We lease space for administrative offices in Mexico City and in the cities of Puebla and Querétaro. Our main headquarters are located in Santa Fe, Mexico City in a building leased for a 5-year term that expires on February 26, 2007 and that is renewable for two additional 5-year terms. This building is comprised of l15,110 square feet. In November 2003, we sub-leased 29,870 square feet of our main headquarters until February 26, 2007. This sub – lease agreement is renewable for two 5 – year terms, provided we decide to renew our lease agreement. The price per square feet on our sub – lease agreement is exactly the same as the one we have for our lease agreement, therefore we accounted the rent of our sub – lease agreement as a reduction of the rent rather than as income.

     In May 2003, we reached an agreement with our landlord at our former headquarters in Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May 2013 on the first floor, where one of our Lucent 5ESS switches is located, and a portion of the roof-top, where we have microwave transmission antennas. We were also released from lease obligation on approximately 35,887 square feet plus parking space of the building originally running through September 30, 2013. In exchange, we agreed to prepay the full, ten-year lease obligations on the first floor and a portion of the roof-top, which amount to U.S.$2.7 million and was payable in installments through May 2004.

     Our offices in the City of Puebla are leased for a 10-year renewable term that expires on March 25, 2008. These offices in Puebla are comprised of 14,100 square feet and hold one of our Lucent Technologies 5ESS switch. We have a branch office in Puebla that is leased for a 5-year term that expires on June 1, 2004, renewable for one similar additional term. This building is comprised of 1,350 square feet. We cancelled in June 2004, the lease agreement for the parking of our vehicular fleet in the City of Puebla. This parking space was comprised of 13,185 square feet.

     Our offices in the City of Queretaro are leased for a 15-year renewable term that expires on August 1, 2017. These offices in Queretaro are comprised of 12,012 square feet. We have a branch office in Querétaro that is leased for a 15-year term that expires on June 23, 2017. This branch office is comprised of 33,947 square feet and holds one of our other Lucent Technologies 5ESS switch.

     On August 1, 2003, we leased a warehouse comprised of 28,620 square feet for a 2-year term that expires on July 31, 2005. In addition we lease approximately 130 other sites that are used as hosts or single-site buildings and are located throughout Mexico City and the cities of Puebla. Additionally, we are the owners of five portions of land in the City of Puebla that are used as part of our infrastructure. We believe that our facilities are adequate for our present needs and are suitable for their intended purposes.

     Our financial statements have been prepared in accordance with Bulletin B-10, “Recognition of the Effects of Inflation on Financial Information,” as amended, issued by the Mexican Institute of Public Accountants (“MIPA”), which provides guidance for the recognition of the effects of inflation and translation of foreign currency transactions.

     We restate our income statement to reflect the purchasing power of the peso as of the most recent reporting date (December 31, 2004), using a restatement factor derived from the change in the national consumer price index from the month in which the transaction occurred to the most recent year-end. 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, 2004. 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 2002, 2003 and 2004, the rates of inflation in Mexico, as measured by changes in the Mexican national consumer price index, were 5.7%, 4.0% and 5.2%, respectively.

     Bulletin B-12, issued by the MIPA, specifies the appropriate presentation of the statement of changes in financial position when the financial statements have been restated in constant monetary units. Bulletin B-12 identifies the sources and applications of resources as the differences between beginning and ending financial statement balances in constant monetary units. The Bulletin also requires that monetary and foreign exchange gains and losses not be treated as non-cash items in the determination of resources provided by operations.

Recent developments

     On June 20, 2005 we filed before the Banking and Securities Commission of Mexico ( “Comisión Nacional Bancaria y de Valores” ) a petition to issue a program of securities in Mexican markets for up to Ps.150,000,000 (approximately U.S.$14 million dollars) in the form of unsecured “certificados bursátiles”. These notes will be issued, if authorized, on short term tranches. We have retained IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero to serve as our financial agent and lead manager in connection with this program. We are still negotiating the final terms of this local securities program.

Overview of Maxcom

     We are a growing facilities-based telecommunications company operating in the competitive local exchange carrier market in Mexico. We are focused on developing our network and support infrastructure required to provide local as well as long distance and other value-added services to targeted small and medium-sized business and residential customers within our concession areas. We position ourselves as a single-source provider of telecommunications services to our customers.

     We commenced commercial operations on May 1, 1999 and currently provide last-mile connectivity to small and medium-sized business and residential customers in Mexico City and the cities of Puebla and Querétaro. In addition to our existing local and long distance services, we offer value-added services such as digital high-speed data connectivity, dial-up Internet access and other broadband services.

     We were incorporated in February 1996 to take advantage of business opportunities arising out of the liberalization of Mexico’s telecommunications industry. In February 1997, we were awarded Mexico’s first competitive wireline local and long distance telephony concession, covering the Federal District of Mexico and over 100 cities and towns in the Gulf region for local service and the whole nation for long distance service. This concession has a term of 30 years. Our concession was expanded in September 1999 to cover most of the greater Mexico City area, and a wider area within the Gulf region. In September 2001, our wireline local telephony concession was expanded to cover all of Mexico.

     We were also awarded seven nationwide point-to-point and three regional point-to-multipoint microwave concessions in October 1997, each for 20 years.

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Devaluation and inflation

     On December 20, 1994, the Mexican government responded to exchange rate pressures by increasing the upper limit of the then existing free market peso/U.S. dollar exchange rate band by 15% and, two days later, by eliminating the band to allow the peso to fluctuate freely against the U.S. dollar. This resulted in a major devaluation of the peso relative to the U.S. dollar. Where the noon buying rate had been Ps.3.45 per U.S.$1.00 on December 19, 1994, by December 31, 1994 the noon buying rate had fallen to Ps.5.00 per U.S.$1.00, representing a 44.9% devaluation. The peso continued to decline against the U.S. dollar during 1995, closing at a noon buying rate of Ps.7.74 per U.S.$1.00 on December 31, 1995, which represented a 54.8% devaluation relative to the U.S. dollar for the year.

     The Mexican economy began to recover in 1996 and 1997, as exchange rates stabilized, inflation decreased and real gross domestic product grew by 5.3% and 6.8%, respectively. However, the financial crises in Asia and Russia, together with the weakness in the price of oil in 1998, which is a significant source of revenue for the Mexican government, contributed to renewed weakness in the peso, which devalued 22.7% relative to the U.S. dollar. From 1999 to 2000, the peso-to-dollar exchange rate remained relatively stable. In 2001, the peso-to-dollar exchange rate showed a slight recovery of 4.8% from Ps.9.62 on December 31, 2000 to Ps.9.16 on December 31, 2001. However, in 2002 and 2003, the peso devalued 13.9% and 7.8% relative to the U.S. dollar, and in 2004 the peso revalued 0.8% relative to the U.S. dollar. In the first five months of 2005, the peso reevaluated 2.2% relative to the U.S. dollar.

     Peso devaluations contributed to sharp increases in inflation. Inflation, which had been 7.1% in 1994, increased to 52.0% and 27.7% in 1995 and 1996, respectively. After a reduction to 15.7% in 1997, inflation was 18.6% in 1998. In 1999, 2000, 2001, 2002 and 2003, the inflation rate decreased to 12.3%, 9.0%, 4.4%, 5.7% and 4.0%, respectively. In 2004, the inflation rate was 5.2%.

     The general economic conditions in Mexico resulting from a devaluation of the peso and the resulting inflation may have a negative impact on our results of operations, primarily as a result of:

Capitalization of pre-operating expenses

     We commenced commercial operations on May 1, 1999. As permitted under Mexican GAAP, during our pre-operating stage, we capitalized all of our general and administrative expenses and our net integral cost of financing.

     We were required to begin to amortize all previously capitalized pre-operating costs. These capitalized pre-operating expenses, net, which balance amounted to Ps.256.5 million at December 31, 2001, Ps.223.5 million at December 31, 2002, Ps.188.9 million at December 31, 2003 and Ps.153.5 million at December 31, 2004, are amortized on a straight-line basis for a period not exceeding ten years.

Voice, data and wholesale revenues

     In July 2002 we began reporting revenues from data services separately from voice and data revenue began to grow in significance. Prior to that date, revenues from data services were included with voice revenues.

     Voice services are our core business. Revenues from voice services include:

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     We began to offer data services on a full basis in July 2002. Revenues from data services include: Internet dial-up access, ADSL, dedicated Internet access, digital private lines and lease of backbone capacity. We charge for these services on a bandwidth basis.

     Wholesale service revenues are related basically to the sale of bulk minutes where the cost per minute depends on the volume of traffic. Customers include high-usage customers, Internet service providers and carriers with whom we do not have “bill & keep” agreements (such as long distance and mobile carriers). We also include in this group other miscellaneous revenues.

Results of operations

     The following table sets forth, for the periods indicated, selected statement of operations data calculated in accordance with Mexican GAAP and expressed as a percentage of net revenue:

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

Net revenues

     Our net revenues primarily include monthly fees, usage fees, installation charges, interconnection fees and the sale of telephone sets. See note 3.n to the consolidated financial statements included in this annual report for an explanation of how we recognize revenues.

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     Our net revenues increased 7.8% in 2004 as compared to 2003, from Ps. 805.4 million in 2003 to Ps.868.2 million in 2004.

     Voice revenues increased by 7.0%, from Ps.668.9 million in 2003 to Ps.715.5 million in 2004. This increase was primarily due to 13.3% increase of the number of average voice lines in service from 125,723 in 2003 to 142,439 in 2004, as we continued the buildout of our network infrastructure and had more voice lines available. The increase in the number of average voice lines was partially offset by a 1% decrease in Company ARPU. The increase in voice lines produced a 0.7% increase in monthly fee revenues (from Ps.309.8 million in 2003 to Ps.312.0 million in 2004) and a 9.0% increase in overall usage fees (from Ps.333.0 million in 2003 to Ps.363.1 million in 2004).

     Wholesale revenues increased by 24.0%, from Ps.89.4 million in 2003 to Ps.110.9 million in 2004. This increase was primarily due to a 54.5% increase in traffic from 634.6 thousand minutes in 2003 to 980.7 thousand minutes in 2004, partially offset by a 13.0% decrease in the average cost per minute.

     The following table presents a breakdown of our revenues by source for 2003 and 2004:

     The following table presents a breakdown of our average revenue per line (also known as ARPU) for 2003 and 2004.

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     We calculate ARPU by dividing the total voice revenues for a given period of times by the average number of voice lines in service during such period. ARPU is a widely utilized standard measure in the telecommunications industry and is used to evaluate the performance of the voice business. Revenues from data and wholesale services are reported separately and are not the factor in calculating ARPU.

     We calculate voice lines ARPU for our residential and business lines. Overall ARPU is affected by our business/residential line mix as business lines tend to generate higher ARPU than residential lines. Total Company ARPU includes Public Telephony revenues and lines.

     Business ARPU decreased 5% to U.S.$75.4 in 2004 from U.S.$79.6 in 2003, as a result of (i) a 14% decrease in installation charges as we continued waiving installation fees in many cases during 2004 due to competitive pressures; and (ii) a 2% decrease in usage charges as a result of a slightly lower number of local outbound calls per line. This decrease was partially offset by a 10% increase in monthly fees related to a change in the product mix, given that each product generates different rates.

     Residential ARPU increased 1% to U.S.$30.6 in 2004 from U.S.$30.4 in 2003. The increase was mainly due to a 2% increase in usage charges.

     The following table presents a breakdown of our lines by type of customer at December 31, 2003 and 2004 and the percentage variation:

Operating costs and expenses

     Our operating costs and expenses include:

     Our operating costs and expenses were Ps.1,015.7 million in 2004, a 3.1% decrease as compared to Ps.1,048.5 million in 2003. This decrease was primarily due to:

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     Selling, general and administrative expenses decreased Ps.31.1 million, or 7.7% primarily due to (i) Ps.20.4 lower provision for executive bonuses in 2004, (ii) a Ps.10.9 million pesos decrease in severance expenses as a result of the headcount reduction in 2003, (iii) a Ps.12.9 million decrease in bad debt provisioning coming mainly from the provision in 2003 of a fraud detected from a business customer, see “Item 8. Financial Information-A. Consolidated statements and other financial information, Legal proceedings” and customer retention plans that have allowed us to improve collections and hence to reduce bad debt provisioning, (iv) a Ps. 3.1 million or 9.9% decrease in leases of offices buildings, as we reached an agreement with our landlord at our former headquarters in 2003 together with sub-leases of office space in our current headquarters to other companies, (v) a Ps. 2.4 million, or 6.4% reduction in fees paid to external advisors; and, (vi) a Ps. 2.3 million or 51.8% reduction in insurance expenses.

     These savings were offset in part by (i) a Ps.10.1 million, or 244.1% increase in advertising expenses, as we initiated advertising campaigns in new clusters, (ii) a Ps.2.8 million, or 11.0% increase in sales commissions, as a result of a 16.6% increase in gross installed lines from 53,655 in 2003 to 62,579 in 2004, (iii) Ps. 2.6 million, or .8% increase in reserve for obsolete equipment as we sold obsolete equipment in 2004, (iv) Ps. 2.6 million, or 8.8% increase in general selling and administrative expenses, (v) Ps. 1.6 million or 453.1% in market research expenses; and, (iii) a Ps.1.2 million increase in maintenance expenses.

Integral cost of financing

     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 cost of financing” refers to the combined financial effects of:

     Net foreign exchange gains or losses reflect the impact of changes in foreign exchange rates on assets and liabilities denominated in currencies other than pesos. A foreign exchange loss arises if a liability is denominated in

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a foreign currency which appreciates relative to the peso between the time the liability is incurred and the date it is repaid, as the appreciation of the foreign currency results in an increase in the amount of pesos which must be exchanged to repay the specified amount of the foreign currency liability.

     The gain or loss on monetary position refers to the gains and losses realized from holding net monetary assets or liabilities and reflects the impact of inflation on monetary assets and liabilities. For example, a gain on monetary position results from holding net monetary liabilities in pesos during periods of inflation, as the purchasing power of the peso declines over time.

     Our integral cost of financing was a negative Ps.47.3 million in 2004, a 136.5% decrease as compared to positive Ps.129.4 million in 2003. The decrease in integral cost of financing was primarily due to:

     (i) a Ps.180.7 million, or 99.2% reduction in exchange loses, as a consequence of the effect on our dollar-denominated debt of a lower devaluation of the peso as compared to the dollar during 2004, when compared to the devaluation of the peso during 2003, as well as lower debt lever due to our October 2004 restructuring; and

     (ii) a Ps.6.1 million, or 7.6% increase in gain on net monetary position, as a result of the effect of a higher inflation on our liabilities monetary position in 2004 when compared to the inflation during 2003.

     These factors of financing costs were partially offset by (i) a Ps.4.5 million increase in interest expense associated with financing from vendors and, (ii) a Ps.5.5 million higher bank commissions, net of interest on cash balances.

Asset tax

     We recorded Ps.26.9 million in asset taxes in 2004 as compared to Ps.12.9 million in asset taxes in 2003. The difference is primarily due to a significant increase in our asset base in 2000, when we increased the buildout of our network, as compared to 1999, which are the respective years considered for purposes of computation of the asset tax. Asset taxes are computed on the asset base existing four years before the current tax year.

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

Net revenues

     Our net revenues increased 37.4% in 2003 as compared to 2002, from Ps.586.2 million in 2002 to Ps.805.3 million in 2003. This increase was primarily due to 36.1% increase of the average number of lines in service from 96,521 in 2002 to 125,723 in 2003, as we continued the buildout of our network infrastructure. The increase in voice lines produced a 33.4% increase in monthly fee revenues (from Ps.231.5 million in 2002 to Ps.309.8 million in 2003) and a 31.3% increase in overall usage fees (from Ps.253.6 million in 2002 to Ps.333.0 million in 2003).

     Wholesale revenues increased by 79.3%, from Ps.49.9 million in 2002 to Ps.89.4 million in 2003. This increase was primarily due to a 138.6% increase in traffic from 266.0 thousand minutes in 2002 to 634.6 thousand minutes in 2003, partially offset by a 8.6% decrease in the average cost per minute.

     The following table presents a breakdown of our revenues by source for 2002 and 2003.

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     The following table presents a breakdown of our average revenue per line (also known as ARPU) for 2002 and 2003.

     Business ARPU decreased 1.6% to U.S.$79.6 in 2003 from U.S.$80.6 in 2002, as a result of (i) a 31.7% decrease in installation charges as we waived installation fees in many cases during 2003 due to competitive pressures and, (ii) a 1.1% reduction in usage charges as a result of a slightly lower number of local, long distance and mobile outbound calls per line. This decrease was partially offset by a 2.7% increase in monthly fees related to a change in the product mix, given that each product generates different rates.

     Residential ARPU decreased 9.1% to U.S.$30.4 in 2003 from U.S.$33.5 in 2002. The decrease was mainly the result of a 58.5% decrease in installation fees due to waivers of such fees granted to customers as a result of competitive pressures.

     The following table presents a breakdown of our lines by type of customer at December 31, 2002 and 2003 and the percentage variation:

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Operating costs and expenses

     Our operating costs and expenses were Ps.1,048.4 million in 2003, a 0.4% increase as compared to Ps.1,043.8 million in 2002. This increase was primarily due to:

     The increases were offset in part by a Ps.63.4 million, or 13.5% decrease in selling, general and administrative expenses primarily due to the implementation of cost-reduction measures such as (i) a Ps.28.9 million decrease in severance expenses as a result of the headcount reduction in late 2002, (ii) a Ps.24.6 million, or 10.7% reduction in salaries, wages and benefits as a result of the above-mentioned headcount reduction, (iii) a Ps. 18.5 million decrease in leases of offices buildings, as we reached an agreement with our landlord at our former headquarters, (iv) a Ps.14.0 million, or 77.2% reduction in advertising expenses, as we have been selective with our advertising campaigns; and, (v) a Ps.7.5 million, or 22.8% reduction in sales commissions, as a result of a 35.2% reduction in gross installed lines from 77,411 in 2002 to 53,655 in 2003.

     These savings were offset in part by (i) a Ps.20.5 million, or 74.4% increase in our bad debt provision mainly due to our increasing residential customer base and the provision for fraud detected from a business customer, see “Item 8. Financial Information-A, Consolidated statements and other financial information, Legal proceedings”, (ii) a Ps.8.4 million, or 28.8% increase in fees paid to external advisors, and, (iii) a Ps.1.1 million increase in general, selling and administrative expenses.

Integral cost of financing

     Our integral cost of financing was Ps.129.4 million in 2003, a 61.7% decrease as compared to Ps.338.2 million in 2002. The increase in integral cost of financing was primarily due to:

     (i) a Ps.195.3 million, or 86.0% decrease in interest expense as a result of the coupon reduction in 95.8% of our outstanding debt, from 13 ³ / 4 % to 0%, and

     (ii) a Ps.43.9 million, or 19.4% reduction in exchange loses, as a consequence of the effect on our dollar-denominated debt of a lower devaluation of the peso during 2002.

     These factors of financing costs were partially offset by: (i) a Ps.30.0 million reduction of gain in net monetary position; and, (ii) a Ps.8.7 million higher bank commissions, net of interest on cash balances.

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Asset tax

     We recorded Ps.12.9 million in asset taxes in 2003 as compared to Ps.7.5 million in asset taxes in 2002. The difference is primarily due to a significant increase in our asset base in 1999, when we increased the buildout of our network, as compared to 1998, which are the respective years considered for purposes of computation of the asset tax. Asset taxes are computed on the asset base existing four years before the current tax year.

Principal differences between Mexican GAAP and U.S. GAAP

     The financial information included in this annual report is prepared and presented in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. See note 23 to the consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us; for a reconciliation of our net income and stockholders’ equity to U.S. GAAP as of December 31, 2003 and 2004 and for each of the two years then ended; and for a description of the principal differences in classification between the statements of changes in financial position under Mexican GAAP and the requirements under U.S. GAAP for statements of cash flows.

Recent United States accounting pronouncements

     In December 2004, and as amended in April 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), which replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. SFAS 123R is effective for fiscal years beginning after June 15, 2005. Early application of SFAS 123R is encouraged, but not required.

     Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method. Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method. Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes. Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, “TOPIC 14: Share-based payment” (SAB 107). SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the valuation of share-based payment arrangements for public companies. This bulletin is effective immediately. We have not yet determined the method of adoption to be used and have not completed our evaluation of the effects of adopting SFAS 123R.

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets” (An amendment to APB Opinion No. 29) (SFAS 153). This statement addresses the measurement of exchanges of nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, and replaces it with an exception for exchanges that do not have commercial substance. This statement specifies that a monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted. We are currently evaluating the potential impact of this statement.

     In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143”. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement

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activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We have not quantified the impact of adopting FIN 47, but we do not expect the adoption to have a material impact on our financial position or results of operations.

Recent Mexican accounting pronouncements

     The following accounting standards, which were issued by the Mexican Institute of Public Accountants (IMCP), went into effect on January 1, 2005. Management considers that the adoption of these standards will not have a significant effect on the financial information:

     Statement B-7, “Acquisitions of Businesses”, which establish, among other things, the purchase method as the only method of accounting for the acquisition of a business, changes to the accounting treatment of goodwill, eliminating the amortization of goodwill as from the date on which that statement went into effect and making it subject instead to annual impairment tests. The statement also provides specific rules for the acquisition of minority interests and the transfer of assets or the exchange of shares between entities under common control.

     The amendments to Statement C-2, “Financial Instruments”. Its provisions require that the effects of valuing investments available for sale be recorded in stockholders equity and not in income for the year, and include rules for determining the effects of impairment of financial instruments.

     Statement C-10 “Derivative Financial Instruments and Coverage Operations”. This Statement, besides detailing recording, valuation and disclosure criteria applicable to all derivative financial instruments, requires that the effectiveness of hedges of cash flows and of net investment in subsidiaries located abroad be evaluated and that the effective portion of the gains or losses on hedging instruments be recognized within comprehensive income.

     The amendments to Statement D-3, Labor Obligations. These amendments provide additional valuation and disclosure rules for recognizing severance payments due to causes other than restructuring.

B. Liquidity and capital resources

Financing sources and liquidity

     We financed our start-up costs through capital contributions and vendor financing, as described below:

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     On March 17, 2000, we sold 13 ³ / 4 % notes due 2007 bearing an annual interest rate of 13 ³ / 4 % due April 1, 2007 in an aggregate principal amount of U.S.$300.0 million (the “13 ³ / 4 % notes”). Our debt service relating to the 13 ³ / 4 % notes for the first two years was paid with U.S.$77.9 million of the net proceeds of the offering of the 13 ³ / 4 % notes that was deposited in an interest escrow account.

     In September 2000, our principal shareholders invested an aggregate of U.S.$35.0 million of new capital. This capital contribution was used primarily to fund capital expenditures and working capital related to the buildout of our network infrastructure.

     During 2001, we financed our operations and capital expenditures with remaining funds from the issuance and sale of the 13 ³ / 4 % notes and with the remaining funds from the U.S.$35.0 million capital contribution completed in September 2000.

     On April 29, 2002, we consummated a debt restructuring and recapitalization of Maxcom. The purpose was to reduce our debt service burden, improve our liquidity and attract additional investment, in order to continue the buildout of our infrastructure and the growth of our business. The following actions were taken pursuant to the debt restructuring and recapitalization:

     In April 2002, we cancelled U.S.$25,000,000 in principal amount of 13 ³ / 4 % notes that we had purchased in the secondary market prior to the 2002 debt restructuring. In addition, on July 25, 2002, we completed an additional exchange of U.S.$4,000,000 in aggregate principal amount of 13 ³ / 4 % notes under the same terms and conditions of the exchange offer consummated on April 29, 2002. 95.8% of the total 13 ³ / 4 % notes were exchanged and or cancelled, and old notes of an aggregate principal amount of U.S.$167,623,590 remained outstanding. An aggregate principal amount of U.S.$11,590,000 of 13 ³ / 4 % notes remained outstanding.

     On December 17, 2003, we were advised by Bank of America/Nexus that it had purchased an aggregate amount of old notes with a face value of approximately U.S.$126.4 million, representing approximately 75% of the principal amount of the then outstanding of the old notes.

     On April 28, 2004, we executed a working capital credit facility with Banco Santander Mexicano, S.A. (which we refer to as Banco Santander) for U.S.$2.0 million. We serve interests on a monthly basis on any outstanding balance, at a rate of LIBOR (London Inter-bank Offered Rate) plus 190 basis points. The original term of the facility was 5 months. Additionally, on August 17, 2004, we executed a working capital credit facility with Banco Santander for Ps.55.9 million. We serve interests on a monthly basis on any outstanding balance, at a rate of TIIE (Inter-bank Equilibrium Interest Rate or Tasa de Interés Interbancaria de Equilibrio ) plus 100 basis points. The original term of the facility was 2 months. Both credit facilities are guaranteed by one of our shareholders. Before both facilities expired, we negotiated new terms until October 2004.

     On October 8, 2004, we consummated an exchange offer and consent solicitation. The purpose was to improve our leverage and capital structure, in order to attract additional investments and access multiple

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opportunities for future growth. The following actions were taken pursuant to the debt restructuring and recapitalization:

     As a result of the October 8, 2004 debt restructuring, debt maturity dates of our debt will be as follows:

     On November 5, 2004 we obtained a line of credit from Banco Santander of Ps.100,000 million with a monthly interest rate of TIIE plus 1.2 additional percentage points. The terms require average monthly principle payments of Ps.5.5 million in accordance with the amortization table set forth in the contract plus accrued interest. The term of the contract is for 18 months and the due date is May 10, 2006. There are guarantees in place for payment to Banco Santander under this contract as follows:

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incur additional indebtedness is restricted by the terms of the Indentures governing the old notes and the new notes.

     Our future operating performance and ability to service and repay the new notes, the old notes and the outstanding 13 ³ / 4 % notes will be subject to future economic and competitive conditions and to financial, business and other factors, many of which are beyond our control.

     On June 20, 2005 we filed before the Banking and Securities Commission of Mexico ( Comisión Nacional Bancaria y de Valores ) a petition to issue a program of securities in Mexican markets for up to Ps.150,000,000 (approximately U.S.$14 million dollars) in the form of unsecured “certificados bursátiles”. These notes will be issued, if authorized, on short term trenches. We have retained IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero to serve as our financial agent and lead manager in connection with this program. We are still negotiating the final terms of this securities program.

Indebtedness

     Our consolidated debt at December 31, 2004 was Ps.768.4 million (including Ps.1.6 million of debt discount related to the issuance of detachable warrants), of which Ps.622.9 million was long-term debt. Ps.595.1 million of our consolidated debt outstanding at December 31, 2004 was denominated in U.S. dollars and Ps.173.3 million was denominated in Mexican pesos.

     The U.S.$300 million aggregate principal amount 13 ³ / 4 % notes accrued interest at an annual rate of 13 ³ / 4 %, representing an interest expense of U.S.$39.8 million per year. In May and June 2001, Maxcom purchased U.S.$25 million aggregate principal amount of 13 ³ / 4 % notes in the secondary market, which Maxcom cancelled in April 2002. Pursuant to the April 29, 2002 debt restructuring, 13 ³ / 4 % notes in an aggregate principal amount of U.S.$259,410,000 were exchanged for old notes in an aggregate principal amount of U.S.$165,078,150, as well as for certain equity. The old notes bear 0% interest through March 1, 2006 and 10% annual interest in the last year. On July 25, 2002, we completed an additional exchange of U.S.$4,000,000 of 13 ³ / 4 % notes under the same terms and conditions of the exchange offer consummated on April 29, 2002. On December 17, 2003, we were advised by Bank of America/Nexus that it had purchased an aggregate amount of old notes with a face value of approximately U.S.$126.4 million, representing approximately 75% of the principal amount of outstanding of the old notes. Pursuant to the October 8, 2004 debt restructuring, old notes in an aggregate principal amount of U.S.$162,505,711 were exchanged for an aggregate of (i) U.S.$36,117,789 in principal amount of new notes, bearing an annual interest rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009, and (ii) 101,110,338 of our Series N-1 Preferred Shares. As of December 31, 2004, new notes in an aggregate principal amount of U.S.$36,117,789 remained outstanding, old notes in an aggregate principal amount of U.S.$5,117,879 remained outstanding, and 13 ³ / 4 % notes in an aggregate principal amount of U.S.$11,590,000 remained outstanding.

     As a result of the October 8, 2004 debt restructuring, debt maturity dates of our debt will be as follows:

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     The indenture governing the old notes (the “Old Indenture”) and the indenture governing the new notes (the “New Indenture”) restrict our ability to incur indebtedness. In particular, in order to be able to incur additional indebtedness, we must comply with a minimum consolidated leverage ratio of less than 3.75 to 1.00 and a minimum fixed charge coverage ratio of 2.00 to 1.00, in each case after giving effect to the proposed incurrence of indebtedness . We do not, and are unlikely in the near future to, meet these ratios. However, pursuant to certain exemptions, we are still able to incur up to U.S.$100.0 million of indebtedness to finance the cost of acquiring or constructing or installing telecommunication assets, and up to U.S.$20.0 million for working capital purposes, in each case at any one time outstanding. However, pursuant to the amendments to the old indenture, we only have the ability to incur up to an aggregate of $150 million of certain types of permitted indebtedness outstanding at any one time (including the new notes, old notes and the 13 ³ / 4 % notes) prior to the consummation of a merger, consolidation or sale of all or substantially all of our assets. Additionally, pursuant to the amendments to the Old Indenture the covenants restricting our ability to pledge our assets as security for financings were amended to allow us to secure up to an additional U.S.$50 million of liens on our assets. The covenant limiting our restricted payments, permitted investments and affiliate transactions was amended to allow us to securitize our assets, including our accounts receivable. The covenant restricting our ability to enter into sale/leaseback transactions was deleted.

     The Old Indenture and the New Indenture also provide that if certain events of bankruptcy, insolvency or reorganization of Maxcom occur, the principal and interest on all of the old notes will become immediately due and payable. In addition, if certain other events of default occur and are continuing, the trustee appointed under the Old Indenture or our holders representing at least 25.0% in principal amount of the then outstanding old notes may declare all the old notes to be due and payable immediately. These other events of default include, among others, (i) a failure to pay interest or any gross-up amount when due for thirty days; (ii) a failure to pay principal when due; (iii) a failure to comply with certain covenants (including financial, reporting, control, merger and other covenants), representations, warranties and other agreements in the old indenture; (iv) a default under other indebtedness or a judgment or decree for the payment of money, in each case in excess of U.S.$5.0 million; (v) the unenforceability or disaffirmation of any subsidiary guarantee; and (vi) a failure to disclose an event of default. In some of these events of default, a limited grace period applies before the trustee or the holders can proceed to accelerate the old notes. The indenture governing the 13 ³ / 4 % notes provides that the trustee appointed under the indenture or our holders representing at least 25.0% in principal amount of the then outstanding 13 ³ / 4 % notes, may declare all the old notes to be due and payable immediately if we fail to (i) pay interest or any gross-up amount when due for thirty days, (ii) pay principal when due, (iii) comply with certain conditions in the event of a merger or (iv) observe any covenant, representation or agreement in the indenture for 60 days after notice by the trustee.

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 private equity, public debt and vendor financing. For the years ended December 31, 2002, 2003 and 2004, our earnings were insufficient to cover our fixed charges by Ps.793.8 million (U.S.$71.2 million), Ps.372.7 million (U.S.$33.4 million) and Ps.117.5 million (U.S.$10.5 million), respectively.

Resources used for operating activities

     For the year ended December 31, 2004, net resources used in operating activities amounted to Ps.267.8 million compared to a negative Ps.49.6 million for the year ended December 31, 2003. The increase in 2004 from 2003 was mainly attributable to a Ps.238.5 million decrease in losses from operations, a Ps.72.5 million increase in restricted cash, liabilities and other assets, mainly attributable to:

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     (i) Ps.18.2 increase in restricted cash under our new Banco Santander financing. See “Item 5. Operating and Financial Review and Prospects — B Liquidity and Capital Resources — Financing Resources and Liquidity”, and

     (ii) Ps.90.7 increase in short term liabilities, and

     A Ps.6.6 million decrease in inventory as we improved our inventory management; and, a Ps.7.0 million reduction in prepaid expenses primarily related to the recognition in 2003 of the agreement with the landlord at our former headquarters in Magdalena to retain a leasehold interest through 2013. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Advertising.” and “Item 10. Additional Information-C Material contracts- Lease termination agreement”

     All of these factors were partially offset by a Ps.7.2 million increase in accounts receivable as a result of the growth of our operations in 2003.

     For the year ended December 31, 2003, net resources used in operating activities amounted to Ps.49.5 million compared to Ps.372.0 million for the year ended December 31, 2002. The decrease in 2003 from 2002 was mainly attributable to a Ps.421.3 million decrease in losses from operations, a Ps.38.3 million reduction in accounts receivable as a result of a tighter strategy for collections and allowance for doubtful accounts receivable; and, a Ps$9.6 million reduction in prepaid expenses primarily related to the advanced purchase of radio advertising time from Operadora Plusgamma in 2002 and the recognition in 2003 of the agreement with the landlord at our former headquarters in Magdalena to retain a leasehold interest through 2013. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Advertising.” and “Item 10. Additional Information-C Material contracts- Lease termination agreement”. All these factors were partially offset by a Ps.10.5 million increase in inventory as we reduced the speed of deployment of network infrastructure during 2003 and a Ps.152.8 million decrease in restricted cash, liabilities and other assets, mainly attributable to:

     (i) Ps.205.3 decrease related to the release in 2002 of the escrow account;

     (ii) Ps.66.4 decrease in short term liabilities, and

     (iii) Ps.104.7 increase in interest payable basically as a result of the payment in 2002 of the interest on the old notes.

Resources provided by financing activities

For the year ended December 31, 2004, net resources generated by financing activities amounted to Ps.96.3 million, driven by a Ps. 173.4 million increase in bank financing as a result of the financing obtained from Banco Santander. See “Item 5. Operating and Financial Review and Prospects - B Liquidity and Capital Resources — Financing Resources and Liquidity”, partially offset by the non-cash effect of the October 8 restructure See “Item 5. Operating and Financial Review and Prospects – B Liquidity and Capital resources – Financing Resources and Liquidity” comprised by i) a Ps. 1,923.5 million decrease in old notes, ii) a Ps.406.9 million increase in new notes; and, iii) a Ps. 576.7 million and Ps. 865.1 million increase on issuance of capital stock and additional paid-in capital from the exchange U.S.$ 126.4 million old notes for 96.8 million N-1 and 4.3 million B-1 series shares. This increase in resources generated by financing activities in 2004 compares to resources provided of Ps.98.8 million for the year ended December 31, 2003, due primarily to the inflationary effect (non-cash).

     For the year ended December 31, 2003, net resources generated by financing activities amounted to Ps.98.8 million, mostly driven by inflationary effect (non-cash), compared to resources provided of Ps.876.8 million for the year ended December 31, 2002. This change was attributable to (i) Ps.819.0 million lower additional paid-in capital as a consequence of the debt capitalization resulting from the exchange of 13 ³ / 4 % notes for old notes and equity instruments pursuant to the debt restructuring completed in April 2002, (ii) Ps.858.9 million lower additional capital stock related to the U.S.$66.2 million private placement completed in April 2002, and (iii) Ps.900.0 million higher liabilities mainly attributable to the exchange of the 13 ³ / 4 % notes in 2002.

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Resources used for investing activities

     For the year ended December 31, 2004, net resources used for investing activities amounted to Ps.347.8 million compared to Ps.131.9 million for the year ended December 31, 2003. The increase was mainly attributable to a Ps.209.3 million increase in investment in telephone equipment as a result of Maxcom’s strategy of infrastructure growth during 2003, and a Ps.6.6 million increase in investment in intangible and other assets resulting primarily from a non-cash inflationary effect.

     For the year ended December 31, 2003, net resources used for investing activities amounted to Ps.131.9 million compared to Ps.577.7 million for the year ended December 31, 2002. The decrease was mainly attributable to a Ps.285.8 million decrease in investment in telephone equipment as a result of Maxcom’s strategy of prioritizing infrastructure growth at a time of financial constraints, and a Ps.162.1 million decrease in investment in intangible assets resulting mainly from our purchase in 2002 of the irrevocable and exclusive right to use two strands in a 2,011-kilometer fiber optic link covering cities between Mexico City and Laredo, Texas.

Other contractual obligations

     In addition to our financial indebtedness, we are committed to make certain payments under various lease arrangements. All of our peso-denominated leases and some of our dollar-denominated site leases adjust automatically to reflect any variances experienced by the Mexican and U.S. consumer price index, respectively.

     Our new corporate headquarters are leased for a 5-year term, renewable for two additional 5-year terms. Site leases generally run for five, ten or fifteen year terms.

     In May 2003, we reached an agreement with our landlord at our former headquarters in Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May 2013 on the first floor, where one of our Lucent 5ESS switches is located, and the roof-top, where we have microwave transmission antennas and a section of the basement, which will be used for parking and to place some of our electric equipment that supports the switch. We were also released from our lease obligations on approximately 35,887 square feet plus parking space of the building originally running through September 30, 2013. In exchange for the new lease and the releases, we agreed to prepay the full, ten-year lease obligations on the first floor, the roof-top and basement, as well as pay past-due lease payments dating back from October 2002 through April 2003. All these payments amount in the aggregate to U.S.$2.7 million and were paid in installments through May 2004.

     The following table presents our minimum contractual operating lease obligations denominated in Pesos for the periods indicated:

     The following table presents our contractual operating lease obligations denominated in dollars for the periods indicated:

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     The following table presents our minimum contractual operating maintenance obligations denominated in Pesos for the periods indicated:

     The following table presents our contractual operating maintenance obligations denominated in dollars for the periods indicated:

Capital expenditures

     Through December 31, 2004, we have invested Ps.3,427.1 million in the buildout of our network operating support system and other capital expenditures, excluding cumulative pre-operating expenses and the expenses related to the issuance of the 13 ³ / 4 % notes, the old notes and the new notes and the U.S.$66.2 million private equity investment. This amount includes Ps.139.8 million paid to obtain all of our frequency rights.

     For 2005, we plan to make capital expenditures of approximately U.S.$35.8 million, mainly to continue to build out of our network. Of this total amount, we had already spent approximately Ps.84.1 million (approximately U.S.$7.4 million) by March 31, 2005. Our ability to make the remaining expenditures hinges on our ability to obtain financing for them. We cannot assure you that financing will be available or on terms acceptable to us.

Dividend policy

     Our current policy is to reinvest profits into our operations. In addition, the indenture that governs the terms of the new notes allows us to pay cash dividends only if we meet the following conditions:

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Critical accounting policies

      Applications of critical accounting policies and estimates.

     We have identified certain key accounting estimates on which our consolidated financial condition and results of operations are dependent. These key accounting estimates 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 estimates 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 the allowance for doubtful accounts receivable, revenue recognition, installation revenues and costs, valuation of long-lived assets, stock-based compensation and fair value of our common stock, and deferred taxes. For a full description of all of our accounting policies, see Notes 3 and 23 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:

Allowance of doubtful accounts receivable

     The allowance for doubtful accounts represents our estimate of losses resulting from the failure or inability of our customers to make required payments. Determining our allowance for doubtful accounts receivable requires significant estimates. Due to the large number of customers that we serve, it is impractical to review the credit-worthiness of each of our customers, although a credit review is performed for business customers that request more than two lines. We consider a number of factors in determining the proper level timing for the recognition of and the amount of allowance, including historical collection experience, customer base, current economic trends and the aging of the accounts receivable portfolio. From this analysis, our current policy is to reserve in the amount of 90% and 100% of account receivable balance due over 90 but less than 119 days, and over 120 days, respectively except when there is a negotiated agreement with a customer. In such cases, a reserve is created in the amount of 30% once accounts receivable balance is 90 days past due and 100% when the balance is due over 120 days. We periodically review this policy to ensure that it accurately reflects current collection patterns.

     In addition, in order to mitigate collections risk, our collection procedures include, but are not limited to, periodic reminder phone calls once a customer is past due, suspension of service, use of a collection agency and disconnection of service, if needed. Furthermore, within our network we have systems to detect fraudulent call activity. If these systems fail to identify any of this activity, we may have to recognize a higher degree of un-collectable accounts. While we believe that our estimates are reasonable, changes in our customer trends or any of the factors mentioned above could materially affect our bad debt expense.

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Revenue recognition

The Company recognizes revenues from telephone services provided to customers, the sale of customer-premise equipment, services provided to other telephone-service companies (such as interconnection services), and installation charges.

Revenues from services provided to customers, including installation and maintenance, are recognized in the month the service is rendered. When the installation is not charged to the customer, the cost is amortized on a straight-line basis over a period equal to the remaining original term of our microwave concessions, which will expire in October 2017.

Revenues from the sale of customer-premise equipment are recognized at the time of the sale and delivery and installation of such equipment.

Revenues from interconnections services are recognized on an accrual basis. The Company has entered into agreements with several telephone companies under the “Bill and Keep” compensatory agreement. Under this arrangement and in most cases, if the imbalance between local calls originated by the other carrier and terminated by Maxcom and calls originated by Maxcom and terminated by the other carrier during a month does not exceed a determined percentage, then no interconnection fee amounts are payable by the net user of interconnection services. If the imbalance exceeds that percentage in any given month, the net user will be subject to a per minute charge. The percentage of the aforementioned imbalance was 70% for the period February 25, 1999 to December 31, 2002, 30% for January 1, 2003 to October 31, 2004, 18% for December 1 to 31, 2004 and 15% as of January 2005. In the event that we fail to maintain a significant percentage of residential users, the compensatory agreement will be terminated and asymmetric interconnection rates could be applied.

The Company also has interconnection agreements for mobile and long distance services with other carriers, however, they do not incorporate the feature of the compensatory agreement.

In 2003 we started a new business line, the lease of transmission capacity through its fiber optic ring. Revenues from lease of capacity will be recorded in deferred revenue as billed and then recognized ratably into revenue over the term of the contract. (See Note 23)

Advances from customers are classified as current liabilities until they are refunded. When the contract is rescinded, these deposits are applied to any outstanding balance with the respective customer.

The Company creates a reserve in the amount of 90% and 100% of account receivable balance due over 90 but less than 119 days, and over 120 days, respectively except when there is a negotiated agreement with a customer. In such cases, a reserve is created in the amount of 30% once accounts receivable balance is 90 days past due and 100% when the balance is due over 120 days.

Under U.S. GAAP, customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence. If element based on the relative fair values of the separate elements and the revenue associated with each element is recognized as earned. If the elements are not deemed separable, total consideration is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period. We believe that the accounting estimates related to customer relationship periods and to the assessment of whether bundled elements are separable are “critical accounting estimates” because: (i) they require management to make assumptions about how long we will retain customers; (ii) the assessment of whether bundled elements are separable can be subjective; (iii) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material; and (iv) the assessment of whether bundled elements are separable may result in revenues being reported in different periods than significant portions of the related costs.

Installation revenues and costs

     Installation costs include labor, tools and materials. Through December 31, 2002, when we waived installation costs to our customers, installation costs were capitalized and amortized on a straight-line basis over a period of 20 years. Beginning in 2003, when we waive installation costs, we capitalize and amortize them on a

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straight-line basis over a period equal to the remaining original term of the microwave concessions, which expire in October 2017. When we charge installation fees to our customers, we recognize this cost as an expense and we do not capitalize or amortize it. Once service with a customer is terminated, the capitalized installation cost is expensed. Under U.S. GAAP, installation revenues and the related direct installation costs are deferred and amortized over the expected customer’s relationship period. When installation costs are not billed to customers, the related costs are expensed immediately.

     We do not track capitalized installation costs on an individual customer basis because to do so would not be efficient. Based on an analysis of customer history including installation costs and cancellations, we have determined an estimated average cost per customer and estimated customer life and we use these estimates to calculate the amount of cost deferred and the amortization period of such deferred costs and the related installation revenue that is deferred and amortized over the customer relationship. As we have a limited operating history, past history cannot be used as the only accurate indicator as the average customer life. Based on our limited operating history and industry benchmarking, we have determined an average customer relationship period of four years.

Valuation of long - lived assets

     We review fixed, definite lived intangible and other long-lived assets at least annually, under Statement C-15. Impairment reviews require a comparison of the estimated future undiscounted cash flows to the carrying value of the asset for U.S. GAAP reporting and discounted cash flows to the carrying value of the asset for statutory reporting. If the total of the undiscounted cash flows is less than the carrying value under U.S. GAAP or discounted cash flows is less than the carrying value under statutory reporting, an impairment charge is recorded for the difference between the estimated fair value and the carrying value of the asset. In making such evaluations, we estimated the fair value of the long-lived assets as well as the undiscounted and discounted cash flows. In determining our undiscounted and discounted cash flows we make significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as estimating remaining useful lives and the possible impact that inflation may have in our ability to generate cash flow, as well as customer growth and the appropriate discount rate. Although we believe that our estimates are reasonable, different assumptions regarding such remaining useful lives or future cash flows could materially affect the valuation of our long-lived assets.

     We also evaluate our operating leases for utilization. Spaces leased in buildings with low occupancy have been reserved based on the contractual penalty for early termination, which is calculated as the maximum amount that would be paid upon termination of the contract.

     Upon adoption of SFAS 142 “Goodwill and Other Intangible Assets” and Statement C-15 “Impairment of the Value of Long Lived Assets and their Disposal” we were required to reassess the useful lives of our intangible assets, which primarily consist of Mexican government telecommunications concessions and infrastructure rights. Upon reassessment, we concluded that our concessions would be definite lived intangibles. We will periodically reassess the useful lives of our concessions.

Stock-based compensation and fair value of our common stock

     We have historically entered into various agreements with third parties and our employees to exchange our warrants or our stock for services rendered to us. The fair value of such transactions is based on various assumptions, such as volatility, risk free interest rates and expected life of the options. We contract a third party to assist in developing said assumptions and establishing the appropriate valuation model. Different assumptions regarding such estimations could materially affect our financial position and results of operations.

     As our common stock is not traded on the open market there is not a readily determinable fair value. The fair value of our common stock is essential for calculating stock compensation amounts and in the calculation of the troubled debt restructurings as recorded under U.S. GAAP in 2002 and 2004. To evaluate the fair value of our

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common stock we contracted a third party who used assumptions related to the Mexican telecommunications industry, general market data, the current state and future operations of Maxcom, as well as other pertinent factors.

Deferred taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from the different treatment for tax and accounting purposes of several items, such as depreciation, amortization, and allowance for doubtful accounts. These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely to occur, we must include an expense within the tax provision in the statement of operations.

     Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The valuation allowance is based on management projections of future financial results. Accordingly, we have created a valuation account for the full balance of our deferred tax asset as we feel it is unlikely we will use our net operating loss carry forwards before they expire. If actual results differ from these estimates or we adjust the projections in future periods, we may need to materially adjust the valuation allowance.

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

     Maxcom does not undertake research and development activities other than market research.

D. Trend information

     The growth of competition has been substantial and we expect it to continue. We are continuously improving our competitive position by strengthening our voice and data products and services. The increase in competition negatively affects our profit margins.

     Our current financial constraints (including the insufficiency of our earnings to cover fixed charges and the uncertainty as to the availability of financing) has and may continue to negatively affect our plans for growth, including the buildout of our network. See “Item 3. Key Information—D. Risk Factors—We may need additional financing.”

E. Off – balance sheet arrangements

     Not applicable.

F. Tabular disclosure of contractual obligations

     The following table presents our minimum contractual operating lease obligations denominated in Pesos for the periods indicated:

     The following table presents our contractual operating lease obligations denominated in dollars for the periods indicated:

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     The following table presents our minimum contractual operating maintenance obligations denominated in Pesos for the periods indicated:

     The following table presents our contractual operating maintenance obligations denominated in dollars for the periods indicated: