C. V. (Región 5)
    
    
    100.00
    
    
    
    100.00Sistemas Telefónicos Portátiles Celulares, S. A. de C. V. (Región 6)
    
    
    100.00
    
    
    
    100.00Telecomunicaciones del Golfo, S. A. de C. V. (Región 7)
    
    
    100.00
    
    
    
    100.00Inmobiliaria Montes Urales 460, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Mexican Cellular Investments, Inc.
    
    
    100.00
    
    
    
    100.00Iusanet, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Iusatelecomunicaciones, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Grupo Iusacell Nicaragua, S. A.
    
    
    100.00
    
    
    
    100.00Infotelecom, S. A. de C. V.
    
    
    49.00
    
    
    
    49.00Punto a Punto Iusacell, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Grupo Portatel, S. A. de C. V. y subsidiaria (Región 8)
    
    
    100.00
    
    
    
    100.00Iusatel, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Iusatel USA, Inc.
    
    
    94.90
    
    
    
    94.90
 NOTE 4  BASIS OF PRESENTATION AND ACCOUNTING POLICIES:  a.
    
    Basis of presentationThe Companys consolidated financial statements have been prepared in
conformity with Mexican GAAP. The consolidated financial statements have been
presented in thousands of constant Mexican pesos as of December 31, 2003 as
required by Bulletin B-10, Recognition of the Effects of Inflation on
Financial Information, as amended, issued by the Mexican Institute of Public
Accountants (MIPA) (Bulletin B-10).b.
    
    Consolidated financial statementsThose companies in which the Company holds 50.00% or more of the capital
stock and/or exercises control over operating and financing activities are
included in the consolidated financial statements. In addition, while the
Company owns less than 50.00% of the voting common stock of the Non-Cellular
Subsidiaries, it consolidates them because it exercises management control
over their day-to-day operations and financial administration by appointment
of the stockholders and other arrangements (Note 3). All significant
inter-company balances and transactions have been eliminated in
consolidation. F-14




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##### Table of Contents



c.
    
    Use of estimatesThe preparation of financial statements in conformity with Mexican GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.d.
    
    Monetary unitThe financial statements are presented in Mexican pesos (Ps.), the currency
that, based on Mexican laws, must be used to prepare the accounting records
of the Company and its Mexican subsidiaries.e.
    
    Effects of inflation on the financial statementsThe consolidated financial statements of the Company have been prepared in
accordance with Bulletin B-10. The Third Amendment to Bulletin B-10 requires
the restatement of all comparative financial statements to constant Mexican
pesos as of the date of the most recent balance sheet presented. Accordingly,
the consolidated financial statements have been restated as follows:  
    
    The balance sheet amounts as of December 31, 2002 presented in the
consolidated financial statements have been restated to constant Mexican pesos
as of December 31, 2003 based on the National Consumer Price Index (NCPI)
published by Banco de México (the Mexican Central Bank).  
    
    Consolidated income statements for the current and prior years have been
restated to constant Mexican pesos as of December 31, 2003 using the NCPI from
the periods in which the transactions occurred.  
    
    Bulletin B-12, Statement of Changes in Financial Information, issued by the
MIPA (Bulletin B-12), addresses the presentation of the statement of changes in
financial position when financial statements have been restated to constant
Mexican pesos as of the latest balance sheet date. Bulletin B-12 identifies the
origin and application of resources representing differences between beginning
and ending balance sheet amounts in constant Mexican pesos, excluding the
effect of holding non-monetary assets. Bulletin B-12 also provides that
monetary and foreign exchange gains and losses should not be eliminated from
resources provided by operating or financing activities. F-15




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##### Table of Contents



The items that originate from the recognition of effects of inflation on
financial information are as follows:Restatement of non-monetary assets:Inventories are valued at the average price of the purchases made during the
period and are restated using the NCPI, without exceeding net realizable
value.Based on the Fifth Amendment to Bulletin B-10, property and equipment, net,
and depreciation for the year are restated using the NCPI, without exceeding
net realizable value.Property and equipment are depreciated using the straight-line method, based
on the restated values. The average annual rates of depreciation used by the
Group are as follows: 2003
    
    2002(%)
    
    (%)Buildings and facilities
    
    
    4.00
    
    
    
    4.00Communications equipment
    
    
    10.00
    
    
    
    10.00Furniture and fixtures
    
    
    10.00
    
    
    
    10.00Transportation equipment
    
    
    17.00
    
    
    
    17.00Computer equipment
    
    
    29.00
    
    
    
    29.00Cellular rental telephones
    
    
    
    
    
    
    25.00
 The Group does not capitalize integral financing cost for assets under
construction, unless the integral financing cost generated by loans are
directly attributable to those assets. For the years ended December 31, 2003,
2002 and 2001, the Group did not capitalize integral financing cost. Investments in associated companies are accounted for using the equity method
based on the associated companys equity and are adjusted for the
effects of inflation in accordance with Bulletin B-10. Restatement of stockholders equity: The contributed and earned capital accounts include the effect of
restatement determined by applying the NCPI factor from the date capital
was contributed or earned. The restatement represents the amount
required to maintain the contributions and accumulated results in
constant Mexican pesos as of December 31, 2003. The excess or deficit from restatement of capital account is an element
of stockholders equity that includes surplus or deficit from holding
non-monetary assets, which represents the excess or deficit in specific
values of net non-monetary assets in comparison with the increase
attributable to general inflation as measured by the NCPI. F-16




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##### Table of Contents



Integral financing cost: Integral financing cost is comprised of net interest expense, foreign
exchange gains and losses and gains and losses from net monetary position. Foreign exchange gains and losses on transactions denominated in currencies
other than Mexican pesos result from fluctuations in exchange rates between
the date transactions are recorded and the date of settlement or period end. Gains and losses from net monetary position represent the effects of
inflation, as measured by the NCPI, on the Groups monetary assets and
liabilities at the beginning of each month. If monetary liabilities
exceed monetary assets, there is a gain from monetary position. If
monetary liabilities are less than monetary assets, there is a resulting
loss from monetary position.  f.
    
    Cash and cash equivalentsCash and cash equivalents consist primarily of bank deposits. The Group
invests its excess cash in deposits with major banks.g.
    
    Financial instrumentsBulletin C-2, Financial Instruments, issued by the MIPA (Bulletin C-2),
requires that all financial instruments be recorded in the balance sheet at
their fair value and changes in the fair value be recorded in each period in
the income statement. Bulletin C-2 also requires that derivative financial
instruments used for hedging purposes be recorded in the balance sheet and
valued using the same valuation criteria used to value the hedged asset or
liability.The Groups financial instruments consist principally of cash and cash
equivalents, accounts receivable and payable, notes payable, long-term debt,
and until 2002, foreign currency and interest hedge contracts.Until October 2002, the Group used derivative financial instruments to manage
the risk of variable interest rates and foreign currency exchange
fluctuations, which under Bulletin C-2, are classified as hedge transactions.
On October 7 and 10, 2002, the Group early terminated the derivative
financial instruments used for hedging purposes (Note 16).The carrying amounts of the Groups financial instruments, as reflected in
the balance sheet, approximate their fair value as of December 31, 2003 and
2002, except for long-term debt which has a quoted market value (Note 16). F-17




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As a result of the adoption of this new accounting pronouncement in 2001, the
Group recognized a cumulative loss on derivative financial instruments of
Ps.7,120 as of January 1, 2001.h.
    
    Allowance for doubtful accountsThe Group cancels service to customers with invoices that are 60 days past
due. The allowance for doubtful accounts represents the Groups estimate of
the probable loss inherent in all accounts receivable due to general
historical trends of customer performance and factors surrounding the
specific customers credit risk. The Group wrote off accounts receivable for
Ps.198,233 in 2002. The charge to income for the year for the allowance for
doubtful accounts amounted to Ps.169,753, Ps.63,777 and Ps.119,175 in 2003,
2002 and 2001, respectively.i.
    
    Investment in associated companiesThe Company carries under the equity method long-term investments in
associated companies in which it owns between 20.00% and 50.00% of the
companys voting common stock and over which the Company can exercise
significant influence. Under the equity method, such investments are carried
at cost adjusted for the Companys share of the net income or losses of these
companies and the effects of restatement of non-monetary assets in the
associated companies. The effects of significant transactions with such
associated companies are eliminated before applying the equity method.j.
    
    Cellular telephonesUntil September 30, 2003, the cost of cellular telephones given to customers
under exclusive service contracts was amortized based on the nature and terms
of the service contracts to match costs with the timing of earned revenues.
Average amortization period was twelve months. Until September 30, 2003, the
cost of such telephones was included in Recoverable taxes and other, in the
consolidated balance sheet, net of accumulated amortization. Such cost did
not exceed market value.During the third quarter of 2003, the Group changed the accounting policy for
the telephones given to customers under exclusive service contracts. As a
result, the cost of such telephones is recorded in the income statement at
the moment when the contract is signed and such cost is included as a part of
the cost of equipment sales and other, in the consolidated statement of
income. The cumulative effect of this change in accounting policy resulted in
a loss for the year for 2003 of Ps.159,015 related to the remaining balance
of telephones being amortized as of that date, amount that is included in the
line cumulative effect of the adoption of the new accounting pronouncement
and change in accounting policy, in the consolidated income statement for the
year ended December 31, 2003. F-18




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In addition to the effect for this change, the Group reclassified Ps.226,027
of the amortization for the period from January to September 2003, which were
originally recorded as a depreciation and amortization for the period, to
cost of telephone equipment sales and other. If this reclassification had
been made for the years ended December 31, 2002 and 2001, the cost of
telephone equipment sales and other would have been of Ps.925,869 and
Ps.1,578,643, respectively, and the depreciation and amortization would have
been Ps.1,787,422 and Ps.1,660,071, respectively.At the end of the contract term, the customer keeps the cellular telephone.
In the event of an early termination of an exclusive service contract, the
customer either (i) is required to return the phone to the Group or (ii)
acquires the telephone at its market value on the date of termination.The cost of cellular telephones sold to customers is recorded as cost of
sales based on the average cost of such telephones. Until 2002,
telephones leased to customers are included in fixed assets and are
depreciated over the initial lease period, generally two years.k.
    
    ConcessionsCosts related to the acquisition of concessions granted by the Mexican
government to provide cellular telephone services have been capitalized
and are included in other assets. Such costs are amortized on a
straight-line basis over the initial term of the respective concession.
The Mexican government requires the Companys compliance with the
specific terms of each concession. Through December 31, 2003, the Group
had complied substantially with such requirements, except for certain
informational requirements of the Mexican authorities. The Group
believes that such noncompliance does not expose it to any risk of
concession forfeiture, or any other material liability.l.
    
    AdvertisingAdvertising costs are expensed as incurred. The cost of prepaid media
advertising (including television air time, magazine, directory and
other print media) is deferred and recorded in other assets until the
advertising airtime or space is used, at which time, such cost is
recognized as an operating expense. Advertising expense amounted to
Ps.428,124, Ps.291,301 and Ps.473,691 for 2003, 2002 and 2001,
respectively.On July 1, 2003, the Group signed a contract with an advertising agency,
through which the agency is delivering advertising services to the
Group, including television air time provided by Televisión Azteca, S.A.
de C.V. (TVA), related party, as well as advertising in other media
companies. The contract was signed for the period from July 1, 2003 to
December 31, 2004. For the year ended December 31, 2003, the amount paid
to this advertising agency, without the Value Added Tax, amounted to
Ps.288,856. F-19




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##### Table of Contents



m.
    
    GoodwillGoodwill is amortized on a straight-line basis over twenty years.
Amortization expense was Ps.197,069, Ps.175,625 and Ps.174,785 in 2003,
2002 and 2001, respectively. Additionally, the Group canceled goodwill
for Ps.35,180 from its telephones leasing business, amount that is
presented as an special item in the line cancellation of intangible
assets in the consolidated statement of income for the year ended
December 31, 2003 (Note 4o.).n.
    
    Intangible assetsBeginning January 1, 2003, the Group adopted Bulletin C-8 Intangible assets
issued by the MIPA. This statement requires intangible assets to be
recognized on the balance sheet as long as they are identifiable, provide
expected economic benefits and the company has control over such benefits. It
also provides that intangible assets with an indefinite useful life should
not be amortized and intangible assets with a definite life should be
amortized systematically, based on the best estimate of their useful life
determined in accordance with the expected future economic benefits. These
assets are subject to an annual evaluation of their recoverable value, to
identify any impairment losses (Note 9).The adoption of this statement did not have a significant effect on the
Groups financial position. During the third quarter of 2003 and considering
the economic conditions under which the Group is operating (Note 2) and based
on the business plan prepared by the Groups new management, the Group wrote
down intangible assets for Ps.181,640 , amount that was charged to income of
the year and is shown in the consolidated income statement for the year ended
December 31, 2003, as a special item (Note 4o.).
    
    . Evaluation of long-lived assetsThe Group evaluates the recoverability of its long-lived assets when
events and circumstances indicate that such assets might be impaired.
The Group determines impairment by comparing the undiscounted cash flows
estimated to be generated by these assets to their respective carrying
amounts. In the event impairment exists, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the
asset. If quoted market prices for an asset are not available, fair
market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on
property and equipment to be disposed of are determined in a similar
manner, except that fair market values are reduced for the cost to
dispose.For the year ended December 31, 2003, the Group wrote down intangible assets
for Ps.216,820, including Ps.35,180 of goodwill (Notes 4m. and 4n.). F-20




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##### Table of Contents



p.
    
    Deferred income taxes and employee profit sharingThe Group follows the provisions of Bulletin D-4, Accounting Treatment
of Income Tax, Assets Tax and Employee Profit Sharing, issued by the
MIPA, (Bulletin D-4). This Bulletin requires a method to calculate
deferred taxes based on comprehensive assets and liabilities. The new
method requires the recognition of future tax consequences based on the
difference between the financial statements and tax basis of assets and
liabilities -temporary differences- as of the date of the financial
statements.During 2003, and due to the circumstances mentioned in Note 2 and since the
Group can not assure the realization of certain tax loss carry forwards, the
Group increased the net deferred tax asset valuation allowance to fully
reserve the deferred tax asset amounting to Ps.163,170 (Note 11).Employee profit sharing is a statutory labor obligation payable to employees
and determined, for each subsidiary with employees, on its pretax income, as
adjusted, in accordance with the provisions of Mexican labor and tax laws.q.
    
    LiabilitiesBeginning January 1, 2003, the Group adopted Bulletin C-9 Liabilities,
provisions, contingent assets and liabilities and commitments issued by the
MIPA (Bulletin C-9). This Bulletin establishes general rules for the
valuation, presentation and disclosure of liabilities, provisions and
contingent assets and liabilities, as well as for the disclosure of
commitments entered into by a company as part of its normal operations. The
adoption of this Bulletin did not have a significant effect on the Groups
financial position.As a consequence of the adoption of Bulletin C-9, the Groups liabilities
represent present obligations and the liability provisions recognized in the
balance sheet represent present obligations whose settlement will probably
require the use of economic resources. These provisions have been recorded,
based on Group managements best estimate of the amount needed to settle the
liabilities; however, actual results could differ from the recorded
provisions.r.
    
    Seniority premiumsIn accordance with Mexican labor law, Groups employees are entitled to
seniority premiums upon retirement after 15 years of service or upon
dismissal, disability or death. The Group follows Bulletin D-3, Labor
Obligations, issued by the MIPA (Bulletin D-3). Under Bulletin D-3, the
actuarially determined projected benefit obligation is computed using
estimates of salaries that will be in effect at the time of payment. F-21




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##### Table of Contents



Personnel not yet eligible for seniority premiums are also included in the
determination of the obligation with necessary adjustments made in
accordance with the probability that these employees will reach the
required seniority. The Groups liability and related costs for
seniority premiums are immaterial for all periods presented.In accordance with Mexican labor law, the Group is liable for severance
payments to employees who are dismissed under certain circumstances.
Such compensation is expensed when paid.The Group has no employee pension plans and does not provide for
post-retirement benefits.During the last quarter of 2003, the Group transferred the majority of its
employees to two related entities which are not part of the Group.s.
    
    Revenue recognitionCellular air time is recorded as revenue as service is provided. Until
December 31, 2001, revenue from the sale of prepay cards was recognized
at the date of sale. The Group had recognized the revenue on the sale
of prepay cards at the date of sale rather than on a deferred basis
because the length of the average consumption period for such prepay
cards was not significant, i.e., approximately one to one and a half
months, and it was not material to results of operations for 2001.
Starting January 1, 2002, the Group started to recognize revenue from
the sale of the prepay cards as service is provided because the
increasing length of the average consumption period for such prepay
cards. Revenues from the sale of prepay cards associated with services
that have not been provided are deferred until the services are provided
and are included in taxes and other payable in the accompanying
consolidated balance sheet.Sales and cost of sales of equipment and related services are recorded
when goods are delivered and services are provided. Cellular access
charges are billed in advance and recognized when the services are
provided. Other revenues, mainly from paging and long distance
services, are recognized when the related services are provided.t.
    
    Foreign currency transactionsForeign currency transactions are recorded at the exchange rates in effect at
the transaction date. Assets and liabilities denominated in foreign
currencies are translated to Mexican pesos using the exchange rates in
effect at the time of settlement or valuation at each balance sheet
date, with the resulting exchange differences being recognized as
exchange gains or losses.u.
    
    Comprehensive lossComprehensive loss includes the Groups consolidated net loss and any other
item that, because of specific accounting guidance, is recorded directly
as a part of stockholders equity, and which are not capital stock
increases, decreases and/or distributions. F-22




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##### Table of Contents



The comprehensive loss line included in the consolidated statement of
stockholders equity represents the result of the performance of the
Group during the year. For the years ended December 31, 2003, 2002 and
2001, comprehensive loss was the same as the consolidated loss for the
year.v.
    
    New accounting pronouncementsThe provisions of Bulletin C-15, Impairment of the value of long-lived
assets and their disposal, issued by the MIPA (Bulletin C-15), went
into effect on January 1, 2004. This Bulletin establishes general
criteria for the identification and, if applicable, recording of losses
from impairment or decrease in value of long-lived tangible and
intangible assets, including goodwill; additionally, it defines concepts
such as net sales price and value in use for the valuation of long-lived
assets. The Group is in the process of carrying out a study to
determinate the value in use of its long-lived assets and the amount of
any possible impairment.In 2003, the MIPA issued new Bulletin C-12, Financial instruments with
characteristics of liabilities, capital or both (Bulletin C-12), which
highlights the differences between liabilities and capital from the viewpoint
of the issuer, as a basis for identifying, classifying and accounting for the
liability and capital components of combined financial instruments at the
date of issuance. Bulletin C-12 establishes the methodology for separating
the liabilities and capital components from the proceeds of the issuance 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 incurred in connection
with the issuance of combined instruments should be assigned to liabilities
and stockholders equity in proportion to the amounts of the components
recognized as liabilities and stockholders equity; that the profits and
losses related to financial instrument components classified as liabilities
should be recorded in comprehensive financing cost and that distributions to
owners of financial instrument components classified as capital should be
charged directly to a stockholders equity account other than the net income
for the year.Although Bulletin C-12 became effective on January 1, 2004, there is no
requirement to restate information of prior periods or recognize an initial
effect of adopting in the income for the year it is adopted, in accordance
with the transitory provisions of the Bulletin C-12. The adoption of the
Bulletin C-12 is not expected to have an impact on the Groups consolidated
financial statements. F-23




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##### Table of Contents



NOTE 5  RELATED PARTIES: A summary of related party accounts and notes, receivable and payable, as of
December 31, is as follows: Receivable
    
    Payable2003
    
    2002
    
    2003
    
    2002Iusacell PCS
    
    
    
    
    
    Ps.
    14,786Iusacell
    
    
    
    
    
    
    48,505Servicios Eficientes de Cartera
    
    Ps.
    83,270
    
    
    
    Iusacell Arrendadora
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ps.
    21,519Iusacell Infraestructura
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,895Iusacell Infraestructura de México
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,174Grupo Elektra
    
    
    
    
    
    
    
    
    
    Ps.
    94,896
    
    
    
    Operadora Unefon
    
    
    
    
    
    
    
    
    
    
    2,605
    
    
    
    Teleactivos
    
    
    
    
    
    
    
    
    
    
    7,577
    
    
    
    Verizon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,271Vodafone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,108Otros
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    Total
    
    Ps.
    83,270
    
    
    Ps.
    63,291
    
    
    Ps.
    105,915
    
    
    Ps.
    114,967Net accounts payable
    
        (Ps.
    22,645
        )
    
        (Ps.
    51,676
        )
 As discussed in Note 1, during 2003 Verizon and Vodafone sold its investment in
the Company, so beginning in the date of the sale, they are not related parties
of the Group anymore. Accounts and notes payable to Verizon, including
interest, as of December 31, 2003 and 2002, amounted to Ps.84,804 and
Ps.82,271, respectively. Accounts and notes payable at the date of the sale,
were reclassified in the consolidated balance sheet and as of December 31, 2003
are presented as taxes and other accounts payable. Until December 31, 2002,
they were presented as accounts and notes payable to related parties. Accounts
payable to Verizon result from services rendered by seconded employees assigned
by Verizon. F-24




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##### Table of Contents



For the period ended July 31, 2003 (date of sale), and for the years ended
December 31, 2002 and 2001, transactions with Verizon and Vodafone are as
follows: December 31,July 31,2003
    
    2002
    
    2001Service revenues
    
    Ps.
    14,101
    
    
    Ps.
    36,928
    
    
    Ps.
    5,777Cellular telephones repair expense
    
    
    
    
    
    
    
    
    
    Ps.
    17,166Technical expenses
    
    Ps.
    29,621
    
    
    Ps.
    22,005
    
    
    
    65,211Lease expenses
    
    
    
    
    
    
    
    
    
    
    6,764Interest expense
    
    
    
    
    
    
    9,092
    
    
    
    5,977Total expenses
    
    Ps.
    29,621
    
    
    Ps.
    31,097
    
    
    Ps.
    95,118Acquisition of handsets
    
    Ps.
    12,174
    
    
    Ps.
    
    
    
    Ps.
    
 Beginning August, 2003, Iusacell and the Company are subsidiaries of Movil
Access. Contracts signed with related parties are described as follows: Contracts with Grupo Elektra, S.A. de C.V. and subsidiaries  a.
    
    On August 5, 2003, Iusacell, S.A. de C.V., subsidiary of the Company
(Iusa), Elektra del Milenio, S.A. de C.V. (Elektra) and Salinas y Rocha,
S.A. de C.V. (SyR) signed a contract through which Elektra and SyR are
obligated to lease commercial areas in their stores in order for Iusa to
place a point of sale and to promote its telecommunication services as
well as other promotional and marketing activities. For these services,
Elektra and SyR will receive U.S.$2,500 payable in four installments on
October 20, 2003, November 28, 2003, December 31, 2003 and April 30, 2004.
The contract was signed for the period from August 5, 2003 to August 4,
2004.b.
    
    On August 5, 2003 Iusa, Elektra and SyR signed a contract through which
Elektra and SyR will provide support to promote through advertising
campaigns the services offered by Iusa in their stores. For such services,
Elektra and SyR will receive U.S.$5,000 payable in four installments on
October 30, 2003, November 28, 2003, December 31, 2003 and April 30, 2004.
The contract was signed for the period from August 5, 2003 to December 31,
2004.c.
    
    On August 2, 2003, Iusa and Elektra signed a ten-year commission
agreement, through which Iusa designed Elektra as a distributor to promote
and commercialize the services and sale the Iusa products in its stores
around the country. F-25




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##### Table of Contents



Elektra is obligated to use Iusas Trade Mark only to promote,
commercialize and sale Iusa services. Iusa will pay Elektra a commission for
the sale of its products in the following way: 25.00% on the selling price of
the VIVA kit product, 13.00% on the air-time sold, Ps.350 (pesos) for
contracts sold of the rate plan Plan Facilito.d.
    
    On October 1, 2003, Grupo Elektra and Iusa, signed an indefinite life
agreement under which Iusa gives to Elektra the right to operate and
manage its Centros de Solución Inmediata (CSI), chain of 103 stores
through which Iusa commercialized telephone services in Mexico. In such
stores Elektra will offer, in addition to the services and products of
Iusa, other services and products of third parties.Pursuant to the contract, Elektra will charge Iusas clients for concepts
like rents charged in advance, guaranteed deposits and surety bonds,
differences for handsets costs, etc., and will make weekly deposits to Iusa
of the amounts collected in the CSIs for these concepts, net of the
commission for the administration of the business. Also, Elektra will pay
Iusa, if applicable, an amount for the following concepts: royalties for the
administration and operation of the CSIs, the use of the trade marks, the
use of the computer system, personnel training and lease of assets.Iusa will transfer to Elektra the rights over the lease contracts of the
facilities in which the CSIs are located or will sub-lease them to Elektra.
Beginning October 2003, Elektra is paying the lease for the CSIs.The amounts (commissions) payable by Iusa are as follows:  
    
    27.00% on the selling price of the VIVA kit product
    
    18.00% on the air-time sales
    
    Up to Ps.3,180 (pesos) during one year for post-paid
    
    Between 7.00% and 11.00% on residual commissions for post-paid
    
    Between 2.00% and 7.00% based on the collection amounts
    
    Ps.150 (pesos) for each activation of other distributor
    
    Between Ps.450 and Ps.1,800 (pesos) for contracts renewal
    
    Ps.7,200 annually for the lease of commercial spaces for customer care
activities
    
    Ps.15 monthly for each radio base installed in the CSIs  e.
    
    On August 1, 2003, Iusa and Elektra signed a current account contract, to
control and record the transfer of funds between the two companies
originated by the corporate, commercial relationship, financing,
administration and services activities between the two companies, for
approximately Ps.80,000. Iusacell delivered a note payable to Elektra for
U.S.$7,000 as a guarantee to comply with its obligations under this
contract. The contract is for an indefinite term (Note 12l.). F-26




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##### Table of Contents



Contract with Servicios Eficientes de Cartera, S. de R.L. (SECSA) Iusa signed a services, commissions and deposits contract with SECSA on October
6, 2003, under which SECSA (subsidiary of Movil Access) is committed to perform
collection activities, and the administration of cash flows and payments for
Iusa. The term of the contract is ten years and Iusa will pay 0.50% of the
amount of collections and payments. For the year ended December 31, 2003, Iusa
paid commissions to SECSA for Ps.4,896. Contract signed with Teleactivos, S.A. de C.V. (Teleactivos)  a.
    
    On September 1, 2003, Iusa signed a Master Agreement for Call Center
Services through which Teleactivos (affiliated company of Movil Access),
is committed to provide the following services on behalf of Iusa: Service
    
    Monthly payment*911
    
    Ps.60  Ps.80(1)*Hogar
    
    Ps.50*Doc
    
    Ps.90*Info
    
    Ps.48  Ps.75(1)*Hechos
    
    Ps.25*Vial
    
    Ps.7001-800
    
    Ps.25  Ps.45(1)Iusacell to Iusacell
    
    Ps.50 pesos por each record*FDI
    
    Ps.25  Ps.50(1)Corporate switchboard
    
    Ps.30Change your plan
    
    Ps.110
   (1)
    
    The cost is variable depending on the number of incoming and
outgoing calls.  b.
    
    On November 3, 2003 Iusa signed a Master Agreement for the Operation of a
Call Center through which Teleactivos will be in charge of the operation
of Iusas call center, and delivering the services mentioned in the
following page: F-27




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##### Table of Contents



Cost in PesosService
    
    of the position per hourShort Messages Services
    
    Ps.
    103.00*411
    
    
    107.00Activations
    
    
    110.00Claims before PROFECO
    
    
    116.00Thefts
    
    
    35.00Welcome call
    
    
    116.00First invoice
    
    
    116.00Night time (paging)
    
    
    116.00Billing and collection
    
    
    110.00Renewals
    
    
    116.00Technical disruptions
    
    
    112.00Roaming
    
    
    116.00Back office
    
    
    116.00Retention In
    
    
    116.00Retention Out
    
    
    116.00VIP
    
    
    116.00General information
    
    
    107.00Corporate
    
    
    116.00Executive
    
    
    110.00
  Both contracts are for an indefinite term and can be cancelled for any of the
parts with a 30 days in advance notification. Contracts with Operadora Unefon, S.A. de C.V. (Unefon)  a.
    
    Interconnection agreement, signed on June 9, 2000. Interconnection rate
is Ps.1.90 (pesos) per minute of traffic (fixed rate). This contract is
for an indefinite term.b.
    
    Short Messages Services (SMS) contract signed on August 14, 2003. The
rate is of Ps.0.40 (pesos) per message (fixed rate/subject to review).
This contract is for an indefinite term. F-28




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##### Table of Contents



The following is a summary of the related party transactions previously
described for the year ended December 31, 2003: Telephone equipment sales
    
    Ps.
    304,005Air time sales
    
    
    15,998Interconnection revenues
    
    
    10,012Lease revenues
    
    
    15,216Administrative services
    
    
    29,376Total revenues
    
    Ps.
    374,607Telephone equipment purchases
    
    Ps.
    450,002Sales commissions
    
    Ps.
    4,875Administrative services
    
    
    23,965Lease expenses
    
    
    21,466Interconnection expenses
    
    
    14,437Advertising expenses
    
    
    44,750Total expenses
    
    Ps.
    109,493
 NOTE 6  INVENTORIES, NET: As of December 31, inventories, net, consisted of the following: 2003
    
    2002Cellular telephones and accessories
    
    Ps.
    281,096
    
    
    Ps.
    144,466Less: Allowance for obsolete and
slow-moving inventories
    
    
    (52,381
    )
    
    
    (107,347
    )228,715
    
    
    
    37,119Advances to suppliers
    
    
    27,280
    
    
    
    Ps.
    255,995
    
    
    Ps.
    37,119
 NOTE 7  INVESTMENTS: As of December 31, the Companys investments in associated companies were as
described in the following page: F-29




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##### Table of Contents



2003
    
    2002Entity
    
    Ownership
    
    Investment
    
    Ownership
    
    InvestmentEditorial Celular, S. A. de C. V.
    
    
    40.00
    %
    
    Ps.
    12,086
    
    
    
    40.00
    %
    
    Ps.
    14,426AMCEL
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,144Other
    
    
    
    
    
    
    2,108
    
    
    
    
    
    
    
    5,221Ps.
    14,194
    
    
    
    
    
    
    Ps.
    35,791
 The investment in Editorial Celular, S.A. de C.V. is accounted for by the
equity method. For each of the three years in the period ended December 31,
2003, the Groups share of net (losses) earnings of Editorial Celular, S.A. de
C.V. was of Ps.1,134, (Ps.10,129) and Ps.2,794, respectively. For the year
ended December 31, 2001, the gain on sale of equity investments was of
Ps.4,370. During 2003, the Mexican Association of Cellular Concessionaires, A. C. (AMCEL)
entered into liquidation and for this reason, the Group wrote-down its
investment in such entity recording a loss of Ps.18,678 which is presented in
the line equity participation in net loss of associated companies and net loss
on sale of equity investments, in the consolidated income statement for the
year ended December 31, 2003. NOTE 8  PROPERTY AND EQUIPMENT, NET:  a.
    
    At December 31, property and equipment, net, consisted of: 2003
    
    2002Buildings and facilities
    
    Ps.
    1,819,448
    
    
    Ps.
    1,794,075Communications equipment
    
    
    11,692,014
    
    
    
    11,190,547Furniture and fixtures
    
    
    400,424
    
    
    
    394,376Transportation equipment
    
    
    53,969
    
    
    
    64,390Computer equipment
    
    
    1,908,187
    
    
    
    1,829,980Cellular rental telephones
    
    
    10,255
    
    
    
    10,83815,884,297
    
    
    
    15,284,206Accumulated depreciation
    
    
    (9,329,313
    )
    
    
    (7,168,569
    )6,554,984
    
    
    
    8,115,637Land
    
    
    84,603
    
    
    
    71,601Construction in progress
    
    
    264,841
    
    
    
    704,940Advances to suppliers
    
    
    2,022
    
    
    
    1,125Ps.
    6,906,450
    
    
    Ps.
    8,893,303
 F-30




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##### Table of Contents



b.
    
    Depreciation expense was Ps.1,611,779, Ps.1,467,646 and Ps.1,347,601 for
2003, 2002 and 2001, respectively.c.
    
    In December 1999, the Company entered into a series of agreements with
MATC Celular, S. de R. L. de C. V. (an affiliated company of American
Tower Corporation) (MATC Celular). These agreements, among other things,
gave MATC Celular the right to acquire approximately 350 existing Iusacell
Celular non-strategic towers. During 2003, 2002 and 2001, the Group sold
33, 67 and 244 non-strategic towers to MATC Celular, respectively, for
Ps.92,646 (U.S.$8,200), Ps.102,002 (U.S.$10,050) and Ps.383,305
(U.S.$36,600), respectively, generating a gain on the sale, before taxes,
of Ps.85,984, Ps.95,257 and Ps.338,388, respectively. As a part of this
agreement, a subsidiary of Iusacell signed a lease contract for the same
towers with MATC Celular for a minimum mandatory term of ten years, a term
that could be automatically extended for two additional periods of five
years each. In December 2003, the Group extended the agreements with MATC
Celular which, among other things, gave MATC Celular the right to acquire
up to 143 additional towers, which will be also leased by the Group under
conditions similar to the original agreement (Note 12a.) During 2004 and
until the issuance date of these financial statements, the Group has sold
36 additional towers.Under Mexican GAAP, Bulletin D-5, Leases, (Bulletin D-5) establishes the
general criteria for capital and operating lease transactions.
Sale-leaseback transactions are recognized with the use of the general
criteria of Bulletin D-5. The timing of the recognition of a gain derived
from sale-leaseback transactions should be based on the subsequent lease
classification criteria of the leaseback portion of the transaction. If the
subsequent leaseback is accounted for as an operating lease, full immediate
gain recognition is allowed, whereas, if the subsequent leaseback is
accounted for as a capital lease, the gain is deferred and amortized in
proportion with the estimated useful life of the asset leased. Based upon
this criteria, the sale-leaseback agreement with MATC Celular was recorded by
the Group as an operating lease and consequently, the Ps.85,984, Ps.95,257
and Ps.338,388 gains were recognized at the date of the sale and have been
recorded as other operating income in the consolidated income statements for
the years ended December 31, 2003, 2002 and 2001.d.
    
    During the year ended December 31, 2003, Groups management performed a
study of its communications equipment. Based on this study and on the new
business plan of the Group, Groups management decided to write-down
certain communications equipment recording it at its estimated net
realizable value, originating a charge to income of Ps.404,700, amount
that is presented as a special item in the consolidated income statement
for the year ended December 31, 2003. F-31




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##### Table of Contents



NOTE 9  OTHER ASSETS, NET:  a.
    
    At December 31, other assets consisted of the following: 2003
    
    2002Concessions
    
    Ps.
    886,070
    
    
    Ps.
    886,070Prepaid expenses
    
    
    
    
    
    
    346,040Advance payments
    
    
    
    
    
    
    477,766Pre-operating expenses
    
    
    
    
    
    
    26,521Other
    
    
    1,194
    
    
    
    108,420Deferred income taxes, net (Note 11)
    
    
    
    
    
    
    169,664887,264
    
    
    
    2,014,481Accumulated amortization
    
    
    (230,470
    )
    
    
    (494,281
    )Ps.
    656,794
    
    
    Ps.
    1,520,200
  b.
    
    Concessions (and until 2002, telephones) amortization expense was
Ps.144,839, Ps.562,778 and Ps.1,300,778 in 2003, 2002 and 2001,
respectively.c.
    
    As discussed in Note 4n., during 2003 the Group wrote down intangible
assets for Ps.181,640 that mainly consisted of: (i) Pre-operating expenses
originated by the start-up operations of the long distance and microwave
lease businesses and (ii) certain payments made by the Group to Teléfonos
de México, S.A. de C.V. (Telmex) related to the special projects
implemented by Telmex to permit competition in long distance telephony
(Note 12c.). This write down of intangible assets is presented as a
special item in the consolidated income statement for the year ended
December 31, 2003.d.
    
    During the third quarter of 2003, the Group wrote-off installation
expenses for Ps.307,413 and advance payments for Ps.86,924, these advance
payments related to the expenses incurred by the Group while obtaining
long-term financing, which were reclassified to current liabilities during
2003. This write-off is presented in the other expenses, net, line in the
consolidated income statement for the year ended December 31, 2003.e.
    
    During 2003, the Group increased the valuation allowance of its net
deferred income tax asset (Note 11). F-32




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##### Table of Contents



NOTE 10  NOTES PAYABLE AND LONG-TERM DEBT: As of December 31, 2003 and 2002, the debt of the Group consisted of the
following: U.S. Dollars2003
    
    2003
    
    2002Secured Senior Notes Due 2004 (a)
    
    U.S.$
    150,000
    
    
    Ps.
    1,684,500
    
    
    Ps.
    1,628,218Amended and Restated Senior
Secured Credit Loan Agreement (b)
    
    
    265,622
    
    
    
    2,982,929
    
    
    
    2,883,263U.S.$
    415,622
    
    
    Ps.
    4,667,429
    
    
    Ps.
    4,511,481
  As discussed in Note 2, at December 31, 2003, these loans were reclassified
as short-term debt.a.
    
    Secured Senior Notes Due 2004On July 25, 1997, the Company completed an offering of long- term,
secured senior notes due July 15, 2004 for U.S.$150,000, accruing
interest at a fixed rate of 10.00%, payable semi-annually starting
January 15, 1998 (the Secured Senior Notes Due 2004). The Secured
Senior Notes Due 2004 were redeemable at the option of Iusacell
Celular, in whole or in part, at any time on or after July 15, 2001
starting at a redemption price of 105.00% of principal amount plus
accrued interest, if any, declining to 102.50% after July 15, 2002, and
finally to 100.00% after July 15, 2003.The Secured Senior Notes Due 2004 could also be redeemed at a price
equal to 100.00% of principal amount plus accrued interest, if any, in
the case of legal changes adversely affecting the treatment of the
withholding taxes on payments to holders of the Secured Senior Notes
Due 2004.On July 15, 2003, the Group decided that until concluding with its
restructuring process with its lenders, it would not pay the interest
due on the Secured Senior Notes Due 2004. Since the Group did not make
the interest payments during the 30 day cure period, this originated an
event of default under the indenture governing the Secured Senior Notes
Due 2004. Furthermore, the Group did not pay either the interest due in
January 2004. Additionally, the acquisition of Iusacell by Movil Access
(Note 1) constituted a change in control under the indenture governing
the Secured Senior Notes Due 2004. These events entitled the holders of
the Secured Senior Notes Due 2004 with the right to claim, request or
demand the acceleration of the due date of the indebtedness under the
Secured Senior Notes Due 2004. F-33




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##### Table of Contents



On September 11, 2003, the Company announced that it received a formal
notification of default requesting immediate payment of the indebtedness
under the Secured Senior Notes Due 2004, from a law firm in the United
States of America representing an informal committee which then represented
approximately 51.00% of the holders of the Secured Senior Notes Due 2004.Additionally, on January 14, 2004, a group of note holders representing
approximately 31.00% of the total holders of the Secured Seniors Notes
Due 2004, filed a lawsuit before a Court in New York demanding immediate
payment of the indebtedness under the Secured Senior Notes Due 2004, and
also alleging breach of the Secured Senior Notes Due 2004 indenture
requesting that the Court declare that the holders of the notes are
pari-passu with the lenders under the Amended and Restated Senior
Secured Credit Loan Agreement. On April 19, 2004, this group of holders
of the notes filed an amended complaint and now is also seeking
injunctive relief barring the Company from selling, transferring or
otherwise encumbering the assets pending decision on the merits of their
claim for specific performance (Note 2).b.
    
    Amended and Restated Senior Secured Credit Loan AgreementOn March 29, 2001, the Company completed the restructuring of its long-term
bank loan, its revolving credit facility, and the payment of the Eximbank
financing and the Commerzbank financing by entering into an amended and
restated senior secured loan agreement (the Amended and Restated Senior
Secured Credit Loan Agreement), which consists of:  (i)
    
    The Tranche A Loan for an aggregate principal amount of U.S.$189,805
for the purpose of refinancing existing indebtedness under the
long-term bank loan and the revolving credit facility and under a
certain bridge loan used to pay the January 2001 principal amortization
payments under the long-term bank loan and the revolving credit
facility.(ii)
    
    The Tranche B Loan for an aggregate principal amount of U.S.$75,817
for the purpose of paying existing indebtedness under the Eximbank
financing and the Commerzbank financing and under a certain bridge loan
used to pay also in January 2001 a principal amortization payment under
the Commerzbank financing.  The Amended and Restated Senior Secured Credit Loan Agreement provides for
interest at a rate per annum equal to one, two, three or six month LIBOR at
Companys option plus a spread ranging, depending on Companys leverage
ratio, from 1.75% to 2.25% with quarterly interest payments which began on
May 29, 2001. Principal installments will be due beginning 2004 through
2006.There was no gain or loss recognized from this loan restructuring. F-34




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##### Table of Contents



On December 7, 2001 the Amended and Restated Senior Secured Credit Loan
Agreement was amended, and a waiver and consent were granted by the lenders
allowing the Company to (i) create liens encumbering initial deposits and
margin deposits securing indebtedness under any interest rate protection
agreement or other interest hedging agreement up to the principal amount of
indebtedness of the Company and its subsidiaries with floating rates of
interest; (ii) make loans or advances to Iusacell in lieu of paying
dividends at such times and in such amounts as necessary to permit Iusacell
to pay scheduled interest (including any tax gross-up with respect thereto)
and principal payments as and when due in respect to the Notes Due 2006 and
(iii) make loans or advances to Iusacell in lieu of paying dividends in an
amount not to exceed U.S.$5,000, so long as an event of default has not
occurred, to discharge other liabilities of Iusacell incurred in the
ordinary course of business.On March 27, 2003, the Company announced that it received notification from
lenders of the occurrence of two technical defaults under the Amended and
Restated Senior Secured Credit Loan Agreement. The underlying defaults are
due to the failure to obtain the consent of the lenders prior to the closing
and opening of certain bank accounts and the failure to effect the
registration of a mortgage on certain newly acquired assets within the time
period specified in the Amended and Restated Senior Secured Credit Loan
Agreement.On April 28, 2003, as part of its debt restructuring effort, the Company
received a temporary Amendment and Waiver (the Amendment) of the Debt/EBITDA
leverage ratio and certain other provisions and technical defaults under the
Amended and Restated Senior Secured Credit Loan Agreement. The Amendment was
scheduled to expire on May 22, 2003 and at its expiration date the Amendment
was extended to June 13, 2003 and further extended several times. In October
2003, the Amendment was not further extended, and upon its expiration the
Company is in default of its Debt/EBITDA leverage ratio, which constitutes an
event of default under the Amended and Restated Senior Secured Credit Loan
Agreement, and the lenders under the Amended and Restated Senior Secured
Credit Loan Agreement were entitled with the right to request the
acceleration of the due date of such Amended and Restated Senior Secured
Credit Loan Agreement. Additionally, the Company exceeded the aggregate
amount for the incurrence of Attributable Debt under the Amended and Restated
Senior Secured Credit Loan Agreement (Note 2).c.
    
    Covenants and collateralThe Amended and Restated Senior Secured Credit Loan Agreement and the
Secured Senior Notes Due 2004 contain certain restrictive covenants,
including the maintenance of certain financial ratios, restrictions on
incurring additional debt, limitations on capital expenditures and
restrictions on the sale or lease of Companys assets. As discussed
previously, the Company has incurred in some events of default under
the contracts governing these loans. F-35




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##### Table of Contents



The Companys obligations under the Amended and Restated Senior Secured
Credit Loan Agreement are unconditionally guaranteed, jointly and
severally, by the principal operating and concession-holding
subsidiaries of the Company and are secured by the pledge of
substantially all capital stock and equity interests held by the
Company and by all cellular concessions, and by a first lien on
substantially all assets used in connection with or related to such
concessions.As of December 31, 2003, all of the Companys debt is classified as
current liabilities (Note 2).d.
    
    Notes payableAs of December 31, 2002, notes payable consisted of a handset
acquisition financing facility from Banco Santander Mexicano, S.A.
(Santander) obtained by the Company on February 25, 2002, which
consisted of a one-year unsecured credit facility in a principal amount
of U.S.$12,000. Loans outstanding under this facility provided for
interest at an annual variable rate of LIBOR plus a spread of 1.00%.
Interest was paid quarterly. At the maturity date of this facility,
February 25, 2003, the Company reached an agreement with Santander to
refinance a portion of this facility under which the Company paid
Santander U.S.$7,000 plus accrued interest, and refinance the remaining
U.S.$5,000. The refinanced facility consisted of an unsecured
five-months credit facility in a principal amount of U.S.$5,000 bearing
interest at an annual fixed rate of 3.84%. Interest and principal
would be paid in five equal monthly installments starting March 25,
2003. This facility contains certain restrictive covenants.On May 29, 2003, the Company reached an agreement with Santander to repay the
remaining balance of U.S.$3,000 under the refinanced credit facility. Under
this agreement, the Company and Santander agreed to settle the remaining
amount for U.S.$1,500. The Company recognized the difference as an early
extinguishment of debt under Mexican GAAP Bulletin C-9 and recorded this
amount as an extraordinary gain for the year ended December 31, 2003. NOTE 11  INCOME TAX (IT), NET ASSETS TAX (AT) AND EMPLOYEE PROFIT SHARING (EPS): For the years ended December 31, 2003, 2002 and 2001, the provision for IT and
AT consisted of the following: 2003
    
    2002
    
    2001Current IT and AT
    
    Ps.
    103,854
    
    
    Ps.
    116,051
    
    
    Ps.
    160,908Deferred IT
    
    
    163,170
    
    
    
    9,214
    
    
    
    Total
    
    Ps.
    267,024
    
    
    Ps.
    125,265
    
    
    Ps.
    160,908
 F-36




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##### Table of Contents



The Company has filed annual consolidated income tax returns since the tax year
beginning January 1, 1994. Starting the year ended December 31, 2000, Iusacell
is the holding company for tax consolidation purposes. Beginning January 1, 2003, IT rate in Mexico is 34.00% (35.00% for 2002 and
2001). As a result of the changes to the IT Law approved on January 1, 2002,
the IT rate will be reduced annually beginning in 2003 until it reaches a
nominal rate of 33.00% and 32.00%, in 2004 and 2005, respectively. The effect
of these reductions in the IT rate was considered in the calculation of the
deferred taxes, reducing the deferred IT asset in 2002. For the years ended
December 31, 2003 and 2002, the Group generated tax losses of Ps.1,086,672 and
Ps.1,204,015, respectively. At December 31, 2003 and 2002, the main temporary differences the Group
recognizes for the calculation of deferred income taxes were as follows: 2003
    
    2002Allowance for doubtful accounts
    
    Ps.
    267,081
    
    
    Ps.
    97,328Liability accruals
    
    
    36,831
    
    
    
    34,196Income tax losses carry forwards and tax credits
    
    
    5,990,808
    
    
    
    5,307,868Inventories
    
    
    (255,995
    )
    
    
    (37,119
    )Property and equipment
    
    
    (2,482,179
    )
    
    
    (2,814,587
    )Telephones to be amortized
    
    
    
    
    
    
    (146,971
    )Concessions
    
    
    (304,509
    )
    
    
    (320,536
    )Temporary differences
    
    
    3,252,037
    
    
    
    2,120,179Income tax rate
    
    
    34.00
    %
    
    
    35.00
    %1,105,693
    
    
    
    742,063Valuation allowance
    
    
    (1,105,693
    )
    
    
    (563,185
    )Deferred income tax asset
    
    
    
    
    
    
    178,878Income tax rate change
    
    
    
    
    
    
    (9,214
    )Net deferred income tax asset
    
    Ps.
    
    
    
    Ps.
    169,664
 During 2003, the Group decided to increase the net deferred tax asset valuation
allowance which is mainly originated by the effect of the tax loss carry
forwards, reflecting the uncertainty about the ability of the Company to
continue as a going concern. The realization of the net deferred tax asset
dependent on generating sufficient taxable income prior to expiration of the
loss carry forwards. The Companys management estimates that considering the
present situation of the Group the realization of the tax losses can not be
assured through the generation of sufficient taxable income during the
following years (Note 2). F-37




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##### Table of Contents



As of December 31, 2003 and 2002, the Group had a valuation allowance of
Ps.1,105,693 and Ps.563,185, respectively, to reduce its deferred tax assets to
estimated realizable value. The valuation allowance primarily relates to the
deferred tax assets arising from tax loss carry forwards and tax credits. At December 31, 2003, the Group had the following net operating losses for IT
purposes, that may be carried forward and applied against future taxable
earnings: Year of
    
    Amount
    
    Expirationloss
    
    of loss
    
    year1994
    
    Ps.
    105,026
    
    
    
    20041995
    
    
    254,245
    
    
    
    20051996
    
    
    120,097
    
    
    
    20061997
    
    
    200,536
    
    
    
    20071998
    
    
    994,140
    
    
    
    20081999
    
    
    247,743
    
    
    
    20092000
    
    
    784,252
    
    
    
    20102001
    
    
    810,882
    
    
    
    20112002
    
    
    1,204,015
    
    
    
    20122003
    
    
    1,086,672
    
    
    
    2013
 These losses are indexed for inflation from the year incurred to the sixth
month of the year utilized. Accordingly, these amounts include inflation up to
June 2003. The 1.80% AT is calculated on the average value of substantially all assets
less certain liabilities. This tax is required to be paid if this computation
exceeds the amount of income tax. The 1.80% AT paid may be utilized as a
credit against future income tax in the years in which the Company generates IT
in excess of the AT. The AT is available as a carry forward for up to ten
years and is subject to restatement based on the NCPI when used. As of December
31, 2003, AT available as a carry forward was Ps.62,288 which expires in 2007. EPS, generally 10.00%, is computed on taxable income, with adjustments to
exclude inflationary effects and the restatement of depreciation expense. In
the years ended December 31, 2003 and 2002, the Company did not generate any
taxable income for profit sharing purposes. F-38




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##### Table of Contents



The effective rate reconciliation as of December 31, was as follows: 2003
    
    2002
    
    2001Loss on continuing operations before taxes
    
    (Ps.2,934,742)
    
    (Ps.988,055)
    
    (Ps.181,883)Statutory IT rate
    
    
    34.00
    %
    
    
    35.00
    %
    
    
35.00
    %Income tax (benefit) expense at statutory rate
    
    
    (997,812
    )
    
    
    (345,819
    )
    
    
    (63,659
    )Add (deduct):Inventory purchases less cost of sales
    
    
    (25,928
    )
    
    
    (218,358
    )
    
    
    (1,654
    )Depreciation and amortization
    
    
    (113,345
    )
    
    
    (302,105
    )
    
    
    (252,485
    )Differences between interest and inflationary
gains or losses
    
    
    363,163
    
    
    
    174,610
    
    
    
    83,412Provision for doubtful accounts
    
    
    67,399
    
    
    
    20,444
    
    
    
    (4,152
    )Telephones to be amortized
    
    
    
    
    
    
    138,674
    
    
    
    214,136Goodwill amortization
    
    
    67,003
    
    
    
    61,469
    
    
    
    65,329Intangible assets write-offs
    
    
    368,490
    
    
    
    
    
    
    
    Income tax rate change
    
    
    
    
    
    
    3,224
    
    
    
    Other
    
    
    (98,438
    )
    
    
    (10,511
    )
    
    
    4,369IT (benefit) expense for the year
    
    
    (369,468
    )
    
    
    (478,372
    )
    
    
    45,296Deferred IT Valuation allowance
    
    
    369,468
    
    
    
    478,372
    
    
    
    45,296Net IT (benefit) expense for the year
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    Effective rate
    
    
    13.00
    %
    
    
    48.00
    %
    
    
    25.00
    %
 NOTE 12  COMMITMENTS AND CONTINGENCIES: As of December 31, 2003, the Group had the following commitments and contingent
liabilities:  a.
    
    The Group has entered into operating lease agreements for administrative
offices, sales branches and service facilities and since 2001, operating
lease agreements with Iusacell Arrendadora, S.A. de C.V. (affiliated
company) for the lease of towers (Note 8c.). These lease agreements
expire at various dates through 2011, and some agreements contain options
for renewal. Lease expense was Ps.480,344, Ps.398,079 and Ps.172,728 for
the years ended December 31, 2003, 2002 and 2001, respectively. F-39




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##### Table of Contents



Future annual minimum rental payments under existing leases as of December
31, 2003 are as follows: 2004
    
    Ps.
    398,9892005
    
    
    416,2842006
    
    
    434,3772007
    
    
    453,2672008
    
    
    472,988Thereafter
    
    
    1,030,262Ps.
    3,206,167
  b.
    
    The Company has certain commitments from his joint venture agreement with
Infomin for the incorporation of Infotelecom (Note 3). The Company
committed to contribute up to U.S.$10,500. As of December 31, 2001, the
Company had invested U.S.$10,500. Additionally, if a partner does not
fulfill its responsibilities under the joint venture agreement, sanctions
could cause such partner to lose its investment and incur a penalty of up
to U.S.$1,000.c.
    
    During April 2001, Iusatel, a subsidiary of the Company, reached an
agreement to settle the outstanding amounts due related to the special
projects implemented by Telmex to permit competition in long distance
telephony. Iusatel agreed to pay for its portion of such special projects
in two parts: (i) a fixed payment of approximately U.S.$13,600, payable in
twelve equal monthly installments beginning in April 2001, and (ii) a
U.S.$0.0053 per full minute, usage-based surcharge to the local wire line
interconnection rate from January 1, 2001 through December 31, 2004 for
long distance calls terminated in Telmexs local wire line network.d.
    
    Iusacell, S. A. de C.V., a subsidiary of the Company, decided to sue and
seek compensatory damages from one of the Company  ́s distributors as a
result of the latters decision to breach their distribution agreement.
In the same act, such distributor also sued Iusacell, S. A. de            C. V.
The decision of the Court in the first instance was not to set a favorable
opinion to any of the parts. Both parties appealed the Courts decision.
During 2003 this process was settled without any damage to the Group.e.
    
    On January 1, 2002, the Mexican Congress approved a tax law reform that
assesses an additional 10.00% excise tax on certain wireless
telecommunications services. In February 2002 the Company and some of its
subsidiaries filed an injunction action to challenge the Mexican
governments implementation of the tax. The Group obtained a favorable
resolution against this 10.00% excise tax and the Mexican government filed
an appeal. F-40




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##### Table of Contents



On June 6, 2003, the Group was officially notified that by disposition of the
appeal filed by the Mexican government, Mexicos Supreme Court affirmed the
ruling in favor of the Group in their injunction filed against the
above-mentioned excise tax for 2002. The Group is in the process to obtain
the refund of the tax paid for the year 2002 and the Court has requested that
the authorities comply with the injunction resolution.In February 2003, the Company filed an injunction action to challenge the
Mexican government regarding the same 10.00% excise tax for the year 2003.
The Group obtained a favorable resolution and the Mexican government filed an
appeal which is in process.f.
    
    A supplier of the Company has sued Iusacell, S. A. de C. V. for the
improper termination of their agreement. The Company has obtained a
favorable resolution in the first instance. The supplier filed an appeal
and a new resolution was ruled declaring that the claim of the supplier
can proceed against the subsidiary of the Company. The Group has filed an
injunction which is currently in process.The amount claimed by the supplier is Ps.85,023. Based on the Companys
external legal counsels, the Companys management considers that it is
possible that the Group obtains a favorable resolution.g.
    
    A telecommunications company sued SOS Telecomunicaciones, S.A. de C.V., a
subsidiary of the Group. In June 2003 this matter ended since the lawsuit
did not proceed.h.
    
    A client of the Group sued Iusacell, S.A. de C.V., a subsidiary of the
Group, due to a claim for improper termination of their agreement. During
2003, Companys subsidiary obtained a favorable resolution in the first
instance. The client has filed an appeal. The amount claimed by the client
is U.S.$25,000. Based on the Groups external legal counsels, the
Companys management considers it is probable that the Groups subsidiary
obtains a favorable resolution.i.
    
    A services supplier of the Company sued Iusacell, S. A. de C.V. claiming
on improper termination of their agreement. The process is in its
preliminary stage. The amount claimed by this supplier is Ps.7,000. Based
on the Groups external legal counsels, the Companys management considers
it is possible that the Groups subsidiary obtains a favorable resolution.j.
    
    Iusacell, S.A. de C.V., a subsidiary of the Company, was sued by a person
for the improper use of her image. The person has not obtained favorable
resolutions before two different instances. The amount claimed by this
person cannot be determined. Based on the Groups external legal counsels,
the Companys management considers it is possible that the Groups
subsidiary obtains a favorable resolution. F-41




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##### Table of Contents



k.
    
    Some subsidiaries of the Group are currently in a process before the
Mexican Tax Court to obtain a resolution about their position of not being
subject to certain rights payable to the Telecommunications Ministry in
Mexico over interconnection revenues from calling party pays. The process
is in the first stage on such Court. The amount of rights that the
subsidiaries of the Group consider is not subject to be paid is
approximately Ps.340,000. Based on the Groups external legal counsels,
the Companys management considers it is possible that the Groups
subsidiaries obtain a favorable resolution.l.
    
    Elektra has started collection procedures against the Group to recover an
account payable in the amount of U.S.$7,000 originated from the operations
derived from the contract signed with the Group (Note 5). NOTE 13  CONTRIBUTED CAPITAL: During the years ended December 31, 2003, 2002 and 2001, the following
transactions took place: On March 30, 2001, 1 series A share was subscribed through the capitalization
of stockholders debt. The total amount converted was of Ps.121. After this
capital stock increase, Companys stockholders approved a 30,000 to 1 reverse
stock split. The reverse stock split became effective on May 7, 2001. This
resulted in the cancellation of fractions of shares and a corresponding
decrease of Ps.266 in capital stock. On August 24, 2001, 3 series A shares were subscribed by the Companys
stockholders for an amount of Ps.352. During 2001, Iusacell made contributions to the Company, for future capital
stock increases in an aggregate amount of Ps.981,892. On May 31, 2002, Companys stockholders approved an increase of the fixed and
variable portions of the capital stock. This increase was made as follows:  a.
    
    The increase of the fixed portion of the capital stock amounted to
Ps.40,747, which were subscribed by the Companys stockholders at their
ownership proportion at the date of the increase. No new shares were
issued on this subscription.b.
    
    The increase of the variable portion of the capital stock was
subscribed through the issuance of 20,266 shares, of which 10,335 were
series A shares and the remaining 9,931 were series B shares. This
portion increase amounted to Ps.2,372,306. This increase was made through the capitalization of contributions for future
capital stock increases. F-42




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##### Table of Contents



The changes in the number of shares of common stock for the period January 1,
2002 through December 31, 2003 are analyzed as follows: Number of sharesBalance as of January 1, 2002
    
    
    54,832May 31, 2002 - issuance of common stock through the
capitalization of contributions for future capital stock
increases
    
    
    20,266Balance as of December 31, 2002
    
    
    75,098No changes
    
    
    Balance as of December 31, 2003
    
    
    75,098
 At December 31, 2003 and 2002, the issued and outstanding shares of common
stock of the Company, without par value, are as follows: 2003
    
    2002series A
    
    
    38,302
    
    
    
    38,302series B
    
    
    36,796
    
    
    
    36,796Total
    
    
    75,098
    
    
    
    75,098
 Series A and B represent shares entitling the holder of each share to one vote
at the Companys stockholders meetings. Stockholder actions on certain
matters require approval by both series A and series B stockholders. Series A shares must always represent no less than 51.00% of the capital stock
with full voting rights and may be acquired by Mexicans or foreigners. Series
B shares may also be acquired by foreigners or Mexicans. NOTE 14  EARNED CAPITAL: Under Mexican law, a legal reserve must be created and increased annually by
5.00% of the annual net earnings until it reaches 20.00% of the nominal amount
of a corporations capital stock. This reserve is not available for dividends,
but may be used to reduce a deficit or be transferred to capital. F-43




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Dividends paid are not subject to IT if paid from the Net Tax Profit Account
(CUFIN). Any excess over this account is subject to a tax equivalent to 49.25%
and 47.06% depending on whether paid in 2004 and 2005 respectively. The tax is
payable by the Company and may be credited against its IT in the same year or
the following two years. Dividends paid are not subject to withholding tax. At
December 31, 2003, the balance on the CUFIN is approximately Ps.146,600. The contributed capital and earned capital accounts consist of the following: December 31, 2003Accumulated
    
    MajorityHistorical
    
    adjustments for
    
    stockholdersvalue
    
    inflation
    
    equityCapital stock subscribed
    
    Ps.
    7,880,528
    
    
    Ps.
    8,678,201
    
    
    Ps.
    16,558,729Capital contributions
    
    
    18,655
    
    
    
    83,372
    
    
    
    102,027Legal reserve
    
    
    (11,411
    )
    
    
    40,896
    
    
    
    29,485Accumulated losses from prior years
    
    
    (4,875,981
    )
    
    
    (2,968,293
    )
    
    
    (7,844,274
    )Net loss for the year
    
    
    (2,860,857
    )
    
    
    (466,443
    )
    
    
    (3,327,300
    )Accumulated other comprehensive income
    
    
    172,031
    
    
    
    (902,633
    )
    
    
    (730,602
    )Total
    
    Ps.
    322,965
    
    
    Ps.
    4,465,100
    
    
    Ps.
    4,788,065
 December 31, 2002Accumulated
    
    MajorityHistorical
    
    adjustments for
    
    stockholdersvalue
    
    inflation
    
    equityCapital stock subscribed
    
    Ps.
    7,880,528
    
    
    Ps.
    8,678,201
    
    
    Ps.
    16,558,729Capital contributions
    
    
    18,655
    
    
    
    83,372
    
    
    
    102,027Legal reserve
    
    
    (11,411
    )
    
    
    40,896
    
    
    
    29,485Accumulated losses from prior years
    
    
    (4,145,958
    )
    
    
    (2,595,145
    )
    
    
    (6,741,103
    )Net loss for the year
    
    
    (730,023
    )
    
    
    (373,148
    )
    
    
    (1,103,171
    )Accumulated other comprehensive income
    
    
    172,031
    
    
    
    (902,633
    )
    
    
    (730,602
    )Total
    
    Ps.
    3,183,822
    
    
    Ps.
    4,931,543
    
    
    Ps.
    8,115,365
 F-44




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NOTE 15  FOREIGN CURRENCY POSITION: The balance sheet as of December 31 includes assets and liabilities denominated
in U.S. Dollars, as follows: 2003
    
    2002Monetary assets
    
    
    U.S.$2,436
    
    
    
    U.S.$13,925Monetary liabilities
    
    
    512,133
    
    
    
    463,386Net monetary liability position in U.S. Dollars
    
    
    U.S.$499,697
    
    
    
    U.S.$449,461Equivalent in nominal Mexican pesos
    
    Ps.
    5,611,597
    
    
    Ps.
    4,692,058
 As of December 31, 2003 and 2002, most of the communications equipment and
inventories of cellular telephones and accessories are of foreign origin (Notes
6 and 8). During 2003, 2002 and 2001, interest income and interest expense on assets and
liabilities denominated in U.S. Dollars were as follows: 2003
    
    2002
    
    2001Interest income
    
    
    U.S.$410
    
    
    
    U.S.$917
    
    
    
    U.S.$1,587Interest expense
    
    
    25,757
    
    
    
    28,952
    
    
    
    35,675Net interest expense
    
    
    U.S.$25,347
    
    
    
    U.S.$28,035
    
    
    
    U.S.$34,088Equivalent in nominal Mexican pesos
    
    Ps.
    284,647
    
    
    Ps.
    292,666
    
    
    Ps.
    312,570
 Operating results for the years ended December 31, 2003, 2002 and 2001 include
depreciation and amortization expenses, related to fixed assets and inventories
of foreign origin. The exchange rates as of December 31, 2003 and 2002 were Ps.11.2300 and
Ps.10.4393, per U.S. Dollar, respectively. At the issuance date of these
financial statements, March 26, 2004, the exchange rate in effect was
Ps.11.0130 per U.S. Dollar. NOTE 16  FINANCIAL INSTRUMENTS: The Company determines the fair value of outstanding financial instruments as
follows:  a.
    
    Cash and cash equivalents: the carrying value approximates fair
value due to its short-term nature.b.
    
    Accounts receivable and payable: the carrying value approximates
fair value due to its short-term nature. F-45




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##### Table of Contents



c.
    
    Notes payable: Carrying value approximates fair value due to its
short-term nature.d.
    
    Short-term and long-term debt: the Company estimates the fair value
of its debt based on public and current rates available for debt of the
same remaining duration.e.
    
    Derivatives: the Company determines the fair value of derivative
financial instruments as follows: Foreign-currency exchange forward contracts The Group purchased foreign-currency exchange forward contracts with contract
terms of up to three years to protect itself against the adverse effect that
exchange rate fluctuations may have on foreign currency-denominated
liabilities, principally U.S. dollars. During 2001, the Group used derivative instruments to hedge its
foreign-currency exposure of approximately 50.00% of the principal and
interest payments coming due over the next year. In August and October 2001,
the Group also used foreign-currency exchange forward contracts to hedge its
exchange rate exposure on the Secured Senior Notes Due 2004 for U.S.$150,000
and its interest payments of U.S.$34,500. Until its early termination, these
derivatives were highly effective since a foreign currency rate change on the
forward contract was offset by a corresponding change in the value of the
hedged loan. In October 2002, the Group early terminated its foreign-currency exchange
forward contracts hedging its exchange rate exposure on the Secured Senior
Notes Due 2004, paying a termination fee of U.S.$1,687. As of December 31, 2003 and 2002, the Group does not have any
foreign-currency exchange contracts. Interest rate collars In July 1998, the Company entered into an interest rate collar agreement for
a notional amount of U.S.$35,000 until July 30, 2002. The collar agreement
limits the maximum effective LIBOR cost to 6.12% if six-month LIBOR is lower
than 7.12% and 7.12% if LIBOR equals or exceeds 7.12%. The Company could
participate in a decline in LIBOR to 5.30%. On February 26, 1999, the Company entered into an additional interest rate
collar agreement to limit the maximum interest rate, which must be paid on
U.S.$15,000 of its floating rate debt until July 30, 2002. This collar
agreement limits the maximum effective LIBOR cost to 5.82% if six-month LIBOR
is lower than 6.82% and 6.82% if LIBOR equals or exceeds 6.82%. The Company
could participate in a decline in LIBOR to 4.75%. These interest rate collars expired during 2002. F-46




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##### Table of Contents



At December 31, the fair values of financial instruments were as follows: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fairvalue
    
    value
    
    value
    
    valueCash and cash equivalents
    
    Ps.
    4,157
    
    
    Ps.
    4,157
    
    
    Ps.
    154,397
    
    
    Ps.
    154,397Accounts receivable
    
    
    852,332
    
    
    
    852,332
    
    
    
    1,190,571
    
    
    
    1,190,571Accounts payable
    
    
    1,024,363
    
    
    
    1,024,363
    
    
    
    1,027,850
    
    
    
    1,027,850Notes payable
    
    
    
    
    
    
    
    
    
    
    130,258
    
    
    
    130,258Long-term debt:Secured Senior Notes Due 2004
    
    
    1,684,500
    
    
    
    943,320
    
    
    
    1,628,218
    
    
    
    814,108Amended and Restated Senior
Secured Credit Loan Agreement
    
    
    2,982,929
    
    
    
    2,982,929
    
    
    
    2,883,263
    
    
    
    2,883,263
 NOTE 17  SEGMENT INFORMATION: Beginning the year ended December 31, 2003, the Group prepares segment
information based on Bulletin B-5 Segment Financial Information issued by the
MIPA (Bulletin B-5). Before this date, the Groups segment data was prepared in
accordance with International Accounting Standard No.14 (revised). The adoption
of Bulletin B-5 did not change the way in which the Group prepares this
information. Reportable segments are those that are based on the Groups method
of internal reporting. The Group has three reportable segments that it operates and manages as
strategic business units that offer different products and services. The Group
measures its reportable segments based on operating profit (loss), including
inter-segment revenues and corporate expenses that are allocated to the
operating segments and excluding any non-recurring items. Inter-segment
transactions are accounted for at current market prices. The Company evaluates
the performance of its segments and allocates resources to them based on
operating loss. The accounting policies underlying the reported segment data
are the same as those described in the summary of significant accounting
policies (Note 4). The Companys three reportable segments and their principal activities are: Cellular  The Group operates and provides wireless cellular telephone services
in five of the nine Regions in the Mexican market. The Group serves customers
in large metropolitan areas such as Mexico City, Guadalajara, León, Puebla and
Mérida. The Groups services include value added services such as voice mail
and caller identification of incoming calling numbers. F-47




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##### Table of Contents



Long distance  The Group provides long distance services for which its first
natural market is its cellular subscriber base. The Group is also providing
these services to residential and commercial entities. The Group uses its own
switches and transmission equipment and a combination of fiber optic lines,
microwave links, satellite transmission and lines leased from Telmex to provide
these services. Other businesses  The Group provides paging, local telephony, microwave links
and data transmission services. The tables below present information about reportable segments for the years
ended December 31, 2003, 2002 and 2001 under Mexican GAAP measurement: Year ended December 31, 2003 Long
    
    Other
    
    Total
    
    Reconciling
    
    TotalCellular
    
    distance
    
    businesses
    
    segments
    
    items
    
    consolidatedRevenues  third party
    
    Ps.
    4,632,305
    
    
    Ps.
    111,043
    
    
    Ps.
    19,829
    
    
    Ps.
    4,763,177
    
    
    
    
    
    
    Ps.
    4,763,177Revenues  affiliates
    
    
    5,568,646
    
    
    
    265,435
    
    
    
    1,082,615
    
    
    
    6,916,696
    
    
    (Ps.
    6,916,696
    )
    
    
    Depreciation and amortization
    
    
    1,782,150
    
    
    
    140,096
    
    
    
    31,441
    
    
    
    1,953,687
    
    
    
    
    
    
    
    1,953,687Operating loss
    
    
    (1,348,811
    )
    
    
    (72,939
    )
    
    
    14,050
    
    
    
    (1,407,700
    )
    
    
    
    
    
    
    (1,407,700
    )Total assets
    
    
    16,001,127
    
    
    
    1,077,259
    
    
    
    1,021,637
    
    
    
    18,100,023
    
    
    
    (7,698,087
    )
    
    
    10,401,936Capital expenditures
    
    
    171,294
    
    
    
    369
    
    
    
    19,337
    
    
    
    191,000
    
    
    
    
    
    
    
    191,000
 Year ended December 31, 2002 Long
    
    Other
    
    Total
    
    Reconciling
    
    TotalCellular
    
    distance
    
    businesses
    
    segments
    
    items
    
    consolidatedRevenues  third party
    
    Ps.
    5,429,539
    
    
    Ps.
    280,854
    
    
    Ps.
    93,391
    
    
    Ps.
    5,803,784
    
    
    
    
    
    
    Ps.
    5,803,784Revenues  affiliates
    
    
    4,332,212
    
    
    
    337,867
    
    
    
    1,336,241
    
    
    
    6,006,320
    
    
    (Ps.
    6,006,320
    )
    
    
    Depreciation and amortization
    
    
    2,046,240
    
    
    
    128,786
    
    
    
    33,650
    
    
    
    2,208,676
    
    
    
    (2,626
    )
    
    
    2,206,050Operating loss
    
    
    (69,904
    )
    
    
    (143,745
    )
    
    
    (115,894
    )
    
    
    (329,543
    )
    
    
    49,500
    
    
    
    (280,043
    )Total assets
    
    
    19,373,768
    
    
    
    1,436,103
    
    
    
    813,134
    
    
    
    21,623,005
    
    
    
    (7,838,051
    )
    
    
    13,784,954Capital expenditures
    
    
    514,450
    
    
    
    13,836
    
    
    
    72,115
    
    
    
    600,401
    
    
    
    
    
    
    
    600,401
 Year ended December 31, 2001 Long
    
    Other
    
    Total
    
    Reconciling
    
    TotalCellular
    
    distance
    
    businesses
    
    segments
    
    items
    
    consolidatedRevenues  third party
    
    Ps.
    6,463,800
    
    
    Ps.
    322,553
    
    
    Ps.
    125,491
    
    
    Ps.
    6,911,844
    
    
    
    
    
    
    Ps.
    6,911,844Revenues  affiliates
    
    
    3,310,903
    
    
    
    695,543
    
    
    
    1,350,378
    
    
    
    5,356,824
    
    
    (Ps.
    5,356,824
    )
    
    
    Depreciation and amortization
    
    
    2,690,087
    
    
    
    112,012
    
    
    
    29,937
    
    
    
    2,832,036
    
    
    
    (8,872
    )
    
    
    2,823,164Operating loss
    
    
    (416,342
    )
    
    
    (129,490
    )
    
    
    (228,483
    )
    
    
    (774,315
    )
    
    
    722,736
    
    
    
    (51,579
    )Total assets
    
    
    18,844,930
    
    
    
    1,027,599
    
    
    
    717,353
    
    
    
    20,589,882
    
    
    
    (4,991,216
    )
    
    
    15,598,666Capital expenditures
    
    
    1,694,012
    
    
    
    98,346
    
    
    
    19,468
    
    
    
    1,811,826
    
    
    
    
    
    
    
    1,811,826
 F-48




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##### Table of Contents



NOTE 18  SIGNIFICANT DIFFERENCES BETWEEN MEXICAN GAAP AND ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA The Companys consolidated financial statements are prepared in accordance with
Mexican GAAP, which varies in certain significant respects from accounting
principles generally accepted in the United States of America (U.S. GAAP). The reconciliation to U.S. GAAP does not include the reversal of the
adjustments to the financial statements for the effects of inflation required
under Mexican Bulletin B-10. The application of Bulletin B-10 represents a
comprehensive measure of the effects of price-level changes in the financial
statements based on historical cost for Mexican and U.S. accounting purposes.
The principal differences, other than inflation accounting, between Mexican and
U.S. GAAP are listed below together with an explanation, where appropriate, of
the adjustments that affect consolidated net income for each of the three years
in the period ended December 31, 2003, and stockholders equity as of December
31, 2003 and 2002. a. Deferred income taxes Under Mexican GAAP, the Group applies revised Bulletin D-4 as described in Note
4p. For purposes of the reconciliation to U.S. GAAP, the Group has applied
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, for all periods presented. The U.S. GAAP adjustment to deferred
income taxes exists as a result of the U.S. GAAP adjustments changing the book
basis which impacts various deferred tax balances and the related valuation
allowance. SFAS 109 requires an asset and liability method of accounting whereby deferred
taxes are recognized for the tax consequences of all temporary differences
between the financial statement carrying amounts and the related tax basis of
assets and liabilities. Under U.S. GAAP, the effect on deferred taxes of a
change in tax rate is recognized in income in the period that includes the
enactment date. b. Pre-operating costs Under Mexican GAAP, the Company capitalized certain pre-operating costs. Under
U.S. GAAP, pre-operating costs are expensed as incurred. As mentioned in Note
2, the Company no longer consolidates Iusacell PCS. Consequently, in 2000, the
investment is recorded at cost and the pre-operating costs which were expected
to be amortized under Mexican GAAP once operations commenced will now form part
of the basis of the investment. As mentioned in Notes 4n. and 9, in 2003 the
Group adopted Bulletin C-8. During the third quarter of 2003 the Group wrote
down the carrying value of all its pre-operating expenses and hence, the
remaining U.S. GAAP difference was reversed. F-49




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##### Table of Contents



c. Derivative financial instruments As mentioned in Note 16, the Group entered into interest rate collar agreements
to hedge an aggregate notional amount of U.S.$50,000 of its floating rate debt.
Additionally, during 2001 the Group purchased foreign-currency forward
exchange contracts, which at December 31, 2001, hedged a notional amount of
U.S.$201,000 in debt. The Group employs risk management strategies using
foreign currency forwards and interest rate collar agreements. The Group does
not hold derivatives for trading purposes. As mentioned in Note 4g., the Group follows Bulletin C-2, which requires that
all financial instruments, including those used for hedging purposes, be
recorded in the balance sheet at their fair value and changes in the fair value
to be recorded in the income statement for each period. Bulletin C-2 also
requires that derivative financial instruments used for hedging purposes, be
recorded in the balance sheet and valued using the same valuation criteria used
to value the hedged asset or liability. Based on these valuation criteria,
under Mexican GAAP since the hedged liabilities are not carried at fair value,
the Group did not record the derivative financial instruments related to those
hedged liabilities at fair value but rather, the Group keeps the derivative
financial instruments valued at the exchange rate at the end of the year. On December 30, 1999 the Company entered into a foreign currency hedge
utilizing forward-rate contracts, hedging its exchange rate exposure for up to
U.S.$77,000 or approximately 50% of the principal and interest payments coming
due over the period April 2000 to April 2001. Under U.S. GAAP, effective January 1, 2001, the Group adopted SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS 137 and 138. Under SFAS 133, all derivatives are also recognized on the
balance sheet at their fair value. The Groups derivative financial instruments were classified as cash flow
hedges based on certain criteria established by SFAS 133. Accordingly, the
effective portion of the gain or loss of the hedged instrument is reported in
accumulated other comprehensive income, and its ineffective portion is reported
in earnings. All of the Groups derivatives were considered highly effective.
The portion of accumulated other comprehensive income to be reclassified into
earnings over the next 12 months is expected to be immaterial. The cumulative effect on the adoption of this new accounting pronouncement
amounted to Ps.7,120 as of January 1, 2001. All derivative financial instrument arrangements were terminated as of December
31, 2002. F-50




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##### Table of Contents



d. Gain from the exchange of non-monetary assets During 2002 and 2001, the Company entered into certain fiber optic cable swap
agreements to exchange certain long-distance fiber optic cables fair valued at
Ps.126,039 and Ps.156,814, respectively. Under Mexican GAAP, the Group
recorded the transactions as both acquisitions (at the carrying value of the
asset sold) and sales of fixed assets based on the contract amount, resulting
in a gain on the sale of Ps.55,288 and Ps.151,009, for the years ended December
31, 2002 and 2001, respectively. Under U.S. GAAP, because the assets exchanged
are similar productive assets and, on a net basis, no cash was exchanged, the
transactions did not result in the recognition of earnings. Consequently,
under U.S. GAAP, the acquisitions and sales would not have been recorded. The
resulting gains have been reversed and the depreciation for U.S. GAAP purposes
has been determined on the carrying value of the equipment sold. Additionally, in December 1998, the Group entered into another similar fiber
optic cable swap agreement with Bestel for Ps.268,902, resulting in a gain on
the sale of Ps.234,172 that was not recorded under U.S. GAAP. e. Sale-leaseback transaction with MATC Celular As mentioned in Note 8c., during 2003, 2002 and 2001 the Group sold and
leased-back 33, 67 and 244, respectively, non strategic towers to MATC Celular. Under Mexican GAAP, sale-leaseback transactions are recognized with the use of
the general criteria for capital and operating lease transactions pursuant to
Bulletin D-5, Leases. The timing of the recognition of a gain derived from
sale-leaseback transactions should be based on the subsequent lease
classification criteria of the leaseback portion of the transaction. If the
subsequent leaseback is accounted for as an operating lease, full immediate
gain recognition is allowed whereas if the subsequent leaseback is accounted
for as a capital lease, the gain is deferred and amortized in proportion with
the estimated useful life of the asset leased. Based upon these criteria, the
sale-leaseback agreement with MATC was recorded by the Company as an operating
lease and consequently, the Ps.85,984, Ps.95,257 and Ps.338,388 gains were
recognized at the date of the sale. Under U.S. GAAP, SFAS 28, Accounting for Sales with Lease Backs, this
sale-leaseback transactions should be recognized as a single financing
transaction in which any profit or loss on the sale is deferred and amortized
by the seller, who becomes the lessee. As the Company retained more than a
minor part but less than substantially all of the use of the assets leased and
the profit on the sale does not exceed the present value of the minimum lease
payments, the Company deferred Ps.45,968, Ps.79,423 and Ps.297,714 of the gains
at the transaction dates. In addition, as the leaseback qualified as an
operating lease, the Group is amortizing the difference between the deferred
gain against the gross rental charged to be recorded under U.S. GAAP and the
gain recorded under Mexican GAAP to operations over the lease term.
Consequently, the U.S. GAAP net income for the years ended December 31, 2003,
2002 and 2001 was decreased Ps.26,920, Ps.62,865 and Ps.286,993, respectively. F-51




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f. Capitalized interest Mexican GAAP allows, but does not require, capitalization of financing costs as
part of the cost of assets under construction. Financing costs capitalized
include interest costs, gains from monetary position and foreign exchange
losses. Under Mexican GAAP, the Group did not capitalize any financing costs
for each of the years ended December 31, 2003, 2002 and 2001. U.S. GAAP requires the capitalization of interest during the construction of
qualifying assets. In an inflationary economy, such as Mexico, acceptable
practice is to capitalize interest net of the monetary gain on the related
Mexican Peso debt, but not on U.S. dollar or other stable currency debt.
U.S.GAAP does not allow the capitalization of foreign exchange losses. g. Goodwill and indefinite-lived intangible assets Under Mexican GAAP, the Group amortizes goodwill on a straight-line basis over
a period of 20 years. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets.
SFAS 141 supercedes Accounting Principles Board Opinion (APB) No. 16, Business
Combinations and amends or supercedes a number of related interpretations of
APB 16. SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations and changes the criteria to recognize intangible assets
apart from goodwill. SFAS 142 supercedes APB 17, Intangible Assets. Under
SFAS 142, goodwill and indefinite-lived intangible assets are no longer
amortized but are reviewed annually or more frequently if impairment indicators
arise, for impairment. SFAS 141 is effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. Accordingly, the Group
applied SFAS 141 to the Portatel acquisition and SFAS 142 to the intangible
assets acquired therein (Note 3). Effective January 1, 2002, the Group adopted the provisions of SFAS 142.
Goodwill is no longer amortized but is reviewed for impairment on an annual
basis at the reporting unit level. The impairment test is performed in two
phases. The first step of the goodwill impairment test compares the fair value
of the reporting unit with its carrying value, including goodwill. If the fair
value of the reporting unit exceeds its carrying value, goodwill of the
reporting unit is considered not impaired; however if the carrying value of the
reporting unit exceeds its fair value, an additional procedure must be
performed. The additional procedure compares the implied fair value of the
reporting unit (as defined by SFAS 142) with the carrying amount of that
goodwill. An impairment loss is recorded to the extent that the carrying amount
of goodwill exceeds its implied fair value. Upon adoption of SFAS 142,
goodwill was tested for impairment and no impairment charges were recorded. F-52




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Under Mexican GAAP goodwill continues to be amortized. For U.S. GAAP purposes,
the reversal of goodwill amortization under Mexican GAAP increased the net
income for the years ended December 31, 2003 and 2002 in Ps.197,069 and
Ps.175,625, respectively. Additionally, the Company defined concessions as intangible assets with
definite life, consequently, under both Mexican GAAP and U.S. GAAP, the
amortization of this intangible asset continues. The impact of adopting SFAS 142 on net loss and loss per share adjusted to
exclude amortization expense related to goodwill is as follows: Years ended December 31,2003
    
    2002
    
    2001Net loss for the year under U.S. GAAP
    
    (Ps.
    3,093,398
    )
    
    (Ps.
    934,411
    )
    
    (Ps.
    631,762
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    172,599Pro-forma net loss for the year
under U.S. GAAP
    
    (Ps.
    3,093,398
    )
    
    (Ps.
    934,411
    )
    
    (Ps.
    459,163
    )
 h. Effect of inflation accounting on U.S. GAAP adjustments In order to determine the net effect on the financial statements of recognizing
certain of the adjustments described above, it is necessary to recognize the
effects of applying the Mexican GAAP inflation accounting principles (see Note
4e.) to such adjustments. i. Minority interest Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component within the stockholders equity section of
the consolidated balance sheet. For U.S. GAAP purposes, minority interest is
not included in stockholders equity and accordingly, is excluded to arrive at
U.S. GAAP stockholders equity. j. Accounting for sales commissions Mexican GAAP allows vendor sales commissions to be recorded as a cost incurred.
Under U.S. GAAP cash consideration (including sales incentive) given by a
vendor to a customer is presumed to be a reduction of the selling prices of the
vendors products or services and, therefore, should be characterized as a
reduction of revenue when recognized in the vendors income statement. F-53




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##### Table of Contents



That presumption is overcome and the consideration should be characterized as a
cost incurred if, and to the extent that the vendor receives, or will receive,
an identifiable benefit (goods or services) in exchange for the consideration
and can reasonably estimate the fair value of the benefit identified. As these
criteria were not met the commissions should be recorded as a reduction of
revenue for U.S. GAAP reporting purposes. If commissions of Ps.292,171,
Ps.484,980 and Ps.505,874 had been characterized as a reduction of revenue,
revenue would have been Ps.4,471,006, Ps.5,318,804 and Ps.6,405,970 for the
years ended December 31, 2003, 2002 and 2001. k. Early extinguishment of debt Mexican GAAP allows the gain or loss on the early extinguishment of debt to be
recorded outside of operations as an extraordinary item. Under U.S. GAAP the
gain on the early extinguishment of debt of Ps.15,517 during 2003 does not
qualify as an extraordinary item under the provisions of APB 30 Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions and would therefore be recorded within income from continuing
operations. l. Provision for consolidation of facilities Prior to 2000, the Group recorded a charge and related provision for the
potential sale and anticipated loss on the sale of its then corporate
headquarters. Since the Company has not had the ability to remove such
headquarters from operations, under U.S. GAAP an impairment charge would not
have been recorded, therefore, under U.S. GAAP the charge and related provision
recorded by the Group has been reversed. m. Net income (loss) and stockholders equity under U.S. GAAP The following is a summary of net (loss) profit and stockholders equity
adjusted to take into account certain material differences between Mexican GAAP
and U.S. GAAP: F-54




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##### Table of Contents



Years ended December 31,2003
    
    2002
    
    2001Net loss under Mexican GAAP
    
    (Ps.
    3,327,300
    )
    
    (Ps.
    1,103,171
    )
    
    (Ps.
    327,166
    )Pre-operating costs (b.)
    
    
    26,521
    
    
    
    (2,747
    )
    
    
    Derivative financial instruments (c.)
    
    
    
    
    
    
    178
    
    
    
    Gain from the exchange of non-monetary
assets (d.)
    
    
    
    
    
    
    (55,288
    )
    
    
    (151,009
    )Depreciation of the gain from the exchange
of non-monetary assets (d.)
    
    
    28,946
    
    
    
    25,722
    
    
    
    23,417Sale lease-back transactions (e.)
    
    
    (26,920
    )
    
    
    (62,865
    )
    
    
    (286,993
    )Capitalized interest (f.)
    
    
    31,143
    
    
    
    99,296
    
    
    
    100,980Depreciation of capitalized interest (f.)
    
    
    (20,028
    )
    
    
    (10,098
    )
    
    
    Amortization of goodwill (g.)
    
    
    197,069
    
    
    
    175,625
    
    
    
    2,186Minority interest (i.)
    
    
    (2,829
    )
    
    
    (1,648
    )
    
    
    6,507Effect of inflation accounting on U.S. GAAP
adjustments (h.)
    
    
    
    
    
    
    585
    
    
    
    316Net loss under U.S.GAAP
    
    (Ps.
    3,093,398
    )
    
    (Ps.
    934,411
    )
    
    (Ps.
    631,762
    )
 As of December 31,2003
    
    2002Stockholders equity under Mexican GAAP
    
    Ps.
    4,710,144
    
    
    Ps.
    8,115,365Pre-operating costs (b.)
    
    
    (62,527
    )
    
    
    (89,048
    )Gain from the exchange of non-monetary
assets (d.)
    
    
    (440,469
    )
    
    
    (440,469
    )Accumulated amortization on the gain from
the exchange of non-monetary assets
(d.)
    
    
    78,085
    
    
    
    49,139Sale lease-back transactions (e.)
    
    
    (376,778
    )
    
    
    (349,858
    )Capitalized interest (f.)
    
    
    231,419
    
    
    
    200,276Accumulated depreciation on capitalized
interest (f.)
    
    
    (30,126
    )
    
    
    (10,098
    )Amortization of goodwill (g.)
    
    
    374,880
    
    
    
    177,811Minority interest (i.)
    
    
    82,105
    
    
    
    7,013Provision for consolidation of facilities
(l.)
    
    
    21,696
    
    
    
    21,696Stockholders equity under U.S. GAAP
    
    Ps.
    4,588,429
    
    
    Ps.
    7,681,827
 F-55




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##### Table of Contents



Provided below is an analysis of changes in stockholders equity under U.S.
GAAP: As of December 31,2003
    
    2002Opening balance
    
    Ps.
    7,681,827
    
    
    Ps.
    8,412,757Net loss for the year
    
    
    (3,093,398
    )
    
    
    (934,411
    )Other comprehensive income:Inflation effects
    
    
    
    
    
    
    (584
    )Derivative financial instruments
    
    
    
    
    
    
    204,065Closing balance
    
    Ps.
    4,588,429
    
    
    Ps.
    7,681,827
 n) Depreciation Under Mexican GAAP, depreciation is not included in the measure of gross
profit. Under U.S. GAAP, Ps.1,602,861, Ps.1,452,024 and Ps.1,324,184 for the
years ended December 31, 2003, 2002 and 2001, respectively, are reclassified to
cost of sales. o) Impairment of long-lived assets During the year ended December 31, 2002, the Company adopted SFAS 144,
Accounting for he Impairment of Long-Lived Assets. SFAS 144 provides guidance
on the accounting for the impairment or disposal of long-lived assets. SFAS 144
supercedes SFAS 121 and applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business. SFAS 144 develops one accounting model
(based on the model in SFAS 121) for long-lived assets that are to be disposed
of by sale, as well as addresses the principal implementation issues. The
adoption of SFAS 144 had no effect on the consolidated financial position or
results of operations of the Company. p. Change in accounting estimate Mexican GAAP allows a change in accounting estimate to be recorded outside of
income from continuing operations on the income statement. U.S. GAAP requires
separate disclosure if material, however the effect of a change in accounting
estimate is reported within income from continuing operations. The change in
estimate discussed in note 4j. increased the cost of equipment sales and other
by Ps.159,015, or Ps.1.7 per share during the year ended December 31, 2003. F-56




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##### Table of Contents



q) Supplementary U.S. GAAP disclosures 1) Cash flow information Under U.S. GAAP, SFAS 95, Statement of Cash Flows, a statement of cash flows
is required, which presents only movements in cash and excludes non-cash items.
SFAS 95 does not provide any specific guidance with respect to
inflation-adjusted financial statements. However, it is accepted practice to
adjust cash flows from operating activities for the monetary gains and losses
and unrealized foreign exchange gains and losses. Years ended December 31,Operating activities:
    
    2003
    
    2002
    
    2001Net loss under U.S. GAAP
    
    (Ps.
    3,093,398
    )
    
    (Ps.
    934,411
    )
    
    (Ps.
    631,762
    )Adjustments to reconcile net loss to cash
(used in) provided by operating activities:Depreciation
    
    
    1,602,861
    
    
    
    1,452,024
    
    
    
    1,324,184Amortization
    
    
    144,839
    
    
    
    562,778
    
    
    
    1,473,377Gain on the sale of towers
    
    
    (59,064
    )
    
    
    (32,389
    )
    
    
    (51,394
    )Intangible assets write-off
    
    
    190,299
    
    
    
    
    
    
    
    Other long-term assets write-off
    
    
    394,337
    
    
    
    
    
    
    
    Abandoned fixed assets write-off
    
    
    404,700
    
    
    
    
    
    
    
    Equity in (profit) loss of associated companies
    
    
    17,544
    
    
    
    10,129
    
    
    
    (2,794
    )Gain on sale of equity investments
    
    
    
    
    
    
    
    
    
    
    (4,370
    )Increase in allowance for doubtful accounts
    
    
    169,753
    
    
    
    63,777
    
    
    
    119,175Increase in allowance for
obsolete and slow-moving inventories
    
    
    
    
    
    
    11,659
    
    
    
    72,554Minority interest
    
    
    (15,135
    )
    
    
    (8,501
    )
    
    
    (29,252
    )Deferred income taxes and employee
profit sharing
    
    
    163,170
    
    
    
    9,214
    
    
    
    Gain on net monetary position and foreign
exchange losses
    
    
    221,202
    
    
    
    297,332
    
    
    
    (286,975
    )Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (29,061
    )
    
    
    119,122
    
    
    
    (100,211
    )Inventories
    
    
    (218,876
    )
    
    
    214,746
    
    
    
    (46,921
    )Increase (decrease) in:Trade accounts payable and related parties
    
    
    3,738
    
    
    
    (514,955
    )
    
    
    82,521Taxes and other payable
    
    
    184,107
    
    
    
    (363,326
    )
    
    
    (235,124
    )Income tax
    
    
    (51,632
    )
    
    
    (13,486
    )
    
    
    22,745Other
    
    
    (2,484
    )
    
    
    (57,206
    )
    
    
    (12,458
    )Net cash provided by operating activities
    
    
    26,900
    
    
    
    816,507
    
    
    
    1,693,295
 F-57




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##### Table of Contents



Years ended December 31,2003
    
    2002
    
    2001Financing activities:Payments of notes payable and long-term
debt
    
    
    (125,272
    )
    
    
    
    
    
    
    (26,404
    )Contributions for future capital stock
increases
    
    
    
    
    
    
    
    
    
    
    981,892Capital stock increases
    
    
    
    
    
    
    
    
    
    
    86Net cash (used for) provided by financing
activities
    
    
    (125,272
    )
    
    
    
    
    
    
    955,574Investing activities:Purchase of property and equipment, net
    
    (Ps.
    134,605
    )
    
    (Ps.
    673,666
    )
    
    (Ps.
    1,761,655
    )Proceeds from sales of investments in
associated companies
    
    
    
    
    
    
    
    
    
    
    4,370Proceeds from the sale of the towers
    
    
    92,646
    
    
    
    102,002
    
    
    
    383,305Acquisition of Portatel, net of cash
    
    
    
    
    
    
    (192,581
    )
    
    
    (544,390
    )Purchase of other assets
    
    
    
    
    
    
    (21,763
    )
    
    
    (889,653
    )Net cash used in investing activities
    
    
    (41,959
    )
    
    
    (786,008
    )
    
    
    (2,808,023
    )Translation and inflation effects in cash
    
    
    (9,909
    )
    
    
    (7,489
    )
    
    
    (30,776
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (150,240
    )
    
    
    23,010
    
    
    
    (189,930
    )Cash and cash equivalents at beginning
of year
    
    
    154,397
    
    
    
    131,387
    
    
    
    321,317Cash and cash equivalents at the end
of year
    
    Ps.
    4,157
    
    
    Ps.
    154,397
    
    
    Ps.
    131,387Interest paid
    
    Ps.
    195,994
    
    
    Ps.
    118,061
    
    
    Ps.
    422,871Income tax paid
    
    Ps.
    99,271
    
    
    Ps.
    147,493
    
    
    Ps.
    125,588Supplemental disclosures of non-cash
activities:Conversion of debt to equity
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    121Capitalization of contributions for future
capital stock increases
    
    
    
    
    
    
    2,413,053
    
    
    
    
 F-58




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##### Table of Contents



2) Deferred income taxes Significant components of deferred income taxes under U.S. GAAP are as follows: December 31, 2002SFAS 109
    
    SFAS 109applied to
    
    applied toMexican GAAP
    
    U.S. GAAPBalances
    
    adjustments
    
    TotalDeferred tax assets:Allowance for doubtful accounts
    
    Ps.
    86,347
    
    
    Ps.
    
    
    
    Ps.
    86,347Net operating loss carryforwards and tax
credits
    
    
    1,917,059
    
    
    
    
    
    
    
    1,917,059Reorganization reserve
    
    
    4,132
    
    
    
    
    
    
    
    4,132Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    115,963
    
    
    
    115,963Pre-operating costs
    
    
    
    
    
    
    20,009
    
    
    
    20,009Gain on the sale lease-back transaction
    
    
    
    
    
    
    120,569
    
    
    
    120,569Valuation allowance
    
    
    (1,032,163
    )
    
    
    (192,127
    )
    
    
    (1,224,290
    )Deferred tax assets
    
    
    975,375
    
    
    
    64,414
    
    
    
    1,039,789Deferred tax liabilities:Inventories
    
    
    83,634
    
    
    
    
    
    
    
    83,634Property and equipment
    
    
    794,298
    
    
    
    
    
    
    
    794,298Concessions
    
    
    97,443
    
    
    
    
    
    
    
    97,443Capitalized interest
    
    
    
    
    
    
    64,414
    
    
    
    64,414Deferred tax liabilities
    
    
    975,375
    
    
    
    64,414
    
    
    
    1,039,789Net deferred tax assets
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
 F-59




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##### Table of Contents



December 31, 2002SFAS 109
    
    SFAS 109applied to
    
    applied toMexican GAAP
    
    U.S. GAAPBalances
    
    adjustments
    
    TotalDeferred tax assets:Allowance for doubtful accounts
    
    Ps.
    32,128
    
    
    Ps.
    
    
    
    Ps.
    32,128Net operating loss carryforwards and tax
credits
    
    
    1,698,517
    
    
    
    
    
    
    
    1,698,517Reorganization reserve
    
    
    4,070
    
    
    
    
    
    
    
    4,070Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    125,226
    
    
    
    125,226Pre-operating costs
    
    
    
    
    
    
    28,496
    
    
    
    28,496Gain on the sale lease-back transaction
    
    
    
    
    
    
    111,954
    
    
    
    111,954Valuation allowance
    
    
    (499,343
    )
    
    
    (204,819
    )
    
    
    (704,162
    )Deferred tax assets
    
    
    1,235,372
    
    
    
    60,857
    
    
    
    1,296,229Deferred tax liabilities:Inventories
    
    
    12,498
    
    
    
    
    
    
    
    12,498Property and equipment
    
    
    900,668
    
    
    
    
    
    
    
    900,668Cellular telephones to be amortized
    
    
    49,970
    
    
    
    
    
    
    
    49,970Concessions
    
    
    102,572
    
    
    
    
    
    
    
    102,572Capitalized interest
    
    
    
    
    
    
    60,857
    
    
    
    60,857Deferred tax liabilities
    
    
    1,065,708
    
    
    
    60,857
    
    
    
    1,126,565Net deferred tax assets
    
    Ps.
    169,664
    
    
    Ps.
    
    
    
    Ps.
    169,664
 3) New Accounting Pronouncements 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. F-60




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##### Table of Contents



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 February 2003, the FASB issued Emerging Issues Task Force 00-21 (EITF
00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate
units based on their relative fair values. Applicable revenue recognition
criteria should be considered separately for each unit. The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is evaluating the impact of adoption
of EITF 00-21 will have on its financial position and results of operations. 4) U.S. GAAP requires the desegregation of the account balances as disclosed
below. There is no similar requirement under Mexican GAAP. As of December 31,
the account balances were as follows: 2003
    
    2002Recoverable taxes and other:Interconnection fees
    
    Ps.
    59,556
    
    
    Ps.
    74,903Recoverable VAT
    
    
    73,444
    
    
    
    96,563Other taxes
    
    
    57,673
    
    
    
    60,191Telephones to be amortized
    
    
    
    
    
    
    146,971Other
    
    
    162,869
    
    
    
    85,119353,542
    
    
    
    463,747Taxes and other payables:Taxes and rights payable
    
    
    56,587
    
    
    
    242,190Interest payable
    
    
    179,856
    
    
    
    79,161Other
    
    
    403,686
    
    
    
    253,091Ps.
    640,129
    
    
    Ps.
    574,442
 F-61




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##### Table of Contents



6) A significant portion of trade receivables is represented by a small number
of distributors. In 2001, our three largest distributors accounted for 59% and
52% of our net trade accounts receivable as of December 31, 2003 and 2002.
Management has established certain measures to reduce the risk associated with
this concentration such as certain guarantees and property liens. Management
believes that this distributor concentration will be reduced over time as the
size of the operations grows. However, results of operations could be
negatively affected, at least in the short term, if any defaults on payment
occur with respect to these distributors. NOTE 19  CONDENSED CONSOLIDATED FINANCIAL INFORMATION As mentioned in Note 10, in July 1997, the Company issued U.S.$150,000 of
senior unsecured notes due 2004 as part of its refinancing program. The Notes
Due 2004 are guaranteed on a senior subordinated, unsecured basis pursuant to
guarantees by most of the Companys directly and indirectly wholly owned
subsidiaries (Guarantor Subsidiaries). The subsidiary guarantees are full,
unconditional, joint and several. Presented below is condensed consolidating financial information as of December
31, 2003 and 2002 and for the three years ended December 31, 2003 for i) the
parent company; ii) the combined Guarantor Subsidiaries; iii) the combined
non-Guarantor Subsidiaries; iv) eliminations; and v) the Companys consolidated
financial statements. Where applicable, the equity method has been used by the
parent company with respect to its investments in certain subsidiaries for the
respective periods presented. The Company has not presented separate financial statements and other
disclosure concerning each of the Guarantor Subsidiaries because management has
determined that such information is not material to investors. F-62




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##### Table of Contents



CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2003 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and short-term investments
    
    Ps.
    4,632
    
    
    (Ps.
    807
    )
    
    Ps.
    332
    
    
    Ps.
    
    
    
    Ps.
    4,157Accounts receivable:Trade, net
    
    
    
    
    
    
    423,568
    
    
    
    75,222
    
    
    
    
    
    
    
    498,790Related parties
    
    
    2,820,908
    
    
    
    
    
    
    
    
    
    
    
    (2,820,908
    )
    
    
    Recoverable taxes and other
    
    
    16,057
    
    
    
    177,847
    
    
    
    159,638
    
    
    
    
    
    
    
    353,5422,836,965
    
    
    
    601,415
    
    
    
    234,860
    
    
    
    (2,820,908
    )
    
    
    852,332Inventories, net
    
    
    
    
    
    
    255,728
    
    
    
    267
    
    
    
    
    
    
    
    255,995Total current assets
    
    
    2,841,597
    
    
    
    856,336
    
    
    
    235,459
    
    
    
    (2,820,908
    )
    
    
    1,112,484Investment in associated companies
    
    
    569,937
    
    
    
    535,041
    
    
    
    (380
    )
    
    
    (1,090,404
    )
    
    
    14,194Property and equipment, net
    
    
    5,070,446
    
    
    
    853,234
    
    
    
    982,770
    
    
    
    
    
    
    
    6,906,450Other assets, net
    
    
    9,480
    
    
    
    607,664
    
    
    
    39,650
    
    
    
    
    
    
    
    656,794Excess of investment cost over
book value, net
    
    
    1,712,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,712,014Total assets
    
    Ps.
    10,203,474
    
    
    Ps.
    2,852,275
    
    
    Ps.
    1,257,499
    
    
    (Ps.
    3,911,312
    )
    
    Ps.
    10,401,936Current liabilities:Current portion of long-term debt
    
    Ps.
    4,667,429
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    4,667,429Trade accounts payable
    
    
    72,900
    
    
    
    272,204
    
    
    
    15,831
    
    
    
    
    
    
    
    360,935Related parties
    
    
    
    
    
    
    885,830
    
    
    
    2,300,519
    
    
    
    (3,163,704
    )
    
    
    22,645Taxes and other payable
    
    
    675,080
    
    
    
    117,280
    
    
    
    82,328
    
    
    
    (234,559
    )
    
    
    640,129Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    5,415,409
    
    
    
    1,275,314
    
    
    
    2,398,678
    
    
    
    (3,398,263
    )
    
    
    5,691,138Long-term debt
    
    
    
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    654Total liabilities
    
    
    5,415,409
    
    
    
    1,275,968
    
    
    
    2,398,678
    
    
    
    (3,398,263
    )
    
    
    5,691,792Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity:Capital contributions
    
    
    16,660,756
    
    
    
    7,483,288
    
    
    
    1,842,861
    
    
    
    (9,326,149
    )
    
    
    16,660,756Earned capital
    
    
    (11,872,691
    )
    
    
    (5,906,981
    )
    
    
    (2,984,040
    )
    
    
    8,891,021
    
    
    
    (11,872,691
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,921
    )
    
    
    (77,921
    )Total stockholders equity
    
    
    4,788,065
    
    
    
    1,576,307
    
    
    
    (1,141,179
    )
    
    
    (513,049
    )
    
    
    4,710,144Total liabilities and
stockholders equity
    
    Ps.
    10,203,474
    
    
    Ps.
    2,852,275
    
    
    Ps.
    1,257,499
    
    
    (Ps.
    3,911,312
    )
    
    Ps.
    10,401,936Total stockholders equity
under Mexican GAAP
    
    Ps.
    4,788,065
    
    
    Ps.
    1,576,307
    
    
    (Ps.
    1,141,179
    )
    
    (Ps.
    513,049
    )
    
    Ps.
    4,710,144Pre-operating costs
    
    
    
    
    
    
    
    
    
    
    (62,527
    )
    
    
    
    
    
    
    (62,527
    )Gain from exchange of non-
monetary assets
    
    
    
    
    
    
    
    
    
    
    (362,384
    )
    
    
    
    
    
    
    (362,384
    )Gain on the sale lease-back
transaction
    
    
    (188,864
    )
    
    
    (183,316
    )
    
    
    (4,598
    )
    
    
    
    
    
    
    (376,778
    )Capitalized interest
    
    
    201,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,293Amortization of goodwill
    
    
    374,880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374,880Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,105
    
    
    
    82,105Provision for consolidation of facilities
    
    
    21,696
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,696Total stockholders equity
under U.S. GAAP
    
    Ps.
    5,197,070
    
    
    Ps.
    1,392,991
    
    
    (Ps.
    1,570,688
    )
    
    (Ps.
    430,944
    )
    
    Ps.
    4,588,429
 F-63




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##### Table of Contents



CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2003 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedTotal revenues
    
    Ps.
    1,819,198
    
    
    Ps.
    9,232,581
    
    
    Ps.
    628,094
    
    
    (Ps.
    6,916,696
    )
    
    Ps.
    4,763,177Total cost of sales
    
    
    68,077
    
    
    
    6,363,897
    
    
    
    188,237
    
    
    
    (4,189,811
    )
    
    
    2,430,400Gross profit
    
    
    1,751,121
    
    
    
    2,868,684
    
    
    
    439,857
    
    
    
    (2,726,885
    )
    
    
    2,332,777Operating expenses
    
    
    219,679
    
    
    
    3,684,187
    
    
    
    304,134
    
    
    
    (2,421,210
    )
    
    
    1,786,790Depreciation and amortization
    
    
    1,513,262
    
    
    
    285,447
    
    
    
    154,978
    
    
    
    
    
    
    
    1,953,687Operating (loss) profit
    
    
    18,180
    
    
    
    (1,100,950
    )
    
    
    (19,255
    )
    
    
    (305,675
    )
    
    
    (1,407,700
    )Intangible assets write-off
    
    
    35,180
    
    
    
    
    
    
    
    181,640
    
    
    
    
    
    
    
    216,820Abandoned fixed assets write-off
    
    
    404,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    404,700Other expenses
    
    
    283,123
    
    
    
    62,313
    
    
    
    108,381
    
    
    
    (146,656
    )
    
    
    307,161Integral financing results:Interest (income) expense, net
    
    
    180,210
    
    
    
    32,835
    
    
    
    146,570
    
    
    
    
    
    
    
    359,615Foreign exchange (gain) loss, net
    
    
    367,563
    
    
    
    21,210
    
    
    
    (1,938
    )
    
    
    
    
    
    
    386,835(Gain) loss from monetary position
    
    
    (111,099
    )
    
    
    27,890
    
    
    
    (82,424
    )
    
    
    
    
    
    
    (165,633
    )436,674
    
    
    
    81,935
    
    
    
    62,208
    
    
    
    
    
    
    
    580,817Equity participation in net (gain)
loss of associated companies
    
    
    1,965,182
    
    
    
    17,202
    
    
    
    
    
    
    
    (1,964,840
    )
    
    
    17,544Provision for assets tax
    
    
    236,138
    
    
    
    30,886
    
    
    
    
    
    
    
    
    
    
    
    267,024Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,964
    )
    
    
    (17,964
    )Extraordinary items
    
    
    (15,517
    )
    
    
    159,015
    
    
    
    
    
    
    
    
    
    
    
    143,498Net loss for the year
    
    (Ps.
    3,327,300
    )
    
    (Ps.
    1,452,301
    )
    
    (Ps.
    371,484
    )
    
    Ps.
    1,823,785
    
    
    (Ps.
    3,327,300
    )Net loss for the year under
Mexican GAAP
    
    (Ps.
    3,327,300
    )
    
    (Ps.
    1,452,301
    )
    
    (Ps.
    371,484
    )
    
    Ps.
    1,823,785
    
    
    (Ps.
    3,327,300
    )Pre-operating costs
    
    
    
    
    
    
    
    
    
    
    26,521
    
    
    
    
    
    
    
    26,521Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    
    
    
    
    28,946
    
    
    
    
    
    
    
    28,946Sale lease-back transactions
    
    
    (11,379
    )
    
    
    (15,792
    )
    
    
    251
    
    
    
    
    
    
    
    (26,920
    )Capitalized interest
    
    
    11,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,115Amortization of goodwill
    
    
    197,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,069Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,829
    )
    
    
    (2,829
    )Net (loss) profit for the year under
US GAAP
    
    (Ps.
    3,130,495
    )
    
    (Ps.
    1,468,093
    )
    
    (Ps.
    315,766
    )
    
    Ps.
    1,820,956
    
    
    (Ps.
    3,093,398
    )
 F-64




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Net (loss) profit for the year
    
    (Ps.
    3,130,495
    )
    
    (Ps.
    1,468,093
    )
    
    (Ps.
    315,766
    )
    
    Ps.
    1,820,956
    
    
    (Ps.
    3,093,398
    )Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,336,221
    
    
    
    285,447
    
    
    
    126,032
    
    
    
    
    
    
    
    1,747,700Equity in net loss (earnings) of
associated companies and net
gain on sale of equity
investments
    
    
    1,965,182
    
    
    
    17,202
    
    
    
    
    
    
    
    (1,964,840
    )
    
    
    17,544Gain on the sale of the towers
    
    
    (27,705
    )
    
    
    (31,108
    )
    
    
    (251
    )
    
    
    
    
    
    
    (59,064
    )Intangible assets write-off
    
    
    35,180
    
    
    
    
    
    
    
    155,119
    
    
    
    
    
    
    
    190,299Other long-term assets write-off
    
    
    283,123
    
    
    
    62,313
    
    
    
    48,901
    
    
    
    
    
    
    
    394,337Abandoned fixed assets write-off
    
    
    404,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    404,700Increase in allowance for
doubtful accounts
    
    
    
    
    
    
    169,753
    
    
    
    
    
    
    
    
    
    
    
    169,753Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,135
    )
    
    
    (15,135
    )Deferred income taxes
    
    
    163,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,170Gain on net monetary position and
foreign exchange losses
    
    
    256,464
    
    
    
    49,100
    
    
    
    (84,362
    )
    
    
    
    
    
    
    221,202Changes in operating assets and
liabilities:Accounts receivable
    
    
    
    
    
    
    94,560
    
    
    
    (36,859
    )
    
    
    (86,762
    )
    
    
    (29,061
    )Inventories
    
    
    
    
    
    
    (218,609
    )
    
    
    (267
    )
    
    
    
    
    
    
    (218,876
    )Trade accounts payable and related parties
    
    
    (1,564,830
    )
    
    
    1,559,560
    
    
    
    9,008
    
    
    
    
    
    
    
    3,738Taxes and other payable
    
    
    321,810
    
    
    
    (475,140
    )
    
    
    87,657
    
    
    
    249,780
    
    
    
    184,107Income Tax
    
    
    (33,205
    )
    
    
    (14,786
    )
    
    
    (3,641
    )
    
    
    
    
    
    
    (51,632
    )Other
    
    
    
    
    
    
    (2,484
    )
    
    
    
    
    
    
    
    
    
    
    (2,484
    )Net cash provided by (used in)
operating activities
    
    
    9,615
    
    
    
    27,715
    
    
    
    (14,429
    )
    
    
    3,999
    
    
    
    26,900Investing activities:Purchase of property and equipment,
net
    
    
    (35,377
    )
    
    
    (113,114
    )
    
    
    13,886
    
    
    
    
    
    
    
    (134,605
    )Proceeds from the sale of the towers
    
    
    42,112
    
    
    
    50,534
    
    
    
    
    
    
    
    
    
    
    
    92,646Investment in associated
companies, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided
by investing activities
    
    
    6,735
    
    
    
    (62,580
    )
    
    
    13,886
    
    
    
    
    
    
    
    (41,959
    )Financing activities:Payments of notes payable and
long-term debt
    
    
    (125,272
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125,272
    )Net cash provided by (used in)
financing activities
    
    
    (125,272
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125,272
    )Translation and inflation effects in cash
    
    
    (4,519
    )
    
    
    (1,356
    )
    
    
    (35
    )
    
    
    (3,999
    )
    
    
    (9,909
    )Net decrease in cash
    
    
    (113,441
    )
    
    
    (36,221
    )
    
    
    (578
    )
    
    
    
    
    
    
    (150,240
    )Cash at beginning of year
    
    
    118,073
    
    
    
    35,414
    
    
    
    910
    
    
    
    
    
    
    
    154,397Cash at the end of year
    
    Ps.
    4,632
    
    
    (Ps.
    807
    )
    
    Ps.
    332
    
    
    Ps.
    
    
    
    Ps.
    4,157
 F-65




---



##### Table of Contents



CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and short-term investments
    
    Ps.
    118,073
    
    
    Ps.
    35,414
    
    
    Ps.
    910
    
    
    Ps.
    
    
    
    Ps.
    154,397Accounts receivable:Trade, net
    
    
    
    
    
    
    687,881
    
    
    
    38,363
    
    
    
    (62,711
    )
    
    
    663,533Related parties
    
    
    1,446,942
    
    
    
    807,560
    
    
    
    42
    
    
    
    (2,191,253
    )
    
    
    63,291Recoverable taxes and other
    
    
    12,082
    
    
    
    483,169
    
    
    
    346,938
    
    
    
    (378,442
    )
    
    
    463,7471,459,024
    
    
    
    1,978,610
    
    
    
    385,343
    
    
    
    (2,632,406
    )
    
    
    1,190,571Inventories, net
    
    
    
    
    
    
    37,119
    
    
    
    
    
    
    
    
    
    
    
    37,119Total current assets
    
    
    1,577,097
    
    
    
    2,051,143
    
    
    
    386,253
    
    
    
    (2,632,406
    )
    
    
    1,382,087Investment in associated companies
    
    
    2,481,694
    
    
    
    241,123
    
    
    
    10
    
    
    
    (2,687,036
    )
    
    
    35,791Property and equipment, net
    
    
    6,753,783
    
    
    
    1,017,847
    
    
    
    1,122,688
    
    
    
    (1,015
    )
    
    
    8,893,303Other assets, net
    
    
    424,126
    
    
    
    712,594
    
    
    
    287,347
    
    
    
    96,133
    
    
    
    1,520,200Excess of investment cost over
book value, net
    
    
    1,953,573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,953,573Total assets
    
    Ps.
    13,190,273
    
    
    Ps.
    4,022,707
    
    
    Ps.
    1,796,298
    
    
    (Ps.
    5,224,324
    )
    
    Ps.
    13,784,954Current liabilities:Notes payable and notes payable
to suppliers
    
    Ps.
    130,258
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    130,258Trade accounts payable
    
    
    73,015
    
    
    
    201,841
    
    
    
    10,150
    
    
    
    (2,428
    )
    
    
    282,578Related parties
    
    
    
    
    
    
    
    
    
    
    2,297,234
    
    
    
    (2,182,267
    )
    
    
    114,967Taxes and other payable
    
    
    360,154
    
    
    
    614,863
    
    
    
    254,968
    
    
    
    (655,543
    )
    
    
    574,442Income tax
    
    
    
    
    
    
    14,786
    
    
    
    3,641
    
    
    
    34,296
    
    
    
    52,723Total current liabilities
    
    
    563,427
    
    
    
    831,490
    
    
    
    2,565,993
    
    
    
    (2,805,942
    )
    
    
    1,154,968Long-term debt
    
    
    4,511,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,511,481Notes payable to suppliers
    
    
    
    
    
    
    3,140
    
    
    
    
    
    
    
    
    
    
    
    3,140Total liabilities
    
    
    5,074,908
    
    
    
    834,630
    
    
    
    2,565,993
    
    
    
    (2,805,942
    )
    
    
    5,669,589Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity:Capital contributions
    
    
    16,660,756
    
    
    
    7,483,288
    
    
    
    1,842,861
    
    
    
    (9,326,149
    )
    
    
    16,660,756Earned capital
    
    
    (8,545,391
    )
    
    
    (4,295,211
    )
    
    
    (2,612,556
    )
    
    
    6,907,767
    
    
    
    (8,545,391
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    8,115,365
    
    
    
    3,188,077
    
    
    
    (769,695
    )
    
    
    (2,418,382
    )
    
    
    8,115,365Total liabilities and
stockholders equity
    
    Ps.
    13,190,273
    
    
    Ps.
    4,022,707
    
    
    Ps.
    1,796,298
    
    
    (Ps.
    5,224,324
    )
    
    Ps.
    13,784,954Total stockholders equity
under Mexican GAAP
    
    Ps.
    8,115,365
    
    
    Ps.
    3,188,077
    
    
    (Ps.
    769,695
    )
    
    (Ps.
    2,418,382
    )
    
    Ps.
    8,115,365Pre-operating costs
    
    
    
    
    
    
    
    
    
    
    (89,048
    )
    
    
    
    
    
    
    (89,048
    )Gain from exchange of non-
monetary assets
    
    
    
    
    
    
    
    
    
    
    (391,330
    )
    
    
    
    
    
    
    (391,330
    )Sale lease-back transactions
    
    
    (177,485
    )
    
    
    (167,524
    )
    
    
    (4,849
    )
    
    
    
    
    
    
    (349,858
    )Capitalized interest
    
    
    190,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,178Amortization of goodwill
    
    
    177,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,811Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,011
    
    
    
    7,011Provision for consolidation of facilities
    
    
    21,696
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,696Total stockholders equity
under U.S. GAAP
    
    Ps.
    8,327,565
    
    
    Ps.
    3,020,553
    
    
    (Ps.
    1,254,922
    )
    
    (Ps.
    2,411,371
    )
    
    Ps.
    7,681,825
 F-66




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##### Table of Contents



CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2002 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedTotal revenues
    
    Ps.
    1,692,895
    
    
    Ps.
    9,102,896
    
    
    Ps.
    921,615
    
    
    (Ps.
    5,913,622
    )
    
    Ps.
    5,803,784Total cost of sales
    
    
    44,888
    
    
    
    4,667,753
    
    
    
    411,532
    
    
    
    (3,005,713
    )
    
    
    2,118,460Gross profit
    
    
    1,648,007
    
    
    
    4,435,143
    
    
    
    510,083
    
    
    
    (2,907,909
    )
    
    
    3,685,324Operating expenses
    
    
    121,670
    
    
    
    3,956,069
    
    
    
    583,592
    
    
    
    (2,902,014
    )
    
    
    1,759,317Depreciation and amortization
    
    
    1,416,075
    
    
    
    638,090
    
    
    
    146,355
    
    
    
    5,530
    
    
    
    2,206,050Operating (loss) profit
    
    
    110,262
    
    
    
    (159,016
    )
    
    
    (219,864
    )
    
    
    (11,425
    )
    
    
    (280,043
    )Integral financing results:Interest (income) expense, net
    
    
    322,113
    
    
    
    (10,704
    )
    
    
    87,227
    
    
    
    1,330
    
    
    
    399,966Foreign exchange (gain) loss, net
    
    
    509,215
    
    
    
    22,052
    
    
    
    (4,632
    )
    
    
    696
    
    
    
    527,331(Gain) loss from monetary position
    
    
    (205,216
    )
    
    
    85,724
    
    
    
    (96,507
    )
    
    
    (13,415
    )
    
    
    (229,414
    )626,112
    
    
    
    97,072
    
    
    
    (13,912
    )
    
    
    (11,389
    )
    
    
    697,883Equity participation in net (gain)
loss of associated companies
    
    
    539,650
    
    
    
    
    
    
    
    
    
    
    
    (529,521
    )
    
    
    10,129Provision for assets tax
    
    
    47,671
    
    
    
    68,991
    
    
    
    8,305
    
    
    
    298
    
    
    
    125,265Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,149
    )
    
    
    (10,149
    )Net loss for the year
    
    (Ps.
    1,103,171
    )
    
    (Ps.
    325,079
    )
    
    (Ps.
    214,257
    )
    
    Ps.
    539,336
    
    
    (Ps.
    1,103,171
    )Net loss for the year under
Mexican GAAP
    
    (Ps.
    1,103,171
    )
    
    (Ps.
    325,079
    )
    
    (Ps.
    214,257
    )
    
    Ps.
    539,336
    
    
    (Ps.
    1,103,171
    )Pre-operating costs
    
    
    
    
    
    
    
    
    
    
    (2,747
    )
    
    
    
    
    
    
    (2,747
    )Derivative financial instruments
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    
    
    
    
    (29,566
    )
    
    
    
    
    
    
    (29,566
    )Sale lease-back transactions
    
    
    (19,704
    )
    
    
    (43,161
    )
    
    
    
    
    
    
    
    
    
    
    (62,865
    )Capitalized interest
    
    
    89,198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,198Amortization of goodwill
    
    
    175,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,625Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,648
    )
    
    
    (1,648
    )Effects of inflation on US GAAP
adjustments
    
    
    585
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585Net (loss) profit for the year under
US GAAP
    
    (Ps.
    857,289
    )
    
    (Ps.
    368,240
    )
    
    (Ps.
    246,570
    )
    
    Ps.
    537,688
    
    
    (Ps.
    934,411
    )
 F-67




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Net (loss) profit for the year
    
    (Ps.
    857,289
    )
    
    (Ps.
    368,240
    )
    
    (Ps.
    246,570
    )
    
    Ps.
    537,688
    
    
    (Ps.
    934,411
    )Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,240,449
    
    
    
    638,090
    
    
    
    146,354
    
    
    
    (10,091
    )
    
    
    2,014,802Equity in net loss (earnings) of
associated companies and net
gain on sale of equity
investments
    
    
    539,314
    
    
    
    
    
    
    
    
    
    
    
    (529,185
    )
    
    
    10,129Gain on the sale of the towers
    
    
    (12,767
    )
    
    
    (19,622
    )
    
    
    
    
    
    
    
    
    
    
    (32,389
    )Increase in allowance for
doubtful accounts
    
    
    
    
    
    
    63,777
    
    
    
    
    
    
    
    
    
    
    
    63,777Increase in allowance for obsolete
and slow-moving inventories
    
    
    
    
    
    
    11,659
    
    
    
    
    
    
    
    
    
    
    
    11,659Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,501
    )
    
    
    (8,501
    )Deferred income tax
    
    
    9,214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,214Gain on net monetary position and
foreign exchange losses
    
    
    356,171
    
    
    
    107,776
    
    
    
    (101,139
    )
    
    
    (65,476
    )
    
    
    297,332Changes in operating assets and
liabilities:Accounts receivable
    
    
    128,263
    
    
    
    (216,837
    )
    
    
    11,403
    
    
    
    196,293
    
    
    
    119,122Inventories
    
    
    3,703
    
    
    
    176,180
    
    
    
    34,863
    
    
    
    
    
    
    
    214,746Trade accounts payable and related parties
    
    
    (1,238,144
    )
    
    
    526,507
    
    
    
    66,588
    
    
    
    130,094
    
    
    
    (514,955
    )Taxes and other payable
    
    
    172,352
    
    
    
    (157,481
    )
    
    
    (35,307
    )
    
    
    (342,890
    )
    
    
    (363,326
    )Income Tax
    
    
    (8,531
    )
    
    
    6,006
    
    
    
    (7,582
    )
    
    
    (3,379
    )
    
    
    (13,486
    )Other
    
    
    (56,806
    )
    
    
    (220
    )
    
    
    
    
    
    
    (180
    )
    
    
    (57,206
    )Net cash provided by (used in)
operating activities
    
    
    275,929
    
    
    
    767,595
    
    
    
    (131,390
    )
    
    
    (95,627
    )
    
    
    816,507Investing activities:Purchase of property and equipment,
net
    
    
    (775,131
    )
    
    
    (229,879
    )
    
    
    221,856
    
    
    
    109,488
    
    
    
    (673,666
    )Proceeds from the sale of the towers
    
    
    32,471
    
    
    
    69,531
    
    
    
    
    
    
    
    
    
    
    
    102,002Investment in associated
companies, net of cash acquired
    
    
    111,039
    
    
    
    (3,333
    )
    
    
    
    
    
    
    (300,287
    )
    
    
    (192,581
    )Purchase of other assets
    
    
    342,675
    
    
    
    (1,307,735
    )
    
    
    656,871
    
    
    
    286,426
    
    
    
    (21,763
    )Net cash (used in) provided
by investing activities
    
    
    (288,946
    )
    
    
    (1,471,416
    )
    
    
    878,727
    
    
    
    95,627
    
    
    
    (786,008
    )Financing activities:Payments of notes payable and
long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital stock increases and contributions
for future capital stock increases
    
    
    
    
    
    
    743,431
    
    
    
    (743,431
    )
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    
    
    
    
    743,431
    
    
    
    (743,431
    )
    
    
    
    
    
    
    Translation and inflation effects in cash
    
    
    (7,472
    )
    
    
    240
    
    
    
    (257
    )
    
    
    
    
    
    
    (7,489
    )Net decrease in cash
    
    
    (20,489
    )
    
    
    39,850
    
    
    
    3,649
    
    
    
    
    
    
    
    23,010Cash at beginning of year
    
    
    138,562
    
    
    
    (4,436
    )
    
    
    (2,739
    )
    
    
    
    
    
    
    131,387Cash at the end of year
    
    Ps.
    118,073
    
    
    Ps.
    35,414
    
    
    Ps.
    910
    
    
    Ps.
    
    
    
    Ps.
    154,397
 F-68




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##### Table of Contents



CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2001 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedTotal revenues
    
    Ps.
    1,081,095
    
    
    Ps.
    9,610,775
    
    
    Ps.
    1,455,092
    
    
    (Ps.
    5,235,118
    )
    
    Ps.
    6,911,844Total cost of sales
    
    
    27,453
    
    
    
    4,131,742
    
    
    
    478,250
    
    
    
    (2,599,016
    )
    
    
    2,038,429Gross profit
    
    
    1,053,642
    
    
    
    5,479,033
    
    
    
    976,842
    
    
    
    (2,636,102
    )
    
    
    4,873,415Operating expenses
    
    
    (40,099
    )
    
    
    4,267,742
    
    
    
    536,812
    
    
    
    (2,662,625
    )
    
    
    2,101,830Depreciation and amortization
    
    
    1,351,248
    
    
    
    1,336,790
    
    
    
    144,000
    
    
    
    (8,874
    )
    
    
    2,823,164Operating (loss) profit
    
    
    (257,507
    )
    
    
    (125,499
    )
    
    
    296,030
    
    
    
    35,397
    
    
    
    (51,579
    )Integral financing results:Interest (income) expense, net
    
    
    214,689
    
    
    
    (81,000
    )
    
    
    286,302
    
    
    
    4,135
    
    
    
    424,126Foreign exchange (gain) loss, net
    
    
    (81,221
    )
    
    
    (19,803
    )
    
    
    (4,260
    )
    
    
    2
    
    
    
    (105,282
    )(Gain) loss from monetary position
    
    
    (131,891
    )
    
    
    54,566
    
    
    
    (99,925
    )
    
    
    (4,126
    )
    
    
    (181,376
    )1,577
    
    
    
    (46,237
    )
    
    
    182,117
    
    
    
    11
    
    
    
    137,468Equity participation in net (gain)
loss of associated companies
    
    
    (3,635
    )
    
    
    (16,776
    )
    
    
    
    
    
    
    13,247
    
    
    
    (7,164
    )Provision for assets tax
    
    
    64,597
    
    
    
    95,643
    
    
    
    7,792
    
    
    
    (7,124
    )
    
    
    160,908Cumulative effect of the adoption of the
new accounting principle
    
    
    7,120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,120Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,745
    )
    
    
    (22,745
    )Net loss for the year
    
    (Ps.
    327,166
    )
    
    (Ps.
    158,129
    )
    
    Ps.
    106,121
    
    
    Ps.
    52,008
    
    
    (Ps.
    327,166
    )Net loss for the year under
Mexican GAAP
    
    (Ps.
    327,166
    )
    
    (Ps.
    158,129
    )
    
    Ps.
    106,121
    
    
    Ps.
    52,008
    
    
    (Ps.
    327,166
    )Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    
    
    
    
    (127,592
    )
    
    
    
    
    
    
    (127,592
    )Sale lease-back transactions
    
    
    (157,780
    )
    
    
    (124,363
    )
    
    
    (4,850
    )
    
    
    
    
    
    
    (286,993
    )Capitalized interest
    
    
    100,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,980Amortization of goodwill
    
    
    2,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,186Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,507
    
    
    
    6,507Effects of inflation on US GAAP
adjustments
    
    
    316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316Net (loss) profit for the year under
US GAAP
    
    (Ps.
    381,464
    )
    
    (Ps.
    282,492
    )
    
    (Ps.
    26,321
    )
    
    Ps.
    58,515
    
    
    (Ps.
    631,762
    )
 F-69




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001 Combined
    
    CombinedParent
    
    guarantor
    
    non-guarantorcompany
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Net (loss) profit for the year
    
    (Ps.
    381,464
    )
    
    (Ps.
    282,492
    )
    
    (Ps.
    26,321
    )
    
    Ps.
    58,515
    
    
    (Ps.
    631,762
    )Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,349,061
    
    
    
    1,336,790
    
    
    
    120,584
    
    
    
    (8,874
    )
    
    
    2,797,561Equity in net loss (earnings) of
associated companies and net
gain on sale of equity
investments
    
    
    (7,164
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,164
    )Gain on the sale of the towers
    
    
    (28,255
    )
    
    
    (22,271
    )
    
    
    (868
    )
    
    
    
    
    
    
    (51,394
    )Increase in allowance for
doubtful accounts
    
    
    
    
    
    
    119,175
    
    
    
    
    
    
    
    
    
    
    
    119,175Increase in allowance for obsolete
and slow-moving inventories
    
    
    
    
    
    
    72,554
    
    
    
    
    
    
    
    
    
    
    
    72,554Minority interest
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    (29,042
    )
    
    
    (29,252
    )Gain on net monetary position and
foreign exchange losses
    
    
    (206,310
    )
    
    
    34,763
    
    
    
    (104,185
    )
    
    
    (11,243
    )
    
    
    (286,975
    )Changes in operating assets and
liabilities:Accounts receivable
    
    
    (112,423
    )
    
    
    (34,153
    )
    
    
    45,589
    
    
    
    776
    
    
    
    (100,211
    )Inventories
    
    
    829
    
    
    
    (28,067
    )
    
    
    (18,742
    )
    
    
    (941
    )
    
    
    (46,921
    )Trade accounts payable and related parties
    
    
    668,421
    
    
    
    (253,113
    )
    
    
    (320,327
    )
    
    
    (12,460
    )
    
    
    82,521Taxes and other payable
    
    
    32,910
    
    
    
    (265,788
    )
    
    
    72,522
    
    
    
    (74,768
    )
    
    
    (235,124
    )Income Tax
    
    
    42,826
    
    
    
    8,773
    
    
    
    (2,587
    )
    
    
    (26,267
    )
    
    
    22,745Other
    
    
    56,806
    
    
    
    (368
    )
    
    
    (30
    )
    
    
    (68,866
    )
    
    
    (12,458
    )Net cash provided by (used in)
operating activities
    
    
    1,415,027
    
    
    
    685,803
    
    
    
    (234,365
    )
    
    
    (173,170
    )
    
    
    1,693,295Investing activities:Purchase of property and equipment,
net
    
    
    (1,449,258
    )
    
    
    73,196
    
    
    
    (484,999
    )
    
    
    99,406
    
    
    
    (1,761,655
    )Proceeds from the sale of the towers
    
    
    205,908
    
    
    
    170,739
    
    
    
    6,658
    
    
    
    
    
    
    
    383,305Investment in associated
companies, net of cash acquired
    
    
    (540,020
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (540,020
    )Purchase of other assets
    
    
    (748,849
    )
    
    
    (939,552
    )
    
    
    (510,788
    )
    
    
    1,309,536
    
    
    
    (889,653
    )Net cash (used in) provided
by investing activities
    
    
    (2,532,219
    )
    
    
    (695,617
    )
    
    
    (989,129
    )
    
    
    1,408,942
    
    
    
    (2,808,023
    )Financing activities:Payments of notes payable and
long-term debt
    
    
    (26,404
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,404
    )Capital stock increases and contributions
for future capital stock increases
    
    
    981,978
    
    
    
    
    
    
    
    1,218,541
    
    
    
    (1,218,541
    )
    
    
    981,978Net cash provided by (used in)
financing activities
    
    
    955,574
    
    
    
    
    
    
    
    1,218,541
    
    
    
    (1,218,541
    )
    
    
    955,574Translation and inflation effects in cash
    
    
    (13,208
    )
    
    
    (236
    )
    
    
    (101
    )
    
    
    (17,231
    )
    
    
    (30,776
    )Net decrease in cash
    
    
    (174,826
    )
    
    
    (10,050
    )
    
    
    (5,054
    )
    
    
    
    
    
    
    (189,930
    )Cash at beginning of year
    
    
    313,388
    
    
    
    5,614
    
    
    
    2,315
    
    
    
    
    
    
    
    321,317Cash at the end of year
    
    Ps.
    138,562
    
    
    (Ps.
    4,436
    )
    
    (Ps.
    2,739
    )
    
    Ps.
    
    
    
    Ps.
    131,387
 F-70




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##### Table of Contents



GRUPO IUSACELL CELULAR, S.A. DE C.V. SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
Years Ended 2001, 2002 and 2003
(Amounts expressed in Thousands of Mexican Pesos (Ps.)
with Purchasing Power as of December 31, 2003) Balance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    other
    
    
    
    
    
    end ofof period
    
    expenses
    
    accounts
    
    Deductions
    
    periodAllowance for obsolete and
slow-moving inventories2001
    
    
    56,414
    
    
    
    72,554
    
    
    
    
    
    
    
    7,239
    
    
    
    121,7292002
    
    
    121,729
    
    
    
    11,659
    
    
    
    
    
    
    
    26,041
    
    
    
    107,3472003
    
    
    107,347
    
    
    
    (41,996
    )
    
    
    
    
    
    
    12,970
    
    
    
    52,381Allowance for doubtful
accounts2001
    
    
    243,646
    
    
    
    119,175
    
    
    
    
    
    
    
    131,037
    
    
    
    231,7842002
    
    
    231,784
    
    
    
    63,777
    
    
    
    
    
    
    
    198,233
    
    
    
    97,3282003
    
    
    97,328
    
    
    
    169,753
    
    
    
    
    
    
    
    
    
    
    
    267,081