Axtel Sab De CV 6-K Axtel, S.a. Form 6-K for the Month of August 2006

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of August 2006

Commission File Number 333-114196

AXTEL, S.A. DE C.V.

(Translation of Registrant’s name into English)

Blvd. Gustavo Diaz Ordaz 3.33 No. L-1

Col. Unidad San Pedro

San Pedro Garza Garcia, N.L.

Mexico, CP  66215

(52)(81) 8114-0000

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x    Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): _________

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): _________

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether the registrant by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o    No x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_____.

In this report, references to “$,” “$US” or “Dollars” are to United States Dollars and references to “Ps.” or “Pesos” are to Mexican Pesos. This report contains translations of certain Peso amounts into Dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Peso amounts actually represent such Dollar amounts or could be converted into Dollars at the rates indicated or at any other rate. This report contains discussions and financial information that were prepared in accordance with Mexican GAAP, unless otherwise indicated.

Forward Looking Statements

This report on Form 6-K contains certain forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our views with respect to our financial performance and future events. All forward-looking statements contained herein are inherently uncertain. Actual results could differ materially from those projected in the forward-looking statements as a result of factors discussed herein. Many of these statements may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential,” among others. Readers are cautioned not to place reliance on these forward-looking statements. The following factors, as well as other factors described in this report, could cause actual results to differ materially from such forward-looking statements:

·   ability to attract subscribers;

·   expansion of our business to new cities;

·   changes and developments in technology, including our ability to upgrade our networks to remain competitive and our ability to anticipate and react to frequent and significant technological changes;

·   our ability to manage, implement and monitor billing and operational support systems;

·   an increase in churn, or subscriber cancellations;

·   the control of us retained by certain of our stockholders;

·   changes in capital availability or cost, including interest rate or foreign currency exchange rate fluctuations;

·   the effects of governmental regulation of the Mexican telecommunications industry;

·   declining rates for long distance traffic;

·   fluctuations in labor costs;

·   foreign currency exchange fluctuations relative to the US dollar or the Mexican peso;

·   the general political, economic and competitive conditions in markets where we have operations, including competitive pricing pressures, inflation or deflation and changes in tax rates;

·   the timing and occurrence of events which are beyond our control; and

·   other factors described in this Form 6-K.

Any forward-looking statements in this Form 6-K are based on certain assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the current circumstances. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. You are therefore cautioned not to place undue reliance on such forward-looking statements. While we continually review trends and uncertainties affecting our results of operations and financial condition, we do not intend to update any particular forward-looking statements contained in this document.

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TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	Page
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005	2
	Condensed Consolidated Statements of Changes in Financial Position for the Six Months Ended June 30, 2006 and 2005	3
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2006	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 2.	Changes in Securities and Use of Proceeds	48
Item 3.	Defaults upon Senior Securities	48
Item 4.	Submission of Matters to a Vote of Security Holders	48
Item 5.	Other Information	48
Item 6.	Exhibits and Reports	48
Signatures

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PART I - FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AXTEL, S. A. DE C. V. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

June 30, 2006 and December 31, 2005

(Thousands pesos of constant purchasing power as of June 30, 2006)

		(Unaudited	)
		June 30,		December 31,
Assets		2006		2005
Current assets:
Cash and cash equivalents	$	1,034,116		1,911,826
Restricted cash		-		34,858
Accounts receivable		714,050		660,438
Refundable taxes and other accounts receivable		85,097		42,741
Prepaid expenses		24,983		57,290
Inventories		67,742		62,040
Total current assets		1,925,988		2,769,193
Long-term accounts receivable		21,586		19,007
Property, systems and equipment, net (note 5)		7,276,812		7,112,342
Telephone concession rights, net of accumulated amortization of $350,156 and $323,468 in 2006 and 2005, respectively		654,734		681,422
Pre-operating expenses, net		166,455		180,113
Deferred income taxes (note 9)		-		17,382
Other assets (note 6)		160,299		172,965
Total assets	$	10,205,874		10,952,424
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	644,351		551,644
Accrued interest		8,851		12,890
Taxes payable		42,147		47,534
Current maturities of long-term debt (note 7)		43,782		41,429
Other accounts payable (note 8)		262,621		221,570
Derivative financial instruments (note 3)		44,652		84,313
Total current liabilities		1,046,404		959,380
Long-term debt, excluding current maturities (note 7)		1,920,303		2,812,328
Deferred income taxes (note 9)		5,526		-
Other long-term accounts payable		2,859		3,316
Seniority premiums		3,212		3,012
Allowance for severance payments		21,400		19,209
Total liabilities		2,999,704		3,797,245
Stockholders’ equity (note 10):
Common stock		8,125,928		8,125,928
Additional paid-in capital		512,547		521,518
Deficit		(1,535,645	)	(1,557,260	)
Cumulative deferred income tax effect		123,763		123,763
Change in the fair value of derivative instruments (note 3)		(20,423	)	(58,770	)
Total stockholders’ equity		7,206,170		7,155,179
Commitments and contingencies (note 11)

Total liabilities and stockholders’ equity $ 10,205,874 10,952,424

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

AXTEL, S. A. DE C. V. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Thousands pesos of constant purchasing power as of June 30, 2006)

	Three months ended					Six months ended
	June 30,						June 30,
	(Unaudited)						(Unaudited)
		2006		2005				2006		2005
Telephone services and related revenues	$	1,414,287		1,241,316				2,731,198			2,401,048
Operating costs and expenses:
Cost of sales and services		(433,587	)	(388,546	)			(829,211	)		(753,269	)
Selling and administrative expenses		(477,733	)	(421,474	)			(921,849	)		(835,418	)
Depreciation and amortization		(332,036	)	(273,512	)			(675,829	)		(545,464	)
		(1,243,356	)	(1,083,532	)			(2,426,889	)		(2,134,151	)
Operating income		170,931		157,784				304,309			266,897
Comprehensive financing result:
Interest expense		(65,137	)	(91,150	)			(252,500	)		(191,098	)
Interest income		13,719		9,717				55,712			27,223
Foreign exchange (loss) gain, net		(40,604	)	91,750				(67,784	)		84,419
Monetary position gain		2,263		4,053				7,829			16,620
Comprehensive financing result, net		(89,759	)	14,370				(256,743	)		(62,836	)
Other (expense) income, net		(12,497	)	573				(14,363	)		(6,942	)
Income before income taxes		68,675		172,727				33,203			197,119
Deferred income tax (note 9)		(22,635	)	(50,130	)			(11,588	)		(59,573	)
Net income	$	46,040		122,597				21,615			137,546
Weighted average common shares outstanding		2,840,936,866		2,533,706,866				2,840,936,866			2,533,706,866
Basic and diluted earnings per share (pesos)		0.02		0.05				0.01			0.05

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

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AXTEL, S. A. DE C. V. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Financial Position

(Thousands pesos of constant purchasing power as of June 30, 2006)

	Six months ended
	June 30,
	(Unaudited)
		2006		2005
Operating activities:
Net income	$	21,615		137,546
Add charges to operations not requiring resources:
Depreciation		594,000		487,791
Amortization		81,829		57,673
Deferred income tax		11,588		59,573
Resources provided by the operations		709,032		742,583
Net financing from (investment in) operations		52,997		(265,774	)
Resources provided by operating activities		762,029		476,809
Financing activities:
Additional paid-in capital		(8,971	)	-
(Payments) proceeds from loans, net		(889,672	)	782,707
Restricted cash		34,858		(8,636	)
Accrued interest		(4,039	)	4,179
Other accounts payable		15,376		(4,206	)
Resources (used in) provided by financing activities		(852,448	)	774,044
Investing activities:
Acquisition and construction of property, systems         and equipment, net		(758,470	)	(668,264	)
Pre-operating expenses		(8,040	)	(376	)
Other assets		(20,781	)	(25,800	)
Resources used in investing activities		(787,291	)	(694,440	)
(Decrease) increase in cash and cash equivalents		(877,710	)	556,413
Cash and cash equivalents at beginning of period		1,911,826		578,989
Cash and cash equivalents at end of period	$	1,034,116		1,135,402

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

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AXTEL, S. A. DE C. V. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

Six months ended June 30, 2006

(Thousands pesos of constant purchasing power as of June 30, 2006)

		Common stock	Additional paid-in capital		Deficit		Cumulative deferred income tax effect		Change in the fair value of derivative instruments		Total stockholders’ equity
Balances as of December 31, 2005	$	8,125,928	521,518		(1,557,260	)		123,763	(58,770	)	7,155,179
Issuance costs		-	(8,971	)	-			-	-		(8,971	)
Comprehensive income		-	-		21,615			-	38,347		59,962
Balances as of June 30, 2006 (Unaudited)	$	8,125,928	512,547		(1,535,645	)		123,763	(20,423	)	7,206,170

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

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AXTEL, S. A. DE C. V. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

June 30, 2006 and December 31, 2005

(Thousands pesos of constant purchasing power as of June 30, 2006)

(1)   Organization and description of business

Axtel, S. A. de C. V. and subsidiaries (the Company or AXTEL) is a Mexican corporation engaged in operating and/or exploiting a public telecommunication network to provide voice, sound, data, text, and image conducting services, and local, national, and international long-distance calls. To provide these services and carry out the Company’s activity, a concession is required (see note 11e). In June 1996, the Company obtained a concession from the Mexican Federal Government to install, operate and exploit public telecommunication networks for an initial period of thirty years.

AXTEL offers different access technologies, including fixed wireless access, point-to-point, point-to-multipoint, fiber optic radio links and copper technology, which are used depending on the communication needs of the clients.

The Company has been granted the following licenses over the spectrum of frequencies necessary to provide the services:

·   60MHz for Point-to-Multi-Point in the 10.5GHz band to cover each one of the nine regions of the Mexican territory. The acquisition of these twenty-year concessions, with an extension option, represented an investment of $150,698 for the Company.

·   112MHz for Point-to-Point in the 15GHz band and a 100MHz in the 23GHz band with countrywide coverage. The acquisition of these twenty-year concessions, with an extension option, represented an investment of $76,000 for the Company.

·   50MHz in the 3.4GHz. The licenses obtained allow coverage in the nine regions of the country, and the investment was $778,192 for a period of twenty years with an extension option.

The Company has commercial services in Monterrey, Mexico City, Guadalajara, Puebla, Toluca, León, Querétaro, San Luis Potosí, Aguascalientes, Saltillo, Ciudad Juárez, Tijuana, Veracruz, Torreón, Chihuahua and Celaya.

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(2)   Financial statement presentation

The accompanying consolidated financial statements have been prepared in accordance with Financial Reporting Standards Generally Accepted in Mexico (Mex GAAP), which include the recognition of the effects of inflation on the financial information, and are expressed in Mexican pesos of constant purchasing power as of June 30, 2006, based on the National Consumer Price Index (NCPI) published by Banco de Mexico.

The following national consumer price indexes (NCPI) were used to recognize the effects of inflation:

	NCPI	Inflation %
June 30, 2006	429.905	1.10
December 31, 2005	425.232	3.30
June 30, 2005	415.642	0.97

The accompanying financial statements should be read in conjunction with Axtel’s Annual Audited Financial Statements for the year ended December 31, 2005, as certain information and note disclosures normally included in financial statements prepared in accordance with Mex GAAP have been condensed or omitted. The Company’s condensed consolidated interim financial statements are unaudited, but in the opinion of management, reflect all necessary adjustments for a fair presentation, which are of a normal recurring nature. Operations results for the three months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.

When reference is made to pesos or “$”, it means Mexican pesos; when reference is made to dollars or U.S.$, it means currency of the United States of America. Except where otherwise is indicated or specific references are made to “U.S. dollar millions”, the amounts in these notes are stated in thousand of constant Mexican pesos as of the most recent balance sheet date.

The U.S. dollar exchange rates as of June 30, 2006 and December 31, 2005 were $11.39 and $10.77 respectively. As of July 21, 2006, the exchange rate was $10.90

The consolidated financial statements include the assets, liabilities, equity and results on operations of the subsidiaries listed below. The balances and transactions between companies have been eliminated in the preparation of the consolidated financial statements.

	% ownership
Instalaciones y Contrataciones, S. A. de C. V. (“Icosa”)	99.999%
Impulsora e Inmobiliaria Regional, S. A. de C. V. (“Inmobiliaria”)	99.999%
Servicios Axtel, S. A. de C. V. (“Servicios Axtel”)	99.999%

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(3)   Derivative instruments and hedging activities

The Company has Cross Currency Swaps (CCS) transactions, denominated “Coupon Swap” agreement to hedge its original aggregate principal amount U.S. dollar foreign exchange exposure resulting from the issuance of the U.S. $250 million senior notes. The Company does not enter into derivative instruments for any purpose other than hedging activities. That is, the Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in currency exchange rates fluctuations, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit counterparty risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality foreign financial counterparties.

On June 6, 2005, the Company entered into a derivative CCS. The purpose of this agreement was to hedge the remaining portion of its U.S. dollar foreign exchange exposure. Under this agreement, Axtel will receive semiannual payments calculated based on the aggregate notional amount of U.S. $136.25 million at an annual rate of 11%, and the Company will make semiannual payments calculated based on the aggregate of $1,480,356 (nominal value) at annual rate of 12.26%.

On March 29, 2004, the Company entered into a derivative CCS to hedge a portion of its U.S. dollar foreign exchange exposure resulting from the issuance of the U.S. $175 million 11% senior notes, which matures in 2013. Under the CCS transactions, Axtel will receive semiannual payments calculated based on the aggregate notional amount of U.S. $113.75 million at an annual U.S. rate of 11%, and the Company will make semiannual payments calculated based on the aggregate of $1,270,019 (nominal value) at annual rate of 12.30%.

Both of the CCS will expire in December 2008. During the life of the contracts, the cash flows originated by the exchange of interest rates under the CCS are similar to those contractual terms in interest payment dates and those conditions of the underlying debt, except that the underlying debt is due in 2013. The Company has been accounting these partial term hedge fixed for fixed CCS under the cash flow hedge accounting model.

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As of June 30, 2006, the CCS information is as follows:

(Amounts in charts are expressed in millions)

	Currencies					Interest Rates
Maturity date		Notional amount		Notional amount (nominal value	)		Axtel receives		Axtel pays		Estimated fair value
December 15, 2008		U.S.$ 113.75	$	1,270			11.00	%	12.30	%	U.S.$(2.4	)
December 15, 2008		U.S.$ 136.25	$	1,480			11.00	%	12.26	%	U.S.$(1.6	)

For the six-month period ended June 30, 2006, the change in the fair value of these CCS is an unrealized gain amount of U.S. $2.3 million, when compared to the fair value as of December 31, 2005. This gain was recognized within the other comprehensive income section of equity, net of deferred taxes. Due to the redemption of 35% of the U.S. $250,000,000 original aggregate principal amount of the notes (see note 7), a hedge ineffectiveness amounting U.S. $(1.3) million was recognized on the comprehensive financing result during 2006, under the cash flow hedge accounting model.

The estimated fair values of derivative instruments used for the exchange of interest rates and/or currencies fluctuate over time and will be determined by future interest rates and currency prices. These values should be viewed in relation to the fair values of the underlying transactions and as part of the overall Company’s exposure to fluctuations in interest rates and foreign exchange rates. 

The Company has conducted an initiative to identify, analyze and segregate if applicable, those contractual terms and clauses that implicitly or explicitly embed derivatives characteristics within financial or non financial agreements. These instruments are commonly known as embedded derivatives and do follow the same accounting treatment as of those free-standing contractual derivatives. Based on the above, the Company identified and considered that the amount of embedded derivatives for the six-month period ended June 30, 2006 was immaterial and no amount was registered in the accounting records.

(4)   Related parties transactions

The main transactions with related parties, during the six-months period ended June 30, 2006 and 2005 are:

	(Unaudited)		(Unaudited)
	June 30,		June 30,
	2006		2005
Lease expense	$	17,625		23,182
Installations services expense		2,512		2,576
Marketing and advertising expense		-		9,285
Other		109		164

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The balances with related parties as of June 30, 2006 and December 31, 2005 are as follows:

	June 30		December 31
	2006		2005
Prepaid expenses:
Operadora de Parques y Servicios, S.A. de C.V.	$	6,138		6,205
Accounts Payable:
GEN Industrial, S.A. de C.V.	$	51		23
Instalaciones y Desconexiones Especializadas, S.A. de C.V.		620		-
	$	671		23

(5)   Property, systems and equipment

Property, systems and equipment are as follows:

	(Unaudited)
	June 30,		December 31,		Useful
	2006		2005		lives
Land	$	40,112		40,117
Building		141,718		130,271		25 years
Computer and electronic equipment		1,203,489		1,139,139		3 years
Transportation equipment		35,893		30,699		4 years
Furniture and fixtures		112,510		110,702		10 years
Network equipment		9,416,141		8,598,376		6 to 28 years
Leasehold improvements		182,829		173,877		5 to 14 years
Construction in progress		1,037,497		1,146,070
Advances to suppliers		27,502		129,808
		12,197,691		11,499,059
Less accumulated depreciation		4,920,879		4,386,717
Property, systems and equipment, net	$	7,276,812		7,112,342

As of June 30, 2006 the Company has capitalized CFR as a component of the acquisition cost of property, systems and equipment aggregating $2,392.

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(6)   Other assets

Other assets consist of the following:

	(Unaudited)
	June 30,		December 31
	2006		2005
Notes issuance costs	$	93,049		93,049
Telmex / Telnor infrastructure costs		63,937		63,937
WTC concession rights		21,045		-
Guarantee deposits		20,118		20,865
Other		19,538		28,708
		217,687		206,559
Less accumulated amortization		57,388		33,594
Other assets, net	$	160,299		172,965

(7)   Long-term debt

Long-term debt as of June 30, 2006 and December 31, 2005 consist of the following:

	(Unaudited)
	June 30,		December 31,
	2006		2005
U.S. $162,500,000 in aggregate principal amount of 11% Senior Notes due 2013. Interest is payable semi-annually in arrears on June 15, and December 15 of each year.	$	1,852,061		2,724,035
Premium on senior notes issuance		32,435		53,142
Promissory Notes with Hewlett Packard Operations Mexico, S. de R.L. de C.V. denominated in U.S. dollars, payable in 12 quarterly installments maturing in December 2007. The interest rate is 7.0%		24,415		29,087
Other long-term financing with several credit institutions with interest rates fluctuating between 6% and 9% for those denominated in dollars and TIIE (Mexican average interbank rate) plus six percentage points for those denominated in pesos.		55,174		47,493
Total long-term debt		1,964,085		2,853,757
Less current maturities		43,782		41,429

Long-term debt, excluding current maturities $ 1,920,303 2,812,328

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Annual installments of long-term debt are as follows:

Year	Amount
June 2008	$	22,783
June 2009		11,916
June 2010		1,108
December 2013		1,884,496
	$	1,920,303

During January 2005, the Company issued Senior Notes for U.S. $75 million under the original indenture. This issuance matures on December 2013. The bonds were issued at a price of 106.75% over face value, thus resulting in a premium of U.S. $5.1 million, which will be amortized as a reduction of interest expense over the term of the issuance from 11.00% to 9.84%.

On February 22, 2006 the Company redeemed U.S. $87,500,000 aggregate principal amount of its 11% senior notes due 2013, or 35% of the U.S. $250,000,000 original aggregate principal amount of the notes. The redemption was made at a price of 111% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date. The premium paid on this transaction was U.S. $9.6 million, which is included on the comprehensive financing result.

Each of the Company’s consolidated subsidiaries, Instalaciones y Contrataciones, S.A. de C.V., Impulsora e Inmobiliaria Regional, S.A. de C.V. and Servicios Axtel, S.A. de C.V., are guaranteeing the notes with unconditional guaranties that are unsecured.

Some of the debt agreements that remain outstanding establish certain covenants, the most important of which refer to limitations on dividend payments and comprehensive insurance on pledged assets, among others. As of June 30, 2006, the Company was in compliance with all of its covenants and obligations.

(8)   Other accounts payable

As of June 30, 2006 and December 31, 2005, other accounts payable consist of the following:

	(Unaudited)
	June 30,		December 31,
	2006		2005
Guarantee deposits (note 11a)	$	148,165		141,650
Interest payable (note 11a)		51,065		41,750
Other		63,391		38,170
Total other accounts payable	$	262,621		221,570

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(9)   Income tax (IT), tax on assets (TA), employee statutory profit sharing (ESPS) and tax loss carryforwards

The parent company and its subsidiaries file their tax returns on a stand-alone basis, and the consolidated financial statements show the aggregate of the amounts determined by each company.

In accordance with the current tax legislation, companies must pay either the IT or TA, whichever is greater. Both taxes recognize the effects of inflation, in a manner different from Mexican GAAP.

The TA law establishes a 1.8% tax on assets adjusted for inflation in the case of inventory, property, systems and equipment and deducted from certain liabilities. TA levied in excess of IT for the year can be recovered in the succeeding ten years, updated for inflation, provided that in any of such years IT exceeds TA.

Effective January 1, 2002 a new Income Tax Law had been enacted, which provided for a 1% annual reduction in the income tax rate beginning in 2003, so that the income tax rate would have been 32% in 2005. In December 2004 the Mexican Congress approved changes to the Income Tax Law where the tax rate for 2005 was further reduced to 30%. Also, for years 2006 and 2007 the tax rates will decrease to 29% and 28%, respectively. Consequently, the deferred income taxes were calculated assuming a 28% tax rate for assets and liabilities. The effect of the reduction in the deferred income tax assets calculation for 2005 was $10,229.

For the six months ended June 30, 2006 and 2005 (unaudited), deferred IT amounted to an expense of $11,588 and $59,573, respectively; also, as of June 30, 2006, $7,943 was recorded into the change in the fair value of derivative instruments.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2006 and December 31, 2005 are presented below:

	(Unaudited)
	June 30,		December 31,
	2006		2005
Deferred tax assets:
Net operating loss carryforwards	$	236,905		313,595
Allowance for doubtful accounts		63,683		50,693
Accrued liabilities		16,236		13,564
Tax on assets		22,970		20,409
Premium on bond issuance		9,107		15,435
Fair value of derivative instruments		7,943		22,855
Total gross deferred tax assets		356,844		436,551
Less valuation allowance		23,492		22,913
Net deferred tax assets		333,352		413,638

-12-

	(Unaudited)
	June 30,			December 31,
	2006			2005
Deferred tax liabilities:
Property, systems and equipment		100,034			147,840
Telephone concession rights		180,692			186,437
Pre-operating expenses		46,739			51,435
Other assets		11,413			10,544
Total deferred tax liabilities		338,878			396,256
Deferred tax (liabilities) assets, net	$	(5,526	)		17,382

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $845,869 prior to the expiration of the net operating loss carryforwards in various dates as disclosed below. Taxable income for the six-month periods ended June 30, 2006 and 2005 were $249,045 and $335,831, respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at June 30, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. As of June 30, 2006 and December 31, 2005, a deferred tax asset valuation allowance was established for tax loss carryforwards from the subsidiaries and TA from the Company.

According to the IT law, the tax loss of a year, restated by inflation, may be carried to the succeeding ten years. The tax losses have no effect on ESPS. As of June 30, 2006, the tax loss carryforwards expired as follows:

Year	Inflation-adjusted tax loss carryforwards		Recoverable TA
2010	$	156,360		-
2011		232,107		-
2012		456,917		-
2013		-		9,413
2014		-		9,140
2015		485		3,068
2016		-		1,349
	$	845,869		22,970

-13-

(10)   Stockholders’ equity

The principal characteristics of stockholders’ equity are described below:

(a)   Common stock structures

At June 30, 2006, the Company had 2,840,936,866 shares issued and outstanding. Company’s shares are divided in two Series: Series A and B; both Series have two type of classes, Class “I” and Class “II”, with no par value. From the total shares, 32,212,209 shares are Series A and 2,808,724,657 shares are Series B. At June 30, 2006 the Company has only issued Class “I” shares. Also, at June 30, 2006 all shares issued are part of the fixed portion.

By resolutions adopted at the Extraordinary Shareholders Meeting held on August 26, 2005, the shareholders of the Company approved a proposal to cancel the increase of the variable portion of the common stock of the Company that was previously approved in a Extraordinary Shareholders Meeting held on September 8, 2004 in the amount equal to $3,202 through the issuance of 124,957,212 non-voting Series “N” shares. These Series “N” shares were never subscribed and paid.

By resolutions adopted at the Extraordinary Shareholders´ Meetings held on August 26, 2005, the shareholders of the Company (i) approved a proposal to reduce the variable portion of the capital stock of the Company by $5,274 (ii) approved a proposals to increase the variable portion of the capital stock of the Company by $5,274 (iii) approved a proposal to carry out a merger through which the Company (Merging company) absorbed Telinor Telefonía S. de R.L. de C.V (Merged company). These resolutions had no significant effects on the financial position or on the result of operations of the Company.

By resolutions adopted at the Ordinary and Extraordinary Shareholders´ Meetings held on November 11, 2005 (10 a.m.), the shareholders of the Company: (i) ratified all shareholders resolutions adopted prior to the date of this meeting; (ii) approved the financial statements of the Company for the fiscal year that ended on December 31, 2004, and (iii) reported about the current structure of the capital stock. At this meeting it was resolved and confirmed that the total subscribed and paid capital stock of the Company was $5,742,897,450 pesos (nominal value), represented by 1,253,233,984 common, non par value, Series “A” shares; 888,152,627 common, non par value, Series “C” shares; and 392,320,255 non voting, non par value, Series “N” shares.

-14-

By resolutions adopted by the Ordinary and Extraordinary Shareholders´ Meetings held on November 11, 2005 (12 p.m.), the shareholders of the Company: (i) approved the conversion of 2,533,606,866 shares of the variable portion of the capital stock into the same number of shares of the minimum fixed capital stock; (ii) approved an increase of the minimum fixed capital stock of the Company by $5,742,897,450 pesos (nominal value); (iii) approved that the shares representative of the minimum fixed capital stock of the Company will be identified as Class “I” and the shares representative of the variable portion will be identified as Class “II”, and the reclassification of all the shares of the capital stock of the Company so that the capital stock will be represented by two series of nominative, common and non par value shares identified as Series “A” and Series “B” shares; (iv) approved that the subscribed and paid capital stock of the Company is represented by 32,212,209 nominative, common, non par value, Class “I”, Series “A” shares, and by 2,501,494,657 nominative, common, non par value, Class “I”, Series “B” shares; (v) approved an increase of the minimum fixed capital stock of the Company in the amount of up to $787,201,057 pesos through the issuance of up to 343,529,802 nominative, common, non par value, Class “I”, Series “B” shares, to be offered, subscribed and paid as part of a public and private offering (the offering) to be carried out by the Company no later than December 31, 2005.

In connection with the capital increase described in item (v) of the precedent paragraph, it was also resolved in such meeting to delegate to the Board of Directors and certain officers of the Company the authority (i) to determine, once the offering is completed, the number of shares subscribed in the offering, (ii) to determine the exact amount of the capital increase approved in such meeting based on the results of the offering, (iii) to cancel the unsubscribed and unpaid shares as a result of the offering, and (iv) to modify the text of Clause Sixth of the bylaws to reflect the subscribed and paid capital stock as a result of the offering.

Immediately after giving effect to the resolutions of the meeting referred to in the preceding two paragraphs, the Company’s capital stock was $6,521,541,755 pesos (nominal value), represented by 32,212,209 common, non par value, Class “I”, Series “A” subscribed and paid shares; 2,501,494,657 common, non par value, Class “I”, Series “B” subscribed and paid shares; and 343,529,802 common, non par value, Class “I”, Series “B” unsubscribed and unpaid shares to be offered in the offering.

(b)   Stockholders’ equity restrictions

Stockholder contributions, restated as provided for in the tax law, totaling $6,508,859 may be refunded to stockholders tax-free.

No dividends may be paid while the Company has a deficit. Some of the debt agreements disclosed in note 7 establish limitations on dividend payment.

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(11)   Commitments and contingencies

As of June 30, 2006, there are the following commitments and contingencies:

(a)   On January 24, 2001 a contract was signed with Global Towers Communications Mexico, S. de R.L. de C.V. (Formerly Spectrasite Communications Mexico, S. de R.L. de C.V.) expiring on January 24, 2004, to provide the Company with services to locate, construct, set up and sell sites within the Mexican territory. As part of the operation, the Company agreed to build 650 sites, subject to approval and acceptance by Global Towers Communications Mexico, S. de R.L. de C.V. (Global Towers) and, in turn, sell or lease them under an operating lease plan.

On January 24, 2001, the Company received 13 million dollars from Global Towers to secure the acquisition of the 650 sites at 20,000 dollars per site. These funds are not subject to restriction per the contract for use and destination. However, the contract provides for the payment of interest at a Prime rate in favor of Global Towers on the amount corresponding to the number of sites that as of June 24, 2004 had not been sold or leased in accordance with the terms of the contract. The Company has recognized a liability to cover such interest for $51,065, included within the other accounts payable in the balance sheet as of June 30, 2006.

During 2002, Global Towers filed an Ordinary Mercantile Trial against the Company before the Thirtieth Civil Court of Mexico City, demanding the refund of the guarantee deposit mentioned above, plus interest and trial-related expenses. The Company countersued Global Towers for unilateral rescission of the contract. As of June 30, 2006, the trial is at a stage where evidence is being shown.

(b)   On October 2002, Metronet, S.A. de C.V. (“Metronet”) filed an action against the Company in the Fourth Civil Court in Monterrey (Mexico). Metronet claims that the Company wrongfully terminated a letter of intent and is seeking payment for services and direct damages of approximately U.S.$3.8 million, plus other expenses and attorneys’ fees. The trial court ruled against the Company in first instance. The Company appealed such judgment before the Appeal Court and on October 22, 2004 ruled in favor of the Company, discharging Axtel of any liability, damages or payment in favor of Metronet. On November 12, 2004 Metronet requested constitutional review. On May 27, 2005, the Mexican Federal Court resolved the constitutional review requested by Metronet by ordering the State Superior Court of Appeals to review the case and to issue a new resolution. The State Superior Court of Appeals on July 7, 2005 ruled again in favor of the Company, releasing Axtel of any liability and responsibility. On August 5 2005, Metronet requested constitutional review challenging such State Superior Court’s decision. On January 20, 2006, the Mexican Federal Court resolved the constitutional review requested by Metronet by ordering the State Superior Court of Appeals to review the case and to issue a new resolution. On April 18, 2006 the State Superior Court of Appeals issued a new resolution awarding Metronet damages of approximately US$ 5.4 million.  The Company is reviewing the order and intends to appeal it.

-16-

(c)   The Company is involved in a number of lawsuits and claims arising in the normal course of business. It is expected that the final outcome of these matters will not have significant adverse effects on the Company’s financial position and results of operations.

(d)   In compliance with commitments made in the acquisition of concession rights, the Company has granted surety bonds to the Federal Treasury and to the Ministry of Communication and Transportation of $9,014 and to other service providers amounting $165,494.

(e)   The concessions granted by the Ministry of Communications and Transportation (SCT), mentioned in note 1, establish certain obligations of the Company, including, but not limited to: (i) filing annual reports with the SCT, including identifying main shareholders of the Company, (ii) reporting any increase in common stock, (iii) providing continuous services with certain technical specifications, (iv) filing monthly reports about disruptions, (v) filing the services’ tariff, and (vi) providing a bond.

(f)   The Company leases some equipment and facilities under operating leases. Some of these leases have renewal clauses. Lease expense for the six-month periods ended June 30, 2006 and 2005 was $177,632 and $177,919, respectively.

The annual payments under the committed leases as of June 30, 2006 are as follows:

	Contracts in:
		Pesos (thousands)		U.S. Dollars (thousands)
June 2007		$	108,824		8,091
June 2008			95,714		5,492
June 2009			83,235		3,394
June 2010			62,942		2,890
June 2011			43,256		2,800
Thereafter			278,436		8,084
		$	672,407		30,751

(g)   As of June 30, 2006, the Company has placed purchase orders which are pending delivery from suppliers for approximately $504,838.

(h)   On July 20, 2004 Axtel, Nortel Networks Limited and Nortel Networks de México, S.A. de C.V., entered into a Purchase and License Agreement for the supply of next generation soft switch equipment and related services (the “NGN PLA”). This NGN PLA contains standard commercial and legal terms. In this NGN PLA, Axtel has a purchase commitment to acquire from Nortel Networks the equipment and the software licenses required to have 100,000 lines in services by the end of the five (5) year term of such agreement. As of June 30, 2006, the Company has acquired the equipment and software licenses required to the have 70,451 lines in service.

-17-

(12)   Differences between Mexican and United States accounting principles

The consolidated financial statements of the Company are prepared according to Mexican financial reporting standards (Mexican GAAP), which differ in certain significant respects from those applicable in the United States of America (U.S. GAAP).

The consolidated financial statements under Mexican GAAP include the effects of inflation provided for by Bulletin B-10, whereas the financial statements prepared under U.S. GAAP are presented on a historical cost basis. The following reconciliation does not eliminate the inflation adjustments for Mexican GAAP, since they represent an integral measurement of the effects of the changes in the price levels in the Mexican economy and, as such, are considered a more meaningful presentation than the financial reports based on historic costs for book purposes for Mexico and the United States of America.

The main differences between Mexican GAAP and U.S. GAAP and their effect on consolidated net income for the three month and the six-month periods ended June 30, 2006 and 2005, and on stockholders’ equity as of June 30, 2006 and December 31, 2005 are presented below, with an explanation of the adjustments.

	(Unaudited)					(Unaudited)
	Three months ended					Six months ended
	June 30,					June 30,
		2006		2005			2006		2005
Net (loss) income reported under Mexican GAAP	$	46,040		122,597			21,615		137,546
Approximated U.S. GAAP adjustments
1. Deferred income taxes (see 12a)		22,741		50,130			360		59,573
2. Amortization of start-up costs (see 12c)		10,971		10,466			21,698		20,926
3. Start-up costs of the period (see 12c)		(1,888	)	(376	)		(8,040	)	(376	)
4. Revenue recognition (see 12b)		(8,652	)	(10,791	)		(19,000	)	(17,763	)
5. Allowance for post retirement benefits (see 12d)		43		50			176		210
6. Capitalized interest (see 12e)		(66	)	(59	)		(272	)	(248	)
Total approximate U.S. GAAP adjustments		23,149		49,420			(5,078	)	62,322
Approximate net income (loss) under U.S. GAAP	$	69,189		172,017			16,537		199,868

-18-

	(Unaudited)
	June 30,			December 31,
	2006			2005
Total stockholders’ equity reported under Mexican GAAP	$	7,206,170			7,155,179
U.S. GAAP adjustments
1. Deferred income taxes (see 12a)		83,310			82,950
2. Start-up costs (see 12c)c		(166,455	)		(180,113	)
3. Revenue recognition (see 12b)		(139,363	)		(120,363	)
4. Allowance for post retirement benefits (see 12d)		(16,000	)		(16,176	)
5. Capitalized interest (see 12e)		24,753			25,025
Total approximate U.S. GAAP adjustments		(213,755	)		(208,677	)
Total stockholders’ equity under U.S. GAAP	$	6,992,415			6,946,502

The term “SFAS” as used in this document refers to Statement of Financial Accounting Standards.

(a)   Deferred income taxes (IT) and employee’s statutory profit sharing (“ESPS”)

·   For Mexican GAAP Deferred IT are accounted for under the asset and liability method. All of the Company’s pretax income and reported income tax expense is derived from domestic operations.

·  

·   For Mexican GAAP Deferred ESPS is recognized only for timing differences arising from the reconciliation of book income to income for ESPS purposes, which can be reasonably presumed to result in a future liability or benefit, with indication that the liabilities or benefits will materialize.

·   For U.S. GAAP purposes, the Company accounts for IT and ESPS under SFAS 109 “Accounting for Income Taxes,” which uses the asset and liability method to account for deferred tax assets and liabilities. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences of “temporary differences,” by applying the enacted statutory tax rates applicable to future years to the differences between the book amounts of the financial statements and the tax bases of existing assets and liabilities and the tax loss carryforwards. The amount of deferred income taxes charged or credited to the operations in each period, for U.S. GAAP purposes, is based on the difference between the beginning and ending balances of the deferred tax assets and liabilities for each period, expressed in nominal pesos. The deferred tax effect of a change in the tax rate is recognized in the results of operations of the period in which the change is enacted.

-19-

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of June 30, 2006 and December 31, 2005 for U.S. GAAP are presented below:

	(Unaudited)
	June 30,		December 31,
	2006		2005
Deferred tax assets:
Net operating loss carryforwards	$	236,905		313,595
Allowance for doubtful accounts		63,683		50,693
Deferred revenues		39,022		33,700
Accrued liabilities		16,236		13,564
Fair value of derivative instruments		7,943		22,855
Premium on bond issuance		9,107		15,435
Tax on assets		22,970		20,409
Total gross deferred tax assets		395,866		470,252
Less valuation allowance		23,492		22,913
Net deferred tax assets		372,374		447,338
Deferred tax liabilities:
Property, systems and equipment		106,964		154,551
Telephone concession rights		180,692		186,437
Other assets		6,934		6,018
Total deferred tax liabilities		294,590		347,006
Net deferred tax liabilities under U.S. GAAP		77,784		100,332
Plus (less) net deferred tax liability (assets) recognized under Mexican GAAP		5,526		(17,382	)
U.S. GAAP adjustment to stockholders’ equity	$	83,310		82,950

-20-

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Since the Company had not generated taxable income prior to 2002. A deferred tax asset valuation allowance of $23,492 as of June 30, 2006 was recorded for U.S. GAAP. This represents an increase in the valuation allowance of $579 for the six-month period ended June 30, 2006.

(b)   Revenue recognition

On December 17, 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104). This bulletin summarizes the point of view of the SEC in the recognition of revenues in the financial statements according to U.S. GAAP. The SEC concluded that only when all the following conditions are met is revenue recognition appropriate:

a)there is persuasive evidence of an agreement;

b)the delivery was made or the services rendered;

c)the sales price to the purchaser is fixed or determinable; and

d)collection is reasonable assured.

SAB 104, specifically in Topic 13A, Question 5, discusses the situation of recognizing as revenue certain non-refundable cash items. SAB 104 provides that the seller should not recognize non-refundable charges generated in certain transactions when there is continuous involvement by the vendor.

One of the examples provided by SAB 104 is activation revenues from telecommunication services. The SAB concludes that unless the charge for the activation service is an exchange for products delivered or services rendered that represent the culmination of a separate revenue-generating process, the deferral method of revenue is appropriate.

Based on the provisions and interpretations of SAB 104, for purposes of the U.S. GAAP reconciliation, the Company has deferred the activation revenues over a three-year period starting in the month such charge is originated. This period was determined based on Company’s experience. The net effect of the deferral and amortization is presented in the U.S. GAAP reconciliation.

-21-

(c)   Start-up costs

In April 1998, the AICPA issued Statement of Position 98-5, “Report of Start-up Costs” (SOP 98-5), which requires start-up costs, including organization costs, to be expensed as incurred. SOP 98-5 is effective, except for certain investment companies, for fiscal years beginning after December 15, 1998. Under Mexican GAAP, these costs were recognized when incurred as a deferred asset and amortized over a period of 10 years. The Company has reversed the amortization of $21,698 and $20,926 for the six months period ended June 30, 2006 and 2005 as shown in the U.S. GAAP reconciliation, and has reduced stockholders’ equity by $166,455 and $180,113 to write off the unamortized balance at June 30, 2006 and December 31, 2005. For U.S. GAAP purposes during the six months periods ended June 30, 2006 and 2005 the Company reversed $8,040 and $376, respectively, of capitalized amortization costs.

(d)   Allowance for post retirement benefits

For the years ended December 31, 2004 and before, under Mexican GAAP (Bulletin D-3), severance payments were recognized in earnings in the period in which they were paid, unless such payments were used by an entity as a substitution of pension benefits, in which case, they were considered as a pension plan. Starting January 1, 2005, the new Bulletin D-3 replaces the issue of unforeseen payments with the one relating to “Payments Upon Terminations of the Labor Relationship” and establishes certain valuation and disclosure requirements for those payments for reasons other than restructuring, which are the same as those for pension and seniority premium payments. Under U.S. GAAP, post-employment benefits for former or inactive employees, excluding retirement benefits, are accounted for under the provisions of SFAS 112, which requires recognition of certain benefits, including severance, over an employee's service life. For the six months ended June 30, 2006 and 2005 the Company recorded an increase in net income of $176 and $210, respectively. As of June 30, 2006 and December 31, 2005, the Company cancelled a deferred charge of $16,000 and $16,176, as allowed under Mexican GAAP. The US GAAP liability amounts to $21,400 and $19,209 as of June 30, 2006 and December 31, 2005, respectively.

(e)   Capitalized interest

Under Mexican GAAP, the Company capitalizes interest on property, systems and equipment under construction. The amount of financing cost to be capitalized is comprehensively measured in order to include properly the effects of inflation. Therefore, the amount capitalized includes: (i) the interest cost of the debt incurred, plus (ii) any foreign currency fluctuations that result from the related debt, and less (iii) the monetary position result recognized on the related debt. Under U.S. GAAP, only interest is considered an additional cost of constructed assets to be capitalized and depreciated over the lives of therelated assets. 

The U.S. GAAP reconciliation removes the foreign currency gain or loss and the monetary position result capitalized for Mexican GAAP, derived from borrowings denominated in foreign currency.

-22-

(f)   Guaranteed debt

On December 16, 2003, the Company completed an offering of senior unsecured notes, for a value of U.S.$ 175 million maturing on December 15, 2013. In addition, during January 2005, the Company re-opened its bond issuance program, issuing U.S. $75 million under the current indenture. Interest on the notes are payable semiannually at annual rate of 11%, beginning on June 15, 2004.

On February 22, 2006 the Company redeemed U.S. $87,500,000 aggregate principal amount of its 11% senior notes due 2013, or 35% of the U.S. $250,000,000 original aggregate principal amount of the notes. The redemption was made at a price of 111% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date.

Each of the Company’s consolidated subsidiaries, Instalaciones y Contrataciones, S.A. de C.V. (Instalaciones), Impulsora e Inmobiliaria Regional, S.A. de C.V. (Impulsora) and Servicios Axtel, S.A. de C.V. (Servicios), are guaranteeing the notes with unconditional guaranties that are unsecured. Each of the subsidiary guarantors is 99.99% owned by Axtel, S.A. de C.V. All guarantees are full and unconditional and are joint and several.

Axtel is eligible, under Adopting Release (nos. 33-7878 and 34-43124) and a no-action request letter, for presenting the condensed consolidating financial information of Impulsora, Instalaciones and Servicios in this note in accordance with Rule 3-10 (f) of Regulation S-X. Each of Impulsora, Instalaciones and Servicios has total capital stock outstanding of 50,000 common shares. Axtel directly owns all but one share of each of Impulsora, Instalaciones and Servicios. The ownership of the remaining share by someone other than Axtel is a requirement of Mexican law.

For the purpose of the accompanying condensed consolidating balance sheets, income statements and changes in financial position under Mexican GAAP, the first column, “Axtel” corresponds to the parent company issuer. The second column, “Combined Guarantors”, represents the combined amounts of Instalaciones, Impulsora and Servicios, after adjustments and eliminations relating to their combination. The third column, “Adjustments and Eliminations”, includes all amounts resulting from the consolidation of Axtel, and the guarantors. The fourth column, “Axtel Consolidated”, represents the Company’s consolidated amounts as reported in the audited consolidated financial statements. Additionally, all amounts presented under the line item “Investments in subsidiaries” for both the balance sheet and the income statement are accounted for by the equity method.

-23-

The condensed consolidating financial information is as follows:

Condensed consolidating balance sheets:

Adjustments
(Unaudited)			Combined	and		Axtel
As of June 30, 2006		Axtel	Guarantors	Eliminations		Consolidated
Current assets	$	1,934,413	163,743	(172,168	)	1,925,988
Property, systems and equipment, net		7,268,987	8,787	(962	)	7,276,812
Concession rights, pre-operating expenses and deferred taxes		821,189	11,133	(11,133	)	821,189
Investment in subsidiaries		34,937	-	(34,937	)	-
Other non-current assets and long-term receivable		162,926	18,959	-		181,885
Total assets	$	10,222,452	202,622	(219,200	)	10,205,874
Current liabilities	$	1,076,462	142,110	(172,168	)	1,046,404
Long-term debt		1,920,303	-	-		1,920,303
Other non-current liabilities		19,517	24,613	(11,133	)	32,997
·Total liabilities		3,016,282	166,723	(183,301	)	2,999,704
Total stockholders equity		7,206,170	35,899	(35,899	)	7,206,170
Total liabilities and stockholders equity	$	10,222,452	202,622	(219,200	)	10,205,874

					Adjustments
			Combined		and			Axtel
As of December 31, 2005	Axtel		Guarantors		Eliminations			Consolidated
Current assets	$	2,783,316		131,048		(145,171	)		2,769,193
Property, systems and equipment, net		7,104,307		9,096		(1,061	)		7,112,342
Concession rights, pre-operating expenses and deferred taxes		869,466		9,451		-			878,917
Investment in subsidiaries		33,399		-		(33,399	)		-
Other non-current assets and long-term receivable		171,684		20,288		-			191,972
Total assets	$	10,962,172		169,883		(179,631	)		10,952,424
Current liabilities	$	991,350		113,201		(145,171	)		959,380
Long-term debt		2,812,328		-		-			2,812,328
Other non-current liabilities		3,315		22,222		-			25,537
Total liabilities		3,806,993		135,423		(145,171	)		3,797,245
Total stockholders equity		7,155,179		34,460		(34,460	)		7,155,179
Total liabilities and stockholders equity	$	10,962,172		169,883		(179,631	)		10,952,424

-24-

Condensed consolidating income statements:

							Adjustments
(Unaudited)				Combined			and			Axtel
For the three-month period ended June 30, 2006	Axtel			Guarantors			Eliminations			Consolidated
Telephone services and related revenues	$	1,414,287			306,446			(306,446	)		1,414,287
Costs of revenues and services		(433,587	)		-			-			(433,587	)
Selling and administrative expenses		(477,661	)		(306,518	)		306,446			(477,733	)
Depreciation and amortization		(331,917	)		(119	)		-			(332,036	)
Operating income		171,122			(191	)		-			170,931
Comprehensive financing result, net		(89,572	)		(465	)		278			(89,759	)
Other (expenses) income, net		(12,366	)		147			(278	)		(12,497	)
Income tax		(23,500	)		865			-			(22,635	)
Investment in subsidiaries		356			-			(356	)		-
Net (loss) income	$	46,040			356			(356	)		46,040

							Adjustments
(Unaudited)				Combined			and			Axtel
For the three-month period ended June 30, 2005	Axtel			Guarantors			Eliminations			Consolidated
Telephone services and related revenues	$	1,241,316			250,508			(250,508	)		1,241,316
Costs of revenues and services		(388,546	)		-			-		(388,546)
Selling and administrative expenses		(421,924	)		(250,058	)		250,508		(421,474)
Depreciation and amortization		(273,396	)		(116	)		-		(273,512)
Operating income (loss)		157,450			334			-			157,784
Comprehensive financing result, net		14,483			(473	)		360			14,370
Other (expenses) income, net		62			871			(360	)		573
Income tax		(50,133	)		3			-			(50,130	)
Investment in subsidiaries		735			-			(735	)		-
Net income (loss)	$	122,597			735			(735	)		122,597

-25-

							Adjustments
(Unaudited)				Combined			and			Axtel
For the six-month period ended June 30, 2006	Axtel			Guarantors			Eliminations			Consolidated
Telephone services and related revenues	$	2,731,198			599,014			(599,014	)		2,731,198
Costs of revenues and services		(829,211	)		-			-			(829,211	)
Selling and administrative expenses		(922,424	)		(598,439	)		599,014			(921,849	)
Depreciation and amortization		(675,601	)		(228	)		-			(675,829	)
Operating income		303,962			347			-			304,309
Comprehensive financing result, net		(256,323	)		(987	)		567			(256,743	)
Other (expenses) income, net		(14,290	)		494			(567	)		(14,363	)
Income tax		(13,272	)		1,684			-			(11,588	)
Investment in subsidiaries		1,538			-			(1,538	)		-
Net (loss) income	$	21,615			1,538			(1,538	)		21,615

							Adjustments
(Unaudited)				Combined			and			Axtel
For the six-month period ended June 30, 2005	Axtel			Guarantors			Eliminations			Consolidated
Telephone services and related revenues	$	2,401,048			484,007			(484,007	)		2,401,048
Costs of revenues and services		(753,269	)		-			-		(753,269)
Selling and administrative expenses		(834,410	)		(485,015	)		484,007		(835,418)
Depreciation and amortization		(545,228	)		(236	)		-		(545,464)
Operating income (loss)		268,141			(1,244	)		-			266,897
Comprehensive financing result, net		(62,580	)		(961	)		705			(62,836	)
Other (expenses) income, net		(7,176	)		939			(705	)		(6,942	)
Income tax		(58,842	)		(731	)		-			(59,573	)
Investment in subsidiaries		(1,997	)		-			1,997			-
Net income (loss)	$	137,546			(1,997	)		1,997			137,546

-26-

Condensed consolidating statements of changes in financial position:

							Adjustments
(Unaudited)				Combined			and			Axtel
For the six-month period ended June 30, 2006	Axtel			Guarantors			Eliminations			Consolidated
Operating activities:
Net (loss) income	$	21,615			1,538			(1,538	)		21,615
Charges (credits) to operations not requiring (providing) resources		687,335			(1,456	)		1,538			687,417
Resources provided by operations		708,950			82			-			709,032
Net investment in operations		57,044			(3,696	)		(351	)		52,997
Resources provided by (used in) operations, net		765,994			(3,614	)		(351	)		762,029
Financing activities:
Additional paid-in capital		(8,971	)		-			-			(8,971	)
Loans payments, net		(893,711	)		(351	)		351			(893,711	)
Others		50,234			-			-			50,234
Resources used in financing activities		(852,448	)		(351	)		351			(852,448	)
Investing activities:
Acquisition and construction of property, systems and equipment, net		(758,452	)		(18	)		-			(758,470	)
Other assets		(30,149	)		1,328			-			(28,821	)
Resources used in investing activities		(788,601	)		1,310						(787,291	)
Decrease in cash and equivalents		(875,055	)		(2,655	)		-			(877,710	)
Cash and equivalents at the beginning of the period		1,908,339			3,487			-			1,911,826
Cash and equivalents at the end of the period	$	1,033,284			832			-			1,034,116

-27-

							Adjustments
(Unaudited)				Combined			and			Axtel
For the six-month period ended June 30, 2005	Axtel			Guarantors			Eliminations			Consolidated
Operating activities:
Net income (loss)	$	137,546			(1,997	)		1,997			137,546
Charges to operations not requiring resources		606,067			967			(1,997	)		605,037
Resources provided by (used in) operations		743,613			(1,030	)		-			742,583
Net (investment in) financing from operations		(269,629	)		4,231			(376	)		(265,774	)
Resources provided by operations, net		473,984			3,201			(376	)		476,809
Financing activities:
Proceeds from (loans payments), net		786,886			(376	)		376			786,886
Others		(12,842	)		-			-			(12,842	)
Resources provided by (used in) financing activities		774,044			(376	)		376			774,044
Investing activities:
Acquisition and construction of property, systems and equipment, net		(668,245	)		(19	)		-			(668,264	)
Other assets		(24,322	)		(1,854	)		-			(26,176	)
Resources used in investing activities		(692,567	)		(1,873	)		-			(694,440	)
Increase (decrease) in cash and equivalents		555,461			952			-			556,413
Cash and equivalents at the beginning of the period		576,891			2,098			-			578,989
Cash and equivalents at the end of the period	$	1,132,352			3,050			-			1,135,402

-28-

The tables below present combined balance sheets as of June 30, 2006 and December 31, 2005, income statements for each of the three-month and the six-month periods ended June 30, 2006 and June 30, 2005, and statements of changes in financial position for each of the six-month periods ended June 30, 2006 and June 30, 2005 for the Guarantors. Such information presents in separate columns each individual Guarantor, combination adjustments and eliminations, and the combined guarantors. All significant related parties balances and transactions between the Guarantors have been eliminated in the “Combined Guarantors” column.

The amounts presented in the column “Combined Guarantors” are readily comparable with the information of the Guarantors included in the condensed consolidating financial information.

Guarantors’ Combined Balance Sheets:

(Unaudited)								Adjustments
As of June 30, 2006								and			Combined
Assets	Icosa			Inmobiliaria		Servicios		Eliminations			Guarantors
Cash and cash equivalents	$	111			29		692		-			832
Related parties receivables		15,217			-		130,539		(8	)		145,748
Refundable taxes and other accounts receivable		1,538			1,293		14,332		-			17,163
Total current assets		16,866			1,322		145,563		(8	)		163,743
Property, systems and equipment, net		-			8,787		-		-			8,787
Deferred income taxes		180			-		11,156		(203	)		11,133
Other non-current assets		1,671			-		17,288		-			18,959
Total assets	$	18,717			10,109		174,007		(211	)		202,622
Liabilities and Stockholders Equity
Account payable and accrued liabilities	$	374			-		32,131		-			32,505
Taxes payable		7,474			-		46,130		-			53,604
Related parties payables		8			7,962		-		(8	)		7,962
Other accounts payable		3,715			-		44,324		-			48,039
Total current liabilities		11,571			7,962		122,585		(8	)		142,110
Deferred income tax		-			203		-		(203	)		-
Other non-current liabilities		2,049			-		22,564		-			24,613
Total liabilities		13,620			8,165		145,149		(211	)		166,723
Equity		5,195			1,651		27,515		-			34,361
Net (loss) income		(98	)		293		1,343		-			1,538
Total stockholders equity		5,097			1,944		28,858		-			35,899
Total liabilities and stockholders equity	$	18,717			10,109		174,007		(211	)		202,622

-29-

As of December 31, 2005
									Adjustments
Assets	Icosa			Inmobiliaria		Servicios			and Eliminations			Combined Guarantors
Cash and cash equivalents	$	426			11		3,050			-			3,487
Related parties receivables		11,115			-		100,848			(2	)		111,961
Refundable taxes and other accounts receivable		1,361			1,331		12,908			-			15,600
Total current assets		12,902			1,342		116,806			(2	)		131,048
Property, systems and equipment, net		-			9,096		-			-			9,096
Deferred income taxes		207			-		9,446			(202	)		9,451
Other non-current assets		1,689			-		18,599			-			20,288
Total assets	$	14,798			10,438		144,851			(204	)		169,883
Liabilities and stockholders’ equity
Account payable and accrued liabilities	$	141			-		19,984			-			20,125
Taxes payable		6,317			174		53,895			-			60,386
Related parties payables		-			8,312		2			(2	)		8,312
Other accounts payable		1,239			-		23,139			-			24,378
Total current liabilities		7,697			8,486		97,020			(2	)		113,201
Deferred income tax		-			202		-			(202	)		-
Other non-current liabilities		1,907			-		20,315			-			22,222
Total liabilities		9,604			8,688		117,335			(204	)		135,423
Equity		6,721			1,572		44,854			-			53,147
Net (loss) income		(1,527	)		178		(17,338	)		-			(18,687	)
Total stockholders equity		5,194			1,750		27,516			-			34,460
Total liabilities and stockholders equity	$	14,798			10,438		144,851			(204	)		169,883

-30-

Guarantors’ Combined Income Statements:

										Adjustments
(Unaudited) For the three-months period ended June 30, 2006	Icosa			Inmobiliaria			Servicios			and Eliminations		Combined Guarantors
Rental, service and other revenues	$	36,450			496			269,500			-		306,446
Administrative expenses		(36,450	)		-			(270,068	)		-		(306,518	)
Depreciation and amortization		-			(105	)		(14	)		-		(119	)
Operating income		-			391			(582	)		-		(191	)
Comprehensive financing result, net		(62	)		(260	)		(143	)		-		(465	)
Other ( expenses) income, net		(14	)		-			161			-		147
Income (loss) before income taxes		(76	)		131			(564	)		-		(509	)
Income taxes		(7	)		(13	)		885			-		865
Net (loss) income	$	(83	)		118			321			-		356

										Adjustments
(Unaudited) For the three-months period ended June 30, 2005	Icosa			Inmobiliaria			Servicios			and Eliminations		Combined Guarantors
Rental, service and other revenues	$	25,027			496			224,985			-		250,508
Administrative expenses		(25,027	)		-			(225,031	)		-		(250,058	)
Depreciation and amortization		-			(109	)		(7	)		-		(116	)
Operating income (loss)		-			387			(53	)		-		334
Comprehensive financing result, net		(21	)		(343	)		(109	)		-		(473	)
Other income, net		1			-			870			-		871
(Loss) income before income taxes		(20	)		44			708			-		732
Income taxes		(10	)		(7	)		20			-		3
Net (loss) income	$	(30	)		37			728			-		735

-31-

										Adjustments
(Unaudited) For the six-months period ended June 30, 2006	Icosa			Inmobiliaria			Servicios			and Eliminations		Combined Guarantors
Rental, service and other revenues	$	70,296			994			527,724			-		599,014
Administrative expenses		(70,196	)		-			(528,243	)		-		(598,439	)
Depreciation and amortization		-			(210	)		(18	)		-		(228	)
Operating income		100			784			(537	)		-		347
Comprehensive financing result, net		(152	)		(491	)		(344	)		-		(987	)
Other ( expenses) income, net		(19	)		-			513			-		494
Income (loss) before income taxes		(71	)		293			(368	)		-		(146	)
Income taxes		(27	)		-			1,711			-		1,684
Net (loss) income	$	(98	)		293			1,343			-		1,538

										Adjustments
(Unaudited) For the six-months period ended June 30, 2005	Icosa			Inmobiliaria			Servicios			and Eliminations		Combined Guarantors
Rental, service and other revenues	$	49,440			996			433,571			-		484,007
Administrative expenses		(49,440	)		-			(435,575	)		-		(485,015	)
Depreciation and amortization		-			(217	)		(19	)		-		(236	)
Operating income (loss)		-			779			(2,023	)		-		(1,244	)
Comprehensive financing result, net		(84	)		(632	)		(245	)		-		(961	)
Other income, net		3			-			936			-		939
(Loss) income before income taxes		(81	)		147			(1,332	)		-		(1,266	)
Income taxes		(1	)		(8	)		(722	)		-		(731	)
Net (loss) income	$	(82	)		139			(2,054	)		-		(1,997	)

-32-

Guarantors’ Combined Statements of Changes in Financial Position:

										Adjustments
(Unaudited) For the six-months period ended June 30, 2006	Icosa			Inmobiliaria			Servicios			and Eliminations		Combined Guarantors
Operating activities:
Net (loss) income	$	(98	)		293			1,343			-		1,538
Non-cash items		27			210			(1,693	)		-		(1,456	)
Resources (used in) provided by operations		(71	)		503			(350	)		-		82
Net investment in operations		(262	)		(134	)		(3,300	)		-		(3,696	)
Resources (used in) provided by operations, net		(333	)		369			(3,650	)		-		(3,614	)
Financing activities:
Loans payment, net		-			(351	)		-			-		(351	)
Resources used in financing activities		-			(351	)		-			-		(351	)
Investing activities:
Property, system and equipment, net		-			-			(18	)		-		(18	)
Other assets		18			-			1,310			-		1,328
Resources provided by investing activities		18			-			1,292			-		1,310
(Decrease) increase in cash and equivalents		(315	)		18			(2,358	)		-		(2,655	)
Cash and equivalents at the beginning of the period		426			11			3,050			-		3,487
Cash and equivalents at the end of the period	$	111			29			692			-		832

-33-

										Adjustments
(Unaudited) For the six-months period ended June 30, 2005	Icosa			Inmobiliaria			Servicios			and Eliminations		Combined Guarantors
Operating activities:
Net (loss) income	$	(82	)		139			(2,054	)		-		(1,997	)
Non-cash items		1			225			741			-		967
Resources (used in) provided by operations		(81	)		364			(1,313	)		-		(1,030	)
Financing from operations, net		589			12			3,630			-		4,231
Resources provided by operations, net		508			376			2,317			-		3,201
Financing activities:
Loans payments, net		-			(376	)		-			-		(376	)
Resources used in financing activities		-			(376	)		-			-		(376	)
Investing activities:
Property, system and equipment, net		-			-			(19	)		-		(19	)
Other assets		(337	)		-			(1,517	)		-		(1,854	)
Resources used in investing activities		(337	)		-			(1,536	)		-		(1,873	)
Increase in cash and equivalents		171			-			781			-		952
Cash and equivalents at the beginning of the period		614			12			1,472			-		2,098
Cash and equivalents at the end of the period	$	785			12			2,253			-		3,050

-34-

Guarantors - U.S. GAAP reconciliation of net income and stockholders’ equity:

As discussed at the beginning of this note 12, the following reconciliation to U.S. GAAP does not eliminate the inflation adjustments for Mexican GAAP, since they represent an integral measurement of the effects of the changes in the price levels in the Mexican economy and, as such, are considered a more meaningful presentation than the financial reports based on historic costs for book purposes for Mexico and the United States.

The main differences between Mexican GAAP and U.S. GAAP and their effect on combined guarantors’ net loss and stockholders´ equity for the three-month and the six-month periods ended June 30, 2006 and 2005 and on the stockholders’ equity as of June 30, 2006 and December 31, 2005 is presented below, with an explanation of the adjustments.

	(Unaudited)
	three-month period ended June 30
	2006			2005
Net income (loss) reported under Mexican GAAP	$	356			735
U.S. GAAP adjustments
1. Deferred income taxes (A)		(12	)		(3	)
2. Allowance for post retirement benefits (B)		43			50
Total U.S. GAAP adjustments		31			47
Net income (loss) income under U.S. GAAP	$	387			782

	(Unaudited)
	six-month period ended June 30
	2006			2005
Net income (loss) reported under Mexican GAAP	$	1,538			(1,997	)
U.S. GAAP adjustments
1. Deferred income taxes (A)		(51	)		731
2. Allowance for post retirement benefits (B)		176			210
Total U.S. GAAP adjustments		125			941
Net income (loss) income under U.S. GAAP	$	1,663			(1,056	)

-35-

	(Unaudited)
	June 30			December 31
	2006			2005
Total stockholders’ equity reported under Mexican GAAP	$	35,899			34,460
U.S. GAAP adjustments
1. Deferred income taxes (A)		4,480			4,529
2. Allowance for post retirement benefits (B)		(16,000	)		(16,176	)
Total approximate U.S. GAAP adjustments		(11,520	)		(11,647	)
Total stockholders’ deficit under U.S. GAAP	$	24,379			22,813

Guarantors-Notes to the U.S. GAAP reconciliation

A.   Deferred income taxes

Deferred income taxes adjustment in the stockholders’ equity reconciliation to U.S. GAAP, as of June 30, 2006 and December 31, 2005, represented increases of $4,480 and $4,529, respectively, as shown in the U.S. GAAP reconciliation.

B.   Severance

For the year ended December 31, 2005 and prior under Mexican GAAP (Bulletin D-3), severance payments should be recognized in earnings in the period in which they are paid, unless such payments were used by an entity as a substitution of pension benefits, in which case, they were considered as a pension plan. Starting January 1, 2005, the new Bulletin D-3 replaces the issue of unforeseen payments with the one relating to “Payments Upon Termination of the Labor Relationship” and establishes certain valuation and disclosure requirements for those payments for reasons other than restructuring, which are the same as those for pension and seniority premium payments. Under U.S. GAAP, post-employment benefits for former or inactive employees, excluding retirement benefits, are accounted for under the provisions of SFAS 112, which requires recognition of certain benefits, including severance, over an employee's service life. For the six-month periods ended June 30, 2006 and 2005 the Company recorded an increase in net income of $176 and $210, respectively. As of June 30, 2006 and December 31, 2005, the Company cancelled a deferred charge of $16,000 and $16,176, respectively, as allowed under Mexican GAAP. The US GAAP liability amounts to $21,400 and $19,209 as of June 30, 2006 and December 31, 2005, respectively.

-36-

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

We provide bundled local and long distance voice services, as well as data and internet services. Our integrated service offering enables us to maximize the recurring revenue received from each customer, increasing the return on our investment in infrastructure. Our experience points out that customers prefer to purchase their telecommunications services from a single provider and receive a single bill. We believe customer loyalty is increased with the provision of quality services and by adding new features to existing services, allowing us to maintain under control our churn rate.

Revenues

We derive our revenues from:

·Local calling services. We generate revenue by enabling our customers to originate and receive an unlimited number of calls within a defined local service area. Customers are charged a monthly fee for basic service, a per call fee for local calls (“measured service”), a per minute usage fee for calls completed on a cellular line (“calling party pays,” or CPP calls) and a monthly fee for value added services and internet when requested by the customer.

·Long distance services. We generate revenues by providing long distance services (domestic and international) for our customers’ completed calls.

·Other services. We generate revenues from other services, which include activation fees for new customers as well as data, interconnection and dedicated private line services charged on a monthly basis.

The following table summarizes our revenues and percent of revenues from operations from these sources:

	Revenues (Constant Ps. in millions as of June 30, 2006) Six-month period ended June 30,			% of Revenues Six-month period ended June 30,
Revenue Source	2006	2005	% of Change	2006	2005
Local calling services	Ps 1,983.8	Ps. 1,708.3	16.1%	72.6%	71.1%
Long distance services	227.9	220.4	3.4%	8.3%	9.2%
Other services	519.5	472.3	10.1%	19.1%	19.7%
Total	Ps. 2,731.2	Ps. 2,401.0	13.8%	100.0%	100.0%

	Revenues (Constant Ps. in millions as of June 30, 2006) Three-month period ended June 30,			% of Revenues Three-month period ended June 30,
Revenue Source	2006	2005	% of Change	2006	2005
Local calling services	Ps. 1,025.0	Ps. 892.0	14.9%	72.5%	71.9%
Long distance services	121.6	115.9	5.0%	8.6%	9.3%
Other services	267.7	233.4	14.7%	18.9%	18.8%
Total	Ps. 1,414.3	Ps. 1,241.3	13.9%	100.0%	100.0%

-37-

Cost of Revenues and Operating Expenses

Our costs are categorized as follows:

·Cost of revenues include expenses related to the termination of our customers’ cellular and long distance calls on other carriers’ networks, as well as expenses related to billing, payment processing, operator services and our leasing of private circuit links.

·Operating expenses include costs incurred in connection with general and administrative matters, including compensation and benefits, the costs of leasing land related to our operations and costs associated with sales and marketing and the maintenance of our network.

·Depreciation and amortization includes depreciation of all communications network and equipment and amortization of preoperating expenses and the cost of spectrum licenses.

Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005

Revenues from Operations

Revenues from operations totaled Ps. 2,731.2 million for the six-month period ended June 30, 2006 compared to Ps. 2,401.0 million for the same period in year 2005, an increase of Ps. 330.2 million, or 14%. Our average revenue per user declined to Ps. 569.4 from Ps. 654.8 during this same period. Our lines in service at the end of the first half of 2006 reached 696,968; compared to 529,653 at the end of the same period in 2005, an increase of 32%.

Local services. Local service revenues amounted to Ps. 1,983.8 million for the six-month period ended June 30, 2006 from Ps. 1,708.3 million for the same period ended in year 2005, an increase of Ps. 275.5 million, or 16.1%. These increases were primarily due to increased monthly rents and revenues from cellular usage as a result of more lines in service in existing and new cities.

Long distance services. Long distance service revenues increased to Ps. 227.9 million for the six-month period ended June 30, 2006 from Ps. 220.4 million for the period ended June 30, 2005, an increase of Ps. 7.4 million, or 3%. This revenue growth resulted from higher long distance traffic, partially offset by reduced pricing related to special offers.

Other services. Revenue from other services totaled Ps. 519.5 million in the six-month period ended June 30, 2006, compared to Ps. 472.3 million in the same period in 2005, an increase of Ps. 47.2 million. This positive variation resulted from increases in activation fees, equipment sales, data and other items in connection with lines installed during the period.

Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of revenues from operations amounted to Ps. 829.2 million for the six-month period ended June 30, 2006 compared to Ps. 753.3 million in the same period in 2005, an increase of Ps. 75.9 million, or 10%. This growth was due primarily to a Ps. 83.4 million increase in our underlying costs related to calling party pays cellular traffic.

Gross profit. Gross profit is defined as revenues minus costs of revenues. For the six-month period ended June 30, 2006 gross profit was Ps. 1,902.0 million, an improvement of Ps. 254.2 million, or 15%, over the same period in year 2005.Our gross margin reached 70% of total revenues for the six-month period ended June 30, 2006 compared with 69% in the same period in year 2005.

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Operating expenses. Operating expenses for the six-month period ended June 30, 2006 grew Ps. 86.4 million, or 10.3% to Ps. 921.8 million. During the same period of year 2005 this amount was Ps. 835.4 million. This increase was attributable primarily to salaries, rents, sales commissions and network maintenance based on the current operational level of the Company.

Depreciation and Amortization. Depreciation and amortization from continuing operations reached Ps. 675.8 million in the six-month period ended June 30, 2006 as compared to Ps. 545.5 million recorded in the same period in 2005, an increase of Ps. 130.4 million, or 24%. This increase in depreciation and amortization reflects the Company’s infrastructure growth.

Operating income. Due to the factors previously described, operating income totaled Ps. 304.3 million for the six-month period ended June 30, 2006 compared to Ps. 266.9 million for the same period in year 2005, a positive variation of Ps. 37.4 million, or 14%.

Comprehensive financial result. The comprehensive financial result was Ps. (256.7) million for the six month period ended June 30, 2006, compared to a comprehensive financial result of Ps. (62.8) million for the same period in year 2005. This decrease arose in part from the redemption of US$87,500,000 aggregate principal amount of our 11% senior notes due 2013 at a 111% redemption price during the first quarter of 2006. Additionally, the comprehensive financial result was also affected by the non-cash foreign exchange loss of Ps. 67.8 million, compared to a gain of Ps. 84.4 million in the same period in 2005 (for the period ended June 30, 2006, the Peso depreciated 5.7% against the US dollar, compared to 3.7% appreciation during the same period of 2005). The following table illustrates the comprehensive financial results:

Comprehensive Financial Result Comparison
	Six-month period ended June 30,		% of
Description	2006	2005	Change
Interest expense	Ps.(252.5)	Ps.(191.1)	32%
Interest income	55.7	27.2	105%
Foreign exchange (loss) gain, net	(67.8)	84.4	N/A
Monetary position gain	7.8	16.6	-53%
Total	Ps. (256.7)	Ps. (62.8)	308%

Net Income. We recorded net income of Ps. 21.6 million for the six-month period ended June 30, 2006 compared to Ps. 137.5 million in the six-month period ended June 30, 2005.

Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005

Revenues from Operations

Revenues from operations increased to Ps. 1,414.3 million in the second quarter of year 2006 from Ps. 1,241.3 million for the same period in 2005, an increase of Ps. 172.9 million or 14%. The average revenue per user decreased to Ps. 568.2 from Ps. 658.9.

Local services. Local service revenues amounted to Ps. 1,024.9 million for the three-month period ended June 30, 2006, compared to Ps. 892.1 million for the same period ended in 2005, an increase of Ps. 132.9 million or 15%. This increase was primarily due to higher monthly rent and cellular consumption, as a result of a more lines in service.

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Long distance services. Long distance service revenues amounted to Ps. 121.6 million for the three-month period ended June 30, 2006, compared to Ps. 115.8 million in the same period in 2005, an increase of Ps. 5.7 million or 5%. This increase resulted from higher long distance traffic, partially offset by pricing related to special offers.

Other services. Revenue from other services totaled Ps. 267.7 million in the second quarter of 2006, a positive variation of Ps. 34.3 million, or 15%, from Ps. 233.4 million registered in the same period in 2005. This positive variation resulted from increases in activation fees, equipment sales and other items in connection with lines installed during the period.

Cost of Revenues and Operating Expenses

Cost of Revenues. For the three-month period ended June 30, 2006, the cost of revenues totaled Ps. 433.6 million, an increase of Ps. 45.0 million compared with the same period of year 2005. This growth was due primarily to a Ps 40.8 million increase in our underlying costs related to calling party pays calls.

Gross profit. For the second quarter of 2006, gross profit accounted for Ps. 980.7 million, an increase of Ps. 127.9 million or 15%, over the same period in year 2005.Our gross margin remained in 69% of total revenues for the three-month period ended June 30, 2006.

Operating expenses. For the second quarter of year 2006, operating expenses grew Ps. 56.3 million, or 13%, totaling Ps. 477.7 million compared to Ps. 421.5 million for the same period in year 2005. The two main factors that generated this increase were the greater customer base and business scale in the twelve cities in operations in the second quarter of 2005, and the incremental expenses associated with the four new cities opened in 2006.

Depreciation and Amortization. As a result of the continuing expansion of our asset base, depreciation and amortization totaled Ps. 332.0 million in the three-month period ended June 30, 2006 as compared to Ps. 273.5 million for the same period in 2005, an increase of Ps. 58.5 million or 21%.

Operating income. Due to the factors previously described, operating income increased to Ps. 170.9 million for the three-month period ended June 30, 2006 as compared to Ps. 157.8 million for the same period in year 2005, an improvement of Ps. 13.1 million or, 8%.

Comprehensive financial result. The comprehensive financial result was Ps. (89.8) million for the three-month period ended June 30, 2006, as compared to Ps. 14.4 million for the same period in year 2005.

The following table illustrates the comprehensive financial results:

Comprehensive Financial Result Comparison
	Three-month period ended June 30,		% of
Description	2006	2005	Change
Interest expense	Ps. (65.1)	Ps. (91.2)	-28.5%
Interest income	13.7	9.7	41.2%
Foreign exchange (loss) gain, net	(40.6)	91.8	N/A
Monetary position gain	2.3	4.0	-44.2%
Total	Ps. (89.8)	Ps 14.4	N/A

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The loss evidenced in the second quarter of 2006 was a result of a significant non-cash foreign exchange loss of Ps. 40.6 million (for the quarter ended June 30, 2006, the Peso depreciated 4.0% against the US dollar), compared to a gain of Ps. 91.8 million in the same period in 2005 (for the quarter ended June 30, 2005, the Peso appreciated 4.0% against the US dollar), partially offset by a decrease of Ps. 26.1 million in interest expense due to our reduced indebtedness level.

Net Income. We registered Ps. 46.0 million for the three-month period ended June 30, 2006 compared to Ps. 122.6 million recorded in the three-month period ended June 30, 2005.

Liquidity and Capital Resources

Historically we have relied primarily on vendor financing, private equity contributions, the proceeds of the sale of securities, internal cash from operations and the proceeds from bank debt to fund our operations, capital expenditures and working capital requirements. Although we believe that we would be able to meet our debt service obligations and fund our operating requirements in the future with cash flow from operations, we may seek additional financing in the capital markets from time to time depending on market conditions and our financial requirements. We will continue to focus on investments in fixed assets and working capital management, including the collection of accounts receivable and management of accounts payable.

At June 30, 2006, we had cash and cash equivalents of Ps 1,034.1 million compared to cash and cash equivalents of Ps. 1,135.4 million at the same date in 2005.

Net cash provided by operating activities was Ps. 762.0 million for the six-month period ended June 30, 2006 compared to Ps. 476.8 million recorded in the same period of year 2005. Net cash provided by operating activities for the three-month period ended June 30, 2006 was Ps. 476.8 million compared to Ps. 423.8 for the same period ended 2005.

Net cash used in investing activities was Ps. (787.3) million for the first six months of year 2006 compared to Ps. (694.4) million recorded in the same period of year 2005. For the three-month period ended June 30, 2006 net cash used in investing activities reached Ps. (401.8) million vs. Ps. (330.7) million in the same period of year 2005. These cash flows primarily reflect investments in fixed assets of Ps. 758.5 million and Ps. 668.3 million for the six-month period ended June 30, 2006 and 2005, respectively. For the three-month period ended June 30, 2006 investment in fixed assets was Ps. 379.3 million, an increase of Ps. 54.3 million over the same period in 2005.

Net cash (used in) provided by financing activities from continuing operations were Ps. (852.4) million and Ps. 774.0 million for the six-month period ended June 30, 2006 and 2005, respectively. For the three-month period ended June 30, 2006, net cash provided by (used in) financing activities was Ps. 17.1 million compared to Ps. (259.4) million recorded in the same period of 2005.

We expect to make additional investments in future periods as we selectively expand our network within our coverage area and into other areas of the country in order to exploit market opportunities as well as to maintain our existing network and operating facilities.

Capitalization of preoperating expenses

We commenced commercial operations in June 1999. As permitted under Mexican GAAP, during our preoperating stage we were able to capitalize all of our general and administrative expenses and our net comprehensive cost of financing.

Beginning in June 1999, we are required to amortize all previously capitalized general and administrative expenses and to depreciate all previously capitalized net comprehensive cost of financing. These capitalized preoperating expenses are amortized on a straight-line basis for a period not exceeding ten years.

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Summary of contractual obligations

The following table discloses aggregate information about our contractual obligations and the periods in which payments are due.

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	pro forma, payments due by period (US$ in millions)
Contractual obligations:
Debt maturing within one year		3.8		3.8		-		-		-
Long-term debt		165.6		-		3.0		0.1		162.5
Interest payments		134.2		17.9		35.8		35.8		44.7
Operating leases		89.7		17.6		24.6		15.0		32.5
Nortel		1.9		-		-		1.9		-
Total contractual cash obligation		395.2		39.3		63.4		52.8		239.7

US GAAP Reconciliation

We describe below the principal differences between Mexican GAAP and US GAAP. See Note 12 to the unaudited consolidated financial statements for reconciliation to US GAAP of shareholders’ equity and net loss for the respective periods presented.

Recognition of the effects of inflation on financial information. Under Mexican GAAP, the effects of inflation are reflected in financial statements. Such a convention has no counterpart under US GAAP. However, although Mexican GAAP includes the effects of inflation in financial statements, the SEC does not require the restatement of financial statements to reconcile the effects of the Mexican GAAP inflation accounting.

Preoperating expenses. Under Mexican GAAP, all expenses incurred while a company is in the preoperating or development stages are deferred and considered as a component of a company’s assets. Such capitalized expenses are amortized on a straight-line basis for a period not exceeding 10 years after the corresponding asset commences operations. According to US GAAP, such preoperating or development expenses are expensed and reported as a deficit to shareholders’ equity recorded during the developing stage.

Deferred income tax and employees statutory profit sharing. Under Mexican GAAP deferred income tax is accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax and employees statutory profit sharing is recognized only for timing differences arising from the reconciliation of book income to income for profit sharing purposes, on which it may reasonably be estimated that a future liability or benefit will arise and there is no indication that the liabilities or benefits will not materialize. Under US GAAP, deferred income tax and employees statutory profit sharing are determined under the asset and liability method recognizing the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards.

Statement of changes in financial position. In accordance with Mexican GAAP, we present statements of changes in financial position in constant pesos. This presentation identifies the generation and application of resources representing differences between beginning and ending financial statements balances in constant pesos.

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The changes in the consolidated financial statement balances included in our unaudited consolidated financial statements constitute cash flow activity stated in constant pesos (including monetary losses which are considered as cash losses in the financial statements presented in constant pesos). SFAS No. 95 does not provide guidance with respect to inflation adjusted financial statements. However, US GAAP requires that non-cash financing and investing transactions should be excluded from the statement of cash flows and reported in related disclosures.

Capitalization of interest. In accordance with Mexican GAAP, capitalization of interest or, during inflationary periods, comprehensive cost of financing or income incurred in the period of construction and installation of an asset is permitted. The interest to be capitalized is that of the specific financing obtained for the construction of the related asset. Under US GAAP, capitalization of interest is required for certain qualifying assets that require a period of time to get them ready for their intended use. The amount of interest to be capitalized is that portion of the interest cost incurred during the assets’ acquisition period that theoretically could have been avoided if expenditures for the assets had not been made, and is not limited to indebtedness attributable to the asset.

Recently Issued Accounting Standards

Recently issued accounting pronouncements under Mexican GAAP

Through May 2004, the Accounting Principles Commission (Comisión de Principios de Contabilidad or CPC) of the Mexican Institute of Public Accountants was in charge of issuing accounting standards in Mexico. Those standards are contained in the Bulletins of Generally Accepted Accounting Principles (Bulletins), which are deemed standards, and in the Circulars, that are regarded as opinions or interpretations.

Beginning June 1, 2004, the aforementioned function was transferred to the Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF). CINIF is an entity whose objectives are to develop Financial Reporting Standards (FRS) in Mexico that are useful to both issuers and users of financial information, as well as to achieve as much consistency as possible with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board.

Through December 2005, CINIF has issued eight series A and one series B Financial Reporting Standards. Therefore, Mexican FRS currently include both the standards issued by CINIF and the Bulletins and Circulars issued by CPC, that have not been revised, substituted or superseded by the new FRS.

The principal changes included in the aforementioned FRS, which are effective for fiscal years beginning after December 31, 2005, are the following:

(a) Donations received are included in the results of operations, instead of in contributed capital.

(b) Elimination of special and extraordinary items, classifying income statement items as ordinary and non-ordinary.

(c) Retroactive recognition of the effects of changes in particular standards.

(d) Disclosure of the authorized date for issuance of financial statements, as well as the officer or body authorizing issuance.

We believe that the adoption of these recently issued accounting standards will not have an impact on our financial statements.

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Recently issued accounting pronouncements under US GAAP

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision to the previous Statement 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. For nonpublic companies, this Statement will require measurement of the cost of employees services received in exchange for stock compensation based on the grant-date fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. The adoption of this Statement will not have an effect on our financial statements.

In December 2004, the FASB issued FASB Statement No. 153, Exchanges of Non-monetary Assets, which eliminates an exception in APB 29 for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. This Statement will be effective for our company for nonmonetary asset exchanges occurring on or after January 1, 2006. The adoption of this Statement will not have a significant effect on our financial statements.

In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections. Statement 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. This statement will be effective for us for all accounting changes and any error corrections occurring after January 1, 2006.

In September 2005, the Emerging Issues Task Force issued EITF Issue No. 04-13 Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13 provides guidance as to when purchases and sales of inventory with the same counterparty should be accounted for as a single exchange transaction. EITF 04-13 will be applied to new arrangements entered into, and modifications or renewals of existing arrangements occurring after January 1, 2007. The applications of EITF 04-13 is not expected to have a significant impact on our financial statements.

Critical Accounting Policies

Our consolidated financial statements included elsewhere in this report have been prepared in accordance with Mexican GAAP, which differ in significant respects from US GAAP. See Note 12 to our consolidated financial statements, included elsewhere in this report, for a description of the principal differences between Mexican GAAP and US GAAP as they relate to us.

We have identified below the accounting policies we have applied under Mexican GAAP that are critical to understanding our overall financial reporting.

Income taxes

Under Mexican GAAP, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Significant judgment is required to appropriately assess the amounts of tax assets. We record tax assets when we believe there will be enough future taxable income for the realization of such deductible temporary

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difference. If this determination cannot be made, a valuation allowance is established to reduce the carrying value of the asset.

Deferred income tax and employees statutory profit sharing is recognized only for timing differences arising from the reconciliation of book income to income for profit sharing purposes, on which it may be reasonably estimated that a future liability or benefit will arise and there is no indication that the liabilities or benefits will not materialize.

Recognition of the effects of inflation

Under Mexican GAAP, the financial statements are restated to reflect the loss of purchasing power (inflation) of their functional currency. The inflation effects arising from holding monetary assets and liabilities are reflected in the income statements as monetary position result. Inventories, fixed assets and deferred charges, with the exception and the equity accounts, are restated to account for inflation using the Mexican National Consumer price Index (NCPI) published by Banco de Mexico (central bank). The result is reflected as an increase in the carrying value of each item. Income statement accounts are also restated for inflation into constant Mexican Pesos as of the reporting date.

Impairment of long-lived assets

We evaluate periodically the adjusted values of our property, plant, systems and equipment and other non-current assets, to determine whether there is an indication of potential impairment.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net revenues expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the asset exceeds the expected net revenues. Assets to be disposed of are reported at the lower of the carrying amount or realizable value.

Revenue Recognition

On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). This bulletin summarizes the point of view of the SEC in the recognition of revenues in the financial statements according to US GAAP. The SEC concluded that only when all the following conditions are met is revenue recognition appropriate:

(a)there is persuasive evidence of an agreement;

(b)the delivery was made or the services rendered;

(c)the sales price to the purchaser is fixed or determinable;

(d)collection is reasonably assured.

SAB 101, specifically in Topic 13A, Question 5, discusses the situation of recognizing as revenue certain non-refundable cash items. SAB 101 provides that the seller should not recognize non-refundable charges generated in certain transactions when there is continuous involvement by the vendor.

One of the examples provided by SAB 101 is activation revenues from telecommunication services. The SAB concludes that unless the charge for the activation service is an exchange for products delivered or services rendered that represent the culmination of a separate revenue-generating process, the deferral method of revenue is appropriate.

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Based on the provisions and interpretations of SAB 101, for purposes of the US GAAP reconciliation, we have deferred the activation revenues over a three-year period starting in the month such charge is originated. This period was determined based on our experience. The net effect of the deferral and amortization is presented in the above US GAAP reconciliation.

Estimated Useful Lives of Property, Plant and Equipment

We estimate the useful lives of particular classes of plant, property and equipment in order to determine the amount of depreciation expense to be recorded in each period. Depreciation expense is a significant element of our costs, amounting in 2005, 2004 and 2003 to Ps. 1,017.3 million, 923.6 million and 841.8 million., which amounts represent 25%, 28% and 27% or our operating costs and expenses respectively.

The estimates are based on historical experience with similar assets, anticipated technological changes and other factors, taking into account the practices of other telecommunications companies. We review estimated useful lives each year to determine whether they should be changed, and at times we have changed them for particular classes of assets. We may shorten the estimated useful life of an asset class in response to technological changes, changes in the market or other developments.

Financial Derivatives

We comply with the procedures of Bulletin C-10 of Mexican GAAP regarding the recording of derivative transactions. One of the objectives of this bulletin is to qualify the relation of the changes in the cash flows of the primary position to the changes in the net cash flows of the financial derivative. This allows us to calculate a “net” position at the end of a particular period, taking into account the exchange rate and the interest rate at the date the derivative is being analyzed. The net position will be recorded in our books.

This bulletin also calls for us to determine whether the derivative transaction is a net positive, giving effect to the methodology of the bulletin. If the net position is negative, the accounting treatment will vary.

Inventory

We periodically examine our inventory in order to determine its obsolescence. Based on these examinations, we might be required to establish reserves to provide for obsolescence. To date, we estimate that we are not required to establish such a reserve for that purpose.

Doubtful Accounts

We believe that proper management of our working capital is essential to successful management of our finances generally. For this reason, controlling and monitoring of our accounts receivable is a priority in daily financial management. In furtherance of the above, we have established a policy of reserving for all balances over 30 days past due.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks

Our primary foreign currency exposure relates to our US dollar-denominated debt. Most of our debt obligations at June 30, 2006 were denominated in US dollars. Therefore, we are exposed to currency exchange rate risks that could significantly affect our ability to meet obligations since our revenues are in pesos. On March 29, 2004, we entered into two separate derivative transactions denominated ‘‘Coupon Swap’’ agreements to hedge a portion of our U.S. dollar foreign exchange exposure resulting from the issuance of our US$175.0 million 11% senior notes due 2013. Under the transactions, we will receive semi-annual payments based on the aggregate notional amount of US$113.8 million at an annual rate of 11%, and we will make semiannual payments calculated based on the aggregate of Ps. 1,270.0 million at an annual rate of 12.3%. Both of these transactions will terminate in December 2008. During June 2005, we entered into two separate derivative transactions, which will cover the remaining portion of our US foreign exchange exposure. Under these transactions we will receive semi-annual payments based on the aggregate notional amount of US$136.2 million at an annual rate of 11%, and we will make semiannual payments calculated based on the aggregate of Ps. 1,480.0 million at an annual rate of 12.26%. Both transactions will also terminate in December 2008.

The following table provides information about the details of our option contracts as of June 30, 2006:

(Amounts in millions)	Currencies		Interest Rates
Maturity date	Notional amount	Notional amount	Axtel receives	Axtel pays	Estimated fair value
December 15, 2008	US$ 113.8	Ps. 1,270	11.00%	12.30%	US$ (2.4)
December 15, 2008	US$ 136.2	Ps. 1,480	11.00%	12.26%	US$(1.6)

Prior to entering into foreign currency hedging contracts, we evaluate the counterparties’ credit ratings. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. We do not currently anticipate non-performance by such counterparties.

The exchange rate of the peso to the US dollar is a freely floating rate and the peso has experienced significant devaluation in previous years. Any significant decrease in the value of the peso relative to the US dollar in the near term may have a material adverse effect on our results of operations and financial condition, including our ability to repay or repurchase the notes.

ITEM 4.CONTROLS AND PROCEDURES

Not applicable.

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PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

For information relating to our legal proceedings, please see our Registration Statement on Form F-4 (Reg. No. 333-123608). There have been no material changes in our legal proceedings from that described in the Registration Statement, except for the Metronet Disputes, which have the following developments:

In October 2002, Metronet, S.A. de C.V. (‘‘Metronet’’) filed an action against us in the Fourth Civil Court in Monterrey (Mexico). Metronet claims that we wrongfully terminated a letter of intent and is seeking payment for services and direct damages of approximately US$3.8 million, plus other expenses and attorneys’ fees. The trial court ruled against us. Then, on appeal, the State Superior Court of Appeals ruled in our favor, releasing us of any liability and responsibility on the grounds that such letter of intent itself did not constitute a binding final agreement but a promise to enter a future contract. On November 12, 2004, Metronet requested constitutional review challenging such State Superior Court’s decision. On May 27, 2005, the Mexican Federal Court resolved the constitutional review requested by Metronet by ordering the State Superior Court of Appeals to review the case and to issue a new resolution. On July 7, 2005 the State Superior Court of Appeals again ruled in favor of Axtel, releasing us of any liability and responsibility. On August 5, 2005, Metronet requested constitutional review challenging the State Superior Court’s decision. . On January 20, 2006, the Mexican Federal Court resolved the constitutional review requested by Metronet by ordering the State Superior Court of Appeals to review the case and to issue a new resolution. On April 18, 2005 the State Superior Court of Appeals issued a new resolution awarding Metronet damages of approximately US$ 5.4 million. On May 16, 2006, Metronet requested constitutional review, challenging the State Superior Court’s decision. Axtel, on May 22, 2006, also requested constitutional review, challenging the State Superior Court’s decision. Currently the Mexican Federal Court is reviewing and resolution is pending.

ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5.OTHER INFORMATION

Not applicable.

ITEM 6.EXHIBITS AND REPORTS

Not applicable.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Axtel, S.A. de C.V. By:/s/ Patricio Jimenez Barrera Patricio Jimenez Barrera Chief Financial Officer
Date:August 15, 2006

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