##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F





(Mark One)

| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2009

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

OR



| ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Commission file number: 001-31894





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

(Exact name of Registrant as specified in its charter)





ALESTRA

(Translation of Registrants name into English)





United Mexican States

(Jurisdiction of incorporation or organization)

Ave. Lázaro Cárdenas No. 2321, 9th Floor

Col. Residencial San Agustín

Garza García N.L. 66260 México

(Address of principal executive offices)

Sergio Bravo

(52) 81 86 25 22 01

(52) 81 86 25 21 00 ext. 2493 - Fax

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

Ave. Lázaro Cárdenas No. 2321, 9th Floor

Col. Residencial San Agustín

Garza García N.L. 66260 México

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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

11.750% Senior Notes due 2014

(Title of Class)





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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.    Yes   ̈    No  x

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

 ̈  Large accelerated filer     ̈  Accelerated filer    x  Non-accelerated
filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 ̈  U.S.
GAAP     ̈  International Financial Reporting Standards as issued by the International Accounting Standards
Board    x  Other

If Other has been checked in
response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17   ̈    Item
18  x

If this is an annual report, indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes   ̈    No  x









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##### Table of Contents

TABLE OF CONTENTS



|                                                   |  |                                                                               |  |   
|-------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --
|CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS |  | 1                                                                            
|Item 1.                                            |  | Identity of Directors, Senior Management and Advisers.                        |  | 2 
|Item 2.                                            |  | Offer Statistics and Expected Timetable.                                      |  | 2 
|Item 3.                                            |  | Key Information.                                                              |  | 2 
|Item 4.                                            |  | Information on the Company.                                                   |  | 11
|Item 4.A.                                          |  | Unresolved Staff Comments.                                                    |  | 30
|Item 5.                                            |  | Operating and Financial Review and Prospects.                                 |  | 30
|Item 6.                                            |  | Directors, Senior Management and Employees.                                   |  | 48
|Item 7.                                            |  | Major Shareholders and Related Party Transactions.                            |  | 50
|Item 8.                                            |  | Financial Information.                                                        |  | 51
|Item 9.                                            |  | The Offer and Listing.                                                        |  | 51
|Item 10.                                           |  | Additional Information.                                                       |  | 52
|Item 11.                                           |  | Quantitative and Qualitative Disclosures About Market Risk.                   |  | 58
|Item 12.                                           |  | Description of Securities Other Than Equity Securities.                       |  | 59
|Item 13.                                           |  | Defaults, Dividend Arrearages and Delinquencies.                              |  | 59
|Item 14.                                           |  | Material Modifications to the Rights of Security Holders and Use of Proceeds. |  | 59
|Item 15.                                           |  | Controls and Procedures.                                                      |  | 59
|Item 16.                                           |  | Reserved.                                                                     |  | 60
|Item 16.A.                                         |  | Audit Committee Financial Expert                                              |  | 60
|Item 16.B.                                         |  | Code of Ethics                                                                |  | 60
|Item 16.C.                                         |  | Principal Account Fees and Services                                           |  | 60
|Item 16.D.                                         |  | Exemptions from the Listing Standards for Audit Committees                    |  | 60
|Item 16.E.                                         |  | Purchases of Equity Securities by the Issuer and Affiliated
Purchasers        |  | 60
|Item 16.F.                                         |  | Change in Registrants Certifying Accountant                                  |  | 60
|Item 16.G.                                         |  | Corporate Governance                                                          |  | 60
|Item 17.                                           |  | Financial Statements.                                                         |  | 60
|Item 18.                                           |  | Financial Statements.                                                         |  | 61
|Item 19.                                           |  | Exhibits.                                                                     |  | 61
|Index to the Financial Statements                  |  | F-1                                                                          



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##### Table of Contents

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

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

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

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



| |  |  | general economic conditions in Mexico, the United States and any significant economic or political developments in those countries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the competitive nature of providing long distance, data, internet and local services;
| | - |  | -------------------------------------------------------------------------------------



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



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



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



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



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



| |  |  | Interest rate levels;
| | - |  | ---------------------



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



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



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



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



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



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

Other matters set forth in this annual report may also cause actual results in the future to differ materially from those described in the
forward-looking statements, including those set forth in Risk Factors in this annual report. Accordingly, investors are cautioned not to place undue reliance on the forward-looking statements in this annual report. We undertake no
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report
might not occur. See Item 5, Operating and Financial Review and Prospects.



1



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##### Table of Contents

PART I

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

Not applicable.

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

Item 3. Key Information.

A. Selected Financial Data

The following tables set forth summary historical financial data for Alestra and its consolidated subsidiary. The financial information
presented as of and for the fiscal years ended December 31, 2008 and 2009 was derived from our audited consolidated financial statements included elsewhere in this annual report. The financial information presented as of and for the fiscal
years ended December 31, 2005, 2006 and 2007 was derived from our audited financial statements that are not included in this annual report. We use Pesos to refer to Mexican Pesos throughout this document.

Our consolidated financial statements have been prepared in accordance with Mexican Financial Reporting Standards (Mexican
FRS) as promulgated by the Mexican financial reporting standards board (Consejo Mexicano para la Investigación y Desarollo de Normas de Información Financiera, or CINIF). Mexican FRS differs in certain
significant respects from accounting principles generally accepted in the United States (U.S. GAAP). Note 20 to our consolidated financial statements provides information relating to the nature and effect of such differences, as they
relate to us, and provides a reconciliation to U.S. GAAP of net income and total stockholders equity.

Mexican FRS
requires that all financial information as of December 31, 2007, and prior periods, be presented in Pesos of purchasing power as of December 31, 2007 and financial information beginning January 1, 2008 and for later periods be
presented in adjusted nominal Pesos. Due to the implementation of the new Mexican Financial Information Standard (Norma de Información Financiera, or NIF) B-10 Inflation Effects, financial information as of
January 1, 2008 and later periods is presented in adjusted nominal Pesos, as the information includes the cumulative inflation effects up to December 31, 2007, but will not include any future inflation adjustments. References in this
annual report to amounts in nominal Pesos are to Pesos that have not been adjusted for inflation. See Note 2 to our consolidated financial statements for further details regarding the change in Mexican FRS. Although the restatement of
nominal Peso amounts into constant Peso amounts lessens the distorting effect that inflation has on comparisons of financial statements over time, this restatement does not wholly eliminate those distortions, and evaluation of period-to-period
trends may be difficult.

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



|                                                     |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|---------------------------------------------------- |  | ----------------------------------------- | ------ | - | -------- | --- | ------ | -------- |  | --- | -------- | - |  | -------- | ------ | - |  | --- | ------ | -
|                                                     |  | As of and for the year ended December 31, |       
|                                                     |  | 2005 (1)                                  |        |   | 2006 (1) |     |        | 2007 (1) |  |     | 2008 (2) |   |  | 2009 (2) |       
|                                                     |  | (in millions, unless otherwise indicated) |       
|STATEMENT OF OPERATION                               |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Mexican FRS:                                         |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Revenues:                                            |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Long distance services                               |  | Ps.                                       | 2,327  |   |          | Ps. | 2,189  |          |  | Ps. | 2,415    |   |  | Ps.      | 1,722  |   |  | Ps. | 1,421  |  
|Data, internet and local services                    |  |                                           | 2,068  |   |          |     | 2,346  |          |  |     | 2,641    |   |  |          | 2,950  |   |  |     | 3,263  |  
|                                                     |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Total                                                |  |                                           | 4,395  |   |          |     | 4,536  |          |  |     | 5,056    |   |  |          | 4,673  |   |  |     | 4,684  |  
|Cost of services (excluding depreciation):           |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Long distance services                               |  |                                           | (1,139 | ) |          |     | (1,120 | )        |  |     | (1,460   | ) |  |          | (1,042 | ) |  |     | (956   | )
|Data, internet and local services                    |  |                                           | (523   | ) |          |     | (608   | )        |  |     | (758     | ) |  |          | (747   | ) |  |     | (781   | )
|Total                                                |  |                                           | (1,663 | ) |          |     | (1,729 | )        |  |     | (2,218   | ) |  |          | (1,789 | ) |  |     | (1,737 | )
|Administration, selling and other operating expenses |  |                                           | (1,526 | ) |          |     | (1,536 | )        |  |     | (1,513   | ) |  |          | (1,552 | ) |  |     | (1,529 | )
|Depreciation and amortization                        |  |                                           | (1,016 | ) |          |     | (1,084 | )        |  |     | (870     | ) |  |          | (757   | ) |  |     | (854   | )
|Operating income                                     |  |                                           | 191    |   |          |     | 187    |          |  |     | 455      |   |  |          | 575    |   |  |     | 564    |  



2



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|                                                     |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|---------------------------------------------------- |  | ----------------------------------------- | ------ | - | -------- | --- | ------ | -------- |  | --- | -------- | - |  | -------- | ------ | - |  | --- | ------ | -
|                                                     |  | As of and for the year ended December 31, |       
|                                                     |  | 2005 (1)                                  |        |   | 2006 (1) |     |        | 2007 (1) |  |     | 2008 (2) |   |  | 2009 (2) |       
|                                                     |  | (in millions, unless otherwise indicated) |       
|Comprehensive financial result (3)                   |  |                                           | (116   | ) |          |     | (292   | )        |  |     | (180     | ) |  |          | (944   | ) |  |     | (221   | )
|Other (expenses) income (8)                          |  |                                           | (19    | ) |          |     | (15    | )        |  |     | 1        |   |  |          | (50    | ) |  |     | (73    | )
|Asset tax                                            |  |                                           | (3     | ) |          |     | (3     | )        |  |     | (3       | ) |  |          |       |   |  |     |       |  
|Income tax                                           |  |                                           |       |   |          |     |       |          |  |     | (86      | ) |  |          | 35     |   |  |     | 22     |  
|Net (loss) income                                    |  |                                           | 52     |   |          |     | (124   | )        |  |     | 188      |   |  |          | (384   | ) |  |     | 291    |  
|U.S. GAAP: (4)                                       |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Revenues:                                            |  |                                           | 4,395  |   |          |     | 4,536  |          |  |     | 5,056    |   |  |          | 4,673  |   |  |     | 4,684  |  
|Cost of services (excluding depreciation):           |  |                                           | (1,663 | ) |          |     | (1,729 | )        |  |     | (2,218   | ) |  |          | (1,789 | ) |  |     | (1,737 | )
|Administration, selling and other operating expenses |  |                                           | (1,548 | ) |          |     | (1,535 | )        |  |     | (1,514   | ) |  |          | (1,543 | ) |  |     | (1,531 | )
|Depreciation and amortization                        |  |                                           | (893   | ) |          |     | (977   | )        |  |     | (945     | ) |  |          | (895   | ) |  |     | (904   | )
|Operating income                                     |  |                                           | 292    |   |          |     | 294    |          |  |     | 379      |   |  |          | 446    |   |  |     | 512    |  
|Comprehensive financial result                       |  |                                           | 188    |   |          |     | (2     | )        |  |     | 63       |   |  |          | (718   | ) |  |     | 103    |  
|Net income (loss)                                    |  | Ps.                                       | 461    |   |          | Ps. | 301    |          |  | Ps. | 299      |   |  | Ps.      | (227   | ) |  | Ps. | 648    |  
|BALANCE SHEET                                        |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Mexican FRS:                                         |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Cash and cash equivalents                            |  | Ps.                                       | 993    |   |          | Ps. | 745    |          |  | Ps. | 283      |   |  | Ps.      | 203    |   |  | Ps. | 317    |  
|Restricted Cash                                      |  |                                           |       |   |          |     | 161    |          |  |     | 166      |   |  |          |       |   |  |     | 318    |  
|Trade receivables, net                               |  |                                           | 382    |   |          |     | 406    |          |  |     | 472      |   |  |          | 516    |   |  |     | 494    |  
|Property and equipment, net                          |  |                                           | 5,657  |   |          |     | 5,243  |          |  |     | 5,133    |   |  |          | 5,169  |   |  |     | 5,205  |  
|Other assets                                         |  |                                           | 1,076  |   |          |     | 703    |          |  |     | 490      |   |  |          | 453    |   |  |     | 581    |  
|                                                     |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Total assets                                         |  |                                           | 8,108  |   |          |     | 7,258  |          |  |     | 6,544    |   |  |          | 6,341  |   |  |     | 6,915  |  
|8% Senior Notes due 2010                             |  |                                           | 4,408  |   |          |     | 3,211  |          |  |     | 2,581    |   |  |          | 2,701  |   |  |     |       |  
|11.750% Senior Notes due 2014                        |  |                                           |       |   |          |     |       |          |  |     |         |   |  |          |       |   |  |     | 2,612  |  
|Bank loans, notes payable and capital leases         |  |                                           | 84     |   |          |     | 608    |          |  |     | 393      |   |  |          | 473    |   |  |     | 597    |  
|                                                     |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Total debt                                           |  |                                           | 4,492  |   |          |     | 3,818  |          |  |     | 2,974    |   |  |          | 3,174  |   |  |     | 3,209  |  
|Accounts payable                                     |  |                                           | 762    |   |          |     | 587    |          |  |     | 399      |   |  |          | 521    |   |  |     | 763    |  
|Dividends payable                                    |  |                                           |       |   |          |     |       |          |  |     |         |   |  |          |       |   |  |     | 131    |  
|Other payables (9)                                   |  |                                           | 310    |   |          |     | 460    |          |  |     | 487      |   |  |          | 423    |   |  |     | 499    |  
|Deferred income taxes                                |  |                                           |       |   |          |     |       |          |  |     | 86       |   |  |          | 6      |   |  |     |       |  
|Total liabilities                                    |  |                                           | 5,563  |   |          |     | 4,866  |          |  |     | 3,946    |   |  |          | 4,125  |   |  |     | 4,602  |  
|Contributed capital                                  |  |                                           | 1,395  |   |          |     | 1,395  |          |  |     | 1,395    |   |  |          | 1,395  |   |  |     | 1,395  |  
|Retained earnings                                    |  |                                           | 1,152  |   |          |     | 997    |          |  |     | 1,203    |   |  |          | 821    |   |  |     | 919    |  
|                                                     |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Total stockholders equity                           |  | Ps.                                       | 2,546  |   |          | Ps. | 2,393  |          |  | Ps. | 2,598    |   |  | Ps.      | 2,217  |   |  | Ps. | 2,314  |  
|U.S. GAAP: (4)                                       |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Property and equipment, net                          |  | Ps.                                       | 6,122  |   |          | Ps. | 5,586  |          |  | Ps. | 5,319    |   |  | Ps.      | 5,220  |   |  | Ps. | 5,205  |  
|Total assets                                         |  |                                           | 8,237  |   |          |     | 7,597  |          |  |     | 6,800    |   |  |          | 6,346  |   |  |     | 6,846  |  
|Total stockholders equity                           |  |                                           | 1,481  |   |          |     | 1,779  |          |  |     | 2,075    |   |  |          | 1,852  |   |  |     | 2,299  |  
|CASH FLOW DATA:                                      |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Resources provided by (used in) (5)                  |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Mexican FRS:                                         |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Operating activities                                 |  | Ps.                                       | 1,122  |   |          | Ps. | 1,065  |          |  | Ps. | 997      |   |  | Ps.      | 1,283  |   |  | Ps. | 1,768  |  
|Investing activities                                 |  |                                           | (360   | ) |          |     | (640   | )        |  |     | (615     | ) |  |          | (834   | ) |  |     | (899   | )
|Financing activities                                 |  |                                           | (476   | ) |          |     | (673   | )        |  |     | (844     | ) |  |          | (722   | ) |  |     | (483   | )
|U.S. GAAP: (4)                                       |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Operating activities                                 |  | Ps.                                       | 804    |   |          | Ps. | 1,006  |          |  | Ps. | 809      |   |  | Ps.      | 1,048  |   |  | Ps. | 1,450  |  
|Investing activities                                 |  |                                           | (435   | ) |          |     | (769   | )        |  |     | (543     | ) |  |          | (668   | ) |  |     | (899   | )
|Financing activities                                 |  |                                           | (105   | ) |          |     | (447   | )        |  |     | (701     | ) |  |          | (461   | ) |  |     | (483   | )
|OTHER FINANCIAL/OPERATING DATA:                      |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|(Unaudited):                                         |  |                                           |        |   |          |     |        |          |  |     |          |   |  |          |        |   |  |     |        |  
|Capital expenditures                                 |  | Ps.                                       | 368    |   |          | Ps. | 482    |          |  | Ps. | 600      |   |  | Ps.      | 793    |   |  | Ps. | 937    |  
|Minutes of traffic, domestic long distance           |  |                                           | 1,628  |   |          |     | 1,994  |          |  |     | 1,879    |   |  |          | 1,760  |   |  |     | 1,641  |  
|Minutes of traffic, international long distance      |  |                                           | 2,362  |   |          |     | 2,197  |          |  |     | 1,392    |   |  |          | 862    |   |  |     | 485    |  
|Employees (6)                                        |  |                                           | 1,933  |   |          |     | 1,899  |          |  |     | 1,902    |   |  |          | 1,766  |   |  |     | 1,699  |  
|Residential lines (7)                                |  |                                           | 371    |   |          |     | 327    |          |  |     | 285      |   |  |          | 173    |   |  |     | 116    |  
|On-net customer locations  type I (10)              |  |                                           | 2,738  |   |          |     | 2,864  |          |  |     | 3,440    |   |  |          | 4,119  |   |  |     | 4,519  |  
|On-net customer locations  type II (11)             |  |                                           | 4,643  |   |          |     | 6,017  |          |  |     | 7,259    |   |  |          | 8,015  |   |  |     | 7,800  |  
|Customer access circuits  E0 equivalents (12)       |  |                                           | 222    |   |          |     | 276    |          |  |     | 377      |   |  |          | 518    |   |  |     | 617    |  



3



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|(1) | Information as of and for the years ended December 31, 2005, 2006 and 2007 is expressed in millions of Pesos with purchasing power as of December 31, 2007,
except as otherwise indicated.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Information as of and for the years ended December 31, 2008 and 2009 is expressed in millions of adjusted nominal Pesos, except as otherwise indicated.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes interest expense, interest income, net exchange gain (loss), effect of derivative instruments and net gain from monetary position.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(4) | See Note 20 to our consolidated financial statements.
|--- | -----------------------------------------------------

|(5) | Through December 31, 2007, under Mexican FRS, the changes in financial position for operation activities, financing and investing were presented in the statements
of changes in financial position. On January 1, 2008, Mexican FRS B-2 Statement of Cash Flows became effective on a prospective basis. As a result, management has included the statements of cash flow for the years ended
December 31, 2008 and 2009. See Note 2 to our consolidated financial statements for further information regarding this change. Due to the adoption of Mexican FRS B-2 Statement of Cash Flows, 2008 and 2009 information is not directly
comparable to 2007, 2006 and 2005 information. The criteria for determining resources used in, or generated from, operating, investing and financing activities under the new Mexican FRS B-2 Statement of Cash Flows is different from prior
years. See Note 2 to our consolidated financial statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Actual number of employees, not in millions.
|--- | --------------------------------------------

|(7) | In thousands, not millions.
|--- | ---------------------------

|(8) | In accordance with Mexican FRS as required by NIF B-3 and the Interpretation of Financial Information Standard (Interpretación a las Normas de
Información Financiera or INIF) 4 Presentation of Employee Statutory Profit-Sharing in the Income Statement, beginning on January 1, 2007, employee statutory profit-sharing and special items are presented in
other income (expenses), net. For comparability purposes, the financial information for the years ended December 31, 2007, 2006 and 2005 in the table above also reflects statutory employee profit sharing and special item in other income
(expenses), net.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | On January 1, 2008 the standards contained in Mexican FRS D-3 Employee benefits became effective. This standard requires, among other things, a
reduction in the amortization period of items relating to the prior service cost, incorporation of the effects of salary growth in the calculation of the defined benefit obligation, as well as the elimination of the additional minimum liability and
corresponding intangible asset and the amount recorded in stockholders equity. From January 1, 2008 onwards, the transitional liability is amortized over the lesser of the period pending to be amortized or five years. Prior to
January 1, 2008, the actuarial gains and losses and transition liability captions subject to amortization were amortized on the basis of the average estimated service lives of the employees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Represents actual number of discrete customer locations that are connected to our network via dedicated company-owned access circuits, both fiber-optic and wireless.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Represents actual number of discrete customer locations that are connected to our network via dedicated access circuits leased from third-party carriers.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | In thousands of total E0 equivalents of customer access circuits providing data, internet and local services. E0 is a standardized measure of circuit capacity of 64
kilobits per second adopted by the International Telecommunication Union Telecommunication Standardization Sector (ITU-T) that is widely used in most countries outside the United States, Canada and Japan.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rate Information

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



|              |  |                                   |  |       |  |            |  |           
|------------- |  | --------------------------------- |  | ----- |  | ---------- |  | ----------
|              |  | Noon Buying Rate(Peso per Dollar)
|Year          |  | High                              |  | Low   |  | Average(1) |  | Period End
|2005          |  | 11.41                             |  | 10.41 |  | 10.87      |  | 10.63     
|2006          |  | 11.46                             |  | 10.43 |  | 10.90      |  | 10.80     
|2007          |  | 11.27                             |  | 10.67 |  | 10.93      |  | 10.92     
|2008          |  | 13.94                             |  | 9.92  |  | 11.21      |  | 13.83     
|2009          |  | 15.41                             |  | 12.63 |  | 13.58      |  | 13.06     
|              |  |                                   |  |      
|Month         |  |                                   |  |       |  |            |  |           
|January 2010  |  | 13.06                             |  | 12.65 |  | 12.81      |  | 13.03     
|February 2010 |  | 13.19                             |  | 12.76 |  | 12.94      |  | 12.76     
|March 2010    |  | 12.74                             |  | 12.30 |  | 12.57      |  | 12.30     



|(1) | Yearly basis on average of month-end rates and monthly basis on average of day-end rates.
|--- | -----------------------------------------------------------------------------------------



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##### Table of Contents

On April 16, 2010 the noon buying rate as provided by The Federal Reserve Bank of New York was Ps.
12.2698 per US$1.

B. Capitalization and Indebtedness

Not applicable.

C.
Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Relating to Us

Weakening economic conditions adversely affect us.

The global economy is currently undergoing a period of slowdown and unprecedented volatility, widely viewed as a recession, and the future
economic environment may continue to be less favorable than that of recent years. Global economic slowdowns and U.S. economic slowdowns in particular may have, and in the case of the current slowdown, have had, a negative impact on the Mexican
economy and on our business. See  Risks Relating to Mexico  Downturns in the Mexican economy adversely affect us.

Our level of indebtedness could affect our ability to operate and develop our business or service our debt, including our notes.

We currently have a significant amount of debt, and we may incur additional debt in the future. As of
December 31, 2009, we had a consolidated total indebtedness of Ps. 3,208.6 million. Our significant level of debt could have important consequences to you, including:



| |  |  | requiring that a substantial portion of our cash flows from operations be used for the payment of principal and interest on our debt, therefore
reducing the funds available to us for our operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, changes in our business and our industry because our available cash flow after paying
principal and interest on our debt may not be sufficient to make the expenditures necessary to address these changes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash
flow, we will be required to devote a proportionally greater amount of our cash flow to paying principal and interest on our debt;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our ability to obtain additional financing in the future to fund working capital, capital expenditures and general corporate requirements;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | making it difficult for us to refinance our indebtedness or to refinance such indebtedness on favorable terms;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | placing us at a competitive disadvantage to other relatively less leveraged competitors that have more cash flow available to fund working capital,
capital expenditures and general corporate requirements; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | leaving us vulnerable to increases in interest rates affecting our variable rate debt.
| | - |  | --------------------------------------------------------------------------------------

Although the indenture governing our notes contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to
qualifications and exceptions, and the indebtedness that we may incur in compliance with these restrictions could be substantial.

We are exposed to risks associated with turmoil in the financial markets.

Global credit and capital markets have recently undergone significant disruption, making it difficult for many businesses to obtain
financing on acceptable terms. If these conditions continue or worsen, our cost of borrowing may increase, and it may be more



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##### Table of Contents

difficult to refinance our current debt and to obtain financing in the future, which could negatively affect our business and operating results. We also face challenges relating to the impact of
the disruption in the global financial markets on parties with which we do business, such as customers, vendors and other parties. The inability of these parties to obtain financing on acceptable terms could impair their ability to perform under
their agreements with us and lead to various negative effects on us.

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

We are dependent on domestic and international long distance services, which accounted for 30.3% of our revenues in 2009, 36.9% of our
revenues in 2008 and 47.8% of our revenues in 2007. Average prices for domestic long distance calls in Mexico declined more than 80% in real terms from December 1996 to December 2009. Since there is an oversupply of fiber optic capacity,
our competitors can increase their long distance traffic volumes without incurring any significant costs other than those related to the acquisition of customers. If our competitors continue to attempt to increase market share by reducing the price
they charge for long distance calls, we expect that our revenues will continue to decrease as our customers switch to our competitors, or as we are forced to reduce our rates to remain competitive. Our revenues from long distance services may
continue to decline as a result of severe competition and the oversupply of fiber optic capacity.

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

As a result of our decreasing revenues from long distance services, we have been refocusing our resources and marketing efforts on
capturing future growth in local, data and internet related services in Mexico. This strategy poses many risks, including but not limited to:



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



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



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



| |  |  | the superior competitive position of some of our competitors, including Teléfonos de México S.A.B. de C.V. (Telmex), which is
the dominant provider of telecommunications services in Mexico and who may be better positioned to offer business clients, our primary target market, bundled data and voice services at lower prices;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | new competition from cable TV and terrestrial microwave TV providers, who provide data voice services and internet broadband services to the Mexican
public; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the development of WiFi/WiMax technology in Mexico, which could allow our competitors to capture even more of the broadband services market and more
spectrum in case the regulator decides to auction available frequencies without certain limitations to those who already have spectrum.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Historically, we have relied on the use of the AT&T service mark together with our new Alestra registered service
mark to market all of our services to our customers; however, under our Service Mark License Agreement, our current ability to use the AT&T brand name and service mark is limited and we have to rely on the Alestra brand name and service mark.

Commencing on November 18, 2007, we began solely using the Alestra brand to market our services in Mexico and
stopped using the AT&T mark and logo in all of our materials. Prior to that date, we were only able to use the AT&T name as a tag line below our Alestra mark. Pursuant to our Amended and Restated Service Mark License Agreement (our
Service Mark License Agreement) dated as of October 17, 1996 and amended February 13, 2003 and November 30, 2005 with AT&T Inc. (AT&T), we ceased using the AT&T name as a tag line on
November 18, 2008. We are permitted to use the AT&T Global Services phrase for the limited purpose of providing AT&T Global Services within Mexico on a nonexclusive basis until June 2010. As a result of these brand
changes we have had to rely on our own brand and marketing to sell our services.



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Developing the Alestra brand and service marks has been subject to numerous risks, and we
may not be successful in effectively positioning our new brand and service marks. These risks include:



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



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

We cannot predict whether we will be able to successfully continue to develop our own brand name and the
results in using our own brand. If we are unsuccessful in developing or positioning our own brand name, our operating results and financial condition would be adversely impacted.

Our equity holders, AT&T and Alfa, may have differing interests.

AT&T Telecom Mexico Inc. (AT&T Mexico), is the direct holder of AT&Ts equity interest in us. AT&T Mexico
and Alfa S.A.B. de C.V. (Alfa) currently are able to elect all of our directors and are able to exercise control over our business, policies and affairs. AT&T Mexico is able to elect four of our nine directors. AT&T is also the
second largest shareholder of Telmex, our principal competitor, which may create conflicts of interest between AT&T on the one hand and Alfa or us on the other. The failure of AT&T and Alfa to reach an agreement on how we operate our
business may delay or inhibit us from exercising our business strategy.

As a result of technological advances,
regulatory changes and the lack of enforcement of regulations, we are facing additional competition from new market participants, which may result in lower prices for telecommunication services, lower margins, and/or a loss of market share.

As a result of technological advances and regulatory changes, cable network operators entered the Mexican telecommunications
market with bundled and convergent services, increasing the level of competition. Several cable network providers have requested the Secretaría de Comunicaciones y Transportes (the SCT) to amend their concession titles to
offer telephone services. The SCT has passed a resolution that allows cable network operators to provide voice services, as well as telecommunications entrants to offer video services under particular conditions. Also, the SCT has granted several
concessions to cable networks operators to offer telephone services.

In addition, since the SCT has not been able to enforce
regulations to stop the illegal provision of Voice Over Internet Protocol (VoIP) services by entities without a concession, several international VoIP providers target the Mexican telecommunications market to illegally offer telephone
services through the Internet.

Additionally, the SCT is considering the auctioning of the 1850-1910/1930-1990 MHz, 3400-3700
MHz and 1710-1770/2110-2170 MHz spectrum segments to take place in 2010 that could open the market to new concessionaires and technologies, such as WiMax, that could also compete with some of the services we provide.

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

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

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



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



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



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



| |  |  | anti-competitive practices by our competitors;
| | - |  | ----------------------------------------------



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



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



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



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

The telecommunications industry is subject to continuous, rapid
and significant changes in technology and introductions of new products and services. These include evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products,
enhancements and changes in end-user needs and preferences, and continuing developments of alternative technologies in mobile and fixed-line telephony, high-speed data communications, satellite direct services and internet related services. We
expect that new services and technologies applicable to our market will continue to emerge and we cannot predict the effect of technological changes on our business. For example, the Internet represents an increasingly important medium for voice
communication and may displace traditional long distance services, which represent an important part of our business. Our competitors may implement superior new technologies, allowing them to provide lower priced or higher quality services than we
do. Any such new service offerings may:



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



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



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

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

Telmex exerts significant influence on all aspects of the telecommunications market in Mexico, including interconnection, on which we
depend to service most of our customers. Telmex is well capitalized and has substantially greater financial, technical and marketing resources, larger customer bases and more established relationships in the telecommunications industry than we do.
With these advantages, and as the dominant provider of telecommunications services in Mexico, Telmex has a significant competitive advantage over us. If Telmex were to engage in price squeezing or predatory pricing, we would be unable to
competitively price our services and could experience significant loss in market share and revenues.

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

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

Our network is the source of nearly all of our revenues. While to date we have not experienced any
serious technical problems or damage, if our network suffered technical problems or damage, our ability to provide telecommunications services to our customers would be impaired, which could cause us to lose customers and thus adversely impact our
revenues.

It may be difficult to enforce civil liabilities against us or our directors, officers and controlling
persons.

We are organized under the laws of Mexico. Most of our directors, officers and controlling persons reside
outside the United States, and a significant portion of the assets of these directors, officers and controlling persons, and all of our assets, are located outside of the United States. As a result, it may be difficult for you to effect service of
process within the United States upon these persons or to enforce against them or us in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the U.S. There is doubt as to the enforceability, in
original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability
provisions of U.S. federal securities laws.

Risks Relating to the Mexican Regulatory Environment

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

The operation of telecommunications systems in Mexico, including ours, has been subject to laws and regulations administered by the SCT
and the Comisión Federal de Telecomunicaciones (Cofetel). An amendment to the internal operating rules of the SCT (Reglamento Interior) was issued during 2008, increasing the authority granted to the SCT by allowing
it to assume certain responsibilities of Cofetel; however, in November 2009, the Mexican Supreme Court overruled the amendment and restored the authority previously granted.



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On July 5, 2008, fixed and mobile phone number portability was implemented in Mexico.
As of this date, the portability service has been operating properly, with the exception of certain third party networks that still take longer than established to route calls to the receiving user. We cannot predict the consequences that
portability will have on the market or how it might affect our business.

On January 2010, the SCT published bid terms for
auctioning the 1710-1770/2110-2170 MHz and 1850-1910/1930-1990 MHz spectrum segments under independent processes which should be concluded by the end of June. The awarding of the spectrum segment could open the market to new concessionaires and
technologies, such as WiMax, that could also compete with some of the services we provide. We cannot predict the outcome of any such auction. As of the auction of the 3400-3700 MHz spectrum segment, the bid call is expected to take place during the
second half of 2010.

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

Our revenues from international long
distance service reflect amounts earned from our customers and our proportion of all settlement payments received from foreign carriers, as well as other international non direct-dialed calls. A portion of all settlement revenues from foreign
carriers is paid in U.S. dollars and accounted for 16.6% in 2007, 9.6% in 2008 and 3.9% in 2009. Settlement agreements, principally with AT&T, govern our payment rates to foreign carriers for the use of their facilities in interconnecting
international calls billed in Mexico and the rates foreign carriers must pay to use our facilities for interconnecting calls billed abroad, but terminating in Mexico.

Since 1997, the international settlement rates applicable to U.S.-originated international calls have been decreasing and may decrease
further. Most of our traffic exchanged with foreign carriers in 2008 and 2009 was traffic originated in the United States. Therefore, such reduction has adversely affected our results. Any further reduction in international settlement rates
attributable to U.S.-originated international calls would result in a further decrease in dollar-denominated settlement amounts payable to us by U.S. carriers. If our dollar-denominated revenues decrease and we do not experience an offsetting
increase in volume, we may be unable to meet our dollar-denominated debt and other obligations without incurring currency exchange risk.

Continued devaluation of the Peso relative to the U.S. dollar would adversely affect our ability to meet our U.S. dollar-denominated
trade and financial obligations, since fixed interconnection tariffs have been established in U.S. dollars and our domestic services are charged in Pesos.

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

Under the Ley Federal de Telecomunicaciones (the Federal Telecommunications Law) and the Ley de Inversión
Extranjera(the Foreign Investment Law), no more than 49% of the voting equity of a Mexican corporation holding a concession to provide fixed-line telecommunications services may be held by non-Mexican nationals. AT&T Mexico,
which owns 49% of our equity, is deemed a non-Mexican national for purposes of the Foreign Investment Law. Absent revisions to the Foreign Investment Law, future sales of equity securities to non-Mexicans would involve securities with limited voting
rights or would require a proportional purchase of voting stock by Mexican nationals. These restrictions limit our ability to raise equity capital which could be used to implement our business plan and grow our business.

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

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



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



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



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



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



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

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



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

As a foreign private issuer, investors may not be able to obtain as much publicly-available
information about us as they would about U.S. issuers of publicly traded securities. In addition, we prepare our consolidated financial statements in accordance with Mexican FRS, which differs from U.S. GAAP in certain significant
respects. Therefore, potential investors may not be able to easily ascertain the risks facing us as they would if we were a U.S. company. See Note 20 to our consolidated financial statements for a description of the principal differences
between Mexican FRS and U.S. GAAP applicable to us.

Risks Relating to Mexico

Downturns in the Mexican economy adversely affect us.

The majority of our customers are Mexican companies or individuals and all of our operations and the vast majority of our assets are
located in Mexico. For these reasons, our operations, results and financial condition are dependent upon the level of economic activity in Mexico. Telecommunications traffic in Mexico and our revenues are highly affected by the level of economic
activity in Mexico and the general purchasing power of individuals and companies. Accordingly, declines in our customers spending could have additional negative effects on our revenues. Economic slowdowns in Mexico may have, and in the case of
the current slowdown, have had, additional consequences that impact our business. We also face risks associated with the impact of economic downturns on third parties, such as suppliers, financial institutions and other parties with which we do
business. If these parties experience negative effects on their businesses due to the economic slowdown, it could negatively affect our business or operating results.

Currency devaluations may impair our ability to service our debt.

Changes in the value of the Peso relative to the U.S. dollar have adversely affected and may continue to adversely affect our
financial condition and results of operations. All of our indebtedness and a portion of our trade payables are denominated in U.S. dollars, while a majority of our revenues and operating expenses are denominated in Pesos. For example, the 0.1%
currency appreciation of the Peso against the U.S. dollar that occurred in 2007 resulted in an exchange loss of Ps. 2.2 million, the 20.3% currency depreciation of the Peso against the U.S. dollar that occurred in 2008 resulted in an
exchange loss of Ps. 615.2 million and the 3.5% currency appreciation of the Peso against the U.S. dollar that occurred in 2009 resulted in an exchange gain of Ps. 99.1 million.

Continued devaluation of the Peso relative to the U.S. dollar would adversely affect our ability to meet our
U.S. dollar-denominated trade and financial obligations, including our notes, and to make additional capital expenditures.

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

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

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

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

Political developments in Mexico may adversely affect us.

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

Although the Mexican government has pursued policies of economic liberalization and deregulation in the Mexican economy and in the
Mexican telecommunications industry in the past decade, a significant change in those policies may hurt business and economic conditions in Mexico in general and our business in particular. If there were instability or a market failure in the
Mexican



10



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##### Table of Contents

telecommunications industry, the Mexican government could reverse its economic policies of liberalization in the Mexican telecommunications market. As we are a competitive provider of
telecommunications services in Mexico, we believe that any reversal of the Mexican liberalization policies in the Mexican telecommunications market would restrict our ability to expand our market share in the voice, data and internet services
market. We do not have and do not intend to obtain political risk insurance.

Item 4. Information on the
Company.

A. History and development of the company

Our legal and commercial name is Alestra, S. de R.L. de C.V. We were incorporated on October 13, 1995. We are a sociedad de
responsabilidad limitada de capital variable (limited liability variable capital company) organized under the laws of Mexico for a term of 99 years. Our principal executive office is located at Avenida Lázaro Cárdenas No. 2321,
Piso 9, Col. Residencial San Agustín, San Pedro Garza García, N.L. 66260, México and our telephone number is 011-5281-8625-2200. Our authorized representative in the United States is Puglisi & Associates, located at 850
Library Avenue, Suite 204, Newark, Delaware 19711, U.S.A. Puglisi & Associates phone number is (302) 738-6680.

We are a leading provider of telecommunications services in Mexico. We are focused primarily on multinational corporations, domestic
large- and mid-size businesses and institutional customers in Mexico (which we refer to as the enterprise sector), and we believe that we are the only enterprise-focused telecommunication services provider in the country. Through our
extensive fiber optic and wireless network, we offer data, internet-related and local telephony services (which we refer to as value added services), as well as domestic and international long distance telephony services. Since the
commencement of our operations in 1995, we have invested approximately Ps. 7,786.6 million in the construction of our network, which currently interconnects with 199 cities throughout Mexico. We believe our network enables us to provide
coverage to over 90% of the Mexican market.

Our value added services include managed Internet Protocol (IP)
telephony, IP virtual private networks, managed local area network (LAN)/wide area network (WAN), hosting and application services, managed security services, as well as more basic data transport, internet access and transit
and local telephony services (which we report as our data, internet-related and local services segment). Our enterprise customers demand services with cutting-edge technology and real-time technical support, and we seek to satisfy these needs
through our extensive data network and technical capabilities developed through more than 14 years of joint collaboration with AT&T.

We began providing basic data services to our customers in May 1997 and internet services in July 1998, and the majority of our
revenue growth for the last three years has come from the evolution of those services into a broad portfolio of value added services. Between December 31, 2008 and December 31, 2009, revenues from value added services grew by 10.6%. Our
value added services accounted for 63.1% of our revenues in 2008 and 69.7% of our revenues in 2009. We believe that the contributions to our revenues and operating income from our value added services will continue to increase in the foreseeable
future, as our customers needs evolve into more sophisticated data communications systems and applications that require the convergence of telecommunications and information technology.

We believe that our strategic focus on the enterprise sector, superior product offerings and customer service have enabled us to
establish long-term relationships with these customers, which has resulted in a stable source of revenues with low customer churn. We provide these services mainly through long-term contracts with our enterprise customers. We also provide services
to high usage residential customers and to other telecommunications carriers.

Our network consists of more than 6,101
route-kilometers of high-capacity fiber optic lines that connect metropolitan areas, more than 1,740 route-kilometers of fiber optic lines within metropolitan areas, and five high-capacity fiber optic lines that cross the U.S. and Mexico
border. We also have wireless concessions in the 7, 10.5, 15, and 23 GHz bands to provide point-to-point connectivity nationwide and point-to-multipoint connectivity in Mexico City, Guadalajara and Monterrey and their surrounding regions. We use
these wireless concessions principally to provide dedicated last mile broadband connections to our enterprise clients. Our network is equipped to provide IP virtual private network services in 50 cities, AT&T Global Network services
in 28 cities and local telephony in 28 cities, with coverage in the major urban centers in Mexico. Our network connects approximately 5,101 customer locations through dedicated Alestra-owned fiber-optic and wireless access circuits, and
approximately an additional 8,286 customer locations via dedicated access circuits leased from third-party carriers.

We are
owned 51% by Alfa and 49% by AT&T Mexico, an indirect wholly owned subsidiary of AT&T. Alfa is one of Mexicos largest conglomerates, comprised of four groups that participate in key industries around the world, including
petrochemicals, aluminum and auto components, refrigerated food and telecommunications. AT&T is among the premier voice, video and data communications companies in the world, serving businesses, consumers, and governments. A leading supplier of
data, internet and managed services for the public and private sectors, AT&T offers outsourcing and consulting services to large businesses and governments.



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Prior to October 18, 2007, we were owned 51% by Onexa S.A. de C.V. (Onexa).
On that date, Onexas shareholders entered into an agreement to merge with Alfa. This merger was conditioned on Mexican governmental approval and was effective on March 31, 2008. After the effective date of the merger, Alfa replaced Onexa
as our direct shareholder.

In response to the amendment to the Service Mark License Agreement, which phased out our ability
to use the AT&T service mark beginning on November 17, 2007, we began developing our own service mark in April 2006. Before we developed our own service mark, we marketed all of our services under the AT&T service mark.

We operate our business under the Federal Telecommunications Law, which was enacted in 1995.

Our revenues were Ps. 5,056.0 million in 2007, Ps. 4,672.5 million in 2008 and Ps. 4,683.6 million in 2009. Under Mexican
FRS, we had a net income of Ps. 188.0 million in 2007, a net loss of Ps. 384.3 million in 2008 and a net income of Ps. 291.5 million in 2009. Under U.S. GAAP, we had a net income of Ps. 299.0 million in 2007, a net loss of Ps.
227.1 million in 2008 and a net income of Ps.647.5 million in 2009.

Capital expenditures

During the past three years, we have concentrated our investments in last mile access for new customers and new services. Our
capital expenditures for 2007, 2008 and 2009 amounted to Ps. 600.4 million, Ps. 793.4 million and Ps. 937.3 million respectively. From January to March of 2010 we invested Ps. 137.0 million primarily to provide last
mile access. All of our investments have been made in Mexico. We do not expect that any single capital expenditure in 2010 will have a material impact on our operations or financial results. Our estimated total capital expenditures according
to our 2010 annual budget is Ps. 1,018.5 million.

We believe that our cash flow from our operations is sufficient to fund our
capital expenditures and the servicing of our short term debt in 2010. For a discussion of our capital expenditures and liquidity, see Item 5, Operating and Financial Review and Prospects  Liquidity and capital resources.

B. Business overview

Summary of Material Licenses

Service mark

During 2007 we launched the use of the commercial brand name Alestra together with the AT&T brand, to allow a transition
from the AT&T brand to the Alestra brand commencing in November 2007. At the same time, we stopped using the AT&T mark and logo in all of our materials, except as a tag line below our Alestra mark.

Pursuant to our agreement with AT&T, we ceased using the AT&T name as a tag line on November 18, 2008. After that date, we
are permitted to use the AT&T Global Services phrase for the limited purpose of providing AT&T Global Services within Mexico on a nonexclusive basis until June 2010. See Item 3(D), Risk Factors  Risks Relating to Us
 Historically, we have relied on the use of the AT&T service mark together with our new Alestra registered service mark to market all of our services to our customers; however, under our Service Mark License Agreement, our ability to use
the AT&T brand name and service mark is limited and we have to rely on the Alestra brand name and service mark.

Our operations

The majority of our revenue growth has come from traditional data services and IP-based solutions.

Data and Internet Services

Our Data Services include:



| |  |  | Direct access. For operating legacy networks and next generation IP networks, we offer reliable, secure and high quality dedicated access
lines from the customers premises to our network. We provide this connection depending on the customers needs and revenue potential through a wireless solution, a fiber optics connection or using the services of alternate access
providers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AT&T Global Services. To meet all of the global or international needs, we are part of the AT&T Global Network (AGN).
This gives us an active role in serving all multinational accounts requirements in Mexico by providing:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enhanced Virtual Private Network
| | - |  | --------------------------------



| |  |  | International Packet Service
| | - |  | ----------------------------



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| |  |  | Global Managed Internet Services
| | - |  | --------------------------------



| |  |  | AT&T Virtual Private Network
| | - |  | ----------------------------



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



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



| |  |  | Alestra frame relay. Frame relay is an information transportation service based on packet switching technology, which has been designed to
increase the efficiency of data transportation between remote localities needing to exchange large amounts of information at high transmission speeds and to optimize the bandwidth used. Frame relay also provides transparency to any application, low
latency and mesh connectivity. The service is available to establish domestic and international circuits under a bilateral or end-to-end scheme jointly with AT&T. Through our Alestra frame relay, users can access their corporate data network
from remote sites through a telephone connection.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Alestra End to End ATM. Asynchronous transfer mode (ATM) is a high performance technology that allows the transmission of
various types of applications, such as voice, data and video, using the same means of transmission. We offer different classes of service for those applications, allowing the customers to utilize a common network platform to satisfy all their
telecommunication needs, and to assign a different priority to each type of traffic or application.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | VoIP service. Our Twingo service, based on VoIP technology, enables customers to make unlimited local and international phone calls at the
same time they are using a broadband internet service. The VoIP service uses the Internet as a transmission device for telephone calls. By using the IP through data packets, the service enables a connection to the public telephone network.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Convergence Services are part of our Internet Services and are grouped into four main managed services
portfolios:

1. Managed Connectivity

These services provide organizations with the widest portfolio of connectivity services, from a simple Internet access connection to a
managed virtual private network (VPN) infrastructure.



| |  |  | Internet Solutions. For our business customers we offer dedicated high capacity Internet access. In addition, we offer transport services
and internet dial-up ports wholesale to internet service providers requiring connectivity to the Internet in Mexico and worldwide. We also serve as an internet service provider and offer dial-up access, asymmetrical digital subscriber line
(ADSL) access, and email services. For large customers we offer our Clean Pipes service which protects our customer infrastructure exposed to Internet from certain hacking activities called distributed denial of service (attacks from
millions of computers pointing to specific computers or applications (targets).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | VPN Solutions. We offer VPN services to permit a selected group of computers to communicate directly with each other, irrespective of their
physical location within a network. VPN uses a public data network to transport private data reliably and securely. It is virtual because it appears to the user as a genuine private network. We offer several features including remote access to allow
connectivity to a dedicated VPN, a VPN port in our own data center and the maintenance of servers, applications and resources as part of the customers VPN network. In 2009 we introduced two important enhancements to our VPN offer: VPNA3, which
optimizes some network conditions to improve the behavior of some user applications to accelerate them, and RVPN, which provides the central nodes with an automated redundancy option to increase the service availability.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Ethernet Solutions. This service provides connectivity between two or more sites with high bandwidth capabilities and the Ethernet
technology advantages of high speed, reliability and time reduction for provisioning and changing bandwidth capacity. We offer this service in Mexico City, Monterrey and Guadalajara. In 2009 we introduced the first gigabit ethernet between the three
major cities. Large financial institutions benefit from this service as it enables their disaster recovery sites to operate in a reliable and efficient manner.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. Managed Unified Communication

Through this service, we empower businesses to access the cost and productivity savings of having voice, data and video available over the
Internet.



| |  |  | IP Communications. Our IP Communications service is delivered on a high-speed network that integrates data, voice, and video. Businesses
can realize significant cost savings with the reduction of toll, long-distance, and maintenance charges. The complexities of network performance are managed and monitored by our technicians 24 hours a day to allow businesses to focus on their core
competencies and strategic requirements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Collaboration.This service is a collected set of tools that allows two or more users to interact, meet, share information and collaborate
over the Internet or over a VPN in real time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Instant Messaging.This service allows the sending of short text messages from a computer to a user.
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Conferencing.This service creates a simultaneous working session of three or more participants using audio and video.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Intelligent Content Distribution. This service allows diverse content to be sent to screens located in geographically disperse areas using
a VPN or Internet Network as distribution channels. The service intelligently defines which, when, and how each piece of content (video, power point presentation, live TV channel) is sent to each particular destination (associated with specific
computer screens), making it a powerful tool for corporate communications, training and marketing, among other usages.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Convergent Solutions.This service integrates several technologies designed to satisfy customer specific needs for specific industries
(vertical markets) by integrating network services with different applications (such CRMs) and adding mobility. We are building vertical solutions for the education, government and health care industries. Other industries such as the Financial,
Insurance, Retail, Logistics and Manufacturing industries will also be served by this strategy.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.
Managed Security

We believe that these services provide the most comprehensive portfolio of managed security services in
the Mexican market.



| |  |  | CALMA. This portfolio of services includes several security solutions in order to protect our customers data from both external
threats from the Internet and internal risks. These services include, among others, the definition of firewall platforms for denied access to resources, content filtering and antivirus software.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | VAS. Our Vulnerability Assessment service is a network discovery and scanning service in which we provide feedback based on the outcome of the
assessment that will allow the customer to prioritize its network protection requirements by defining rules and policies based on the importance of the different assets analyzed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Internet Protect. This is an information service provided by AT&T regarding network internet, application and protocol security. The
customer receives access to a special portal where he or she can download information, papers and studies regarding network security.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Strategic Information Security Consulting Services. BIA (Business Impact Analysis), DRP (Disaster Recovery Plans), Risk Management and PCI
Compliance are consulting services designed to help our customers to enable or improve their information security practices.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. Managed Data Center

These services provide the security, resilience and environmental integrity expected for the applications and data required to run a
business.



| |  |  | Dedicated Servers.This service provides the rental and exclusive use of a high-performance server, related software and connection to the
Internet or VPN access.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Co-location Service.This service offers secure, cost-effective and reliable accommodation space in our own data center for other
businesses servers and equipment.
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| |  |  | Data Storage.Through this service we handle large quantities of valuable data and offer our clients fast recoverability.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | DRP (Disaster Recovery Plan) Solutions.This service takes advantage of our data center locations in Mexico, Monterrey and Guadalajara
along with different services such as VPN, Ethernet and security services to enable alternate data rooms for our customers, which can be used as hot or stand-by recovery sites.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Information Security

We have an information security division with the goal of protecting our network and clients from growing information technology threats
and complying with new local regulations related to information security.

This division has developed several processes that
for each of our services, implement security controls to protect the integrity, confidentiality and availability of those services.

In 2007, we obtained the standard ISO27001 certification on Information Security, becoming the first Mexican telecommunication company to
receive this recognition. We continue operating under the ISO27001 standard.

In 2007, 2008 and 2009, we launched several
services offering information security best practices and technologies to protect the information assets of our customers, such as our security operations center. We expect to continue to develop more information security services in 2010.

Local Service

Our local service offers the enterprise market a direct connection to the public switched telephone network (PSTN), enabling
local, cellular, long distance or operator assisted calls. Service is available in 27 cities: Mexico City, Monterrey, Guadalajara, Aguascalientes, Cd. Juárez, León, Puebla, Querétaro, San Luis Potosí, Saltillo, Toluca,
Torreón, Tijuana, Nuevo Laredo, Matamoros, Reynosa, Morelia, Chihuahua, Pachuca, Celaya, Cuernavaca, Tampico, Culiacán, Hermosillo, Mexicali, Mérida and Cancún. Our management expects that our local service will continue
to grow based on increased business customer demand.

Local service revenues consist of a fixed monthly rate that includes the
rent of the access facilities and a number logged to the PSTN, and additional charges per call on calls to fixed local numbers and per minute on calls to mobile phones.

There are several alternatives of local service depending on the customers needs:

Smart iPhone:This service is a fully integrated VoIP solution based on a hosted Private Branch Exchange
(PBX) platform that enables customers to interconnect different branches. This solution provides customers with telephone equipment and virtual PBX features like voice mail, web call control, remote office, four digit dialing
between customer premises and unified messaging among other traditional PBX functionalities. We offer this service in the three main cities: Mexico City, Monterrey and Guadalajara.

Enlace Digital:This commercial program offers digital trunks to connect our customer switchboard directly to our network,
thereby enabling local, cellular, long distance or operator assisted calls. There are two types of signals that Enlace Digital supports: CAS-R2 and ISDN PRI. This service can be offered through digital radio waves or fiber optic lines and is
currently available in all 27 cities of coverage.

Línea Empresarial:This commercial program provides
local, long distance, cellular, 800 numbers and operator calls, using plain old telephone services lines. The telephone service is provided by a wireless technology that offers the customer the opportunity to integrate data, voice and internet
solutions on one platform. We offer this commercial plan in Mexico City, Monterrey, Guadalajara, Toluca, Saltillo and Reynosa.

Enlace Total Multiservicio:This commercial program provides local, long distance, cellular, 800 number, operator assistance
calls and dedicated Internet in a complete bundle offer using IP technology through a common dedicated IP access. We offer this commercial plan in all 27 cities of coverage.

Long Distance Services

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

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



| |  |  | Operator services, home country direct services, calling card services and 800 services. We offer a full range of bilingual operator
assistance, direct connections between customers abroad and Mexico, calling cards services and toll free services.
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| |  |  | Virtual network services. To our business customers, we offer the Aria VNS Red Privada Virtual (Aria VNS), a virtual network
system that permits the configuration of tailored, private corporate voice networks. This service provides most of the advantages of a private network (i.e., call screening, overflows, flexible routing, authorization codes and private dialing plans)
without the corresponding maintenance and operation costs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Global Conference Service. This service is a reservationless call service that enables callers to create private group conference calls
without making reservations or using operators. Users of this service can access the conferencing platform worldwide using the toll free numbers available in more than 80 countries or through the Internet. There are several advanced features
available, including, on line conferencing management and reservation, audio conferencing recording, and online document sharing tool.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pricing and promotions

Our pricing for services offered to business and residential segments varies depending on customer needs. Our business pricing strategy is
based on voice, data and internet bundled offers. The commercial programs are tailored to offer value added business solutions through telecommunications integrated services according to the customers needs. For the residential segment, there
are several plans for our long distance service (including 800 numbers and dialing cards); for our Twingo service, which offers local service through internet (including VoIP); and for our internet services. All of our plans are tailored to the
customers calling patterns, and are designed to capture and retain long distance customers. We believe that our prices are competitive with, and our promotions similar to those of our major competitors, Telmex and Axtel. We generally price our
long distance services slightly below Telmexs prices and we are highly competitive with Axtel.

Our marketing

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

Business Customers. We have national
market coverage through our presence in different cities: 199 for long distance service, 50 for VPN, 26 for data/Internet and 27 for local service. We have nearly 400 sales, marketing and e-business professionals dedicated to identifying, attracting
and retaining business customers. We also have a Value Added Reseller program that incorporates more than 200 agents with more than 950 account executives, extending our presence to 80 cities. In addition to basic services, we offer to business
customers a variety of advanced voice and data services to increase revenues per customer and reduce customer churn. We also deliver customized bundled offers, including the key services and value-added features such as fraud control and
reports-on-demand. We mainly target four groups of business customers:



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



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



| |  |  | Small and Medium-Sized Businesses. Small and medium-sized businesses include those that generate monthly billings of between Ps. 2,500 and Ps. 100,000.
Small and medium-sized businesses represent the largest part of our business segment in terms of number of accounts and volume. We believe that in most cases these companies are underserved by Telmex and that we can help them become up to date on
the latest telecommunication technology.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

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

Advertising and Public Relations. We believe that effective advertising stimulates demand for our services. We advertise
using television, billboards, radio, Internet, newspapers and specialized business periodicals as well as direct marketing campaigns. In addition, in the past we have also sponsored sports events and teams, educational programs and cultural
activities. We believe that building credibility - as an ignition element for any communication, before demand stimulation - is essential to ensure a solid brand reputation and the trust necessary to place our services in the Mexican market. In this
respect, our public relations efforts create an informed opinion among third parties (journalists, leaders of public opinion, government officials, business partners, the financial community, consumers, etc.) in order to multiply messages regarding
the promotion of advanced telecommunications solutions and consultancy aimed at sales activities. During 2009, we focused on the use of the commercial brand name Alestra to position it in all markets, through a campaign consisting of
mass media advertising activities (including TV, billboards, magazines and radio). We will continue with our advertising activities to increase the Alestra brand recognition.

Sales and distribution

Direct sales for business customers.We maintain 20 independent sales offices throughout Mexico, including the key cities of
Mexico City, Monterrey and Guadalajara. Our sales force is highly qualified and knowledgeable about our services. We believe that the training of our sales force will be an important factor in our success. When marketing our services, our sales
force places special emphasis on the quality of our network and our customer service capabilities. Our direct sales force is compensated with salaries, as well as commissions and bonuses. Our independent telemarketing representatives are compensated
with negotiated fees.

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

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

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

E-commerce. In addition to our telemarketing efforts for the residential segment, we have a webpage
(www.twingo.com.mx) where our customers can find and purchase our internet-based services.

Customer service

We have been able to distinguish ourselves from our main competitors, Telmex and Axtel, by offering superior customer
service. In 2009, our TRI*M index showed Alestra above our main competitors. The TRI*M index is a ranking system which measures the strength of client retention, offering a unique measure of how customers perceive us. We have two main customer
service centers, one for business customers and the other for residential customers, which are designed to provide service and support for each one of our business units. We also have an operator service center to provide call processing assistance
and directory assistance and two help desk service centers to provide technical support, one for Internet and the other for e-services (web hosting). All of our service centers operate 24 hours a day, 7 days a week.



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Our business customer service center received a total of 371,300 calls during 2009,
regarding product and general service inquiries, billing inquiries and fault reports. Our residential customer service center receives approximately 73,000 calls per month. Around 25,000 additional calls per month are handled by an interactive voice
response system for residential customers.

Our customer service centers maintain world class indexes (our average speed of
answer was less than 13 seconds and the abandon rate percentage was less than 5%). More than 95% of inquiries were resolved on time. Our satisfaction index remains above 90% for top customers segment.

In addition, our business customer service center has been awarded, for the fourth consecutive year, the National Excellence Award in
Contract Center during the 2010 national event organized by IMT Contact Forum, for our internal intelligent metrics. We have received prior awards in the areas of Top Customers and Government Service Center and Customer Care Manager.

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

Our main goal is
the solution in the first call on each of the calls that we receive. For example, during the last six months of 2009 the index for technical requirement solution during the first call was 90%, which we intend to improve in 2010 by
creating a team that provides integral care to our customers. We are also committed to innovation; in 2009 we implemented operational improvements that have allowed us to decrease operating expenses up to 15%. For example, we developed a billing
website for our customers to check their balance and get or pay their bill by credit card. Currently there are 20,000 clients registered.

Customer activation, billing and collection policies

Activation. At the time a salesperson receives an order for service, the information provided by the prospective customer is
checked against our internal customer database. If the customers credit history is in good standing, a representative from the verification company, a third-party verification entity, is connected into the call to verify the customers
order. We believe that this system of third-party verification, which was implemented in February 1998, has significantly reduced slamming practices in Mexico and reduced churn caused by payment failure.

Billing. Currently, we use an integrated/convergent billing system that includes network and customer support capabilities.
Our customers are billed monthly, and we split our customer billing into 14 billing cycles. Also, we have installed a state-of-the-art customer care and billing system, which includes, among other features, enhanced call center support for
activities such as e-commerce, rapid development and deployment of any new service that we may add in the future, automated customer request tracking, bundling and integration of multiple data and voice services. We use a fraud management system
that allows our fraud center to detect and prevent unauthorized use of our network through the use of programs that monitor and identify unusual activity. In addition, the fraud center uses an application developed to detect and analyze fraudulent
cases using different profile solutions and statistical, financial, payment history, billing, traffic, and customer information.

Collection. Bills for residential customers may be paid in cash at one of 7,047 bank branches, or one of more than 7,140
supermarkets, convenience stores, public telegraph offices or electronically through our website. We give customers the option to charge the invoice balance to credit card or checking accounts. Bills for business customers are paid mainly with
electronic funds transfers or in cash at banks. There is no seasonality in our collection.

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

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

Sales and revenue by category of activity

See Item 5, Operating and Financial Review and Prospects.

Competition

Our main area of competition is in value-added services for the business sector. Voice services are now a complement to this area.

Even though the SCT has granted a large amount of permits or concessions relating to value-added services, a small group of
competitors remains dominant in this area. Along with us, this group includes Telmex, Axtel and Telefónica Data México S.A. de C.V. (Telefónica). However, according to the firm Pyramid Research, Telmex is the leader
of this group due to its broad commercial coverage and network infrastructure.



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Telmex also dominates the broadband access market, with 6.5 million subscribers, while
cable operators reach approximately 2.0 million subscribers.

In data and IP networks, we have increased our market share
since 2007 as a result of our robust service portfolio in managed services and through an alliance with AT&T for AGN services. We compete primarily with Telmex in the corporate and medium business segment.

In terms of hosting services our main competitors are Telmex (which uses the commercial name Prodigy Triara Hosting for its hosting
services), Six Sigma Networks S.A. de C.V. (Kio Networks) and Diveo Internet de México S. de R.L. de C.V. (Diveo).

In January 2010 the SCT began an auction process from the Mexican government-owned company Federal Electricity Commission (Comision
Federal de Electricidad or CFE) of two of its dark fiber optics. We expect that the SCT and Cofetel will promote new initiatives in the following years, which will result in a more open competitive environment and broader coverage
for data and internet services.

Regarding long distance services, the market has declined since it opened to competition.
More than 33 concessions had been granted and reselling is allowed, but the most relevant driver for the market deterioration is the substitution of mobile and VoIP services. The market leaders in long distance services are Telmex and
Radiomóvil Dipsa, S.A. de C.V. (Telcel) due to the dominant market share of both in their respective markets, as measured in lines. Long distance is usually a complement to a bundle service package. Most competitors offer long
distance as part of a bundle offer or with an unlimited service plan for a monthly fee.

Regarding local services, there are
three main subsegments of competition: corporate enterprise, which is the most competitive subsegment; small and medium business subsegments, in which low capacity local access is critical to competition; and the consumer subsegment, in which
wireless alternatives compete with copper or cable lines.

In 2008, cable operators entered the local service market. Their
services are based on VoIP and they aim to protect their current video customer base in the consumer subsegment. Cable operators continue to consolidate, with Grupo Televisa S.A. (Televisa) and Megacable Holdings S.A.B. de C.V.
(Megacable Comunicaciones) the largest competitors among cable operators. Another fixed-line competitor with copper lines access is Maxcom Telecomunicaciones, S.A. de C.V. (Maxcom), but it only has limited coverage.

Regarding wireless access, Telmex, Nextel Mexico S. de R.L. (Nextel) and Axtel all own WiMax spectrum, but only
Axtel has deployed services. Additional availability of WiMax spectrum is required to increase competition in this area, and we expect that the SCT will hold an auction of WiMax in the months ahead.

The following paragraphs contain information of our main competitors obtained from Pyramid Researchs report, Communications
Market 2009, the technology research firm Select S.A. de C.V. (Select) and our own estimates.

Telmex

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

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

Telmex is the biggest competitor in the Mexican industry. It has participated in all
fixed telecom services, with a substantial market share in each of them. Telmex has leveraged its broad last-mile access network, where it has retained total control, into its nationwide coverage. According to Pyramid Research, Telmexs share
was approximately 89% in the local lines market and approximately 75% in the long distance market, as measured in minutes.

Telmexs broadband ADSL service reached approximately 6.5 million subscribers at the end of 2009 while its internet dial-up
customer base fell to 0.1 million subscribers. In value-added internet services, Telmex formed an alliance with Microsoft Corporation in 2000, launching the T1MSN portal and changing its brand name to Prodigy. Additionally, its Prodigy Triara
hosting service merged with the Prodigy services portfolio. By the end of the third quarter of 2009, according to Pyramid Research, Telmex had a 73% market share of both broadband and internet dial-up subscribers.

In the core data services market, Telmex has leveraged its local coverage to become the market leader in private lines and frame relay
services. Telmexs market share in data services is currently estimated at 65% in terms of revenues, according to Select.



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Axtel

Axtel is a fixed wireless company founded in 1994. Axtel has several nationwide wireless spectrums: 60 MHz at 10.5 GHz for
point-to-multipoint access, 112 MHz at 15 GHz for point-to-point backhaul access, 100 MHz at 23 GHz for point-to-point last-mile access and 50 MHz at 3.4 GHz for fixed wireless access, the last one being the most used for its current local service.
Its network included 39 cities with local service at the end of 2008. In the fourth quarter of 2006 Axtel acquired Avantel, S. de R.L. de C.V. (Avantel). This acquisition increased Axtels market position in the small and medium
businesses segment and also enhanced its service portfolio in the large corporate segment with Avantels services portfolio. In 2007, Axtel launched its pre-WiMax service.

According to Select, as a result of its acquisition of Avantel at the end of third quarter of 2008, Axtel has increased its market share,
however, it has declined during the last year. Analysts estimate a market share of 13% in corporate networks and 8% in voice

Telefónica

Telefónica, following its expansion strategy in Latin America, has acquired several telecommunications service providers in Mexico.
In 1999 Telefónica acquired Infosel, a part of Terra Networks México, S.A. de C.V (Terra), and adopted the Terra brand name for its internet and information services. Terra had 128,000 internet dial-up accounts in 2002, but
its business declined to approximately 75,000 accounts as of June 30, 2004, according to Telefónicas reports, and it exited the dial-up business at the end of 2004 by entering into an alliance with us in which its dial-up customers
were absorbed. Terra repositioned its strategy, focusing instead on providing content services, e-commerce, broadband content, and internet advertising business through the Terra portal.

At the beginning of 2000, Telefónica acquired Optel Mexicana, S.A. de C.V. (Optel). Optel specializes in X.25, frame
relay and dedicated internet services. This acquisition has allowed Telefónica to take a small piece of the corporate networks market and enter into the business data market with its brand name Telefónica Data.
Telefónica also developed new features for its data service and enhanced its network with dark fiber contracts with Marcatel, S.A. de C.V. (Marcatel) to increase its service coverage. Telefónica also competes with us
through its fixed local and long distance concessions in the Mexican market, but they are currently more focused on supporting enterprise solutions for mobile phones.

Since 2005, Telefónica Móviles México S.A. de C.V. (Telefónica Móviles México), a
subsidiary of Telefónica, focused strongly on mobile telephone services and deployed an aggressive commercial strategy against Telcel.

Other Competitors

Our other competitors in voice and data markets are Telcel, Marcatel, Maxcom, Iusacell-Unefon, S.A. de C.V. (Iusacell), and
Nextel.

Regulatory framework and bodies

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

The SCT and the
Mexican Congress unsuccessfully attempted during 2003, 2004 and 2005 to reach consensus with the industry in order to pass a new communications bill. However, in 2006, a new federal telecommunications law was adopted. As a consequence of the new
law, all of Cofetels commissioners were replaced, TV broadcasters were allowed to offer telecommunications services and Cofetels powers were increased in order to regulate broadcasting and telecom services.

The SCT is the Mexican governmental agency responsible for regulating telecommunications services and was the exclusive authority in this
area until August 1996, when the Mexican government established Cofetel. Cofetel is a specialized regulatory agency within the SCT, which pursuant to the new federal telecommunications law consists of five commissioners appointed by the
President of Mexico and approved by the Mexican Congress, created to enforce the Federal Telecommunications Law and to implement the necessary regulatory framework to guarantee fair, nondiscriminatory and lawful competition among telecommunication
services providers in Mexico.

Cofetel and the SCT have the power to monitor our compliance with the telecommunications public
network concession and our wireless concessions. The SCT delegated to Cofetel many of its powers and obligations under the Telecommunications Regulations.



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However, some of the authorities and obligations delegated to Cofetel were returned to the SCT in late 2008, through a change to the internal operating rules of the SCT. We cannot predict how
these new operating rules may affect our business, if at all.

The SCT has retained the authority to grant all concessions and
permits as well as to impose fines. Cofetel makes recommendations to the SCT on major issues, such as spectrum allocation and the granting of new concessions and permits, the imposition of fines and the revocation of concession title; however, the
SCT has the final decision-making power on these issues.

Under the existing Federal Telecommunications Law, registration
before Cofetel is the sole requirement to provide value-added services. Cofetel is currently primarily responsible for, among other things:



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



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



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



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



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



| |  |  | administering the numbering resources, signaling protocols, technical plans and national numbering migrations;
| | - |  | --------------------------------------------------------------------------------------------------------------



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



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

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

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

The SCT issued the initial rules for the interconnection of other carriers with Telmexs network in July 1994, specifying that,
beginning on January 1, 1997 and before 2001, Telmex was obligated to provide interconnection points for 200 cities in accordance with a rollout schedule (those local service areas were consolidated into 198 areas). After that, the rules
also obligated Telmex to provide interconnection in all the cities of the country which have at least one switch with routing capability. Currently, Telmex has provided interconnection points in 198 local service areas. However, no additional areas
have been added, and Telmex has argued that there is no switch with routing capability left for the remaining 199 local service areas. However, as a result of a consultation process within the industry, conducted during 2006, over the next years
there could be further consolidation of local service areas that could result in a decrease of the 397 local service areas that currently exist.

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

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

On August 11, 2004, international telecommunications
rules (the International Telecommunications Rules) were issued by Cofetel. Under these rules, the international settlement rates for terminating long distance calls became subject to free market rules. See  International
settlement below.



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

In 2006 the SCT revised and passed a resolution on service convergence, to allow telecommunications and cable networks to offer
triple play service (voice, data and video services). The same resolution also established obligations related to number portability and interconnection between networks. During 2007, Cofetel issued the rules for the implementation of
number portability in 2008.

In January 2010 the SCT began the auction process for the 1850-1910/1930-1990 MHz and 1710-
1770/2110-2170 MHz spectrum segments, which should be concluded by the end of June 2010. Also, the auction of the 3400-3700 MHz spectrum segment could take place during late 2010. These auctions could open the market to new concessionaires and
technologies, such as WiMax, that could also compete with some of the services we provide. We cannot predict the outcome of any such auction.

Our concessions

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



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



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



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



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

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

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

Wireless concessions. In June 1998, the SCT granted us two 20 year point-to-point national
wireless telecommunications concessions in the 15 and 23 GHz frequency bands, and in September of 1998, three 20 year point-to-multipoint wireless concessions in the 10.5 GHz frequency band covering the regions 4, 6 and 9. These regions comprise
Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacan, Mexico, Hidalgo and Morelos. Under the 10.5 GHz concessions, we were asked to provide by the end of September 2000 point-to-multipoint signal
coverage to those municipalities or delegations where 30% of the total population in such regions resides. On July 14, 2000, we petitioned the SCT to allow us to comply with such requirement a year after the original compliance period. On
February 28, 2001, the SCT granted us an extension until August 27, 2001 to comply with such requirement. By August 27, 2001, we had installed 10.5 GHz sites in regions 4, 6 and 9, which include the urban areas of Mexico City,
Monterrey and Guadalajara. The authorities have been properly notified of our progress and compliance.

On July 19, 2002,
we filed a report with Cofetel regarding the implementation of a 10.5 GHz point-to-multipoint radio base station in the city of Morelia. With this infrastructure and the one discussed above, we fulfilled our commitments to provide signal coverage
for 30% of the population residing in regions 4, 6 and 9.

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



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



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



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



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



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

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



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



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



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



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



| |  |  | to fulfill international agreements and treaties subscribed to by the Mexican federal government.
| | - |  | -------------------------------------------------------------------------------------------------

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

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



| | (1) | unauthorized or unjustified interruption of services;
| | --- | -----------------------------------------------------



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



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



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



| | (5) | loss of our Mexican nationality;
| | --- | --------------------------------



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



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



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

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

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

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



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Local service

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

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

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

Tariffs, anti-competitive practices and interconnection

Tariffs. Under the Federal Telecommunications Law, tariffs for telecommunications services are generally determined freely by
the providers of such services and are subject to the requirements set forth in the concessions. Tariffs must be registered before Cofetel prior to being implemented. However, Telmex is an exception to this rule because it is required to obtain
approval before it sets rates. Under its concession, beginning in 1999, and every 4 years thereafter, Telmexs price cap regulation is subject to review.

Such review allows Telmex to increase prices based on a basket of services including local, domestic and international long distance
services, subject to a cap based on the inflation rate and adjusted by a productivity factor (3% from 2003 through 2006 and 3.3% for the 2007  2010 period). Within the basket, Telmex is allowed to raise tariffs as long as the price of the
basket remains under the cap, and lower tariffs, provided they remain above the long run incremental cost of each service.

Telmexs tariffs for domestic long distance declined in real terms more than 70% from December 1996 to March 2008, because
either Telmex did not increase its prices to account for inflation or the price decreased due to competitive forces. We believe that the Mexican telecommunications market will continue to experience tariff pressure.

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



| |  |  | quality;
| | - |  | --------



| |  |  | competitiveness;
| | - |  | ----------------



| |  |  | security; and
| | - |  | -------------



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

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

Long distance-to-local and local-to-local interconnections. Under Mexican regulations, local telephone concessionaires must
enter into interconnection agreements with local and long distance concessionaires, pursuant to which the local operator is obligated to route calls from customers to the local or long distance carrier to which the number has been assigned and in
the case of Telmex to the long distance carrier of choice.

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

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



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Every year we engage in negotiations with Telmex on the terms and conditions, including
rates, applicable for the next year interconnection. If we are not able to reach an agreement, the Federal Telecommunications Law provides that in 60 days Cofetel will resolve any interconnection disagreement between concessionaires. The
interconnection agreements provide, however, that the terms and conditions of the agreements will remain in place until we and Telmex are able to reach a new agreement, which will apply retroactively to the first day of the year in which it is
intended to be used.

During 2007, we reached a new agreement with Telmex for 2008, except for off-net charges, in which
Cofetel, as requested by Alestra, issued a resolution stating the rates for 2008. Regarding interconnection terms and conditions for 2009, we did not reach an agreement with Telmex, and therefore Cofetel issued a resolution stating the terms and
conditions to be applied by Alestra and Telmex for 2009, including a US$0.008 per minute tariff for the interconnection services. For 2010, we have not yet reached an agreement with Telmex, so once again we have requested the intervention of Cofetel
to resolve the terms and conditions that were not agreed upon, including the rates to be applied during 2010. Telmex has disputed the 2008 and 2009 resolutions. As of December 31, 2009, the amount under dispute was Ps. 318.2 million. This
amount is in an escrow account with a Mexican trustee and is expressed in our consolidated financial statements as restricted cash. As of this date, we are unable to estimate the outcome of this dispute and its consequences.

The interconnection agreements may be terminated if we have a substantial default under our interconnection agreement with Telmex.

International settlement

On August 11, 2004, the International Telecommunications Rules were issued by Cofetel. Under this system, the international
settlement rates are subject to free market rules which allow for each carrier to negotiate freely its own rates. We expect that the international settlement rates that leading U.S. carriers use to settle accounts with foreign
telecommunications carriers will continue to be subject to intense downward pressure due to competition factors.

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

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

On April 13, 2006, Cofetel issued a resolution in order to implement the domestic and international long distance calling
party pays system in Mexico. As a result of the publication of the resolution, we initiated different legal procedures to prevent the implementation of the long distance calling party pays system on our network. Finally, we agreed
to its implementation and voluntarily dismissed our legal actions. As a consequence of the agreement, we increased our long distance rates, including international settlement rates, in order to pay the mobile terminating network rate of Ps.
1.34 per minute in 2007, Ps. 1.21 per minute in 2008, Ps. 1.09 per minute in 2009 and Ps. 1.00 per minute in 2010.

During 2007, the price increase resulted in a loss of international traffic, since some users ceased or migrated their long distance
traffic from fixed to mobile networks; however, the revenues increased. Nevertheless, beginning in the later months of 2007 and continuing today, we are facing incremental by-pass traffic since some entities are terminating cheaper mobile services.

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

Telmex bills us a higher per-minute charge to terminate calls on its network in cities outside of those 199 cities with which we are
interconnected. This traffic in minutes represented about 8% of our total minutes of traffic for 2008 and 20% for 2009.

On
December 20, 2007, as a result of our negotiations to establish the terms and conditions for the interconnection rate and other issues for the year 2008, we agreed with Telmex to maintain off-net charges and conditions set for 2006 and 2007,
equal to the lowest of Ps. 0.75 per minute and any rate available by Telmex for domestic long distance service to any telecommunications public network concessionaire or any rate available by Telmex to U.S. carriers for traffic originated
outside Mexico and terminated in Mexican national territory, until new agreements could be reached.

However, we did not reach
an agreement with Telmex for 2008 and 2009 and requested the intervention of Cofetel. Cofetels rulings were issued on August 27, 2008 and February 2, 2009, and stated that the exchange of traffic to local service areas that are not
opened to competition, and therefore have no interconnection point available, are in fact interconnection services. In its ruling, Cofetel maintained its position that the tariffs that we must pay to Telmex for the provision of this service must be
cost-oriented. Among other



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requirements, Cofetel established a US$0.008 per minute tariff for the interconnection services (off-net charges), applicable until December 31, 2009, instead of Ps 0.75 per minute. We
are complying with Cofetels resolutions, and although Telmex is challenging them, we and Cofetel are defending their legality. On September 30, 2009, we entered into a transaction with Telmex whereby we have established a trust in order
to deposit the full amounts claimed by Telmex for 2008 and 2009 services (Ps. 0.75 per minute instead of US$ 0.008 per minute tariff), until a final decision has been made by the court. As of December 31, 2009, the amount under
dispute was Ps. 318.2 million. At this point in time we are unable to predict the outcome or consequences of such actions or if the tariffs contained in such resolution will prevail.

Regarding terms and conditions for off-net charges and other issues for 2010, we have not yet reached an agreement with Telmex and
therefore we requested the intervention of Cofetel to resolve the terms and conditions not agreed upon, including the rates to be applied during 2010. We are expecting to have a resolution in the first half of 2010. As of this date, we are unable to
estimate the outcome of the dispute and its consequences.

In spite of this new dispute with Telmex, we continue our
negotiations with Telmex and expect that we can reach an agreement in the near future.

Mobile interconnection rates

On March 10, 2005, we filed before Cofetel an interconnection disagreement with Telcel, in order to reduce the
mobile interconnection rate that is charged for calls originating in fixed networks and terminating in mobile networks, under the calling party pays system. It is due to a tariff distortion derived by the existence of lower service
mobile tariffs than interconnection rates, and the fact that we believe that current interconnection tariff is not cost oriented, as it should be. In addition, we require Cofetel to oblige Telcel, as part of the disagreement, to charge the
interconnection rate by seconds, in place of by minutes, and to provide information about the location of the interconnection points used by Telmex and Telcel to exchange traffic.

On August 31, 2006, Cofetel issued the resolution applicable to this interconnection dispute and the corresponding interconnection
charges. Nevertheless, Telcel and us both challenged this resolution trying to obtain, respectively, lower and higher rates than those determined by Cofetel. Finally, on December 15, 2006 we agreed with Telcel on the applicable interconnection
rates for traffic termination in Telcels mobile network under the calling party pays system. As a consequence of the agreement, we increased our long distance rates, including international settlement rates, in order to pay the
mobile terminating network rate of Ps. 1.34 per minute in 2007, Ps. 1.21 per minute in 2008, Ps. 1.09 per minute in 2009 and Ps. 1.00 per minute in 2010. During 2008, we faced an increase in by-pass traffic since some entities
began to terminate cheaper mobile traffic using mobile end users services. As a consequence, during 2008 and 2009 we reduced the traffic to be terminated with the mobile networks. During 2010, we will begin new negotiations with Telcel in order to
reduce the interconnection rate applicable to 2011.

Value-added taxation of telephone services

Effective January 2010, billings for telephone services increased by 1% and are now subject to value-added tax of 16.0% throughout Mexico,
except billings for telecommunication services in cities that border the United States or cities located within certain states or municipalities, which are subject to value-added tax of 11.0%. We include this charge on all Mexican bills and we are
obligated to remit this amount monthly to the relevant taxing authority.

In addition to the aforementioned tax, as of
January 1, 2010, telecommunications services are subject to a special tax established in the Special Tax on Production and Services Law (Ley del Impuesto Especial Sobre Producción y Servicios or LIEPS) which consists
of a 3% surcharge on telecommunication services included in the price and prior to the corresponding VAT.



C. Organizational structure

We are owned 51% by Alfa and 49% by AT&T. AT&T holds its equity in us through its subsidiary AT&T Mexico.

Prior to October 18, 2007, we were owned 51% by Onexa. On that date, Onexas shareholders entered into an agreement to merge
with Alfa. This merger was conditioned on Mexican governmental approval and was effective on March 31, 2008. After the effective date of the merger, Alfa replaced Onexa as our direct shareholder. The following diagram depicts our overall
organizational structure:

LOGO







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Alfa is one of Mexicos largest conglomerates, comprised of four groups that
participate in key industries around the world, including petrochemicals, aluminum and auto components, refrigerated food and telecommunications. As of December 31, 2009, Alfas total assets amounted to Ps. 108.1 billion, with
revenues and operating income for 2009 of Ps. 115.6 billion and Ps. 8.8 billion, respectively.

AT&T is among the premier
voice, video and data communications companies in the world, serving businesses, consumers, and government. A leading supplier of data, internet and managed services for the public and private sectors, AT&T offers outsourcing and consulting to
large businesses and governments.

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

Our notes are not guaranteed, secured or otherwise supported by our equity holders.
Under the Federal Telecommunications Law and the Foreign Investment Law, no more than 49% of the voting equity of a Mexican corporation holding a concession to provide long distance telecommunications services may be held by non-Mexican nationals.

We have entered into a joint venture agreement with our equity holders, and have adopted bylaws, each of which governs the
relationship between the equity holders and us. Our 1,699 employees are employed through our subsidiary, Servicios Alestra, S.A. de C.V. (Servicios Alestra), which is organized under the laws of Mexico. We hold 99% of the capital stock
of Servicios Alestra. Our employees are paid by that entity with funds provided by us on a monthly basis under a management and services agreement.

D. Property, plants and equipment

Our network

Network components. As of December 31, 2009, we have invested more than Ps. 7,786.6 million in our technologically
advanced fiber-optic network. Construction of the original design for our long haul network was completed in 1997. Our average network reliability in 2009 was 100% for our backbone, 100% for last-mile solutions based on fiber optic equipment and
99.9997% for last mile solutions based on digital microwave transmission equipment. Our network is regularly upgraded and extended using state-of the-art technology. Our network was constructed and is operated in accordance with the reliability,
redundancy and restoration standards of AT&Ts U.S. network. The key components of the network, all of which are directly owned by us, include:



| |  |  | Over 6,101 route kilometers of long-haul and intra-city network, mostly with Lucent True Wave fiber-optic underground inter-city facilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately 1,740 route kilometers of metropolitan area fiber-optic facilities;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Two dense wave division multiplexing (DWDM) ultra-high-capacity optical transmission systems, capable of transmitting 40 gigabytes per
second (Gbps) and 400 Gbps respectively, the latter may be easily updated to support 800 Gbps;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Next generation VoIP network based on Sonus Softswitch and gateways to provide local and long distance services, the largest network of its type in
Latin America;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Broadsoft platform for consumer VoIP services and enterprise hosted IPPBX services;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Cisco IP/multiprotocol label switching (MPLS)/ATM/frame relay switches; carrier-class Cisco Gigabit Switch routers,
carrier-class Cisco routers used for data services and internet connection; an MPLS core for VPN services; and over 11,000 modems for dial-up services; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cisco ethernet metropolitan rings for LAN services, transparent, national, point-to-point, and point-to-multipoint.
| | - |  | -------------------------------------------------------------------------------------------------------------------

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

Our network is expandable and flexible. The conduit comprising the long haul network contains a fiber-optic cable with 24 fiber-optic
strands. In the metropolitan rings, there are three conduits (four in the case of Mexico City), at least one of which contains



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fiber-optic cable with 36 fiber-optic strands. The metropolitan infrastructure installed in Mexico City, Monterrey, Guadalajara and Ciudad Juarez has a fiber-optic cable with 144 fiber-optic
strands. These conduits are generally buried at a depth of 4 feet.

Most of the metropolitan rings built by us also have at
least one empty conduit, allowing for additional capacity to be deployed in the future at a substantially lower cost.

We have
large points of presence (POPs), in 30 cities within our long haul network, in addition to 104 metropolitan miniPOPs, junction and regenerator sites. A POP or miniPOP is a location where we have installed transmission and data switching
equipment that serves as a switching center or relay for the larger network. Our POPs contain telecommunications equipment (switching and/or transport) and serve as interconnection points between different elements of our network and other networks
(including Telmex). Each switch and POP is housed in a concrete structure that is equipped with an advanced power supply, air conditioning, security and fire protection system.

Fiber-optics. Our inter-and intra-city fiber-optic network is 6,101 kilometers in length and consists of three fiber-optic
inter-city rings with the transmission capabilities of DWDM and synchronous digital hierarchy (SDH) architecture. The network is located in the following areas:



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



| |  |  | a west-central ring through Guadalajara and other cities;
| | - |  | ---------------------------------------------------------



| |  |  | a southern ring through Mexico City and other cities;
| | - |  | -----------------------------------------------------



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



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

We own metropolitan rings in 16 main cities. SDH and Ethernet
technologies are used to provide all services as allowed by our long distance and value-added services concessions.

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

Our network incorporates Lucent True Wave non-zero dispersion shifted fiber-optic cable, which
supports SDH and DWDM. SDH is the industry standard in transmission technology, similar to Synchronous Optical Network (SONET), which supports 2.5, 10 Gbps and higher transmissions over a single fiber-optic strand. SDH enables the
deployment of bidirectional ring architecture, a system that allows for nearly instantaneous rerouting of traffic in the event of an equipment failure or a fiber-optic cut. We were the first Latin American carrier to use dense wave division
multiplexing technology, which enables greatly expanded transmission capacity over the same physical infrastructure or fiber link through the installation of additional electronics, thus enabling us to increase significantly our transmission
capacity. All of our initial long distance fiber-optic facilities use dense wave division multiplexing technology with an effective transmission rate of 40 Gbps per pair of fiber-optic strands, and our new DWDM system has 400 Gbps of capacity, with
the possibility to upgrade it to 800 Gbps in an additional pair of fiber-optic strands. We are currently utilizing one pair of fiber-optic strands with a 2.5 Gbps capacity, a second pair of fiber-optic strands using DWDM technology with a capacity
of 40 Gbps, of which we currently utilize sixteen wavelengths with a capacity of 2.5 Gbps each, and a third pair of fiber-optic strands for next generation DWDM system with 400 Gbps.

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

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



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Voice and VoIP Next Generation Network (NGN). We have
deployed NGN infrastructure for VoIP services, such as pre/postpaid, local and long distance VoIP services, for business and consumer customers, based on softswitches, application servers and dedicated data infrastructure. Our main vendors include
Sonus Networks, Inc. (Sonus), Broadsoft Inc. (Broadsoft), Pactolus Communications Software Corporation (Pactolus), Agnity Inc. (Agnity) and Genband Inc. (Genband) among others. An
increasing number of VoIP and signaling gateways have been deployed in several cities, while the main control functions are centralized in Mexico City and Monterrey.

Local Number Portabilityfor fixed and mobile voice services was a regulatory mandate implemented in Mexico in 2008, covering all
telecommunications operators and numbers within the same local service area, allowing for transfer of customers from mobile-to-mobile operators and from fixed-to-fixed operators, including basic local, freephone, and virtual network numbers.

All of our VoIP services are based on core technologies from leading world-class vendors, and in the short to medium term all
of our local services voice traffic will be handled through this NGN. This infrastructure is especially suited for deploying Services over IP (SoIP) and advanced media switching services, such as conferencing and collaborative-work,
which are provided through the same infrastructure based on customer requirements and demand.

Sonus and Broadsoft are leading
vendors of NGNs and IP Multimedia Subsystem (IMS) based VoIP infrastructure for fixed and mobile networks, capable of supporting advanced and converged services for consumer and business customers through application servers
and reconfigurable electronics. The performance and availability of networks based on these technologies has been proven through its intensive use in the largest and more complex telecommunications networks.

Data Infrastructure. To support the growing demand for data services, we have deployed an MPLS-based core network for
MPLS-VPNs, and Internet, and several metropolitan Ethernet networks. We have deployed ATM and frame relay switches in several cities, such as in Mexico City, Monterrey, Guadalajara, Puebla, Tijuana and Ciudad Juarez, which interconnect with
AT&Ts Global Frame Relay network. Our IP network is supported by carrier class gigabit routers and other high capacity routers deployed in key points of presence and switch sites. Our IP network interconnects with the global Internet via
AT&T internet services and other high quality service providers. We have deployed Cisco routers for our VPN infrastructure in places such as Mexico City, Monterrey, Guadalajara, Tijuana, Ciudad Juarez, Chihuahua, Culiacan, Cancun, Tampico,
Mexicali, Hermosillo, Nogales, Ciudad Obregon, Los Mochis, La Paz, Acapulco, Ciudad del Carmen, Coatzacoalcos, Irapuato, Merida, Oaxaca, Tuxtla and Villahermosa. All of our service networks expand their coverage to the entire country through our own
transmission network and through the use of alternate access providers.

Direct access. Our direct access
facilities allow our customers to access our network directly and avoid interconnection with local exchange carriers and incumbent networks like Telmexs. We have deployed metropolitan fiber-optic rings consisting of approximately 1,740 route
kilometers in Monterrey, Mexico City, Guadalajara, Ciudad Juarez, Tijuana, San Luis Potosi, Queretaro, Leon and other cities in Mexico, each of which has been deployed using an SDH ring, IP/Ethernet or ATM architecture. To date, we have 104
metropolitan miniPOPs in our metropolitan rings acting as hubs to connect enterprise customers and some corporate buildings to our network, and more are scheduled for construction every year as customer demand increases. In addition, we possess
national and regional licenses for microwave wireless frequencies that allow us to connect many of our business customers directly to our network, reducing our dependence on Telmexs local network.

Wireless facilities. We hold two national point-to-point concessions to provide wireless connectivity to business customers
(one in the 15 GHz band and one in the 23 GHz band). We also hold three point-to-multipoint concessions in the 10 GHz band covering Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacan, Mexico, Hidalgo
and Morelos which provide direct access to our small business customers. We lease wireless frequency capacity from Conectividad Inalámbrica 7GHz, S. de R.L., a joint venture between our equity holders and a subsidiary of Axtel, which acquired
rights to use a concession in the 7 GHz band with national coverage to provide wireless connectivity to business customers and to expand the network infrastructure. To provide less capital-intensive direct access facilities and network
interconnection in selected smaller cities (and for redundancy purposes), we have deployed 63 radio towers in our network. On these towers we have selectively deployed point-to-point and point-to-multipoint digital microwave transmission equipment.
Our main suppliers of digital microwave equipment include Alcatel-Lucent Mexico, S.A. de C.V. (Alcatel-Lucent), Alvarion, Ltd (Alvarion), Microwave Networks International (MNI), Aviat Networks Mexico S.A. de C.V.
(Aviat Networks) and SIAE Microelettronica S.p.a. (SM). A continuous process of evaluation is performed among current and potential technology suppliers.

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

We continually review, optimize and improve our network, and we believe that there are no environmental issues that may have an impact on
our network.



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Other properties

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

Item 4.A. Unresolved Staff Comments.

Not applicable.

Item 5. Operating and Financial Review and Prospects.

A. Operating results

Basis of presentation

Our consolidated financial statements have been prepared in accordance with Mexican FRS, which differ in certain significant respects from
U.S. GAAP. Note 20 to our consolidated financial statements provides information relating to the nature and effect of such differences, as they relate to us, and provides a reconciliation to U.S. GAAP of our net income (loss) reported under Mexican
FRS for the years ended December 31, 2007, 2008 and 2009 and our total stockholders equity as of December 31, 2008 and 2009.

Mexican FRS was established by CINIF. This organization releases Mexican FRS and interpretations of Mexican FRS.

Mexican FRS also requires that all financial information as of December 31, 2007 and prior periods be presented in Pesos of
purchasing power as of December 31, 2007, and financial information beginning January 1, 2008 and for later periods be presented in adjusted nominal Pesos. Due to the implementation of the new NIF B-10 Inflation Effects,
financial information as of January 1, 2008 and later periods is presented in adjusted nominal Pesos, as the information includes the cumulative inflation effects up to December 31, 2007, but will not include any future inflation
adjustments. References in this annual report to amounts in nominal Pesos are to Pesos that have not been adjusted for inflation. See Note 2 to our consolidated financial statements for further information regarding the change in Mexican
FRS. Although the restatement of nominal Peso amounts into constant Peso amounts lessens the distorting effect that inflation has on comparisons of financial statements over time, this restatement does not wholly eliminate those distortions, making
evaluation of period-to-period trends difficult.

Overview

Our primary business consists of the operation of a public telecommunications network in Mexico offering domestic and international long
distance voice, data, video, internet-related services, and local telephone service. In accordance with the terms of our long distance concession and guidelines established by the SCT, on January 1, 1997 we began the gradual rollout and
expansion of our long distance services to 60 cities. Our services became available in all 60 cities on June 27, 1997. Currently, we provide long distance origination services from 199 cities in Mexico.

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

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

The following table sets forth information regarding our revenues:



|                                  |  |          |  |      |          |  |         |          |      |   |  |         |  |      |  
|--------------------------------- |  | -------- |  | ---- | -------- |  | ------- | -------- | ---- | - |  | ------- |  | ---- | -
|                                  |  | 2007 (1) |  |      | 2008 (2) |  |         | 2009 (2) |     
|Domestic long distance            |  | 1,259.5  |  | 24.9 | %        |  | 1,047.8 |          | 22.4 | % |  | 1,036.7 |  | 22.1 | %
|International long distance       |  | 1,155.1  |  | 22.8 | %        |  | 674.7   |          | 14.4 | % |  | 384.0   |  | 8.2  | %
|Data, internet and local services |  | 2,641.4  |  | 52.2 | %        |  | 2,950.1 |          | 63.1 | % |  | 3,263.0 |  | 69.7 | %
|                                  |  |          |  |      |          |  |         |          |      |   |  |         |  |      |  
|Total                             |  | 5,056.0  |  | 100  | %        |  | 4,672.5 |          | 100  | % |  | 4,683.7 |  | 100  | %
|                                  |  |          |  |      |          |  |         |          |      |   |  |         |  |      |  



|(1) | Expressed in millions of constant Pesos of purchasing power as of December 31, 2007.
|--- | ------------------------------------------------------------------------------------

|(2) | Information for 2008 and 2009 expressed in millions of adjusted nominal Pesos.
|--- | ------------------------------------------------------------------------------



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



|                                                 |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|------------------------------------------------ |  | --------- |  | --- | ---- |  | --------- | ---- | --- | - |  | --------- |  | --- | -
|                                                 |  | 2007      |  |     | 2008 |  |           | 2009 |    
|Long distance lines in service at end of period: |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|Business                                         |  | 77,238    |  |     |      |  | 78,176    |      |     |   |  | 71,945    |  |     |  
|Residential                                      |  | 284,606   |  |     |      |  | 172,916   |      |     |   |  | 116,382   |  |     |  
|Minutes of use for the
period(1):                |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|Domestic long distance                           |  | 1,879,101 |  | 57  | %    |  | 1,760,324 |      | 67  | % |  | 1,641,368 |  | 77  | %
|International long distance                      |  | 1,391,913 |  | 43  | %    |  | 862,024   |      | 33  | % |  | 484,586   |  | 23  | %
|                                                 |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  
|Total                                            |  | 3,271,013 |  | 100 | %    |  | 2,622,347 |      | 100 | % |  | 2,125,954 |  | 100 | %
|                                                 |  |           |  |     |      |  |           |      |     |   |  |           |  |     |  



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



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Impact of developments in the Mexican economy

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

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



|                        |  |               |   |  |                     |   |  |                              |    |  |                                                       |             
|----------------------- |  | ------------- | - |  | ------------------- | - |  | ---------------------------- | -- |  | ----------------------------------------------------- | ------------
|Year Ended December 31, |  | InflationRate |   |  | Average28-day Cetes |   |  | Mexican GDPAnnual GrowthRate |    |  | Gross InternationalReserves as of the Endof Each
Year
|1997                    |  | 15.7          | % |  | 19.8                | % |  | 6.8                          | %  |  | $                                                     | 28.0 billion
|1998                    |  | 18.6          | % |  | 24.6                | % |  | 4.9                          | %  |  | $                                                     | 30.1 billion
|1999                    |  | 12.3          | % |  | 21.3                | % |  | 3.9                          | %  |  | $                                                     | 30.7 billion
|2000                    |  | 9.0           | % |  | 15.3                | % |  | 6.6                          | %  |  | $                                                     | 33.6 billion
|2001                    |  | 4.4           | % |  | 11.3                | % |  | (0.2                         | )% |  | $                                                     | 40.9 billion
|2002                    |  | 5.7           | % |  | 7.1                 | % |  | 0.8                          | %  |  | $                                                     | 48.0 billion
|2003                    |  | 4.0           | % |  | 6.2                 | % |  | 1.4                          | %  |  | $                                                     | 57.4 billion
|2004                    |  | 5.2           | % |  | 6.8                 | % |  | 4.1                          | %  |  | $                                                     | 61.5 billion
|2005                    |  | 3.3           | % |  | 9.2                 | % |  | 3.3                          | %  |  | $                                                     | 68.7 billion
|2006                    |  | 4.1           | % |  | 7.2                 | % |  | 4.8                          | %  |  | $                                                     | 67.7 billion
|2007                    |  | 3.8           | % |  | 7.2                 | % |  | 3.4                          | %  |  | $                                                     | 78.0 billion
|2008                    |  | 6.5           | % |  | 7.7                 | % |  | 1.5                          | %  |  | $                                                     | 85.3 billion
|2009                    |  | 3.6           | % |  | 5.4                 | % |  | (6.5                         | )% |  | $                                                     | 90.8 billion

Source: Banco de
México

A portion of our cost of services and a significant portion of our operating expenses are indexed by
inflation. Accordingly, increases in inflation will generally increase our cost of service and operating expenses. We generally have fixed contracts with our customers and in the event we are unable to raise our rates to incorporate increases in
inflation, our results will be adversely affected.

Impact of foreign currency fluctuations

Our principal foreign currency fluctuation risk involves changes in the value of the Peso relative to the U.S. dollar. As of
December 31, 2009, the amount of our notes, bank loans, notes payable and capital leases denominated in U.S. dollars was Ps. 3,208.6 million.

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

We record an
exchange gain or losses with respect to U.S. dollar-denominated net monetary position of assets and liabilities when the Peso appreciates or depreciates in relation to the U.S. dollar. Our U.S. dollar-denominated monetary liabilities
exceed our U.S. dollar-denominated monetary assets.

As of the date of this annual report, we do not have any derivative
instruments. We had a settlement of forward contracts in an amount of US$1.6 million in both January 2009 and February 2009. The effect of those derivative instruments was negative and amounted to Ps. 2.2 million. In addition, we
have a U.S. dollar-denominated lease contract which for accounting purposes the dollar currency embedded in the host lease contract is considered as embedded derivative. For the year ended December 31, 2009, the effect of this embedded
derivative was negative and amounted to Ps. 2.6 million, this contract is evaluated on a monthly basis.

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

IETU

On October 1, 2007, the Mexican government made changes to its tax system, which took effect on January 1, 2008. The changes
introduced a flat tax (Impuesto Empresarial a Tasa Única, or IETU), which replaces the Mexican asset tax. In general, Mexican companies are subject to paying the greater of the flat tax or the income tax. Taxpayers will
calculate IETU tax at 17.5 percent of an income determined based on the cash flow (although transitional rates of 16.5 percent and 17.0 percent apply in 2008 and 2009, respectively). If the IETU tax is a positive amount, the enterprise compares the
IETU tax to the income tax calculated under the current income tax system and to IETU tax credits. If the IETU tax is larger, this amount is classified as IETU tax and paid as a supplement to the regular income tax liability. However, if the IETU
tax is positive but less than the regular income tax plus the IETU tax credits, no IETU tax is due. If the tax base that is subject to the IETU tax is negative (which will occur when deductible



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expenditures exceeds taxable receipts), the amount of excess expenditures multiplied by the IETU tax rate will result in a credit for the IETU tax that can be used to reduce or eliminate the
regular income tax in the current year and/or reduce the IETU tax in the subsequent 10 years. For 2009, our income tax is higher than our IETU tax; accordingly, we have not recognized any IETU in our consolidated income statements.

In accordance with the interpretation published by CINIF on December 21, 2007 with respect to the accounting effects of the IETU
tax, and based on our financial and tax projections, we have determined that we will continue to pay the income tax in the foreseeable future. As a result, our management has not recorded any deferred IETU taxes as of December 31, 2009.

On December 7, 2009, a decree was published, which modified, added and revoked several provisions of the Mexican Income
Tax Law for 2010. This decree establishes, among others, that the income tax rate will be 30% for fiscal years 2010 to 2012, 29% for 2013 and 28% from 2014 onwards. At December 2009 the aforementioned change in rates resulted in a decrease in our
deferred income tax asset balance of Ps. 18.6 million, with a corresponding effect on income for the year, which was determined based on the expectation of the reversal of temporary items at the new rates.

Regulations

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

Results of operations

Fiscal Year ended December 31, 2009 compared to Fiscal Year ended December 31, 2008

Revenues

Total revenues increased 0.2%, or Ps. 11.1 million, to Ps. 4,683.6 million in 2009 from Ps. 4,672.5 million in 2008,
primarily due to higher revenues from data, internet and local services, which offset the decrease in revenues from long distance services.

Data, Internet and Local Services.Data, internet and local service revenues increased 10.6%, to Ps. 3,263.0 million
in 2009 from Ps. 2,950.1 million in 2008. Such increase resulted primarily from an increase in our VPN, Ethernet and managed services revenues, as we continued to focus our sales efforts on these services. Our data, internet and local service
segment continued to increase its share in our revenue portfolio, and represented 69.7% of our total revenues in 2009, compared to 63.1% in 2008.

Long Distance Services. Revenues derived from our long distance services decreased 17.5%, to Ps. 1,420.6 million in 2009 from
Ps. 1,722.5 million in 2008. The decrease in long distance services revenues was primarily due to lower traffic, which decreased 18.9% to 2,126 million minutes in 2009 from 2,622 million minutes in 2008. As a percentage of total
revenues, long distance revenues represented 30.3% of our total revenues in 2009, compared to 36.9% of our total revenues in 2008.

Revenues from domestic long distance services decreased 1.1%, or Ps. 11.1 million, to Ps. 1,036.7 million in 2009 from Ps.
1,047.8 million in 2008. Our average domestic long distance revenue per minute increased 6.1% to Ps. 0.63 in 2009 from Ps. 0.60 in 2008. Domestic long distance volume for 2009 decreased by 119 million minutes, or 6.8%, to 1,641 million
minutes in 2009 from 1,760 million minutes in 2008, primarily due to the decrease in traffic from our residential customers. Our total lines in service decreased by 62,765 lines, a 25.0% decrease, to 188,328 lines as of December 31, 2009
from 251,093 lines as of December 31, 2008, primarily due to our strategy to focus on our business customers and high-usage residential customers.

Revenues from international long distance services decreased 43.1%, or Ps. 290.8 million, to Ps. 384.0 million in 2009 from Ps.
674.7 million in 2008. International long distance volume decreased 43.7%, or 377 million minutes, to 485 million minutes in 2009 from 862 million minutes in 2008. Our average revenue per minute was 0.79 in 2009, similar to 2008.
The decrease in our international long distance revenue was primarily due to lower international long distance volume as a result of our decision not to carry unprofitable traffic.



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Cost of Services (excluding depreciation)

Our cost of services consisted primarily of interconnection costs, including:



| |  |  | Fees for leased lines, typically paid on a per-circuit per month basis to Telmex and other last mile access providers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Interconnection costs, including local access charges and resale expenses, paid on a per-minute basis primarily to Telmex; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | International settlement payments to foreign carriers on a per-minute basis for the completion of international calls originated in Mexico by us.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Cost of services decreased 2.9% to Ps. 1,736.7 million in 2009 from Ps. 1,789.0 million in 2008.
The decrease in cost of services was primarily due to lower volume of traffic in long distance services.

Data,
Internet and Local Services. Cost of data, internet and local services increased 4.5% to Ps. 781.1 million in 2009 from Ps. 747.5 million in 2008. This was primarily due to an increase in internet-related services revenues, such as
VPN, Ethernet and managed services, which have better margins among data, internet and local services.

Long Distance
Services. Cost of long distance services decreased 8.2% to Ps. 955.6 million in 2009 from Ps. 1,041.5 million in 2008. This decrease in cost of long distance services was primarily due to a decrease in domestic and international long
distance volume of traffic.

Gross Profit

Gross profit is defined as revenues minus cost of services (excluding depreciation and amortization). Gross profit is a non-. GAAP
financial measure that is not defined under Mexican FRS.

We believe that gross profit can be useful to facilitate comparisons
of operating performance between periods and with other companies. However, our computation of gross profit is not necessarily comparable to gross profit as reported by other companies because it excludes depreciation and amortization expense.
Though gross profit is a relevant measure of operating performance, it should not be considered as an alternative to operating income (determined in accordance with Mexican FRS as an indication of our financial performance), or as an indication of
resources generated from operating activities (determined in accordance with Mexican FRS, as a measure of our liquidity), nor is it indicative of funds available to meet our cash needs.

Gross profit in 2009 increased 2.2% to Ps. 2,946.9 million from Ps. 2,883.5 million in 2008. Our gross profit increased
primarily due to higher data, internet and local services gross profit, which helped to offset the decrease in the long distance services gross profit.

Data, Internet and Local Services. Our data, internet and local services gross profit increased 12.7%, or Ps.
279.4 million, to Ps. 2,481.9 million in 2009 from Ps. 2,202.6 million in 2008. This increase was primarily due to the growth of these services revenues.

Long Distance Services. Our long distance gross profit decreased 31.7% to Ps. 465.0 million in 2009 from Ps.
681.0 million in 2008. This decrease was primarily due to a decrease in both domestic and international long distance revenues.

Our gross margin, defined as gross profit as a percentage of total revenues, increased to 62.9% in 2009 from 61.7% in 2008.

A reconciliation of our operating income to gross profit is provided below as of December 31, 2008 and 2009.



|                                                     |  |                         |          |   |      |    |          |  
|---------------------------------------------------- |  | ----------------------- | -------- | - | ---- | -- | -------- | -
|                                                     |  | Year ended December 31, |         
|                                                     |  | 2008                    |          |   | 2009 |   
|Gross profit                                         |  | Ps                      | 2,883.5  |   |      | Ps | 2,946.9  |  
|Administration, selling and other operating expenses |  |                         | (1,551.7 | ) |      |    | (1,529.4 | )
|Depreciation and amortization                        |  |                         | (756.7   | ) |      |    | (853.5   | )
|                                                     |  |                         |          |   |      |    |          |  
|Operating income                                     |  | Ps                      | 575.1    |   |      | Ps | 564.0    |  
|                                                     |  |                         |          |   |      |    |          |  



Administration, selling and other operating expenses

Administration, selling and other operating expenses decreased 1.4%, or Ps. 22.3 million, to Ps. 1,529.4 million in 2009 from
Ps. 1,551.7 in 2008, primarily due to a decrease in marketing expenses and lower personnel expenses due to the reorganization of our consumer segment at the end of 2008. As a percentage of total revenues, administration, selling and other operative
expenses represented 32.7% in 2009, compared to 33.2% in 2008.



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Depreciation and amortization

Depreciation and amortization increased 12.8%, or Ps. 96.8 million, to Ps. 853.5 million in 2009 from Ps. 756.7 million in
2008. This increase was primarily due to higher fixed assets as a result of an increase in capital expenditures during 2009 and the shorter useful lives of some of those assets.

Operating income

Operating income decreased 1.9%, or Ps. 11.1 million, to Ps. 564.0 million in 2009 from Ps. 575.1 million in 2008. This
increase was primarily due to a Ps. 96.8 million increase in depreciation and amortization already explained above when compared to 2008.

Comprehensive financial result

Our comprehensive financial loss in 2009 was Ps. 221.4 million, compared to a loss of Ps. 943.9 million in 2008. The following
table sets forth our comprehensive financial results for the periods under review:



|                                           |  |                         |   |  |         |  
|------------------------------------------ |  | ----------------------- | - |  | ------- | -
|                                           |  | Year ended December 31, |  
|                                           |  | 2008(1)                 |   |  | 2009(1) |  
|Interest expense                           |  | (294.6                  | ) |  | (333.3  | )
|Interest income                            |  | 29.1                    |   |  | 17.6    |  
|Exchange loss, net                         |  | (615.2                  | ) |  | 99.1    |  
|Effect of derivative financial instruments |  | (63.2                   | ) |  | (4.8    | )
|                                           |  |                         |   |  |         |  
|Comprehensive financial result, net        |  | (943.9                  | ) |  | (221.4  | )
|                                           |  |                         |   |  |         |  



|(1) | Information is expressed in millions of adjusted nominal Pesos.
|--- | ---------------------------------------------------------------

Our interest expense totaled Ps. 333.3 million in 2009 compared to Ps. 294.6 million in 2008. The increase in the interest
expense was due to non-recurrent financial expenses related to the prepayment of our 8% senior notes due 2010 through a tender offer on each of August 12, 2009 and August 25, 2009 and through an optional redemption on September 11,
2009 and also due to a higher interest rate of our 11.750% senior notes due 2014 issued on August 11, 2009 when compared to the interest rate of our 8% senior notes due 2010, which were prepaid in August and September of 2009.

Interest income decreased to Ps. 17.6 million in 2009 from Ps. 29.1 million in 2008, primarily due to lower interest rates
during 2009.

We recorded a foreign exchange gain of Ps. 99.1 million in 2009 compared a foreign exchange loss of Ps.
615.2 million in 2008. We record a foreign exchange gain or loss with respect to U.S. dollar-denominated net monetary position of assets and liabilities when the Peso appreciates or depreciates in relation to the U.S. dollar. Our U.S.
dollar-denominated monetary liabilities exceeded our U.S. dollar-denominated monetary assets for the year ended December 31, 2009. We recorded a foreign exchange gain primarily due to a 3.5% appreciation of the value of the Peso against the
U.S. dollar during 2009.

In October 2008, we entered into a forward to sell contract at an average monthly amount of US $1.2
million for December 2008, and January and February 2009, at an average exchange rate of Ps. 12.39 per US$1. The effect of those derivative financial instruments was negative and amounted to Ps. 2.2 million in 2009 due to a 10.3%
depreciation of the Peso against the U.S. dollar during the first two months of 2009. In addition, we have a U.S. dollar-denominated lease contract which for accounting purposes the dollar currency embedded in the host lease contract is
considered as embedded derivative. For 2009, the effect of this embedded derivative was negative and amounted to Ps. 2.6 million. This contract is evaluated on a monthly basis.

Income and IETU

We and our sole subsidiary, Servicios Alestra, are required to pay the greater of the income tax or IETU, which are computed separately
for each entity. The Company participates in the tax consolidation of Alfa, its holding company. We recorded an income tax expense of Ps. 22.1 million in 2009 compared to Ps. 34.5 million in 2008.

In 2009, we amortized tax loss carry-forwards previously reserved, against our current income tax, amounting to Ps. 138.0 million. The
utilization of these tax loss carry-forwards derived from different factors, such as the appreciation of the Peso in 2009 (resulting in lower costs because our fixed interconnection tariffs are established in U.S. dollars) and obtaining better
results in 2009 than those presented in our projections from 2008 (we used a conservative scenario due to the consideration that the global financial crisis could have an adverse effect on our business).



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##### Table of Contents

Based on our projected tax results for future years, we have determined that we will be
subject to income tax rather than IETU. Our projections assume the following tax considerations:



| |  |  | We will exercise the option to apply an accelerated tax deduction on certain capital expenditures in 2010 and future years;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain assets will continue depreciating for tax purposes at the 1% rate;
| | - |  | --------------------------------------------------------------------------



| |  |  | An increase in our interest expense due to the issuance of our 11.750% senior notes; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | We may not amortize tax loss carry-forwards in following years (a reserve has been created for this amount).
| | - |  | ------------------------------------------------------------------------------------------------------------

Net Income (loss)

As a result of the above factors, in 2009, we recorded a net income of Ps. 291.5 million compared to a net loss of Ps.
384.3 million in 2008. Although we had similar operating income in 2008 and 2009, we recorded a foreign exchange gain in 2009, while in 2008 we recorded a foreign exchange loss.

Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007

Revenues

Total revenues decreased 7.6%, or Ps. 383.5 million, to Ps. 4,672.5 million in 2008 from Ps. 5,056.0 million in 2007,
primarily due to lower long distance revenues.

Data, Internet and Local Services.Data, internet and local
service revenues increased 11.7%, to Ps. 2,950.1 million in 2008 from Ps. 2,641.4 million in 2007. Such increase resulted primarily from an increase in our VPN and direct access services revenues, as we continued to focus our sales efforts
on these services. Our data, internet and local service segment continued to increase its share in our revenue portfolio, and represented 63.1% of our total revenues in 2008, compared to 52.2% in 2007.

Long Distance Services. Revenues derived from our long distance services decreased 28.7%, to Ps. 1,722.5 million in 2008
from Ps. 2,414.6 million in 2007. The decrease in long distance services revenues was primarily due to both lower traffic, which decreased 19.8% to 2,622 million minutes in 2008 from 3,271 million minutes in 2007, and lower rates.

Revenues from domestic long distance services decreased 16.8%, or Ps. 211.7 million, to Ps. 1,047.8 million in 2008
from Ps. 1,259.5 million in 2007. Our average domestic long distance revenue per minute decreased 7.7% to Ps. 0.60 in 2008 from Ps. 0.65 in 2007, primarily due to the competition in rates. Domestic long distance volume for 2008 also decreased
6.3%, or 119 million minutes, to 1,760 million minutes compared to 1,879 million minutes in 2007, primarily due to the decrease in traffic from our residential customers. Our total lines in service decreased by 110,751 lines, a 30.6%
decrease, to 251,093 lines as of December 31, 2008 from 361,844 lines as of December 31, 2007, primarily due to our strategy to focus on our business customers and high-usage residential customers. As a percentage of total revenues,
domestic long distance revenues represented 22.4% of our total revenues in 2008, compared to 24.9% of our total revenues in 2007.

Revenues from international long distance services decreased 41.6%, or Ps. 480.4 million, to Ps. 674.7 million in 2008 from Ps.
1,155.1 million in 2007. International long distance volume decreased 38.1%, or 530 million minutes, to 862 million minutes in 2008 from 1,392 million minutes in 2007. Our average revenue per minute decreased 2.5%, to Ps. 0.78 in
2008 from Ps. 0.80 in 2007. As a percentage of total revenues, international long distance revenues represented 14.4% of our total revenues in 2008, compared to 22.8% of our total revenues in 2007. The decrease in both long distance volume and
average revenue per minute is primarily due to increased competition and our decision not to carry unprofitable traffic.

Cost of Services (excluding depreciation)

Our cost of services consisted primarily of interconnection costs, including:



| |  |  | Local access charges and resale expenses, paid on a per-minute basis primarily to Telmex,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | International settlement payments paid to foreign carriers on a per-minute basis for the completion of international calls originated in Mexico by us;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fees for leased lines, typically paid on a per-circuit per month basis to Telmex and other last mile access providers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Cost of services decreased 19.3% to Ps. 1,789.0 million in 2008 from Ps.
2,217.7 million in 2007. The decrease in cost of services was primarily due to lower volume of traffic in long distance services.

Data, Internet and Local Services. Cost of data, internet and local services decreased 1.4% to Ps. 747.5 million in
2008 from Ps. 757.7 million in 2007. This was primarily due to fixed costs optimization.

Long Distance
Services.Cost of long distance services decreased 28.7% to Ps. 1,041.5 million in 2008 from Ps. 1,460.0 million in 2007. This decrease in cost of long distance services was primarily due to a decrease in domestic and
international long distance volume of traffic.

Gross Profit

Gross profit in 2008 increased 1.6% to Ps. 2,883.5 million from Ps. 2,838.4 million in 2007. Our gross profit increased
primarily due to higher data, internet and local services gross profit, which helped to offset the decrease in the long distance services gross profit.

Data, Internet and Local Services. Our data, internet and local services gross profit increased 16.9%, or Ps. 318.9
million, to Ps. 2,202.6 million in 2008 from 1,883.6 million in 2007. This increase was primarily due to an increase in revenues from our data, internet and local services, while cost of these services decreased.

Long Distance Services. Our long distance gross profit decreased 28.7% to Ps. 681.0 million in 2008 from Ps.
954.7 million in 2007. This decrease was primarily due to a decrease in both domestic and international long distance revenues.

Our gross margin, defined as gross profit as a percentage of total revenues, increased to 61.7% in 2008 from 56.1% in 2007.

A reconciliation of our operating income to gross profit is provided below as of December 31, 2007 and 2008.



|                                                     |  |                         |          |   |         |     |          |  
|---------------------------------------------------- |  | ----------------------- | -------- | - | ------- | --- | -------- | -
|                                                     |  | Year Ended December 31, |         
|                                                     |  | 2007(1)                 |          |   | 2008(2) |    
|Gross profit                                         |  | Ps.                     | 2,838.4  |   |         | Ps. | 2,883.5  |  
|Administration, selling and other operating expenses |  |                         | (1,513.3 | ) |         |     | (1,551.7 | )
|Depreciation and amortization                        |  |                         | (870.1   | ) |         |     | (756.7   | )
|                                                     |  |                         |          |   |         |     |          |  
|Operating income                                     |  | Ps.                     | 454.9    |   |         | Ps. | 575.1    |  
|                                                     |  |                         |          |   |         |     |          |  



|(1) | Information for 2007 is expressed in millions of Pesos with purchasing power as of December 31, 2007.
|--- | -----------------------------------------------------------------------------------------------------

|(2) | Information for 2008 is expressed in millions of adjusted nominal Pesos.
|--- | ------------------------------------------------------------------------

Administration, selling and other operating expenses

Administration, selling and other operating expenses increased 2.5%, or Ps. 38.4 million, to Ps. 1,551.7 million in 2008 from
Ps. 1,513.3 in 2007. This increase was primarily due to an increase of our personnel expenses. As a percentage of total revenues, administration, selling and other operative expenses represented 33.2% in 2008, compared to 29.9% in 2007.

Depreciation and amortization

Depreciation and amortization decreased 13.0%, or Ps. 113.5 million, to Ps. 756.7 million in 2008 from
Ps. 870.1 million in 2007. This decrease was primarily due to the ending of our preoperative expenses amortizations in the second half of 2007. In 2007, we recorded preoperative expenses amortizations in an amount of Ps.
114.6 million.

Operating income

Operating income increased 26.4%, or Ps. 120.2 million, to Ps. 575.1 million in 2008 from Ps. 454.9 million in 2007. This
was primarily due to the increase of Ps. 45.2 million in gross profit coupled with a decrease of Ps. 113.5 million in depreciation and amortization when compared to 2007.

Comprehensive financial result



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Our comprehensive financial result in 2008 was a loss of Ps. 943.9 million, compared to
a loss of Ps. 179.5 million in 2007. The following table sets forth our comprehensive financial results for the periods under review:



|                                           |  |                         |   |  |         |  
|------------------------------------------ |  | ----------------------- | - |  | ------- | -
|                                           |  | Year Ended December 31, |  
|                                           |  | 2007(1)                 |   |  | 2008(2) |  
|Interest expense                           |  | (314.2                  | ) |  | (294.6  | )
|Interest income                            |  | 30.2                    |   |  | 29.1    |  
|Exchange loss, net                         |  | (2.2                    | ) |  | (615.2  | )
|Effect of derivative financial instruments |  | 2.9                     |   |  | (63.2   | )
|Gain from monetary position                |  | 103.8                   |   |  |        |  
|                                           |  |                         |   |  |         |  
|Comprehensive financial result, net        |  | (179.5                  | ) |  | (943.9  | )
|                                           |  |                         |   |  |         |  



|(1) | Information for 2007 is expressed in millions of Pesos purchasing power as of December 31, 2007.
|--- | ------------------------------------------------------------------------------------------------

|(2) | Information for 2008 is expressed in millions of adjusted nominal Pesos.
|--- | ------------------------------------------------------------------------

Our interest expense totaled Ps. 294.6 million in 2008 compared to Ps. 314.2 million in 2007. The decrease in the interest
expense was primarily due to lower levels of indebtedness as a result of the corresponding amortization of our 8% senior notes due 2010 on December 31, 2007 and June 30, 2008, and the US$23.1 million prepayment of a then outstanding
bank facility on September 11, 2008, with internally generated funds and a new US$15.0 million bank facility.

Interest income decreased to Ps. 29.1 million in 2008 from Ps. 30.2 million in 2007, primarily due to a lower average cash
balance coupled with lower interest rates during 2008.

We recorded a foreign exchange loss of Ps. 615.2 million in 2008
compared to a foreign exchange loss of Ps. 2.2 million in 2007. We recorded an exchange loss primarily due to a 24.8% depreciation of the value of the Peso against the U.S. dollar during 2008, which caused our U.S. dollar-denominated
monetary liabilities to exceed our U.S. dollar-denominated monetary assets.

The effect of derivative financial
instruments was Ps. 63.2 million in 2008, primarily due to a 6.2% appreciation of the Peso against the U.S. dollar during the first eight months of 2008. This situation affected our two economic hedge contracts with a fixed purchase
exchange rate in 2008 of Ps. 10.82 per US$1 and Ps. 10.79 per US$1, respectively. On September 26, 2008 and September 29, 2008, our two economic hedge contracts were canceled, with a total premium paid of US$0.1 million.

In October 2008, we entered into a forward to sell contract at an average monthly amount of US$1.2 million in
December 2008 and January and February 2009, at an average exchange rate of Ps. 12.39 per US$1.00.

According
to the new accounting pronouncement NIF B-10 Inflation effects under Mexican FRS, which became effective on January 1, 2008, there is no gain from monetary position in 2008.

Income and IETU

We and our sole subsidiary, Servicios Alestra, are each required to pay the greater of the income tax or IETU, which are computed
separately for each entity. Based on the projections prepared by our management relative to our projected tax results in future years, we have determined that we will be subject to income tax rather than IETU. Our projections assume the following:

a) we will not exercise the option to apply the immediate deduction on investments in 2009; and

b) we will not amortize the tax loss carry forward in an amount of Ps. 323.6 million in 2009 and 2010.

Hence, a reserve has been created for this amount. As a result, a deferred income tax provision has been included in our income statement
for 2008.

Net Income (loss)

As a result of the above factors, we recorded a net loss of Ps. 384.3 million in 2008, compared to a net income of Ps.
188.0 million in 2007. Despite an increase in operating income, we recorded a net loss, primarily due to a higher exchange loss in 2008 compared to 2007.

Critical accounting policies

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



38



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##### Table of Contents

Revenue Recognition

Our principal sources of revenue are derived from domestic and international long distance services and from data, internet and local
services. Long distance revenues are recognized based on minutes of traffic processed by us. Revenues for international long distance services into Mexico are recognized based mainly on the minutes that AT&T sends to us.

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

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

Allowance for doubtful accounts

We take what we believe is a conservative approach toward uncollectible accounts, commonly called the Spindown Method. For all services,
this method calculates a certain reserve based on an estimate of the amount of customer accounts receivable that will become uncollectible. Both the residential and business accounts will be fully reserved when those accounts are 241 days and
271 days past due, respectively. To obtain this forecast, an uncollectible rate (the Spindown Rate) is estimated and applied to each bucket of the accounts receivable. The Spindown Rate applied on each months reserve
calculation equals the average Spindown Rate registered on the previous six-month period. Payment is due 25 days after the issuance of an invoice. We take several different actions to collect past due amounts, including the use of messages,
telegrams, collection letters sent to the customer and person-to-person calls. Service is completely suspended when a residential customer has an account that is more than 30 days past due, or when a business customer has an account that is
more than 60 days past due. If the balance for a residential customer is still unpaid 90 days after the due date, we assign the account to a collection agency. For business customers with an unpaid balance greater than Ps. 50, the account
is also assigned to a collection agency 120 days after the due date. If the efforts of collection agencies are unsuccessful and the balance is large enough to make legal proceedings worthwhile, we commence legal proceedings. As of
December 31, 2007, 2008 and 2009, our allowance for doubtful accounts was Ps. 55.7 million, Ps. 83.5 million and Ps. 62.5 million, respectively. We consider this reserve sufficient to cover the probable loss of accounts
receivables; however, we cannot assure you that we will not be required to increase the amount of this reserve. A 10% change in the amounts estimated to be uncollectible would result in a change in uncollectible expense of approximately Ps.
6.3 million.

Long-lived assets

We estimate the useful lives of long-lived assets in order to determine depreciation and amortization expense to be recorded during any
reporting period. The useful life of an asset is estimated at the time the asset is acquired and is based on historical experience with similar assets, taking into account anticipated technological or other changes. If technological changes were to
occur more rapidly than anticipated, or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened. This would result in the recognition of increased depreciation and amortization expense in future
periods. Alternatively, these types of technological changes could result in the recognition of an impairment charge to reflect the write-down in assets value. We review assets for impairment annually, or when events or circumstances indicate
that the carrying amount may not be recoverable over the remaining lives of the assets. In assessing impairments, we use cash flows, which take into account managements estimates of future operations, including estimates of revenues, costs,
operating expenses, capital expenditures and debt service. For U.S. GAAP purposes, pursuant to Accounting Standards Codification (ASC) 360-10, we review the carrying value of our long-lived assets for impairment whenever changes in
events and circumstances indicate that the carrying amount of the assets may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with an asset would be compared to the assets carrying value
to determine if an asset is impaired, in which case the asset is written down to its fair value. Based on our cash flow analysis, no impairment existed at December 31, 2007, 2008, and 2009.

Deferred taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our
income taxes. This process requires us to estimate our certain current tax exposure together with an assessment of temporary differences resulting from the differing treatment of certain items for tax and accounting purposes, such as depreciation
and amortization, cost and accruals, and allowance for doubtful accounts. These differences result in deferred tax assets and liabilities, which are included on our consolidated balance sheet. This method of determining deferred taxes is known as
the comprehensive asset  liability method. To the extent we establish a valuation allowance or we increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management
judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In 2009 we recorded a valuation allowance of Ps. 134.8 million,
due to uncertainty whether we may use certain deferred tax assets, primarily certain net operating losses carried forward, before they expire. This allowance for tax loss carry-forwards is based on our projected tax results for future years,
considering the scenario at the reporting date. If the scenario under which we prepared our projections changes, the allowance for tax loss carry-forwards may be reversed in the following years.



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These net operating loss carry-forwards expire ten years after they accumulate. The
valuation allowance is based on financial projections prepared by us. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance that could
materially impact our financial position and results of operations.

In accordance with the interpretation with respect to the
accounting effects of IETU published by CINIF on December 21, 2007 and based on financial and tax projections, we have determined that we will continue to pay regular income tax in the foreseeable future. As a result, we have not recorded any
deferred IETU taxes as of December 31, 2009.

New adopted standards

As of January 1, 2009, we adopted the following standards, which did not have a material impact on our financial statements:

Mexican FRS B-7, Business acquisitions, which establishes the general standards for valuation and
disclosure in the initial recognition of the net assets acquired in a business acquisition at acquisition date as well as for the non controlling interest and other items that may arise in them, such as goodwill.

Mexican FRS B-8, Consolidated and combined financial statements, which establishes the general standards for the
preparation and presentation of the consolidated and combined financial statements; as well as for the disclosures accompanying such financial statements.

Mexican FRS C-7, Investments in associated companies and other permanent investments, which sets forth the standards
for the accounting recognition of the investments in associates, and other permanent investments in which there is no control, joint control or significant influence.

Mexican FRS C-8, Intangible assets, which sets forth the valuation, presentation and disclosure standards for the
initial and subsequent recognition of the intangible assets acquired individually or through a business acquisition, or internally generated in the normal course of business.

Mexican FRS D-8, Share-based payments, which stipulates the standards for recognition of share-based payments in the
financial information. This NIF supersedes IFRS-2 Share-based payments, issued by the International Financial Reporting Standards Board applicable on a supplementary basis in Mexico.

Interpretation to Mexican FRS  18, Recognition of the 2010 Tax Reform in the Income tax. This interpretation was
issued with the purpose to guide the financial information preparers through certain questioning related to the 2010 Tax Reform and more specific, for the modifications to the tax consolidation and income tax rate applicable for future years.

New Financial Reporting Standards

The CINIF issued, during December 2009, a series of Mexican FRS and Interpretations (INIF) which will become effective as of
January 1, 2010, with exception of Mexican FRS B-5 and B-9 which will become effective as of January 1, 2011. Such Mexican FRS and interpretations are not considered to have a significant impact in our consolidated financial statements.

Mexican FRS B-5 Financial Information by Segments. It establishes the general standards to disclose
financial information by segments. Additionally, it allows the user of such information to analyze the entity from the same point of view as the management does and requires to present financial information by segment consistently with its financial
statements. This standard will leave Bulletin B-5 Financial Information by Segment without effect.

Mexican FRS
B-9 Financial Information at Interim Dates. It establishes the guidance for the determination and presentation of financial information at interim dates which among other, establishes the presentation of the statement of changes in
stockholders equity and of cash flows which, were not required by former Bulletin B-9 Financial Information at interim dates.

Mexican FRS C-1 Cash and cash equivalents. It establishes standards on the accounting treatment and disclosure of
cash, restricted cash and available for sale securities. It also introduces new terminology to make it consistent with other Mexican FRS previously issued. This standard supersedes Bulletin C-1, Cash.

Interpretation to Mexican FRS 17 Service concession arrangements. The interpretation removes the inconsistency between
Mexican FRS D-6 Capitalization of the comprehensive financial result and Bulletin D-7 Contracts of construction and manufacturing of some equity goods, concerning the accounting treatment of the comprehensive financial result
in the event of recognition of an intangible asset during the construction phase for service concession arrangements.



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Recently Issued Accounting Guidance under U.S. GAAP

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13). The new standard modifies the fair value requirements of ASC 605-25, Revenue Recognition-Multiple Element Arrangementsby allowing the use of the best estimate
of a selling price in addition to Vendor Specific Objective Evidence (VSOE) and Third Party Evidence (TPE) for determining the selling price of a deliverable. ASU 2009-13 changes the requirements for establishing
separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the effect ASU 2009-13 may have on our consolidated financial statements.

In June 2009, the FASB issued ASC 810, Consolidation,(formerly SFAS No. 167, Amendments to FASB Interpretation
No. 46(R)) regarding the consolidation of variable interest entities. ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional
disclosures about a companys involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. We are currently evaluating the effect ASC 810 may have on our
consolidated financial statements.

In June 2009, the FASB issued ASC 860, Transfers and Servicing (formerly SFAS
No. 166, Accounting for Transfers of Financial Assets). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. ASC 860
eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosure. This standard is effective for fiscal years beginning after November 15, 2009, which
did not have a material impact on our consolidated financial statements.

Recently Adopted Accounting Guidance under
U.S. GAAP

In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles
(formerly SFAS No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally Accepted
Accounting Principles  a replacement of FASB Statement No. 162) (ASC 105). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental
U.S. GAAP, except for the U.S. Securities and Exchange Commission (SEC) rules and interpretive releases, which are sources of authoritative U.S. GAAP for SEC registrants. The standard is effective for interim and annual periods
ending after September 15, 2009. We adopted the provisions of the standard on September 30, 2009, which did not have a material impact on our consolidated financial statements.

On May 3, 2009, we adopted ASC Topic 855 (ASC 855), formerly SFAS No. 165, Subsequent Events. ASC 855
establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This pronouncement is effective for interim or annual
financial periods ending after June 15, 2009, and shall be applied prospectively. The adoption of ASC 855 did not have a material impact on our consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). The amendments remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised
financial statements. ASU 2010-09 was effective upon issuance. Its adoption did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued ASC 825, Financial Instruments(formerly Financial Staff Position (FSP)
No. 107-1 and Accounting Principles Board (APB) 28-1 (FSP No. 107-1 and APB 28-1), Interim Disclosures about Fair Value of Financial Instruments) (ASC 825). ASC 825 requires disclosures of fair value for any
financial instruments not currently reflected at fair value on the balance sheet for all interim periods. ASC 825 enhances consistency in financial reporting by increasing the frequency of fair value disclosures and is effective for interim and
annual periods ending after June 15, 2009, and is to be applied prospectively. We adopted the provisions of the standard, which did not have an effect on our consolidated financial statements.

In April 2009, the FASB issued transition guidance ASC 820-10-65-4 Fair Value Measurements and
DisclosuresOverallTransition Guidance, the provisions of which have been incorporated in ASC 820-10-50-2 Fair Value Measurements and DisclosuresOverallDisclosures(ASC 820).ASC 820 requires
disclosures about fair value of financial instruments for interim reporting periods and annual financial statements of publicly traded companies. This guidance is effective for interim and annual periods ending after June 15, 2009. We adopted
the provisions of the standard and included its effect on our consolidated financial statements.



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In March 2008, the FASB issued ASC 815, Derivatives and Hedging(formerly SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133) (ASC 815). ASC 815 requires enhanced disclosures about an entitys derivative and hedging activities
including how and why an entity uses, how an entity accounts for derivative instruments; and related hedged items and how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash
flows. ASC 815 is effective beginning January 1, 2009. We adopted the provisions of the standard and included its effect on our consolidated financial statements.

In February 2008, the FASB issued ASC 820, Fair Value Measurements and Disclosures (formerly FSP Financial Accounting Standard
(FAS) No. 157-2, Effective Date of FASB Statement No. 157) which delayed the effective date for nonfinancial assets and nonfinancial liabilities until January 1, 2009. We adopted the provisions of the standard as of
January 1, 2009, which did not have an effect on our consolidated financial statements.

In December 2007, the
FASB issued ASC 805, Business Combinations (ASC 805), (formerly SFAS 141 (revised 2007), Business Combinations).ASC 805 expands the definition of a business and a
business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the business combination; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. ASC 805 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. We adopted the provisions of the standard, which did not have an effect on our consolidated financial statements. However, if we enter into material business combinations in the future,
a transaction may significantly impact our consolidated financial statements.

U.S. GAAP Reconciliation

Our consolidated financial statements are prepared in accordance with Mexican FRS, which differ in certain significant
respects from U.S. GAAP. See Note 20 to our consolidated financial statements for information relating to the nature and effect of such differences. Financial statements prepared under Mexican FRS recognize the effects of inflation until
December 31, 2007, whereas financial statements prepared under U.S. GAAP are presented on a nominal cost basis. We are not required to reverse the Mexican inflation accounting adjustments when reconciling Mexican FRS to U.S. GAAP, as
these adjustments provide a means of measuring the effects of price-level changes in the inflationary Mexican economy. Accordingly, these nominal-adjusted figures are considered a more meaningful presentation than nominal cost-based financial
reporting for both Mexican and U.S. accounting purposes.

Net income (loss) under U.S. GAAP amounted to Ps.
299.0 million in 2007, Ps. (227.1) million in 2008 and Ps. 647.5 million in 2009, compared with net income (loss) under Mexican FRS of Ps. 188.0 million in 2007, Ps. (384.3) million in 2008 and
Ps. 291.5 million in 2009.

Stockholders equity under U.S. GAAP amounted to Ps. 2,075.3 million in
2007, Ps. 1,852.1 million in 2008 and Ps. 2,299.2 million in 2009, compared with stockholders equity under Mexican FRS of Ps. 2,597.9 million in 2007, Ps. 2,216.8 in 2008 and Ps. 2,313.7 million in 2009. See Note 20 to
our consolidated financial statements for further discussion of the adjustments under U.S. GAAP.

B. Liquidity and
capital resources

We continue to focus our capital expenditures on businesses that we believe may offer more
attractive margins and a short- to medium-term return. All capital expenditures are included in a budget which is pre-authorized by our Board of Directors. We do not expect that any single capital expenditure in 2010 will have a material impact on
our operations or financial results. We may incur additional indebtedness in 2010 to finance a portion of our capital expenditures. We believe that we will generate positive capital resources from our operations to fund working capital, capital
expenditures and most of our debt service needs in 2010.

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



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



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



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



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



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



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Current Liquidity

As of December 31, 2008 and 2009 we had Ps. 202.8 million and Ps. 317.4 million of unrestricted cash available,
respectively. Our unrestricted cash balance consists of cash and temporary investments with original maturities of three months or less. Despite an increase of Ps. 34.2 million in our total debt, from Ps. 3,174.4 million in 2008 to Ps.
3,208.6 million in 2009, our cash balance increased Ps. 114.6 million from December 31, 2008 to December 31, 2009. The increase in our cash balance was primarily due to internally-generated funds from our operations.

Our treasury policy is to invest in highly liquid temporary cash investments issued by major Mexican and U.S. banks and corporations with
high credit ratings. As of December 31, 2009, we had cash of Ps. 4.1 million and temporary investments of Ps. 303.9 million, of which Ps. 147.6 million were in Peso-denominated instruments and Ps. 156.3 million in U.S.
dollar-denominated instruments. In our opinion, our cash and cash equivalents balance is sufficient for our present requirements.

As of December 31, 2009 and December 31, 2008 our ratio of current assets to current liabilities was 0.86x, 0.58x,
respectively. Our ratio of current assets to current liabilities as of December 31, 2009 includes the corresponding amortization of our vendor loan facilities.



|                          |  |                                                  |       |   |                        |     |       |  
|------------------------- |  | ------------------------------------------------ | ----- | - | ---------------------- | --- | ----- | -
|                          |  | As of December 31,2008                           |       |   | As of December 31,2009 |    
|                          |  | (in millions of nominal Pesos, excluding ratios) |      
|Unrestricted cash balance |  | Ps.                                              | 202.8 |   |                        | Ps. | 317.4 |  
|Current ratios (times)    |  |                                                  | 0.58  | x |                        |     | 0.86  | x

Net debt as of
December 31, 2009 decreased by US$13.6 million to US$206.8 million from US$220.4 million as of December 31, 2008. The reduction of net debt was primarily due to a higher cash balance from internally-generated funds. Total debt slightly
increased in 2009. In 2009 debt payment included:



| |  |  | the principal amortization of our 8% senior notes due 2010 in the amount of US$19.8 million on June 30, 2009;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the prepayment of our 8% senior notes due 2010 in the amount of US$67.4 million on August 12, 2009, US$2.0 million on August 25, 2009 and
US$123.7 million on September 11, 2009; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the payment of our debt outstanding with Comerica Bank (Comerica), in the amount of US$15.0 million on September 10, 2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

During 2009 we obtained new financing including:



| |  |  | on August 11, 2009 we issued US$200.0 million of 11.750% senior unsecured notes due 2014. The principal amortization is payable at maturity on
August 11, 2014, and interest is paid semi-annually in cash in arrears on February 11 and August 11 of each year, beginning on February 11, 2010. The proceeds of the offering were used to prepay our then outstanding 8% senior
notes due 2010;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | on October 12, 2009, we obtained a bank facility with Comerica in an amount of US$10.0 million. The facility has a variable interest rate of
three-month LIBOR plus 3.75%. Interest payments are payable quarterly, with the principal due at maturity on October 12, 2011; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | during 2009 we obtained a total of US$26.2 million of vendor facilities. The interest and principal of these vendor facilities are paid in a monthly
basis with maturities of one, three and four years and rates in the ranges from 5.7% to 8.9%.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital expenditures during
2009 amounted to Ps. 937.3 million, Ps. 143.9 million higher than the Ps. 793.4 million invested in 2008. Our capital expenditure program includes investments to expand our network, provide new services and to extend our network to
customers premises, commonly referred to as the last-mile access. As of the date of this report, our capital expenditure program is proceeding according to schedule.

Cash flows for the years 2009 and 2008 are explained as follows:

Our operating activities net cash flows were Ps. 1,768.5 million and Ps. 1,282.9 million in 2009 and 2008, respectively. This increase was
primarily due to an improvement in operations and results coupled with an increase in accounts payable as we hold interconnection payments to Telmex due to a dispute of interconnection rates. We also incurred in Ps. 2,936.8 million and Ps.
414.8 million of new debt in 2009 and 2008, respectively. This increase in debt was primarily due to the issuance of US$ 200.00 million of 11.750% senior notes due 2014. These resources for 2009 and 2008 were primarily used towards:



| |  | The acquisition of property and equipment in an amount of Ps.808.4 million and Ps. 788.2 million in 2009 and 2008, respectively;
|- |  | --------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | The payment of Ps. 482.4 million in 2008 of the corresponding debt amortization of our 8% senior notes due 2010 and Ps. 2,640.3 million in
2009 of the corresponding debt amortization and prepayment on August and September 2009 of our 8% senior notes due 2010 and payment of other debt and bank loans in an amount of Ps. 424.9 million and 393.0 million in 2009 and 2008,
respectively.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The payment of interest corresponding to our then outstanding debt in an amount of Ps. 224.7 million and Ps. 261.7 million in 2009 and 2008,
respectively.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in financial position for the years 2006 and 2007 are explained as follows:

Resources generated from, or used in, operating activities. Resources generated from operating activities in
2007 were Ps. 997.5 million compared to Ps. 1,064.8 million in 2006. This decrease was primarily due the payment of administrative fees to Onexa and AT&T in 2007, an amount of Ps. 137.0 million and Ps. 99.5 million
respectively. As a part of our debt restructuring process during 2002 and 2003, our partners agreed that the administrative service fees that Onexa and AT&T charged would not become due until 2007.

Resources used in, or generated from, investing activities. Resources used in investing activities were Ps.
615.4 million and Ps. 640.2 million in 2007 and 2006, respectively. The increase was due to a higher amount invested in property and equipment. Our main capital expenditures during 2007 were on network growth and direct access; Ps.
311.9 million and Ps. 83.1 million, respectively.

Resources used in, or generated from, financing
activities. Resources used for financing activities for 2007 were Ps. 844.4 million compared to resources used for financing activities of Ps. 672.9 million in 2006. The increase was mainly due to the higher principal amortization of
the senior notes due 2010 in 2006, and the beginning of the principal amortization of the bank facility on February 1, 2007.

Up through December 31, 2007, under Mexican FRS, the changes in financial position for operation activities, financing and investing
were presented through the statements of changes in financial position. On January 1, 2008, Mexican FRS B-2 Statement of Cash Flows became effective on a prospective basis. Therefore management has included the new statement of cash
flow for the year ended December 31, 2008 and December 31, 2009. See Note 2 to our consolidated financial statements for information regarding this change. Due to the adoption of Mexican FRS B-2 Statement of Cash Flows, 2008
and 2009 information is not directly comparable to 2007 and prior years. The criteria for determining resources used in, or generated from, operating, investing and financing activities under the new Mexican FRS B-2 Statement of Cash
Flows is different from prior years.

Given the nature of our revenues derived from U.S. dollar-denominated services
rendered to multinational companies and from international incoming traffic, and of our costs and expenses, which are principally Peso-denominated, we believe we will be partially insulated from potential exchange rate fluctuations.

For this reason, we periodically assess our exposure and consider opportunities to manage this risk, including the use of hedging
instruments. In 2009 we used currency hedge instruments to minimize the effect of fluctuations in the U.S. dollar/Peso exchange rate. See Item 5, Operating and Financial Review and Prospects  Results of Operations.

Material Commitments and Funding

The table below describes by year of payment due current material commitments as of December 31, 2009.



|                                         |  |                                           |  |       |  |       |  |       |  |        
|---------------------------------------- |  | ----------------------------------------- |  | ----- |  | ----- |  | ----- |  | -------
|                                         |  | As of and for the year ended December 31,
|                                         |  | 2010                                      |  | 2011  |  | 2012  |  | 2013  |  | 2014   
|                                         |  | (in millions of Pesos) (1)               
|Vendor financing (2)                     |  | 209.7                                     |  | 184.5 |  | 104.7 |  | 6.9   |  |       
|Principal                                |  | 185.9                                     |  | 172.3 |  | 101.4 |  | 6.8   |  |       
|Interest                                 |  | 23.8                                      |  | 12.2  |  | 3.3   |  | 0.1   |  |       
|Principal payments on long-term debt (3) |  |                                          |  | 130.6 |  |      |  |      |  | 2,611.5
|Interest payments (4)                    |  | 313.1                                     |  | 310.7 |  | 306.9 |  | 306.9 |  | 306.9  
|Operating leases                         |  | 101.5                                     |  | 106.9 |  | 110.6 |  | 115.1 |  | 119.8  
|Capital expenditures (5)                 |  | 1,018.5                                   |  |      |  |      |  |      |  |       
|                                         |  |                                           |  |       |  |       |  |       |  |        
|Total                                    |  | 1,642.7                                   |  | 732.7 |  | 522.2 |  | 428.8 |  | 3,038.2
|                                         |  |                                           |  |       |  |       |  |       |  |        



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##### Table of Contents

|(1) | Nominal Pesos converted from U.S. dollars at a rate of 13.0576 Pesos per U.S. dollar, which is the noon buying rate provided by The Federal Reserve Bank of New York on
December 31, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Hewlett-Packard Operations México S. de R.L. de C.V. (HP), Cisco Systems Capital Corporation (Cisco) and Capita Corporation S.A. de C.V.
(CIT) vendor financing facilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Principal payments on the bank facility and our 11.750% senior notes due 2014.
|--- | ------------------------------------------------------------------------------



|(4) | Interest payments on the bank facility and our 11.750% senior notes due 2014.
|--- | -----------------------------------------------------------------------------



|(5) | Derived from the annual budget from 2010.
|--- | -----------------------------------------

Our vendor financing commitments include a loan facility with HP with final maturities of the loan tranches on October 31,
2012, February 28, 2013 and April 30, 2013, a loan facility with CIT which expires on April 30, 2010, and a loan facility with Cisco with final maturities of the loan tranches on August 7, 2011, October 28,
2011, June 15, 2012, August 6, 2012, September 10, 2012, September 11, 2012, October 15, 2012 and December 15, 2012.

Our principal long term debt commitments for 2010 to 2014 include the principal amortization of our US$ 200.0 million due on
August 11, 2014 of our 11.750% senior notes due 2014 and our debt outstanding with Comerica, in the amount of US$10.0 million due on October 12, 2011. Our interest commitments for 2010 to 2014 include the interest payments on our bank
facility with Comerica and on our 11.750% senior notes due 2014.

Our operating lease commitments include the rent of our
operative and administrative buildings, and our capital expenditures commitments include an estimate of our capital expenditures for this year.

Capital expenditures for 2007, 2008 and 2009 amounted to Ps. 600.4 million, Ps. 793.4 million and Ps. 937.3 million
respectively. Our estimated payment according to our 2010 annual budget is Ps. 1,018.5 million.

We believe that the funds to
meet our material commitments in 2010 will be provided by internally-generated funds from our operations and through new available vendor and lease financing facilities.

11.750% Senior Notes due 2014

On August 11, 2009 we issued US$200.0 million of 11.750% senior unsecured notes due 2014. The principal amortization is payable at
maturity on August 11, 2014, and interest is paid semi-annually in cash in arrears on February 11 and August 11 of each year, beginning on February 11, 2010. The proceeds of the offering were used to prepay our then outstanding
8% senior notes due 2010.



|                       |  |                                                |   |  |                                                 
|---------------------- |  | ---------------------------------------------- | - |  | ------------------------------------------------
|Principal payment date |  | Percentage of originalprincipal amount payable |   |  | Percentage of remainingoriginal principal amount
|August 11, 2014        |  | 100.00                                         | % |  |                                                

The
indenture governing our 11.750% senior notes due 2014 contains the following covenants, among others, each subject to certain customary exceptions and carve-outs:



| |  |  | subject to specified exceptions, we may not incur indebtedness unless our consolidated leverage ratio (as defined in the indenture) would be less than
3.50 to 1.0 and our consolidated fixed charge coverage ratio (as defined in the indenture) would be greater than or equal to 2.0 to 1.0. As of December 31, 2009, our consolidated leverage ratio was less than 3.50 to 1.0 and our consolidated
fixed charge coverage ratio was greater than 2.0 to 1.0.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | subject to specified exceptions, we may not make restricted payments, such as dividends, unless we could incur at least one additional dollar of
indebtedness under the ratios above, no event of default has occurred and is continuing, and the sum of all restricted payments since August 11, 2009 is less than a specified amount; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | subject to specified exceptions, we may not incur any liens on any of our properties unless the notes are equally and ratably secured.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

Other Indebtedness

On October 12, 2009, we obtained a bank facility with Comerica in an amount of US$10.0 million. The facility has a variable interest
rate of three-month LIBOR plus 3.75%. Interest payments are payable quarterly, with the principal due at maturity on October 12, 2011.



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As of December 31, 2009 we had a loan facility with an outstanding balance of US$22.7
million with Cisco, which pays principal and interest on a monthly basis. Tranches with maturities on 2011 and 2012 have an outstanding balance of US$8.0 million and US$14.7 million, respectively, as of December 31, 2009.

As of December 31, 2009 we had a loan facility with an outstanding balance of US$12.3 million with HP, which pays principal and
interest on a monthly basis. Tranches with maturities on 2012 and 2013 have an outstanding balance of US$5.7 million and US$6.6 million, respectively, as of December 31, 2009.

As of December 31, 2009 we had a loan facility with an outstanding balance of US$0.7 million with CIT, which pays principal and
interest on a quarterly basis and has a maturity on April 30, 2010.

Other developments

In 2009 we experienced a 33.9% decrease in long distance and internet revenues of our consumer subsegment when compared to 2008. This
decrease in revenues was primarily due to:



| |  |  | rate reductions along the long distance and internet consumer subsegments;
| | - |  | --------------------------------------------------------------------------



| |  |  | lower acquisition rates;
| | - |  | ------------------------



| |  |  | customer churn in the consumer segment;
| | - |  | ---------------------------------------



| |  |  | migration to VoIP services; and
| | - |  | -------------------------------



| |  |  | high competition.
| | - |  | -----------------

We
expect that long distance and internet revenues from the consumer segment will continue to decline. As a result, we decided to redefine the organizational structure of our consumer business unit and other support areas in 2008. This restructuring
resulted in a reduction of approximately 270 employees with remuneration upon termination of labor of approximately Ps. 35.3 million.

Legal Proceedings

Sanction regarding infractions to the public administration acquisition act

On July 16, 2006, Corporación Mexicana de Investigación en Materiales, S.A. de C.V. (COMIMSA), (a Mexican
public administration entity) held a bid process to select a provider of domestic and international long distance services. We participated in the bid process and on July 20, 2006, we were chosen by COMIMSA to provide these services. On
August 21, 2006 we notified COMIMSA that we were not capable of providing long distance services in two of the cities in which COMIMSA required such service, due to the fact that the service areas had not been opened to pre-subscription by
Cofetel in accordance with the long distance service rules. As a result, we could not enter into the respective services agreement which we were obliged to execute. As a result, on October 3, 2006, COMIMSA filed with the Secretaria de la
Función Publica, the administrative comptroller agency of the Mexican government (SFP), an administrative proceeding against us to determine if we were subject to sanctions under the applicable law. After a long legal process
of three years, on November 10, 2009, SFP decided that we infringed on the applicable law and imposed sanctions consisting of a fine of Ps. 73,000. We were not sanctioned or restricted from participating in public bids or from offering
telecommunication services to the Mexican federal administration.

Claim regarding a fire originated in a building leased
by Servicios Alestra

In August 2006, ABA Seguros S.A. de C.V. (ABA Seguros) and 7-Eleven, Inc.
(7-Eleven) filed a claim against our subsidiary Servicios Alestra in the amount of Ps. 50.0 million, for damages from a fire that began in the building leased by us to Casa Chapa, S.A. de C.V., under the theory of subrogation of
rights. We filed our response with the support of ACE Seguros (the insurance division of Servicios Alestra), since ACE Seguros is the party that would pay should Servicios Alestra be found liable. In order to examine Servicios Alestras
responsibility, ABA Seguros, 7-Eleven and Servicios Alestra sought the opinions of five experts in the following areas: (i) damages valuation, (ii) insurance settlement, (ii) fires, (iv) accounting, and (v) electrical
installation. Although the outcome of the claim has not yet been decided, we do not believe it would have a material adverse effect on our financial position, results of operations or cash flows.

Dispute with Telmex regarding interconnection services rates

We are involved in a dispute with Telmex regarding interconnection services rates applicable for 2008 and 2009 and had requested the
intervention of Cofetel regarding the interconnection rates applicable for 2010. On September 8, 2009, a trust was created by us, Telmex and BBVA Bancomer as a trustee to guarantee the payment of such interconnection services. As of December
31, 2009, the trust balance was Ps. 318.2 million, which is presented as restricted cash in our balance sheet. We continue negotiations with Telmex, and we cannot assure you that we will reach an agreement in the near future.



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

Not applicable.

D. Trend information

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

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

The Mexican telecom industry is highly influenced by various U.S. industry trends, such as:



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



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



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



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

E. Off-balance sheet arrangements

Not applicable.

F. Tabular disclosure of contractual obligations



|                                       |  |                            |  |                 |  |           |  |           |  |                 
|-------------------------------------- |  | -------------------------- |  | --------------- |  | --------- |  | --------- |  | ----------------
|                                       |  | Payments due in period    
|Obligation                             |  | Total                      |  | Less than1 year |  | 1-3 years |  | 3-5 years |  | More than 5years
|                                       |  | (in millions of Pesos) (1)
|Long-term debt (2)                     |  | 4,286                      |  | 313             |  | 1,055     |  | 2,918     |  |                
|Principal                              |  | 2,742                      |  |                |  | 131       |  | 2,612     |  |                
|Interest                               |  | 1,544                      |  | 313             |  | 924       |  | 307       |  |                
|Vendor and capital lease financing (3) |  | 506                        |  | 210             |  | 296       |  |          |  |                
|Operating lease obligation             |  | 808                        |  | 102             |  | 333       |  | 245       |  | 130             
|Purchase obligations (4)               |  | 106                        |  | 106             |  |          |  |          |  |                
|                                       |  |                            |  |                 |  |           |  |           |  |                 
|Total                                  |  | 5,706                      |  | 730             |  | 1,684     |  | 3,163     |  | 130             
|                                       |  |                            |  |                 |  |           |  |           |  |                 



|(1) | Calculated based on an exchange rate of Ps. 13.0576 per U.S. dollar, the noon buying rate as provided by The Federal Reserve Bank of New York on
December 31, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest and principal amount of our bank facility and our 11.750% senior notes due 2014.
|--- | -----------------------------------------------------------------------------------------

|(3) | HP, Cisco and CIT financing facilities.
|--- | ---------------------------------------

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



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##### Table of Contents

Item 6. Directors, Senior Management and Employees.

A. Directors and senior management

Biographies of Senior Management

Rolando Zubirán Shetler(57) is our Chief Executive Officer. Mr. Zubirán has over 20
years of experience in telecommunications. He joined us on January 1, 1999. He has served as President and General Manager of Compania Ericsson S.A.C.I. in Argentina, as Managing Director of Ericsson Telecom, S.A. de C.V. in Mexico, as Managing
Director of Ericsson Telecomunicações S.A. in Brazil and various other positions in business planning. Mr. Zubirán holds a Bachelors of Science Degree in Industrial Engineering from Universidad Nacional
Autónoma de México and a Masters of Science Degree in Operations Research from the University of Southern California.

Bernardo García(51) is our Chief Financial and Administrative Officer. Mr. García has
been with us since our start in 1996 and has held several positions, including marketing director, enterprise sales director, commercial strategy director and Vice-President of our Consumer Small Business Market. Before joining us, he also served in
several positions in Alfa, including one on the team that negotiated the joint venture agreement with AT&T to form our company. Mr. García holds a Bachelors Degree in Industrial and Systems Engineering from the Instituto
Tecnológico de Estudios Superiores de Monterrey, a Masters Degree in International Trade from Universidad de Monterrey and an MBA from IMD in Switzerland.

Raúl Ortega(53) is our Chief Public Affairs and Legal Officer. From 1993 to 1996, Mr. Ortega
was a Public Affairs Director with AT&T. Mr. Ortega has been with us since our start in 1996. He has substantial experience as an advisor in international telecommunications, as well as in trade politics, policy and regulation in the U.S.
and Mexico. Before joining AT&T, Mr. Ortega served as Managing Director of an alliance of Mexican private sector organizations formed to promote expanded trade between the U.S., Mexico and Canada, particularly in the context of the North
American Free Trade Agreement. Mr. Ortega also has seven years of experience with Consejo Empresarial Mexicano para Asuntos Internacionalesas a representative of Mexican business interests in Washington, D.C. He holds an accounting
degree from the Universidad Iberoamericana and a graduate degree in Political Economics.

Alejandro
Irigoyen(57) is our Chief Operations and Systems Officer. Mr. Irigoyen has over 20 years of human resources experience in various Alfa subsidiaries and corporate organizations. Mr. Irigoyens expertise is
focused in the areas of labor relations and compensation. Prior to his assignment with us, he served as Director of Administrative Staff and Services at Alfas Corporate Headquarters where he held various managerial positions in Human
Resources. Mr. Irigoyen joined us in 1996. Mr. Irigoyen has a Bachelor of Science Degree in Mechanical Engineering from the Universidad Autónoma de Nuevo León, a Master of Science Degree in Economics, majoring in Human
Resources Administration, from the University of Utah, and he attended the Instituto para la Alta Dirección de Empresas. He has also been a consultant at the Instituto Tecnológico de Estudios Superiores de Monterrey and at the
Universidad Autónoma de Nuevo León.

Ricardo Hinojosa(44)CMO &
Convergence Services Director. Mr. Hinojosa has been with us since 1997 and has held several executive positions, including MNCs & Corporate Sales Director and Business & Product Development Director. He has over 21
years experience with Alfa, where he has held several strategic positions in Planning and human resources. Mr. Hinojosa has a bachelors degree from the Instituto Tecnológico de Monterrey in Computer Science and a Masters
Degree in Business (MBA) from the John E. Anderson School of Business on University of California in Los Angeles.

Biographies of Directors

Armando Garza Sada(52) is the President of the Board of Directors of Alestra and currently is the President
of the Board of Directors of Alfa. Prior to taking his current position, Mr. Garza was Corporate Development President for Alfa. He was President of Sigma from 1993-1999 and before Sigma, he held other executive positions, including
Vice-President of Planning in Alfas holding company and President of Polioles and Selther. Mr. Garza is a member of the Board of Alfa, Femsa, Coca Cola Femsa, Gigante, Lamosa, Liverpool, MVS, Pyosa, Farmacias Benavides, ITESM and Vitro
Vidrio Plano. He served as Chairman of CAINTRA (Nuevo Leon Chamber of the Manufacturing Industry) and CEESP (a private sector economic think-tank). He is also a member of the Board of CCE (Corporate Coordination Council), the Stanford Business
School Alumni Association, Rabobanks North American Agribusiness Advisory Board, and the Deans Advisory Council of MITs Sloan School of Management. Mr. Garza has a B.S. in Management from the Massachusetts Institute of
Technology and a M.B.A. from the Stanford Graduate School of Business. Mr. Garza, who is a nominee of Alfa, has been a director of Alestra since October 2001.

Alejandro Elizondo Barragán(57) is the Corporate Development President for Alfa. Prior to taking
his current position, Mr. Elizondo was the Chief Financial and Planning Officer for Alfa. He has over 30 years experience in Alfa, where he has held various executive positions. Mr. Elizondo was the Chief Executive Officer of Hylsamex and
is a member of the Board of Directors of Embotelladoras Arca, Hylsamex and Banco Regional de Monterrey. He has a Bachelors Degree in Mechanical Engineering from the Instituto Tecnológico de Monterrey and a M.B.A. from Harvard
University. Mr. Elizondo, who is a nominee of Alfa, has been a director of Alestra since March 2006.



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Carlos Jimenez Barrera(54) is the Secretary of the Board of Directors
and General Counsel of Alfa. He has been with Alfa since 1976. He holds a law degree from the Universidad de Monterrey and a Masters Degree in Comparative Jurisprudence from New York University School of Law.

Carlos Salinas Garcíais Senior Vice-President of Corporate Planning and Economic Studies at Alfa. He has over 20
years of experience in Alfa, where he has held several positions in planning, sales and marketing, at different subsidiaries of Alfa. Mr. Salinas obtained his Bachelors Degree in Industrial Engineering and an MBA from Instituto
Tecnológico de Monterrey and an MS from Stanford University. Mr. Salinas, who is a nominee of Alfa, has been a director of Alestra since 2008.

Eric R. Weinbrom(48) is the Financial Vice-President, Business Planning and International, responsible for financial
planning and analysis for the AT&T Business Services enterprise. His responsibilities include preparing the annual operating budget and monthly outlook forecasts, as well as preparing ad hoc analyses of results and other opportunities to improve
performance. In addition to managing FP&A activities, he remains responsible for all financial and statutory compliance for AT&Ts international operations. Mr. Weinbrom is a graduate of the Pennsylvania State University with a
B.S. in Health Planning and Administration. He also holds a Masters Degree in Finance from Xavier University and a graduate certificate in Accounting from Fairleigh Dickinson University. Mr. Weinbrom, who is a nominee of AT&T Mexico,
has been a full director of Alestra since December 2004 and an alternate since January 2004.

Daniel T. Walshis
Senior Vice President for Segment Marketing and AT&T Business Solutions. In this capacity, Mr. Walsh drives the marketing programs for the sales teams supporting our business and government clients worldwide. Mr. Walsh has held a
variety of sales and marketing positions within AT&T and previously in Southwestern Bell Corporation (SBC). He holds a B.S. in Engineering and an Executive MBA from Michigan State University.

Craig Fiaschettiis the Assistant Vice President for Wholesale Project Office. He is responsible for the strategic planning
and contract management of the largest strategic integrator in the wholesale organization. Mr. Fiaschetti has over 20 years of experience in AT&T managing voice and data solutions for a wide range of customers, from small businesses to
multi-national corporations. He received an MBA from Clarkson University and a B.S. degree in Business Administration and Finance from Siena College.

Brian Troupis Vice President for Partners & Alternate Channels and AT&T Business Solutions. He is responsible
for the strategic planning and management of AT&Ts Partners and Alternate Channels program. He has over 23 years experience with AT&T and has held a variety of assignments in sales, sales support, strategic pricing and contract
negotiation.Prior to his current assignment he was Vice-President, Mid-Atlantic Region, Premier Client Group, AT&T Global Services. Mr. Troup completed his undergraduate studies at James Madison University and holds an MBA from
Lehigh University.

B. Compensation

For the year ended December 31, 2009, we paid aggregate annual compensation of approximately Ps. 37.5 million to our executive
officers as a group for their services in all capacities. As of December 31, 2009, we have accrued pension benefits and similar liabilities of Ps. 102.7 million.

During 2007, we created a new defined contribution retirement plan for employees. We make monthly contributions to the plan on behalf of
each participating employee. The contribution expense related to the plan equaled Ps. 38.0 million in 2008 and Ps. 33.0 million in 2009.

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

C. Board Practices

Our direct equity holders are AT&T Mexico and Alfa. Under our amended joint venture agreement, the number of directors on our board of
directors is fixed at nine. AT&T Mexico may nominate four of these directors, while Alfa may nominate the remaining five. Unless otherwise provided in our joint venture agreement or our by-laws, any vote by the board of directors requires a
majority for approval, except that the affirmative vote of at least one director appointed by each of the holders of the series A social part and the series B social part shall be required for the election of the Secretary and alternate Secretary
and the approval of any matter decided by the Board relating to a decision that we should commence bankruptcy, liquidation or similar proceedings. No director may be removed during his or her term without the consent of the party that nominated that
director. For our directors and senior management, there is no expiration date for their term of office. In addition, we have no service contracts that provide for benefits upon termination of employment. The period during which each director has
served on our board is set forth at Item 6, Directors, Senior Management and Employees  A. Directors and Senior Management  Biographies of Directors. We currently do not have a separate audit committee. We are not
required under the Sarbanes-Oxley Act of 2002 to have a separate audit committee, as we delisted from the New York Stock Exchange.



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##### Table of Contents

D. Employees

As of December 31, 2009, we employed 1,699 people through our sole subsidiary, Servicios Alestra. The chart below shows the
distribution of our employees for the years 2007, 2008 and 2009:



|                                |  |                                       |  |       |  |      
|------------------------------- |  | ------------------------------------- |  | ----- |  | -----
|                                |  | Number of Employees as ofDecember 31,
|Direction                       |  | 2007                                  |  | 2008  |  | 2009 
|Officers and Staff              |  | 10                                    |  | 9     |  | 9    
|Enterprise Convergence Services |  | 92                                    |  | 115   |  | 196  
|Administration                  |  | 208                                   |  | 191   |  | 204  
|Human Resources                 |  | 34                                    |  | 40    |  | 38   
|Engineering and Operations      |  | 403                                   |  | 405   |  | 509  
|Business Sale Unit              |  | 401                                   |  | 425   |  | 249  
|Residential Sale Unit           |  | 612                                   |  | 441   |  | 348  
|Systems                         |  | 99                                    |  | 100   |  | 107  
|Strategic Planning              |  | 11                                    |  | 11    |  | 10   
|Legal and Government Relations  |  | 32                                    |  | 29    |  | 29   
|                                |  |                                       |  |       |  |      
|Total                           |  | 1,902                                 |  | 1,766 |  | 1,699
|                                |  |                                       |  |       |  |      

In addition, Servicios Alestra has also contracted with
third-party agencies for the services of less than 40 additional temporary employees. Only one labor union, Sindicato Nacional de Trabajadores del Transporte Público y Comunicaciones(the National Union of Workers of Public
Transportation and Communications), which operates as an autonomous workers union, represents our employees. It represents 31 Servicios Alestra employees. Relations with the union are governed by a collective bargaining agreement between us
and the union. Under Mexican law, collective bargaining agreements are reviewed annually with regard to salaries, and biannually with regard to fringe benefits. To date, we have not experienced any work stoppages, and we believe that our
relationship with our employees and the union is good.

E. Share Ownership

Not applicable.

Item 7. Major Shareholders and Related Party Transactions.

A. Major Shareholders

We are owned 49% by AT&T and 51% by Alfa. AT&T holds its equity in us through its subsidiary AT&T Mexico.

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

Alfa is one of Mexicos largest conglomerates. It comprises four groups that participate in key industries within the Mexican and
NAFTA economies, including petrochemicals and synthetic fibers, processed food, auto parts and telecommunications. As of December 31, 2009, Alfas total assets amounted to Ps. 108.1 billion, with revenues and operating income for 2009
of Ps. 115.6 billion and Ps. 8.8 billion, respectively.

AT&T is among the premier voice, video and data communications
companies in the world, serving businesses, consumers and governments. AT&T runs the largest, most sophisticated communications network in the U.S., backed by the research and development capabilities of AT&T laboratories. A leading supplier
of data, internet and managed services for the public and private sectors, AT&T offers outsourcing and consulting to large businesses and governments. AT&T is a market leader in local, long distance and internet services, as well as in
transaction-based services like prepaid cards, collect calling and directory assistance. On January 31, 2005, AT&T Corp. and SBC announced that their boards had approved a deal under which SBC would acquire AT&T Corp., and on
November 17, 2005, SBC completed its acquisition of AT&T Corp.

Under the Federal Telecommunications Law and the
Foreign Investment Law, no more than 49.0% of the voting equity of a Mexican corporation holding a concession to provide long distance telecommunications services may be held by non-Mexican nationals. Alfa, a Mexican national, holds 51% of our
voting equity. We have entered into a joint venture agreement with our equity holders, and have adopted certain bylaws which govern the relationship between the equity holders and us.



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On November 17, 2003 our equity holders resolved to increase the variable portion of
our capital stock by $100 million (Ps. 1,181.0 million), which was subscribed and paid for by each equity holder in proportion to its share of our capital, i.e., 51% by Alfa and 49% by AT&T. In order to reconcile our capital with Mexican FRS,
reflect inflationary gain, and absorb accumulated losses, on December 1, 2003 our equity holders resolved to (i) reclassify the balance as of December 31, 2002 of our restatement of capital stock account into the variable portion of
our capital stock in the amount of Ps. 5,230.3 million, and (ii) reduce the variable portion of the capital stock for Ps. 9,565.9 million and Ps. 1,394.62 million by reclassifying these amounts from our accumulated deficit
account and our accumulated deficit from restatement account, respectively. As a consequence, the nominal value of the shares was proportionally reduced according to the ownership interest of each of the shareholders, 51% on Alfa and 49% on
AT&T. These transactions did not represent a contribution or payment to the equity holders.

Prior to October 18,
2007, we were owned 51% by Onexa. On that date, Onexas shareholders entered into an agreement to merge with Alfa. This merger was conditioned on Mexican governmental approval and became effective on March 31, 2008. After the effective
date of the merger, Alfa replaced Onexa as our direct shareholder.

B. Related party transactions

See Item 18, Financial Statements  Note 4. Balances and Transactions with Related Parties.

C. Interests of experts and counsel

Not applicable.

Item 8. Financial Information.

A. Consolidated statements and other financial information

See Item 18, Financial Statements for the list of all financial statements filed as a part of this annual report.

Policy on Dividend Distribution

Our shareholders joint venture agreement provides that our shareholders, subject to their vote and to applicable provisions of our 11.750% senior
notes due 2014 (or any of our other indebtedness restricting our ability to pay dividends), may agree to declare annual distributions of fifty percent of our after tax net income, determined in accordance with Mexican FRS. Notwithstanding the
foregoing, we will declare distributions only (x) in an amount which does not exceed the lesser of (i) earnings on which Mexican taxes have been paid so that no additional Mexican tax is payable as a result of the distribution, and
(ii) our net cash flow, (y) after such time as all scheduled capital contributions have been made and (z) after all requirements of Mexican law for the declaration and payment thereof have been satisfied. As of today, we have not
declared any dividends.

B. Significant changes

Not applicable.

Item 9. The Offer and Listing.

A. Offer and listing details

Not applicable.

B. Plan of distribution

Not applicable.

C. Markets

Our 11.750% senior notes due 2014 are listed on the unregulated Euro MTF Market of the Luxembourg Stock Exchange.

D. Selling shareholders

Not applicable.

E. Dilution

Not applicable.



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##### Table of Contents

F. Expenses of the issue

Not applicable.

Item 10. Additional Information.

A. Share capital

Not applicable.

B. Memorandum and articles of association

Our deed of incorporation and bylaws were previously filed as Exhibit 3.1 to Form F-4, Registration No.333-11084 filed with the SEC on
November 9, 1999. Our bylaws were amended by the minutes to the General Partners Meeting on November 14, 2000, which were filed as Exhibit 3.2 to Form F-4, Registration No.333-100075 filed with the SEC on February 12, 2003. Our
bylaws were further amended by the minutes to the general partners meeting on November 4, 2005, which were filed as Exhibit 1.3 to Form 20-F, filed with SEC on April 3, 2006. Our joint venture agreement was filed as Exhibit 10.1 to
Form F-4, Registration No.333-11084 filed with the SEC on November 9, 1999. Our joint venture agreement was further amended on November 30, 2005 (our Amended and Restated Joint Venture Agreement), which amendment was filed as
Exhibit 4.1 to Form 20-F, filed with SEC on April 3, 2006. The following discussion and Item 6 above summarize some of the important aspects of our Amended and Restated Joint Venture Agreement and our bylaws. Our deed of incorporation
includes the following as the purposes of our company:



| |  |  | To install, operate and/or exploit a public telecommunications network under a concession from the SCT.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | The rendering of telephone services, conduction and transmission of signals, cable television or restricted television, value added or improved
services; interconnection services with other public or private networks and any other type of telecommunications and information service in the country, to the extent allowed by our bylaws.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To use, benefit from and/or exploit frequency bands in the national territory under a concession from the SCT, except for the radioelectric spectrum
classified as free access which may be used and exploited without a concession.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The rendering of radiocommunication, radiotelephone, cellular, telephone services, personal communication services and all services that use the
radioelectric spectrum.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Construct, own, operate or exploit satellite communication systems under a concession from the SCT to occupy geostationary orbital positions and other
satellite orbits and exploit their respective frequency bands.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The rendering of all types of satellite communication and information services, including voice, data and video.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Exploit, under a concession from the SCT, the rights to generate and receive frequency band signals associated to foreign satellite systems that cover
and can render services in national territory.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Install, operate or exploit earth satellite transmission signal stations under the corresponding permit.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Manufacture, assemble, repair, adapt, purchase, sell, import, export, lease or otherwise utilize, commercialize or dispose of telecommunication and
computer equipment, software and other related, accessory or similar equipment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sell, lease, dispose of and otherwise divest itself of the telecommunication network capacity.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Resell telecommunication capacity and services to the extent allowed by law.
| | - |  | ----------------------------------------------------------------------------



| |  |  | Carry out or promote research and development programs and telecommunication training programs.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Acquire, own or otherwise receive industrial or intellectual property rights, such as patents, trademarks or trade names, industrial secrets,
copyrights and similar, as well as licenses for their use and/or exploitation and, if applicable, grant, dispose of or transfer this rights or licenses of use and exploitation in favor of third parties.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Engage in the rendering of commodities and services directly or indirectly related to the purposes described in this Clause, as well as any other
activities in matter of telecommunications, computing and information, by means of the use of present or future technology.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In general, carry out any other legal businesses or activities.
| | - |  | ---------------------------------------------------------------

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



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

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



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



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

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

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



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



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



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

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

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

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

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

Any additional interest in Telmex or America Movil acquired by AT&T, shall not constitute an Acquisition of Control (as
defined in our Amended and Restated Joint Venture Agreement) or be subject to the provisions of our Amended and Restated Joint Venture Agreement. So long as AT&T has the right to designate at least one member to the board of directors or the
executive committee of Telmex or America Movil, AT&T has agreed that none of the individuals nominated to serve as AT&Ts representatives on the board of directors or steering committee shall have any direct or indirect responsibility
for AT&Ts relationship with Telmex or America Movil or serve (or for twenty-four (24) months after serving on our board of directors serve) on either the Telmex or America Movil board of directors or executive committee. In addition,
AT&T shall establish and enforce a policy against the transfer of non-public information about us to Telmex or America Movil.

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



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



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



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



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



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

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

Shareholder meetings. Shareholder meetings can be called
by:



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



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



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



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

At these meetings, our shareholders may:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

C. Material contracts

As discussed above, after November 18, 2005, following the AT&T acquisition, we and our shareholders amended our joint venture
agreement to modify our corporate governance and certain other provisions. We also amended our Service Mark License Agreement, the AT&T Global Network Cooperation Agreement between AT&T and us (the AGN Agreement) and our bylaws
(the Bylaws).

Governance Provisions

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



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



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



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



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



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



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

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

Service Mark License Agreement

On November 30, 2005 we amended our Service Mark License Agreement with AT&T to provide for our continued use of the AT&T
brand for a period not to exceed 36 months from the consummation of the SBC and AT&T merger, which occurred on November 17, 2005. Pursuant to this amendment, we have to develop, acquire, license or position a new service brand for marketing
our services. As a result, we have developed the brand Alestra in different phases, as follows: During the 24 month period ending on November 17, 2007, we used the brand Alestra in conjunction with the brand AT&T. During the 12 month period
ending on November 17, 2008, as agreed with AT&T, we used the Alestra brand together with a tag line Con AT&T conecta el hoy con el mañana (with AT&T connect today with the future). As described
above, on November 17, 2008, we ceased using the AT&T brand name. At this stage, we can use the phrase AT&T Global Services until June 2010 for the purpose of providing AT&T Global Services within Mexico, under the terms
of the AGN Agreement.

AGN Agreement

The AGN Agreement has been extended to June 30, 2010. Under the amended AGN Agreement, if our Mexican shareholder, Alfa, transfers
certain of its interest in us, AT&Ts obligations under the AGN Agreement will terminate.

Non-Compete Provision

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

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



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Insulation from Certain AT&T Affiliates

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



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



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

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

Transfer Restrictions

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

Certain Purchase and Financial Commitments

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

D. Exchange controls

Capital controls

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

E. Taxation

Mexican taxation

General

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

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



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Interest and principal

Payments of interest (including original issue discount which is deemed interest under the Income Tax Law) with respect to our outstanding
debt securities to a Non-Mexican Holder will generally be subject to a Mexican withholding tax assessed at a rate of 10.0% because the outstanding debt securities are registered in the Special Section of the Registro Nacional de Valores e
Intermediarios(National Registry of Securities, or RNV). However, the withholding tax rate on such interest payments generally is 4.9% if, besides registering the outstanding debt securities as set forth above, the Non-Mexican
Holder is the effective beneficiary of the interest payment and resides in a country that has entered into a treaty for avoidance of double taxation with Mexico which is in effect, and satisfies the conditions and requirements for obtaining benefits
under such treaty. Non-Mexican Holders residing in the United States may qualify for the 4.9% rate under the Tax Treaty. Other Non-Mexican Holders should consult their tax advisors regarding whether they reside in a country that has entered into a
treaty for avoidance of double taxation with Mexico which is effective, and, if so, the conditions and requirements for obtaining benefits under that treaty. However, if the beneficial owner, either directly or indirectly, individually or jointly
with related parties, of more than 5% of the interest derived from the related securities, is any of the following



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



| |  |  | a legal entity 20% of whose stock is owned, directly or indirectly, individually or jointly with related parties, by the issuer, then, the withholding
tax rate will be 30%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Notwithstanding the foregoing, under Rule I.3.22.8. published in the Diario
Oficial de la Federación(the Official Register of the Federation) on April 29, 2009 which is subject to amendment or repeal but is expected to remain in effect until April 30, 2010 (the Reduced Rate Rule), payments
of interest made where:



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



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



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



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

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

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

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



| | (1) | is the effective beneficiary of the interest;
| | --- | ---------------------------------------------



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



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



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

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

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

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



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Dispositions

Under the Mexican Income Tax Law, gains resulting from the sale or disposition of the notes by a foreign holder to another foreign holder
are not taxable in Mexico. Gains resulting from the sale of the notes by a foreign holder to a purchaser who is a Mexican resident for tax purposes or to a foreign holder deemed to have a permanent establishment in Mexico for tax purposes will be
subject to Mexican federal income or other taxes pursuant to the rules described above in respect of interest payments. The acquisition of the notes at a discount by a foreign holder will be deemed interest income, and subject to Mexican withholding
taxes, if the seller is a Mexican resident or a foreign resident deemed to have a permanent establishment in Mexico.

Other
taxes

A foreign holder will not be liable for Mexican estate, gift, inheritance or similar taxes with respect to its
holding of the notes, nor will it be liable for Mexican stamp, registration or similar taxes.

F. Dividends and Paying
Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We file annual reports with the SEC as required by the Securities Exchange Act of 1934. We also file quarterly information statements as
required by the indenture governing our 11.750% senior notes due 2014.

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

I. Subsidiary
Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risk.

Our business activities require the holding or issuing of financial instruments which expose us to market risks related to changes in
interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.

Interest Rate Risk

We currently believe that increases in interest rates in the international markets are not likely to have a material
direct adverse impact on our financial results or cash flows because 96% of our total debt bears fixed rates of interest. Our results and cash flows could be impacted if additional financing is required in the future when interest rates are high in
relation to our current conditions. If we obtain new financing, current market conditions would imply higher interest rates than our current fixed rates.

Most of our indebtedness bears fixed rates of interest, including our 11.750% senior notes due 2014 and our vendor financing. However,
our bank facility interest payments are based on the floating three-month London Interbank Offered Rate (LIBOR). As of December 31, 2009, principal amount outstanding under this facility was Ps. 130.6 million.

The potential loss from a hypothetical, instantaneous and unfavorable increase of 500 basis points in the three-month LIBOR would have
resulted in additional interest expense of approximately Ps. 5.3 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in Pesos of servicing U.S. dollar-denominated indebtedness.

Foreign Exchange Risk

Our principal foreign currency fluctuation risk involves changes in the value of the Peso relative to the U.S. dollar. Although U.S.
dollar-denominated revenues and expenses are exposed to foreign currency fluctuations, our financial instruments are more highly impacted. As of December 31, 2009, the amount of senior notes and notes payable denominated in U.S. dollars was Ps.
3,199.5 million.

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



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

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

The hypothetical, potential loss in value of financial instruments held at December 31, 2009, the value of which totaled Ps.
3,208.6 million, that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in the Mexican Peso-U.S. dollar exchange rate would have been approximately Ps. 319.9 million. Such a change in currency exchange rates
would also have resulted in additional interest expense of approximately Ps. 30.7 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in Pesos of servicing U.S.
dollar-denominated indebtedness.

We periodically enter into financial instrument contracts to hedge our exposure to changes
in the Mexican Peso and the U.S. dollar exchange rates. These contracts are used to hedge the exposure related to interconnection fees, denominated in U.S. dollars, paid to other carriers. We do not enter into derivatives contracts for
speculative purposes.

On October 9, 2008, we entered into two derivative instruments to hedge January and February 2009
payments from AT&T (based on traffic minutes) for an original amount of US$4.2 million for each month. This was the estimated amount to be settled with AT&T. Subsequently, AT&T confirmed a lesser amount than the payments originally
planned; therefore in order to compensate our balance relative to the sale of U.S. dollars, we entered into two purchase agreements, US$3.6 million for the month of December 2008 and US$2.6 million for the months of January and February 2009, at the
same dates and with similar exchange rates to those agreed. These contracts are being accounted for as cash flow hedges under Mexican FRS. As of December 31, 2009, we recorded a loss of Ps.2.2 million in comprehensive income.

The effectiveness of financial derivative instruments classified as hedge instruments is assessed on a periodic basis. On
December 31, 2009, our management had assessed the effectiveness of hedges and estimated that they are highly effective.

We formally document our hedge relationships, including identifying the hedging instruments and the hedged items, as well as our risk
management objectives and strategies for undertaking the hedge transaction.

Item 12. Description of
Securities Other Than Equity Securities.

Not applicable.

Item 13. Defaults, Dividend Arrearages and Delinquencies.

Not applicable.

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

Not applicable.

Item 15. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The conclusions of our Chief Executive Officer and Chief Financial Officer about the effectiveness of our disclosure controls and
procedures (as such term is defined under Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended) based on their evaluation of these controls and procedures as of December 31, 2009, are as follows:

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us is recorded, processed,
summarized and reported within required timeframes. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their assessments of our disclosure controls and procedures, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Managements
Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting.

Under the supervision and with the
participation of our management, including our CEO and CFO, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. The assessment was based on criteria established in the
framework Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that our internal control over financial reporting was
effective as of December 31, 2009.



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This annual report does not include an attestation report of our independent registered
public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys independent registered public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only managements report in this annual report.

Changes in
Internal Control over Financial Reporting

During the period covered by this report, there has been no change in our
internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. Reserved.

Item 16.A. Audit Committee Financial Expert

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

Item 16.B. Code of Ethics

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

Item 16.C. Principal Account Fees and Services

The aggregate fees billed by PricewaterhouseCoopers, S.C. (PwC), our independent auditor, for professional services in 2008
and 2009 were as follows:



|                       |  |         |  |        
|---------------------- |  | ------- |  | -------
|                       |  | 2008(1) |  | 2009(1)
|Audit Fees (2)         |  | 5.9     |  | 5.9    
|Audit Related Fees (3) |  | 0.7     |  | 7.8    
|                       |  |         |  |        
|Total                  |  | 6.6     |  | 13.7   
|                       |  |         |  |        
|                       |  |         |  |        

| | (1) | Expressed in millions of adjusted nominal Pesos.
| | --- | ------------------------------------------------

| | (2) | Audit fees include fees associated with the annual audit of our consolidated financial statements and reviews of our quarterly reports for statutory purposes. Audit
fees also include fees associated with various audit requirements of us and for reviews of registration statements.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Audit-related fees include amounts paid to PwC for the audit of statutory social security and housing report, transfer pricing, other statutory reports and the offering
memorandum and SEC Form F-4 in connection with our 11.750% senior notes due 2014.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Not applicable.

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

Not applicable.

Item 16.F. Change in Registrants Certifying Accountant

Not applicable.

Item 16.G. Corporate Governance

Not applicable.

Item 17. Financial Statements.

Not applicable.



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Item 18. Financial Statements.

See pages F-1 through F-43 incorporated herein by reference.

Item 19. Exhibits.

1.1 Deed of Incorporation and By-Laws of Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to
its Form F-4, Registration Number 333-11084 on November 4, 1999).

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

1.3 Amendment to the By-Laws dated November 4, 2005 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form
20-F, Registration Number 001-31894 on April 3, 2006).

2.1 Indenture dated August 11, 2009 between Alestra, S. de R.L. de C.V. and
The Bank of New York Mellon, as trustee, for the 11.750% Senior Notes due 2014 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-162372 on October 7, 2009).

2.2 Form of New Global Note for the 11.750% Senior Notes due 2014 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to
its Form F-4, Registration Number 333-162372 on October 7, 2009).

4.1 Second Amended and Restated Joint Venture Agreement dated as of
October 17, 1996 by and among Alfa, S.A. de C.V., AT&T Corp., AT&T Telecom Mexico Inc., Bancomer, S.A. Institución de Banca Múltiple Grupo Financiero, Onexa, S.A. de C.V., Valores Industriales, S.A. and Alestra, S. de R.L.
de C.V. Portions of this exhibit have been omitted pursuant to a request for confidential treatment (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4,
1999).

4.2 Amended and Restated Service Mark License Agreement dated as of October 17, 1996 between AT&T Corp. and Alestra, S. de
R.L. de C.V. Portions of this exhibit have been omitted pursuant to a request for confidential treatment (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on
November 4, 1999).

4.3 Master Agreement for the Supply of Interconnection Services dated as of October 10, 1996 between
Teléfonos de México, S.A. de C.V. and Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.4 Concession to Build, Operate and Exploit a Public Telecommunications Network granted by the Federal Government of Mexico to Sistemas
Telefónicos de la República, S. de R.L. de C.V. (now Alestra, S. de R.L. de C.V.) (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4,
1999).

4.5 Concession for the Use of Radioelectric Frequencies to provide point-to-multipoint microwave telecommunication services
(66PAM10-4) granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.6 Concession for the Use of Radioelectric Frequencies to provide point-to-multipoint microwave telecommunication services (68PAM10-6)
granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.7 Concession for the Use of Radioelectric Frequencies to provide point-to-multipoint microwave telecommunication services (71PAM10-9) granted by the
Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.8 Concession for the Use of Radioelectric Frequencies to provide point-to-point microwave telecommunication services (15-PAP-23) granted by the Federal
Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).



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4.9 Concession for the Use of Radioelectric Frequencies to provide point-to-point microwave
telecommunication services (31-PAP-15) granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on
November 4, 1999).

4.10 Attachment C, of the concession to build, operate and exploit a public telecommunications network
granted by the federal Government of Mexico to Alestra, S de R.L. de C.V, authorizing it to provide local telephone services in the cities of Mexico City, Guadalajara and Monterrey (previously filed with the Commission by Alestra, S. de R.L. de C.V.
as an exhibit to its Form F-4, Registration Number 333-100075 on January 15, 2003).

4.11 Service Mark License Amendment dated
February 13, 2003 between AT&T Corp and Alestra S. De R. L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-100075 on February 25, 2003).

4.12 Addendum to the Second Amended and Restated Joint Venture Agreement, dated November 30, 2005 (previously filed with the Commission by Alestra,
S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on April 3, 2006).

4.13 Addendum to the Amended and
Restated Service Mark License Agreement, dated November 30, 2005 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on April 3, 2006).

4.14 Addendum to the AT&T Global Network Cooperation Agreement, dated November 30, 2005 (previously filed with the Commission by Alestra, S. de
R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on April 3, 2006).

4.15 Note Purchase Agreement dated
July 26, 2006 by and among Alestra S. de R.L. de C.V. and Deutsche Bank AG, London Branch (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on March 30,
2007).

4.16 Security Agreement dated July 26, 2006 by and among Alestra S. de R.L. de C.V. and Deutsche Bank Trust Company Americas as
collateral agent (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on March 30, 2007).

8.1 Subsidiary of Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4,
Registration Number 333-100075 on January 15, 2003).

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

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

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

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



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INDEX TO THE FINANCIAL STATEMENTS



|                                                                                                                 |  |     
|---------------------------------------------------------------------------------------------------------------- |  | ----
|Contents                                                                                                         |  | Page
|Report of Independent Registered Public Accounting Firm                                                          |  | F-2 
|Consolidated Balance Sheets as of December 31, 2008 and 2009                                                     |  | F-3 
|Consolidated Statements of Operations for the Years Ended December 31, 2007, 2008 and
2009                       |  | F-4 
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 
31, 2007, 2008 and 2009 |  | F-5 
|Consolidated Statement of Changes in Financial Position for the Year Ended December 31,
2007                     |  | F-6 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and
2009                             |  | F-7 
|Notes to Consolidated Financial Statements                                                                       |  | F-8 



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of

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

We have audited
the accompanying consolidated balance sheets of Alestra, S. de R. L. de C. V. and subsidiary (the Company), as of December 31, 2008 and 2009, and the consolidated statements of operations and changes in stockholders equity for
the three years ended December 31, 2009; we also audited the consolidated statement of changes in the financial position for the year ended December 31, 2007 and cash flows for the two years ended December 31, 2009. These financial
statements are the responsibility of the Companys Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States) and generally accepted auditing
standards in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they were prepared in accordance with the Mexican
Financial Reporting Standards (Mexican FRS). An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the standards of financial
information used and significant estimates made by the Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Alestra, S. de R.L. de C.V. and its subsidiary, as of December 31, 2008 and 2009 and its consolidated results of operations and changes in stockholders equity for each of the three years ended December 31, 2009, and changes in the
financial position for the year ended December 31, 2007 and cash flows for the two years ended December 31, 2009 in conformity with Mexican FRS.

As of January 1, 2008, The Company adopted the new Mexican Financial Reporting Standards (Mexican FRS) B-10 Inflation
Effects, B-2 Statement of Cash Flows and D-3 Employees Benefits.

Mexican FRS vary in certain significant
respects from the accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such difference is presented in Note 20 to the consolidated financial statements.

PricewaterhouseCoopers, S.C.

Alberto Cano
Charles

Monterrey, Nuevo León, México

January 27, 2010, except for Note 20, which is as of April 23, 2010



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##### Table of Contents

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

Subsidiaries of Alfa S. A. B. de C. V.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2008 AND 2009

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)



|                                                                                    |  |                  |  |                 
|----------------------------------------------------------------------------------- |  | ---------------- |  | ----------------
|                                                                                    |  | December 31,2008 |  | December 31,2009
|Assets                                                                              |  |                  |  |                 
|CURRENT ASSETS:                                                                     |  |                  |  |                 
|Cash and cash equivalents                                                           |  | Ps 202,805       |  | Ps 317,429      
|Restricted cash (Note 13)                                                           |  |                 |  | 318,202         
|Trade receivables, net (Note 3)                                                     |  | 516,173          |  | 494,216         
|Due from affiliates and other related parties (Note 4)                              |  | 54,297           |  | 24,018          
|Other receivables                                                                   |  | 70,493           |  | 75,918          
|Prepaid expenses (Note 5)                                                           |  | 22,694           |  | 40,022          
|Other current assets                                                                |  | 1,923            |  | 572             
|                                                                                    |  |                  |  |                 
|Total current assets                                                                |  | 868,385          |  | 1,270,377       
|Property and equipment, net (Note 6)                                                |  | 5,169,181        |  | 5,204,783       
|Deferred charges and other assets, net (Note 7)                                     |  | 303,845          |  | 336,239         
|Deferred income tax (Note 15)                                                       |  |                 |  | 104,084         
|                                                                                    |  |                  |  |                 
|Total assets                                                                        |  | Ps 6,341,411     |  | Ps 6,915,483    
|                                                                                    |  |                  |  |                 
|                                                                                    |  |                 
|Liabilities and stockholders equity                                                |  |                  |  |                 
|CURRENT LIABILITIES:                                                                |  |                  |  |                 
|Accounts payable to Teléfonos de México, S.A.B de C.V. and other carriers (Note 13) |  | Ps 154,501       |  | Ps 472,362      
|Other suppliers                                                                     |  | 354,809          |  | 286,683         
|8% Senior notes due 2010 (Note 9)                                                   |  | 363,142          |  |                
|Bank loans, notes payable and capital leases (Note 8)                               |  | 287,120          |  | 185,665         
|Due to affiliates and other related parties (Note 4)                                |  | 11,918           |  | 4,854           
|Income tax payable                                                                  |  | 7,884            |  |                
|Dividends payable (Note 11)                                                         |  |                 |  | 130,587         
|Other accounts payable and accrued expenses                                         |  | 309,341          |  | 396,047         
|                                                                                    |  |                  |  |                 
|Total current liabilities                                                           |  | 1,488,715        |  | 1,476,198       
|LONG-TERM LIABILITIES:                                                              |  |                  |  |                 
|8% Senior notes due 2010 (Note 9)                                                   |  | 2,337,925        |  |                
|11.750% Senior notes due 2014 (Note 9)                                              |  |                 |  | 2,611,740       
|Bank loans, notes payable and capital leases (Note 8)                               |  | 186,202          |  | 411,147         
|Deferred income tax (Note 15)                                                       |  | 6,020            |  |                
|Employees benefits (Note 10)                                                       |  | 105,704          |  | 102,677         
|                                                                                    |  |                  |  |                 
|Total liabilities                                                                   |  | 4,124,566        |  | 4,601,762       
|                                                                                    |  |                  |  |                 
|STOCKHOLDERS EQUITY (Note 11):                                                     |  |                  |  |                 
|Contributed stock                                                                   |  | 1,394,971        |  | 1,394,971       
|Retained earnings                                                                   |  | 821,873          |  | 918,749         
|                                                                                    |  |                  |  |                 
|Total shareholders equity of Alestra                                               |  | 2,216,844        |  | 2,313,720       
|Non controlling interest                                                            |  | 1                |  | 1               
|                                                                                    |  |                  |  |                 
|Total stockholders equity                                                          |  | 2,216,845        |  | 2,313,721       
|                                                                                    |  |                  |  |                 
|CONTINGENCIES AND COMMITMENTS (Note 12)                                             |  |                  |  |                 
|                                                                                    |  |                  |  |                 
|Total liabilities and stockholders equity                                          |  | Ps 6,341,411     |  | Ps 6,915,483    
|                                                                                    |  |                  |  |                 

The accompanying notes are an integral part of these consolidated
financial statements, which were authorized for their issuance on January 27, 2010 by the officers that sign these financial statements and related notes.



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##### Table of Contents

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

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)



|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | ---- |  | -- | ---------- | -
|                                                                                  |  | 2007 |            |   | 2008 |    |            | 2009 | 
|REVENUES (Note 14)                                                                |  |      |            |   |      |    |            |      |  |    |            |  
|Long distance services                                                            |  | Ps   | 2,414,649  |   |      | Ps | 1,722,487  |      |  | Ps | 1,420,624  |  
|Data, internet and local services                                                 |  |      | 2,641,391  |   |      |    | 2,950,062  |      |  |    | 3,263,013  |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|                                                                                  |  |      | 5,056,040  |   |      |    | 4,672,549  |      |  |    | 4,683,637  |  
|OPERATING EXPENSES:                                                               |  |      |            |   |      |    |            |      |  |    |            |  
|Cost of services (excluding depreciation and amortization - Note 14)              |  |      |            |   |      |    |            |      |  |    |            |  
|Long distance services                                                            |  |      | (1,459,930 | ) |      |    | (1,041,532 | )    |  |    | (955,631   | )
|Data, internet and local services                                                 |  |      | (757,748   | ) |      |    | (747,497   | )    |  |    | (781,075   | )
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|                                                                                  |  |      | (2,217,678 | ) |      |    | (1,789,029 | )    |  |    | (1,736,706 | )
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|Gross profit                                                                      |  |      | 2,838,362  |   |      |    | 2,883,520  |      |  |    | 2,946,931  |  
|Administration, selling and other operating expenses                              |  |      | (1,513,334 | ) |      |    | (1,551,709 | )    |  |    | (1,529,384 | )
|Depreciation and amortization                                                     |  |      | (870,137   | ) |      |    | (756,687   | )    |  |    | (853,510   | )
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|Operating income                                                                  |  |      | 454,891    |   |      |    | 575,124    |      |  |    | 564,037    |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|COMPREHENSIVE FINANCIAL RESULT:                                                   |  |      |            |   |      |    |            |      |  |    |            |  
|Interest expense                                                                  |  |      | (314,231   | ) |      |    | (294,575   | )    |  |    | (333,336   | )
|Interest income                                                                   |  |      | 30,243     |   |      |    | 29,099     |      |  |    | 17,591     |  
|Exchange (loss) gain                                                              |  |      | (2,165     | ) |      |    | (615,195   | )    |  |    | 99,092     |  
|Gain (loss) on derivative financial instruments                                   |  |      | 2,853      |   |      |    | (63,179    | )    |  |    | (4,789     | )
|Gain from monetary position, net                                                  |  |      | 103,780    |   |      |    |           |      |  |    |           |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|                                                                                  |  |      | (179,520   | ) |      |    | (943,850   | )    |  |    | (221,442   | )
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|OTHER INCOME (EXPENSE), NET                                                       |  |      | 1,175      |   |      |    | (50,072    | )    |  |    | (73,229    | )
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|Gain (loss) before the following provisions for deferred income tax and asset tax |  |      | 276,546    |   |      |    | (418,798   | )    |  |    | 269,366    |  
|Asset tax (Note 15)                                                               |  |      | (2,880     | ) |      |    |           |      |  |    |           |  
|Income tax (Note 15)                                                              |  |      | (85,630    | ) |      |    | 34,476     |      |  |    | 22,099     |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|Consolidated net income (loss)                                                    |  |      | 188,036    |   |      |    | (384,322   | )    |  |    | 291,465    |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|Net (loss) income attributable to non controlling interest                        |  |      | (1         | ) |      |    | (1         | )    |  |    |           |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  
|Net income (loss) attributable to total stockholders of Alestra                   |  | Ps   | 188,035    |   |      | Ps | (384,323   | )    |  | Ps | 291,465    |  
|                                                                                  |  |      |            |   |      |    |            |      |  |    |            |  

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their
issuance on January 27, 2010 by the officers that sign these financial statements and related notes.



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##### Table of Contents

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

Consolidated Statements of Changes in Stockholders Equity

for the Years Ended December 31, 2007, 2008 and 2009

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)



|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|------------------------------------------------------------------------------------------ |  | ------------- | --- | ---------------------------- | -- | -------------------------- |  | ----------------------------------- | ------- |  | ----------------------------------------------------- | --------------------------- | - | ---------------------------------------- | ----------------------- | -------- | ---------------- | ------------------------ | -- | ------ | - |  | -- | --------- | - |  | -- | --------- | - |  | -- | -- | - |  | -- | --------- | -
|                                                                                           |  |               |     | Accumulated (deficit) income |    |                            |  |                                     |         |  |                                                       |                             |   |                                         
|                                                                                           |  |               |     |                              |    |                            |  | Effect onequityfrom laborobligation |         |  | Deficit fromrestatementfrom 
holdingnonmonetaryassets |                             |   | Effects ofderivativefinancialinstruments |                         |          | Retainedearnings |                          |    |        |   |  |    |           |   |  |   
|                                                                                           |  | Capital stock |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                        
|                                                                                           |  | Fixed         |     | Variable                     |    | RestatementOf CapitalStock |  |                                     |         |  |                                                       | Stockholderequity ofAlestra |   |                                          | Non controllinginterest |          |                  | TotalStockholdersEquity |   
|Balance at December 31, 2006                                                               |  | Ps            | 300 |                              | Ps | 1,181,046                  |  | Ps                                  | 213,625 |  | Ps                                                    | (5,668                      | ) |                                          | Ps                      | 96,402   |                  |                          | Ps | 1,303  |   |  | Ps | 905,485   |   |  | Ps | 2,392,493 |   |  | Ps | (1 | ) |  | Ps | 2,392,492 |  
|Changes in 2007:                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Net income                                                                                 |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    | 188,035   |   |  |    | 188,035   |   |  |    | 1  |   |  |    | 188,036   |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         | 
|Additional minimum pension liabilities                                                     |  |               |     |                              |    |                            |  |                                     |         |  |                                                       | 593                         |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    | 593       |   |  |    |    |   |  |    | 593       |  
|Deficit from restatement                                                                   |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         | 16,763   |                  |                          |    |        |   |  |    |           |   |  |    | 16,763    |   |  |    |    |   |  |    | 16,763    |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Comprehensive income                                                                       |  |               |    |                              |    |                           |  |                                     |        |  |                                                       | 593                         |   |                                          |                         | 16,763   |                  |                          |    |       |   |  |    | 188,035   |   |  |    | 205,391   |   |  |    | 1  |   |  |    | 205,392   |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Balance at December 31, 2007                                                               |  |               | 300 |                              |    | 1,181,046                  |  |                                     | 213,625 |  |                                                       | (5,075                      | ) |                                          |                         | 113,165  |                  |                          |    | 1,303  |   |  |    | 1,093,520 |   |  |    | 2,597,884 |   |  |    |   |   |  |    | 2,597,884 |  
|Changes in 2008:                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Net loss                                                                                   |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    | (384,323  | ) |  |    | (384,323  | ) |  |    | 1  |   |  |    | (384,322  | )
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         | 
|Transfer of deficit from restatement from holding non monetary assets to retained earnings |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         | (113,165 | )                |                          |    |        |   |  |    | 113,165   |   |  |    |          |   |  |    |    |   |  |    |          |  
|Elimination of additional minimum pension liabilities                                      |  |               |     |                              |    |                            |  |                                     |         |  |                                                       | 5,075                       |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    | 5,075     |   |  |    |    |   |  |    | 5,075     |  
|Effect of derivative financial instruments                                                 |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    | (1,792 | ) |  |    |           |   |  |    | (1,792    | ) |  |    |    |   |  |    | (1,792    | )
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Comprehensive loss                                                                         |  |               |     |                              |    |                            |  |                                     |         |  |                                                       | 5,075                       |   |                                          |                         | (113,165 | )                |                          |    | (1,792 | ) |  |    | (271,158  | ) |  |    | (381,040  | ) |  |    | 1  |   |  |    | (381,039  | )
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Balance at December 31, 2008                                                               |  |               | 300 |                              |    | 1,181,046                  |  |                                     | 213,625 |  |                                                       |                            |   |                                          |                         |         |                  |                          |    | (489   | ) |  |    | 822,362   |   |  |    | 2,216,844 |   |  |    | 1  |   |  |    | 2,216,845 |  
|Changes in 2009:                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Net income                                                                                 |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    | 291,465   |   |  |    | 291,465   |   |  |    |   |   |  |    | 291,465   |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         | 
|Dividends declared                                                                         |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    | (195,078  | ) |  |    | (195,078  | ) |  |    |    |   |  |    | (195,078  | )
|Effect of derivative financial instruments                                                 |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    | 489    |   |  |    |           |   |  |    | 489       |   |  |    |    |   |  |    | 489       |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Comprehensive income                                                                       |  |               |    |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    | 489    |   |  |    | 291,465   |   |  |    | 96,876    |   |  |    |   |   |  |    | 96,876    |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  
|Balance at December 31, 2009                                                               |  | Ps            | 300 |                              | Ps | 1,181,046                  |  | Ps                                  | 213,625 |  | Ps                                                    |                            |   |                                          | Ps                      |         |                  |                          | Ps |       |   |  | Ps | 918,749   |   |  | Ps | 2,313,720 |   |  | Ps | 1  |   |  | Ps | 2,313,721 |  
|                                                                                           |  |               |     |                              |    |                            |  |                                     |         |  |                                                       |                             |   |                                          |                         |          |                  |                          |    |        |   |  |    |           |   |  |    |           |   |  |    |    |   |  |    |           |  

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their
issuance on January 27, 2010 by the officers that sign these financial statements and related notes.



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##### Table of Contents

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

CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION

FOR THE YEAR ENDED DECEMBER 31, 2007

(Amounts expressed in thousands of Mexican Pesos, as explained in Note 2)



|                                                                                   |  |                                |           |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | --------- | -
|                                                                                   |  | For the yearended December 31, |          
|                                                                                   |  | 2007                           |          
|OPERATING ACTIVITIES:                                                              |  |                                |           |  
|Consolidated net income                                                            |  | Ps                             | 188,036   |  
|Adjustments to reconcile net income to resources provided by operating activities: |  |                                |           |  
|Cost of labor obligations                                                          |  |                                | 38        |  
|Amortization of capitalized expenses from issuance of senior notes                 |  |                                | 26,038    |  
|Deferred income tax                                                                |  |                                | 85,630    |  
|Depreciation and amortization                                                      |  |                                | 870,137   |  
|                                                                                   |  |                                |           |  
|                                                                                   |  |                                | 1,169,879 |  
|                                                                                   | 
|Changes in working capital:                                                        |  |                                |           |  
|Trade receivables, net                                                             |  |                                | (66,019   | )
|Due from affiliates and other related parties                                      |  |                                | 14,316    |  
|Recoverable taxes and other receivables                                            |  |                                | 3,977     |  
|Derivative financial instruments                                                   |  |                                | (2,853    | )
|Prepaid expenses                                                                   |  |                                | 14,322    |  
|Accounts payable to Teléfonos de México, S.A.B. de C.V. and other carriers         |  |                                | 26,281    |  
|Due to affiliates and other related parties                                        |  |                                | (214,046  | )
|Other accounts payable and expenses accrued                                        |  |                                | 51,609    |  
|                                                                                   |  |                                |           |  
|Resources provided by operating activities                                         |  |                                | 997,466   |  
|                                                                                   |  |                                |           |  
|INVESTING ACTIVITIES:                                                              |  |                                |           |  
|Purchase of property and equipment                                                 |  |                                | (546,954  | )
|Deferred charges and other assets                                                  |  |                                | (62,931   | )
|Restricted cash                                                                    |  |                                | (5,491    | )
|                                                                                   |  |                                |           |  
|Resources used in investing activities                                             |  |                                | (615,376  | )
|                                                                                   |  |                                |           |  
|FINANCING ACTIVITIES:                                                              |  |                                |           |  
|Payments of senior notes                                                           |  |                                | (629,277  | )
|Bank loans, notes payable and capital leases, net                                  |  |                                | (215,104  | )
|                                                                                   |  |                                |           |  
|Resources used in financing activities                                             |  |                                | (844,381  | )
|                                                                                   |  |                                |           |  
|Decrease in cash and cash equivalents                                              |  |                                | (462,291  | )
|Cash and cash equivalents, beginning of period                                     |  |                                | 745,350   |  
|                                                                                   |  |                                |           |  
|Cash and cash equivalents, end of period                                           |  | Ps                             | 283,059   |  
|                                                                                   |  |                                |           |  

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their
issuance on January 27, 2010 by the officers that sign these financial statements and related notes.



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##### Table of Contents

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)



|                                                                                  |  |      |           |   |      |    |            |  
|--------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -- | ---------- | -
|                                                                                  |  | 2008 |           |   | 2009 |   
|Operation activities:                                                             |  |      |           |   |      |    |            |  
|(Loss) income before income tax                                                   |  | Ps   | (418,798  | ) |      | Ps | 269,366    |  
|Items relating to investing activities:                                           |  |      |           |   |      |    |            |  
|Depreciation and amortization                                                     |  |      | 756,687   |   |      |    | 853,510    |  
|Cost related to seniority premiums and pension plans                              |  |      | 21,299    |   |      |    | 20,257     |  
|Interest income                                                                   |  |      | (29,099   | ) |      |    | (17,591    | )
|Loss on derivative financial instruments                                          |  |      | 63,179    |   |      |    | 4,789      |  
|Gain on sale of equipment                                                         |  |      | 3,888     |   |      |    | 20,134     |  
|Items relating to financing activities:                                           |  |      |           |   |      |    |            |  
|Interest expense                                                                  |  |      | 294,575   |   |      |    | 333,336    |  
|Exchange loss (gain)                                                              |  |      | 615,195   |   |      |    | (99,092    | )
|Accelerated amortization of issuance costs of 8%senior notes                      |  |      |           |   |      |    | 19,229     |  
|Other, net                                                                        |  |      | 7,596     |   |      |    | 1,723      |  
|                                                                                  |  |      |           |   |      |    |            |  
|Subtotal                                                                          |  |      | 1,314,522 |   |      |    | 1,405,661  |  
|Increase in accounts receivable and other current assets                          |  |      | 5,302     |   |      |    | 27,452     |  
|Increase in suppliers, accounts payable and other current liabilities             |  |      | 72,408    |   |      |    | 413,014    |  
|Payments relating to settlement of derivative financial instruments               |  |      | (58,775   | ) |      |    | (2,241     | )
|Income tax paid                                                                   |  |      | (50,573   | ) |      |    | (75,404    | )
|                                                                                  |  |      |           |   |      |    |            |  
|Operating activities net cash flows                                               |  |      | 1,282,884 |   |      |    | 1,768,482  |  
|                                                                                  |  |      |           |   |      |    |            |  
|Investing activities:                                                             |  |      |           |   |      |    |            |  
|Interest received                                                                 |  |      | 28,810    |   |      |    | 17,063     |  
|Acquisition of property and equipment                                             |  |      | (788,159  | ) |      |    | (808,373   | )
|Acquisition of deferred charges and other assets                                  |  |      | (74,554   | ) |      |    | (107,275   | )
|                                                                                  |  |      |           |   |      |    |            |  
|Investing activities net cash flows                                               |  |      | (833,903  | ) |      |    | (898,585   | )
|                                                                                  |  |      |           |   |      |    |            |  
|Exceeding cash to apply in financing activities                                   |  |      | 448,981   |   |      |    | 869,897    |  
|                                                                                  |  |      |           |   |      |    |            |  
|Financing activities:                                                             |  |      |           |   |      |    |            |  
|Increase in bank loans, notes payable and capital leases                          |  |      | 414,762   |   |      |    | 349,788    |  
|Issuance of 11.750% Senior Notes due 2014                                         |  |      |          |   |      |    | 2,586,980  |  
|Fees and expenses incurred for the issuance of the 11.750% Senior Notes due 2014  |  |      |          |   |      |    | (65,522    | )
|Payment of 8% Senior Notes due 2010                                               |  |      | (482,400  | ) |      |    | (2,640,321 | )
|Interest paid                                                                     |  |      | (261,742  | ) |      |    | (224,676   | )
|Payment of debt and bank loans                                                    |  |      | (392,972  | ) |      |    | (424,949   | )
|Dividends paid                                                                    |  |      |          |   |      |    | (64,490    | )
|                                                                                  |  |      |           |   |      |    |            |  
|Financing activities net cash flows                                               |  |      | (722,352  | ) |      |    | (483,190   | )
|                                                                                  |  |      |           |   |      |    |            |  
|Net cash (decreasing) increasing cash and cash equivalents                        |  |      | (273,371  | ) |      |    | 386,707    |  
|Adjustments to cash flow as a result of changes in exchange rates                 |  |      | 27,101    |   |      |    | 46,119     |  
|Cash, cash equivalents and restricted cash at beginning of year                   |  |      | 449,075   |   |      |    | 202,805    |  
|                                                                                  |  |      |           |   |      |    |            |  
|Cash and cash equivalents and restricted cash at year end                         |  | Ps   | 202,805   |   |      | Ps | 635,631    |  
|                                                                                  |  |      |           |   |      |    |            |  
|Cash, cash equivalents and restricted cash at beginning of year is integrated by: |  |      |           |   |      |    |            |  
|Cash and cash equivalents                                                         |  | Ps   | 283,059   |   |      | Ps | 202,805    |  
|                                                                                  |  |      |           |   |      |    |            |  
|Restricted cash                                                                   |  | Ps   | 166,016   |   |      | Ps |           |  
|                                                                                  |  |      |           |   |      |    |            |  

The companying notes are an integral part of these consolidated financial statements, which were authorized for their
issuance on January 27, 2010 by the officers that sign these financial statements and related notes.



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

Subsidiaries of Alfa, S.A.B. de C.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AT DECEMBER 31, 2008 AND 2009

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)

1. INCORPORATION AND ACTIVITY OF THE COMPANY

Alestra, S. de R. L. de C. V. (Alestra), is a Mexican company with limited liability and variable capital, incorporated on
October 13, 1995, as a joint venture between Onexa, S. A. de C. V. (Onexa) (51%) and AT&T Telecom México, Inc. (AT&T) (49%).

In a general extraordinary meeting held on October 2, 2007, the stockholders approved the merger of Onexa into Alfa, S. A. B. de C.
V., which became effective as of March 31, 2008. As a result of this merger, Alfa owns directly 51% of the shares of Alestra.

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

The Company does not have any direct employees and all services required are provided by Servicios
Alestra.

The Companys business consists of the installation and operation of a public telecommunications network in
Mexico, offering long distance telephone services and data, internet and local services.

The Companys business requires
a concession (license granted by the Mexican federal government) to operate. On December 6, 1995, the Secretaría de Comunicaciones y Transportes (Ministry of Communications and Transportation, or Ministry of Communications)
granted the Company a renewable thirty-year concession to operate its business. The Company did not make any payments to the Ministry of Communications in relation to this concession. The concession places certain performance conditions on the
Company with respect to the roll-out and expansion of its network, quality of its services, rates and billing systems, compliance with the terms established for the operation of the network as well as delivery of audited financial statements on an
annual basis. In accordance with the terms of its concession and the guidelines and schedule established by the Ministry of Communications, on January 1, 1997, the Company began the gradual rollout and expansion of its domestic and
international long distance services to 60 cities. The Company began earning revenues in 1997. Under the Ministry of Communications guidelines, the Company has gradually expanded its services to additional cities, totaling 198 cities as of
December 31, 2009.

The Ministry of Communications has made various amendments to Companys telecommunication public
network concession in order to permit the Company to provide local telephone services to residential and commercial users throughout Mexico.

On November 30, 2005, the Company and its shareholders amended their Second Amended and Restated Joint Venture Agreement (the
Joint Venture Agreement) and certain other agreements including: the Amended and Restated Service Mark License Agreement (the Service Mark License Agreement) and the AT&T Global Network Cooperation Agreement (the
AGN Agreement) and its bylaws.

The Service Mark License Agreement provided for the following:



| |  |  | Beginning November 30, 2005, the Company had an initial 18-month period (the Initial Transition Period) in which Company covenants to
develop, acquire, license or position new service brands for its services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At the end of the mentioned Initial Transition Period, in specific circumstances, the Company had an additional 18-month period (the Extended
Transition Period) where the Company had limited use of the AT&T service brand.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 24 months after the amendment date, the Company only used the AT&T service brand together with its new service brand, and may only used it for
reference purposes and always with the prior approval from AT&T.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The Company was permitted to use the AT&T brand name until November 17, 2008. The Company is allowed to use the phrase AT&T Global
Services, as a tag line below the Alestra brand, for the limited purpose of providing AT&T Global Services within on a nonexclusive basis until June 2010, provided that Alestra meets certain conditions, which, at the date of issuance of these
financial statements are fulfilled.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The license agreement contains provisions allowing AT&T to terminate the license agreement at its sole discretion upon certain changes in the
Companys ownership, or if the Company fails to abide by certain quality control standards or if the Company misuses the AT&T brand and in certain other circumstances. At the date of issuance of these financial statements, these commitments
are fulfilled.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements were authorized for issuance on January 27, 2010, by the officers that sign these
financial statements and related notes.

The accompanying consolidated financial statements at December 31, 2008 and 2009
fully meet with the established in the Mexican Financial Reporting Standards (Mexican FRS).

The Company prepared
the statement of operations based on its function, which underlying characteristic is to separate the sales cost from the other costs. Additionally, for a better analysis of the statement of operations, the Company considered necessary to include
the operating income (loss) amount separately in such statement, since this information is a common disclosure practice in the industry to which the Company belongs.

The provisions of the Mexican FRS B-10 specify that as of 2008, the Mexican economy is not an inflationary environment, since there has
been a cumulative inflation below 26% in the last three years (the established limit by Mexican FRS to define an economy as inflationary). Therefore, as of January 1, 2008, the Company is required to discontinue the recognition of the inflation
effects in the financial information. Consequently, the figures of the financial statements at December 31, 2008 and 2009 are stated in adjusted nominal Mexican pesos as they include cumulative inflation effects on the financial information
recognized up to December 31, 2007.

The inflation rates are shown below:



|                                             |  |                                |   |  |       |   |  |       |  
|-------------------------------------------- |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                                             |  | For the year endedDecember 31, |  
|                                             |  | 2007                           |   |  | 2008  |   |  | 2009  |  
|Year inflation                               |  | 3.76                           | % |  | 6.53  | % |  | 3.57  | %
|Cumulative inflation in the last three years |  | 11.56                          | % |  | 15.01 | % |  | 14.48 | %

New adopted standards:

As of January 1, 2009, the Company adopted the following standards, which did not have a material impact on the
Companys financial statements:

Mexican FRS B-7, Business acquisitions, which establishes the general
standards for valuation and disclosure in the initial recognition of the net assets acquired in a business acquisition at acquisition date as well as for the non controlling interest and other items that may arise in them, such as goodwill.

Mexican FRS B-8, Consolidated and combined financial statements, which establishes the general standards
for the preparation and presentation of the consolidated and combined financial statements; as well as for the disclosures accompanying such financial statements.



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##### Table of Contents

Mexican FRS C-7, Investments in associated companies and other permanent
investments, which sets forth the standards for the accounting recognition of the investments in associates, and other permanent investments in which there is no control, joint control or significant influence.

Mexican FRS C-8, Intangible assets, which sets forth the valuation, presentation and disclosure standards for the
initial and subsequent recognition of the intangible assets acquired individually or through a business acquisition, or internally generated in the normal course of business.

Mexican FRS D-8, Share-based payments, which stipulates the standards for recognition of share-based payments in the
financial information. This NIF supersedes IFRS-2 Share-based payments, issued by the International Financial Reporting Standards Board applicable on a supplementary basis in Mexico.

Interpretation to Mexican FRS  18, Recognition of the 2010 Tax Reform in the Income tax. This interpretation was
issued with the purpose to guide the financial information preparers through certain questioning related to the 2010 Tax Reform and more specific, for the modifications to the tax consolidation and income tax rate applicable for future years.

Following is a summary of the most significant accounting policies followed by the Company, which have been applied on a
consistent basis in the preparation of their consolidated financial information for the years presented, unless otherwise indicated:

a. Basis of presentation and disclosure

The consolidated financial statements are expressed in Mexican Pesos, (functional and reporting currency) denoted by the symbol
Ps.

The consolidated financial statements include those of Alestra and its subsidiary, Servicios Alestra, of
which Alestra holds 99.00% of the capital stock. All significant intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with Mexican FRS requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from those estimates.

Significant estimates and assumptions include certain international long distance services revenues and expenses (see
Note 2-h), allowance for doubtful accounts (see Note 3), deferred income tax provision (see Note 15) and employee benefits (see Note 10).

b. Cash and cash equivalents

The Company considers all highly liquid temporary cash investments with original maturities of three months or less, consisting primarily
of short-term deposits and money market accounts, as cash equivalents (see Note 13).

c. Property and equipment, net (Note
6)

From January 1, 2008 onwards, new acquisitions of property and equipment including those acquired under capital
leases are stated at nominal cost; until December 31, 2007, property and equipment and related accumulated depreciation were stated at cost restated by applying factors derived from the National Consumer Price Index (NCPI) to the
acquisition cost, except for equipment of foreign origin, for which value was restated by applying factors that reflect the inflation of the country of origin at the date of valuation and translating those amounts to pesos at the exchange rate
prevailing at the end of 2007. Consequently, as of December 31, 2008 and 2009, property and equipment are stated at adjusted nominal cost.

Replacements, maintenance and repairs which do not improve or extend the life of the respective asset are expensed as incurred.
Installation cost is capitalized and amortized during the estimated useful life of the line contracted by the client which is estimated to be three years.

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



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The Company leases telecommunications equipment with certain characteristics, for which the
Company substantially assumes all the inherent benefits and risks of the ownership. Consequently, these are classified as capital leases; which are capitalized at the beginning of the leasing contract at the lower of the value of the leased property
or the present value of the minimal payments. The financial costs derived from the financing granted by the leasing for the acquisition of such assets is recognized in the statement of operations as accrued (see Note 8).

Depreciation is calculated using the straight-line method over the useful lives of the assets estimated by the Company, including those
acquired under capital leases. These useful lives are consistent with the guidelines established by the Federal Telecommunications Commission (Cofetel), and are as follows:



|                                   |  |        
|---------------------------------- |  | -------
|                                   |  | Years  
|Buildings                          |  | 25     
|Telephone network                  |  | 8 to 28
|Billing and customer care software |  | 7      
|Equipment:                         |  |        
|Office                             |  | 10     
|Computer                           |  | 3      
|Transportation                     |  | 4      

Property and equipment
are subject to the recognition of impairment, as well as to its reversal, when required. As of December 31, 2008 and 2009, these assets show no signs of impairment.

Leasehold improvements are amortized over the estimated useful lives of the improvements or the termination of the lease contract,
whichever is shorter.

As of December 31, 2008 and 2009, no capitalization of the comprehensive financing result has been
recognized because the Company did not identify any qualifying assets, as defined by Mexican FRS D-6 Capitalization of Comprehensive Financing Result (see Note 6).

d. Deferred charges and other assets, net

The intangible assets are recognized in the balance sheet since they meet the following conditions: that they are identifiable, provide
future economic benefits and the company has control over such benefits. The intangible assets are classified as follows:

Definite life, are those which are amortized systematically, based on the best estimate of their useful life determined in accordance
with the expected future economic benefits, and are subject to impairment tests if any trigging event is identified.

Indefinite useful life, which are not amortized but subject to annual impairment assessment.

These intangible assets either acquired or developed, are expressed as follows: i) as of January 1, 2008, at their nominal cost, and
ii) up to December 31, 2007 at indexed values determined through the application of factors derived from the NCPI to its acquisition costs up to that date. Consequently, these assets are stated at their adjusted nominal cost, reduced from the
corresponding cumulative amortization and, in its case, impairment losses.

Internal use software costs are amortized over
three to five years.

Deferred charges are subject to recognition of impairment, as well as to its reversal, when so required.
At December 31, 2008 and 2009, these assets show no signs of impairment.

e.Provisions

The liabilities provisions represent present obligations for past events where the outflow of economic resources is possible. These
provisions have been recorded based on managements best estimation. See Notes 3, 10, 13 and 15.



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f. Comprehensive financing result (CFR)

The CFR is determined by grouping the following in the statement of operations: the financial income and expense, exchange differences,
the effect of derivative financial instruments and gain from monetary position.

Until December 31, 2007, it was
necessary to calculate the gain or loss on monetary position, which represented the effect of inflation, as measured by the NCPI, on the Companys monthly net monetary assets and liabilities during the year expressed in Mexican Pesos of the
most recent balance sheet date. In accordance with Mexican FRS B-10, its recognition is not required from January 1, 2008 onwards.

g. Concessions

As previously mentioned in Note 1, on December 6, 1995, the Ministry of Communications awarded the Company, at no cost, a concession
to install and operate a public telecommunications network for a 30-year period. That concession was subsequently amended in 2000, and currently permits the Company to render basic telephone services with national coverage, long-distance services,
data transfer services, and other value-added services.

In accordance with Mexican FRS C-8 Intangible Assets,
this concession was not accounted as an intangible asset for financial reporting purposes as it had no cost to the Company.

h. Revenue recognition

Income from outgoing and incoming local and international long distance services are recorded based on the traffic minutes processed by
the Company and those processed by third parties, respectively.

Revenues from international long distance services are based
on the revenues obtained under bilateral agreements between the Company and the foreign long-distance service providers. The bilateral agreements determine both the fees to be paid by the Company to foreign long-distance service providers for the
use of their telephone networks in long-distance interconnections billed in Mexico and the fees to be received from foreign providers of services to the Company for the use of the telephone network of the foreign provider for the interconnection of
calls billed outside of Mexico. Tariffs subject to these agreements are negotiated on an annual basis with each foreign provider and are reported to Cofetel, whose regulations authorize each long-distance service provider to freely negotiate market
prices. The fees between Mexico and the United States are negotiated directly with AT&T.

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

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

i. Transactions in foreign currency and
exchange differences

Monetary assets and liabilities denominated in foreign currencies, mainly U.S. dollars (US$), are
stated in Mexican Pesos at the exchange rates in effect as of the balance sheet dates. Exchange differences arising from changes in exchange rates between the transaction and settlement dates or the balance-sheet date, are charged or credited to CFR
in the statement of operations (see Note 16).

j. Advertising

Prepaid airtime is amortized based on the transmission of the television spots. The related production costs are recognized in the results
of operations the first time the advertising takes place. All other advertising costs are expensed as received.



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k. Income tax and flat rate business tax (Note 15)

The income tax included in the consolidated statement of operations represents the current and deferred tax for the year. The deferred
income tax is recorded under the comprehensive asset  liability method requiring recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of
all assets and liabilities expected to be realized in the future and their respective tax bases.

The Flat Rate Business Tax
(Impuesto Empresarial Tasa Unica or IETU for its name in Spanish) is effective as of January 1, 2008. The law introduces a flat tax, which replaces Mexicos asset tax and will apply along with Mexicos regular
income tax. In general, Mexican companies are subject to paying the greater of the flat tax or the income tax. The flat tax is calculated by applying a 16.5% tax rate in 2008, a 17% tax rate in 2009, and 17.5% in 2010 and the following years. In
accordance with the interpretation published by the CINIF last December 21, 2007, with respect to the accounting effects of the IETU, and based on financial and tax projections, the Company has determined that it will continue paying regular
income tax in the future. As a result, the Companys management has not recorded any deferred IETU taxes as of December 31, 2007.

In 2009, the Mexican Congress approved the tax reform bill for 2010. Among others, the most significant changes are:

a. An increase of the income tax rate from 28% to 30% from 2010 to 2012, a decrease to 29% in 2013 and finally 28% in 2014 and future years.

b. Modifications in the tax consolidation regime in which the Company is participating as a subsidiary of Alfa.

c. The creation of an excise tax of 3% to cable and telephone communication services, excluding public telephone, rural fixed and internet services.

d. A 1% increase in the value added tax rate.

l. Capital Stock (Note 11)

Capital Stock, retained earnings, deficit from restatement from holding non-monetary assets effect of derivative financial instruments and
the effect in equity from labor obligations are expressed as follows: i) changes done as of January 1, 2008 at nominal cost and onwards, and ii) changes done before January 1, 2008 at indexed values determined through the application to
their originally determined values of factors derive from the NCPI up to December 31, 2007. Accordingly, the different stockholders equity concepts are expressed at adjusted nominal cost.

m. Deficit from restatement from holding non monetary assets

As of December 31, 2007, the deficit from restatement from holding non-monetary assets is comprised primarily of the initial
cumulative effects of initial monetary position and the gain or loss from withholding non-monetary assets stated in Mexican pesos as of the end of the period. Since it was not practical to identify the effects of the non-monetary assets leading to
the deficit from restatement from holding non-monetary assets, in realized and non-realized concepts, the net amount of Ps113,165 was transferred to retained earnings, according to the provisions of Mexican FRS B-10.

n. Risk concentrations

Financial instruments (see Note 17) which potentially subject the Company to significant concentrations of credit risk consist primarily
of cash and cash equivalents, trade accounts receivable and receivables and payables to domestic operators.

Concentration of
credit risk with respect to trade accounts receivable is limited due to the large number of customers throughout Mexico. The Company maintains allowances for doubtful accounts based on the expected collectibles of all receivables determined by using
the spin down method (see Note 3).

Approximately, 71.6%, 65.2%, and 33.8% of the Companys revenues related to
international long distance services for the years ended December 31, 2007, 2008 and 2009, respectively, were generated from telephone traffic exchanged between AT&T (a related party) and the Company (see Note 4).



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##### Table of Contents

In order to service its customers, the Company must interconnect with and use the telephone
network of Teléfonos de México, S. A. B. de C. V. (Telmex), the major provider of local telephone services covering all of Mexico. The interconnection and other surcharge rates that the Company must pay Telmex are filed
with Cofetel (see Note 13). For the years ended December 31, 2007, 2008 and 2009, interconnection costs amounted to Ps1,098,144, Ps781,411, and Ps802,964, respectively.

o. Employees benefits (Note 10)

The employee retirement plans (pensions, health-care expenses and seniority premiums), both formal and informal, as well as the benefits
payable at termination of employment for causes other than from restructuring, are recognized as a cost of the years in which the services are rendered in accordance with actuarial studies made by independent actuaries.

Actuarial gains and losses arising from retirement benefits in excess of the greater of 10% of the value of defined benefit obligation or
10% of the value of plan assets are amortized over the expected average remaining service lives of the employees expected to receive the benefits.

On January 1, 2008 the standards contained in FRS D-3 Employee benefits became effective. These standards require, among
other things, a reduction in the amortization period of the items relating to prior service cost, the incorporation of the effects of salary growth in the calculation of the defined benefit obligation, as well as the elimination of the additional
liability and corresponding intangible asset, and if applicable, of the amount recorded in stockholders equity.

From
January 1, 2008 onwards the transition liability is amortized over the lesser of the period pending to be amortized or five years. Until December 31, 2007, the actuarial gains and losses and transition liability captions subject to
amortization were amortized on the basis of the average estimated service lives of the employees.

The net cost of the period
of each employee benefit plan is recognized as an operating expense in the year it is accrued, which includes, among others, the amortization of the labor cost of the past services and the actuarial gains (losses) of the previous years (see Note
10).

In addition to the mentioned benefit plans, since 2007, the Company has established a defined contribution plan through
an investment fund. Contributions in 2007, 2008 and 2009 are recognized as an expense in those years, and amounting to Ps18,020, Ps37,995 and Ps32,970, respectively.

In 2008, the Company completed a restructuring of its residential sector business. This restructuring was due to a decrease in this
sector income as well as a re-focus of its business strategy related to the long distance segment. As part of this restructuring, the Company reduced its total employees by 214 and recorded a severance expense of Ps 42,754. This effect is shown in
the statement of operations as part of other income (expenses), in accordance with Mexican FRS B-3.

p. Comprehensive
income (loss)

Comprehensive income (loss) is represented by the net income (loss) plus the change in fair value on cash
flow hedges and other items required by specific accounting standards to be reflected in stockholders equity but which do not constitute capital contributions, reductions or distributions. The amounts of the comprehensive income (loss) from
2007 are expressed in Mexican pesos with purchasing power of December 31, 2007. Amounts in 2008 and 2009 are expressed in adjusted nominal Mexican pesos.

q. Derivative financial instruments

All derivative financial instruments entered into and identified and classified as held for trading or as hedge instruments are included
in the balance sheet as assets and/or liabilities at fair value. The fair value is determined based on the prices of recognized markets; when no quoted market prices are available, it is determined based on valuation techniques accepted in the
financial sector.



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##### Table of Contents

The changes in the fair value of derivative financial instruments are recognized in the
comprehensive financing income (expense), except when entered into to hedge against risk and comply with all related requirements. Their designation as a hedge is documented at the inception of the transaction, specifying the related objective,
initial position, risks to be hedged, type of hedge relationship, characteristics, accounting recognition and how their effectiveness will be assessed. Fair value hedges are stated at fair value and changes in valuation are recorded in income under
the same caption as the hedged item. In the case of cash flow hedges, the effective portion is temporarily included in comprehensive income in stockholders equity and is reclassified to income when the hedged item affects income. Any
ineffective portion is recognized immediately in income.

The Company suspends accounting for hedge transactions when the
derivative instrument has expired, has been sold, cancelled or exercised, when it has not reached a high effectiveness to offset the changes in the fair value or cash flow of the hedged item, or when its designation as a hedge is cancelled.

The Company periodically enters into financial instrument contracts to hedge its exposure to changes in the exchange rate
between the Mexican peso and the U. S. dollar. The Company does not enter into derivatives contracts for speculative purposes.

Upon suspending accounting for hedge transactions, in the case of cash flow hedges, the amounts accumulated in stockholders equity
forming part of comprehensive income remain in stockholders equity until the effect of the forecasted transaction or firm commitment affect income. In the event the forecasted transaction or firm commitment seem unlikely to occur, the gains or
losses accumulated in comprehensive income are recognized immediately in income. When the hedge of a forecasted transaction is originally effective but later does not comply with the effectiveness test, the effects accumulated in comprehensive
income in stockholders equity are carried to income in proportion as the forecasted asset or liability affects income.

The derivative financial instruments were privately negotiated with various counterparties whose sound financial condition was supported
by high ratings assigned by securities and credit risk rating agencies. The documentation used to formalize the operations entered into was that commonly used; in general terms, it follows the Master Agreement generated by the
International Swaps & Derivatives Association (ISDA), and is accompanied by the annexes commonly known as Schedule and Confirmation.

The fair value of the financial derivative instruments reflected in the Companys financial statements represents a mathematical
estimate of its fair value.

r. Impairment of long-lived assets in use

The Company reviews the carrying amounts of long-lived assets in use annually or earlier when an impairment indicator suggests that such
amounts might not be recoverable, considering the greater of the present value of future net cash flows using an appropriate discount rate, or the net sale price upon disposal. Impairment is recorded when the carrying amounts exceed the greater of
the amounts mentioned above. The impairment assessment of investment in associates was performed for the values recognized under the equity method. As of December 31, 2008 and 2009, there were no impairment adjustments.

s. Deferred Employees Profit Sharing (ESPS)

The deferred ESPS is recorded under the comprehensive asset-and-liability method, which consists of recognizing a deferred ESPS for all
differences between the book and ESPS value of the assets and liabilities for which payment or recovery is likely.

At
December 31, 2007, the ESPS was only recognized by the non-recurring temporary differences arising from the reconciliation between the net income and the taxable income to calculate the ESPS and on which it was reasonably determined that would
produce a benefit for the employee. See Note 15.

As of December 31, 2008 and 2009, the Company recognized a valuation
reserve due to the uncertainty of the deferred assets to be realized in the future.



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##### Table of Contents

t. Segments (Note 14)

Mexican FRS B-5 Financial Information by Segments, requires the Company to analyze its organizational structure and its
reporting system for the purpose of identifying segments. The Company has identified the following two business segments: Long Distance and Data, Internet and Local services.

u. Reclassifications

Certain reclassifications of amounts previously reported have been made to the consolidated statement of cash flow for the year ended
December 31, 2008 to maintain consistency and comparability between periods presented, as shown below:



|                                                                      |  |                     |           |   |                  |    |         |                   |  |    |          
|--------------------------------------------------------------------- |  | ------------------- | --------- | - | ---------------- | -- | ------- | ----------------- |  | -- | ---------
|                                                                      |  | Originally reported |           |   | Reclassification |    |         | December 31, 2008
|Operating activities net cash flows                                   |  |                     |           |   |                  |    |         |                   |  |    |          
|Cost related to seniority premiums and pension plans                  |  | Ps                  |          |   |                  | Ps | 21,299  |                   |  | Ps | 21,299   
|Exchange loss (gain)                                                  |  |                     | 588,095   |   |                  |    | 27,100  |                   |  |    | 615,195  
|Increase in accounts receivable and other current assets              |  |                     | 33,310    |   |                  |    | (7,602  | )                 |  |    | 25,708   
|Increase in suppliers, accounts payable and other current liabilities |  |                     | 113,205   |   |                  |    | (40,797 | )                 |  |    | 72,408   
|Increase in accounts receivable and other current assets              |  |                     | 25,708    |   |                  |    | (20,406 | )                 |  |    | 5,302    
|Other, net                                                            |  |                     | (20,406   | ) |                  |    | 20,406  |                   |  |    |         
|Operating activities net cash flows                                   |  | Ps                  | 1,282,884 |   |                  | Ps |        |                   |  | Ps | 1,282,884
|                                                                      |  |                     |           |   |                  |    |         |                   |  |    |          

v. Investment in associated company

Permanent investments in associates are measured through the equity method. Under this method the investment is initially recorded at cost
and subsequently increased (or decreased) for post acquisition net income (or loss), other movements impacting the equity of the investee and any adjustments required for impairment. Losses in associates are recognized in the corresponding portion,
as follows: a) in the permanent investment until leave it in zero; b) if there is any surplus after applying what is described in a) previous, this is recognized until leave them in zero; c) any surplus is recognized as a liability for the legal
obligations or assumed in behalf of the associate; and d) any surplus of the losses is not recognized by the holding.

w.
New Financial Reporting Standards

The CINIF issued, during December 2009, a series of Mexican FRS and Interpretations
(INIF) which will become effective as of January 1, 2010, with exception of Mexican FRS B-5 and B-9 which will become effective as of January 1, 2011. Such Mexican FRS and interpretations are not considered to have a significant impact in
the financial information presented by the Company.

Mexican FRS B-5 Financial Information by Segments. It
establishes the general standards to disclose financial information by segments. Additionally, it allows the user of such information to analyze the entity from the same point of view as the management does and requires to present financial
information by segment consistently with its financial statements. This standard will leave Bulletin B-5 Financial Information by Segment without effect.

Mexican FRS B-9 Financial Information at Interim Dates. It establishes the guidance for the determination and
presentation of financial information at interim dates which among other, establishes the presentation of the statement of changes in stockholders equity and of cash flows which, were not required by former Bulletin B-9 Financial Information
at interim dates.

Mexican FRS C-1 Cash and cash equivalents. It establishes standards on the accounting
treatment and disclosure of cash, restricted cash and available for sale securities. It also introduces new terminology to make it consistent with other Mexican FRS previously issued. This standard supersedes Bulletin C-1, Cash.



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##### Table of Contents

Interpretation to Mexican FRS 17 Service concession arrangements. The
interpretation removes the inconsistency between Mexican FRS D-6 Capitalization of the comprehensive financial result and Bulletin D-7 Contracts of construction and manufacturing of some equity goods, concerning the
accounting treatment of the comprehensive financial result in the event of recognition of an intangible asset during the construction phase for service concession arrangements.

3. TRADE RECEIVABLES, NET

As of December 31, 2008 and 2009, trade receivables, net consist of the following:



|                                      |  |      |         |   |      |    |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | -- | ------- | -
|                                      |  | 2008 |         |   | 2009 |   
|Trade receivables                     |  | Ps   | 599,631 |   |      | Ps | 556,694 |  
|Less: allowance for doubtful accounts |  |      | (83,458 | ) |      |    | (62,478 | )
|                                      |  |      |         |   |      |    |         |  
|                                      |  | Ps   | 516,173 |   |      | Ps | 494,216 |  
|                                      |  |      |         |   |      |    |         |  

For the years ended December 31, 2007, 2008 and 2009, the allowance for doubtful accounts is as
follows:



|                                                                 |  |      |         |   |      |    |         |      |  |    |         |  
|---------------------------------------------------------------- |  | ---- | ------- | - | ---- | -- | ------- | ---- |  | -- | ------- | -
|                                                                 |  | 2007 |         |   | 2008 |    |         | 2009 | 
|Balance at beginning of year                                     |  | Ps   | (75,690 | ) |      | Ps | (55,699 | )    |  | Ps | (83,458 | )
|Charge to income to increase the allowance for doubtful accounts |  |      | (31,304 | ) |      |    | (27,526 | )    |  |    | (19,602 | )
|Write off of doubtful accounts                                   |  |      | 48,703  |   |      |    |        |      |  |    | 40,720  |  
|Recovery of written off accounts                                 |  |      | (151    | ) |      |    | (233    | )    |  |    | (138    | )
|Restatement effect                                               |  |      | 2,743   |   |      |    |        |      |  |    |        |  
|                                                                 |  |      |         |   |      |    |         |      |  |    |         |  
|Balance at end of year                                           |  | Ps   | (55,699 | ) |      | Ps | (83,458 | )    |  | Ps | (62,478 | )
|                                                                 |  |      |         |   |      |    |         |      |  |    |         |  

The Company determines the level of reserve for doubtful accounts based on an analysis of trade accounts
receivable that may become uncollectible based on the spin down method. This method groups the balances by days due by gradually applying a percentage of the reserve to each group, until reserving the total consumer trade accounts receivable due for
more than 241 days and the total commercial trade accounts receivable due for more than 271 days and is consistent with the historical experience of the Company. Doubtful accounts are written off every 18 months, in accordance with Alestras
policies.

4. BALANCES AND TRANSACTIONS WITH RELATED PARTIES

As of December 31, 2008 and 2009, balances due from and due to affiliates and other related parties were as follows:



|                           |  |      |        |      |    |       
|-------------------------- |  | ---- | ------ | ---- | -- | ------
|                           |  | 2008 |        | 2009
|Due from:                  |  |      |        |      |    |       
|AT&T and affiliates        |  | Ps   | 45,174 |      | Ps | 10,533
|Alfa and related companies |  |      | 9,123  |      |    | 13,485
|                           |  |      |        |      |    |       
|                           |  | Ps   | 54,297 |      | Ps | 24,018
|                           |  |      |        |      |    |       
|Due to:                    |  |      |        |      |    |       
|AT&T and affiliates        |  | Ps   | 10,757 |      | Ps | 4,377 
|Alfa and related companies |  |      | 1,161  |      |    | 477   
|                           |  |      |        |      |    |       
|                           |  | Ps   | 11,918 |      | Ps | 4,854 
|                           |  |      |        |      |    |       



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##### Table of Contents

During 2007, 2008 and 2009, the main transactions carried out with affiliates and other
related parties were as follows:



|                                                                                    |  |      |         |      |    |         |  |    |        
|----------------------------------------------------------------------------------- |  | ---- | ------- | ---- | -- | ------- |  | -- | -------
|                                                                                    |  | 2007 |         | 2008 |    | 2009   
|International long distance, data, internet and local service settlement revenue(a) |  | Ps   | 826,496 |      | Ps | 429,777 |  | Ps | 177,623
|International long distance, data, internet and local service settlement cost(a)    |  |      | 227,502 |      |    | 170,977 |  |    | 122,633
|Administrative services received(b)                                                 |  |      | 69,266  |      |    | 63,427  |  |    | 53,547 
|Internet service
costs(c)                                                           |  |      | 42,350  |      |    | 53,540  |  |    | 54,351 
|Interest income(d)                                                                  |  |      |        |      |    | 386     |  |    | 513    



|(a) | These amounts represent mainly the income and expenses derived from the liquidation of international traffic between AT&T and Alestra, as well as the income from
data services and local service with other affiliates. The international settlement rates used are in accordance with Note 2-h.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The Company has entered into several administrative service agreements with Alfa and AT&T.
|--- | ------------------------------------------------------------------------------------------

|(c) | This amount corresponds to the cost of services received from AT&T regarding the payment of internet connection services.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(d) | This amount corresponds to accrued interest of loans with affiliated companies.
|--- | -------------------------------------------------------------------------------

Remunerations and benefits received by the main officials of the Company amounted to Ps35,186, Ps31,797 and Ps37,498 for the years ended
December 31, 2007, 2008 and 2009 respectively, which was comprised of the basic salary and benefits established by law and complemented by a variable compensation program governed basically based on the Companys income. There is no
agreement or program to involve employees in the capital of the Company.

The Company does not have any other significant
operations with related parties or any conflicts of interest to disclose.

5. PREPAID EXPENSES

Prepaid expenses as of December 31, 2008 and 2009 consist primarily of prepaid expenses for systems maintenance, insurance, bonds and
advertising time.



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##### Table of Contents

6. PROPERTY AND EQUIPMENT, NET

As of December 31, 2008 and 2009, property and equipment net, consists of the following:



|                                          |  |      |            |   |      |    |            |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | -
|                                          |  | 2008 |            |   | 2009 |   
|Buildings                                 |  | Ps   | 143,539    |   |      | Ps | 147,213    |  
|Furniture, fixtures and other             |  |      | 264,323    |   |      |    | 234,232    |  
|Hardware equipment                        |  |      | 368,261    |   |      |    | 332,290    |  
|Transportation equipment                  |  |      | 24,893     |   |      |    | 26,536     |  
|Telephone network                         |  |      | 9,201,601  |   |      |    | 9,925,493  |  
|Leasehold improvements                    |  |      | 70,269     |   |      |    | 77,079     |  
|Billing and customer care software        |  |      | 524,141    |   |      |    | 524,141    |  
|                                          |  |      |            |   |      |    |            |  
|                                          |  |      | 10,597,027 |   |      |    | 11,266,984 |  
|Accumulated depreciation and amortization |  |      | (5,829,521 | ) |      |    | (6,443,102 | )
|                                          |  |      |            |   |      |    |            |  
|                                          |  |      | 4,767,506  |   |      |    | 4,823,882  |  
|Land                                      |  |      | 165,194    |   |      |    | 165,194    |  
|Constructions in progress                 |  |      | 236,481    |   |      |    | 215,707    |  
|                                          |  |      |            |   |      |    |            |  
|Total                                     |  | Ps   | 5,169,181  |   |      | Ps | 5,204,783  |  
|                                          |  |      |            |   |      |    |            |  

Amortization of billing and customer care software charged to income amounted to Ps69,435, Ps68,113, and
Ps36,006 for the years ended December 31, 2007, 2008 and 2009, respectively.

Depreciation charged to income, not
including amortization of the billing and customer care software mentioned above was Ps632,318, Ps633,122, and Ps743,467 for the years ended December 31, 2007, 2008 and 2009, respectively.

As of December 31, 2008 and 2009, property and equipment include assets acquired under capital leases, and amounted to Ps1,982 and
Ps641, respectively (see Note 8).

7. DEFERRED CHARGES AND OTHER ASSETS, NET

As of December 31, 2008 and 2009, deferred charges and other assets consist of the following:



|                                                                                |  |      |           |   |      |    |           |  
|------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -- | --------- | -
|                                                                                |  | 2008 |           |   | 2009 |   
|Capitalized expenses derived from issuance of 11.750% senior notes due 2014 (a) |  | Ps   |          |   |      | Ps | 66,166    |  
|Capitalized expenses derived from issuance of 8% senior notes due 2010 (b)      |  |      | 184,911   |   |      |    |          |  
|Frequency bands (c)                                                             |  |      | 174,370   |   |      |    | 174,370   |  
|Software (d)                                                                    |  |      | 712,516   |   |      |    | 729,778   |  
|Investments in associate (e)                                                    |  |      | 15,818    |   |      |    | 16,113    |  
|Guarantee deposits                                                              |  |      | 7,573     |   |      |    | 7,656     |  
|Other assets                                                                    |  |      | 74,209    |   |      |    | 90,516    |  
|                                                                                |  |      |           |   |      |    |           |  
|                                                                                |  |      | 1,169,397 |   |      |    | 1,084,599 |  
|Accumulated amortization                                                        |  |      | (865,552  | ) |      |    | (748,360  | )
|                                                                                |  |      |           |   |      |    |           |  
|Total deferred charges and other                                                |  | Ps   | 303,845   |   |      | Ps | 336,239   |  
|                                                                                |  |      |           |   |      |    |           |  

Amortization charged to income was Ps170,627, Ps55,452, and Ps74,037 for the years ended December 31,
2007, 2008 and 2009, respectively.



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##### Table of Contents

a. Capitalized expenses derived from issuance of 11.750% senior notes due 2014

Correspond to fees and expenses incurred for the issuance of the 11.750% senior notes due 2014 and are amortized using the
straight line method over the terms of the senior notes. Amortization charged to income for the year ended December 31, 2009 amounted Ps3,535.

b. Capitalized expenses derived from issuance of 8% senior notes due 2010

Correspond to fees and expenses incurred for the issuance of the 8% senior notes due 2010. The Company fully amortized the remaining
balance amounting Ps36,089 in 2009 due to the extinguishment of this obligations plus the amortization of the year up to the extinguishment date (see Note 9).

Amortization charged to income for the years ended December 31, 2007 and 2008 amounted to Ps26,038 and Ps28,182 respectively.

c. Frequency bands

In 1997, the Company obtained two national point-to-point wireless telecommunications concessions and three point-to multipoint wireless
concessions covering Mexico City, Monterrey and Guadalajara. The concessions are for 20 years beginning in 1998 and are amortized on a straight-line basis over the concession period. Frequency band amortization expense for the years ended
December 31, 2007, 2008 and 2009 amounted to Ps8,719 and a net carrying amount of Ps84,261 and Ps75,542 for the years ended December 31, 2008 and 2009 respectively.

d. Software

Software costs consist of purchased software license for internal use. The amortization of software for the years ended December 31,
2007, 2008 and 2009 amounted to Ps30,335, Ps44,829, and Ps64,271, respectively.



|                         |  |      |          |   |      |    |          |  
|------------------------ |  | ---- | -------- | - | ---- | -- | -------- | -
|                         |  | 2008 |          |   | 2009 |   
|Software                 |  | Ps   | 712,516  |   |      | Ps | 729,778  |  
|Accumulated amortization |  |      | (573,365 | ) |      |    | (584,464 | )
|                         |  |      |          |   |      |    |          |  
|Total software           |  | Ps   | 139,151  |   |      | Ps | 145,314  |  
|                         |  |      |          |   |      |    |          |  

e. Investment in associate

In 2008, the Company acquired 50% of common shares of Conectividad Inalámbrica 7 GHz, S. de R.L. This acquisition is measured by
using the equity method.



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##### Table of Contents

8. BANK LOANS, NOTES PAYABLE AND CAPITAL LEASES

As of December 31, 2008 and 2009, bank loans, notes payable and capital leases consist of the following:



|                                                                                                                      |  |      |          |   |      |    |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -- | -------- | -
|                                                                                                                      |  | 2008 |          |   | 2009 |   
|Bank loan obtained from Comerica Bank for an amount of US$10 million. (1)                                             |  | Ps   |         |   |      | Ps | 130,587  |  
|Bank loan obtained from Comerica Bank for an amount of US$15 million (2)                                              |  |      | 203,075  |   |      |    |         |  
|Promissory notes to Cisco Systems Capital Corporation for an amount of US$29.7 million. (3)                           |  |      | 166,335  |   |      |    | 296,251  |  
|Promissory notes to Hewlett Packard Operations de México, S. de R. L. de C. V., for an amount of US$15.7 million.
(4) |  |      | 102,084  |   |      |    | 160,908  |  
|Capital lease contract with CSI Leasing México, S. de R. L for telecommunications equipment. (5)                      |  |      | 1,828    |   |      |    |         |  
|Capital lease contract with Arrendadora Capital Corporation, S. A. de C. V., for an amount of Ps27,199. (6)           |  |      |         |   |      |    | 9,066    |  
|                                                                                                                      |  |      |          |   |      |    |          |  
|                                                                                                                      |  |      | 473,322  |   |      |    | 596,812  |  
|Current portion of bank loans notes payable and capital leases                                                        |  |      | (287,120 | ) |      |    | (185,665 | )
|                                                                                                                      |  |      |          |   |      |    |          |  
|Long term debt                                                                                                        |  | Ps   | 186,202  |   |      | Ps | 411,147  |  
|                                                                                                                      |  |      |          |   |      |    |          |  



|(1) | On October 12, 2009 the Company contracted a loan with Comerica Bank (Comerica) for US$10 million bearing interest at 3 month LIBOR rate plus 3.75%. Interest
payments are payable quarterly, with the principal due at maturity on October 12, 2011. This loan agreement contains various covenants with which, as of December 31, 2009 and the date of the issuance of these financial statements, the
Company is in full compliance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On August 6, 2008 the Company contracted a loan with Comerica for US$15 million bearing interest at 1 month LIBOR rate plus 1.75%. Interest payments were payable
monthly, with the principal due at maturity on September 10, 2009. As of December 31, 2009 this loan has been repaid in full.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Alestra issued eight promissory notes for a total amount of US$29.7 million to acquire goods with its supplier Cisco Systems Capital Corporation with maturities of one,
three and four years, and an annual interest rate is 5.67%. The amount due as of December 31, 2009 was US$22.7 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | From October 1, 2008 to April 21, 2009, the Company signed four promissory notes with Hewlett Packard Operations de México, S. de R. L. de C. V.
(HP), for the acquisition of goods for a total amount of US$15.7 million. The payments will be made on a monthly basis in 48 installments and annual interest rates between 6.68% and 7.082%. As of December 31, 2009 amount due was
US$12.3 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The Company entered into a capital lease contract with CSI Leasing México, S. de R.L. de C.V. (CSI) to acquire telecommunications and computer
equipment which is denominated in U.S. dollars. Bearing interest at a 7.9%. This capital lease is payable in 36 equal monthly payments of Ps473 (US$35 thousand) each, and matured in April 2009. As of December 31, 2009, this contract has been
fully repaid.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The Company entered into a capital lease contract with Oracle de México, S. A. de C.V. (Oracle) to acquire software licenses and technical support
for a total amount of Ps27,198, and bearing interest at 5.67%. This capital lease is payable in 12 equal monthly payments of Ps2,431 each, and matures in April 30, 2010. On March 25, 2009, Oracle granted the collection rights to
Arrendadora Capital Corporation, S. A. de C. V.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

9. SENIOR NOTES

On August 11, 2009 the Company performed a new debt offering by issuing unsecured senior notes for a total amount of US$200 million.
The senior notes bear interest at annual rate of 11.750% payable semi-annually in cash in arrears on February and August of each year with a maturity on August 11, 2014 (11.750% Senior Notes). The 11.750% Senior Notes principal will
be paid at maturity and is presented as long-term in the balance sheet.

The costs and expenses, including the placing of
premiums and discounts of this new issuance, which at December 31, 2009 amounted to Ps66,166 (US$5.1 million), will be amortized over the life of the 11.750% Senior Notes. The unamortized costs and expenses of the 8% Senior Notes due 2010,
amounting to Ps19,229 at December 31, 2009, were charged to income for the year and are presented in the income statement as other income (expense).

The Company may redeem, at any time, the 11.750% Senior Notes, in whole but not in part, by paying the greater of 100% of the principal
amount of such notes and the sum of the present value of each remaining scheduled payment of principal and interest discounted to the redemption date on a semi-annual basis at the Treasury Rate (as defined in the indenture for the 11.750% Senior
Notes) plus 50 basis points, in each case plus accrued and unpaid interest. In addition, prior to or on August 11, 2012, the Company may redeem up to 35% of the original principal amount of the 11.750% Senior Notes with the net proceeds from
certain equity offerings by the Company, at a price of 111.75% of the aggregate principal amount thereof, plus accrued and unpaid interest.

In the event of a change in the Companys control structure, for example in the case of change of the interest ownership partners of
the Company and with certain exceptions, the holders of the 11.750% Senior Notes are entitled to demand that the Company repurchase the notes in cash, at a price equal to 101% of the principal amount plus unpaid accrued interest.

The proceeds obtained in the issuance of the 11.750% Senior Notes were used to refinance the Companys 8% Senior Notes due 2010
(8% Senior Notes).

As of December 31, 2008, the nominal value of the senior notes acquired by the Company
amounted to Ps185,107 (US$14.2 million).

Senior notes acquired are presented in the balance sheet net of the senior notes
issued. Interest income from these notes amounting to Ps9,501 and Ps9,448 as of December 31, 2008 and 2009, respectively, has been presented net of the financial expense caption in the statements of operations.

The indenture for the 11.750% Senior Notes and other credit agreements contain various debt covenants including limitations on the sale
of assets and affiliate transactions, among others. In addition, these covenants require the Company to have a certain leverage ratio prior to being able to enter into additional debt transactions. As of December 31, 2009 and the date of
issuance of these financial statements, the Company is in compliance with all required covenants.

10. EMPLOYEES BENEFITS

The valuation of the liabilities for formal employee retirement plans covers all employees of Alestra and is based primarily
on their years of service, their present age and their remuneration at date of retirement. Since January 2005 compensation payable related to employment termination benefits for causes other than for restructuring is recognized as part of the
Companys labor liabilities.



F-22



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##### Table of Contents

Following is a summary of the principal consolidated financial data relative to these
obligations:



|a. | Reconciliation between the initial and final balances of the defined benefit obligations (OBD by its Spanish acronym) present value for the periods 2008 and 2009:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                    |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  
|--------------------------------------------------- |  | ----------- | ------- | - | ---------------- | -- | ----- | ------------------- |  | -- | ------------------------ | - |  | ----- | ----- | - |  | -- | ------- | -
|                                                    |  | Pensionplan |         |   | Senioritypremium |    |       | Terminationbenefits |  |    | Other retirementbenefits |   |  | Total |      
|Defined benefit obligation at January 1, 2008       |  | Ps          | 84,170  |   |                  | Ps | 1,149 |                     |  | Ps | 29,415                   |   |  | Ps    | 1,401 |   |  | Ps | 116,135 |  
|More (less):                                        |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  
|Labor cost of the current service                   |  |             | 2,001   |   |                  |    | 127   |                     |  |    | 2,784                    |   |  |       | 41    |   |  |    | 4,953   |  
|Financial cost                                      |  |             | 6,644   |   |                  |    | 97    |                     |  |    | 2,137                    |   |  |       | 119   |   |  |    | 8,997   |  
|Actuarial earnings generated in the period          |  |             | (18,143 | ) |                  |    | (133  | )                   |  |    | (2,373                   | ) |  |       |      |   |  |    | (20,649 | )
|Reductions                                          |  |             | (3,401  | ) |                  |    |      |                     |  |    |                         |   |  |       | (827  | ) |  |    | (4,228  | )
|                                                    |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  
|Defined benefit obligation at December 31, 2008     |  | Ps          | 71,271  |   |                  | Ps | 1,240 |                     |  | Ps | 31,963                   |   |  | Ps    | 734   |   |  | Ps | 105,208 |  
|                                                    |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  
|                                                    |  |             |         |   |                 
|                                                    |  | Pensionplan |         |   | Senioritypremium |    |       | Terminationbenefits |  |    | Other retirementbenefits |   |  | Total |      
|Defined benefit obligation at January 1, 2009       |  | Ps          | 71,271  |   |                  | Ps | 1,240 |                     |  | Ps | 31,963                   |   |  | Ps    | 734   |   |  | Ps | 105,208 |  
|More (less):                                        |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  
|Labor cost of the current service                   |  |             | 1,973   |   |                  |    | 135   |                     |  |    | 2,972                    |   |  |       | 24    |   |  |    | 5,104   |  
|Financial cost                                      |  |             | 5,413   |   |                  |    | 110   |                     |  |    | 2,743                    |   |  |       | 67    |   |  |    | 8,333   |  
|Actuarial (earnings) losses generated in the period |  |             | (4,532  | ) |                  |    | 135   |                     |  |    | (40                      | ) |  |       | (6    | ) |  |    | (4,443  | )
|                                                    |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  
|Defined benefit obligation at December 31, 2009     |  | Ps          | 74,125  |   |                  | Ps | 1,620 |                     |  | Ps | 37,638                   |   |  | Ps    | 819   |   |  | Ps | 114,202 |  
|                                                    |  |             |         |   |                  |    |       |                     |  |    |                          |   |  |       |       |   |  |    |         |  



|b. | The accumulated benefit obligations at December 31, 2008 and 2009 amounted to Ps49,801 and Ps73,769, respectively.
|-- | ------------------------------------------------------------------------------------------------------------------



|c. | The reconciliation between the amount recognized in the balance sheet, defined benefit obligation and the unrecognized amounts pending amortized is as follows:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                |  |                      |        |      |                               |        |      |                                  |    |        |                                      |  |       |        |   |       |    |         |      |  |    |        |   |      |    |      |      |  |    |     |  |    |         |   |  |    |         |  
|----------------------------------------------- |  | -------------------- | ------ | ---- | ----------------------------- | ------ | ---- | -------------------------------- | -- | ------ | ------------------------------------ |  | ----- | ------ | - | ----- | -- | ------- | ---- |  | -- | ------ | - | ---- | -- | ---- | ---- |  | -- | --- |  | -- | ------- | - |  | -- | ------- | -
|                                                |  | PensionsDecember 31, |        |      | Seniority premiumDecember 31, |        |      | Termination benefitsDecember 31, |    |        | Other retirementbenefitsDecember 31, |  | Total |        |   | Total |   
|                                                |  | 2008                 |        | 2009 |                               |        | 2008 |                                  |    | 2009   |                                      |  | 2008  |        |   | 2009  |    |         | 2008 |  |    | 2009   |   | 2008 |    |      | 2009 | 
|Labor assets (liabilities):                     |  |                      |        |      |                               |        |      |                                  |    |        |                                      |  |       |        |   |       |    |         |      |  |    |        |   |      |    |      |      |  |    |     |  |    |         |   |  |    |         |  
|Defined benefit obligation                      |  | Ps                   | 71,271 |      | Ps                            | 74,125 |      |                                  | Ps | 1,240  |                                      |  | Ps    | 1,620  |   |       | Ps | 31,963  |      |  | Ps | 37,638 |   |      | Ps | 734  |      |  | Ps | 819 |  | Ps | 105,208 |   |  | Ps | 114,202 |  
|                                                |  |                      |        |      |                               |        |      |                                  |    |       
|Unfunded status                                 |  |                      | 71,271 |      |                               | 74,125 |      |                                  |    | 1,240  |                                      |  |       | 1,620  |   |       |    | 31,963  |      |  |    | 37,638 |   |      |    | 734  |      |  |    | 819 |  |    | 105,208 |   |  |    | 114,202 |  
|Less unrecognized amounts pending amortization: |  |                      |        |      |                               |        |      |                                  |    |        |                                      |  |       |        |   |       |    |         |      |  |    |        |   |      |    |      |      |  |    |     |  |    |         |   |  |    |         |  
|Actuarial (gains) losses                        |  |                      | 3,968  |      |                               | (9,682 | )    |                                  |    | (1,502 | )                                    |  |       | (1,551 | ) |       |    |        |      |  |    |       |   |      |    |     |      |  |    | 7   |  |    | 2,466   |   |  |    | (11,226 | )
|                                                |  |                      |        |      |                               |        |      |                                  |    |       
|Transition liability                            |  |                      |       |      |                               |       |      |                                  |    | (173   | )                                    |  |       | (130   | ) |       |    | (12,090 | )    |  |    | (9,068 | ) |      |    |     |      |  |    |    |  |    | (12,263 | ) |  |    | (9,198  | )
|Wage career                                     |  |                      | 10,791 |      |                               | 8,899  |      |                                  |    |       |                                      |  |       |       |   |       |    |        |      |  |    |       |   |      |    | (498 | )    |  |    |    |  |    | 10,293  |   |  |    | 8,899   |  
|                                                |  |                      |        |      |                               |        |      |                                  |    |        |                                      |  |       |        |   |       |    |         |      |  |    |        |   |      |    |      |      |  |    |     |  |    |         |   |  |    |         |  
|Net projected liability                         |  | Ps                   | 86,030 |      | Ps                            | 73,342 |      |                                  | Ps | (435   | )                                    |  | Ps    | (61    | ) |       | Ps | 19,873  |      |  | Ps | 28,570 |   |      | Ps | 236  |      |  | Ps | 826 |  | Ps | 105,704 |   |  | Ps | 102,677 |  
|                                                |  |                      |        |      |                               |        |      |                                  |    |        |                                      |  |       |        |   |       |    |         |      |  |    |        |   |      |    |      |      |  |    |     |  |    |         |   |  |    |         |  



F-23



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##### Table of Contents

|d. | Net periodic pension cost
|-- | -------------------------

An
analysis of the net periodic pension cost by plan type is presented as follows:



|                                  |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |      |  |      |     |      |    |      |  |      |        |      |    |        |      |    |        |  |      |     |  |      |      |   |  |    |    |  |    |        |  |    |        |   |  |    |       
|--------------------------------- |  | ------------------------- | ------ | - | ----------------------------- | -- | ----------------------- | ---- | ------------------------------------ | -- | ----------------- | - | ---- | -- | ---- |  | ---- | --- | ---- | -- | ---- |  | ---- | ------ | ---- | -- | ------ | ---- | -- | ------ |  | ---- | --- |  | ---- | ---- | - |  | -- | -- |  | -- | ------ |  | -- | ------ | - |  | -- | ------
|                                  |  | Pensions planDecember 31, |        |   | Seniority premiumDecember 31, |    | IndemnitiesDecember 
31 |      | Other retirement benefitsDecember 31 |    | TotalDecember 
31
|                                  |  | 2007                      |        |   | 2008                          |    |                         | 2009 |                                      |    | 2007              |   | 2008 |    | 2009 |  | 2007 |     | 2008 |    | 2009 |  | 2007 |        | 2008 |    |        | 2009 |    | 2007   |  | 2008 |     |  | 2009
|Net cost of the period:           |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |      |  |      |     |      |    |      |  |      |        |      |    |        |      |    |        |  |      |     |  |      |      |   |  |    |    |  |    |        |  |    |        |   |  |    |       
|Labor cost of the current service |  | Ps                        | 5,725  |   |                               | Ps | 2,001                   |      |                                      | Ps | 1,973             |   |      | Ps | 590  |  | Ps   | 127 |      | Ps | 135  |  | Ps   | 3,473  |      | Ps | 2,784  |      | Ps | 2,972  |  | Ps   | 18  |  | Ps   | 41   |   |  | Ps | 24 |  | Ps | 9,806  |  | Ps | 4,953  |   |  | Ps | 5,104 
|                                  |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |     
|Financial cost                    |  |                           | 4,304  |   |                               |    | 6,644                   |      |                                      |    | 5,413             |   |      |    | 198  |  |      | 97  |      |    | 110  |  |      | 1,014  |      |    | 2,138  |      |    | 2,743  |  |      | 31  |  |      | 119  |   |  |    | 67 |  |    | 5,547  |  |    | 8,998  |   |  |    | 8,333 
|                                  |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |     
|Net actuarial earning or loss     |  |                           |       |   |                               |    |                        |      |                                      |    |                  |   |      |    | 114  |  |      | 144 |      |    | 129  |  |      | 127    |      |    | 5,710  |      |    | 4,352  |  |      |    |  |      |     |   |  |    |   |  |    | 241    |  |    | 5,854  |   |  |    | 4,481 
|                                  |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |     
|Labor cost of past service        |  |                           | (113   | ) |                               |    | (779                    | )    |                                      |    | (743              | ) |      |    | 14   |  |      | 43  |      |    | 43   |  |      | 1,695  |      |    | 3,023  |      |    | 3,023  |  |      | 109 |  |      | 113  |   |  |    |   |  |    | 1,705  |  |    | 2,400  |   |  |    | 2,323 
|Reductions and settlements        |  |                           | 373    |   |                               |    | (706                    | )    |                                      |    | 16                |   |      |    | 34   |  |      |    |      |    |     |  |      | 10,150 |      |    |       |      |    |       |  |      | 6   |  |      | (200 | ) |  |    |   |  |    | 10,563 |  |    | (906   | ) |  |    | 16    
|                                  |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |      |  |      |     |      |    |      |  |      |        |      |    |        |      |    |        |  |      |     |  |      |      |   |  |    |    |  |    |        |  |    |        |   |  |    |       
|Total                             |  | Ps                        | 10,289 |   |                               | Ps | 7,160                   |      |                                      | Ps | 6,659             |   |      | Ps | 950  |  | Ps   | 411 |      | Ps | 417  |  | Ps   | 16,459 |      | Ps | 13,655 |      | Ps | 13,090 |  | Ps   | 164 |  | Ps   | 73   |   |  | Ps | 91 |  | Ps | 27,862 |  | Ps | 21,299 |   |  | Ps | 20,257
|                                  |  |                           |        |   |                               |    |                         |      |                                      |    |                   |   |      |    |      |  |      |     |      |    |      |  |      |        |      |    |        |      |    |        |  |      |     |  |      |      |   |  |    |    |  |    |        |  |    |        |   |  |    |       



F-24



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##### Table of Contents

|e. | Main actuarial assumptions:
|-- | ---------------------------

The
main actuarial assumptions used, expressed in absolute terms, as well as the discount rates, plan assets yield, salaries increases and changes in the indexes or other changes, referred at December 31, 2008 and 2009, are as follows:



|                                          |  |      |   |  |      |  
|----------------------------------------- |  | ---- | - |  | ---- | -
|Concept*                                  |  | 2008 |   |  | 2009 |  
|Discount rates                            |  | 9.15 | % |  | 9.40 | %
|Rate of salary increase                   |  | 5.25 | % |  | 5.25 | %
|Minimum wage increase rate                |  | 4.25 | % |  | 4.25 | %
|Health care inflation annual nominal rate |  | 7.35 | % |  | 7.35 | %



|* | Annual nominal
|- | --------------



|f. | Variation effect in the trend rate assumed from the medical attention costs:
|-- | ----------------------------------------------------------------------------

The effect of a variation in one percent in the variation trend rate assumed concerning health care costs would have been as follows:



|                                                                                       |  |           |     |           |    |           |  |           |     |  |    |    
|-------------------------------------------------------------------------------------- |  | --------- | --- | --------- | -- | --------- |  | --------- | --- |  | -- | ---
|                                                                                       |  | 2008      |     | 2009     
|Concept                                                                                |  | Effect +1 |     | Effect -1 |    | Effect +1 |  | Effect -1
|Cost of the current services and interest of the net medical services at retirement    |  | Ps        | 20  |           | Ps | 29        |  | Ps        | 17  |  | Ps | 25 
|Cumulative obligations by retirement benefits derived from the medical attention costs |  | Ps        | 612 |           | Ps | 888       |  | Ps        | 691 |  | Ps | 979

11. STOCKHOLDERS EQUITY

As of December 31, 2009 the capital stock of Alestra is variable with a fixed minimum of Ps300 and an unlimited maximum.
As of December 31, 2008 and 2009, the subscribed and paid-in capital stock at nominal value amounted to Ps1,181,346. It is represented by common, nominative shares of no par value, and are divided as follows: (a) Series A,
which represents 51% ownership interest, grants full ownership and voting rights, and is restricted to Mexican investors (b) Series B which represents no more than 49% of the ownership interest, grants full ownership and voting
rights, and has no ownership restrictions; and (c) Series N, which may represent up to 65% of the total capital stock, grants limited ownership and voting rights in accordance with article 113 of the General Law of Mercantile
Organizations, and may be acquired by Mexican and foreign investors in accordance with the applicable legal regulations.

The
Companys capital stock at December 31, 2007, 2008 and 2009, consists of the following:



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



F-25



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##### Table of Contents

Net income for the year is subject to the decisions taken at the general stockholders
meeting, to the Companys by-laws and to the General Law of Mercantile Organizations. In accordance with the General Law of Mercantile Organizations, the legal reserve must be increased annually by 5% of annual net profits until it reaches 20%
of the fully paid capital stock amount.

In a shareholders meeting held on December 21, 2009, the shareholders declared a
dividend of US$15 million (Ps195,077), agreeing to pay the dividend in two installments, with the first payment of US$5 million (Ps64,490) to be made no later than December 23, 2009. The first payment was paid as of December 31, 2009 and came from
net tax profit account (CUFIN by its Spanish acronym). The rest of the dividend, US$10 million (Ps130,587) ,will be paid during 2010, depending on the Companys cash flows. At the date of the issuance of these financial statements, this amount
has not been paid. As of December 31, 2007 and 2008, the Company did not declare any dividends.

Dividends paid are not
subject to income tax if paid from the CUFIN. Any dividends paid in excess of this account will cause a tax equivalent to 42.86% if they are paid on 2010. The current tax is payable by the Company and may be credited against its income tax in the
same year or the following two years or in its case against the Flat tax of the period. Dividends paid from retained earnings previously taxed are not subject to any tax withholding or payment. At December 31, 2009 the CUFIN and the Capital
Contribution Account (CUCA) amounted to Ps366,151 and Ps13,851,022, respectively.

12. CONTINGENCIES AND COMMITMENTS



|a. | At December 31, 2009, the Company had commitments from agreements to lease office space classified operating leases. The leases payments are subject to escalation
factors based on the NPCI. At December 31, 2009, future minimum lease payments under non cancelable operating leases with terms in excess of one year are as follows:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|             |  |    |        
|------------ |  | -- | -------
|Year         |  |   
|2010         |  | Ps | 106,867
|2011         |  |    | 110,622
|2012         |  |    | 115,127
|2013         |  |    | 119,824
|2014 onwards |  |    | 389,695
|             |  |    |        
|             |  | Ps | 842,135
|             |  |    |        

Lease expense was Ps82,866, Ps85,362, and Ps99,978 for
the years ended December 31, 2007, 2008 and 2009, respectively.



|b. | As of December 31, 2008 and 2009, the Company obtained performance bonds for Ps238,700 and Ps372,914 respectively, in favor of certain authorities and suppliers to
guarantee the Companys compliance with certain obligations incurred.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|c. | As of December 31, 2008 and 2009, the Company had outstanding commitments to acquire equipment and other capital expenditures related to the construction of its
telecommunications network amounting to US$10.5 million (Ps142,119) and US$14.7 million (Ps192,025), respectively.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-26



---

##### Table of Contents

|d. | In August 2006, ABA Seguros, S. A. de C. V. (ABA Seguros) and 7 ELEVEN, Inc. (7-Eleven) filed a claim against Servicios Alestra in the amount of
Ps 50,000, for damages from a fire that began in the building leased by Servicios Alestra to Casa Chapa, S. A. de C. V. under the theory of subrogation of rights. Servicios Alestra filed a response with the support of ACE Seguros (insurance carrier
of Servicios Alestra), since ACE Seguros is the party that would pay should Servicios Alestra be found liable. In order to examine Servicios Alestras responsibility, ABA Seguros, 7-Eleven and Servicios Alestra sought the opinions of five
experts in the following areas: (i) damages valuation, (ii) insurance settlement, (iii) fires, (iv) accounting, and (v) electrical installation. Although the outcome of the claim has not yet been decided, Servicios Alestra
does not believe it would have a substantial effect on its finances. In the Companys opinion; although the outcomes of these proceedings are uncertain, these should not have a material adverse affect on our financial position, results of
operations or cash flows.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|e. | On July 16, 2006, Corporación Mexicana de Investigación en Materiales, S.A. de C.V. (COMIMSA) held a public bid to select a provider of
domestic and international long distance services. The Company participated in the bid, and on July 20, 2006, it was awarded these services by COMIMSA. On July 21, 2006 the Company notified COMIMSA that the Company was not capable of
providing long distance services in two of the areas in which COMIMSA required such service, because the service areas had not been opened to pre-subscription by Comisión Federal de Telecomunicaciones (Cofetel) in accordance with
the long distance service rules. As a result, the Company could not enter into the respective services agreement, which the Company was obliged to execute within the following 10 working days after the awarding of the bid. As a result, COMIMSA filed
with the Secretaria de la Funcion Publica (SFP) an administrative proceeding against the Company to determine if the Company was subject to sanctions under the applicable law. SFP decided that the Company violated the applicable law and
imposed sanctions consisting of (i) a prohibition against participating in bids to offer telecommunication services to the Mexican federal administration for a period of three months and (ii) a fine of Ps 73 to be paid by the Company. In
connection with the COMIMSA contingency, on November 10, 2009, SFP issued its final decision to not sanction the Company with the prohibition against participating in bids to offer telecommunication services; however, the Company was required
to pay a fine of Ps 73 which is accrued as of December 31, 2009.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|f. | The Company is involved in a dispute with Teléfonos de México, S.A.B. de C.V. (Telmex) regarding interconnection services rates applicable for
2008 and 2009 and had requested the intervention of Cofetel. As of the date of issuance of these financial statements, management continues its negotiations with Telmex and is expected that the Company may reach an agreement in the near future. In
the Companys opinion, although the outcomes of the mentioned proceedings are uncertain, they should not have a material adverse affect on our financial results; however, as of the date of issuance of the financial statements the Company
considers it has recognized sufficient provisions to address such contingencies. See Note 13.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13. RESTRICTED CASH AND
LIABILITIES IN DISPUTE

Alestra filed a disagreement before Cofetel (see Note 12.f) derived from a dispute in the resale of
the interconnection tariffs that Alestra had held with Telmex and Telefonos del Norte (Telnor, a subsidiary of Telmex). The disagreement is requesting a resolution regarding the interconnection traffic tariffs for telecommunication
networks applicable during 2009 and long distance interconnection traffic (interurban transportation) during 2008.

On
September 8, 2009, the parties in dispute agreed to subscribe to a trust agreement with BBVA Bancomer, S. A., for the administration and investment of the total amounts in dispute corresponding to the difference between the amounts invoiced by
Telmex/Telnor as a result of the 2008 and 2009 resolutions and the payments made by Alestra for these services.

Once the
parties reach an agreement or the corresponding trials are definitely solved, the trust funds as well as the yields thereof will be distributed, as agreed.

As of December 31, 2009, the restricted cash shown in the balance sheet for an amount of Ps318,202 represents the trust balance,
integrated by the contribution made by Alestra for the amounts of Ps313,681 and Ps4,521 corresponding to interest income.



F-27



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##### Table of Contents

14. SEGMENTS

The reported segments of the Company represent the specific types of telecommunications services and products that the Company offers and
internally analyzes.

The Company operates in two main segments: long distance (domestic and international) and data, internet
and local services.

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



|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|----------------------------------------------------------- |  | ------------- | ---------- | - | ------------------------------- | -- | --------- | ----- |  | -- | ---------- | -
|Year ended                                                  |  | Long distance |            |   | Data, internetandlocal services |    |           | Total | 
|2007                                                        |  |               |            |   |                                 |    |           |       |  |    |            |  
|Revenues                                                    |  | Ps            | 2,414,649  |   |                                 | Ps | 2,641,391 |       |  | Ps | 5,056,040  |  
|Costs of services (excluding depreciation and amortization) |  |               | (1,459,930 | ) |                                 |    | (757,748  | )     |  |    | (2,217,678 | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Gross profit                                                |  | Ps            | 954,719    |   |                                 | Ps | 1,883,643 |       |  |    | 2,838,362  |  
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Operating expenses                                          |  |               |            |   |                                 |    |           |       |  |    | (2,383,471 | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Operating income                                            |  |               |            |   |                                 |    |           |       |  |    | 454,891    |  
|Comprehensive financial result                              |  |               |            |   |                                 |    |           |       |  |    | (179,520   | )
|Other income, net                                           |  |               |            |   |                                 |    |           |       |  |    | 1,175      |  
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Income before provision for asset and income taxes          |  |               |            |   |                                 |    |           |       |  |    | 276,546    |  
|Asset tax                                                   |  |               |            |   |                                 |    |           |       |  |    | (2,880     | )
|Income tax                                                  |  |               |            |   |                                 |    |           |       |  |    | (85,630    | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Net income                                                  |  |               |            |   |                                 |    |           |       |  | Ps | 188,036    |  
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|                                                            |  |               |           
|Year ended                                                  |  | Long distance |            |   | Data, internetandlocal services |    |           | Total | 
|2008                                                        |  |               |            |   |                                 |    |           |       |  |    |            |  
|Revenues                                                    |  | Ps            | 1,722,487  |   |                                 | Ps | 2,950,062 |       |  | Ps | 4,672,549  |  
|Costs of services (excluding depreciation and amortization) |  |               | (1,041,532 | ) |                                 |    | (747,497  | )     |  |    | (1,789,029 | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Gross profit                                                |  | Ps            | 680,955    |   |                                 | Ps | 2,202,565 |       |  |    | 2,883,520  |  
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Operating expenses                                          |  |               |            |   |                                 |    |           |       |  |    | (2,308,396 | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Operating income                                            |  |               |            |   |                                 |    |           |       |  |    | 575,124    |  
|Comprehensive financial result                              |  |               |            |   |                                 |    |           |       |  |    | (943,850   | )
|Other expense, net                                          |  |               |            |   |                                 |    |           |       |  |    | (50,072    | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Loss before provision for income tax                        |  |               |            |   |                                 |    |           |       |  |    | (418,798   | )
|Income tax                                                  |  |               |            |   |                                 |    |           |       |  |    | 34,476     |  
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  
|Net loss                                                    |  |               |            |   |                                 |    |           |       |  | Ps | (384,322   | )
|                                                            |  |               |            |   |                                 |    |           |       |  |    |            |  



F-28



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##### Table of Contents

|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  
|----------------------------------------------------------- |  | ------------- | --------- | - | ------------------------------- | -- | --------- | ----- |  | -- | ---------- | -
|Year ended                                                  |  | Long distance |           |   | Data, internetandlocal services |    |           | Total | 
|2009                                                        |  |               |           |   |                                 |    |           |       |  |    |            |  
|Revenues                                                    |  | Ps            | 1,420,624 |   |                                 | Ps | 3,263,013 |       |  | Ps | 4,683,637  |  
|Costs of services (excluding depreciation and amortization) |  |               | (955,631  | ) |                                 |    | (781,075  | )     |  |    | (1,736,706 | )
|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  
|Gross profit                                                |  | Ps            | 464,993   |   |                                 | Ps | 2,481,938 |       |  |    | 2,946,931  |  
|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  
|Operating expenses                                          |  |               |           |   |                                 |    |           |       |  |    | (2,382,894 | )
|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  
|Operating income                                            |  |               |           |   |                                 |    |           |       |  |    | 564,037    |  
|Comprehensive financial result                              |  |               |           |   |                                 |    |           |       |  |    | (221,442   | )
|Other expense, net                                          |  |               |           |   |                                 |    |           |       |  |    | (73,229    | )
|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  
|Income before provision for income tax                      |  |               |           |   |                                 |    |           |       |  |    | 269,366    |  
|Income tax                                                  |  |               |           |   |                                 |    |           |       |  |    | 22,099     |  
|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  
|Net income                                                  |  |               |           |   |                                 |    |           |       |  | Ps | 291,465    |  
|                                                            |  |               |           |   |                                 |    |           |       |  |    |            |  

The Company does not have assets outside of Mexico. For the years ended December 2007, 2008 and 2009, the
revenues from international long distance services of the Company generated by AT&T, represented 71.6%, 65.2%, and 33.8%, respectively. (See Notes 2(n) and 4).

15. INCOME TAX



|a. | In 2009 the Company determined it has an income tax of Ps88,005 (Ps45,134 in 2008), which is greater than the flat tax of Ps87,904 (Ps45,132 in 2008).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------



|b. | The financial and tax projections of Alestra assume that: a) the Company, for certain assets, will continue depreciating for tax purposes at the 1% rate, as well as for
some capital expenditures to be incurred in future years, it will exercise the option of applying an accelerated tax deduction, and b) under certain circumstances the carryforward tax losses may not be amortized in future years for the remaining
balance at December 31, 2009 in the amount of Ps481,282 in 2009 (Ps1,155,486 in 2008); consequently, at December 31, 2009 a valuation reserve has been established for such amount.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|c. | The tax result differs from the accounting result, mainly due to those items accumulated and deducted differently through time for accounting and tax purposes, from the
recognition of the effects of inflation for tax purposes, as well as for those items that only affect the accounting or the tax result.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|d. | On December 7, 2009, a decree was published, which modified, added and revoked several provisions of the Mexican Income Tax Law for 2010. This decree establishes,
among others, that the income tax rate will be 30% for fiscal years 2010 to 2012, 29% for 2013 and 28% from 2014 onwards. At December 2009, the aforementioned change in rates resulted in a decrease in our deferred income tax asset balance of
Ps18,557, with a corresponding effect on income for the year, which was determined based on the expectation of the reversal of temporary items at the new rates.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-29



---

##### Table of Contents

|e. | The net credit (charge) to consolidated income for income tax was as follows:
|-- | -----------------------------------------------------------------------------



|                                                                                                                 |  |      |         |   |      |    |         |      |  |    |          |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -- | ------- | ---- |  | -- | -------- | -
|                                                                                                                 |  | 2007 |         |   | 2008 |    |         | 2009 | 
|Current income tax before amortization of tax loss carryforwards                                                 |  | Ps   |        |   |      | Ps | (45,134 | )    |  | Ps | (226,008 | )
|Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years |  |      |        |   |      |    |        |      |  |    | 138,003  |  
|                                                                                                                 |  |      |         |   |      |    |         |      |  |    |          |  
|                                                                                                                 |  |      |        |   |      |    | (45,134 | )    |  |    | (88,005  | )
|Deferred income tax                                                                                              |  |      | (85,630 | ) |      |    | 79,610  |      |  |    | 110,104  |  
|                                                                                                                 |  |      |         |   |      |    |         |      |  |    |          |  
|Total income tax provision                                                                                       |  | Ps   | (85,630 | ) |      | Ps | 34,476  |      |  | Ps | 22,099   |  
|                                                                                                                 |  |      |         |   |      |    |         |      |  |    |          |  

The reconciliation between the statutory and effective income tax rates is shown below:



|                                                                                                                 |  |      |         |   |      |    |          |      |  |    |          |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -- | -------- | ---- |  | -- | -------- | -
|                                                                                                                 |  | 2007 |         |   | 2008 |    |          | 2009 | 
|Income (loss) before income tax                                                                                  |  | Ps   | 276,546 |   |      | Ps | (418,798 | )    |  | Ps | 269,366  |  
|Income tax at statutory rate (28%)                                                                               |  |      | (77,432 | ) |      |    | 117,263  |      |  |    | (75,423  | )
|Add (deduct) effect of income tax on:                                                                            |  |      |         |   |      |    |          |      |  |    |          |  
|Inflationary tax adjustment                                                                                      |  |      | (17,288 | ) |      |    | (26,131  | )    |  |    | (18,369  | )
|Charges to income from the increase in the reserve of tax loss carryforwards of Servicios Alestra (subsidiary)   |  |      |        |   |      |    |         |      |  |    | (22,898  | )
|Effect from change of statutory rate                                                                             |  |      |        |   |      |    |         |      |  |    | (18,557  | )
|Other permanent items                                                                                            |  |      | 9,090   |   |      |    | (56,656  | )    |  |    | 19,343   |  
|                                                                                                                 |  |      |         |   |      |    |          |      |  |    |          |  
|Subtotal                                                                                                         |  |      | (85,630 | ) |      |    | 34,476   |      |  |    | (115,904 | )
|Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years |  |      |        |   |      |    |         |      |  |    | 138,003  |  
|                                                                                                                 |  |      |         |   |      |    |          |      |  |    |          |  
|Total provision of income tax charged to income                                                                  |  | Ps   | (85,630 | ) |      | Ps | 34,476   |      |  | Ps | 22,099   |  
|                                                                                                                 |  |      |         |   |      |    |          |      |  |    |          |  

The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities
at December 31, 2008 and 2009, are as follows:



|                                   |  |      |          |   |      |    |          |  
|---------------------------------- |  | ---- | -------- | - | ---- | -- | -------- | -
|                                   |  | 2008 |          |   | 2009 |   
|Deferred tax asset:                |  |      |          |   |      |    |          |  
|Allowance for doubtful accounts    |  | Ps   | 268,947  |   |      | Ps | 253,510  |  
|Other assets, costs and provisions |  |      | 285,986  |   |      |    | 339,558  |  
|                                   |  |      |          |   |      |    |          |  
|Total deferred tax assets          |  |      | 554,933  |   |      |    | 593,068  |  
|                                   |  |      |          |   |      |    |          |  
|Deferred tax liabilities:          |  |      |          |   |      |    |          |  
|Property and equipment, net        |  |      | 580,813  |   |      |    | 476,977  |  
|Prepaid expenses                   |  |      | 5,320    |   |      |    | 12,007   |  
|                                   |  |      |          |   |      |    |          |  
|Total deferred tax liabilities     |  |      | 586,133  |   |      |    | 488,984  |  
|                                   |  |      |          |   |      |    |          |  
|Tax loss carryforwards             |  |      | 348,716  |   |      |    | 134,759  |  
|Reserve of tax loss carryforwards  |  |      | (323,536 | ) |      |    | (134,759 | )
|                                   |  |      |          |   |      |    |          |  
|Deferred income tax                |  | Ps   | (6,020   | ) |      | Ps | 104,084  |  
|                                   |  |      |          |   |      |    |          |  



F-30



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##### Table of Contents

For the years ended December 31, 2009 and 2008 the change in the valuation reserve of
losses to be amortized is analyzed as follows:



|                                                                                                                 |  |      |          |   |      |    |          |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -- | -------- | -
|                                                                                                                 |  | 2008 |          |   | 2009 |   
|Balances at beginning of year                                                                                    |  | Ps   | (680,136 | ) |      | Ps | (323,536 | )
|Charges to income from the increase in the reserve of tax loss carryforwards of Servicios Alestra (subsidiary)   |  |      |         |   |      |    | (22,898  | )
|Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years |  |      |         |   |      |    | 138,003  |  
|Decrease in reserve from the expiration or loss of rights to use tax loss carryforwards in future years          |  |      | 356,600  |   |      |    | 73,672   |  
|                                                                                                                 |  |      |          |   |      |    |          |  
|Balances at end of year                                                                                          |  | Ps   | (323,536 | ) |      | Ps | (134,759 | )
|                                                                                                                 |  |      |          |   |      |    |          |  

Tax loss carryforwards restated in conformity with the official inflation indexes that could be by the
Company, are presented as follows:



|     |  |    |        
|---- |  | -- | -------
|Year |  |   
|2010 |  | Ps | 367,567
|2011 |  |    | 33,646 
|2012 |  |    | 17,245 
|2013 |  |    | 24,978 
|2014 |  |    | 25,841 
|2015 |  |    | 12,005 
|     |  |    |        
|     |  | Ps | 481,282
|     |  |    |        

16. FOREIGN CURRENCY POSITION

As of December 31, 2008 and 2009 monetary assets and liabilities, denominated in foreign currencies (U.S. dollars) were as follows:



|                                |  |                           |          |   |      |     |          |  
|------------------------------- |  | ------------------------- | -------- | - | ---- | --- | -------- | -
|                                |  | Thousands of U.S. dollars |         
|                                |  | 2008                      |          |   | 2009 |    
|Assets                          |  | US$                       | 22,110   |   |      | US$ | 25,642   |  
|Short and long-term liabilities |  |                           | (267,170 | ) |      |     | (268,008 | )
|                                |  |                           |          |   |      |     |          |  
|Net short position              |  | US$                       | (245,060 | ) |      | US$ | (242,366 | )
|                                |  |                           |          |   |      |     |          |  

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



|                   |  |      |         |   |      |     |         |      |  |     |         |  
|------------------ |  | ---- | ------- | - | ---- | --- | ------- | ---- |  | --- | ------- | -
|                   |  | 2007 |         |   | 2008 |     |         | 2009 | 
|Revenues           |  | US$  | 164,684 |   |      | US$ | 137,366 |      |  | US$ | 120,812 |  
|Cost of services   |  |      | (31,169 | ) |      |     | (28,275 | )    |  |     | (17,209 | )
|Operating expenses |  |      | (28,181 | ) |      |     | (26,054 | )    |  |     | (19,041 | )
|Interest expense   |  |      | (27,057 | ) |      |     | (22,616 | )    |  |     | (31,114 | )
|Interest income    |  |      | 2,884   |   |      |     | 1,247   |      |  |     | 725     |  
|Other income, net  |  |      | 383     |   |      |     |        |      |  |     | 261     |  
|                   |  |      |         |   |      |     |         |      |  |     |         |  
|Net income         |  | US$  | 81,544  |   |      | US$ | 61,668  |      |  | US$ | 54,434  |  
|                   |  |      |         |   |      |     |         |      |  |     |         |  



F-31



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##### Table of Contents

The exchange rates at December 31, 2007, 2008 and 2009, were Ps10.8662, Ps13.5383, and
Ps13.0587 per U.S. dollar, respectively, as published by Banco de México (the Mexican central bank).

At January 27, 2010, the
date of issuance of the financial statements, the exchange rate was Ps12.9412 per U.S. dollar.

17. FINANCIAL INSTRUMENTS

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

The estimated fair values of the senior notes at December 31, 2008 and 2009 are as follows:



|                               |  |                 |           |   |            |    |           |             |  |    |          |  
|------------------------------ |  | --------------- | --------- | - | ---------- | -- | --------- | ----------- |  | -- | -------- | -
|Years ended                    |  | Carrying amount |           |   | Fair value |    |           | Differences | 
|2008                           |  |                 |           |   |            |    |           |             |  |    |          |  
|Bank loans and notes payable   |  | Ps              | 471,494   |   |            | Ps | 439,127   |             |  | Ps | 32,367   |  
|Senior notes                   |  |                 | 2,701,067 |   |            |    | 2,339,618 |             |  |    | 361,449  |  
|Derivative instruments - asset |  |                 | (489      | ) |            |    | (489      | )           |  |    |         |  
|                               |  |                 |           |   |            |    |           |             |  |    |          |  
|                               |  | Ps              | 3,172,072 |   |            | Ps | 2,778,256 |             |  | Ps | 393,816  |  
|                               |  |                 |           |   |            |    |           |             |  |    |          |  
|                               |  |                 |          
|2009                           |  |                 |           |   |            |    |           |             |  |    |          |  
|Bank loans and notes payable   |  | Ps              | 596,812   |   |            | Ps | 590,828   |             |  | Ps | 5,984    |  
|Senior notes                   |  |                 | 2,611,740 |   |            |    | 2,951,266 |             |  |    | (339,526 | )
|Derivative instruments         |  |                 |          |   |            |    |          |             |  |    |         |  
|                               |  |                 |           |   |            |    |           |             |  |    |          |  
|                               |  | Ps              | 3,208,552 |   |            | Ps | 3,542,094 |             |  | Ps | (333,542 | )
|                               |  |                 |           |   |            |    |           |             |  |    |          |  

18. DERIVATIVE FINANCIAL INSTRUMENTS

The Company periodically enters into financial instrument contracts to hedge its exposure to changes in the exchange rate between the
Mexican Peso and the U.S. dollar. These contracts are used to hedge the exposure related to interconnection fees, denominated in U.S. dollars, paid to other carriers. The Company does not enter into derivatives contracts for speculative purposes.

As of December 31, 2009 the Company does not have derivative financial instruments outstanding. Derivative financial
instrument positions in foreign currency held as of December 31, 2008 are summarized as follows:



|              |  |      |  |          |  |            |  |                            |  |                  |  |                   |  |             
|------------- |  | ---- |  | -------- |  | ---------- |  | -------------------------- |  | ---------------- |  | ----------------- |  | ------------
|Bank          |  | Type |  | Currency |  | Notional   |  | Type
ofFinancialinstrument |  | Trade Date       |  | Settlement Date   |  | ExchangeRate
|Merrill Lynch |  | Sell |  | USD      |  | 4,225,000  |  | Forward                    |  | October 9, 2008  |  | January 26, 2009  |  | 12.388      
|Merrill Lynch |  | Sell |  | USD      |  | 4,225,000  |  | Forward                    |  | October 9, 2008  |  | February 26, 2009 |  | 12.430      
|Merrill Lynch |  | Buy  |  | MXN      |  | 32,836,150 |  | Forward                    |  | October 13, 2008 |  | January 26, 2009  |  | 12.391      
|Merrill Lynch |  | Buy  |  | MXN      |  | 32,972,625 |  | Forward                    |  | October 13, 2008 |  | February 26, 2009 |  | 12.443      



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##### Table of Contents

The instruments held during 2008 were related to the Companys purchase of U.S. dollars
to hedge its U.S. dollar denominated settlement payments to Telmex. On October 9, 2008, the Company contracted two derivative instruments to hedge January and February 2009 payments from AT&T (based on traffic minutes) for an original
amount of US$4,225,000 for each month. This was the estimated amount to be settled with AT&T. Subsequently, AT&T confirmed a lesser amount than the payments originally planned; therefore, in order to compensate its balance relative to the
sale of U.S. dollars, the Company contracted two purchase agreements for US$3,600,000 for the month of December 2008 and US$2,650,000 for the months of January and February 2009 at the same dates and with similar exchange rates to those agreed.
These contracts were accounted for as cash flow hedges under Mexican FRS. As of December 31, 2008, the Company has recorded an unrealized loss of Ps1,792 in comprehensive income and a loss of Ps63,179 in the consolidated statement of operations
related to hedge instruments that were settled during 2008.

On February 2009, the Company settled its remaining derivative
positions and recognized the corresponding effect in the statements of operations amounting to Ps2,241.

The effectiveness of
financial derivative instruments classified as hedge instruments is assessed on a periodic basis and the Company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk
management objectives and strategies for undertaking the hedge transaction.

As of December 31, 2008 and 2009, the Company recognized an
embedded derivative effect in the statement of operations amounting to Ps0 and Ps2,548, respectively.

19. SUBSEQUENT EVENTS

On October 7, 2009, the Company filed a registration statement on Form F-4 in order to register its offer to exchange its outstanding 11.750%
Senior Notes due 2014 with new notes that have been registered under the U.S. Securities Act of 1933, as amended. This registration statement became effective on January 6, 2010.



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##### Table of Contents

20. DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP

The Companys consolidated financial statements are prepared in accordance with Mexican FRS, which differ in certain significant
respects from U.S. GAAP. The Mexican FRS consolidated financial statements as of December 31, 2007 include the effects of inflation, whereas financial statements prepared under U.S. GAAP are presented on a nominal cost basis. As of
December 31, 2008 and 2009, the recognition of inflation is discontinued and the financial information is presented in adjusted nominal Mexican Pesos, as mentioned in Note 2. The reconciliation to U.S. GAAP includes a reconciling item for the
effect of applying the option provided by the Fifth Amendment for the restatement of equipment of non-Mexican origin because, as described below, this provision of inflation accounting under Mexican FRS effective up to December 31, 2007 does
not meet the consistent reporting currency requirements of Regulation S-X.

The reconciliation for the year ended
December 31, 2007 does not include the reversal of other adjustments to the financial statements for the effects of inflation required under Mexican FRS because the application of inflation accounting effective up to December 31, 2007
represented a comprehensive measure of the effects of price level changes in the inflationary Mexican economy and, as such, is considered a more meaningful presentation than nominal cost-based financial reporting for both Mexican and U.S. accounting
purposes.

Fair Value

The Company adopted ASC 820 in two steps; effective January 1, 2008, the Company adopted it for all financial instruments and
non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for
measuring fair value and expands related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants. It also establishes a three-level valuation hierarchy based upon observable and non-observable inputs.

For financial assets and liabilities, fair value is the price we would receive to sell an asset or pay to transfer a liability in an
orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of
such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:



| |  |  | Level 1 - Quoted prices for identical instruments in active markets.
| | - |  | --------------------------------------------------------------------



| |  |  | Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active;
and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - Significant inputs to the valuation model are unobservable.
| | - |  | ---------------------------------------------------------------------

The Company maintains policies and procedures to measure instruments using the best and most relevant data available. In addition, the
Company has risk management teams that review valuation, including independent price validation for certain instruments. Further, in other instances, the Company retains independent pricing vendors to assist in valuing certain instruments.



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Non-Recurring Fair Value Measurements

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but
are subject to fair value adjustments only in certain circumstances. These include cost and equity method investments that are written down to fair value when their declines are determined to be other than temporary and long-lived assets that are
written down to fair value when they are held for sale or determined to be impaired.

All fair value adjustments at
December 31, 2008 and 2009 represent assets or liabilities measured at fair value on a recurring basis and were calculated as follows:



|                       |  |                             |           |   |                                                   |    |                                  |           |    |                               |   |  |    |  
|---------------------- |  | --------------------------- | --------- | - | ------------------------------------------------- | -- | -------------------------------- | --------- | -- | ----------------------------- | - |  | -- | -
|                       |  | Balance atDecember 31, 2008 |           |   | Quoted prices inactive marketsfor identicalassets |    | Significantotherobservableinputs |           |    | Significantunobservableinputs
|                       |  |                             | (Level 1) |   | (Level 2)                                         |    |                                  | (Level 3)
|Derivative instruments |  | Ps                          | (489      | ) |                                                   | Ps |                                 |           | Ps | (489                          | ) |  | Ps | 
|Senior notes (*)       |  |                             | 2,701,067 |   |                                                   |    |                                 |           |    | 2,701,067                     |   |  |    | 
|Long term debt (*)     |  |                             | 471,494   |   |                                                   |    |                                 |           |    | 471,494                       |   |  |    | 
|                       |  |                             |           |   |                                                   |    |                                  |           |    |                               |   |  |    |  
|Total                  |  | Ps                          | 3,172,072 |   |                                                   | Ps |                                 |           | Ps | 3,172,072                     |   |  | Ps | 
|                       |  |                             |           |   |                                                   |    |                                  |           |    |                               |   |  |    |  
|                       |  |                             |           |  
|                       |  | Balance atDecember 31, 2009 |           |   | Quoted prices inactive marketsfor identicalassets |    | Significantotherobservableinputs |           |    | Significantunobservableinputs
|                       |  |                             | (Level 1) |   | (Level 2)                                         |    |                                  | (Level 3)
|Senior notes (*)       |  | Ps                          | 2,611,740 |   |                                                   | Ps |                                 |           | Ps | 2,611,740                     |   |  | Ps | 
|Long term debt (*)     |  |                             | 596,812   |   |                                                   |    |                                 |           |    | 596,812                       |   |  |    | 
|                       |  |                             |           |   |                                                   |    |                                  |           |    |                               |   |  |    |  
|Total                  |  | Ps                          | 3,208,552 |   |                                                   | Ps |                                 |           | Ps | 3,208,552                     |   |  | Ps | 
|                       |  |                             |           |   |                                                   |    |                                  |           |    |                               |   |  |    |  



|(*) | Long term debt and senior notes are recognized at its amortized cost. See Note 17 Financial Instruments for fair value disclosures.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

Derivatives are valued using internal models that use as their basis readily observable market inputs, such as
time value, forward interest rates, volatility factors, and current and forward market prices for foreign exchange rates. The Company generally classifies these instruments within Level 2 of the valuation hierarchy. Such derivatives are
for foreign currency.

Fair value for senior notes and long term debt are based on the present value of the cash flow
discounted at interest rates based in readily observable market inputs. These fair values are classified as Level 2 in the fair value hierarchy.



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Long-lived Assets

Long-lived assets, including real estate, may be measured at fair value if such assets are held for sale or when there is a determination
that the asset is impaired. The determination of fair value is based on the best information available, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar
assets and independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental,
occupancy and capitalization rates. See Note 20 h).

Reconciliation of principal differences between Mexican FRS and U.S. GAAP

The principal differences between Mexican FRS and U.S. GAAP and the effect on consolidated net loss and consolidated
stockholders equity are presented below with an explanation of the adjustments.



|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  
|----------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -- | -------- | ---- |  | -- | ------- | -
|                                                                        |  | 2007 |          |   | 2008 |    |          | 2009 | 
|Reconciliation of net (loss) income:                                    |  |      |          |   |      |    |          |      |  |    |         |  
|Net income (loss) as reported under Mexican FRS attributable to Alestra |  | Ps   | 188,036  |   |      | Ps | (384,322 | )    |  | Ps | 291,465 |  
|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  
|U.S. GAAP adjustments:                                                  |  |      |          |   |      |    |          |      |  |    |         |  
|a) Difference in interest expense from restructuring                    |  |      | 243,480  |   |      |    | 226,156  |      |  |    | 324,608 |  
|a) Reversal of debt issuance costs, net of amortization                 |  |      | 22,688   |   |      |    | 22,688   |      |  |    | 34,032  |  
|b) Fifth amendment effect on depreciation expense                       |  |      | (139,899 | ) |      |    | (137,821 | )    |  |    | (50,784 | )
|c) Reversal of pre-operating expense amortization                       |  |      | 64,839   |   |      |    |         |      |  |    |        |  
|d) Severance payments                                                   |  |      | 1,982    |   |      |    | 4,450    |      |  |    | 3,012   |  
|e) Deferred income tax                                                  |  |      | (82,121  | ) |      |    | 34,725   |      |  |    | 47,741  |  
|f) Pension and labor liabilities                                        |  |      |         |   |      |    | 7,026    |      |  |    | (2,528  | )
|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  
|Total U.S. GAAP adjustments                                             |  |      | 110,969  |   |      |    | 157,224  |      |  |    | 356,081 |  
|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  
|Net income under U.S. GAAP                                              |  | Ps   | 299,005  |   |      | Ps | (227,098 | )    |  | Ps | 647,546 |  
|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  
|g) Non controlling interest under U.S. GAAP                             |  |      |         |   |      |    |         |      |  |    |        |  
|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  
|Net income under U.S. GAAP                                              |  | Ps   | 299,005  |   |      | Ps | (227,098 | )    |  | Ps | 647,546 |  
|                                                                        |  |      |          |   |      |    |          |      |  |    |         |  



|                                                                        |  |      |           |   |      |    |           |  
|----------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -- | --------- | -
|                                                                        |  | 2008 |           |   | 2009 |   
|Reconciliation of stockholders equity:                                 |  |      |           |   |      |    |           |  
|Total stockholders equity reported under Mexican FRS                   |  | Ps   | 2,216,845 |   |      | Ps | 2,313,721 |  
|                                                                        |  |      |           |   |      |    |           |  
|U.S. GAAP adjustments:                                                  |  |      |           |   |      |    |           |  
|a) Effect on total debt of extinguishment from 8% Senior Notes due 2010 |  |      | (324,608  | ) |      |    |          |  
|a) Effect on debt issuance costs from 8% Senior Notes due 2010          |  |      | (34,032   | ) |      |    |          |  
|b) Fifth amendment effect on property and equipment                     |  |      | 50,784    |   |      |    |          |  
|d) Severance payments                                                   |  |      | (12,050   | ) |      |    | (9,038    | )
|e) Deferred income tax                                                  |  |      | (44,259   | ) |      |    | 3,480     |  
|f) Pension and labor liabilities                                        |  |      | (618      | ) |      |    | (9,011    | )
|                                                                        |  |      |           |   |      |    |           |  
|Total U.S. GAAP adjustments                                             |  |      | (364,783  | ) |      |    | (14,569   | )
|                                                                        |  |      |           |   |      |    |           |  
|Total stockholders equity under U.S. GAAP                              |  |      | 1,852,062 |   |      |    | 2,299,152 |  
|                                                                        |  |      |           |   |      |    |           |  
|g) Non controlling interest under U.S. GAAP                             |  |      |          |   |      |    | (1        | )
|                                                                        |  |      |           |   |      |    |           |  
|Total stockholders equity of Alestra under U.S. GAAP                   |  | Ps   | 1,852,062 |   |      | Ps | 2,299,151 |  
|                                                                        |  |      |           |   |      |    |           |  



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##### Table of Contents

Summary of the Companys statement of changes in stockholders equity

A summary of the Companys statement of changes in stockholders equity with balances determined under U.S. GAAP
is as follows:



|                                              |  |      |           |   |      |    |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | -- | --------- | -
|                                              |  | 2008 |           |   | 2009 |   
|Balance at beginning of period                |  | Ps   | 2,075,327 |   |      | Ps | 1,852,062 |  
|Net income for the year                       |  |      | (227,098  | ) |      |    | 647,546   |  
|Declaration of dividends                      |  |      |          |   |      |    | (195,078  | )
|Effects from derivative financial instruments |  |      |          |   |      |    | 489       |  
|Impact of pension                             |  |      | 3,833     |   |      |    | (5,868    | )
|                                              |  |      |           |   |      |    |           |  
|Balance at end of period                      |  | Ps   | 1,852,062 |   |      | Ps | 2,299,151 |  
|                                              |  |      |           |   |      |    |           |  

On December 1, 2003, the Companys stockholders resolved to (i) reclassify the balance as of
December 31, 2002 of the restatement of capital stock account into the variable portion of the capital stock in the amount of Ps 5,026,512 and (ii) reduce the variable portion of the capital stock for Ps9, 193,330 and Ps1, 340,308 by
reclassifying these amounts from the accumulated deficit account and the accumulated deficit from restatement account, respectively. As a consequence, the nominal value of the shares was proportionally reduced according to the ownership interest of
each of the shareholders. These transactions did not represent a contribution or payment to the equity holders. For U.S. GAAP purposes, reclassifications of this nature are considered to be quasi-reorganization and as such the Company may not
reclassify a deficit in retained earnings unless certain criteria are met. The Company does not comply with all the criteria and consequently, the stockholders equity under U.S. GAAP as of December 31, 2008 and 2009 is as follows:



|                                           |  |      |             |   |      |    |             |  
|------------------------------------------ |  | ---- | ----------- | - | ---- | -- | ----------- | -
|                                           |  | 2008 |             |   | 2009 |   
|Capital stock                              |  | Ps   | 12,355,567  |   |      | Ps | 12,355,567  |  
|Accumulated losses                         |  |      | (10,503,505 | ) |      |    | (10,056,415 | )
|                                           |  |      |             |   |      |    |             |  
|Total stockholders equity of Alestra      |  |      | 1,852,062   |   |      |    | 2,299,152   |  
|                                           |  |      |             |   |      |    |             |  
|Non controlling interest                   |  |      |            |   |      |    | (1          | )
|                                           |  |      |             |   |      |    |             |  
|Total stockholders equity under U.S. GAAP |  | Ps   | 1,852,062   |   |      | Ps | 2,299,151   |  
|                                           |  |      |             |   |      |    |             |  



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##### Table of Contents

Condensed balance sheets and statements of income under U.S. GAAP

The following table presents condensed balance sheets and statements of income in constant Pesos, including all U.S. GAAP adjustments, as
of December 31, 2008 and 2009 and for the three years then ended:



|                                                                        |  |      |             |   |      |    |             |  
|----------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -- | ----------- | -
|                                                                        |  | 2008 |             |   | 2009 |   
|Cash and cash equivalents                                               |  | Ps   | 202,805     |   |      | Ps | 317,429     |  
|Restricted cash                                                         |  |      |            |   |      |    | 318,202     |  
|Trade receivables                                                       |  |      | 516,173     |   |      |    | 494,216     |  
|Other current assets                                                    |  |      | 149,407     |   |      |    | 140,529     |  
|                                                                        |  |      |             |   |      |    |             |  
|Total current assets                                                    |  |      | 868,385     |   |      |    | 1,270,376   |  
|                                                                        |  |      |             |   |      |    |             |  
|Property and equipment, net                                             |  |      | 5,219,964   |   |      |    | 5,204,783   |  
|Deferred charges and other assets, net                                  |  |      | 257,763     |   |      |    | 261,035     |  
|Deferred income tax                                                     |  |      |            |   |      |    | 110,078     |  
|                                                                        |  |      |             |   |      |    |             |  
|Total assets                                                            |  | Ps   | 6,346,112   |   |      | Ps | 6,846,272   |  
|                                                                        |  |      |             |   |      |    |             |  
|Total current liabilities including the current portion of senior notes |  | Ps   | 1,693,217   |   |      | Ps | 1,476,198   |  
|8% Senior notes due 2010                                                |  |      | 2,458,030   |   |      |    |            |  
|11.750% Senior notes due 2014                                           |  |      |            |   |      |    | 2,545,574   |  
|Bank loans and notes payable                                            |  |      | 186,202     |   |      |    | 411,147     |  
|Deferred income tax                                                     |  |      | 50,279      |   |      |    |            |  
|Estimated liabilities for seniority premiums and pension plans          |  |      | 106,322     |   |      |    | 114,202     |  
|                                                                        |  |      |             |   |      |    |             |  
|Total liabilities                                                       |  |      | 4,494,050   |   |      |    | 4,547,121   |  
|                                                                        |  |      |             |   |      |    |             |  
|STOCKHOLDERS EQUITY :                                                  |  |      |             |   |      |    |             |  
|Contributed capital                                                     |  |      | 12,355,567  |   |      |    | 12,355,567  |  
|Accumulated losses                                                      |  |      | (10,503,505 | ) |      |    | (10,056,415 | )
|                                                                        |  |      |             |   |      |    |             |  
|Total stockholders equity of Alestra                                   |  |      | 1,852,062   |   |      |    | 2,299,152   |  
|                                                                        |  |      |             |   |      |    |             |  
|Non controlling interest                                                |  |      |            |   |      |    | (1          | )
|                                                                        |  |      |             |   |      |    |             |  
|Total stockholders equity                                              |  |      | 1,852,062   |   |      |    | 2,299,151   |  
|                                                                        |  |      |             |   |      |    |             |  
|                                                                        |  | Ps   | 6,346,112   |   |      | Ps | 6,846,272   |  
|                                                                        |  |      |             |   |      |    |             |  



|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|-------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -- | ---------- | ---- |  | -- | ---------- | -
|                                                                                       |  | 2007 |            |   | 2008 |    |            | 2009 | 
|Net revenues                                                                           |  | Ps   | 5,056,040  |   |      | Ps | 4,672,549  |      |  | Ps | 4,683,637  |  
|Cost of services ( excluding depreciation and amortization presented separately below) |  |      | (2,217,678 | ) |      |    | (1,789,029 | )    |  |    | (1,736,706 | )
|Administrative, selling and other operating expenses                                   |  |      | (1,514,019 | ) |      |    | (1,543,261 | )    |  |    | (1,530,690 | )
|Depreciation and amortization                                                          |  |      | (945,196   | ) |      |    | (894,509   | )    |  |    | (904,294   | )
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Operating income                                                                       |  |      | 379,147    |   |      |    | 445,750    |      |  |    | 511,947    |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Comprehensive financial result:                                                        |  |      |            |   |      |    |            |      |  |    |            |  
|Interest (expense) income                                                              |  |      | (40,508    | ) |      |    | (39,320    | )    |  |    | 8,863      |  
|Exchange gain (loss)                                                                   |  |      | 688        |   |      |    | (615,195   | )    |  |    | 99,092     |  
|Effect of derivative financial instruments                                             |  |      |           |   |      |    | (63,179    | )    |  |    | (4,789     | )
|Gain from monetary position                                                            |  |      | 103,780    |   |      |    |           |      |  |    |           |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|                                                                                       |  |      | 63,960     |   |      |    | (717,694   | )    |  |    | 103,166    |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Debt issuance costs, net                                                               |  |      | 22,688     |   |      |    | 22,688     |      |  |    | 14,802     |  
|Other income (expense), net                                                            |  |      | 3,841      |   |      |    | (47,043    | )    |  |    | (52,209    | )
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Net income (loss) before deferred income tax and asset tax                             |  |      | 469,636    |   |      |    | (296,299   | )    |  |    | 577,706    |  
|Asset tax                                                                              |  |      | (2,880     | ) |      |    |           |      |  |    |           |  
|Income tax                                                                             |  |      | (167,751   | ) |      |    | 69,201     |      |  |    | 69,840     |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Net income (loss)                                                                      |  |      | 299,005    |   |      |    | (227,098   | )    |  |    | 647,546    |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Net (loss) income attributable to non controlling interest                             |  |      |           |   |      |    |           |      |  |    |           |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  
|Net income (loss) attributable to total Alestra                                        |  | Ps   | 299,005    |   |      | Ps | (227,098   | )    |  | Ps | 647,546    |  
|                                                                                       |  |      |            |   |      |    |            |      |  |    |            |  



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##### Table of Contents

a) Senior Notes

i) Effects of the restructuring of the Old Senior Notes

During November 2003, the Company restructured its outstanding senior notes (the Old Senior Notes). As a result of the
restructuring of this debt, the Company extinguished, through debt and cash exchange offers, US$232.9 million and US$254.2 million of the debt bearing interest at rates of 12.125% and 12.625%, respectively, representing 85.5% of total Old Senior
Notes. As part of the restructuring of its debt, the Company issued Ps4,008,509 (US$304 million) new senior notes (the 8% Senior Notes due 2010) with maturity in 2010 in exchange for Ps3,765,488 (US$287 million) of Old Senior Notes and
paid Ps1,443,219 (US$110 million) as part of a cash offer to extinguish Ps2,624,033 (US$200 million) of Old Senior Notes. Additionally, the Company paid Ps197,439,422 (US$16,401,848) to holders of the Old Senior Notes, which did not accept the terms
of debt restructuring of the Company, representing 14.5% value of the Old Senior Notes.

Under Mexican FRS, the effects of the
restructuring were recorded as follows:



| |  |  | A gain of Ps 958,753 is recognized for the effect of the extinguishment of the Old Senior Notes.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | A gain of Ps939, 888 for the reversal of accrued and unpaid interest of the Old Senior Notes that were due on November 15, 2002 and May 15,
2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Write-off of unamortized debt issuance cost related to the Old Senior Notes of Ps129, 299 and the capitalization of Ps158, 160 for the debt issuance
cost of the 8% Senior Notes due 2010 amortized over the term of these Notes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense is determined using the contractual interest rate on the 8% Senior Notes due 2010.
| | - |  | ---------------------------------------------------------------------------------------------------

For U. S. GAAP purposes, the debt restructuring of the old senior notes was considered as a troubled debt restructuring in accordance
with ASC 310-40 Troubled Debt Restructurings by Creditors and its effects are recorded as follows:



| |  |  | Since the carrying amount of the old senior notes does not exceed the total future cash payments specified by the 8% Senior Notes due 2010, no gain on
the restructuring was recognized for the notes that were exchanged.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Debt issuance cost of Ps158,160 incurred in the debt restructuring was recorded as an expense of the period; debt issuance cost of Ps129,299 of the Old
Senior Notes, have been amortized in the new term of the restructured notes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense is determined using an effective interest rate that equates the present value of the future cash payments specified by the new notes,
with the carrying amount of the old senior notes. As a result, the net effect of the restructuring, including the reversal of accrued and unpaid interest, will be recognized prospectively as a reduction of the interest expense throughout the term of
the 8% Senior Notes due 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ii) In connection with the issuance of the 11.750% Senior Notes due 2014 and the repayment of
the 8% Senior Notes due 2010.

As mentioned in Note 7 and 9, under Mexican FRS the effects were recognized as follows:



| |  |  | It was considered that the 8% Senior Notes due 2010 are extinguished after repayment and the 11.750% Senior Notes due 2014 is a new debt.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The unamortized debt issuance costs related to the 8% Senior Notes due 2010 were written off and the 11.750% Senior Notes due 2014 were capitalized and
will be amortized over the life of the new debt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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---

##### Table of Contents

| |  |  | Interest expense is determined using the contractual interest rate on the 11.750% Senior Notes due 2014.
| | - |  | --------------------------------------------------------------------------------------------------------

Under U.S. GAAP, the effects were recognized as follows:



| |  |  | Interest expense is determined using an effective interest rate. The difference between the interest expense determined under Mexican FRS and U.S. GAAP
is considered not material.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No difference exists between U.S. GAAP and Mexican FRS regarding the accounting treatment for the issuance costs of the 8% Senior Notes due 2010 and
11.750% Senior Notes due 2014.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company recognized a gain amounting Ps324,608, at the moment of the anticipated repayment of the 8% Senior Notes due 2010, related to the reversal
of accrued and unpaid interest resulted from the debt restructuring of such notes. See Note 20 (a) (i).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

b) Fifth
Amendment effect on property and equipment, net

From January 1, 1997 to December 31, 2007, the Company adopted
the Fifth Amendment which established the option of restating equipment of a non- Mexican origin using an index which reflects the inflation in the respective country of origin and the exchange rate of the Mexican Peso against the currency of such
country at the balance sheet date. For U.S. GAAP purposes, the use of the index that contemplates currency exchange movements is not in accordance with the nominal cost concept nor does it present financial information in a constant reporting
currency. As mentioned previously, since January 1, 2008 the Company presents financial information in adjusted nominal Pesos. Therefore, the U.S. GAAP adjustment represents the remaining depreciation of equipment relating to restatements
for years up to December 31, 2007. As of December 31, 2009 the restatement of equipment of a non- Mexican origin up to December 31, 2007 was fully amortized.

c) Pre-operating Expenses

Under Mexican FRS, pre-operating expenses are permitted to be capitalized and amortized over a period of time estimated to generate the
income necessary to recover such expenses. The Company defined that period as 10 years. Under U.S. GAAP, such costs are expensed as incurred. The amortization of pre-operating expenses has been concluded in 2007.

d) Severance payments

Effective January 1, 2006, the Company adopted the provisions of MFRS D-3, which has subsequently been revised as of January 1,
2008. Under Mexican FRS, beginning in 2005, severance payments should be accounted in a manner similar to other post-retirement benefits. In 2005 the Company opted for the transitional method of recognizing the actuarially determined severance
liability of Ps24,666 over the remaining expected employee service period and consequently, as of December 31, 2007, 2008 and 2009 has recognized a total liability and charge to earnings of Ps 1,982, Ps 4,450, and 3,012. Prior to the adoption
of revised Bulletin D-3, such severance costs were recognized as incurred. With the revision of MFRS D-3, the Company is now amortizing the actuarial determined severance liability over a period of 5 years.

e) Deferred Income Taxes

Under Mexican FRS, deferred tax assets and liabilities are recognized for all significant temporary differences between the carrying
amounts of existing assets and liabilities as of the balance sheet date and their respective tax bases. Under U.S. GAAP, ASC 740 Income Taxes, requires recognition of deferred tax assets and liabilities associated with differences
between the carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized.



F-40



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##### Table of Contents

The tax effects of temporary differences that give rise to significant deferred tax assets
and liabilities, prepared after considering the impact of U.S. GAAP adjustments, as of December 31, 2008 and 2009, are as follows:



|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|--------------------------------------------- |  | -------- | -------- | - | ------------------- | -- | ------- | ---- |  | -- | -------- | -
|                                              |  |          |          |   | U.S GAAP            |    |         |      | 
|                                              |  | Mex GAAP |          |   | Adjustments         |    |         | 2008 | 
|Deferred tax asset:                           |  |          |          |   |                     |    |         |      |  |    |          |  
|Tax loss carryforwards                        |  | Ps       | 348,716  |   |                     | Ps |        |      |  | Ps | 348,716  |  
|Allowance for doubtful accounts               |  |          | 268,947  |   |                     |    |        |      |  |    | 268,947  |  
|Costs and provisions                          |  |          | 285,986  |   |                     |    | (35,359 | )    |  |    | 250,627  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Total deferred tax assets                     |  | Ps       | 903,649  |   |                     | Ps | (35,359 | )    |  | Ps | 868,290  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|                                              |  |          |         
|Deferred tax liabilities:                     |  |          |          |   |                     |    |         |      |  |    |          |  
|Property and equipment, and other assets, net |  | Ps       | 580,813  |   |                     | Ps | 14,220  |      |  | Ps | 595,033  |  
|Prepaid expenses                              |  |          | 5,320    |   |                     |    | (5,320  | )    |  |    |         |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Total deferred tax liabilities                |  |          | 586,133  |   |                     |    | (8,900  | )    |  |    | 595,033  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Net deferred tax assets                       |  |          | 317,516  |   |                     |    | (44,259 | )    |  |    | 273,257  |  
|Valuation allowance                           |  | Ps       | (323,536 | ) |                     | Ps |        |      |  | Ps | (323,536 | )
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Deferred income tax                           |  | Ps       | (6,020   | ) |                     | Ps | (44,259 | )    |  | Ps | (50,279  | )
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|                                              |  |          |         
|                                              |  | Mex GAAP |          |   | U.S GAAPAdjustments |    |         | 2009 | 
|Deferred tax asset:                           |  |          |          |   |                     |    |         |      |  |    |          |  
|Tax loss carryforwards                        |  | Ps       | 134,759  |   |                     | Ps |        |      |  | Ps | 134,759  |  
|Allowance for doubtful accounts               |  |          | 253,510  |   |                     |    |         |      |  |    | 253,510  |  
|Costs and provisions                          |  |          | 339,558  |   |                     |    | 5,994   |      |  |    | 345,552  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Total deferred tax assets                     |  | Ps       | 727,827  |   |                     | Ps | 5,994   |      |  | Ps | 733,821  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Deferred tax liabilities:                     |  |          |          |   |                     |    |         |      |  |    |          |  
|Property and equipment, and other assets, net |  | Ps       | 476,977  |   |                     | Ps |        |      |  | Ps | 476,977  |  
|Prepaid expenses                              |  |          | 12,007   |   |                     |    |         |      |  |    | 12,007   |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Total deferred tax liabilities                |  |          | 488,984  |   |                     |    |        |      |  |    | 488,984  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Net deferred tax assets                       |  |          | 238,843  |   |                     |    |         |      |  |    | 244,837  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Valuation allowance                           |  | Ps       | (134,759 | ) |                     | Ps |        |      |  | Ps | (134,759 | )
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  
|Deferred income, net                          |  | Ps       | 104,084  |   |                     | Ps | 5,994   |      |  | Ps | 110,078  |  
|                                              |  |          |          |   |                     |    |         |      |  |    |          |  

For financial statement purposes, based on the weight of available evidence as of the balance sheet dates,
valuation allowances were recognized as of December 31, 2008 and 2009, for the deferred assets that the Company considered were more likely than not to be realized in the future.

ASC 740 also prescribes a comprehensive model for the recognition, measurement, financial statement presentation and disclosure of
uncertain tax positions taken or expected to be taken in a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.



F-41



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##### Table of Contents

The Company classifies income tax-related interest and penalties as income taxes in the
financial statements.

As of December 31, 2008 and 2009, this pronouncement had no effect on the Companys overall
financial position or results of operations.

f) Pensions and labor liabilities

Due to the revision of Mexican FRS D-3, effective January 1, 2008, companies must now amortize transition obligations/benefits,
unrecognized prior service costs/benefits and net gains and losses over a maximum period of 5 years. This change has resulted in an increase in net periodic pension expense under Mexican FRS and has created a difference of Ps7,026 and Ps2,528 for
fiscal years 2008 and 2009 respectively.

Under U.S. GAAP, ASC 715 Compensation- Retirement Benefits requires
employers to recognize the under-funded or over-funded status of defined benefit pension and postretirement plans as an asset or liability in its statement of financial position, and recognize changes in the funded status in the year in which the
changes occur through accumulated other comprehensive income, which is a component of stockholders equity. The adoption of this standard created a difference in the pension and labor liabilities established under Mexican FRS.

Amount Recognized in Accumulated Other Comprehensive Income (AOCI)



|                          |  |      |         |   |      |    |         |  
|------------------------- |  | ---- | ------- | - | ---- | -- | ------- | -
|(net of tax)              |  | 2008 |         |   | 2009 |   
|Net transition obligation |  | Ps   | 7,257   |   |      | Ps | 6,619   |  
|Prior service cost        |  |      | (15,245 | ) |      |    | (14,031 | )
|Net (loss) gain           |  |      | (5,769  | ) |      |    | 3,466   |  
|                          |  |      |         |   |      |    |         |  
|Total                     |  | Ps   | (13,757 | ) |      | Ps | (3,946  | )
|                          |  |      |         |   |      |    |         |  

AOCI Rollfoward (net of tax)



|                                   |  |      |         |   |      |    |         |  
|---------------------------------- |  | ---- | ------- | - | ---- | -- | ------- | -
|(net of tax)                       |  | 2008 |         |   | 2009 |   
|AOCI at beginning of year          |  | Ps   | (9,871  | ) |      | Ps | (13,757 | )
|Occurring during the year:         |  |      |         |   |      |    |         |  
|Net (gain) loss                    |  |      | (4,490  | ) |      |    | 10,212  |  
|Amounts amortized during the year: |  |      |         |   |      |    |         |  
|Net transition obligation          |  |      | (369    | ) |      |    | 438     |  
|Prior service cost                 |  |      | 1,010   |   |      |    | (791    | )
|Net gain                           |  |      | (37     | ) |      |    | (48     | )
|                                   |  |      |         |   |      |    |         |  
|AOCI at the end of the year        |  | Ps   | (13,757 | ) |      | Ps | (3,946  | )
|                                   |  |      |         |   |      |    |         |  

Pursuant to the requirements of U.S. GAAP, the following tables present a reconciliation of the beginning
and ending balances the accumulated benefit obligation.

Seniority Premiums and Pension Benefits



|                                        |  |      |         |   |      |    |         |  
|--------------------------------------- |  | ---- | ------- | - | ---- | -- | ------- | -
|                                        |  | 2008 |         |   | 2009 |   
|Benefit obligation at beginning of year |  | Ps   | 85,319  |   |      | Ps | 72,512  |  
|Service cost                            |  |      | 2,129   |   |      |    | 2,108   |  
|Interest cost                           |  |      | 6,776   |   |      |    | 6,187   |  
|Actuarial (gain) loss                   |  |      | (7,099  | ) |      |    | 14,326  |  
|Benefits paid                           |  |      | (14,613 | ) |      |    | (19,389 | )
|                                        |  |      |         |   |      |    |         |  
|Benefit obligations at end of year      |  | Ps   | 72,512  |   |      | Ps | 75,744  |  
|                                        |  |      |         |   |      |    |         |  



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##### Table of Contents

Post-retirement benefit



|                                        |  |      |        |   |      |    |        |  
|--------------------------------------- |  | ---- | ------ | - | ---- | -- | ------ | -
|                                        |  | 2008 |        |   | 2009 |   
|Benefit obligation at beginning of year |  | Ps   | 29,415 |   |      | Ps | 31,963 |  
|Service cost                            |  |      | 2,784  |   |      |    | 2,972  |  
|Interest cost                           |  |      | 2,161  |   |      |    | 2,563  |  
|Actuarial loss                          |  |      | 2,278  |   |      |    | 4,044  |  
|Benefits paid                           |  |      | (4,675 | ) |      |    | (3,904 | )
|                                        |  |      |        |   |      |    |        |  
|Benefit obligation at end of year       |  | Ps   | 31,963 |   |      | Ps | 37,638 |  
|                                        |  |      |        |   |      |    |        |  

g) Non Controlling Interest

Under Mexican FRS the non controlling interest in consolidated subsidiaries is presented as a separate component within the
stockholders equity in the consolidated balance sheet.

For U.S. GAAP purposes, as of January 1, 2009, the Company
adopted ASC 810-10-65-65-1 (formerly SFAS No. 160 Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51) which clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, consolidated net income is to be reported with separate disclosure of the amounts attributable to the parent and to the
noncontrolling interests. The presentation and disclosure requirements have been applied retrospectively for all periods presented. The adoption of this standard did not have a significant impact on the Companys overall financial
information.

Statement of Cash Flow

The statement of changes in financial position was presented for the year ended December 31, 2007, as mentioned in Note 2. Under U.S.
GAAP, a statement of cash flow is required, which presents only cash movements and excludes non-cash items.

On
January 1, 2008, Mexican FRS B-2 became effective; therefore, management included the statements of cash flow for the years ended December 31, 2008 and 2009 as part of the basic financial statements with prospective application.

The statements of cash flow prepared in accordance with Mexican FRS for the years ending December 31, 2008 and 2009
presents substantially the same information as that required under U.S. GAAP as interpreted by ASC 230, except for certain differences in presentation.

The Company has chosen to present the statements of cash flow under U.S. GAAP in order to provide consistency in disclosure.



F-43



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##### Table of Contents

Presented below are statements of cash flow for the years ended December 31, 2007, 2008
and 2009 prepared, after considering the impact of U.S. GAAP adjustments.



|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|-------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -- | --------- | ---- |  | -- | ---------- | -
|                                                                                       |  | 2007 |          |   | 2008 |    |           | 2009 | 
|OPERATING ACTIVITIES:                                                                  |  |      |          |   |      |    |           |      |  |    |            |  
|Net income (loss)                                                                      |  | Ps   | 299,005  |   |      | Ps | (227,098  | )    |  | Ps | 647,546    |  
|Adjustments to reconcile net loss to cash flows used in operating activities:          |  |      |          |   |      |    |           |      |  |    |            |  
|Gain from monetary position                                                            |  |      | (155,360 | ) |      |    |          |      |  |    |           |  
|Exchange loss                                                                          |  |      | 30,243   |   |      |    | 615,195   |      |  |    | (99,092    | )
|Depreciation and amortization                                                          |  |      | 919,158  |   |      |    | 894,508   |      |  |    | 904,294    |  
|Allowance for doubtful accounts                                                        |  |      | (17,399  | ) |      |    | 27,758    |      |  |    | (20,980    | )
|Difference in interest expense                                                         |  |      | (243,480 | ) |      |    | (226,156  | )    |  |    | (15,603    | )
|Deferred income tax                                                                    |  |      | 167,751  |   |      |    | (69,201   | )    |  |    | (157,845   | )
|Others                                                                                 |  |      |          |   |      |    |           |      |  |    | 20,335     |  
|Amortization of capitalized expenses derived from issuance of 8% Senior Notes due 2010 |  |      |         |   |      |    |          |      |  |    | 19,229     |  
|Changes in operating assets and liabilities:                                           |  |      |          |   |      |    |           |      |  |    |            |  
|Current assets                                                                         |  |      | (46,683  | ) |      |    | 4,500     |      |  |    | (270,977   | )
|Current liabilities and other provisions                                               |  |      | (144,593 | ) |      |    | 28,737    |      |  |    | 423,373    |  
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|Cash flows provided by operating activities                                            |  |      | 808,642  |   |      |    | 1,048,243 |      |  |    | 1,450,280  |  
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|INVESTING ACTIVITIES:                                                                  |  |      |          |   |      |    |           |      |  |    |            |  
|Purchases of property and equipment                                                    |  |      | (520,628 | ) |      |    | (788,159  | )    |  |    | (808,373   | )
|Interest received                                                                      |  |      | 30,243   |   |      |    | 28,810    |      |  |    | 17,063     |  
|Restricted cash (1)                                                                    |  |      | (11,307  | ) |      |    | 166,016   |      |  |    |           |  
|Purchase of other assets                                                               |  |      | (41,145  | ) |      |    | (74,554   | )    |  |    | (107,275   | )
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|Cash flows used in investing                                                           |  |      | (542,837 | ) |      |    | (667,887  | )    |  |    | (898,585   | )
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|FINANCING ACTIVITIES:                                                                  |  |      |          |   |      |    |           |      |  |    |            |  
|Bank loans and notes payable                                                           |  |      | (111,019 | ) |      |    | 414,762   |      |  |    | 2,936,768  |  
|Payments of bank loans, notes payable, capital leases and senior notes                 |  |      | (590,071 | ) |      |    | (875,372  | )    |  |    | (3,355,468 | )
|Dividends paid                                                                         |  |      |         |   |      |    |          |      |  |    | (64,490    | )
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|Cash flows used in financing activities                                                |  |      | (701,090 | ) |      |    | (460,610  | )    |  |    | (483,190   | )
|Net effect of inflation and exchange loss on cash and cash equivalents                 |  |      | (27,006  | ) |      |    |          |      |  |    | 46,119     |  
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|Decrease in cash and cash equivalents                                                  |  |      | (462,291 | ) |      |    | (80,254   | )    |  |    | 114,624    |  
|Cash and cash equivalents, beginning of period                                         |  |      | 745,350  |   |      |    | 283,059   |      |  |    | 202,805    |  
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|Cash and cash equivalents, end of period                                               |  | Ps   | 283,059  |   |      | Ps | 202,805   |      |  | Ps | 317,429    |  
|Non-cash investing and financing activities:                                           |  |      |          |   |      |    |           |      |  |    |            |  
|Interest and taxes paid:                                                               |  |      |          |   |      |    |           |      |  |    |            |  
|Interest paid                                                                          |  | Ps   | 281,017  |   |      | Ps | 261,742   |      |  | Ps | 224,676    |  
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  
|Income taxes paid                                                                      |  | Ps   | 2,819    |   |      | Ps | 50,573    |      |  | Ps | 75,404     |  
|                                                                                       |  |      |          |   |      |    |           |      |  |    |            |  



|(1) | During 2007 restricted cash amounts were reclassified from financing activities to investment activities.
|--- | ---------------------------------------------------------------------------------------------------------

The Company revised the statements of cash flow for the years ended December 31, 2008 and 2007 to reflect interest received as investing activities
instead of operating activities. The amounts revised for 2008 and 2007 was Ps30,243 and Ps28,810, respectively.



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##### Table of Contents

New accounting pronouncements

Recently Issued Accounting Guidance

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13). The new standard modifies the fair value requirements of ASC 605-25, Revenue Recognition-Multiple Element Arrangementsby allowing the use of the best estimate
of a selling price in addition to Vendor Specific Objective Evidence, or VSOE and Third Party Evidence, or TPE for determining the selling price of a deliverable. ASU 2009-13 changes the requirements for establishing separate units of
accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the effect ASU 2009-13 may have on its audited consolidated financial statements.

In June 2009, the FASB issued Accounting Standards Codification (ASC) 810, Consolidation,(formerly SFAS
No. 167, Amendments to FASB Interpretation No. 46(R)) regarding the consolidation of variable interest entities. ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable
interest entities and by requiring additional disclosures about a companys involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. The Company is currently
evaluating the effect ASC 810 may have on its audited consolidated financial statements.

In June 2009, the FASB issued ASC
860, Transfers and Servicing (formerly SFAS No. 166, Accounting for Transfers of Financial Assets). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to
transferred financial assets. ASC 860 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosure. This standard is effective for fiscal years
beginning after November 15, 2009, which did not have a material impact on its audited consolidated financial statements.

Recently
Adopted Accounting Guidance

In June 2009, the FASB issued ASC 105, Generally Accepted Accounting
Principles (formerly SFAS No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally Accepted
Accounting Principles  a replacement of FASB Statement No. 162) (ASC 105). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental
U.S. GAAP, except for SEC rules and interpretive releases, which are sources of authoritative U.S. GAAP for SEC registrants. The standard is effective for interim and annual periods ending after September 15, 2009. The Company adopted the
provisions of the standard on September 30, 2009, which did not have a material impact on its audited consolidated financial statements.

In April 2009, the FASB issued ASC 825, Financial Instruments(formerly Financial Staff Position (FSP)
No. 107-1 and Accounting Principles Board (APB) 28-1 (FSP No. 107-1 and APB 28-1), Interim Disclosures about Fair Value of Financial Instruments) (ASC 825). ASC 825 requires disclosures of fair value for any
financial instruments not currently reflected at fair value on the balance sheet for all interim periods. ASC 825 enhances consistency in financial reporting by increasing the frequency of fair value disclosures and is effective for interim and
annual periods ending after June 15, 2009, and is to be applied prospectively. The Company adopted the provisions of the standard, which did not have an effect on its audited consolidated financial statements.

In April 2009, the FASB issued transition guidance ASC 820-10-65-4 Fair Value Measurements and
DisclosuresOverallTransition Guidance, the provisions of which have been incorporated in ASC 820-10-50-2 Fair Value Measurements and DisclosuresOverallDisclosures(ASC 820).ASC 820 requires
disclosures about fair value of financial instruments for interim reporting periods and annual financial statements of publicly traded companies. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company
adopted the provisions of the standard and included its effect on its audited consolidated financial statements.



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In March 2008, the FASB issued ASC 815, Derivatives and Hedging(formerly SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133) (ASC 815). ASC 815 requires enhanced disclosures about an entitys derivative and hedging activities
including how and why an entity uses, how an entity accounts for derivative instruments; and related hedged items and how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash
flows. ASC 815 is effective beginning January 1, 2009. The Company adopted the provisions of the standard and included its effect on its audited consolidated financial statements.

In February 2008, the FASB issued ASC 820, Fair Value Measurements and Disclosures (formerly FSP Financial Accounting Standard
(FAS) No. 157-2, Effective Date of FASB Statement No. 157) which delayed the effective date for nonfinancial assets and nonfinancial liabilities until January 1, 2009. The Company adopted the provisions of the
standard as of January 1, 2009, which did not have an effect on its audited consolidated financial statements.

In
December 2007, the FASB issued ASC 805, Business Combinations (ASC 805), (formerly SFAS 141 (revised 2007), Business Combinations).ASC 805 expands the definition
of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related
expenses and restructuring costs to be recognized separately from the business combination; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. ASC 805 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The Company adopted the provisions of the standard, which did not have an effect on its audited consolidated financial statements. However, if the Company enters into
material business combinations in the future, a transaction may significantly impact the Companys audited consolidated financial statements.

j. Subsequent events

On May 3, 2009, the Company adopted ASC Topic 855 (ASC 855), formerly SFAS No. 165, Subsequent Events. ASC
855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This pronouncement is effective for interim or annual
financial periods ending after June 15, 2009, and shall be applied prospectively. The adoption of ASC 855 did not have a material impact on the Companys audited consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). The amendments remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised
financial statements. ASU 2010-09 was effective upon issuance. Its adoption did not have a material impact on the Companys audited consolidated financial statements.



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Signatures

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.



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

/s/ Bernardo García ReynosoBernardo García ReynosoChief Financial and Administrative Officer


Date:
April 23, 2010