20FR12B 1 d20fr12b.htm 20FR12B 20FR12B
Table of Contents

As filed with the Securities and Exchange Commission on May 30, 2008

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 20-F

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:             

TELMEX INTERNACIONAL, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

Telmex International

(Translation of registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

Avenida de los Insurgentes 3500

Colonia Peña Pobre

Delegación Tlalpan

14060 México, D.F., México

(Address of principal executive offices)

 

 

Juan Antonio Pérez Simón González

Avenida de los Insurgentes 3500, Oficina 2130

Colonia Peña Pobre

Delegación Tlalpan

14060 México, D.F., México

52 (55) 5223-3200

Fax: 52 (55) 5244-0367

(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:

 

Title of each class

  

Name of each exchange
on which registered

American Depositary Shares, each representing
20 Series L Shares, without par value

   New York Stock Exchange, Inc.

Series L Shares, without par value

   New York Stock Exchange, Inc. (not for trading, for listing purposes only)

American Depositary Shares, each representing
20 Series A Shares, without par value

   New York Stock Exchange, Inc.

Series A Shares, without par value

   New York Stock Exchange, Inc. (not for trading, for listing purposes only)

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:

None

The number of outstanding shares of each class of capital or common stock as of December 31, 2007 was:

 

8,115 million

  

Series AA Shares, without par value

430 million

  

Series A Shares, without par value

10,816 million

  

Series L Shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨  Yes            x  No

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. N/A

¨  Yes            ¨  No

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. N/A

¨  Yes            ¨  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. (Check one):

Large Accelerated filer  ¨            Accelerated filer  ¨            Non-accelerated filer  x

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

U.S. GAAP  ¨            IFRS  ¨            Other  x

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            x  Item 18

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes            x   No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

   PART I   

Item 1.

   Identity of Directors, Senior Management and Advisers    3

Item 2.

   Not Applicable    4

Item 3.

   Key Information    4
   Selected Financial Data    4
   Exchange Rate Information    7
   Capitalization    8
   Risk Factors    9

Item 4.

   Information on the Company    18
   The Company    18
   Operations in Brazil    24
   Operations Outside Brazil    34
   Yellow Pages Business    40
   Capital Expenditures    42
   Plant, Property and Equipment    42
   The Escisión    43

Item 4A.

   Not Applicable    46

Item 5.

   Operating and Financial Review and Prospects    46

Item 6.

   Directors, Senior Management and Employees    65

Item 7.

   Major Shareholders and Related Party Transactions    72
   Major Shareholders    72
   Related Party Transactions    73

Item 8.

   Financial Information    76
   Consolidated Financial Statements    76
   Legal Proceedings    76
   Dividends    77

Item 9.

   The Offer and Listing    78
   Description of Securities    78
   Trading Markets    78
   Trading on the Mexican Stock Exchange    78

Item 10.

   Additional Information    79
   Share Capital    79
   Bylaws and Mexican Law    79
   Certain Contracts    84
   Exchange Controls    85
   Taxation    85
   Corporate Governance Practices    90
   Dividends and Paying Agents    90
   Statements by Experts    90
   Documents on Display    90

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk    91
   Exchange Rate and Interest Rate Risks    91
   Sensitivity Analysis Disclosures    91

Item 12.

   Description of Securities other than Equity Securities    92
   Description of American Depositary Shares    92

 

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   PART II   

Items 13-16.

   Not Applicable    99
   PART III   

Item 17.

   Not Applicable    99

Item 18.

   Financial Statements    99

Item 19.

   Exhibits    100

 

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PRESENTATION OF INFORMATION

In this registration statement, Telmex Internacional, S.A.B. de C.V., a sociedad anónima bursátil de capital variable organized under the laws of the United Mexican States, or Mexico, is referred to as the registrant and, unless the context otherwise requires, the registrant and its consolidated subsidiaries are referred to collectively as Telmex Internacional. Telmex Internacional was established on December 26, 2007 pursuant to a procedure under Mexican law called an escisión, or the Escisión, which split off the Latin American and yellow pages businesses of Teléfonos de México, S.A.B de C.V., or Telmex. See “The Escisión” under Item 4 and Note 1 to our audited consolidated financial statements. Telmex is a leading Mexican telecommunications provider with the most complete local and long-distance network in Mexico and also offers, among other services, connectivity, Internet access and interconnection services.

This registration statement includes under Item 18 our audited consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005. Our audited consolidated financial statements and the selected financial data provided below for the dates and periods prior to the Escisión have been prepared on a combined basis and include the historical operations of the entities transferred by Telmex to us in the Escisión. See “The Escisión” under Item 4 and Note 1 to our audited consolidated financial statements. You should read the selected financial data in conjunction with our financial statements and related notes included elsewhere in this registration statement.

Our financial statements have been prepared in accordance with Mexican Financial Reporting Standards, or Mexican FRS, which differ in certain respects from generally accepted accounting principles in the United States, or U.S. GAAP. Note 20 to our audited consolidated financial statements provides a description of the principal differences between Mexican FRS and U.S. GAAP, as they relate to us, a reconciliation to U.S. GAAP of net income and total stockholders’ equity, and condensed financial statements under U.S. GAAP.

For periods ending prior to January 1, 2008, Mexican FRS require re-expression of all financial statements in constant Mexican pesos as of the date of the most recent balance sheet presented. Accordingly, the financial statements and other financial information contained in this registration statement are presented in constant pesos with purchasing power as of December 31, 2007.

This registration statement also includes under Item 18 the financial statements of Net Serviços de Comunicação S.A., or Net, as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005, because of the significance of our investment in Net under applicable rules of the U.S. Securities and Exchange Commission, or SEC. The financial statements of Net are presented in accordance with U.S. GAAP and expressed in U.S. dollars.

References herein to “pesos” or “P.” are to Mexican pesos, references to “U.S. dollars” or “U.S.$” are to United States dollars and references to the “real” or “reais” are to Brazilian reales.

FORWARD-LOOKING STATEMENTS

This registration statement contains forward-looking statements. We may from time to time make forward-looking statements in our periodic reports to the SEC on Form 6-K, in our annual report to shareholders, in offering circulars and prospectuses, in press releases and other written materials and in oral statements made by our officers, directors or employees to analysts, investors, representatives of the media and others. Examples of such forward-looking statements include:

 

   

projections of operating revenues, net income, net income per share, capital expenditures, dividends, capital structure or other financial items or ratios;

 

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statements of our acquisition or divestiture plans;

 

   

statements about the impact of our acquisition of businesses outside of Mexico;

 

   

statements of our plans, objectives or goals relating to competition, regulation and rates;

 

   

statements about competition in the business sectors in which we operate;

 

   

statements about our future financial performance or the economic performance of Brazil, Mexico or other countries;

 

   

statements about currency exchange rates;

 

   

statements about the future impact of regulations; and

 

   

statements of assumptions underlying such statements.

Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “should,” “will” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying them.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, some of which are discussed under “Item 3. Key Information—Risk Factors” beginning on page 9, include technological improvements, customer demand, competition, economic and political conditions and government policies in the countries in which we operate or elsewhere, inflation rates, exchange rates and regulatory developments. We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.

Forward-looking statements speak only as of the date they are made. We do not undertake to update such statements in light of new information or new developments.

 

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PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

Directors

The following table sets forth as of the date of this registration statement, the names, business addresses and functions of the members of our board of directors:

 

Name

  

Business Address

  

Position

Carlos Slim Domit   

Paseo de las Palmas No. 736

Colonia Lomas de Chapultepec

11000 México, D.F., México

   Chairman
Jaime Chico Pardo   

Paseo de las Palmas 750, Piso 7

Colonia Lomas de Chapultepec

11000 México, D.F., México

   Director
Laura Diez Barroso de Laviada   

Sierra Madre No. 650

Colonia Lomas de Chapultepec

11000 México, D.F., México

   Director
Arturo Elías Ayub   

Parque Vía 190, Piso 7

Colonia Cuauhtémoc

06599 México, D.F., México

   Director
Roberto Kriete Ávila   

Boulevard Sur y Avenida El Espino

Urbanización Madre Selva

Antiguo Cuscutlán

La Libertad, San Salvador, El Salvador

   Director
Francisco Medina Chávez   

Avenida Acueducto 1867 C

Colonia Lomo de Hidalgo

58240 Morelia, Michoacán, México

   Director
Jorge Andrés Saieh Guzmán   

Avenida Vicuña 1962, Piso 6

Ñuñoa, Santiago, R.M. Chile

   Director
Fernando Solana Morales   

Paseo de la Reforma 2608

Piso 16, oficina 1606

Colonia Lomas Altas

11950 México, D.F., México

   Director and Chairman of the corporate practices committee
Antonio del Valle Ruiz   

Paseo de la Reforma 365

06500 México, D.F., México

   Director and Chairman of the audit committee
Oscar Von Hauske Solís   

Avenida de los Insurgentes 3500

Colonia Peña Pobre, Delegación Tlalpan

14060 México, D.F., México

   Director and Chief Executive Officer
Eric D. Boyer   

Parque Vía 190, Piso 12

Colonia Cuauhtémoc

06599 México, D.F., México

   Director
Rayford Wilkins, Jr.   

Parque Vía 190, Piso 12

Colonia Cuauhtémoc

06599 México, D.F., México

   Director

 

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Executive Officers

As of the date of this registration statement, the names and responsibilities of our executive officers are as follows:

 

Name

  

Responsibilities

Oscar Von Hauske Solís    Chief Executive Officer
Luis Antonio Villanueva Gómez    Head of Development
Francisco Javier Ortega Castañeda    Chief Commercial Officer
José Formoso Martinez    Chief Executive Officer of Embratel
Oscar Von Hauske Solís    Acting Chief Financial Officer
Eduardo Alvarez Ramírez de Arellano    General Counsel

The offices of Telmex Internacional, S.A.B. de C.V., or Telmex Internacional, are located at Avenida de los Insurgentes 3500, Colonia Peña Pobre, Delegación Tlalpan, C.P. 14060, México, D.F., México. The telephone number of Telmex Internacional at this location is 52 (55) 5223-3200.

Mexican Legal Advisers

Our external legal adviser in Mexico is Galicia y Robles, S.C., located at Torre del Bosque, Blvd. Manuel Ávila Camacho No. 24, Piso 7, Lomas de Chapultepec, C.P. 11000, México, D.F., México.

Auditors

Our independent registered public auditors are Mancera, S.C., a Member Practice of Ernst & Young Global, with offices at Antara Polanco, Avenida Ejercito Nacional, Torre Paseo, No. 843-B Piso 4, Colonia Granada, 11520, México, D.F., México. Mancera, S.C. is a member of the Mexican Institute of Public Accountants.

 

Item 2. Not Applicable

 

Item 3. Key Information

SELECTED FINANCIAL DATA

This registration statement includes under Item 18 our audited consolidated financial statements as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005. The audited consolidated financial statements and the selected financial data provided below for the dates and periods prior to the Escisión have been prepared on a combined basis and include the historical operations of the entities transferred by Telmex to us in the Escisión that established Telmex Internacional on December 26, 2007. See “The Escisión” under Item 4 and Note 1 to our audited consolidated financial statements. You should read the selected financial data in conjunction with our financial statements and related notes included elsewhere in this registration statement.

Our financial statements have been prepared in accordance with Mexican FRS, which differ in certain respects from U.S. GAAP. Note 20 to our audited consolidated financial statements provides a description of the principal differences between Mexican FRS and U.S. GAAP, as they relate to us, a reconciliation to U.S. GAAP of net income and total stockholders’ equity, and condensed financial statements under U.S. GAAP.

 

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Mexican FRS require that our financial statements for periods ending prior to January 1, 2008, recognize certain effects of inflation in Mexico and in the other countries in which we operate. Inflation accounting under Mexican FRS has extensive effects on the presentation of our financial statements. See “Effect of Inflation Accounting” under Item 5.

 

     Year ended December 31,
     2007    2006(1)    2005(2)    2004(2)    2003(2)
     (in millions of constant pesos as of December 31, 2007,
except per share data)

Income Statement Data:

              

Mexican FRS:

              

Operating revenues

   P. 67,760    P. 65,520    P. 61,346    P. 30,128    P. 5,247

Operating costs and expenses

     57,430      62,204      54,177      26,855      2,258

Operating income

     10,330      3,316      7,169      3,273      2,989

Net income

     7,014      3,018      4,586      1,965      2,319

Majority net income

     6,464      2,353      3,180      1,584      2,319

Majority net income per share(3)

     0.33      0.11      0.14      0.07      0.09

Weighted average number of shares outstanding (millions)

     19,766      20,948      22,893      23,906      24,908

U.S. GAAP:

              

Operating revenues

   P. 67,760    P. 53,924    P. 46,349    P. 22,688    P. 5,247

Operating costs and expenses

     58,159      51,641      41,169      20,100      2,258

Operating income

     9,601      2,283      5,180      2,587      2,989

Net income

     6,176      1,718      3,113      1,526      2,319

Majority net income

     5,739      1,167      2,391      1,499      2,319

Majority net income per share(3)

     0.29      0.06      0.10      0.06      0.09

Balance Sheet Data:

              

Mexican FRS:

              

Plant, property and equipment, net

   P. 50,494    P. 47,271    P. 44,198    P. 45,276    P. 124

Total assets

     129,281      108,181      94,119      94,941      4,991

Short-term debt and current portion of long-term debt

     4,713      4,932      1,711      13,436      2,108

Long-term debt

     11,269      12,558      9,196      9,015      —  

Total stockholders’ equity

     85,534      61,697      61,898      48,637      2,884

Capital stock

     17,829      —        —        —        —  

Other capital contributions

     37,781      —        —        —        —  

U.S. GAAP:

              

Plant, property and equipment, net

   P. 58,672    P. 42,053    P. 34,657    P. 34,139    P. 124

Total assets

     133,513      89,340      67,470      65,733      4,991

Short-term debt and current portion of long-term debt

     4,713      4,932      1,711      13,436      2,108

Long-term debt

     10,855      9,923      6,645      6,314      —  

Total stockholders’ equity

     86,772      46,374      32,709      20,015      2,884

Capital stock

     17,829      —        —        —        —  

Other capital contributions

     39,997      374      —        —        —  

 

(1)

Our results of operations in 2006 were affected by several items relating to Brazilian tax proceedings. Under commercial, general and administrative costs, we recorded (a) a charge of P.4,210 million related to Embratel’s settlement of a dispute over its liability for value added tax and (b) a provision of P.1,467 million for penalties and monetary correction related to income tax on incoming international long distance service. Under other expenses (income), net we recorded (a) other

 

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income of P.3,919 million representing the monetary gain and accrued interest related to taxes Embratel paid between 1990 and 1994 and became entitled to recover in 2006 and (b) other expenses of P.1,862 million representing the monetary gain and interest accrued related to back income tax Embratel was required to pay in 2006 on incoming international long distance service for prior periods.

 

(2) A series of acquisitions beginning in 2004 resulted in an increase in our results of operations in 2004 and 2005 and an increase in our total assets in 2004.

 

(3) Based on the weighted average numbers of shares of Telmex in each year. We have not presented net income on a per ADS basis. Each L Share ADS represents 20 L Shares, and each A Share ADS represents 20 A Shares.

 

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EXCHANGE RATE INFORMATION

The following table sets forth, for the periods indicated, the high, low, average and period-end noon buying rate in New York City for cable transfers in pesos published by the Federal Reserve Bank of New York, expressed in pesos per U.S. dollar. The rates have not been re-expressed in constant currency units.

 

Period

   High    Low    Average(1)    Period End

2003

   P. 10.11    P. 11.41    P. 10.79    P. 11.24

2004

     10.81      11.64      11.29      11.15

2005

     10.41      11.41      10.89      10.63

2006

     10.43      11.46      10.90      10.80

2007

     10.67      11.27      10.93      10.92

November

     10.67      11.00      10.88      10.90

December

     10.80      10.92      10.85      10.92

2008:

           

January

     10.82      10.97      10.91      10.82

February

     10.67      10.82      10.77      10.73

March

     10.63      10.85      10.73      10.63

April

     10.44      10.60      10.51      10.51

 

(1) Average of month-end rates, where applicable.

On May 23, 2008, the noon buying rate was P.10.39 to U.S.$1.00.

In the future, any cash dividends we pay will be in pesos, and exchange rate fluctuations affect the U.S. dollar amounts received by holders of American Depositary Shares, or ADSs, on conversion by the depositary of cash dividends on the shares represented by such ADSs. Fluctuations in the exchange rate between the peso and the U.S. dollar will affect the U.S. dollar equivalent of the peso price of our shares on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A. de C.V.) and, as a result, can also affect the market price of the ADSs.

 

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CAPITALIZATION

The following table sets forth our consolidated capitalization under Mexican FRS as of April 30, 2008. See “Presentation of Information.”

 

     As of April 30, 2008
     (millions of pesos)

Debt:

  

Banks

   P. 12,108

Senior notes

     1,867

Financial leases

     617

Supplier credits

     199
      

Total debt

     14,791

Less short-term debt and current portion of long-term debt

     3,641
      

Long-term debt

     11,150

Stockholders’ equity:

  

Capital stock

     17,829

Other capital contributions

     37,781

Retained earnings

     12,392

Other accumulated comprehensive income

     18,154

Non-controlling interest

     2,749
      

Total stockholders’ equity

     88,905
      

Total capitalization (total debt and stockholders’ equity)

   P. 103,696
      

 

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RISK FACTORS

Risks Relating to Our Business

Increasing competition in the telecommunications industry could adversely affect our revenues and profitability

We face significant competition in Brazil and the other countries in which we operate, which could result in decreases in current and potential customers, revenues and profitability. Governmental authorities in many of these countries continue to grant new licenses and concessions to new market entrants, which results in increased competition. In addition, technological developments are increasing cross-competition in certain markets, such as between fixed-line operators and wireless providers and between cable television providers and telephony providers.

The effects of competition on our business are highly uncertain and will depend on a variety of factors, including economic conditions, regulatory developments, the behavior of our customers and competitors and the effectiveness of measures we take in response to the competition we face. Our ability to compete successfully will depend on customer service, on marketing and on our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including new services and technologies, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. If we are unable to respond to competition and compensate for declining prices by adding new customers, increasing usage and offering new services, our revenues and profitability could decline.

Our industry is subject to rapid technological changes, which could adversely affect our ability to compete

The telecommunications industry is in a period of rapid technological change. Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will further develop. These new products and technologies may reduce the prices we can charge for our services or they may be superior to, and render obsolete, the products and services we offer and the technologies we use. They may consequently reduce the revenues generated by our products and services or require investment in new technology. As a result, our most significant competitors in the future may be new entrants to our markets that would not be burdened by an installed base of older equipment.

Changes in government regulation could hurt our businesses

Our businesses are subject to extensive government regulation and can be adversely affected by changes in law, regulation or regulatory policy. The licensing, construction, operation, sale, resale and interconnection arrangements of telecommunications systems in Latin America and elsewhere are regulated to varying degrees by government or regulatory authorities. Any of these authorities having jurisdiction over our businesses could adopt or change regulations or take other actions that could adversely affect our operations. In particular, the regulation of prices that operators may charge for their services could have a material adverse effect on us by reducing our profit margins.

Many Latin American countries have recently privatized, and in some cases, deregulated, the provision of communications services and many of the laws, regulations and licenses that regulate our businesses became effective only recently. Consequently, there is only a limited history that would allow us to predict the impact of these regulations on our future operations. In reviewing historical information and in evaluating our future financial and operating performance, you should consider carefully the extensive changes in the structure and regulation of our industry.

 

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For example, in Brazil, where increased regulation accompanied privatization, the Brazilian National Telecommunications Agency (Agência Nacional de Telecomunicações, or “Anatel”) in 2005 defined a series of cost-based methods, including the fully allocated cost methodology and long-run incremental cost methodology, for determining interconnection fees charged by operators belonging to an economic group with significant market power. Anatel has not published the applicable regulations regarding cost-based methods, although in 2006 it provided criteria for determining whether an operator belongs to a group with significant market power in four segments: rented lines, telephone services, fixed interconnection and mobile interconnection. Based on this criteria, Anatel concluded that Embratel is an economic group with significant market power in two of the segments: long distance rented lines and long distance telephone service. When the cost-based methods are ultimately implemented, the revenues and results of operations of our Brazilian operations may be affected.

In addition, changes in political administrations could lead to the adoption of policies concerning competition, privatization and taxation of communications services that may be detrimental to our operations throughout Latin America. These restrictions, which may take the form of preferences for local over foreign ownership of communications licenses and assets, or for government over private ownership, may make it impossible for us to continue to develop our businesses. These restrictions could result in our incurring losses of revenues and require capital investments all of which could materially adversely affect our businesses and results of operations.

We depend on key suppliers and vendors to provide equipment that we need to operate our business

We depend upon various key suppliers and vendors, including Cisco, Nokia-Siemens, Huawei, Alcatel-Lucent, Motorola, Nortel and Nec to provide us network equipment, which we need to expand and operate our business. If these suppliers or vendors fail to provide equipment or service to us on a timely basis, we could experience disruptions, which could have an adverse effect on our revenues and results of operations. In addition, we might be unable to satisfy the requirements contained on our concessions.

We are exposed to special risks in connection with our international call services

Revenues from international service in part reflect payments under bilateral agreements between us and foreign telecommunications authorities or private carriers, which are influenced by the guidelines of the international tariff and trade regulations and cover virtually all international calls to and from the countries in which we operate. Various factors, including unauthorized international traffic (commonly known as bypass), increases in the proportion of outgoing to incoming calls and the levels of settlement prices could affect the amount of net settlement payments from U.S. or other international carriers to us in future years.

Developments in the telecommunications sector have resulted, and in the future may result, in substantial write-downs of the carrying value of certain of our assets

We review on an annual basis, or more frequently where the circumstances require, the value of each of our assets and subsidiaries, to assess whether those carrying values can be supported by the future cash flows expected to be derived from such assets. Whenever we consider that our goodwill, intangible assets or fixed assets may be impaired due to changes in the economic, regulatory, business or political environment, we consider the necessity of performing certain valuation tests, which may result in impairment charges. The recognition of impairments of tangible, intangible and financial assets could result in a non-cash charge on our income statement, which could adversely affect our results of operations.

 

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We continue to look for investment opportunities, and any future acquisitions and related financings could involve risk and have a material effect on our business, results of operations and financial condition

We continue to look for other investment opportunities in telecommunication companies, primarily in Latin America, and we often have several possible acquisitions under consideration. Any new investment may involve risks to which we previously have not been exposed. We cannot assure you that these investments will be successful. Any future acquisitions and related financings also could have a material effect on our business, results of operations and financial condition, but we cannot give any assurances that we will complete any of them. In addition, we may incur significant costs and expenses as we integrate these companies in our systems, controls and networks.

Our ability to pay dividends depends on our subsidiaries’ ability to transfer income and dividends to us

We are a holding company with no significant assets other than the shares of our subsidiaries and our holdings of cash and cash equivalents. Accordingly, our cash flows will be derived principally from dividends, interest and other distributions made to us by our subsidiaries. Our ability to pay dividends depends on the continued transfer to us of dividends and other income from our subsidiaries. The ability of our subsidiaries to pay dividends and make other transfers to us may be limited by various regulatory, contractual and legal constraints that affect our subsidiaries.

We are subject to regulatory limitations in Brazil on the prices we can charge for our domestic and international long distance services

Embratel’s basic domestic and international long distance tariffs are subject to final approval by Anatel, to which we submit requests for rate adjustments. Embratel’s concessions provide for a price cap mechanism to set and adjust rates on an annual basis. We are subject to comprehensive regulations that limit our ability to set tariffs for our services. These regulations may limit our ability to raise prices or may render some kinds of customer traffic unprofitable.

Tariff regulations are subject to challenge in the Brazilian courts, which may result in a loss of profits. We cannot assure you that our financial condition will not be affected by tariff rate challenges in the future.

We are at a disadvantage in Brazil relative to certain of our competitors that control local access networks

To complete long distance telephone calls, we typically must pay originating access charges to the local or the mobile telephone service provider of the caller and terminating access charges to the local or the mobile telephone service provider of the recipient of the call. The Brazilian Telecommunications Law and the concessions for local services oblige local service concessionaires to treat all long distance operators on an equal basis. This means that local service concessionaires should charge their own long distance service concessionaire the same interconnection rate charged to competitors like us. In addition, the Brazilian Telecommunications Law prohibits cross-subsidies between local and long distance concessions, so that if a local service concessionaire were to charge its own long distance concessionaire a lower interconnection rate than the one charged to us, it would be engaging in an anti-competitive practice under the law. However, since some companies own both local and long distance concessions, proving discriminatory pricing and cross-subsidies may be difficult and Anatel may not have sufficient

 

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means to audit and prove such practices. As a result, while we must pay access charges to the local service concessionaire, a local service concessionaire may allow its own long distance concessionaire to avoid payment of such charges. Although we have demanded and will continue to demand that Brazil’s competitive regulation be fully enforced to prevent local service concessionaires from allowing their long distance concessionaires to sell long distance services below cost, there can be no assurance that we will be successful in achieving such enforcement and we may suffer anti-competitive behavior in certain segments of the long distance market.

Since January 1, 2006, local access and long distance interconnection rates have been capped at a fixed percentage of the rates charged to customers, which may limit the ability of local service concessionaires to engage in the discriminatory pricing practices described above, but we cannot assure you that this measure or similar measures adopted in the future will be effective in counteracting these practices.

Most of our basic voice services in Brazil are sold on a per call basis. This makes it easier for customers to switch providers, which could lead us to lose business

Under Brazilian regulations, fixed-line and mobile telephone customers can select their basic domestic and international long distance carrier on a per call basis. Thus, we do not have contracts with most of our customers in our basic domestic and international long distance segment, and those customers can select a different provider at any time. We cannot assure you that our customers will remain loyal to us. If a significant number of our customers were to select another telecommunications service provider, it could have a material adverse impact on our business and financial condition.

If we are unable to successfully combat fraudulent use of our network in Brazil and successfully manage the collections process, our bad debt expense could increase, which would harm our results and our cash flow

Embratel has experienced high levels of bad debt expense, in part because it is required to provide access to our network to all fixed-line and cellular customers without prior assurance that they are creditworthy users. Brazilian telecommunications regulations allow operators to block fixed-line and cellular users only after the customer fails to pay the amount billed. Embratel’s bad debt expense was 5.3% of its net revenues for the year ended December 31, 2006 and 4.4% of its net revenues for the year ended December 31, 2007.

We cannot assure you that our strategies will be effective in combating the fraudulent use of our network or in enabling us to recover unpaid amounts billed for use of our networks, or that efforts that have proved effective in our traditional business will be equally effective in markets such as personal mobile service (SMP) mobile calls and local services. Embratel’s level of bad debt expense may increase in the future, which could harm our profitability and operating cash flow.

We are obligated to meet certain quality of service goals and maintain quality of service standards, and failure to meet such obligations can result in sanctions

Anatel requires Embratel to meet certain quality of service goals under its concessions, including, for example, minimum call completion rates, maximum busy circuit rates, operator availability and responsiveness to repair requests. Failure to meet quality of service obligations can result and has resulted in the imposition of fines by Anatel and other governmental entities. Our ability to meet these goals can be impeded by factors beyond our control and we cannot assure you that we will meet these goals in the future or that we will not be fined in the future.

 

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We are subject to large claims under tax disputes in Brazil

Embratel is party to various tax proceedings in Brazil, some of which involve significant monetary claims for which we have established no reserves. We cannot be certain that these claims will be resolved in our favor. In particular, Embratel is involved in various legal proceedings, including several tax disputes with the Brazilian tax authorities alleging underpayments by Embratel and social security administrative and civil lawsuits for aggregate claims that are substantial. As of December 31, 2007, Embratel had recorded P.5,400 million in reserves for those disputes for which an unfavorable result is probable. There is an additional P.16,832 million claimed for which we believe the likelihood of an unfavorable outcome is possible but less than probable and, consequently, we have not provided for such amount in our financial statements. If all or a significant part of these actions were decided adversely to us, it could have a material impact on our business, financial condition and results of operations.

We will face increased costs if Star One is not able to launch the new Star One C-2 satellite prior to the end of the contractual life of the existing Brasilsat B-1, the satellite it was designed to replace

Our satellite subsidiary in Brazil, Star One S.A., or Star One, has five satellites in operation, which cover the entire territory of South America and part of Florida. Brasilsat B-1, which covers all of Brazil, reached the end of its contractual life in September 2006 and was replaced, on an interim basis, by Brasilsat B-4. We expect that Star One C-2 will permanently replace Brasilsat B-1 in the second quarter of 2008. If we are unable to replace Brasilsat B-1 or, if before Brasilsat B-1 is replaced, Brasilsat B-4 ceases to be a suitable interim replacement for Brasilsat B-1, we may be unable to properly serve our satellite customers and could experience an increase in our costs.

Latin American economic, political and social conditions may adversely affect our business

Our financial performance may be significantly affected by general economic, political and social conditions in the markets where we operate. Many countries in Latin America, including Mexico and Brazil, have suffered significant economic, political and social crises in the past, and these events may occur again in the future. We cannot predict whether changes in administrations will result in changes in governmental policy and whether such changes will affect our business. In addition, governments in these countries have frequently intervened in their economies. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price and wage controls, currency devaluations, capital control and limits on export and imports.

Uncertainty in the region has been caused by many different factors, including:

 

   

significant governmental influence over local economies;

 

   

substantial fluctuations in economic growth;

 

   

high levels of inflation;

 

   

changes in currency values;

 

   

exchange controls or restrictions on expatriation of earnings;

 

   

high domestic interest rates;

 

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wage and price controls;

 

   

changes in governmental economic or tax policies;

 

   

imposition of trade barriers;

 

   

unexpected changes in regulation; and

 

   

overall political, social and economic instability.

Adverse economic, political and social conditions in Latin America may inhibit demand for telecommunications services and create uncertainty regarding our operating environment, which could have a material adverse effect us.

Our financial condition and results of operations are affected by exchange rate variations

Changes in the value of the various currencies in which we conduct operations against the Mexican peso, and changes in the value of the Mexican peso or our other operating currencies against the U.S. dollar, affect our financial condition and results of operations. We report exchange gains or losses on our indebtedness and accounts payable, especially in U.S. dollars, and currency variations affect the results of our non-Mexican subsidiaries as reported in Mexican pesos.

Since 2004, we have acquired a number of companies in other countries in Latin America. During that period, the Mexican peso has been relatively stable against the U.S. dollar. However, currencies of certain other countries, specifically the Brazilian real and the Colombian peso, have appreciated relative to the U.S. dollar and the Mexican peso. Such appreciation amplifies the impact of operations in these countries on our revenues as well as costs. We cannot predict the behavior of the Mexican peso and other currencies against the U.S. dollar in the future and what effect they will have on our financial condition and results of operations.

Exchange rate variations also affect our debt. We use derivative instruments to manage our exposure to the risk associated with such variations. At December 31, 2007, our U.S. dollar-denominated indebtedness amounted to P.14,335 million. During 2007, 2006 and 2005, the Mexican peso and Brazilian real generally appreciated against the U.S. dollar. In all these periods, our foreign exchange gain was either offset (in 2007) or more than offset (in 2006 and 2005) by losses on derivatives we had entered into.

Major devaluation or depreciation of any such currencies may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert such currencies for the purpose of paying dividends or making timely payments of interest and principal on our indebtedness. The Mexican government or the Brazilian government could institute restrictive exchange rate policies in the future which could adversely affect us.

Risks Relating to Our Controlling Shareholder and Capital Structure

We are controlled by one shareholder

A majority of the voting shares of our company (71.3% as of March 6, 2008) is owned by Carso Global Telecom, S.A.B. de C.V., or Carso Global Telecom. Carso Global Telecom has the effective power to designate a majority of the members of our board of directors and to determine the outcome of other actions requiring a vote of the shareholders, except in very limited cases that require a vote of the holders of L Shares. Carso Global Telecom is controlled by Carlos Slim Helú and members of his immediate family, who, taken together, own a majority of the common stock of Carso Global Telecom.

 

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The protections afforded to minority shareholders in Mexico are different from those in the United States

Our bylaws provide that any dispute between us and our shareholders will be governed by Mexican law and that legal actions relating to the execution, interpretation or performance of the bylaws may be brought only in Mexican courts. Under Mexican law, the protections afforded to minority shareholders are different from those in the United States. In particular, the case law concerning fiduciary duties of directors is not well developed, there is no procedure for class actions, there are different procedural requirements for bringing shareholder lawsuits and there are different discovery rules. As a result, it may be more difficult in practice for minority shareholders of Telmex Internacional to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of an U.S. company.

We engage in transactions with related parties that may create the potential for conflicts of interest

We engage in transactions with entities that like us, are controlled, directly or indirectly, by Carlos Slim Helú and members of his immediate family. These entities include (a) Telmex and certain subsidiaries of Telmex, (b) Grupo Carso, S.A.B. de C.V., or Grupo Carso, and its subsidiaries, (c) Grupo Financiero Inbursa, S.A.B. de C.V., or Grupo Financiero Inbursa, and its subsidiaries, (d) América Móvil, S.A.B. de C.V., or América Móvil, and its subsidiaries, and (e) Carso Global Telecom. Our transactions with Telmex include the completion of the international traffic of Telmex in countries where we operate, the completion of our international traffic through Telmex’s facilities in Mexico, our publication and distribution of Telmex’s directories and access to Telmex’s customer database and Telmex’s billing and collection in connection with our directories’ business. Transactions with Grupo Carso include the purchase of network construction services and materials, and transactions with Grupo Financiero Inbursa include financial services and insurance. Our transactions with América Móvil include the mutual completion of long-distance traffic, transportation, renting of lines and call center services in Brazil.

With respect to our shareholders, Carso Global Telecom and AT&T International, we expect to begin paying fees for consulting and management services in 2009. For 2008, we have reimbursed Telmex U.S.$22.5 million of the amount Telmex paid Carso Global Telecom for such services. In addition, we have agreements with AT&T International that provide for the completion of calls in our respective countries of operation.

Our transactions with related parties may create the potential for conflicts of interest.

Holders of L Shares and L Share ADSs have limited voting rights

Our bylaws provide that holders of L Shares are not permitted to vote except on such limited matters as the transformation or merger of Telmex Internacional or the cancellation of registration of the L Shares with the National Securities Registry (Registro Nacional de Valores), managed by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) or any stock exchange on which they are listed. If you hold L Shares or L Share ADSs, you will not be able to vote on most matters, including the declaration of dividends, that are subject to a shareholder vote in accordance with our bylaws.

 

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Holders of ADSs are not entitled to attend shareholders’ meetings, and they may only vote through the ADS depositary

Under Mexican law, a shareholder is required to deposit its shares with a custodian in order to attend a shareholders’ meeting. As long as a shareholder holds shares in ADS form, the shareholder will not be able to satisfy this requirement. There can be no assurance that holders of ADSs will receive notice of shareholders’ meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner. In the event that instructions are not received with respect to any shares underlying ADSs, the ADS depositary will, subject to certain limitations, grant a proxy to a person designated by us. In the event that this proxy is not granted, the ADS depositary will vote these shares in the same manner as the majority of the shares of each class for which voting instructions are received.

You may not be entitled to preemptive rights

Under Mexican law, if we issue new shares for cash as part of a capital increase, we generally must grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in Telmex Internacional. Rights to purchase shares in these circumstances are known as preemptive rights. Preemptive rights do not arise upon the sale of newly issued shares in a public offering or the resale of shares of capital stock previously repurchased by us.

We may not legally be permitted to allow holders of ADSs or holders of L Shares or A Shares in the United States to exercise any preemptive rights in any future capital increase unless we file a registration statement with the SEC with respect to that future issuance of shares. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that we consider important to determine whether we will file such a registration statement. We cannot assure you that we will file a registration statement with the SEC to allow holders of ADSs or U.S. holders of L Shares or A Shares to participate in a preemptive rights offering. As a result, the equity interest of such holders in Telmex Internacional may be diluted proportionately. In addition, under current Mexican law, it is not practicable for the ADS depositary to sell preemptive rights and distribute the proceeds from such sales to ADS holders.

Our bylaws restrict transfers of shares in some circumstances

Our bylaws provide that any acquisition or transfer of more than 10% of our capital stock by any person or group of persons acting together requires the approval of our board of directors. If you wish to acquire or transfer more than 10% of our capital stock, you will not be able to do so without the approval of our board of directors.

Our bylaws restrict the ability of non-Mexican shareholders to invoke the protection of their governments with respect to their rights as shareholders

As required by Mexican law, our bylaws provide that non-Mexican shareholders shall be considered as Mexicans in respect of their ownership interests in Telmex Internacional and shall be deemed to have agreed not to invoke the protection of their governments in certain circumstances. Under this provision, a non-Mexican shareholder is deemed to have agreed not to invoke the protection of his own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the shareholder’s rights as a shareholder, but is not deemed to have waived any other rights he may have, including any rights under the U.S. securities laws, with respect to his investment in Telmex Internacional. If you invoke such governmental protection in violation of this agreement, your shares could be forfeited to the Mexican government.

 

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

Telmex Internacional is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, a substantial portion of our assets and their assets are located in Brazil and Mexico. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico or Brazil, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

Risks Relating to the Escisión

Our historical performance may not be representative of our performance as a separate company

Our audited consolidated financial statements and the selected financial data included herein for the dates and periods prior to the Escisión have been prepared on a combined basis and include the historical operations of the entities transferred by Telmex to us in the Escisión. Our historical performance might have been different if we had been a separate, consolidated entity during the periods presented.

The historical financial information included in this registration statement is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. There may be changes that will occur in our cost structure, funding and operations as a result of our separation from Telmex, including increased costs associated with reduced economies of scale, and increased costs associated with being a publicly traded, stand-alone company.

We are a new company and have never operated independently of Telmex

We are a new company and have never operated independently of Telmex. Our ability to function as a new company will suffer if we do not develop our own administrative infrastructure quickly and cost-effectively. Telmex is providing us with certain legal, financial, accounting, investor relations and other administrative services on an interim basis while we develop the personnel and systems necessary to provide these services ourselves. We expect to be dependent on Telmex for these services through 2008 and possibly longer.

After the expiration of these various arrangements, we may not be able to replace the transitional services in a timely manner or on terms and conditions as favorable as those we received from Telmex. In addition, in order to establish ourselves successfully as an independent company, we need to attract and retain a significant number of highly skilled employees. If we fail to do so, our business could suffer.

There may not be a liquid market for our shares

There is currently no public market for our shares. We intend to apply to list our shares on the Mexican Stock Exchange and our ADSs on a U.S. securities exchange. We cannot assure you as to the liquidity of any markets that may develop for the shares or ADSs or the price at which the shares or ADSs may be sold. Also, the liquidity and the market for our shares may be affected by a number of factors including variations in exchange and interest rates, the deterioration and volatility of the markets for similar securities and any changes in our liquidity, financial condition, creditworthiness, results and profitability. As a result, the initial trading prices of our shares and ADSs may not be indicative of future trading prices.

 

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We may face difficulty in financing our operations and capital expenditures following the Escisión, which could have an adverse impact on our business and results

We may need to incur debt or issue additional equity in order to fund working capital and capital expenditures or to make acquisitions and other investments following the Escisión. We cannot assure you that debt or equity financing will be available to us on acceptable terms, if at all. As a result of the Escisión, it may also become more expensive for us to raise funds through the issuance of debt than it was prior to the consummation of the Escisión. If we are not able to obtain sufficient financing on attractive terms, our business and results could suffer.

 

Item 4. Information on the Company

THE COMPANY

Overview

Telmex Internacional is a Mexican holding company providing through its subsidiaries in Brazil, Colombia, Argentina, Chile, Peru and Ecuador a wide range of telecommunications services, including voice, data and video transmission, Internet access and integrated telecommunications solutions; pay cable and satellite television; and print and Internet-based yellow pages directories in Mexico, the United States, Argentina and Peru.

Our principal business is in Brazil, which accounts for more than 80% of our total revenues. We operate in Brazil through Embratel Participações S.A. and its subsidiaries. Throughout this registration statement, we refer to Embratel Participações S.A. and, where the context requires, its consolidated subsidiaries, as Embratel.

 

   

Through Embratel, we are one of the leading providers of telecommunications services in Brazil. Our principal service offerings in Brazil include domestic and international long distance, local telephone service, data transmission and other communications services, though Embratel is evolving from being a long distance revenue-based company to being an integrated telecommunications provider. Through Embratel’s high-speed data network, we offer a broad array of products and services to a substantial number of Brazil’s 500 largest corporations. In addition, through Embratel’s partnership in Net, the largest cable television operator in Brazil, we offer triple play services in Brazil.

 

   

We operate in Colombia through Telmex Colombia, S.A. and several cable television subsidiaries that we have acquired beginning in October 2006 and whose network passes through more than four million homes. We offer voice, data and video transmission, Internet access, pay television and value added services.

 

   

In Argentina, we provide data transmission, Internet access, and local and long distance voice services to corporate and residential customers, data administration and hosting through two data centers and a yellow pages directory in print and on the Internet.

 

   

In Chile, we provide data transmission, long distance and local telephony, private telephony, virtual private and long distance networks, dedicated Internet access and high capacity media services to business customers, along with other advanced services. We service the residential market as well, with long distance telephone services, broadband, local telephony, a nationwide wireless network in the 3.5 GHz frequency using the WiMax technological platform and pay digital satellite television.

 

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In Peru, we provide data, Internet access, fixed-line telephony including domestic and international long distance, public telephony, and Internet hosting services to corporate and residential customers, as well as a yellow pages directory in print and on the Internet. The acquisition of cable television capabilities in Peru enables us to pass approximately 300,000 homes. We recently began offering wireless telephony using CDMA 450 MHz technology in the interior provinces of the country.

 

   

In Mexico, we publish yellow pages directories in print, which are available on the Internet, and publish white pages directories. In the United States, through Sección Amarilla USA, LLC, we publish Spanish-language telephone directories distributed in 19 states, which are also available on the Internet.

 

   

We entered the telecommunications market in Ecuador in March 2007 to offer a competitive alternative to local incumbents in the residential and business segments. We have begun offering a wide array of voice, data, and Internet services.

Telmex Internacional, S.A.B. de C.V. is a sociedad anónima bursátil de capital variable organized under the laws of Mexico, with its principal executive offices at Avenida de los Insurgentes 3500, Colonia Peña Pobre, Delegación Tlalpan, 14060 México, D.F., México. The telephone number of Telmex Internacional at this location is 52 (55) 5223-3200.

Our strategy

As an integrated telecommunications company with service offerings across Latin America, our strategy consists of:

 

   

building on our leading franchise in Brazil for long-distance services and leverage our leadership position by developing opportunities in related businesses;

 

   

continuing our focus on offering broadband services and local voice services;

 

   

developing value-added services for the corporate market;

 

   

growing our participation in the residential market in Brazil and Colombia through integrated Internet and voice services offerings and triple play services (which includes pay television, broadband Internet access and local and long distance voice services); and

 

   

developing triple play services in Peru, Chile and Ecuador.

In particular, in Brazil we believe that our brand name, reputation for quality service and ownership of Brazil’s only nationwide network combined with our technical capabilities provide us with a strong platform for growth. We expect to continue to use all available technologies to create access solutions for reaching our target customers and to develop new service offerings, with a particular focus on local telephony, broadband Internet and data offerings. We also plan to explore acquisition opportunities, capitalize on local and broadband data opportunities and analyze ways to expand our last mile access network to broaden our existing services and to develop complementary ones. In 2006, together with our investee Net, we launched triple play service for residential customers over Net’s cable network, using our network to provide voice services.

The Brazilian domestic and international long distance markets are increasingly open to full competition. Competitors have gained market share at our expense and are placing pressure on our prices

 

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and competing with us for desirable customers in the long distance and data businesses. In response to these competitive pressures, we are pursuing a marketing strategy to retain and increase our customer base in Brazil, including our local services customers, and further develop our service offerings with a focus on price clarity and appealing pricing.

History

Telmex Internacional was established on December 26, 2007 by means of a procedure under Mexican corporate law called escisión, by which Telmex split off its Latin American and yellow pages directory businesses. See “—The Escisión.” Telmex is a leading Mexican telecommunications provider with the most complete local and long-distance network in Mexico and also offers, among other services, connectivity, Internet access and interconnection services.

Embratel

We acquired Embratel in a series of transactions beginning in July 2004. As of March 28, 2008, we owned 98.1% of the outstanding voting stock and 97.9% of the outstanding non-voting stock of Embratel (98.0% of the total outstanding capital stock) as a result of transactions undertaken by Telmex from 2004 through 2007:

 

   

In July 2004, Telmex purchased 51.8% of the outstanding voting stock of Embratel from MCI for a cash purchase price of U.S.$400 million (P.5,144 million).

 

   

In December 2004, Telmex purchased additional voting stock through a tender offer for a total of U.S.$271.6 million (P.3,413 million).

 

   

Between March and May 2005, Telmex purchased new voting and non-voting stock in a capital increase of Embratel.

 

   

In October 2005, Telmex received new voting stock in exchange for Telmex’s capital stock of Telmex do Brasil, Ltda., or Telmex do Brasil, and its 37.1% interest in Net.

 

   

In May 2006, Telmex began a cash tender offer for any and all publicly held shares of Embratel’s voting and non-voting stock at a price of 6.95 Brazilian reais per 1,000 shares, plus an adjustment at a monthly index published by the Central Bank of Brazil. In November 2006, Telmex acquired all tendered shares of Embratel’s voting and non-voting stock, including non-voting shares represented by ADSs, increasing Telmex’s interest in Embratel to 98.0% of the outstanding voting stock and 94.7% of the outstanding non-voting stock. As required under Brazilian law, Telmex continued to purchase shares at the tender offer price following the expiration of the tender offer through June 2007.

Other Latin American Telecommunications and Cable Businesses

In addition to the acquisition of Embratel, we also made the following significant acquisitions to expand operations into Latin America beginning in 2004:

 

   

companies that are now known as Telmex Argentina S.A., Telmex do Brasil, Ltda., Telmex Chile S.A., Telmex Colombia S.A. and Telmex Perú S.A. (holding the assets of AT&T Latin America Corp.) in February 2004;

 

   

PrimeSys Soluções Empresariais S.A., or PrimeSys, in November 2005;

 

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a non-controlling interest in the Brazilian cable television provider Net in 2005, which Telmex transferred to Embratel later in 2005; and

 

   

the subscribers, assets and a portion of the liabilities of multiple cable television providers in Colombia beginning in October 2006.

For a description of our other acquisitions, see Note 5 to our audited consolidated financial statements.

Yellow Pages Business

Our yellow pages business in Mexico is conducted through our subsidiary Anuncios en Directorios, S.A. de C.V., or Anuncios, which traces its history to 1897 and is the owner of the registered trademark “Sección Amarilla” in Mexico. Our yellow pages business in the United States is conducted through our subsidiary Sección Amarilla USA, LLC, acquired in October 2006 by Telmex. Our yellow pages offerings in Argentina and Peru first began in 2007 through our subsidiaries in those countries.

 

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Significant subsidiaries

The following table sets forth our significant subsidiaries as of the date of this registration statement. Our subsidiary Embratel also owns a 35.1% interest in Net, a provider of cable television, local telephone services and broadband Internet access services in Brazil, which we account for under the equity method.

 

Name of Company

   Jurisdiction of
establishment
   Percentage
of ownership
and voting
interest
 

Description

Controladora de Servicios

Telecomunicaciones, S.A. de C.V.

   Mexico    100.0%   Intermediate holding company

          Anuncios en Directorios, S.A. de C.V.

   Mexico    100.0       Producer of yellow and white pages directories in Mexico

Sección Amarilla USA, LLC

   Delaware      80.0       Producer of Spanish-language yellow pages directories in the United States

Embratel Participações S.A.

   Brazil   

  98.0    

  Intermediate holding company of domestic and international long distance, local and data services providers in Brazil

Empresa Brasileira de

Telecomunicações

S.A. –EMBRATEL

   Brazil      97.0(1)   Provider of domestic and international long distance, local and data services in Brazil

Star One S.A.

   Brazil      77.6(1)   Provider of satellite services in Brazil

PrimeSys Soluções Empresariais S.A.

   Brazil      97.0(1)   Provider of high level value-added services, such as net integration and outsourcing

Telmex do Brasil, Ltda.

   Brazil      98.0(1)   Provider of telecommunications services to corporate customers in Brazil

Metrored Holdings S.R.L.

   Argentina      95.0       Intermediate holding company of providers of telecommunications services in Argentina

Telmex Argentina S.A.

   Argentina      95.3       Provider of telecommunications services to corporate customers in Argentina

Ertach S.A.

   Argentina      95.1       Provider of Internet access, and data and voice services in Argentina

Telmex Chile Holding, S.A.

   Chile    100.0       Intermediate holding company in Chile

Telmex Corp. S.A.

   Chile      99.7       Intermediate holding company whose subsidiaries provide long distance, Internet access and data network services in Chile

Telmex TV S.A.

   Chile    100.0       Provider of satellite television and Internet access services in Chile

Telmex Colombia S.A.

   Colombia    100.0       Provider of telecommunications services to corporate customers in Colombia

Superview Telecomunicaciones, S.A.

   Colombia      99.6       Cable television provider in Colombia

Telmex Hogar S.A.

   Colombia    100.0       Provider of cable television and Internet services in Colombia

TV Cable Telecomunicaciones S.A. E.S.P.

   Colombia    100.0       Provider of cable television and Internet services in Colombia

 

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Name of Company

   Jurisdiction
of
establishment
   Percentage
of
ownership
and voting
interest
 

Description

Network and Operation S.A.

   Colombia      100.0       Provider of cable television and Internet services in Colombia

The Now Operation S.A.

   Colombia      100.0       Editor of cable television programming magazine in Colombia

Megacanales S.A.

   Colombia      100.0       Producer of cable television content

Cablecaribe S.A.

   Colombia      100.0       Provider of cable television and Internet services in Colombia

Telmex Perú S.A.

   Peru      100.0       Provider of telecommunications services to corporate customers in Peru

Boga Comunicaciones, S.A.

   Peru      100.0       Provider of cable television in Peru

Ecuadortelecom, S.A.

   Ecuador      100.0%   Provider of telecommunications services in Ecuador

 

(1) Indirect interest held through Embratel Participações S.A.

Certain financial information by region

The following table sets forth selected financial information on our geographic segments for the year ended December 31, 2007, prepared in accordance with Mexican FRS and expressed in constant pesos as of December 31, 2007 and as a percentage of our total consolidated group.

 

     Year Ended December 31, 2007  
     (in millions of constant Mexican pesos as of December 31, 2007,
except percentages)
 
     Brazil     Other countries     Total(1)  

Operating revenues

   P. 55,457    81. 8 %   P. 12,452    18. 4 %   P. 67,760    100. 0 %

Operating cost and expenses

     48,123    83. 8       9,455    16. 5       57,430    100. 0  

Segment assets(2)

   P. 134,688    89. 3 %   P. 16,186    10. 7 %   P. 150,874    100. 0 %

 

(1) After the elimination of intersegment revenues.

 

(2) Segment assets consist of property, plant and equipment (without deducting accumulated depreciation), construction in progress, advances to suppliers and inventories for operation of the telephone plant. See Note 18 to our audited consolidated financial statements.

 

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OPERATIONS IN BRAZIL

We operate in Brazil through Embratel and its subsidiaries, offering a full range of telecommunications services to customers throughout Brazil. Embratel was founded in 1965 and later became the long distance subsidiary of Telecomunicações Brasileiras S.A. – Telebrás, or Telebrás, the Brazilian government-owned telephone company. In 1998, Telebrás was broken up into 12 new holding companies, including Embratel, which were then privatized. Embratel was granted the concession for domestic and international long distance services. Embratel is a public company in Brazil and its shares are listed on the São Paulo Stock Exchange. After the opening up of the Brazilian local service market to competition, Embratel began providing local telephone services in 2002. We currently own 98.1% of the outstanding voting stock and 97.9% of the outstanding non-voting stock of Embratel (98.0% of the total outstanding capital stock).

Revenues from our Brazilian operations in 2007 amounted to P.55,457 million. Of our total Brazilian revenues in 2007, approximately 68.0% was attributable to voice services, approximately 26.4% was attributable to data services and the remainder was attributable to other services. Voice services include domestic and international long distance and local service. We generate most of our voice services revenue from domestic and international long distance services. Residential customers generate the majority of our long distance revenues. Data services include data and Internet access services. Other services include television and radio transmission, mobile satellite communications services and call center services. Of our total Brazilian revenues in 2007, 60.8% was attributable to corporate customers and the remainder to residential customers.

Domestic long distance services

Through Embratel, we are one of Brazil’s major domestic long distance service providers. We provide intra-sectorial, intra-regional and inter-regional long distance services to corporate, residential and cellular customers throughout Brazil. Domestic long distance services accounted for 47.4% of Embratel’s total net operating revenues in 2007, 51.3% in 2006 and 54.3% in 2005.

The domestic long distance services that we provide throughout Brazil include the following:

 

   

Inter-regional long distance. Inter-regional long distance service consists of all calls that originate within one and terminate in another of the three fixed-line regions and all calls that originate in one and terminate in another cellular region.

 

   

Intra-regional long distance. Intra-regional long distance service consists of all calls that originate in one local calling area within a fixed-line region and terminate in another local calling area within the same fixed-line region. A local calling area is generally equivalent to a municipality, and there are usually several local calling areas within an area code.

 

   

Intra-sectorial long distance. Intra-sectorial long distance service consists of all calls that originate in one local calling area within a fixed-line sector and terminate in another local calling area within the same fixed-line sector. A fixed-line sector is generally equivalent to a state.

Domestic long distance rates

Rates for domestic long distance calls are based on the time of day and day of the week when a call is made, the call’s duration and the distance covered. The rates for domestic long distance calls are established by Anatel and are uniform throughout Brazil. There are currently 16 domestic long distance tariffs, based on combinations of four distance categories and four day/time categories.

 

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Embratel’s concession, effective as of January 1, 2006, establishes a mechanism of annual rate adjustment for local domestic long distance and international long distance services, which is based on rate baskets and adjustments for inflation and productivity. Any other adjustment to our domestic and international long distance switched fixed telephone services is subject to the approval of Anatel. See “—Regulation.”

Our rates are driven primarily by marketing and competitive considerations. In 2005, our strategy was to refrain from increasing domestic long distance rates so we did not implement a tariff increase or request an adjustment from Anatel. In 2006 and 2007, our strategy was to reduce some of the tariffs we charge. As a result, our average domestic long distance rate decreased by 1.3% in 2006 and 1.5% in 2007.

While these rates apply to basic plan customers, we have developed a variety of promotional and customer retention programs since 2000 that enable many of our customers to obtain long distance packages that may include lower rates and/or subscription fees. These programs offer discounts from Anatel-approved rates and are designed to increase our market share and promote usage of the “21” carrier selection code. In addition, we offer discounts to corporate customers on a case-by-case basis. Embratel also has specific campaigns that target specific groups of our corporate customers (e.g., small and medium sized businesses or regional groups). Our customer retention and discount programs are designed to allow us to build customer loyalty and to improve collections by identifying our customers before we bill them for our services.

The majority of our customers for long distance voice services are not “pre-subscribed.” In other words, customers do not register with us as customers before we begin providing services to them. Instead, each time a customer initiates a long distance domestic or international call from either a fixed or a mobile terminal, the customer chooses whether to use our services by dialing the “21” selection code or to use the services of another service provider by dialing a different code.

International long distance services

Through Embratel, we are one of the major providers of international long distance service in Brazil and we believe that we operate the largest long distance telecommunications network in Latin America. We also have ownership interests in several undersea cables between South America and the rest of the world through cable consortia. International long distance services generated 5.8% of Embratel’s total net operating revenues in 2007, 6.2% in 2006 and 8.6% in 2005.

Revenues generated by international long distance services are primarily derived from:

 

   

charges for international outgoing calls originating in Brazil; and

 

   

net settlement payments made by other international telecommunications operators for incoming calls carried through our network in Brazil.

International long distance rates

Rates charged for outgoing international calls vary depending on the time of day and the day of the week when a call is made, the duration of the call, the country of destination and whether special services, such as operator assistance, are used. Maximum rates for our international long distance service

 

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are established by Anatel under the price cap mechanism set forth in our concession and are tied to the rate baskets and the adjustments for inflation and for productivity described under “—Domestic long distance services—Domestic long distance rates.” See also “—Regulation—Rates.” In recent years, we have substantially reduced rates for outgoing international calls, partly due to the periodic application of productivity factors (resulting in a downward adjustment to the price caps established by Anatel in the concessions). We have also reduced rates in response to competition. In 2007, rates for outgoing international calls decreased by 1.5% on average. In 2006, rates for outgoing international calls decreased by 10.0% on average.

Net settlement payments

Revenues from international long distance services also reflect payments under bilateral agreements between Embratel and foreign state-owned or private telecommunications providers, which are influenced by the guidelines of the international tariff and trade regulations and cover virtually all international calls to and from Brazil. These agreements set forth the settlement rates of payment from Embratel to foreign carriers for the use of their facilities in connecting international calls originating in Brazil and from foreign carriers to Embratel for the use of its facilities in connecting international calls originating abroad. The settlement rates under these agreements are negotiated with each foreign carrier and are based on foreign currency. They are charged or paid on a net basis. Various factors could affect the amount of net settlement payments from foreign carriers to Embratel in future years. These factors include unauthorized international traffic (commonly known as bypass), increases in the proportion of outgoing as opposed to incoming calls, the volume of minutes included in the bilateral agreements, fluctuations of the Brazilian real versus the currencies involved, changes in market rates and modifications to the tax policies affecting the transfer of payments related to telecommunication payments abroad.

Data transmission and Internet access services

Through Embratel, we are Brazil’s leading provider of data and Internet services. Our data transmission network, which incorporates fiber optic, digital microwave, satellite and copper transmission technology, allows us to provide a range of value-added broadband data services to a client base that includes a substantial majority of Brazil’s top 500 corporations. Our data transmission services include the renting of high-speed data lines to businesses and to other telecommunications providers, satellite data transmission, Internet services, packet-switched data transmission, frame relay and message-handling systems. In November 2005, Embratel bolstered its offerings of value-added services through the acquisition of PrimeSys, a leading provider of managed telecommunication network operations and data outsourcing, for approximately U.S.$100 million. Data transmission services accounted for 26.4% of Embratel’s total net operating revenues in 2007, 27.5% in 2006 and 24.3% in 2005.

Embratel also operates a free Internet service provider called Click21, which provides us with an easily accessible channel for the marketing and sale of voice services to residential customers and small businesses. At December 31, 2007, Click21 had approximately 2.5 million subscribers, compared to approximately 1.8 million subscribers at December 31, 2006.

Data transmission services and rates are not regulated, though a license is required. See “—Regulation” for more information concerning regulation of our other operations.

In recent years, we have reduced rates per 64 Kbps billed-line equivalent, partly due to new technologies enabling telecommunications companies to provide more bandwidth capacity at lower costs and also in response to more competition in this market. In 2007, rates for 64 Kbps billed-line equivalents decreased by 22.3% on average, and in 2006 our rates for 64 Kbps billed-line equivalents decreased by 8.5% on average.

 

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Local services

In the fourth quarter of 2002, Embratel began providing local telephony services, and in 2007 we served 415 Brazilian cities, including all major Brazilian metropolitan areas. We are the only local service provider present in all Brazilian states. Local services represented 14.9% of Embratel’s total net operating revenues in 2007, 11.1% in 2006, and 9.0% in 2005.

In December 2003, Embratel acquired Vésper S.A. and Vésper São Paulo S.A. and their subsidiaries, together Vésper, wireless local loop, local services and broadband data operators with operations in São Paulo and 16 other Brazilian states. This enabled us to further broaden and accelerate the rollout of our local service offerings. We market our local service to residential customers under the name Livre, which had 1.4 million users as of December 31, 2007, and our local service to business customers under the name VipLine.

We offer voice over Internet protocol, or VoIP services, to VipLine customers as well as under the name Net Fone via Embratel, in conjunction with Net. See “—Equity investment in Net Serviços de Comunicação S.A.”

Our local rates are affected by marketing and competition and vary by product. In 2005, we increased Livre local rates, on average, by approximately 39%. During 2006, we increased Livre rates, on average, by 4%, to remain competitive with other providers. During 2007, we increased Livre rates, on average, by 25%. Net Fone via Embratel rates have not changed since its launch in March 2006.

Satellite services

Through Embratel’s subsidiary Star One, we are Brazil’s leading provider of satellite solutions, including space segment provision, broadband and network services. Star One currently has five satellites in orbit. Star One’s fleet covers the entire territory of South America and part of Florida. We plan to launch an additional satellite during the second quarter of 2008. Star One also owns 11 transponders on board of NSS-10 (originally AMC-12, and referred to as Star One C-12) operated by SES New Skies. We own 80.0% of the capital stock of Star One; the remainder is owned by GE Satellites Holdings LLC. We include revenues from satellite services as revenues from corporate networks.

Star One’s principal customers include television broadcasters, cable operators, telecommunications service providers, and financial and governmental institutions. Star One also provides satellite services to the Brazilian military. A significant amount of Star One’s satellite capacity is leased directly to Embratel for its telecommunications services. Embratel’s telecommunications services use this capacity, together with equipment and software, to provide data, voice and other telecommunications services to our customers.

Other services

In addition to long distance, data transmission and local services, we provide other services including text, telex, sound and image transmission and maritime communications. We also provide call center services through BrasilCenter to related third parties, including the Brazilian subsidiaries of América Móvil that operate under the brand name Claro and our investee Net. The revenues from other services accounted for 3.6 % of Embratel’s total net operating revenues in 2007, 1.8% in 2006 and 1.8% in 2005.

 

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Equity investment in Net Serviços de Comunicação S.A.

Embratel owns a non-controlling interest in Net, the largest cable television operator in Brazil. Net has grown substantially as a result of an increase in subscribers as well as the acquisition of Vivax S.A., or Vivax, in two steps in December 2006 and June 2007. As of December 31, 2007, Net had approximately 2.5 million pay television subscribers (a 16% increase over year end 2006), 1.4 million Internet broadband subscribers (a 65% increase over year end 2006) and 567,000 voice service subscribers (a 212% increase over year end 2006). Net had revenues of P.15,498 million and net income of P.1,069 million in 2007.

In addition to cable television services, Net also offers the Net Fone via Embratel voice service, integrated with video and broadband data services, as part of the triple play package provided jointly with Embratel. This service had approximately 561,000 subscribers as of December 31, 2007. The product, which uses VoIP technology, works like a conventional phone line and allows the user to make local, long distance and international calls to any telephone or handset, which calls are charged per minute and not by pulse. In addition, subscribers can apply their minimum monthly fee to make any type of call, including local and long distance calls and calls to mobile phones. This service is primarily directed to the residential market, and is offered with a minimum monthly subscription fee of R$24.90 per month. As of December 31, 2007, the service is available in 68 cities, including São Paulo, Campinas, Santos, Rio de Janeiro, Porto Alegre, Curitiba, Florianópolis, Belo Horizonte and Brasília.

Embratel’s total direct and indirect interest in Net is 35.1%. We originally acquired the interest in Net from Globo Comunicações e Participações S.A. and two related entities (together, Globo) in 2005 and increased it in successive transactions with Globo in 2006 and 2007, for an aggregate purchase price of U.S.$492.2 million. Our interest was subsequently diluted when Net issued shares to acquire Vivax.

A majority of the voting shares of Net is owned by GB Empreendimentos e Participações S.A., or GB. Globo owns a majority of the voting interests in GB. Globo also owns Net Brasil S.A., a company with which Net has (a) a long-term agreement to purchase Brazilian source programming and (b) a licensing agreement for the right to use the “Net” brand name through 2015.

Under current Brazilian law governing cable operators, Embratel is not permitted to control Net because Embratel is not under Brazilian control. If Brazilian law changes to allow Embratel to own a controlling interest in Net, Embratel (which currently owns 49% of the voting interests and all of the non-voting interests in GB) has the right to purchase an additional interest in GB to give it control of 51% of the voting shares of Net, and Globo has the right to cause Embratel to purchase such interest.

Direct billing and collections

We directly bill our telecommunications and related services, including collect-calling services and standard voice services, to a portion of our end-user customers. Direct billing results in the risk of bad debts. Since 2000, we have taken a number of measures to reduce our bad debt expense, including:

 

   

Co-billing. In 2002, Embratel implemented co-billing arrangements with three local operators to allow these operators to bill Embratel’s long distance calls originated by their local customers. In 2007, we had co-billing arrangements with approximately 15 operators, seven fixed operators and eight mobile operators. Since 2006, Embratel also has incoming co-billing service, which allows us to bill on behalf of other long distance operators for calls that originate on an Embratel local customer’s line.

 

   

Use of call centers. We make proactive use of our call centers in our collection efforts.

 

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Collections system. In 2002, we implemented the CACS Telecom System, a simple, automated collections system that enables us to combine different collection strategies for different customer profiles. In 2007, we continued to implement improvement in collections systems, such as using collection letters that consolidate the debts of our corporate clients.

 

   

Anti-fraud system. This system is capable of monitoring 60 million call detail reports per day, including all local, domestic and international long distance traffic, and is capable of performing real-time call monitoring behavior analysis and scenario investigation, using artificial intelligence.

 

   

Use of third-party credit collection firms. We use third-party collection firms to collect overdue charges from our customers.

 

   

Customer Data System. In the third quarter of 2006, a new customer data system called CCC was implemented. The system allows for faster updating of information, flexibility in customer account structure, quality improvement and improved payment of taxes across the different Brazilian states.

Network and facilities

Embratel owns the largest long distance telecommunications network in Latin America and the largest network of broadband fiber optic transmission systems in Brazil. The network, which connects all of the regional fixed-line and cellular operators throughout Brazil, uses a 100% digital switching system for voice and data services, and packet-switched data transmissions in asynchronous transfer mode, or ATM, and frame relay networks for data and Internet access services. The domestic long distance and international transmission facilities extend to all 26 states and the Federal District of Brazil and include fiber optic, digital microwave, satellite and copper wireline networks.

Domestic long distance and local metropolitan network

We are the principal provider of high-speed data transmission and Internet service in Brazil, with the largest national network of fiber-optic transmission system. We have 36,000 kilometers of cable in a mesh network that has three or more outlets with a capacity of 963 Gbps. We use a 100% digital switching system for voice and data services, and we use packet-switched data transmissions in ATM, frame relay networks and Internet services. Our Internet backbone is the largest in Latin America with 65 Gbps capacity distributed in 1,200 POPs and 40 routing centers.

We have a local metropolitan digital fiber networks with 4,200 kilometers of cable in the main cities in Brazil and we offer direct wireline or wireless connections to businesses in those cities. We are implementing fiber extensions to commercial buildings connected to metropolitan rings, providing high quality direct connections. We have made the modifications necessary to enable our telephony networks to use Net’s coaxial cable networks to provide telephony services and we launched local telephony services for Net’s broadband customers.

We use long distance microwave systems, with a total range of 16,254 kilometers, in areas where installation of fiber cables is difficult. These long distance microwave links offer alternative routes to the fiber network. As a complement to the long distance microwave and fiber networks, we also use five satellites to provide services to remote locations within the country.

 

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We offer local telephony services to our residential customers using the Code Division Multiple Access (CDMA) digital wireless technology. We also provide wireless broadband services in selected areas in the city of São Paulo using CDMA 1xRTT technology.

We have licenses to use the 3.5 GHz frequency with nationwide coverage for the implementation of WiMax technology, which we plan to introduce in 2008 with the goal of providing new service options and access cost reductions via wireless broadband transmission to the homes and offices of our customers.

International network

Embratel’s submarine cable network reaches all continents through 18 different cable systems in which it has various ownership interests. Also, Embratel participates in the Telmex International Regional Network to offer seamless solutions for the most important countries of North and South America. To complement and diversify the international network and increase its global service capacity, Embratel leases satellite capacity from international satellite systems in a cost-effective manner. The International Internet Backbone has 6.9 Gbps of capacity with transmission diversity, providing highly reliable international Internet Protocol, or IP, services to our customers.

Satellite infrastructure

Star One currently operates an earth station in Guaratiba, located in the state of Rio de Janeiro. This station, activated in 1985, is ISO certified and controls the operations of its Brasilsat B-1, B-2, B-3 and B-4 satellites and its Star One C-1 satellite. Embratel has a back-up satellite earth station in Tanguá, also in the state of Rio de Janeiro. Both earth stations are used for satellite operations and control as well as for satellite communications. A third earth station, Mosqueiro, is located in the north of Brazil.

Satellites have a contractual life, based on the expected duration of the satellite’s fuel. We have a program to replace satellites that are nearing or have reached the end of their contractual lives. In November 2007, Star One launched the Star One C-1 satellite to replace the Brasilsat B-2 satellite. Star One C-1 is the first of the new generation of “C” satellites, providing coverage over South America and part of Florida. Brasilsat B-1, which covers all of Brazil, reached the end of its contractual life in September 2006 and was replaced, on an interim basis, by Brasilsat B-4. We expect Star One to launch Star One C-2 during the second quarter of 2008 in order to permanently replace Brasilsat B-1. Star One C-2 will provide coverage over Brazil, South America, Mexico, the west coast of the United States and part of Florida. In 2007, the Brasilsat B-1 was placed in inclined orbit mode and the Brasilsat B-2 is expected to be operating in inclined orbit during the second quarter of 2008. The contractual life of Brasilsat B-3 is until October 2010.

The overall cost of the Star One C-1 was U.S.$278.7 million, U.S.$185.2 million of which has been financed under a credit agreement supported by the French export credit agency (COFACE – French Foreign Trade Insurance Company). The cost of the Star One C-2 is estimated to be approximately U.S.$190.0 million, U.S.$136.5 million of which is being financed under a credit agreement also supported by COFACE.

Competition

The strongest operators in Brazil’s telecommunications market are the companies that were split off from Telebrás, the former government-owned telephone company, upon its privatization. These companies include Telefónica S.A., or Telefónica, Brasil Telecom S.A., or Brasil Telecom, and Oi Participações S.A., whose service in Brazil is under the brand name Oi, and Embratel. Following the

 

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breakup and privatization of Telebrás, three “mirror companies” were created by the auction of mirror licenses to provide local services over public switched networks in the same geographic areas served by the incumbent carriers. In 2003, Embratel acquired Vésper S.A. and Vésper São Paulo S.A., two of the three mirror companies. Global Village Telecom holds the third mirror license for local service. In the case of domestic and international long distance service, our competitor Intelig holds a mirror license.

Since 2002, the Brazilian federal government has authorized Anatel to grant an unlimited number of authorizations for the provision of any type of telecommunications service. Embratel was granted a nationwide license in August 2002 to provide local telephone service after it met certain universal service requirements.

Our principal competitors in Brazil vary by region and type of service. In northern and eastern Brazil, we compete primarily with Oi and CTBC Telecom for local services and Oi and Intelig for long distance services. In São Paulo, we compete primarily with Telefónica for local services and Telefónica and Intelig for long distance services. In southern and western Brazil, we compete primarily with Brasil Telecom and Global Village Telecom for local services and Brasil Telecom and Intelig for long distance services. There are no official statistics we can use to determine our market shares, but we prepare estimates based on public reports of revenues. In local service, market shares vary by area, but for the total nationwide market we estimate that in 2007 our share was between 5% and 6%, while Oi and Telefónica each had more than one-third of the total market for local service and Brasil Telecom had nearly one-quarter. In long-distance service, we estimate that in 2007 Embratel had (a) approximately 40% of the market in northern and eastern Brazil (with Oi having the balance); (b) approximately 38% of the market in São Paulo (with Telefónica having the balance) and (c) approximately 32% of the market in southern and western Brazil (with Brasil Telecom having the balance).

In addition, we have experienced competition for the provision of international long distance service from companies outside Brazil known as telephone service resellers. Telephone service resellers provide customers with lower international rates by offering international long distance voice services using data protocols in Brazil. Initially, these companies provided services without the required public telephony authorizations from Anatel. However, as licenses have become available, several of these companies have acquired them and become regulated providers.

Regulation

The Brazilian Telecommunications Law (Lei Geral das Telecomunicações Brasileiras) provides a framework for telecommunications regulation. Pursuant to Article 8 of the Telecommunications Law and Decree No. 2,338 of October 7, 1997, the primary regulator of Embratel is Anatel. Anatel has the authority to propose and issue regulations that are legally binding on telecommunications services providers. Any proposed regulation of Anatel is subject to a period of public comment, which may include public hearings. Anatel’s actions may ultimately be challenged in Brazilian courts.

Concessions and authorizations

Embratel holds a domestic long distance concession and an international long distance concession, as well as authorizations to provide local and satellite services. Embratel’s concession for the provision of domestic and international long distance service was renewed on December 22, 2005, and will expire on December 31, 2025. Anatel’s regulations provide for possible revision every five years to take into account changed conditions and reconsider universal service obligations and quality targets. The initial grant of the concession to Embratel did not require payment of a fee. Beginning January 1, 2006, however, Embratel is required to pay a fee every two years during the term of the concession equal to 2% of the annual net revenues from the provision of long distance services in the prior year (excluding taxes and social contributions).

 

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Under the terms of the concession agreements effective January 1, 2006:

 

   

All operators to provide co-billing under equal treatment terms. The terms governing co-billing have been established through a public comment process.

 

   

Since April 2006, new regulations guarantee effective accounting separation for each service.

 

   

The General Plan of Competition, introduced in the concession and pending promulgation by Anatel, will set forth rules designed to enhance competition in the local fixed switched telephony market.

Satellite services

Star One’s authorizations for satellites B-1, B-2, B-3 and B-4 were renewed for 15-year terms in December 2005. Star One’s authorizations for satellites C-1 and C-2 were granted in 2003, and each has a 15-year term. Anatel has also granted Star One 15-year authorizations for two new satellites in 2006 and 2007.

Obligations of telecommunications companies

Service and quality targets

Since the privatization of the Brazilian telecommunications system, concessionaires have been required to meet certain universal service and quality targets. Failure to meet these targets carries the possibility of fines and penalties from Anatel.

As provided for in the concession and the General Plan of Telephony Universalization Goals, Embratel installed 1,618 public pay telephones to promote universal service.

Telecommunications providers are subject to the quality targets set forth in the new General Plan on Quality. This plan sets forth a series of service quality obligations that are incorporated into the concessions.

Failure to fulfill our quality of service obligations could lead to the imposition of fines and penalties on Embratel by Anatel. There are a variety of external factors that may impede our ability to fulfill our obligations. Because Embratel’s network connects with those of regional fixed-line operators, regional cellular operators and foreign operators, the quality of service it provides may also be significantly affected by the quality of the networks on which calls originate or terminate.

Interconnection

All telecommunications networks are required to provide interconnection upon request. While the terms and conditions of interconnection are negotiated between the parties, interconnection tariffs are subject to a price cap established by Anatel. Rates below the cap may be freely negotiated between the parties. If a company offers an interconnection tariff below the price cap, it must offer that price to any other party requesting interconnection on a non-discriminatory basis.

 

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Co-location

Co-location means that a party requesting interconnection may place its switching equipment in or near the local exchange of the network operator whose network the requesting party wishes to use and may connect to the network at this point of presence. Co-location arrangements are currently negotiated directly by the parties. Anatel declared that co-location of network elements and services by operators that provide network elements and services is obligatory according to the regulation currently in place. However, the regulation does not determine which network elements and services are to be co-located or how co-location should occur.

Unbundling

In May 2004, Anatel issued an order establishing rules for unbundling of local telephone networks, which requires the three main incumbent telecommunications service providers (Oi, Brasil Telecom and Telefónica) to make their networks available to other providers, including Embratel. The unbundling order also establishes a time by when service providers must comply with the order to provide these services and addresses related matters such as co-location space requirements. However, Anatel has not yet set final unbundling rules or fixed rates for full unbundling.

Number portability

Number portability is the ability of a customer to move to a new home or office or switch service providers while retaining the same telephone number. Although full implementation will not occur until March 2009, operators have already started implementation activities.

Rates

Embratel’s concession establishes a mechanism of annual rate adjustment, based on rate baskets and an adjustment for inflation. Anatel defines rate baskets for local, domestic long distance and international long distance services. While Anatel caps the weighted percentage increase for the entire basket, tariffs for individual services within the basket may be increased at Embratel’s discretion. Rates for data transmission services are not regulated.

Under the concession contracts, the X Factor, which is applied to public rates, and is used to adjust downward the inflation-adjusted price cap to ensure productivity gains, will no longer be pre-set. Instead, Anatel will calculate productivity factors for each concessionaire. For Oi, Brasil Telecom and Telefonica, Anatel will derive an average after calculating these productivity factors. If the concessionaire’s productivity factor exceeds the sector average, then its own productivity factor will apply. If the concessionaire’s productivity factor is lower than the sector average, the average productivity factor will apply. Since Embratel’s business profile is different from that of the other concessionaires, its own productivity factor will apply to its rate increases. According to the current legislation, only half of the productivity adjustment will be transferred to the consumer while the rest remains with the concessionaire.

Network usage charges or interconnection rates

Other telecommunications companies that wish to interconnect with and use Embratel’s network must pay certain fees, including a network usage fee. The network usage fee is subject to a price cap set by Anatel. The price cap for the network usage fee varies from operator to operator based on the underlying cost characteristics of each company’s network. The fee is charged on a per distance and/or per minute of use basis that represents an average charge for a basket of network elements and services.

 

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Taxes and duties on telecommunications services

In addition to the taxes described under “Item 5,” the cost of providing telecommunications services includes a variety of taxes and duties.

State taxes and duties

The principal tax imposed on telecommunications services is a state-level value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços (ICMS). Each Brazilian state imposes its own tax rate on gross revenues derived from telecommunications services, which varies from state to state and averages 26%.

Federal taxes and duties

The principal taxes collected on gross revenues include:

 

   

Programa de Integração Social (PIS). PIS contributions are applied at a rate of 0.65% on gross revenues derived from telecommunications services.

 

   

Contribuição para Financiamento da Seguridade Social (COFINS). COFINS contributions are applied at a rate of 3.0% on gross revenues derived from telecommunications services.

The principal taxes collected on net revenues include:

 

   

Fundo de Universalização dos Serviços de Telecomunicações (FUST) and Fundo para o Desenvolvimento Tecnologico das Telecomunicações (FUNITEL) taxes. These taxes are applied at a rate of 1% and 0.5% of net revenues, respectively.

 

   

Concession fee. Embratel is required to pay a fee every two years during the term of the concession equal to 2% of the annual net revenues from the provision of long distance services in the prior year (excluding taxes and social contributions). See “—Regulation—Concessions and authorizations.”

OPERATIONS OUTSIDE BRAZIL

We provide telecommunications services in Colombia, Argentina, Chile, Peru and Ecuador. We offer cable or satellite television in Colombia, Chile, Peru and Ecuador. Our yellow pages operations are carried out in Mexico, the United States, Argentina and Peru.

Colombia

We operate in Colombia through Telmex Colombia, S.A., or Telmex Colombia, and several other subsidiaries that we have acquired beginning in 2006. Revenues from our Colombian operations in 2007 amounted to P.2,695 million, of which pay television services constituted 34%, data 28%, Internet access 27%, voice services 5%, other services 3% and value-added services 3%. Of our total Colombian revenues in 2007, 61% was generated by cable television subsidiaries.

The main telecommunications regulatory authority in Colombia with respect to cable and broadcast television is the National Television Commission; the main regulatory authorities with respect to other telecommunications services are the Communications Ministry and the Telecommunications Regulatory Commission. Our main competitors in Colombia are Telefónica Telecom (a subsidiary of

 

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Telefónica, S.A.) Empresa de Telecomunicaciones de Bogotá S.A. E.S.P. – ETB and EPM Telecomunicaciones S.A. E.S.P., all of which offer fixed-line telephone service, Internet access, data services and cable television.

Telecommunications

Through Telmex Colombia, we provide business and residential services to customers by means of a metropolitan and inter-city fiber optic network. We provide cable television services, data and Internet access services, local, domestic and international long distance service, value-added services and video conferencing. At the end of 2007, Telmex Colombia was the first company that was not an incumbent operator to obtain a concession to provide long distance services.

Telmex Colombia provides services to the corporate segment and to small and medium sized businesses. Data and Internet solutions represent 55% of our total revenues in Colombia. During 2007, we continued the expansion of the metropolitan fiber optic network to improve quality in Colombia and provide more comprehensive coverage for our business customers, reaching 22 major cities with 5,400 km of cable that permits outflow to submarine cables. Growth in our small and medium sized businesses segment has resulted from the sales of broadband Internet service packages as well as an increase in service, due to our expansion from two local interconnected cities in 2006 to six interconnected cities in 2007. At year-end 2007, Telmex Colombia had 12,843 local telephone lines, a 157% increase compared to 5,000 lines at year-end 2006.

Cable Operations

Through our newly acquired cable television subsidiaries, we offer pay television, broadband Internet access with speeds from 150 Kbps to 4 Mbps, voice services in local fixed telephony and value-added services associated with VoIP, such as three-way calling, voicemail and caller identification. As a result of these acquisitions, we have coverage in 188 cities and towns, including the country’s major population centers, such as Bogotá, Medellin, Cali, Barranquilla, Bucaramanga, Cúcuta, Cartagena, Ibagué, Manizales, Pereira and Armenian. We had 4.1 million homes passed with our network across the country in 2007, an increase of 456% as compared to 2006, due mainly to our acquisitions. We estimate that our operations account for approximately 52% of the pay television market, 23% of the broadband Internet market and 2% of the local fixed telephony market based on number of subscribers in Colombia.

Of our total network, 27.3% of the capacity is bidirectional, meaning that data flows to and from the customer, allowing us to provide triple play services. In the key cities of Bogotá, Medellin and Cali, which represent more than 39% of Colombia’s population, 36.7% of our network in these markets is bidirectional. At the end of 2007, we had 98,000 triple play customers in Colombia.

We entered the cable television business beginning in 2006, and made the following acquisitions:

 

   

In October 2006 we acquired a 99.2% stake in Superview, a cable television provider in Bogotá, for U.S.$37 million.

 

   

In March 2007, we acquired 100% of TV Cable S.A. and its subsidiary, TV Cable Comunicaciones S.A. E.S.P., which provide cable television, Internet access and voice services in Bogotá and Cali, for U.S.$123 million.

 

   

In March 2007, we also acquired 100% of Medellin-based TV Cable del Pacífico S.A. E.S.P., or Cable Pacífico, a cable television and broadband Internet access provider with operations in nine departments of Colombia, for U.S.$113 million. In November 2007, TV Cable S.A. merged with Cable Pacífico, and the surviving company changed its name to Telmex Hogar S.A.

 

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In October 2007, through our subsidiaries we acquired for U.S.$345 million (subject to adjustment) several Delaware companies which in turn owned 100% of the assets and a portion of the liabilities of:

 

   

Unión de Cableoperadores del Centro, Cablecentro S.A., or Cablecentro (now operating as Network and Operation S.A.), a cable television services provider from which we also acquired 100% of its cable television subscribers;

 

   

Megainvest Ltda. (now operating as Megacanales S.A.), which produces content for cable television; and

 

   

Comunicaciones Ver TV, S.A. (now operating as The Now Operation S.A.), which publishes a television programming magazine.

In February 2008, after receiving approval of the Colombian competition authority, we acquired 100% of Cablecentro’s Internet subscribers.

In October 2007, we acquired for U.S.$51 million the subscribers, assets and a portion of the liabilities of Satelcaribe S.A. (now operating as Cablecaribe S.A.), a cable television services provider.

We plan to expand further, having agreed in February 2007, subject to regulatory approval, to acquire the subscribers, assets and a portion of the liabilities of Teledinámica S.A., Organización Dinámica, S.A. and Telebarraquilla S.A., cable television and Internet access providers in Barranquilla, for U.S.$31 million.

Argentina

In Argentina, we operate through Telmex Argentina S.A., or Telmex Argentina. As part of a corporate restructuring in 2007, Telmex Argentina absorbed our subsidiaries, Techtel LMDS Comunicaciones Interactivas S.A. and Metrored Telecomunicaciones S.R.L. In October 2007, we acquired 100% of Ertach S.A., or Ertach, for a purchase price of P.297.7 million (U.S.$28 million). This acquisition is subject to the authorization of Argentina’s competition commission.

In 2007, 42% of the company’s operational revenues in Argentina were attributable to voice services, 40% was related to data and Internet services, 10% was related to E-Business hosting and the remaining portion was related to other services.

Telmex Argentina provides data, Internet access and local and long-distance voice services to corporate and residential customers in Argentina, operates fiber optic rings in metropolitan areas, provides “last-mile” access to reach its customers and offers data administration and hosting through two data centers. We have also developed a new wireless network using pre-WiMax technology in the 3.3 GHz frequency band to provide wireless telecommunications services to small and medium-sized businesses. Telmex Argentina also provides a print and Internet yellow pages directory. See “—Yellow Pages Business.” Ertach provides Internet access and data and voice services through a wireless network integrating Wireless Local Loop (WLL) and WiMax technologies over the 3.5 GHz frequency band. Ertach’s network covers more than 160 cities and towns in Argentina.

 

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Telmex Argentina operates a local point-multipoint distribution service, or LMDS, and fiber optic network in Argentina, and provides voice, data, video and other telecommunications services. LMDS is a wireless service using radio signals to transmit voice, video signal transportation and data. Telmex Argentina also operates an international information center that monitors the services it provides to its international customers located throughout Latin America, which further improves service quality.

Telmex Argentina has a fiber optic network of over 8,500 km that covers many major cities in Argentina and reaches approximately 53% of the population. The voice network covers approximately 80 interconnected cities. During 2007, we built more than 800 km of fiber optic lines as part of a nearly 1,000 km project that will connect the major cities of the northeastern region of Argentina. Telmex Argentina also began laying fiber optic lines that will eventually connect operations in Argentina and Uruguay.

The main telecommunications regulatory authorities in Argentina are the Secretary of Communications (Secretaría de Comunicaciones) and the Communications Commission (Comisión de Comunicaciones), both under the authority of the Ministry of Federal Planning, Public Investment and Services of the National Government. Telefónica de Argentina S.A. and Telecom Argentina S.A. are Telmex Argentina’s main competitors. Several new entrants in the Argentine telecommunications market, such as Global Crossing S.A., Comsat S.A. and NSS S.A., also compete with Telmex Argentina in fixed-line telephones, public telephones and data and Internet access services.

In the second half of 2006, we began renegotiating the conditions of our interconnection contracts with the incumbent operators in Argentina, Telefónica de Argentina S.A. and Telecom Argentina S.A. These contracts regulate the terms and conditions of interconnection for local and domestic and international long distance telephony between telecommunications operators. We have requested the Secretary of Communications to make a determination as to interconnection rates.

Since June of 2007, we are required to pay a fee to the Universal Fund (Fondo Fiduciario del Servicio Universal), which is used to give underserved persons access to telecommunications services. This requirement requires that all telecommunications operators pay 1% of their revenues, determined after certain deductions.

Chile

We started operations in Chile in February 2004, with the acquisition of all of the assets of AT&T Latin America Corp., including AT&T Chile Holding S.A., renamed Telmex Chile Holding S.A., or Telmex Chile, which was organized as Telmex’s holding corporation in Chile. Additional acquisitions include the following:

 

   

In April 2004, we acquired approximately 40% of Chilesat Corp. S.A., or Chilesat, for P.619 (U.S.$47 million) and subsequently increased our interest to 99.3%. Thereafter, Chilesat’s name was changed to Telmex Corp. S.A., or Telmex Corp.

 

   

In August 2007, we acquired 100% of Zap Television Directa al Hogar Ltda., now operating as Telmex TV S.A., for P.57.4 million (U.S.$4.8 million). Telmex TV S.A. provides pay television services in Chile through satellite technology DTH (Direct to Home), which provides coverage throughout the entire Chilean territory.

Of our revenues from Chilean operations in 2007, 63.9% was attributable to voice services, 33.8% to data and Internet access services and the remainder to other services. In 2007, we estimate Telmex Corp. and Telmex Chile together had a market share of 31.4% in the domestic long distance market and approximately 16.6% in the international long distance market in Chile, based on revenues.

 

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Telmex Chile is a provider of advanced telecommunications services. To business customers in Chile, we provide data transmission, long distance and local telephony, private telephony, virtual private and long distance networks, dedicated Internet access and high capacity media services. We also offer other advanced services, such as network administration, videoconferencing, virtual PABX, Internet hosting as well as data center and contact center services and electronic billing, among others. In March 2007, Telmex Chile began to provide service to the small and medium sized businesses market, offering packaged WiMax technology. By December 2007, we had more than 10,000 broadband and telephony clients in this market, presenting an opportunity to introduce a multi-service package that includes broadband and Internet access services and different voice service for small and medium sized business.

In the residential market, Telmex Chile has expanded its focus from long distance services (where we have more than a third of the market), to services based on connectivity that utilize the WiMax network, with broadband, local telephony and pay television via satellite (DTH). As of December 31, 2007, we served 67,000 clients, representing 6% of the pay television market in Chile.

Our fiber optic network covers more than 4,600 kilometers of continental Chile, from Arica to Santiago, Santiago to Valparaiso and Santiago to Valdivia. In the southern regions of Chile and Isla de Pascua, we use a satellite platform. We also own and operate metropolitan fiber networks covering Santiago and Chile’s other major cities. In 2005, we introduced the first commercial 10-gigabit Metro Ethernet network in Santiago, which enables our network to offer integrated Internet Protocol, or IP, services to the corporate market, including VoIP services. During 2007, we expanded our Metro Ethernet infrastructure to offer services supported by DWDM technology, which is able to reach a maximum capacity of 400 Gbps. In addition to services supported by these technologies, we offer services through WiMax, xDSL, VSAT and SCPC among others. Local telephony services are provided in the 24 primary population centers.

The General Telecommunications Law of 1982, as amended, established the legal framework for the provision of telecommunications services in Chile. The law established the rules for granting concessions and permits to provide telecommunications services and for the regulation of rates and interconnection. The main regulatory agency of the Chilean telecommunications sector is the Ministry of Transportation and Telecommunications, which acts primarily through the Undersecretary of Telecommunications, or Subtel. We hold licenses to provide local fixed and wireless service in the 3.4 to 3.6 GHz frequency band throughout the country, domestic long distance and international long distance service, data services and value-added services.

We face competition in all of our business segments, and we compete with Telefónica CTC Chile (indirectly owned by Telefónica S.A.), Entel S.A. and five other carriers. This competition has been vigorous mainly in the corporate telecommunications market and in the international and domestic long distance markets since the implementation of the multicarrier system, which requires local telephone companies to provide facilities that allow long distance carriers to access the local telephone network on an equal basis. In pay television, we face a competition from VTR, Telefónica, Direct TV and other minor competitors.

Peru

Through Telmex Perú, S.A., we provide data, Internet access, fixed-line telephony (including domestic and international long distance), public telephony, and Internet hosting services. We serve corporate customers and residential customers in Lima and the interior of Peru through a fiber optic

 

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network and a last-mile wireless network in the 3.5 GHz band. In 2006, we extended our yellow pages directory operations to Peru. See “—Yellow Pages Business.” Of the revenues from our Peruvian operations in 2007, 48.5% was attributable to voice services, 34.4% to data and Internet access services, 5.6% to cable television and the remainder to other services.

In 2006, we acquired concessions to provide wireless access services in the 3.5 GHz band in Lima and eight provinces in Peru. We implemented 85% of the wireless access platform and began offering the services during the fourth quarter of 2006. In five provinces, the platform functions in the 10.5 GHz band, providing point-to-point access capabilities. This platform allows us to broaden our service offerings to small and medium-sized business customers and expand our metropolitan network coverage.

In 2006, we also completed our local Ethernet Metro Network installation plan, with 16 access nodes in Lima and eight outside of Lima, of which two are in the Amazon region, enabling us to offer higher data transport service quality as well as managed and value-added services to our customers. In addition, we completed the SDH Network for Metropolitan Transport in Lima, consisting of one main and five secondary rings.

In March 2007, we acquired 100% of Boga Comunicaciones S.A., or Boga, a cable television provider with operations in Lima and Chiclayo, for P.284.6 million (U.S.$25 million). In July 2007, we also acquired, through Boga, the assets of Virtecom S.A., a cable television company with a network that passes through residential areas in Lima, for U.S.$2 million. These combined networks are expected to pass 300,000 homes and will serve as the basis for providing double and triple play services in Peru.

We have completed the second expansion phase of our WiMax technology in Lima, which is similar to that in other provinces, using CDMA 450 MHz. We believe this will allow us to offer Internet packages and fixed telephony geared toward the small and medium sized businesses market.

The main telecommunications regulatory authorities in Peru are the Regulatory Body for Private Investment in Telecommunications (Organismo Regulador de la Inversión Privada en Telecomunicaciones, or OSIPTEL) and the Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones). Telefónica del Peru S.A., an affiliate of Telefónica, S.A., is our main competitor in fixed-line telephony, public telephony, data and Internet access services. Americatel Peru S.A., an affiliate of Telecom Italia, also competes with us in the fixed-line long distance market.

United States

Our yellow pages directory operations in the United States are described under “—Yellow Pages Business.”

Ecuador

In March 2007, we acquired 100% of Ecuadortelecom S.A., or Ecutel, for P.270.7 million (U.S.$24 million). Ecutel holds a concession to offer fixed-line telephony (including long distance), public telephony and data transmission services as well as a license to use the 3.5 GHz frequency band, which enables the deployment of WiMax technology. Our operations in Ecuador are substantially under development, though we plan to focus on offering our services to small and medium sized businesses as well as corporate customers.

We currently offer pre-WiMax, local and long distance telephony and Internet access in Guayaquil and Quito. In the fourth quarter of 2007, we began to construct an HFC network to provide triple play services, which will primarily be offered to small and medium sized businesses and residential customers.

 

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YELLOW PAGES BUSINESS

We offer yellow pages directory services in Mexico, the United States, Argentina and Peru. In Mexico, we operate our yellow pages business through Anuncios; in the United States, we operate through Sección Amarilla USA; in Argentina, Telmex Argentina provides services in Buenos Aires under the name Páginas Telmex; and in Peru, Telmex Perú provides services in the department of Lima y Callao under the name Páginas Telmex. In all of these markets, we provide print and digital products and services.

Print directories

We primarily provide yellow pages directories, and through an arrangement with Telmex, we also provide a white pages directory in Mexico.

Yellow pages

We offer two types of printed yellow pages directories: a complete yellow pages book and a two-column hand directory. The smaller edition is a complement to the larger book, and contains similar information. Basic listing in our yellow pages directories is provided at no charge and includes the name, address and telephone number of the business according to its classification. In addition, we sell paid advertising space on an annual basis in our directories and offer various advertising options to our clients. Directories are published on a 12-month cycle, with staggered publication times. We outsource the printing of our directories. In 2007, we produced approximately 18.3 million directories in Mexico (including white pages directories), 2.8 million in the United States, 800,000 in Argentina and 650,000 in Peru.

In Mexico, we have over 100 years of history of providing telephone directories under the brand name Sección Amarilla. In 2007, we published and distributed 127 directories covering different cities and regions within the country. In most cases, we combine yellow and white pages directories in the same book, and these are provided at no cost to fixed telephone line users. In Mexico’s three largest cities, Mexico City, Guadalajara and Monterrey, the yellow pages and white pages are provided in separate books.

In the United States, we began our directory business in October 2006 following our acquisition of an 80% interest in Cobalt Publishing LLC. Subsequent to the acquisition, Cobalt Publishing LLC was renamed Sección Amarilla USA LLC, or Sección Amarilla USA. Sección Amarilla USA publishes Sección Amarilla, a Spanish-language telephone directory with circulation in 19 states, of which our largest offerings are in California, Florida, New York and Texas, and through the Internet. Whereas Sección Amarilla offered 15 directories in 2006, most of which were published before we acquired Cobalt Publishing LLC, we offered 47 directories in 2007 and expect to offer 105 in 2008. In the United States, we identify Spanish-speaking zones and distribute our directories without charge to our advertisers and residents in these areas.

In Argentina and Peru, we began publishing yellow pages directories in 2007. Thus far, we have only offered one directory in each country.

 

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White pages

As a service to Telmex, we publish and distribute white pages directories in exchange for a fixed fee pursuant to our long-term contract with Telmex.

Internet yellow pages directory

In 1997, Anuncios began providing electronic directory services by establishing the Sección Amarilla website on the Internet (www.seccionamarilla.com). The web pages provide access to the information published in the print directories. The websites for Mexico, the United States, Argentina and Peru are similar and enable searches by geographic location, classification or business name. Maps accompany search results showing where a business is located. Beginning in 2001, we began selling advertising on our website.

In Mexico, our website had 17.6 million visits in 2007, an increase from the 16.3 million in 2006 and 15.0 million in 2005. Over the same period, page views of our website increased to 271.1 million in 2006 from 134.0 million in 2005, but decreased to 145.0 million pages views in 2007. The increase in page views from 2005 to 2006 resulted from a joint venture between Telmex and the Microsoft website (Prodigy MSN). Page view reduction in 2007 resulted from an improvement to our search engine, making searches more efficient.

SMS text-messaging services

We offer short text messaging (SMS) services to our customers. Through this service, potential clients of our advertisers can search for and access information through their mobile phones.

Advertising sales and marketing

We derive our revenues through the sale of print and electronic advertising. We sell a majority of our advertisements directly. Customers can advertise in a single directory, though some of our larger customers have national accounts in which they advertise throughout all directories in the territory. Print directory advertising remains the most important source of revenue, though increased access to the Internet might shift this result in the future.

Access to Telmex customer data base

We have a long-term, arm’s length arrangement with Telmex whereby we have access to the Telmex customer database for a fixed fee.

Competition

In Mexico, we are the main provider of yellow pages directories. In the United States, in many of our markets we are the only directory published in the Spanish language. Nevertheless, the U.S. directory advertising industry is highly competitive. We also compete with other types of media, including television broadcasting, newspaper, radio, direct mail, search engines and other Internet yellow pages.

 

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CAPITAL EXPENDITURES

The following table sets forth in constant pesos as of December 31, 2007, our capital expenditures for each year in the three-year period ended December 31, 2007.

 

     Year ended December 31,
     2007    2006    2005
     (millions of constant pesos as of December 31, 2007)

Access, infrastructure and local services

   P. 3,508    P. 1,680    P. 2,043

Network infrastructure

     4,359      2,291      2,001

Data services

     3,592      2,640      2,546

Satellite investments

     775      1,602      2,049

Other

     570      606      613
                    

Total capital expenditures

   P. 12,804    P. 8,819    P. 9,252
                    

Our capital expenditures increased by 45.2% in 2007, due primarily to our acquisition of cable operations in Colombia. In 2007, our consolidated capital expenditures totaled P.12.8 billion (U.S.$1.09 billion). Of our consolidated capital expenditures, our Brazilian operations represented 61.2% (P.7.8 billion or U.S.$721 million) and the remainder of our Latin American operations represented 38.3% (P.5.0 billion or U.S.$369 million).

We have budgeted capital expenditures in an amount equivalent to approximately P.12.5 billion (U.S.$1.1 billion) for the year 2008, including P.6.0 billion (U.S.$531 million) for Brazil, and P.6.5 billion (U.S.$572 million) for our other operations in Colombia, Argentina, Chile, Peru, Ecuador and the United States. Budgeted capital expenditures for 2008 exclude any other investments we may make to acquire other companies. For subsequent years, our capital expenditures will depend on economic and market conditions. Our budgeted capital expenditures are financed through operating cash flows and limited borrowing.

PLANT, PROPERTY AND EQUIPMENT

Our principal properties consist of the networks located in the South American countries in which our subsidiaries operate, including broadband fiber optic transmission systems, digital switching systems, cable television networks, a satellite network, submarine cables and related real estate. As of December 31, 2007, the net book value of our plant, property and equipment was P.50,494 million (U.S.$4,647 million).

Embratel’s properties comprise a majority of our plant, property and equipment and are located throughout Brazil, providing the necessary infrastructure to support local, nationwide long distance and international telecommunications. We conduct the majority of Embratel’s management functions from Rio de Janeiro, and Embratel owns and leases office space in other cities, including São Paulo, Porto Alegre, Belo Horizonte, Curitiba, Brasília, Salvador and Belém. Embratel’s network facilities are in good condition and are suitable to support the wide array of advanced communications services that we provide. Through Star One, Embratel also owns properties related to its space services, consisting primarily of satellites, along with miscellaneous administrative assets held by Star One.

Our properties located in Colombia, Argentina, Chile, Peru and Ecuador consist of transmission and switching networks with coverage in major cities, as well as administrative and customer service offices. Additionally, we have a cable television network in Colombia and Peru and a satellite television network in Chile. For our yellow pages business, we have administrative and customer service offices in Mexico and the United States.

 

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THE ESCISIÓN

The shareholders of Telmex decided to establish Telmex Internacional as a separate, publicly traded company to hold the shares of subsidiaries engaged in non-Mexican business and of subsidiaries engage in the yellow pages business. The primary purposes of the Escisión were:

 

   

to allow each company to operate more efficiently and at the right scale, in Mexico and abroad, in order to allow each of them to operate autonomously for administrative, commercial and financial purposes;

 

   

to improve the competitive position of each company; and

 

   

to tailor further the operations of Telmex in the Mexican telecommunications market, distinguishing its operations in the middle- and high-revenue markets, in which there is competition, from the low-revenue and rural markets, in which there is no competition.

The Escisión that established Telmex Internacional was conducted using a procedure under Mexican corporate law called escisión or “split-up.” In an escisión, an existing company is divided, creating a new company to which specified assets and liabilities are allocated. The shares of the new company are issued to the shareholders of the existing company, pro rata to their share ownerhip in the existing company. This procedure differs from the procedure by which a spin-off is typically conducted in the United States, where a parent company distributes to its shareholders shares of a subsidiary.

The Escisión was approved on December 21, 2007, by a single action of the shareholders of Telmex at an extraordinary meeting. The establishment of Telmex Internacional became effective on December 26, 2007 (the “Effective Date”), following certain corporate and administrative procedures relating to the shareholders’ resolution from the extraordinary meeting, including its registration with a Mexican notary public and in the Mexican Public Registry of Commerce as well as its publication in the Diario Oficial (Official Gazette).

In the Escisión, Telmex Internacional received the shares of an intermediate holding company called Controladora de Servicios de Telecomunicaciones , S.A. de C.V., or Consertel. Telmex Internacional itself did not receive any material assets other than the shares of Consertel, and it did not receive any liabilities. Consertel is the company through which Telmex previously held the shares of all its subsidiaries, and it underwent a separate escisión shortly before the Telmex Escisión, that left Consertel owning generally (a) the shares of Telmex’s subsidiaries operating outside of Mexico (directly or through intermediate holding companies), (b) the shares of the Telmex subsidiaries engaged in the Mexican yellow pages business (directly or through intermediate holding companies), and (c) liquid assets with a total value of approximately U.S.$2 billion (directly or through subsidiaries). All Consertel’s other assets and liabilities were conveyed to a new Telmex subsidiary. These consisted primarily of shares of subsidiaries and affiliate investees that were not transferred to Telmex Internacional, and certain related liabilities. All the businesses of Telmex Internacional are conducted by separate operating subsidiaries, and the continuity of existence of those entities was undisturbed by the Escisión.

Mexican law provides a mechanism for a judicial challenge to an escisión, but such a challenge must be brought within the period of 45 days following the registration of the new company created in the escisión. That period has now passed for both the Escisión and the earlier escisión of Consertel.

Mexican law also provides that if an obligation is assumed by the new company in an escisión, and the new company fails to perform, a claimant may make a claim against the old company for up to

 

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three years unless the claimant expressly consented to the escisión. Telmex Internacional received assets but no liabilities in the escisión, so Telmex Internacional itself does not have any obligations to which these provisions are applicable. Consertel, which is a subsidiary of Telmex Internacional, will be subject to the possibility that a claimant against the new Telmex subsidiary created in the Consertel split-up might seek to assert its claim against Consertel if that new Telmex subsidiary defaults. We consider the risk of such a claim to be remote, and Telmex has agreed to indemnify Telmex Internacional against any such claim.

The Escisión might have constituted or led to a default under some agreements of Telmex, Embratel and other subsidiaries that were transferred to us in the Escisión. Telmex and such subsidiaries obtained waivers or consents under all such agreements. The Escisión also required Telmex to obtain authorizations or approvals from, or otherwise to make submissions to, regulatory authorities in Mexico. All such proceedings have been completed.

Following the Escisión, there will be a variety of contractual relationships between Telmex Internacional and Telmex, both to accomplish the separation of the Escisión and to provide for ongoing commercial relationships. These include:

 

   

agreements relating to the implementation of the Escisión;

 

   

certain transitional arrangements that will continue while Telmex Internacional develops independent capabilities; and

 

   

completion of international traffic, publishing and distribution of telephone directories and access to Telmex’s customer database, and use of each other’s services, generally on terms similar to those on which each company does business with third parties.

See “Related Party Transactions” under Item 7.

Delivery of Telmex Internacional Shares

As of the Effective Date, the capital stock of Telmex Internacional was issued and outstanding and each holder of Telmex shares became the owner of an equal number of Telmex Internacional shares of the corresponding class. On a date shortly following the effectiveness of this registration statement (the “Share Delivery Date”), each outstanding instrument representing shares of Telmex will be exchanged for separate instruments representing shares of Telmex and shares of Telmex Internacional, respectively.

During the period from the Effective Date until the Share Delivery Date, the Telmex shares and the Telmex Internacional shares trade together on the Mexican Stock Exchange and clear together through S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V., or Indeval, a privately owned securities depositary that acts as a clearinghouse for Mexican Stock Exchange transactions (through which most beneficial owners hold their interest in Telmex and Telmex Internacional shares).

Beginning on or about the Share Delivery Date, we also expect that:

 

   

Telmex Internacional A Shares and L Shares will commence trading on the Mexican Stock Exchange.

 

   

Telmex A Shares and L Shares will trade on the Mexican Stock Exchange without the Telmex Internacional Shares.

 

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Delivery of Telmex Internacional ADSs

Beginning on the Effective Date, each Telmex L Share ADS has represented, in addition to 20 Telmex L Shares, 20 Telmex Internacional L Shares, and each Telmex A Share ADS has represented, in addition to 20 Telmex A Shares, 20 Telmex Internacional A Shares.

We will enter into deposit agreements with JPMorgan Chase Bank, N.A., as depositary, providing for L Share ADSs, each representing 20 Telmex Internacional L Shares, and A Share ADSs, each representing 20 Telmex Internacional A Shares. We will arrange with the depositary to deliver Telmex Internacional ADSs to each record holder of Telmex ADSs following the Share Delivery Date. We expect that the Telmex Internacional L Share ADSs and A Share ADSs will commence trading on the New York Stock Exchange shortly after the Share Delivery Date. See “Trading Markets” under Item 9.

Persons holding Telmex ADSs through the facilities of The Depository Trust Company, or DTC, will receive Telmex Internacional ADSs by book entry only, through the facilities of DTC. Persons holding Telmex ADSs directly will receive the delivery of Telmex Internacional ADSs in the form of certificated American Depositary Receipts, or ADRs, representing Telmex Internacional ADSs by mail shortly thereafter. Persons holding Telmex ADSs through a broker or other securities intermediary should consult such broker or other securities intermediary concerning distribution of the Telmex Internacional ADSs.

Adjustments Related to the Escisión

Since the Escisión, Telmex has carried out repurchases of its shares. These transactions will reduce the number of outstanding shares of Telmex Internacional. The amount of the reduction is expected to be approximately 398,000,000 L shares and approximately 951,000 A shares as of May 26, 2008 and may increase as a result of further repurchases before the Share Delivery Date. The repurchase transactions will not reduce the assets of Telmex Internacional because, as contemplated in the December 21, 2007 shareholder decisions, in May 2008 the Telmex board of directors approved the transfer to us of an additional amount of approximately P.3,600 million.

 

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Item 4A. Not Applicable.

 

Item 5. Operating and Financial Review and Prospects

Telmex Internacional is a Mexican holding company that was established in December 2007. Our operating subsidiaries were all owned by Telmex prior to our establishment, and they were transferred to us on December 26, 2007 in the split-up that we refer to as the Escisión. See “The Escisión” under Item 4. Telmex was engaged in the yellow pages business for many years prior to the Escisión, but all of our non-Mexican businesses that were previously conducted by Telmex were acquired by Telmex beginning in 2004. As a result, we are engaged through subsidiaries in telecommunications businesses in Brazil, Colombia, Argentina, Chile, Peru and Ecuador. Our subsidiaries are also engaged in the yellow pages business, primarily in Mexico with additional operations in the United States.

The following discussion should be read in conjunction with the financial statements and notes thereto included in this registration statement. Our financial statements for all dates and periods prior to our establishment have been prepared on a consolidated basis and include the historical operation of the subsidiaries transferred to us in the Escisión.

Our financial statements have been prepared in accordance with Mexican FRS, which differ in certain respects from U.S. GAAP. Note 20 to our audited consolidated financial statements provides a description of the principal differences between Mexican FRS and U.S. GAAP as they relate to us, a reconciliation to U.S. GAAP of net income and total stockholders’ equity, and condensed financial statements under U.S. GAAP.

This registration statement also includes the financial statements of Net as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005, because of the significance of our investment in Net under applicable rules of the SEC.

The presentation of our financial performance is extensively affected by the accounting effects of inflation and exchange rate variations. See “—Effects of Exchange Rate Variations” and “—Effect of Inflation Accounting” below.

Effects of the Escisión

As a result of the Escisión, we are now operating independently of Telmex for the first time. All our operating subsidiaries, however, were already separate prior to the Escisión. Our Mexican yellow pages business has operated separately from Telmex for many years, partly for Mexican regulatory reasons. Our non-Mexican businesses were all acquired since 2004 and, while they were extensively integrated with each other, they were not integrated with Telmex either operationally or administratively. Accordingly, we expect that in general our financial performance will not be materially affected by the separation from Telmex, and we believe that in general our historical combined financial statements for earlier dates and periods would not have been materially different if we had been separate from Telmex at those dates and in those periods.

In particular, we do not expect material differences in our cost structure to result from the Escisión. The costs and expenses we record at the level of the operating subsidiaries will not be affected by the separation from Telmex. At the holding company level, we will incur limited additional expenses to rent office space and for such administrative matters as the legal, accounting and finance functions, including paying fees to Telmex for administrative services during an initial period. We may also pay fees to Carso Global Telecom and AT&T for consulting and management services, as Telmex does, and in 2008 we have reimbursed Telmex U.S.$22.5 million of the amount it has paid Carso Global Telecom

 

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for such services in 2008. We do not, however, expect these expenses to be material to our commercial, administrative and general expenses, which were Ps.16,207 million in 2007. We did not allocate expenses of this kind to Telmex Internacional in preparing our audited consolidated financial statements.

Our costs of financing will also not be immediately affected by the separation from Telmex, because our indebtedness is at the subsidiary level and does not have credit support from Telmex. Similarly, we do not expect the separation to affect our liquidity. We cannot, however, be certain that in the future our subsidiaries, as part of a new and smaller group, will continue to have access to financing on equally favorable terms.

Effects of Exchange Rate Variations

Our financial statements are presented in Mexican pesos, but less than 10% of our revenues are from Mexico. In each jurisdiction in which we operate, we treat the local currency as the functional currency for accounting purposes because it is the currency of the primary operating environment for our segment in that jurisdiction. In Brazil in particular, the Brazilian real is the functional currency. As a result, under Mexican FRS, revenues originating in Brazil are first re-expressed for inflation in constant Brazilian reais at period-end, and then translated to pesos using the year-end exchange rate. If the Brazilian real appreciates against the peso from one year to the next, that will tend to increase our revenues as reported in pesos.

The movement of the Brazilian real against the peso has a significant effect on our financial performance, since the majority of our revenues (81.8% in 2007) are in Brazil and the real has appreciated substantially over the past several years. The value of one Brazilian real in Mexican pesos at the end of 2007 was 20.6% higher than at the end of 2006 and 11.2% higher than at the end of 2005. This tends to make our results, as reported in pesos, improve from year to year. However, the re-expression of financial statements from prior periods, as discussed below, tends to diminish this effect. In comparing our results for 2007 and 2006, the positive effect of the appreciation of the real was almost completely offset by the adverse effect of re-expressing 2006 results in 2007 constant pesos.

Exchange rate variations also affect our financial performance because of our U.S. dollar-denominated debt. We recognize an exchange gain or loss based on changes in the value of the U.S. dollar against the functional currencies of the primary operating environments of our subsidiaries that have debt denominated in U.S. dollars. Since most of our debt is in Brazil, the appreciation of the Brazilian real against the dollar has resulted in exchange gains, but these have been offset by fair value losses on the derivatives we enter into to convert our U.S. dollar exposure to Brazilian reais.

Effect of Inflation Accounting

Through the end of 2007, Mexican FRS required us to recognize certain effects of inflation in our financial statements. They also required us to re-express financial statements from prior periods in constant pesos as of the end of the most recent period presented. As discussed below, we do not expect that inflation accounting will be applicable in 2008.

 

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Recognition of effects of inflation

All our financial statements and other financial information included in this registration statement recognize effects of inflation in accordance with Mexican FRS. The main inflation adjustments are as follows:

 

   

In general, nonmonetary assets are adjusted for inflation based on the consumer price index of the country in which the assets are located. This includes plant, property and equipment, inventories, and licenses and trademarks. For example, the carrying value of real property in our Brazilian operations is adjusted at the end of each period to reflect Brazilian inflation in that period, as measured by the Brazilian consumer price index.

 

   

A special rule applies to plant, property and equipment that was manufactured in a country other than the country in which the assets are located. Such assets are adjusted for inflation based on the consumer price index of the country of origin, and then converted into the currency of the country in which the assets are located using the exchange rate at the balance sheet date. For example, the carrying value of switching equipment purchased in the United States and used in our Brazilian operations is adjusted at the end of each period to reflect U.S. inflation in that period and the appreciation or depreciation of the Brazilian real against the U.S. dollar.

 

   

Gains and losses in purchasing power that result from holding monetary assets and liabilities are recognized in income. In each country in which we have monetary assets or liabilities, we determine monetary gain or loss based on the local inflation rate.

 

   

Capital stock, other capital contributions, parent investment and retained earnings are adjusted for inflation based on the Mexican consumer price index.

Re-expression in constant pesos

Financial statements for all periods have been re-expressed in constant pesos as of December 31, 2007. The re-expression in constant pesos uses a factor that is determined using (a) the inflation rate in each country in which we operate, (b) the exchange rate between the Mexican peso and the currency of each country in which we operate and (c) the contribution to our consolidated revenues of our operations in each country in which we operate. The effect of this factor is to apply a weighted average rate of inflation relative to the Mexican peso. Because of the significance of our Brazilian operations, the most important elements in determining the re-expression factor are Brazilian inflation and the exchange rate between the Brazilian real and the Mexican peso.

The re-expression factor is 1.2607 for the financial statements of 2006 and 1.4297 for the financial statements of 2005. (This factor differs from the factor we used in the information statement dated December 6, 2007, describing the Escisión, which was weighted based on the composition of consolidated revenues of Telmex rather than Telmex Internacional).

The high value of the re-expression factor has a significant impact on the comparison between our results of operations for 2007 and for prior years. To illustrate the effects of the re-expression in constant pesos, if we provided a particular service for 100 nominal pesos of revenue in 2006 and again in 2007, the re-expression in constant pesos would result in a 20.7% decrease in revenue, from 126.1 constant pesos in 2006 to 100 constant pesos in 2007. However, our largest operations by far are in Brazil, and the Brazilian real has appreciated sharply against the Mexican peso during 2006 and 2007. The re-expression factor largely offsets the apparent growth in our reported results that would otherwise have resulted from translating our Brazilian results into Mexican pesos.

Cessation of inflation accounting under Mexican FRS

Mexican FRS have changed for periods beginning in 2008, and the inflation accounting methods summarized above will no longer apply, except if any economic environment in which we operate

 

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qualifies as “inflationary” for purposes of Mexican FRS. An environment is inflationary if the cumulative inflation rate equals or exceeds an aggregate of 26% over three consecutive years (equivalent to an average of 8% in each year). Based on current forecasts, we do not expect the economic environments in which we operate to qualify as inflationary in 2008 or 2009, but that could change depending on actual economic performance.

As a result, we expect to present financial statements without inflation accounting beginning in 2008. We will not re-express financial statements for prior periods to give retrospective effect to the cessation of inflation accounting. In this respect, our financial statements for 2008 will not be comparable to those for prior periods. In comparing our results for 2008 to results for prior periods, we expect that the most important effects of the cessation of inflation accounting, and of related changes in other accounting standards, will be as follows:

 

   

We will no longer recognize a monetary gain and loss attributable to the effects of inflation on our monetary assets and liabilities. We expect our financing costs to be less volatile as a result.

 

   

We will cease to adjust the carrying values of nonmonetary assets for inflation and currency variations. We expect that this will make our depreciation charges less volatile.

 

   

We will cease to re-express results of prior periods. Financial information for dates and periods prior to 2008 will continue to be expressed in constant pesos as of December 31, 2007. Also, we will no longer recalculate the results of our non-Mexican operations to Mexican pesos by applying the period end exchange rate to the inflation-adjusted local currency amounts; instead we will use nominal local currency amounts and apply average exchange rates for the period. We expect that these changes will make our results more sensitive to exchange-rate variations, especially between the Brazilian real and the Mexican peso.

 

   

We will cease to use inflation-adjusted assumptions in determining our employee benefit obligations and instead use nominal discount rates and other assumptions. We do not expect this change to have a significant effect on our financial results in the short term, but it is difficult to predict.

Effects of inflation accounting on U.S. GAAP reconciliation

U.S. GAAP does not ordinarily contemplate the recognition of effects of inflation or the re-expression of prior-period financial statements. However, in reconciling our net income and stockholders’ equity to U.S. GAAP, we have generally not reversed the effect of inflation accounting under Mexican FRS, pursuant to a long-established practice under which Mexican FRS inflation accounting is acceptable in financial statements filed with the SEC. There are two exceptions. The first is the special rule applicable to plant, property and equipment manufactured in a country other than the country in which they are located. Our reconciliation does reverse the effects of that special rule. Second, the re-expression of prior period financial statements under U.S. GAAP uses only Mexican inflation, rather than the weighted re-expression factor we use under Mexican FRS as described above. See Note 20 to our audited consolidated financial statements.

Changes in Mexican FRS

Note 2(x) to our audited consolidated financial statements discusses new accounting pronouncements under Mexican FRS that came into force in 2007. Some of these pronouncements have

 

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already been fully implemented in the financial statements included in this registration statement. Others will require us to change our financial presentation in 2008 in ways that we expect to have a material effect on our results of operations and our balance sheet. In particular, the cessation of inflation accounting, as described above, will also entail changes in accounting for foreign currency translation and for employee benefit obligations.

Effects of Acquisitions

Telmex was engaged in the Mexican yellow pages business for many years prior to the Escisión. All of our other businesses, however, were acquired by Telmex after January 1, 2004, starting with the purchase of AT&T Latin America in February 2004 and the purchase of a controlling interest in Embratel in July 2004. See “Item 4. Information on the Company—The Company—History.”

Our financial performance in 2007, 2006 and 2005 has been affected by the acquisitions made during those periods. The most significant acquisitions are listed below, together with the effective date as of which each has been reflected in our financial statements. These and other, less significant acquisitions are summarized in Note 5 to our audited consolidated financial statements.

 

   

Net (March 2005)—cable television operator in Brazil, for which we account under the equity method. In 2007, our equity interest in Net decreased from 39.9% to 35.1%, after Net issued stock in connection with the acquisition of Vivax, another Brazilian cable operator.

 

   

PrimeSys (December 2005)—high value-added telecommunications services provider in Brazil.

 

   

Superview (November 2006)—cable television operator in Colombia.

 

   

Sección Amarilla USA (November 2006)—yellow pages business in the United States.

 

   

Boga (April 2007)—cable television provider in Peru.

 

   

Ecutel (April 2007)—telecommunications provider in Ecuador.

 

   

TV Cable S.A. and Cable del Pacífico (April 2007)—two cable television companies in Colombia.

 

   

Zap Television Directa al Hogar Ltda. (September 2007)— satellite television services provider in Chile.

 

   

Cablecentro, Megainvest Ltda., Comunicaciones Ver TV, S.A., Satelcaribe, S.A. (November 2007)—cable television assets in Colombia.

 

   

Ertach (November 2007)—Internet, data and voice services provider in Argentina.

In addition to these acquisitions, Telmex increased its percentage ownership of Embratel in two capital increases in 2005 and a cash tender offer that began in 2006. The principal closings under the tender offer occurred in November 2006 and resulted in the acquisition of an additional 24.6% of the shares of Embratel. In accordance with Brazilian law and the terms of the tender offer, Telmex continued to purchase shares at the tender offer price through June 2007, increasing its interest in Embratel by an additional 1.6%.

 

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We have accounted for acquisitions using the acquisition method of accounting, which has resulted in the recognition of a substantial amount of goodwill. At December 31, 2007, the balance of goodwill was P.16,298 million. We have also allocated substantial value to the licenses and trademarks of acquired entities, which has resulted in a net balance of P.5,721 million on our balance sheet at December 31, 2007.

We will continue to evaluate possible acquisitions, particularly in the Latin American telecommunications business, and we may acquire businesses when we are presented with opportunities that are strategically complementary and reasonably priced. In 2008, we have agreed to acquire the assets of Teledinámica, a cable television and Internet access provider in Barranquilla, Colombia, for U.S.$31 million, but the acquisition has not yet closed. Any acquisitions we may make will affect our financial performance in future periods. We may incur additional debt to finance acquisitions, and we may acquire companies with pre-existing debt. Increased debt would also affect our financial condition and our results of operations.

Agreements with Brazilian Operators

Transactions with other Brazilian telecommunications operators are an important part of Embratel’s business. These transactions regularly give rise to disagreements, particularly because the two parties to interconnection and co-billing arrangements reach different determinations about the amount of traffic and about the amounts due.

The disagreements are ordinarily settled by bilateral agreements. These agreements also establish certain understandings, guidelines and commitments governing the parties’ relationships in order to prevent similar disputes from arising in the future. Agreements of this kind between operators are common in the Brazilian telecommunications industry. Each agreement reflects the settlement of outstanding disputes between our subsidiary Embratel and the other party over a range of transactions between them in prior periods, primarily involving interconnection and co-billing arrangements.

In each of 2005, 2006 and 2007, Embratel reached agreements of this kind with other Brazilian fixed and mobile telecommunications operators that settled business disputes among the parties. Each such agreement related to past periods, and none related to the current period or to future periods. Based on the terms of the agreement with each operator, we recognized the difference between the agreed amounts and the amounts Embratel previously estimated and which were reflected on our balance sheets. The effects of these agreement in each period are set forth in Note 18 to our financial statements. We continue to negotiate settlements with operators and, while we cannot be certain, we do not expect any significant amount to be recognized as a result.

Summary of Operating Income and Net Income

The table below summarizes our statements of income for 2005, 2006 and 2007. Our results for 2006 and 2005 have been re-expressed in constant pesos as of December 31, 2007, and as discussed in more detail above, the re-expression factor reflects not only inflation but also exchange rate movements between the Mexican peso and the currencies of the other countries in which we operate, especially the Brazilian real. The high value of the re-expression factor has a significant impact on the comparison between our results of operations for 2007 and for prior years, generally eliminating the growth in peso terms that would otherwise have resulted from the appreciation of the Brazilian real against the peso.

 

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     Year ended December 31,  
     2007     2006(1)     2005  
     (millions of
pesos)
    (percentage of
operating
revenues)
    (millions of
pesos)
    (percentage of
operating
revenues)
    (millions of
pesos)
    (percentage of
operating
revenues)
 

Operating revenues:

            

Domestic long distance service

   P. 27,084     40.0 %   P. 29,248     44.6 %   P. 28,714     46.8 %

Corporate networks

     15,390     22.7       15,482     23.6       12,948     21.1  

Local service

     7,874     11.6       5,510     8.4       3,916     6.4  

Internet access services

     4,381     6.5       3,502     5.3       3,309     5.4  

International long distance service

     3,605     5.3       3,786     5.8       4,864     7.9  

Pay television

     1,044     1.5       49     0.1       0     0.0  

Other

     8,382     12.4       7,943     12.2       7,595     12.4  
                                          

Total operating revenues

     67,760     100.0       65,520     100.0       61,346     100.0  
                                          

Operating costs and expenses:

            

Transport and interconnection

     23,649     34.9       23,988     36.6       24,067     39.2  

Cost of sales and services

     9,802     14.5       8,457     12.9       7,593     12.4  

Commercial, administrative and general

     16,207     23.9       21,488     32.8       14,467     23.6  

Depreciation and amortization

     7,772     11.5       8,271     12.6       8,050     13.1  
                                          

Total operating costs and expenses

     57,430     84.8       62,204     94.9       54,177     88.3  
                                          

Operating income

     10,330     15.2 %     3,316     5.1 %     7,169     11.7 %
                                          

Other expenses (income), net

     242         (1,907 )       207    

Comprehensive financing cost:

            

Interest income

     (1,217 )       (1,167 )       (1,703 )  

Interest expense

     1,631         1,782         2,380    

Exchange loss, net

     3         713         338    

Monetary (gain) loss, net

     (141 )       214         (12 )  
                              
     276         1,542         1,002    
                              

Equity interest in net income of affiliates

     689         578         123    
                              

Income before income tax

     10,501         4,259         6,083    

Income tax

     3,487         1,241         1,497    
                              

Net income

     7,014         3,018         4,586    
                              

Distribution of net income:

            

Majority interest

     6,464         2,353         3,180    

Non-controlling interest

     550         665         1,406    
                              
   P. 7,014       P. 3,018       P. 4,586    
                              

Majority net income per share

   P. 0.327       P. 0.112       P. 0.139    
                              

 

(1) Our results of operations in 2006 were affected by several items relating to Brazilian tax proceedings. Under commercial, general and administrative costs, we recorded (a) a charge of P.4,210 million related to Embratel’s settlement of a dispute over its liability for value added tax and (b) a provision of P.1,467 million for penalties and monetary correction related to income tax on incoming international long distance service. Under other expenses (income), net we recorded (a) other income of P.3,919 million representing the monetary gain and accrued interest related to taxes Embratel paid between 1990 and 1994 and became entitled to recover in 2006 and (b) other expenses of P.1,862 million representing the monetary gain and interest accrued related to back income tax Embratel was required to pay in 2006 on incoming international long distance service for prior periods.

Results of Operations for 2007, 2006 and 2005

The highlights of our results for the three-year period included the following:

 

   

We maintained our leading franchise in Brazilian long-distance, though revenue from long-distance services decreased (in constant-peso terms) under growing competition. In our corporate networks and Internet access businesses across Latin America, we had revenue growth in corporate networks in 2006 and from Internet access in 2007.

 

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Our Brazilian local service business, which started in late 2002, has successfully established itself with steady growth in customers and revenues. At year-end 2007, we had more than 2 million customers for a range of services, and for the year we had almost P.8 billion in operating revenues. This represented year-over-year customer increases at the end of 2007 of 46.3% in Livre services and 19.6% in Net Fone via Embratel services, which led to an increase in revenues of 42.9% for 2007.

 

   

We made a series of acquisitions of cable television businesses in Colombia, giving us a 52% share of the pay television market by the end of 2007. We expect continued revenue growth and improved profitability from our Colombian operations. Our consolidated revenues from pay television surpassed P.1 billion in 2007, and in addition our equity investee Net continues to grow in the pay television business in Brazil.

 

   

Our performance in 2006 was affected by developments in three Brazilian tax proceedings, which together reduced net income by P.3,784 million. Without these matters, we would have seen operating income grow by 25.4% from 2005 to 2006 and by 14.9% from 2006 to 2007, driven by results in Brazil.

 

   

Our comprehensive financing cost declined steadily from 2005 through 2007, due to a stronger balance sheet and lower interest rates.

Revenues

Domestic Long Distance Revenues

Operating revenues from domestic long distance service consist of (a) revenues for carrying long-distance calls for customers and (b) amounts earned from other telecommunications operators for transporting their domestic long distance calls. The amount of operating revenues from domestic long distance service depends on rates and traffic volume. Domestic long distance revenues decreased by 7.4% in 2007 and increased by 1.9% in 2006. The decrease in 2007 was mainly due to a 2.5% decrease in Embratel’s domestic long distance traffic, caused by lower volume of traffic transported for other operators, and a 1.5% reduction in Embratel’s nominal rates beginning in mid-2007. We expect that traffic transported for other operators will continue to decline due to increased competition as other operators construct their own infrastructure. The increase in 2006 was primarily due to a 16.2% increase in traffic at Embratel, principally attributable to calls originating on wireless devices and advanced voice services for corporate customers.

Revenues from Corporate Networks

Revenues from corporate networks are primarily from dedicated private lines and from providing virtual private network services. Revenues from corporate networks decreased by 0.6% in 2007 and increased by 19.6% in 2006. The decrease in 2007 was principally due to customer discounts, partly offset by a 29.4% increase in 64 Kbps billed-line equivalents at Embratel. The increase in 2006 was due to a 34.5% increase in 64 Kbps billed-line equivalents at Embratel, primarily due to services provided to mobile carriers and to the consolidation of PrimeSys in December 2005.

Local Service Revenues

Operating revenues from local service include installation charges for new lines, monthly line rental charges and monthly measured service charges based on the number of minutes. These revenues depend on the number of lines in service, the number of new lines installed and the volume of minutes.

 

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Revenues from local service increased by 42.9% in 2007 and by 40.7% in 2006. The increases in 2007 and 2006 were due primarily to the increase in Embratel’s local services revenues as a result of a 72.5% and 57.1% increase in residential lines, respectively. The increase in lines was primarily from the Livre and Net Fone via Embratel services in 2007 and Livre in 2006.

Revenues from Internet Access Services

Revenues from Internet access services include set-up and service fees for dial-up and broadband Internet access. Revenues from Internet access services increased by 25.1% in 2007 and by 5.8% in 2006. The increase in 2007 was principally due to our cable television operations in Colombia, most of which we acquired in 2007. In addition, revenue from Embratel’s Internet access services increased by 7.6% as a result of a 19.8% increase in the number of Embratel’s Internet access accounts. The increase in 2006 was principally due to revenue from Embratel’s Internet access services, which increased by 9.5% as a result of a 24.2% increase in the number of Embratel’s Internet access accounts.

International Long Distance Revenues

Operating revenues from international long distance service depend on the volume of traffic, the rates charged to our customers, the rates charged by each party under agreements with foreign carriers, principally in the United States, and the effects of competition. We generally settle on a net basis the amounts owing to and from each foreign carrier, but we report the amounts owed to us as revenues and the amounts we owe in cost or sales and services. Settlement payments under service agreements with foreign carriers are generally denominated in U.S. dollars.

International long distance revenues decreased by 4.8% in 2007 and by 22.2% in 2006. The decrease in 2007 was primarily caused by a decrease of the international settlement rates for traffic ending in Brazil and a 1.5% nominal reduction in the rate for outgoing traffic since mid-2007. The decrease in 2006 was primarily caused by a decline in Embratel’s international long distance revenues due to lower international settlement rates for traffic ending in Brazil and a 7.2% decline in total billed traffic. We anticipate that total international long distance traffic will continue to decline.

Revenues from Pay Television

Our revenues from pay television amounted to P.1,044 million in 2007, compared to P.49 million in 2006. The revenues in 2007 are the result of our acquisition of several cable television networks in Colombia in 2007 and, to a lesser extent, of a satellite television operation in Chile and a cable television operation in Peru.

Other Revenues

The largest components of other revenues are sales of yellow pages advertising (principally in Mexico), revenues from interconnection (fees we charge other telecommunications operators for completing calls to our local network), provision of call center services (principally in Brazil) and sales of telecommunications equipment (principally handsets sold to our local service customers in Brazil). Other revenues increased by 5.5% in 2007 and by 4.6% in 2006. The increase in 2007 was principally due to growth in call center services in Brazil, sales of yellow pages advertising in the United States following our acquisition of Sección Amarilla USA in October 2006, and sales of handsets in Brazil, partly offset by a decline in total billed traffic for interconnection services and a decrease in the interconnection rate for local and long distance calls. The increase in other revenues in 2006 was due to the higher sales of telecommunications equipment and call center services in Brazil and sales of telecommunications materials in Argentina, partly offset by a decline in total billed traffic for interconnection services and a decrease in the interconnection rate for local and long distance calls.

 

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Operating Costs and Expenses

Transport and Interconnection

Costs from transport and interconnection consist primarily of payments to operators of mobile and local networks for the use of their facilities to complete calls to their customers and the rental of capacity from other operators in areas where we use rented capacity to complement our network. These costs are driven in large part by our traffic in Brazil. Transport and interconnection costs decreased by 1.4% in 2007 and by 0.3% in 2006. The decrease in both years was due to the reduction in nominal interconnection rates for local networks in Brazil, and the reduction of interconnection rates for mobile networks in Brazil.

Cost of Sales and Services

Cost of sales and services increased by 15.9% in 2007 and by 11.4% in 2006. The increase in 2007 was due to (a) higher personnel costs associated with our recent acquisitions in Colombia and our call center in Brazil, (b) increases in costs associated with servicing and maintaining equipment and facilities in Brazil and (c) increased purchases of telephone handsets for resale in connection with the growth in local services in Brazil. The increase in 2006 was due to the following costs at Embratel: an increase in the regulatory fees related to the Telecommunication Universal Services Fund, or FUST; a new concession fee beginning in January 2006; and the consolidation of PrimeSys beginning in December 2005.

Commercial, Administrative and General Expenses

Commercial, administrative and general expenses decreased by 24.6% in 2007 and increased by 48.5% in 2006. The comparison between years is affected by large charges in 2006 at Embratel. We recorded charges of P.5,677 million in 2006, in respect of interest and penalties related to (a) Embratel’s settlement of a dispute over its liability for ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços, Brazilian state value added tax), for which we recognized a provision of P.4,210 million, and (b) Brazilian governmental proceedings asserting that Embratel should have been liable for penalties and monetary correction related to income tax on incoming international long distance service, for which we recognized a provision of P.1,467 million.

Without the effect of these charges in 2006, commercial, administrative and general expenses would have increased by 2.5% in 2007, primarily due to increased expenses related to our newly-acquired cable operations in Colombia. Also without the effect of these 2006 charges, commercial, administrative and general expenses would have increased by 9.3% in 2006 due to an increase in recorded expenses for the provision for doubtful accounts.

Depreciation and Amortization

Depreciation and amortization decreased by 6.0% in 2007 and increased by 2.7% in 2006. As a result of Mexican FRS inflation accounting rules, changes in exchange rates and inflation rates affect the value of fixed assets and thus the amount of depreciation. The decrease in 2007 was due to the lower adjustment of our imported fixed assets principally due to the appreciation of the Brazilian real against the U.S. dollar, which was partly offset by increased investment in plant, property and equipment and our acquisitions of cable television operations in Colombia. The slight change in 2006 reflected the offsetting effects of changes in exchange rates and inflation.

 

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Operating Income

Operating income increased by 211.5% in 2007 due to the increase of 3.4% in revenues and the reduction of 7.7% in costs and expenses due primarily to Brazilian tax-related charges in 2006. Our operating margin was 15.2% in 2007 compared to 5.1% in 2006. Without the effect of the non-recurring Brazilian tax-related charges in 2006, our operating income would have increased by 14.9% in 2007, due to the growth of Embratel’s local service and our newly acquired cable operations in Colombia.

In 2006, operating income decreased by 53.7%, due to a 14.8% increase in operating costs and expenses, which more than offset a 6.8% increase in revenues. Our operating margin decreased to 5.1% in 2006 from 11.7% in 2005. Without the effect of the non-recurring Brazilian tax charges in 2006, our operating income would have increased by 25.4% and operating margin would have been 13.7%.

Other Expenses (Income), Net

Other expenses (income), net include employee profit sharing and, in 2006, certain amounts related to contested income taxes in Brazil. In 2006, we recorded (a) other income of P.3,919 million representing the monetary gain and accrued interest related to taxes Embratel paid between 1990 and 1994 and became entitled to recover in 2006 and (b) other expenses of P.1,862 million representing the monetary gain and interest accrued related to back income tax Embratel was required to pay in 2006 on incoming international long distance service for prior periods. In each year, other expenses (income), net also reflects the effect of agreements with other telecommunications operators in Brazil. See Note 19 to our audited consolidated financial statements.

Comprehensive Financing Cost

Under Mexican FRS, comprehensive financing cost reflects interest income, interest expense, foreign exchange gain or loss and the gain or loss attributable to the effects of inflation on monetary liabilities and assets. A substantial amount of our indebtedness (89.7% at December 31, 2007), is denominated in U.S. dollars, so variations in the value of the U.S. dollar affect our foreign exchange gain or loss and interest expense. Approximately 1.5% of our monetary assets were denominated in U.S. dollars at December 31, 2007.

In each country in which we have monetary assets or liabilities, we determine foreign exchange gain or loss based on the functional currency of the local operations, and we determine monetary gain or loss based on the local inflation rate. Because our subsidiary Embratel has 88.5% of our total indebtedness, exchange gain or loss is driven primarily by the value of the Brazilian real against the U.S. dollar.

We enter into derivative transactions to manage our exposure to changes in exchange rates, and the change in fair value of these derivative transactions is included in exchange gain or loss.

In 2007, comprehensive financing cost was P.276 million compared with P.1,542 million in 2006 and P.1,002 million in 2005. The changes in each component were as follows:

 

   

Interest income increased by 4.3% in 2007 and decreased by 31.5% in 2006. The change in each period was due to the level of liquid assets, which was particularly high for part of 2005, decreased in 2006 and the increased in 2007 as a result of the monetary assets we received in September in preparation for the Escisión.

 

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Interest expense decreased by 8.5% in 2007 and by 25.1% in 2006. The decreases in 2007 and 2006 were primarily due to lower interest rates, partly offset by a higher average level of debt.

 

   

We recorded a net exchange loss of P.3 million in 2007, compared to P.713 million in 2006 and P.338 million in 2005. In each year, the amount reflects the offsetting effects of exchange gain on dollar-denominated debt, primarily at Embratel, and losses on currency swaps, primarily entered into to convert dollar exposures to Brazilian reais. In 2007, we had larger derivative positions and higher appreciation of the Brazilian real, so the derivatives losses (P.2,829 million in 2007, compared to P.1,413 in 2006) almost fully offset the exchange gains. The appreciation of the Brazilian real against the U.S. dollar was approximately 17.2% in 2007 and 8.7% in 2006.

 

   

We had a net monetary gain of P.141 million in 2007, compared to a net loss of P.214 million in 2006 and a net gain of P.12 million in 2005. In each period, we had a gain in Brazil, where we have substantial monetary liabilities, and a loss in Mexico, where we have substantial monetary assets. The change from 2006 to 2007 was the result of higher monetary gain in Brazil because of a higher rate of inflation. The inflation rate in Brazil was 7.8% in 2007, compared with 3.8% in 2006. We had a loss in 2006 because our average level of monetary assets exceeded the average level of monetary liabilities.

Income Tax

The statutory rate of the Mexican corporate income tax was 28% in 2007, 29% in 2006 and 30% in 2005. Our income in Brazil, which accounts for the majority of our taxable income, was subject to a statutory tax rate of 34% in 2007, 2006 and 2005. Our effective rate of corporate income tax as a percentage of pre-tax profit was 33.2% in 2007, 29.1% in 2006 and 24.6% in 2005.

Net Income

Net income increased by 132.4% in 2007 and decreased by 34.2% in 2006. In 2007, the increase was due to higher operating income and lower comprehensive financing cost. In 2006, the decrease was due to lower operating income caused by the charges related to Brazilian taxes and higher comprehensive financing cost.

Results of Operations by Segment

We operate in eight geographic segments. Segment information is presented in Note 18 of our audited consolidated financial statements included in this registration statement. Brazil is our principal geographic market, accounting for 81.8% of our total operating revenues in 2007 (compared to 84.6% in 2006) and 83.8% of our total costs and expenses in 2007 (compared to 87.5% in 2006).

 

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The table below sets forth the percentage of our total revenues and total costs and expenses represented by each of our principal geographic segments for the periods indicated.

 

     2007     2006     2005  
     % of
Total
revenues
    % of
Total costs
and
expenses
    % of
Total
revenues
    % of
Total costs
and
expenses(1)
    % of
Total
revenues
    % of
Total costs
and
expenses
 

Brazil

   81.8     83.8     84.6     87.5     85.3     88.9  

Mexico

   8.1     4.0     8.1     3.9     8.1     4.1  

Colombia

   4.0     4.4     1.6     1.3     1.1     0.9  

Chile

   2.5     3.2     2.4     3.4     2.5     2.7  

Argentina

   2.1     2.6     2.1     2.6     2.1     2.4  

Peru

   1.5     1.7     1.2     1.4     1.2     1.4  

Other(2)

   0.0     0.3     0.0     (0.1 )   (0.3 )   (0.4 )
                                    

Total

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
                                    

 

(1) To facilitate comparison, amounts do not include the following charges related to Brazilian taxes in 2006: (a) a provision of P.4,210 million related to Embratel’s settlement of a dispute over its liability for value added tax and (b) a provision of P.1,467 million for penalties and monetary correction related to income tax on Embratel’s incoming international long distance service. See “—Operating Costs and Expenses—Commercial, Administrative and General Expenses.”

 

(2) Includes United States, Ecuador and consolidation adjustments.

Brazil

Operating revenues remained stable in 2007, as the increase in revenues in local service and call centers was offset by a decrease in domestic and international long distance revenues. Measured in Brazilian reais without the effects of inflation accounting, currency translation or re-expression, operating revenues in Brazil increased by 4.9% from 2006 to 2007. Operating revenues increased by 2.6% in 2006 principally due to an increase in revenues from local services, data services for corporate customers and other revenues, partly offset by a decrease in international long distance revenues.

Total costs and expenses decreased by 12.6% in 2007 and increased by 14.5% in 2006. The comparison is affected by the charges in 2006 relating to two Brazilian tax matters, as described above. Excluding the effect of those charges, total costs and expenses would have decreased by 2.6% in 2007 and increased by 2.7% in 2006. The decrease in 2007 was due primarily to the effect of a decrease in depreciation. The increase in 2006 was primarily due to the increase in the cost of sales and services from data services for corporate customers, when PrimeSys was consolidated, and an increase of recorded expenses on the provision for doubtful accounts.

Mexico

Operating revenues decreased by 0.9% in 2007 and increased by 11.2% in 2006. Mexican operating revenues are principally attributable to our yellow pages business. The slight reduction in 2007 reflects declining sales of advertising in printed directories, largely offset by growing sales of advertising in our online yellow pages. The increase in 2006 was due to higher sales of advertising in printed directories.

Total costs and expenses increased by 4.8% in 2007 and by 3.3% in 2006. The increase in 2007 was due to higher allowances for doubtful accounts receivable, and higher costs for IT support and software for our online yellow pages. The increase in 2006 was due to increases in distribution expenses, allowances for doubtful accounts receivable, costs of services and marketing expenses.

 

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Colombia

Operating revenues in Colombia increased by 144.5% in 2007, due mainly to an increase in revenues from cable television services resulting from our acquisitions. Operating revenues in Colombia increased by 56.6% in 2006 due to an increase in revenues from data services mainly as a result of a larger customer base, the integration of several corporate customers’ sites and the inclusion of Superview’s revenues.

Total costs and expenses in 2007 increased by 221.1% and by 50.2% in 2006. The increase in 2007 was due to costs incurred in connection with our increased cable television operations, which we grew through a series of acquisitions beginning in October 2006, and the expansion of our local network. The increase in 2006 was due to an increase in network maintenance costs, last mile costs and leased line costs, salaries and benefits, marketing expenses, other third party services and the inclusion of Superview’s costs and expenses.

Other countries

The other countries in which we operate are Argentina, Chile, Peru, Ecuador and the United States. Together they represented less than 7% of 2007 revenues and a small operating loss that was not material to our 2007 operating income.

Liquidity and Capital Resources

Our principal capital requirements are for capital expenditures. Our capital expenditures were P.12.8 billion in 2007 and P.8.8 billion in 2006. We have budgeted capital expenditures in 2008 of approximately P.12.5 billion (U.S.$1.1 billion). Budgeted capital expenditures for 2008 exclude any other investments we might make to acquire other companies.

We may also use funds to pay dividends or to repurchase our shares in the future, although we have not yet established policies regarding dividends or the repurchase of shares. We expect to declare an aggregate of approximately P.2,900 million in dividends in 2008.

We generally plan for each of our major operating subsidiaries to meet its capital requirements for 2008 from its operating cash flow. Our resources provided by operating activities were P.14,494 million in 2007 and P.10,366 million in 2006. Our smaller subsidiaries (in Ecuador and the United States) may not generate sufficient cash flow to meet their capital requirements and will rely on funding provided by us. We have substantial amounts of cash on hand, reflecting the allocation of Telmex’s liquid assets in the Escisión. At December 31, 2007, we had P.17,268 million in cash and cash equivalents.

Since the Escisión, Telmex has carried out repurchases of its shares. These transactions will reduce the number of outstanding shares of Telmex Internacional. The amount of the reduction is expected to be approximately 398,000,000 L shares and approximately 951,000 A shares as of May 26, 2008 and may increase as a result of further repurchases before the Share Delivery Date. The repurchase transactions will not reduce the assets of Telmex Internacional because, as contemplated in the December 21, 2007 shareholder decisions, in May 2008 the Telmex board of directors approved the transfer to us of an additional amount of approximately P.3,600 million.

We believe that the telecommunications industry in Latin America will continue to be characterized by growth, technological change, competition and consolidation. We may take advantage of these opportunities through direct or indirect investments or strategic alliances, but future investments may require substantial additional capital and expose us to new risks. Our expenditures for acquisitions were P.8,485 million in 2007 and P.14,081 million in 2006.

 

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Embratel has a substantial amount of tax-related contingencies. If a major part of the tax disputes were to be decided against Embratel, our liquidity could be materially affected even if we have previously established provisions. See Note 17 to our audited consolidated financial statements.

Outstanding Indebtedness

At December 31, 2007, we had total indebtedness of P.15,982 million (U.S.$1,471 million). Indebtedness of our Brazilian subsidiaries represented approximately 88.6% of our total indebtedness. At December 31, 2007, 89.7% of our total consolidated indebtedness was denominated in U.S. dollars, 0.1% was denominated in Brazilian reais, and 10.2% was denominated in other currencies.

The major categories of indebtedness of our subsidiaries are as follows:

 

   

U.S. dollar-denominated bank financing. We had U.S.$857 million (P.9,307 million) of U.S. dollar-denominated bank financing outstanding at December 31, 2007. Of this amount, approximately 71% was under loans from export credit and development agencies. Most of our bank borrowings bear interest at a spread over LIBOR.

 

   

U.S. dollar-denominated export credit agency financing for satellites. We had U.S.$267 million (P.2,905 million) outstanding at December 31, 2007, in financing for the acquisition of satellites Star One C-1 and Star One C-2. These bear interest at an average rate of 4.1% and mature in 2013.

 

   

Senior notes. We had U.S.$178.8 million (P.1,942 million) aggregate principal amount of Embratel senior notes outstanding at December 31, 2007. These notes bear interest at an annual rate of 11% and mature in December 2008.

We also have other categories of outstanding indebtedness, including local currency denominated loans from local banks, financial leases and supplier credits for equipment financing. We look for the best sources for borrowing in terms of cost and term, including local and international capital markets as well as international banks and local banks.

Most of our credit agreements include cross-default provisions and cross-acceleration provisions that would permit the holders of such indebtedness to declare the indebtedness to be in default and to accelerate the maturity thereof if a significant portion of the principal amount of our debt is in default or accelerated. The terms of these agreements restrict the ability of our subsidiaries to grant liens, pledge assets, sell or dispose of assets and make certain acquisitions, mergers or consolidations. Under a number of these agreements, we are required to maintain certain specified financial ratios, including EBITDA to payments of principal and interest expense of no less than 1.2 to 1.0 and net debt to EBITDA of no more than 3.5 to 1.00 (using terms defined in the credit agreements).

A number of Embratel’s financing instruments are subject to either acceleration or repurchase at the holder’s option if there is a change of control, as defined in the respective instruments. The definitions of change of control vary, but none of them will be triggered so long as we or Carso Global Telecom or its present controlling shareholders continue to control a majority of Embratel’s voting stock.

Of our total debt outstanding as of December 31, 2007, approximately 53.9% of our bank facilities bear interest at specified spreads, mainly over LIBOR, and the remaining 46.1% bear interest at

 

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fixed rates. The weighted average cost of all borrowed funds at December 31, 2007 (including interest and taxes withheld, but excluding fees) was approximately 6.6%. The inclusion of fees in the calculation of weighted average cost of all borrowed funds at December 31, 2007 would increase such cost by 0.5% to 7.1%.

Risk Management

We regularly assess our interest rate and currency exchange exposures in order to determine how to manage the risk associated with these exposures. We use derivative instruments to hedge or adjust our exposures. We have also used derivative instruments from time to time to seek to reduce our costs of financing. Our practices vary from time to time depending on our judgment of the level of risk, expectations as to exchange or interest rate movements and the cost of using derivative instruments. We may stop using derivative instruments or modify our practices at any time. Currently, our derivative transactions relate entirely to Embratel’s indebtedness.

Because our U.S. dollar-denominated indebtedness far exceeds our U.S. dollar-denominated assets and revenues, from time to time we enter into derivative transactions to protect to some degree against the short-term risks of devaluation of the Brazilian real. Under Mexican FRS, we account for these transactions on a fair value basis, and such amounts offset gains and losses from the foreign currency liabilities that are hedged. We had swaps and forwards covering U.S.$1,134.5 million of Embratel’s indebtedness at December 31, 2007 and U.S.$288.3 million of Embratel’s indebtedness at December 31, 2006. We recognized a charge of P.2,828.7 million in 2007 and of P.1,412.7 million in 2006, reflecting the effects of exchange rate variations under our derivative instruments.

Contractual Obligations

In the table below we set forth certain contractual obligations as of December 31, 2007 and the period in which the contractual obligations come due. The amount of our long-term debt reported in the table excludes interest and fee payments, which are primarily variable amounts, and does not reflect derivative instruments, which provide for payment flows that vary depending on exchange rates. Purchase obligations include capital commitments primarily for long term equipment supply contracts and also include payments for the right to use satellite orbital positions. See Note 17 to our audited consolidated financial statements. The table below does not include pension liabilities, tax liabilities or accounts payable.

 

     Payments Due by Period
(in millions of pesos as of December 31, 2007)
     Total    2008    2009-2010    2011-2012    2013 and
beyond

Contractual obligations:

              

Total debt(1)

   P. 15,982    P. 4,713    P. 6,061    P. 4,490    P. 718

Purchase obligations

     2,562      1,894      624      14      30
                                  

Total

   P. 18,544    P. 6,607    P. 6,685    P. 4,504    P. 748
                                  

 

(1) Excludes interest payments, fees and the effect of derivative instruments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements of the type that we are required to disclose under Item 5E of Form 20-F.

 

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U.S. GAAP Reconciliation

Net income under U.S. GAAP was P.5,739 million in 2007, P.1,167 million in 2006 and P.2,391 million in 2005. Compared to majority net income under Mexican FRS, net income under U.S. GAAP was 11.2% lower in 2007, 50.4% lower in 2006 and 24.8% lower in 2005.

There are certain differences between Mexican FRS and U.S. GAAP that affect our net income and stockholders’ equity. The most significant in their effects concern (i) elements of inflation accounting that are determined differently under U.S. GAAP than under Mexican FRS, (see “—Effects of Inflation Accounting” above) and (ii) differences in the application of purchase accounting to the successive transactions in which we increased our interest in Embratel.

Other differences that affected net income relate to accounting for reversal of goodwill impairment, business combinations, capitalization of interest on assets under construction and the treatment of non-controlling interest. The differences in stockholders’ equity under Mexican FRS and U.S. GAAP reflect these same matters. For a discussion of the principal differences between Mexican FRS and U.S. GAAP, see Note 20 to our audited consolidated financial statements.

Use of Estimates in Certain Accounting Policies

In preparing our financial statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and our estimates involve judgments we make based on the information available to us. In the discussion below, we have identified several of these matters for which our financial presentation would be materially affected if either (a) we used different estimates that we could reasonably have used or (b) in the future we change our estimates in response to changes that are reasonably likely to occur.

The discussion addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of revised or different estimates is not material to our financial presentation.

Estimated Useful Lives of Plant, Property and Equipment

We estimate the useful lives of particular classes of plant, property and equipment in order to determine the amount of depreciation expense to be recorded in each period. Depreciation expense is a significant element of our costs, amounting in 2007 to P.6,437 million, or 11.2% of our operating costs and expenses under Mexican FRS.

The estimates are based on historical experience with similar assets, anticipated technological changes and other factors, taking into account the practices of other telecommunications companies. We review estimated useful lives when we consider it necessary to determine whether they should be changed, and at times we have changed them for particular classes of assets. We may shorten the estimated useful life of an asset class in response to technological changes, changes in the market or other developments. This results in increased depreciation expense, and in some cases it might result in our recognizing an impairment charge to reflect a write-down in value. The same kinds of developments can also lead us to lengthen the useful life of an asset class, resulting in reduced depreciation expense.

 

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Employee Pensions and Seniority Premiums

We recognize liabilities on our balance sheet and expenses in our income statement to reflect our obligations to pay employees under the defined-benefit and defined contribution plans as well as a medical assistance plan for defined-benefit plan participants at Embratel; we also have a defined-benefit plan and termination benefits for our Mexican employees. The amounts we recognize are determined on an actuarial basis that involves many estimates and accounts for post-retirement and termination benefits in accordance with Mexican FRS. In 2007, we recognized net period cost relating to these obligations of P.152.9 million under Mexican FRS.

We use estimates in several specific areas that have a significant effect on these amounts: (a) the actual discount rates that we use to calculate the present value of our future obligations, (b) the actual rate of increase in salaries that we assume we will observe in future years, (c) long term average inflation, (d) health care cost trends and (e) the rate of return we assume our pension fund will achieve on its investments. The assumptions we have applied are identified in Notes 14 (Mexican FRS) and 20 (U.S. GAAP) to our audited consolidated financial statements. These estimates are based on our historical experience, on current conditions in the financial markets and on our judgments about the future development of our salary costs and the financial markets. We review the estimates each year, and if we change them, our reported expense for pension costs may increase or decrease.

In 2007, an actuarial gain of P.735 million in the defined benefit pension plan (DBP) and P.76 million in the medical assistance plan (MAP) was primarily attributable to the increase of unamortized balance liability and also by the revision of the actuarial assumptions used in the computation of Embratel’s DBP and MAP. Actuarial assumptions were based on our experience and future expectations with respect to retirement as well as general trends in Brazil over the past several years, including interest rates, investment returns and level of inflation, mortality rates and future employment levels.

The return on investments of our pension fund amounted to a gain of P.2,376 million in 2007, due to the gains by plan assets on the Brazilian stock markets and the increase in fixed-yield interest rates. As of December 31, 2007, 83% of fund assets consisted of Brazilian reais-denominated fixed-income securities, 11% consisted of variable-income securities of Brazilian companies and 6% of other instruments. Our actuarial assumptions as of December 31, 2007 include an assumed annual return of 6% in real terms on plan assets.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts based on our estimates of losses we may experience because our customers or other telecommunications operators do not pay the amounts they owe us. At December 31, 2007, the amount of the allowance was P.4,520 million. For our customers, we perform a statistical analysis based on our past experience, current delinquencies and economic trends. For operators, we make individual estimates that may reflect our evaluation of pending disputes over amounts owed. Our allowance could prove insufficient if our statistical analysis of our customer receivables is inadequate, or if one or more carriers refuse or are unable to pay us. See Note 3 to our audited consolidated financial statements.

Impairment of Long-Lived Assets

We have large amounts of long-lived assets on our balance sheet that we are required under Mexican FRS and U.S. GAAP to test for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable for plant, property and equipment and licenses and trademarks. Impairment testing for goodwill is required to be performed on an annual basis. At December 31, 2007,

 

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these include plant, property and equipment (P.50,494 million, net of accumulated depreciation), goodwill (P.16,298 million) and licenses and trademarks (P.5,721 million, net of accumulated depreciation). To estimate the fair value of long-lived assets, we typically make various assumptions about the future prospects for the business that the asset relates to, consider market factors specific to that business and estimate future cash flows to be generated by that business. Based on these assumptions and estimates, and guidance provided by Mexican FRS and U.S. GAAP relating to the impairment of long-lived assets, we determine whether we need to take an impairment charge to reduce the net carrying value of the asset as stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Different assumptions and estimates could materially impact our reported financial results. More conservative assumptions of the anticipated future benefits from these businesses could result in impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values.

Purchase accounting—purchase price allocation

During 2007, 2006 and 2005, we made a number of acquisitions applying the purchase method of accounting. Accounting for the acquisition of a business under the purchase method requires the determination of the fair values of the net assets acquired and then the allocation of the purchase price to the various assets and liabilities of the acquired business, which affects goodwill recognized on our balance sheet. The most difficult estimations of individual fair values are those involving plant, property and equipment and identifiable intangible assets, such as licenses and trademarks. We use all available information to make these fair value determinations, including the retention of appraisers to determine the fair value of trademarks and an examination of the market value of licenses with similar characteristics to determine the fair value of licenses.

Realization of Net Deferred Tax Assets

The recognition of net deferred tax assets on temporary differences mainly due to Brazilian tax losses and to the negative basis for calculating social contribution in Brazil, is supported by the history of taxable income and Embratel’s estimate of future profitability. Bulletin D-4 establishes the conditions for measuring and recognizing of these deferred assets. Based on Embratel’s financial projections, we believe that these assets will be realized over a period of ten years. A future change in these projections of profitability could result in the need to record a valuation allowance against these net deferred tax assets, resulting in a negative impact on future results.

Provision for Contingencies

We are subject to proceedings, lawsuits and other claims related to tax, labor and civil matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual matter, based on advice of our legal counsel. We record provisions for contingencies only when we believe that it is probable that we will incur a loss in connection with the matter in dispute. In several tax disputes with the Brazilian tax authorities, we have recognized no provisions because we do not believe a loss is probable. The total balance of probable losses is recorded as a current liability, because it is not possible to estimate the time required to reach a settlement. The required reserves for these and other contingencies may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters. Such changes could have an adverse impact on future results and cash flows.

 

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Item 6. Directors, Senior Management and Employees

Directors

Management of our business is vested in the board of directors and the chief executive officer. Our bylaws provide for the board of directors to consist of a maximum of 21 directors and up to an equal number of alternate directors. Each alternate director may attend meetings of the board of directors and vote in the absence of a corresponding director.

Directors are elected by a majority of the holders of the AA Shares and A Shares voting together, provided that any holder or group of holders of at least 10% of the total AA Shares and A Shares is entitled to name one of such directors and one of such alternate directors, and two directors and two alternate directors are elected by a majority vote of the holders of L Shares. Directors and alternate directors are elected at each annual ordinary general meeting of shareholders and each annual ordinary special meeting of holders of L Shares. Pursuant to our bylaws and Mexican law, at least 25% of our directors must qualify as independent, as determined by our shareholders at their annual ordinary general meeting pursuant to the Mexican Securities Market Law (Ley del Mercado de Valores).

The current 12 members of our board of directors were appointed on December 21, 2007 at the extraordinary shareholders’ meeting of Telmex that approved the Escisión. Our bylaws provide that the members of the board of directors are appointed for terms of one year and may be reelected. The names and positions of the members of our board of directors, their dates of birth and information on their principal business activities outside Telmex Internacional are as follows:

 

Carlos Slim Domit    Born:    1967

Chairman

   First elected:    2007
   Principal occupation and other directorships:    Chairman of the board of directors of Grupo Carso, S.A.B. de C.V., Grupo Sanborns, S.A. de C.V. and U.S. Commercial Corp., S.A.B. de C.V.; Vice Chairman of the board of directors of Carso Global Telecom, S.A.B. de C.V.; Co-chairman of the board of directors of Teléfonos de México, S.A.B. de C.V.
   Business experience:    Chief Executive Officer of Sanborn Hermanos, S.A.

 

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Jaime Chico Pardo    Born:    1950

Director

   First elected:    2007
   Principal occupation:    Chairman of the board of directors of Teléfonos de México, S.A.B. de C.V.; Co-Chairman of the board of directors of IDEAL (Impulsora del Desarrollo y el Empleo en América Latina, S.A.B. de C.V.)
   Other principal directorships:    Member of the board of directors of América Móvil, S.A.B. de C.V., Carso Global Telecom, S.A.B. de C.V., Grupo Carso, S.A.B. de C.V. and Honeywell International
   Business experience:    Chief Executive Officer of Teléfonos de México, S.A.B. de C.V.; Chief Executive Officer of Grupo Condumex, S.A. de C.V.; Chairman of Corporación Industrial Llantera (Euzkadi General Tire de México, S.A. de C.V.)
Laura Diez Barroso de Laviada    Born:    1951

Director

   First elected:    2007
   Principal occupation:    President of Tenedora y Promotora Azteca S.A. de C.V.
   Other directorships:    Member of the board of directors of Grupo Financiero Inbursa, S.A.B. de C.V., Fundación del Centro Histórico de la Ciudad de México A.C. and Royal Caribbean International
Arturo Elías Ayub    Born:    1966

Director

   First elected:    2007
   Principal occupation:    Head of Strategic Alliances, Communications and Institutional Relations at Teléfonos de México, S.A.B. de C.V.; General Director of Fundación Telmex
   Other directorships:    Member of the board of directors of Telmex, Grupo Sanborns, Grupo Carso, Carso Global Telecom, U.S. Commercial Corp., Sears Roebuck de México and TM & MS LLC
   Business experience:    Chief Executive Officer of Sociedad Comercial Cadena, President of Pastelería Francesa (El Globo) and President of Club Universidad Nacional, A.C.

 

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Roberto Kriete Ávila    Born:    1953

Director

   First elected:    2007
   Principal occupation:    Chairman and CEO, TACA Airlines; President, Compañia de Inversiones of Kriete Group; President, Gloria Kriete Foundation; Director, Escuela Superior de Economía y Negocios (ESEN) in El Salvador
   Other directorships:    President of the board of directors, Real Intercontinental Hotel of San Salvador; President, Coatepeque Foundation; Member of the board of directors of non-profit organization AGAPA (against extreme poverty) and FUNDASALVA (rehabilitation against drug addiction)
   Business experience:    Director, Camino Real Hotel; Director and Secretary, Banco Agrícola Comercial of El Salvador
Francisco Medina Chávez    Born:    1956

Director

   First elected:    2007
   Principal occupation:    President and Chief Executive Officer of Grupo Fame
   Other directorships:    Member of the boards of directors of Banamex Citigroup Mexico and Aeroméxico
   Business experience:    Director of several companies involving real estate, automobiles and financing
Jorge Andrés Saieh Guzmán    Born:    1971

Director

   First elected:    2007
   Principal occupation:    Chairman of the board of directors and Executive President of Consorcio Periodístico de Chile S.A. (COPESA)
   Other directorships:   

Vice Chairman, Corp Group Interhold S.A

Vice Chairman, CorpBanca S.A.; Director, Corp Group Inmobiliaria; Vice President, National Press Association, Chile; Director, International Press Association; Director, World Association of Newspapers

   Business experience:    Chairman of the board of directors of Corp Group Inmobiliaria; Vice Chairman, AFP Proteccion; member of the board of directors of AFP Provid, CorpBanca Venezuela, Forestal y Papelera Concepción, S.A., Bazuca, Palestino Football Club and Virtualia

 

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Fernando Solana Morales    Born:    1931

Director and Chairman of the corporate practices committee

   First elected:    2007
   Principal occupation:    President of the Mexican Board of International Affairs; President of the Mexican Fund for Education and Development; President of Solana Advisers; member of the board of directors of Analitica
   Other directorships:    Member of the boards of directors of banks, industrial enterprises, universities, philanthropic and cultural organizations
   Business experience:    Member of the Mexican Senate; Chief Executive Officer of Banco Nacional de México, S.A.; Secretary to the Mexican Ministry of International Affairs; Ministry of Education; Ministry of Commerce
Antonio del Valle Ruiz    Born:    1938

Director and Chairman of the audit committee

   First elected:    2007
   Principal occupation:    Chairman of the board of directors of Grupo Empresarial Kaluz, S.A. de C.V.
   Other directorships:    Member of the board of directors of Mexichem, S.A.B. de C.V., Escuela Bancaria y Comercial, Minera las Cuevas y Polímeros de México and Fundación Pro Empleo, A.C.
   Business experience:    Founder of Grupo Empresarial Kaluz, S.A. de C.V.; founder and Chief Executive Officer of Grupo Financiero Bital; Chairman of the Mexican Business Round Table; president of the Mexican Bankers Association
Oscar Von Hauske Solís    Born:    1957

Director and Chief Executive Officer

   First elected:    2007
   Principal occupation    Chief Executive Officer of Telmex Internacional
   Business experience:    Chief Systems and Telecommunications Officer at Teléfonos de México, S.A.B. de C.V.; Head of finance at Grupo Condumex, S.A. de C.V.
Eric D. Boyer    Born:    1965

Director

   First elected:    2007
   Principal occupation:    President and manager of investments in Latin America of AT&T Mexico
   Business experience:    Various positions at AT&T Corp.

 

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Rayford Wilkins, Jr.

   Born:    1951

Director

   First elected:    2007
   Principal occupation and other directorships:    Group president of AT&T International; member of the board of directors and the executive committee of América Móvil, S.A.B. de C.V.
   Business experience:    Various positions in the wireless industry at AT&T Corp.

The secretary of the board of directors is Raúl Humberto Zepeda Ruiz. He is not a member of our board of directors.

Of our directors Carlos Slim Domit is the son of Carlos Slim Helú and Arturo Elías Ayub is the son-in-law of Carlos Slim Helú. Carlos Slim Helú, together with certain members of his immediate family, including Carlos Slim Domit, holds a controlling interest in us. See “Item 7. Major Shareholders and Related Party Transactions.”

Audit Committee

The chairman of the audit committee is Antonio del Valle Ruiz. Our board of directors has appointed Francisco Medina Chávez and Eric D. Boyer as the other members of our audit committee. The audit committee will operate under a written charter to be approved by our board of directors. The mandate of the audit committee is to establish and monitor procedures and controls to ensure that the financial information that we distribute is useful, appropriate and reliable and accurately reflects our financial position.

Corporate Practices Committee

The chairman of the corporate practices committee is Fernando Solana Morales. We expect the other members of our corporate practices committee will be appointed in the coming months. The corporate practices committee will operate under a written charter to be approved by our board of directors. The corporate practices committee will assist the board of directors in evaluating and compensating our executive officers and will provide opinions regarding our transactions with related parties.

Executive Officers

The names, responsibilities and prior business experience of our executive officers are as follows:

 

Officer

  

Business Experience

Oscar Von Hauske Solís

Chief Executive Officer

  

Chief Systems and Telecommunications

Officer at Teléfonos de México, S.A.B. de

C.V.; head of finance at Grupo Condumex, S.A. de C.V.

Luis Antonio Villanueva Gómez

Head of Development

  

Chief executive officer of Teléfonos del

Noreste, S.A. de C.V.; various positions at

Teléfonos de México, S.A.B. de C.V.

 

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Francisco Javier Ortega Castañeda

Chief Commercial Officer

  

Western division head of Teléfonos de

México, S.A.B. de C.V.; various other

positions at Teléfonos de México, S.A.B. de C.V.

José Formoso Martinez

Chief Executive Officer of Embratel

  

Vice president of Embratel Participações

S.A.; Chief executive officer of Empresa

Brasileira de Telecomunicações S.A.–EMBRATEL;

Chief executive officer of Telgua S.A.;

Chief executive officer of Cablevisión

Oscar Von Hauske Solís

Acting Chief Financial Officer

   See above.

Eduardo Alvarez Ramírez de Arellano

General Counsel

  

Manager of international legal affairs at

Teléfonos de México, S.A.B. de C.V.;

various other positions at Teléfonos de

México, S.A.B. de C.V.

Compensation of Officers and Directors

Our executive officers were employed by Telmex in 2007 and the aggregate amount of compensation paid to them in 2007 was P.34 million. Our board of directors, together with our corporate practices committee, will determine the compensation of our executive officers.

We did not pay any compensation to our directors in 2007. Under our bylaws, for each meeting of the board of directors attended in 2008, each director will receive a fee of P.22,000 (nominal), except that for the final meeting of the year, each director will receive P.220,000 (nominal). Each member of a committee of the board of directors will receive a fee of P.15,400 (nominal) for each committee meeting attended in 2008, except the chairman of a committee, who will receive P.22,000 (nominal). None of our directors is a party to any contract with us or any of our subsidiaries that provides for benefits to our directors in their capacity as directors.

As of the date of this registration statement, we have not made provisions to provide pension, retirement or similar benefits for our executive officers and directors.

 

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Employees

The following table sets forth the number of employees and a breakdown of employees by main category of activity and geographic location as of the end of each year in the three-year period ended December 31, 2007.

 

     Year ended December 31,
     2007    2006    2005

End of period number of employees

   26,321    18,733    16,860

Employees by category of activity:

        

Telecommunications

   10,086    9,174    8,924

Call centers

   8,439    6,914    6,159

Cable television

   5,493    489    —  

Yellow pages

   2,303    2,156    1,777

Employees by geographic location:

        

Brazil

   16,044    14,268    13,384

Colombia

   5,547    787    214

Latin America (1) and United States

   4,730    3,678    3,262

 

(1) Includes Argentina, Chile, Ecuador, Mexico and Peru.

The increase in the number of employees in 2007 relates principally to the increase in the number of employees in our cable television operations in Colombia.

At December 31, 2007, 15.9% of our employees are members of unions. All management positions are held by non-union employees. Salaries and certain benefits of employees are negotiated every year.

 

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Item 7. Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

As of March 6, 2008, the AA Shares represented 42.4% of the total capital stock and 95.0% of the full voting shares (A Shares and AA Shares). The AA shares are owned by (a) Carso Global Telecom, (b) AT&T International, and (c) various other Mexican investors. Carso Global Telecom holds interests in the telecommunications industry and was separated from Grupo Carso, S.A. de C.V. in 1996. According to reports of beneficial ownership of Telmex shares filed with the SEC, Carso Global Telecom is controlled by Mr. Carlos Slim Helú and members of his immediate family.

We expect that Carso Global Telecom and AT&T International will enter into an agreement providing for certain matters relating to their ownership of AA Shares. They currently have such an agreement relating to their ownership of AA Shares of Telmex, which among other things, subjects certain transfers of AA Shares by either party to a right of first offer in favor of the other party and provides for the composition of the board of directors and executive committee of Telmex and for each party to enter into a management services agreement with Telmex. We expect them to reach an agreement of similar scope relating to Telmex Internacional.

The following table identifies owners of more than five percent of any class of our shares, based on shares outstanding as of March 6, 2008. Except as described below, we are not aware of any holder of more than five percent of any class of our shares. Holders of five percent or more of any class of our shares have the same voting rights with respect to their shares as do holders of less than five percent of the same class.

 

     AA Shares(1)     A Shares(2)     L Shares(3)     Percent
of voting
shares(4)
 
     Shares
(millions)
   Percent
of class
    Shares
(millions)
   Percent
of class
    Shares
(millions)
   Percent
of class
   

Carso Global Telecom(5)

   6,000.0    73.9 %   92.0    21.4 %   4,658.0    43.9 %   71.3 %

AT&T International(5)

   1,799.5    22.2     —      —       —      —       21.1  

Brandes Investment Partners, L.P.(6)

   —      —       —      —       834.6    7.9     —    

 

(1) As of March 6, 2008, there were 8,115 million AA Shares outstanding, representing 95.0% of the total full voting shares (A Shares and AA Shares).

 

(2) As of March 6, 2008, there were 429 million A Shares outstanding, representing 5.0% of the total full voting shares (A Shares and AA Shares).

 

(3) As of March 6, 2008, there were 10,614 million L Shares outstanding.

 

(4) A Shares and AA Shares.

 

(5) Holders of A Shares and AA Shares are entitled to convert a portion of these Shares to L Shares, subject to the restrictions set forth in our bylaws.

 

(6) Derived from reports of beneficial ownership of our shares filed with the SEC. For comparability purposes, percent of class is calculated based on the number of L Shares outstanding on March 6, 2008.

Carlos Slim Domit (chairman of the board of directors) may be deemed to have beneficial ownership of 6,000.0 million AA Shares, 92.6 million A Shares, and 4,835.6 million L Shares held by Carso Global Telecom and other companies that are under common control with Telmex Internacional. Except as described above, Telmex Internacional is not aware of any director, alternate director or executive officer who holds more than one percent of any class of its shares.

At December 31, 2007, 55.0% of our outstanding L Shares were represented by Telmex L Share ADSs, each representing the right to receive 20 Telmex L Shares and 20 Telmex Internacional L Shares, and 99.1% of the holders of Telmex L Share ADSs (11,632 holders, including The Depository Trust

 

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Company, or DTC) had registered addresses in the United States. Of our outstanding A Shares, 25.8% were represented by Telmex A Share ADSs issued under a sponsored A Share ADS facility, each representing the right to receive 20 Telmex A Shares and 20 Telmex Internacional A Shares, and 99.6% of the holders of sponsored Telmex A Share ADSs (4,090 holders, DTC) had registered addresses in the United States.

We do not have information concerning Telmex Internacional holders with registered addresses in the United States of shares that are not represented by ADSs. We also have no information concerning U.S. ownership of A Share ADSs held under unsponsored A Share ADS programs.

RELATED PARTY TRANSACTIONS

General

We engage in a variety of transactions with affiliates, including transactions related to the Escisión and in the ordinary course of business. Pursuant to Mexican law, our board of directors has to vote on whether or not to approve certain transactions with related parties (1) that are outside the ordinary course of our business or (2) that are at non-market prices. A director with an interest in the transaction is not permitted to vote on its approval. None of the transactions described below was subject to approval by our board of directors.

The aggregate amount of our revenues from affiliates was P.4,683 million in 2007, P.4,176 million in 2006 and P.5,013 million in 2005. The aggregate amount of our expenses paid to affiliates was P.6,497 million in 2007, P.5,837 million in 2006 and P.3,754 million in 2005.

From time to time we may make investments together with affiliated companies, sell our investments to affiliates and buy investments from affiliates. In July 2006, for example, we entered into a 50-50 joint venture with América Móvil to construct a fiber optic network along Peru’s coastline for an estimated total cost of U.S.$86 million.

Transactions Relating to the Escisión

Following the Escisión, there has been a variety of contractual relationships between Telmex and Telmex Internacional, both to accomplish the separation of the Escisión and to provide for ongoing relationships. For these purposes, we have entered into a master transition agreement with Telmex (the “Master Agreement”), the principal terms of which are described below.

Implementation of the Escisión

The creation of Telmex Internacional and the transfer of assets and liabilities to Telmex Internacional was effected by the action of the extraordinary shareholder’s meeting of Telmex on December 21, 2007. Telmex has not made any representations regarding the value of any of the assets we received in the Escisión. We have agreed to indemnify Telmex against any liability, expense, cost or contribution asserted against Telmex that arises out of the assets owned directly or indirectly by Controladora de Servicios de Telecomunicaciones, S.A. de C.V., or Consertel, the subsidiary whose shares were transferred to us in the Escisión. Mexican law also provides that if an obligation is assumed by the new company in an escisión, and the new company fails to perform, a claimant may make a claim against the old company for up to three years unless the claimant expressly consented to the escisión. We did not assume any obligations in the Escisión, so Telmex is not liable for any obligations of Telmex Internacional. Consertel, which is a subsidiary of Telmex Internacional, will be subject to the possibility

 

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that a claimant against the new Telmex subsidiary created in the Consertel split-up might seek to assert its claim against Consertel if that new Telmex subsidiary defaults. We consider the risk of such a claim to be remote, and Telmex has agreed to indemnify us against any such claim.

The Master Agreement includes provisions intended to ensure that the purposes of the Escisión are fully achieved. Among other things, this agreement will provide in general terms as follows:

 

   

Telmex Internacional agrees to indemnify Telmex against any loss or expense resulting from the assertion against Telmex of any liabilities or claims that were transferred to Telmex Internacional in the Escisión or that relate to the businesses transferred to Telmex Internacional in the Escisión.

 

   

Telmex agrees to indemnify Telmex Internacional against any loss or expense resulting from the assertion against Telmex Internacional of any liabilities or claims that were retained by Telmex in the Escisión or that relate to the businesses retained by Telmex in the Escisión.

 

   

The parties agree to cooperate in obtaining consents or approvals, giving notices or making filings, as may be required as a result of the Escisión or in order to achieve the purposes of the Escisión.

 

   

Each party agrees to provide the other with information required to prepare financial statements, tax returns, regulatory filings or submissions and for other specified purposes.

 

   

Each party agrees to maintain the confidentiality of any information concerning the other that it obtained prior to the Escisión or that it obtains in connection with the implementation of the Escisión.

 

   

Each party agrees that it will not take any action that could reasonably be expected to prevent the Escisión from qualifying as tax-free under Mexican or U.S. federal tax laws.

 

   

Each party releases the other from certain claims arising prior to the Escisión. Telmex makes no representations concerning the assets transferred directly or indirectly in the Escisión.

Transitional Services

Under the Master Agreement, Telmex provides a variety of administrative services to Telmex Internacional on an interim basis. The services Telmex provides include certain data processing and corporate support and administrative services. They are generally provided at cost plus a specified percentage. We expect to be dependent on Telmex for these services through 2008 and possibly longer.

Ordinary-Course Transactions with Related Parties

We engage in transactions with entities that like us, are controlled, directly or indirectly, by Carlos Slim Helú and members of his immediate family. These entities include (a) Telmex and certain subsidiaries of Telmex, (b) América Móvil and its subsidiaries, (c) Grupo Carso and its subsidiaries and (d) Grupo Financiero Inbursa and its subsidiaries. In addition, we enter into transactions with our shareholder AT&T International.

We complete international traffic in Brazil, Colombia, Argentina, Chile, Peru and Ecuador from Telmex and América Móvil and their subsidiaries. Telmex completes the international traffic from us in Mexico. The subsidiaries of América Móvil in Latin America and the Caribbean complete international traffic from us through their cellular networks.

 

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In Brazil, Embratel provides telecommunications services in the same geographical markets as subsidiaries of América Móvil that operate under the brand name Claro. As a result, Embratel and América Móvil have extensive operational relationships. Embratel, as a local and long distance service provider, and Claro, as a mobile service provider, interconnect each other’s traffic and make use of each other’s networks. Embratel also transports Claro’s traffic and leases lines to Claro. Through its subsidiary, BrasilCenter, Embratel provides call center services to Claro. América Móvil also provides interconnection to its cellular network in the other countries in South America where we have operations. Additionally, in these other countries, we provide private circuits and long-distance services to the subsidiaries of América Móvil.

In Mexico, we publish Telmex’s white pages telephone directories. Telmex provides us access to its customer database for use in our yellow pages directories and Telmex handles billing and the collection of payments from customers advertising in our yellow pages directories.

Transactions with Grupo Carso include the purchase of network construction services and materials. Transactions with Grupo Financiero Inbursa include financial services and insurance. In 2004, Embratel entered into a U.S.$75 million loan agreement with Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa, a subsidiary of Grupo Financiero Inbursa. Embratel repaid the loan in full in 2006.

We have agreements with AT&T International that provide for AT&T International completing our international calls to the United States and for our completing AT&T International’s calls from the United States.

The terms of our ordinary-course transactions with our affiliates and with other companies that may be deemed to be under common control with us are generally similar to those on which each company does business with other, unaffiliated parties.

Transactions with our Shareholders

We expect to pay fees to our shareholders Carso Global Telecom and AT&T International for consulting and management services, pursuant to agreements with each party to be negotiated on behalf of us by a special committee of directors unaffiliated with any of the parties. Telmex has such an agreement with each of Carso Global Telecom and AT&T International. We have reimbursed Telmex U.S.$22.5 million of the amount Telmex has paid Carso Global Telecom for such services in 2008. We expect to begin paying fees for such services directly to Carso Global Telecom and to AT&T International in 2009.

 

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Item 8. Financial Information

CONSOLIDATED FINANCIAL STATEMENTS

See “Item 18. Financial Statements” beginning on page F-1.

LEGAL PROCEEDINGS

Embratel

Tax Disputes

We are engaged in a significant number of ongoing disputes with the tax authorities in Brazil relating to tax assessments and other claims against Embratel. As a result, we have a substantial amount of tax-related contingencies. As of December 31, 2007, we had recorded provisions in the aggregate amount of P.6,762 million with respect to tax-related contingencies at Embratel. While we believe that our positions in these cases are well founded, there can be no assurance that we will prevail or that the amount of our provisions will be sufficient to meet any adverse judgments or penalties.

In August 2006, pursuant to an agreement among all Brazilian states, we were granted a proportional reduction of our liability for value-added goods and services tax, or ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços), including restatement penalties and surcharges, through July 2006. The agreement is applicable throughout all states and the Federal District of Brazil, but the implementation of its provisions depends on each state’s regulations. In the states in which the agreement has already been implemented, we made payments of P.5,353 million in settlement of all disputes related to this matter. With respect to the states in which the agreement has not yet been implemented, we recorded a provision of P.92 million, based on our expectation that those states will also implement the terms of the agreement.

As of December 31, 2007, we had a provision of P.3,313 million in connection with our ongoing dispute with the Brazilian tax authorities regarding the payment by Embratel of income tax on inbound international income.

For more information regarding our tax-related and other contingencies in Brazil, see Note 17 to our audited consolidated financial statements.

Rate Readjustments

In June 2003, Anatel approved a tariff increase using the IGP-DI inflation index. These tariff increases were challenged in the Brazilian courts. In September 2003, the 2a Vara Federal do Distrito Federal, or the 2nd Chapter of the Federal District Court, issued an injunction requiring the tariff increase to be based on the IPCA inflation index, rather than the IGP-DI index used in the tariff rate formulas established in the concessions. Embratel and the three regional telecommunications operators adopted tariff rate increases based on this injunction. The change affected both the rates that we charged to our customers and the rates that we paid for interconnection. On July 1, 2004, the Corte Especial do Superior Tribunal de Justiça, or the Special Tribunal of the Higher Court of Justice, concluded that the IGP-DI, instead of the IPCA, must be used to calculate the increases in tariffs in the future. Companies were allowed to increase tariffs to reflect the IGP-DI inflation index, but the court decided that the difference in tariffs would not be applied retroactively. To minimize the effect on inflation, telecommunications companies agreed with Anatel and the Ministry of Communications that any increases in the rates to reflect the IGP-DI inflation index would be made gradually.

 

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As a result of the decision by the Special Tribunal of the Higher Court of Justice, in 2004, Embratel reversed a provision of R$66 million, recorded as cost of services and goods sold, corresponding to the period from July through December 2003. However, a final decision is still pending.

Disputes with Third Parties

We are involved in a variety of additional litigation and administrative proceedings that have arisen in the ordinary course of business. Various disputes are in an advanced stage of the litigation process, and we may lose at least some of the cases. As of December 31, 2007, we had a provision of P.726 million for unfavorable rulings in 2007, compared to P.780 million as of December 31, 2006.

Colombian Competition Investigations

In June 2007, the Superintendent of Industry and Trade, Colombia’s competition authority, announced an investigation of our alleged failure to report the increased integration of operations between Telmex Colombia, which provides corporate Internet services, and Superview, which provides residential Internet services. The Superintendent of Industry and Trade announced a second investigation in June 2007 of our alleged failure to report our acquisitions of Superview, TV Cable and Cable Pacifico. Both investigations are in the discovery phase and we cannot predict when or how they will be resolved.

DIVIDENDS

Telmex Internacional has not paid dividends since its establishment in December 2007. The declaration, amount and payment of dividends will be determined by majority vote of the holders of A Shares and AA Shares, generally on the recommendation of the board of directors, and will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the holders of A Shares and AA Shares. We expect to hold a general shareholders’ meeting during the first half of 2008 that will address the distribution of dividends. In March 2008, our board of directors agreed to recommend to our shareholders for approval at a general shareholders’ meeting the declaration of a dividend in 2008 in the amount of P.0.15 per share. We cannot assure you that we will pay dividends in the future or that we will do so on a continuous and regular basis. Our bylaws provide that holders of A Shares, AA Shares and L Shares participate on a per-share basis in dividend payments and other distributions. See “Item 10. Additional Information—Bylaws and Mexican Law—Dividend Rights.”

 

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Item 9. The Offer and Listing

DESCRIPTION OF SECURITIES

Our capital stock comprises Series A Shares, without par value, Series AA Shares, without par value and Series L Shares, without par value. All of the outstanding shares are fully paid and non-assessable. For a summary of the number of outstanding shares of each series, see “Item 10. Additional Information—Share Capital.”

Each AA Share or A Share entitles the holder thereof to one vote at shareholders’ meetings. The holder of an L Share may vote only in limited circumstances as described under “Item 10. Additional Information—Bylaws and Mexican Law––Voting Rights.” The rights of holders of all series of capital stock are otherwise identical except for limitations on non-Mexican ownership of AA Shares. See “Item 10. Additional Information—Bylaws and Mexican Law––Limitations on Share Ownership.”

JPMorgan Chase Bank, N.A., as depositary, will issue L Share ADSs, each representing 20 L Shares, and A Share ADSs each representing 20 A Shares. See “Description of American Depositary Shares” under Item 12.

TRADING MARKETS

As of the date of this registration statement, there is no trading market for the Telmex Internacional shares or ADSs and there can be no assurances as to the establishment or continuity of any such market. We expect that our shares and ADSs will be listed or quoted on the following markets:

 

L Shares

   Mexican Stock Exchange—Mexico City

L Share ADSs

   New York Stock Exchange—New York

A Shares

   Mexican Stock Exchange—Mexico City

A Share ADSs

   New York Stock Exchange—New York

In addition, we expect that our shares will trade on the Mercado de Valores Latinoamericanos en Euros (Latibex).

Listing or quotation on these markets requires approval from the relevant authorities, and as of the date of this registration statement we have not yet received approval from any of them. We expect trading of our shares and our ADSs to begin during the second quarter of 2008, but there can be no assurance that there will be no delay in the commencement of trading.

TRADING ON THE MEXICAN STOCK EXCHANGE

The Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A. de C.V.) located in Mexico City, is the only stock exchange in Mexico. Founded in 1907, it is organized as a corporation whose shares are held by 26 brokerage firms, which are exclusively authorized to trade on the Mexican Stock Exchange. Trading on the Mexican Stock Exchange takes place principally through automated systems, which are generally open on business days between the hours of 8:30 a.m. and 3:00 p.m., Mexico City time. Trades in securities listed on the Mexican Stock Exchange can also be effected off the exchange. The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility, but under current regulations this system does not apply to securities such as the Telmex A Shares or the Telmex L Shares that are directly or indirectly (for example, through ADSs) quoted on a stock exchange outside Mexico, nor is it expected to apply to the Telmex Internacional L Shares.

 

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Settlement is effected three business days after a share transaction on the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not permitted without the approval of the CNBV. Most securities traded on the Mexican Stock Exchange, including those of Telmex, are on deposit with Indeval. It is expected that the Telmex Internacional shares will be on deposit with Indeval.

 

Item 10. Additional Information

SHARE CAPITAL

The shares of Telmex Internacional were authorized and issued pursuant to the Telmex shareholders’ meeting of December 21, 2007 approving the Escisión. See “The Escisión” under Item 4. As of December 31, 2007, our capital structure was as follows:

 

Class

   Number of Shares    Percentage of
Capital
    Percentage of
Voting(1)
 

L Shares (no par value)(2)

   10,815,705,456    55.87 %   —    

AA Shares (no par value)

   8,114,596,082    41.91 %   94.97 %

A Shares (no par value)(3)

   430,095,932    2.22 %   5.03 %
                 

Total

   19,360,397,470    100.0 %   100.0 %
                 

 

(1) Except on limited matters for which L Shares have voting rights.

 

(2) Excluding 12,840,251,914 L Shares held by Telmex Internacional in treasury.

 

(3) Excluding 31,354,480 A Shares held by Telmex Internacional in treasury.

Our capital stock comprises Series AA Shares, Series A Shares and Series L Shares, all without par value. All of the outstanding shares are fully paid and non-assessable.

AA Shares and A Shares have full voting rights. Holders of L Shares may vote only in limited circumstances as described under “—Bylaws and Mexican Law—Voting Rights.” The rights of holders of all series of capital stock are otherwise identical except for limitations on non-Mexican ownership of AA Shares. The AA Shares, which must always represent at least 51% of the combined AA Shares and A Shares, may be owned only by holders that qualify as Mexican investors as provided in our bylaws. See “—Bylaws and Mexican Law—Limitations on Share Ownership.”

Each AA Share or A Share may be exchanged at the option of the holder for one L Share, provided that the AA Shares may never represent less than 20% of our outstanding capital stock or less than 51% of our combined AA Shares and A Shares. As of December 31, 2007, the AA Shares represented 41.91% of our outstanding capital stock and 94.97% of our combined AA Shares and A Shares.

BYLAWS AND MEXICAN LAW

Set forth below is a brief summary of certain significant provisions of our bylaws. This description does not purport to be complete and is qualified by reference to our bylaws, which have been filed as an exhibit to this registration statement. For a description of the provisions of our bylaws relating to our board of directors and its committees, see “Item 6. Directors, Senior Management and Employees.”

Organization and Register

Telmex Internacional is a sociedad anónima bursátil de capital variable organized in Mexico under the Mexican Companies Law (Ley General de Sociedades Mercantiles) and the Mexican Securities Market Law. It is registered with the Public Registry of Commerce of Mexico City under the number 375,438.

 

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Purpose

Our main corporate purpose is to create, organize, operate, acquire and participate in the capital stock or equity of any and all commercial and individual (non-commercial) entities, associations or corporations, whether industrial, commercial, service or of any other type, domestic and foreign, and to construct, install, maintain and operate telecommunications networks.

Voting Rights

Each AA Share and A Share entitles the holder thereof to one vote at any meeting of our shareholders. Each L Share entitles the holder to one vote at any meeting at which holders of L Shares are entitled to vote. Holders of L Shares are entitled to vote only to elect two members of the board of directors and the corresponding alternate directors and on the following matters:

 

   

the transformation of Telmex Internacional from one type of company to another;

 

   

any merger in which Telmex Internacional is not the surviving entity or any merger with an entity whose principal corporate purposes are different from those of Telmex Internacional (when Telmex Internacional is the surviving entity); and

 

   

cancellation of the registration of Telmex Internacional shares on the Mexican National Registry of Securities and any foreign stock exchange on which they are registered.

A resolution on any of the specified matters requires the affirmative vote of both a majority of all outstanding shares and a majority of the AA Shares and the A Shares voting together.

Under Mexican law, holders of shares of any series are also entitled to vote as a class on any action that would affect the rights of holders of shares of such series. Additionally, holders of 20% or more of all outstanding shares would be entitled to request judicial relief against any such action taken without such a vote. The determination whether an action requires a class vote on these grounds would initially be made by the board of directors or any other party calling for shareholder action. A negative determination could be subject to judicial challenge by an affected shareholder, and a court would ultimately determine the necessity for a class vote. There are no other procedures for determining whether a proposed shareholder action requires a class vote, and Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination.

Shareholders’ Meetings

General shareholders’ meetings may be ordinary meetings or extraordinary meetings. Extraordinary general meetings are those called to consider certain matters specified in Article 182 of the Mexican Companies Law, including, principally, amendments of the bylaws, liquidation, merger and transformation from one type of company to another, as well as to consider the removal of our shares from listing on the Mexican Stock Exchange or any foreign stock exchange. General meetings called to consider other matters are ordinary meetings. The two directors elected by the holders of L Shares are elected at a special meeting of holders of L Shares. All other matters on which holders of L Shares are entitled to vote would be considered at an extraordinary general meeting. Holders of L Shares are not entitled to attend or address meetings of shareholders at which they are not entitled to vote.

 

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A special meeting of the holders of L Shares must be held each year for the election of directors. An ordinary general meeting of the holders of AA Shares and A Shares must be held each year to consider the approval of the financial statements for the preceding fiscal year, to elect directors and to determine the allocation of the profits of the preceding year.

The quorum for an ordinary general meeting of the AA Shares and A Shares is 50% of such shares, and action may be taken by a majority of the shares present. If a quorum is not available, a second meeting may be called at which action may be taken by a majority of the AA Shares and A Shares present, regardless of the number of such shares. Special meetings of holders of L Shares are governed by the same rules applicable to ordinary general meetings of holders of AA Shares and A Shares. The quorum for an extraordinary general meeting at which holders of L Shares may not vote is 75% of the AA shares and A Shares, and the quorum for an extraordinary general meeting at which holders of L Shares are entitled to vote is 75% of the outstanding capital stock. If a quorum is not available in either case, a second meeting may be called and action may be taken, provided a majority of the shares entitled to vote is present. Whether on first or second call, actions at an extraordinary general meeting may be taken by a majority vote of the AA Shares and A Shares outstanding and, on matters which holders of L Shares are entitled to vote, a majority vote of all the capital stock.

Holders of 20% of our outstanding capital stock may have any shareholder action set aside by filing a complaint with a court of law within 15 days after the close of the meeting at which such action was taken and showing that the challenged action violates Mexican law or our bylaws. In addition, any holder of our capital stock may bring an action at any time within five years challenging any shareholder action. Relief under these provisions is only available to holders:

 

   

who were entitled to vote on, or whose rights as shareholders were adversely affected by, the challenged shareholder action; and

 

   

whose shares were not represented when the action was taken or, if represented, were voted against it.

Shareholders’ meetings may be called by the board of directors, its chairman, co-chairman or secretary, by the committees that perform audit and corporate practices functions or their chairmen, or by a court. The board of directors or the committees that perform audit and corporate practices functions may be required to call a meeting of shareholders by the holders of 10% of the outstanding capital stock. Notice of meetings must be published in the Official Gazette or a newspaper of general circulation in Mexico City at least 15 days prior to the meeting. In order to attend a meeting, shareholders must deposit their shares with us at our office in Mexico City, with a Mexican or foreign banking institution or with a Mexican exchange broker. If so entitled to attend the meeting, a shareholder may be represented by proxy. The depositary for the L Share ADSs and the A Share ADSs does not satisfy this requirement, so ADS holders are not entitled to attend shareholder meetings. ADS holders must exercise their voting rights through the depositary.

Dividend Rights

At the annual ordinary general meeting of holders of AA Shares and A Shares, the board of directors submits our financial statements for the previous fiscal year, together with a report thereon by the board of directors, to the holders of AA Shares and A Shares for approval. The holders of AA Shares and A Shares, once they have approved the financial statements, determine the allocation of our net profits for the preceding year. They are required by law to allocate 5% of such net profits to a legal reserve, which is not thereafter available for distribution except as a stock dividend, until the amount of the legal reserve equals 20% of our capital stock. The remainder of net profits is available for distribution.

 

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All shares outstanding at the time a dividend or other distribution is declared are entitled to participate in such dividend or other distribution.

Limitation on Capital Increases

Our bylaws require that any capital increase be represented by new shares of each series in proportion to the number of shares of each series outstanding.

Preemptive Rights

In the event of a capital increase, a holder of existing shares of a given series has a preferential right to subscribe for a sufficient number of shares of the same series to maintain the holder’s existing proportionate holdings of shares of that series. Preemptive rights must be exercised within 30 calendar days following the publication of notice of the capital increase in the Official Gazette and a newspaper of general circulation in Mexico City. Under Mexican law, preemptive rights cannot be traded separately from the corresponding shares that give rise to such rights. As a result, there is no trading market for the rights in connection with a capital increase. Holders of ADSs may exercise preemptive rights only through the depositary. We are not required to take steps that may be necessary to make this possible.

Under the Mexican Securities Market Law, however, if Telmex Internacional were to increase its capital stock to effect a public offering of newly issued shares or were to resell any repurchased shares, no preemptive rights would be available to the holders of outstanding shares as a result of the issuance or resale.

Limitations on Share Ownership

Pursuant to our bylaws, non-Mexican investors are not permitted to own more than 49% of our capital stock. The A Shares and the L Shares are unrestricted. The AA Shares, however, which must always represent at least 51% of the combined AA Shares and A Shares, may be owned only by holders that qualify as Mexican investors as defined in the Foreign Investment Law and our bylaws. A holder that acquires AA Shares in violation of the restrictions on non-Mexican ownership will have none of the rights of a shareholder with respect to those AA Shares. As a consequence of these limitations, a non-Mexican investor cannot own AA Shares except through a trust that effectively neutralizes the votes of non-Mexican investors. The restrictions in our bylaws reflect provisions in the bylaws of Telmex. The restrictions in Telmex’s bylaws are derived from the Foreign Investment Law and its regulations, which are applicable to Mexican enterprises in certain economic sectors, including telephone services.

Restrictions on Certain Transactions

Our bylaws provide that any acquisition of more than 10% of our issued and outstanding shares, effected in one or more transactions by any person or group of persons acting in concert, requires prior approval by our board of directors.

Restrictions on Registration in Mexico

Our shares will be registered with the National Registry for Securities, as required under the Mexican Securities Market Law. If we wish to cancel our registration, or if it is cancelled by the CNBV, we will be required to make a public offer to purchase all outstanding shares prior to such cancellation.

 

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Unless the CNBV authorizes otherwise, the offer price will be the higher of: (1) the average of the closing price during the previous 30 days on which the shares may have been quoted, or (2) the book value of the shares in accordance with the most recent quarterly report submitted to the CNBV and to the Mexican Stock Exchange. If, after the public offer is concluded, there are still outstanding shares held by the general public, we will be required to create a trust for a period of six months, into which we will be required to contribute funds in an amount sufficient to purchase, at the same price as the offer price, the number of outstanding shares held by the general public. Within the five days prior to the commencement of the public offer, after taking into account the opinion of the audit committee, our board of directors must publish its opinion regarding the offer price.

Tender Offer Rules

Our bylaws provide that any purchasers or group of purchasers that obtain or increase a significant participation (i.e., 30% or more) in the capital stock of the company, without conducting a previous public offer in accordance with the Mexican Securities Market Law and applicable rules issued by the CNBV, would not have the right to exercise the corporate rights of their shares, and that the company will not register such shares in the share registry book.

Other Provisions

Variable capital. We are permitted to issue shares constituting fixed and variable capital. All of our outstanding shares of capital stock constitute fixed capital. The issuance of variable-capital shares, unlike the issuance of fixed-capital shares, does not require an amendment of the bylaws, although it does require a majority vote of the AA Shares and the A Shares.

Forfeiture of shares. As required by Mexican law, our bylaws provide that “any alien who at the time of incorporation or at any time thereafter acquires an interest or participation in the capital of the corporation shall be considered, by virtue thereof, as Mexican in respect thereof and shall be deemed to have agreed not to invoke the protection of his own government, under penalty, in case of breach of such agreement, of forfeiture to the nation of such interest or participation.” Under this provision, a non-Mexican shareholder is deemed to have agreed not to invoke the protection of his own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the shareholder’s rights as a shareholder, but is not deemed to have waived any other rights he may have, including any rights under the U.S. securities laws, with respect to his investment in us. If the shareholder invokes such governmental protection in violation of this agreement, his shares could be forfeited to the Mexican government. Mexican law requires that such a provision be included in the bylaws of all Mexican corporations unless such bylaws prohibit ownership of shares by non-Mexican persons.

Exclusive jurisdiction. Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws shall be brought only in Mexican federal courts.

Duration. Telmex Internacional’s existence under the bylaws is 99 years from the date of the public deed in which its incorporation is evidenced.

Purchase of our own shares. We may repurchase our shares on the Mexican Stock Exchange at any time at the then prevailing market price. Any such repurchase must be made in compliance with the policies established by the board of directors. The shareholders’ meeting approves the maximum amount of funds that may be used during the year for the repurchase of shares. The economic and voting rights corresponding to repurchased shares may not be exercised during the period in which we own such shares, and such shares are not deemed to be outstanding for purposes of calculating any quorum or vote at any shareholders’ meeting during such period.

 

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Conflict of interest. Shareholders with conflicting interests with Telmex Internacional with respect to a transaction are required to abstain from deliberating and voting on the specific transaction. A shareholder that votes on a specific business transaction in which its interest conflicts with Telmex Internacional’s may be liable for damages, but only if the transaction would not have been approved without its vote. A determination of conflicting interest would initially be made by the shareholder subject to judicial challenge. Mexican law does not provide extensive guidance on the criteria to be applied in making such a decision.

Appraisal rights. Whenever the shareholders approve a change of corporate purposes, change of nationality of the corporation or transformation from one type of company to another, any shareholder entitled to vote on such change that has voted against it may withdraw from Telmex Internacional and receive the book value attributable to its shares, provided it exercises its right within 15 days following the adjournment of the meeting at which the change was approved.

Rights of Shareholders

The protections afforded to minority shareholders under Mexican law are different from those in the United States and many other jurisdictions. The case law concerning fiduciary duties of directors has not been developed and has not been the subject of extensive judicial interpretation in Mexico, unlike many states in the United States where duties of care and loyalty elaborated by judicial decisions help to shape the rights of minority shareholders. Mexican civil procedure does not contemplate class actions, which permit shareholders in U.S. courts to bring actions on behalf of other shareholders. Shareholders cannot challenge corporate action taken at a shareholders’ meeting unless they meet certain procedural requirements, as described above under “—Shareholders’ Meetings.” As a result of these factors, in practice it may be more difficult for our minority shareholders to enforce rights against us or our directors or controlling shareholders than it would be for shareholders of a U.S. company.

Enforceability of Civil Liabilities

Telmex Internacional is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, a substantial portion of our assets and their assets are located in Brazil and Mexico. As a result, it may be difficult for investors to effect service of process within the United States on such persons. It may also be difficult to enforce against them, either inside or outside the United States, judgments obtained against them in U.S. courts, or to enforce in U.S. courts judgments obtained against them in courts in jurisdictions outside the United States, in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

CERTAIN CONTRACTS

We are party to concession agreements that authorize us to provide certain telecommunications services on specific terms. These are described in “Item 4. Information on the Company.”

Our agreements with related parties are described in “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.”

 

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EXCHANGE CONTROLS

Mexico has had a free market for foreign exchange since 1991, and the Mexican government has allowed the peso to float freely against the U.S. dollar since December 1994.

TAXATION

The following summary contains a description of certain Mexican federal and U.S. federal income tax consequences of the acquisition, ownership and disposition of our L Shares, A Shares, L Share ADSs, or A Share ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase, hold or sell shares or ADSs.

The Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion and a Protocol thereto between the United States and Mexico entered into force on January 1, 1994 and has been amended by an additional protocol that entered into force on July 3, 2003 (together, the “Tax Treaty”). The United States and Mexico have also entered into an agreement concerning the exchange of information with respect to tax matters.

This discussion does not constitute, and should not be considered as, legal or tax advice to holders. This discussion is for general information purposes only and is based upon the federal tax laws of Mexico (including the Mexican Income Tax Law and the Mexican Federal Tax Code) and the United States as in effect on the date of this registration statement (including the Tax Treaty), which are subject to change, and such changes may have retroactive effect. Holders of our shares or ADSs should consult their own tax advisers as to the Mexican, U.S. or other tax consequences of the purchase, ownership and disposition of our shares or ADSs, including, in particular, the effect of any foreign, state or local tax laws.

Mexican Tax Considerations

The following is a general summary of the principal consequences under the Mexican Income Tax Law (Ley del Impuesto sobre la Renta) and the rules and regulations thereunder, as currently in effect, of an investment in shares or ADSs by a holder that is not a resident of Mexico and that will not hold the shares or ADSs or a beneficial interest therein in connection with the conduct of a trade or business through a permanent establishment in Mexico (a “nonresident holder”).

For purposes of Mexican taxation, the definition of residence is highly technical and residence arises in several situations. Generally, an individual is a resident of Mexico if he or she has established his or her home in Mexico, or if he or she has his or her center of interests in Mexico; a corporation is considered a resident if it has established its place of effective management in Mexico. However, any determination of residence should take into account the particular situation of each person or legal entity.

If a legal entity or an individual is deemed to have a permanent establishment in Mexico for Mexican tax purposes, all income attributable to that permanent establishment will be subject to Mexican income taxes, in accordance with applicable tax laws.

This summary does not address all of the Mexican tax consequences that may be applicable to specific holders of the shares (including a holder that controls us, an investor that holds 10% or more of the shares or holders that constitute a group of persons for purposes of Mexican law). It also does not purport to be a comprehensive description of all the Mexican tax considerations that may be relevant to a decision to purchase, own or dispose of the shares. In particular, this summary does not describe any tax consequences arising under the laws of any state, locality, municipality or taxing jurisdiction other than certain federal laws of Mexico.

 

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Tax Treaties

The Mexican Income Tax Law has established procedural requirements for a nonresident holder disposing of shares to be entitled to benefits under any of the tax treaties to which Mexico is a party. These procedural requirements include the obligation to (i) prove tax treaty residence, (ii) appoint a representative in Mexico for taxation purposes and (iii) present tax calculations prepared by authorized certified public accountants. These requirements are also applicable to provisions of the Tax Treaty that may affect the taxation of certain U.S. holders (as defined in “—U.S. Federal Income Tax Considerations”).

Payment of Dividends

Dividends, either in cash or in kind, paid with respect to our shares or ADSs will not be subject to Mexican withholding tax.

Taxation of Dispositions

Under current Mexican law and regulations, there is no basis for the Mexican tax authorities to impose taxes on income realized by a nonresident holder from a disposition of shares or ADSs, provided that (i) the transaction is carried out through (a) the Mexican Stock Exchange, (b) other securities exchanges or markets approved by the Mexican Ministry of Finance or (c) other securities exchanges or markets with ample securities trading that are located in countries with which Mexico has entered into an income tax treaty, such as the New York Stock Exchange and the Mercado de Valores Latinoamericanos en Euros (Latibex), and (ii) certain other requirements are met including that the acquisition was made pursuant to a non-restricted open market offer.

For a nonresident corporation or individual that does not meet the requirements summarized above, proceeds obtained from the sale or disposition of shares will be subject to a 25% tax. Under certain circumstances, nonresident corporations and individuals, alternatively, may elect to pay a 20% tax on the gain obtained from the transaction.

Pursuant to the Tax Treaty, gains realized by a U.S. holder (as defined in “—U.S. Federal Income Tax Considerations”) eligible for the benefits of the Tax Treaty from the sale or other disposition of shares, even if the sale or disposition is not carried out under the circumstances described in the preceding paragraphs, will not be subject to Mexican income tax, provided that such U.S. holder owned less than 25% of the shares representing capital stock (including ADSs), directly or indirectly, during the 12-month period preceding such disposition.

Gains realized by other nonresident holders that are eligible to receive benefits pursuant to other income tax treaties to which Mexico is a party may be exempt from Mexican income tax in whole or in part. If a corporation is a resident of a tax haven (as defined by the Mexican Income Tax Law), the applicable rate will be 40% on the gross income obtained. Non-U.S. holders should consult their own tax advisers as to their possible eligibility under such treaties.

In other cases, nonresident holders will be subject to Mexican income tax on the sale or other disposition of shares or ADSs. Such nonresident holders should consult with their own tax advisers as to how Mexican income tax would apply to their circumstances.

 

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Other Mexican Taxes

Under certain circumstances, a nonresident holder will not be liable for estate, inheritance or similar taxes with respect to its holdings of shares or ADSs. A gratuitous transfer of shares by a nonresident holder, however, may in certain circumstances result in the imposition of Mexican tax upon the recipient. There are no Mexican stamp, issue, registration or similar taxes payable by a nonresident holder with respect to shares or ADSs.

U.S. Federal Income Tax Considerations

The following is a summary of certain U.S. federal income tax consequences to U.S. holders (as defined below) of the acquisition, ownership and disposition of shares or ADSs. The summary does not purport to be a comprehensive description of all of the tax consequences of the acquisition, ownership or disposition of shares or ADSs that may be relevant to U.S. holders. The summary applies only to U.S. holders that will hold their shares or ADSs as capital assets and does not apply to special classes of U.S. holders such as dealers in securities or currencies, holders with a functional currency other than the U.S. dollar, holders of 10% or more of our voting shares (whether held directly or through ADSs or both), tax-exempt organizations, financial institutions, holders liable for the alternative minimum tax, securities traders electing to account for their investment in their shares or ADSs on a mark-to-market basis, certain short-term holders of shares or ADSs and persons holding their shares or ADSs in a hedging transaction or as part of a straddle or conversion transaction.

For purposes of this discussion, a “U.S. holder” is a holder or beneficial owner of shares or ADSs that is:

 

   

a citizen or resident of the United States of America;

 

   

a corporation organized under the laws of the United States of America or any state thereof; or

 

   

otherwise subject to U.S. federal income taxation on a net income basis with respect to the shares or ADSs.

If a partnership holds our shares or ADSs, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partners of a partnership holding our shares or ADSs should consult their own tax advisers.

Each U.S. holder should consult such holder’s own tax adviser concerning the overall tax consequences to it of the ownership or disposition of shares or ADSs that may arise under foreign, state and local laws.

Treatment of ADSs

In general, a U.S. holder of ADSs will be treated as the owner of the shares represented by those ADSs for U.S. federal income tax purposes. Deposits or withdrawals of shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes. U.S. holders that withdraw any shares should consult their own tax advisers regarding the treatment of any foreign currency gain or loss on any pesos received in respect of such shares.

 

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Taxation of Distributions

In this discussion, we use the term “dividends” to mean distributions paid out of our current or accumulated earnings and profits with respect to our shares or ADSs. In general, the gross amount of any dividends will be subject to U.S. federal income taxation. Dividends will be paid in pesos and will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day that they are received by the U.S. holder in the case of shares or by the depositary in the case of ADSs. U.S. holders should consult their own tax advisers regarding the treatment of foreign currency gain or loss, if any, on any pesos received by a U.S. holder or depositary that are converted into U.S. dollars on a date subsequent to receipt. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to the ADSs, L Shares and A Shares will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the ADSs, L Shares and A Shares will be treated as qualified dividends if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company, or PFIC. The Tax Treaty has been approved for the purposes of the qualified dividend rules. In addition, based on our audited consolidated financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2008 taxable year.

To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the shares or ADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the shares or ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).

Dividends paid by us will not be eligible for the dividends-received deduction allowed to corporations under the U.S. Internal Revenue Code of 1986, as amended (the “Code”).

Distributions of additional shares or ADSs to U.S. holders with respect to their shares or ADSs that are made as part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

Taxation of Dispositions

A U.S. holder will recognize gain or loss on the sale or other disposition of the shares or ADSs in an amount equal to the difference between the U.S. holder’s basis in such shares or ADSs (in U.S. dollars) and the amount realized on the disposition (in U.S. dollars, determined at the spot rate on the date of disposition or, for a cash basis U.S. holder (or an electing accrual basis U.S. holder), at the exchange rate in effect on the settlement date, if the amount realized is denominated in a foreign currency). Gain or loss realized by a U.S. holder on such sale or other disposition generally will be long-term capital gain or loss if, at the time of disposition, the shares or ADSs have been held for more than one year. The net amount of long-term capital gain recognized by an individual holder is taxed at a reduced rate. Such gain or loss generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes.

 

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Gain, if any, realized by a U.S. holder on the sale or other disposition of the shares or ADSs will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, if a Mexican withholding tax is imposed on the sale or disposition of the shares or ADSs, a U.S. holder that does not receive significant foreign source income from other sources may not be able to derive effective U.S. foreign tax credit benefits in respect of these Mexican taxes. U.S. holders should consult their own tax advisers regarding the application of the foreign tax credit rules to their investment in, and disposition of, our shares or ADSs.

Exchange of Shares

A U.S. holder’s exchange of A Shares for L Shares will not constitute a taxable event for U.S. federal income tax purposes. An exchanging U.S. holder will have a tax basis in the L Shares equal to the basis such holder had in the exchanged A Shares. An exchanging U.S. holder’s holding period for the L Shares will include the holding period such U.S. holder had in the A Shares before such shares were exchanged.

Information Reporting and Backup Withholding

Dividends on, and proceeds from the sale or other disposition of, the shares or ADSs paid to a U.S. holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the holder:

 

   

established that it is a corporation or other exempt holder; or

 

   

provides an accurate taxpayer identification number on a properly completed Internal Revenue Service Form W-9 and certifies that it is not subject to backup withholding has occurred and otherwise complies with applicable requirements of the backup withholding rules.

The amount of any backup withholding from a payment to a holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is furnished to the Internal Revenue Service.

U.S. Tax Consequences for Non-U.S. holders

Distributions. A holder or beneficial owner of shares or ADSs that is not a U.S. holder for U.S. federal income tax purposes (a “non-U.S. holder”) generally will not be subject to U.S. federal income or withholding tax on dividends received on shares or ADSs, unless such income is effectively connected with the conduct by the holder of a U.S. trade or business.

Dispositions. A non-U.S. holder of shares or ADSs will not be subject to U.S. federal income or withholding tax on gain realized on the sale of shares or ADSs, unless:

 

   

such gain is effectively connected with the conduct by the holder of a U.S. trade or business; or

 

   

in the case of gain realized by an individual non-U.S. holder, the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.

 

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Information reporting and backup withholding. Although non-U.S. holders generally are exempt from backup withholding, a non-U.S. holder may be required to comply with certification and identification procedures in order to establish its exemption from information reporting and backup withholding.

CORPORATE GOVERNANCE PRACTICES

The disclosure of the significant ways our corporate governance practices differ from those required for U.S. companies under the New York Stock Exchange listing standards is posted on our website and can be accessed at: www.telmexinternacional.com.

DIVIDENDS AND PAYING AGENTS

We have not yet established procedures for the payment of dividends, and have not appointed any financial institution to act as paying agent for the payment of dividends. No procedures have been put into place to allow non-resident holders to claim dividends.

STATEMENTS BY EXPERTS

The consolidated financial statements of Telmex Internacional, S.A.B. de C.V. at December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, appearing in this registration statement have been audited by Mancera, S.C., a Member of Ernst & Young Global, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein. The consolidated financial statements of Net Serviços de Comunicação S.A. at December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, appearing in this registration statement have been audited by Ernst & Young Auditores Independentes S.S., a Member of Ernst & Young Global, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein. The financial statements referred to above are included in reliance upon such reports given on the authority of such firms as experts in accounting and auditing.

The registered address of Mancera, S.C., a Member of Ernst & Young Global, is at Antara Polanco, Avenida Ejercito Nacional, Torre Paseo, No. 843-B Piso 4, Colonia Granada, 11520, México, D.F., México. The registered address of Ernst & Young Auditores Independentes S.S., a Member of Ernest & Young Global, is at Av. Pres. Juscelino Kubitscheck, 1830, Torre I – 6o. andar – Itaim Bibi, 04543-900 – São Paulo, SP, Brasil.

DOCUMENTS ON DISPLAY

Following effectiveness of this registration statement, we will be subject to the information requirements of the Exchange Act, and in accordance therewith, we will file reports, including annual reports on Form 20-F, and other information electronically with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make are also available to the public over the Internet at the SEC’s website at www.sec.gov and at our website at www.telmexinternacional.com. (This URL is intended to be an inactive textual reference only. It is not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be incorporated into this registration statement.)

 

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Item 11. Quantitative and Qualitative Disclosures about Market Risk

EXCHANGE RATE AND INTEREST RATE RISKS

We are exposed to exchange rate risk and interest rate risk related to our indebtedness. Exchange rate risk exists principally with respect to our indebtedness denominated in currencies other than the currencies of the primary operating environments for each of our subsidiaries. As of December 31, 2007, indebtedness denominated in foreign currencies was P.15,982 million, of which P.14,335 million was denominated in U.S. dollars. Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates. We had P.8,614 million of indebtedness bearing interest at floating rates at December 31, 2007.

We use derivative instruments to minimize the impact of fluctuations in exchange rates affecting our indebtedness. We regularly assess our exposure and monitor opportunities to manage these risks. See “Item 5. Operating and Financial Review and Prospects—Risk Management.”

SENSITIVITY ANALYSIS DISCLOSURES

Exchange Rates

The potential loss in fair value of financial instruments held at December 31, 2007, that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in currency exchange rates, taking into account our hedging transactions, would have been approximately P.1,192 million. Such a change in currency exchange rates would also have resulted in additional interest expense of approximately P.107 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in local currency of servicing foreign currency indebtedness. This sensitivity analysis assumes an instantaneous unfavorable 10% change in exchange rates affecting the foreign currencies in which our indebtedness is denominated.

Interest Rates

The potential loss in fair market value of financial instruments held at December 31, 2007, that would have resulted from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate applicable to such financial instruments, taking into account our hedging transactions, would have been approximately P.128 million. This effect would be fully attributable to the impact of the interest rate change on fixed-rate financial assets and liabilities. A hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate applicable to floating-rate financial assets and liabilities held at December 31, 2007, taking into account our hedging transactions, would have resulted in additional interest expense of approximately P.4 million per year, assuming no change in the principal amount of such indebtedness. The above sensitivity analyses are based on the assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial assets and liabilities. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement with each homogeneous category. As a result, interest rate risk sensitivity analysis may overstate the impact of interest rate fluctuations for such financial instruments, as consistently unfavorable.

 

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Item 12. Description of Securities other than Equity Securities

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

JPMorgan Chase Bank, N.A. is the depositary for the L Share ADSs, each representing 20 L Shares, and the A Share ADSs, each representing 20 A Shares, referred to collectively as the ADSs. We will enter into an L Share ADS Deposit Agreement and an A Share ADS Deposit Agreement, referred to collectively as the Deposit Agreements, with the depositary and all holders from time to time of the L Share ADSs or the A Share ADSs, as the case may be. The depositary’s principal office is 4 New York Plaza, 13th Floor, New York, New York 10004, and its telephone number is (212) 623-0636.

Each L Share ADS and each A Share ADS represents an ownership interest in 20 L Shares or 20 A Shares, as the case may be, deposited with the custodian, as agent of the depositary, specified under the Deposit Agreements. In the future, each ADS will also represent any securities, cash or other property deposited with the depositary but which it has not distributed directly to holders. The ADSs are evidenced by American Depositary Receipts, or ADRs.

ADSs may be held either directly or indirectly through a broker or other financial institution. The following description assumes holders hold ADSs directly, by having an ADS registered in their name on the books of the depositary. Indirect ADS holders must rely on the procedures of the broker or financial institution through which they hold their securities to assert the rights of ADR holders described below, and should consult with their broker or financial institution to find out what those procedures are.

Because the depositary’s nominee will actually be the registered owner of the shares, holders must rely on it to exercise the rights of a shareholder on their behalf. The obligations of the depositary and its agents are set out in the Deposit Agreements. Each of the Deposit Agreements and the ADSs is governed by New York law.

The following is a summary of the material terms of the Deposit Agreements. Because it is a summary, it does not contain all the information that may be important to holders. For more complete information, holders should read the entire Deposit Agreement and the form of ADR which contains the terms of their ADSs. Copies of the Deposit Agreements will be filed as exhibits to this registration statement. Holders may also obtain a copy of the Deposit Agreements at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make are also available to the public over the Internet at the SEC’s website at www.sec.gov and at our website at www.telmexinternacional.com. (This URL is intended to be an inactive textual reference only. It is not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be incorporated into this registration statement.)

Share Dividends and Other Distributions

The depositary has agreed to pay to holders the cash dividends or other distributions it or the custodian receives on the A Shares and L Shares or other deposited securities, after deducting its expenses. Holders will receive these distributions in proportion to the number of underlying shares their ADSs represent.

 

   

Cash. The depositary will distribute to holders any U.S. dollars available to it resulting from any cash dividend or other cash distribution we pay on the shares unless that is not possible or practical. If we pay such cash dividend or cash distribution in foreign currency, the

 

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depositary will convert any such cash into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. The depositary will deduct its expenses in (1) converting and transferring cash, including obtaining the approval of a governmental authority therefor, and (2) making any other public or private sale. In addition, before making a distribution the depositary will deduct any taxes withheld and any fees owing. If the exchange rates fluctuate during a time when the depositary cannot convert the currency, holders may lose some or all of the value of the distribution.

 

   

Shares. The depositary may distribute new ADSs representing any shares we distribute as a dividend or free distribution. The depositary will only distribute whole ADSs. It will sell shares that would require it to issue fractional ADSs and distribute the net proceeds in the same way as it distributes cash. If new ADSs are not so distributed, outstanding ADSs will represent the proportionate interest in the shares for which no new ADSs were distributed.

 

   

Rights to receive additional shares. If we offer holders of our securities any rights to subscribe for additional shares or any other rights, the depositary will make these rights available to holders to the extent that we first furnish the depositary with satisfactory evidence that it is legal to do so. If we do not furnish this evidence and it is practical to sell the rights, the depositary will sell the rights and distribute the U.S. dollar proceeds in the same way as it distributes cash. The depositary may allow rights that are not distributed or not sold (because a sale is not practicable) to lapse. In that case, holders will receive no value for them.

 

   

Other distributions. The depositary will send to holders anything else we distribute on deposited securities by any means it thinks is equitable and practical. If the depositary believes it is not feasible to make the distribution, the depositary will distribute any net proceeds from the sale of what we distributed if available in U.S. dollars, in the same way as it distributes cash.

Any U.S. dollars will be distributed by checks for whole dollars and cents (fractional cents will be withheld without liability for interest and dealt with by the depositary in accordance with its then current practices).

To the extent the depositary decides any distribution to holders is not practical, it may make any other distribution it believes is practical, including foreign currency, securities or property. The depositary may retain any of the same as deposited securities without paying interest on or investing it.

Holders have no assurance from the depositary that it will be able to effect any currency conversion or to sell any distributed property, rights or other securities timely or at a specified rate or price.

Deposit, Withdrawal and Cancellation

Issuance of ADSs

The depositary will issue ADSs if holders or their brokers deposit shares or evidence of rights to receive shares issued by us with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names requested by holders and will deliver ADSs at its office to the persons requested by holders.

 

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Withdrawal of ADS and delivery of shares

Except in limited circumstances permitted under Form F-6, when holders turn in their ADS at the depositary’s office, it will, upon payment of certain applicable fees, charges and taxes, deliver at the custodian’s office the underlying shares in registered form only.

At holders’ risk, expense and request, the depositary may deliver at such other place as the holders may request.

Voting Rights

The depositary will notify holders of upcoming votes and arrange to deliver voting materials to them. Such materials will describe the matters to be voted on and explain how holders may instruct the depositary to vote the shares or other deposited securities underlying their ADSs. For instructions to be valid, the depositary must receive them on or before the date specified. The depositary will try, as far as practical, subject to the provisions of and governing the underlying shares or other deposited securities, to vote or to have its agents vote the shares or other deposited securities as holders instruct. The depositary will only vote or attempt to vote as instructed by holders. We cannot assure holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. Holders who do not provide voting instructions to the depositary will be deemed to have instructed it to give a discretionary proxy to a person that we designate, provided that no such instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that we do not desire a discretionary proxy, substantial opposition exists or materially and adversely affects the rights of holders of L Shares or A Shares, as the case may be. The provisions of the Deposit Agreements relating to voting are the same for L Share ADSs as for A Share ADSs, but the voting rights of the L Shares themselves are more limited. See “Item 10. Additional Information—Bylaws and Mexican Law—Voting Rights.”

Reports and Other Communications

The depositary will make available for inspection by holders any written communications from us which are both received by the custodian or its nominee as a holder of deposited securities and made generally available to the holders of deposited securities. We will furnish these communications in English.

Additionally, if we make any written communications generally available to holders of L Shares or A Shares, as the case may be, including the depositary or the custodian, and the depositary or the custodian actually receives those written communications, the depositary will mail copies of them, or, at its option, summaries of them, to ADS holders.

Fees and Expenses

 

The depositary may charge ADS holders up to:

   For:
U.S.$5.00 per 100 ADSs (or portion thereof)   

•        Each issuance, delivery, reduction, cancellation or surrender of an ADS,(including as a result of a distribution of shares or rights or other property) and each withdrawal of underlying shares

 

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Registration or transfer fees   

•        Transfer and registration of L Shares or A Shares on any applicable register payable by holders when they deposit or withdraw shares

Depositary’s expenses   

•        Conversion of foreign currency to U.S. dollars

Depositary’s expenses   

•        Cable, telex and facsimile transmission

U.S. $0.02 or less per ADS   

•        Any cash distribution

U.S.$1.50 per ADR   

•        Any transfer of ADRs

U.S.$0.02 per ADS per year   

•        Services performed by the depositary in administering the ADRs

In addition, holders may be required to pay a fee for the distribution or sale of securities. Such fee would be for an amount equal to the fee for the execution and delivery of ADSs that would be charged as if the securities were treated as deposited shares.

In addition, ADS holders must pay as necessary or incurred any taxes and other governmental charges the depositary or the custodian is required to pay on any ADS, or share underlying an ADS, such as stock transfer, stamp duty, stamp duty reserve or withholding taxes and charges incurred or payable by the depositary or any of its agents in connection with the servicing of shares or other deposited securities or in connection with compliance with law, rule or regulation.

We will pay all other charges and expenses of the depositary and its agents (except the custodian) pursuant to agreements entered into from time to time between ourselves and the depositary.

Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and exchange application and listing fees. The amount of reimbursement available to us is not calculated based on the fees the depositary collects from investors. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.

Payment of Taxes

Holders will have to pay any other taxes payable by or on behalf of the depositary or the custodian with respect to the ADSs, other deposited securities or any distribution thereon to the depositary. Until holders pay such taxes, the depositary may withhold their dividends and other distributions and may refuse to effect a registration, registration of transfer, split-up, combination or withdrawal of the deposited securities.

The depositary may deduct the amount of any taxes owed from any payments to holders. It may also sell deposited securities or property, other than cash, by public or private sale, to pay any taxes owed. Holders will remain liable if the proceeds of the sale are not enough to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and will pay to holders any proceeds, or send to holders any cash or other property, remaining after it has paid the taxes.

 

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The depositary or the custodian will remit to the governmental authority any amounts required to be withheld in connection with a distribution which is owed by either of them to such governmental authority. We will similarly remit any amounts so owed by us.

Reclassifications, Recapitalizations and Mergers

If we

 

   

change the par value of the L Shares or A Shares,

 

   

reclassify, split up, cancel or consolidate any of the deposited securities, or

 

   

recapitalize, reorganize, merge, consolidate or sell our assets or if there are securities available from a liquidation, receivership or bankruptcy;

then, to the extent the relevant Deposit Agreement is not amended to reflect such change and no distribution is made to Holders:

 

   

the securities received by the depositary will become deposited securities, and each ADS will automatically represent its proportionate share of the new deposited securities, and

 

   

the depositary may issue new ADSs or ask holders to surrender their outstanding ADSs in exchange for new ADSs identifying the new deposited securities.

Amendment and Termination

We may agree with the depositary to amend the Deposit Agreements and the ADSs without the consent of holders for any reason. If an amendment adds or increases fees or charges (except for taxes and other governmental charges, transfer or registration fees or certain expenses of the depositary and except for cable, telex, electronic and facsimile transmission and delivery charges), or prejudices an important right of ADS holders, it will only become effective 30 days after the depositary notifies holders of the amendment. At the time an amendment becomes effective, holders are considered, by continuing to hold their ADSs, to agree to the amendment and to be bound by the relevant ADSs and Deposit Agreement as amended.

No amendment will impair holders’ rights to surrender their ADSs and receive the underlying securities, except in order to comply with mandatory provisions of applicable law.

The depositary will terminate the Deposit Agreements if we ask it to do so but must notify holders 30 days before termination. The depositary may also terminate the Deposit Agreements at its own initiative but may only do so after giving us 30 days’ prior notice at any time 90 days after it has resigned as depositary, provided no successor depositary has been appointed during such 90-day period. In the case of a termination by the depositary, it will provide holders with 30 days’ prior notice.

After termination, the depositary and its agent will be required to do only the following under the Deposit Agreements: (a) advise holders of such termination, (b) collect and hold distributions on the deposited securities, (c) sell property or rights or convert deposited securities into cash as provided in the

 

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Deposit Agreements, and (d) deliver shares and other deposited securities upon cancellation of ADSs. As soon as practicable after six months from the termination date, the depositary will, if practical, sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the relevant Deposit Agreement for the pro rata benefit of the ADS holders that have not surrendered their ADSs. The depositary has no liability for interest. Its only obligations will be to account for the money and other cash. After termination, our only obligations will be with respect to certain indemnification obligations and to pay certain charges to the depositary.

Limitations on Obligations and Liability to ADS Holders

The Deposit Agreements expressly limit our obligations and the obligations of the depositary. They also limit our liability and the liability of the depositary. We and the depositary:

 

   

are only obligated to take the actions specifically set forth in the Deposit Agreement without gross negligence or bad faith;

 

   

are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our respective obligations under the Deposit Agreements;

 

   

are not liable if either of us exercises discretion permitted under the Deposit Agreements;

 

   

have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the Deposit Agreements on holders’ behalf or on behalf of any other party, except in the case of Telmex Internacional unless indemnity satisfactory to us in our sole discretion is, and continues to be, provided to us covering all expenses and liability;

 

   

may rely upon any documents we believe to be genuine and to have been signed or presented by the proper party;

 

   

will not be liable for any action or inaction while relying on advice or information from legal counsel or certain other advisors, holders or anyone else competent to give advice or information.

The depositary will not be responsible for failing to carry out instructions to vote the ADSs or for the manner in which the ADSs are voted or the effect of the vote.

The depositary and its agents may fully respond to any and all demands or requests for information maintained by or in its behalf in connection with the Deposit Agreements, any Holder or Holders, any ADR or ADRs or otherwise related thereto to the extent such information is requested or required by or pursuant to any lawful authority, including, without limitation, laws, rules, regulations, administrative or judicial process, banking, securities or other regulators.

Neither we nor the depositary nor any of our respective agents shall be liable to Holders or beneficial owners of interests in ADSs for any indirect, special, punitive or consequential damages.

The depositary may own and deal in our securities and in ADSs.

In the Deposit Agreements, we and the depositary agree to indemnify each other under certain circumstances.

 

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Requirements for Depositary Actions

Before the depositary will issue or register transfer of an ADS, make a distribution of an ADS, or permit withdrawal of underlying shares, it may require:

 

   

payment of (a) stock transfer or other taxes or other governmental charges, (b) transfer or registration fees charged by third parties for the transfer of any shares or other deposited securities and (c) the depositary’s charges in connection with such action;

 

   

production of satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and

 

   

compliance with regulations it may establish from time to time, consistent with the Deposit Agreements, including presentation of transfer documents.

The depositary may refuse to deliver, transfer or register transfers of ADSs generally when its or our transfer books or any register for deposited securities are closed or at any time the depositary or we think it advisable to do so.

Holders’ Right to Receive Shares Underlying their ADSs

Holders have the right to cancel their ADSs and withdraw the underlying shares at any time except:

 

   

when temporary delays arise because: (a) we or the depositary have closed our transfer books; (b) the transfer of shares is blocked to permit voting at a shareholders’ meeting; or (c) we are paying a dividend on the shares;

 

   

when any holder seeking to withdraw shares owes money to pay fees, taxes and similar charges; and

 

   

when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of shares or other deposited securities.

This right of withdrawal may not be limited by any other provision of the Deposit Agreements.

Books of Depositary

The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs. Holders may inspect such records at reasonable times, but solely for the purpose of communicating with other holders in the interest of business matters relating to the Deposit Agreements or our company.

The depositary will maintain facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities may be closed from time to time, to the extent not prohibited by law.

 

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Pre-release of ADSs

In certain circumstances, subject to the provisions of the Deposit Agreements, the depositary may issue ADSs before deposit of the underlying shares. This is called a pre-release of the ADSs. A pre-release is closed out as soon as the underlying shares are delivered to the depositary. The depositary may pre-release ADSs if:

 

   

before or at the time of the pre-release, the person to whom the pre-release is being made represents in writing to the depositary that it or its customer owns the shares to be deposited, assigns all rights thereto to the depositary, holds the shares for the account of the depositary and will deliver the shares to the custodian as soon as practicable, and

 

   

pre-released ADSs are fully collateralized with cash or U.S. government securities held by the depositary for the benefit of holders. In addition, the depositary will limit the number of pre-released ADSs to no more than 20% of all deposited shares.

PART II

Items 13-16.  Not Applicable

PART III

 

Item 17. Not Applicable

 

Item 18. Financial Statements

Our audited consolidated financial statements are included in this registration statement beginning on page F-1. The audited consolidated financial statements of Net are included in this registration statement beginning on page F-72.

 

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Item 19. Exhibits

Documents filed as exhibits to this registration statement:

 

  1.1    Bylaws (estatutos sociales) of Telmex Internacional, S.A.B. de C.V., dated December 21, 2007 (English translation).
  2.1    Form of L Share Deposit Agreement, incorporated by reference to our registration statement on Form F-6 (File No. 333-151240) filed on May 29, 2008.
  2.2    Form of A Share Deposit Agreement, incorporated by reference to our registration statement on Form F-6 (File No. 333-151242) filed on May 29, 2008.
  4.1    Master Transition Agreement between Teléfonos de México, S.A.B. de C.V. and Telmex Internacional, S.A.B. de C.V., dated as of December 26, 2007 (English translation).
  8.1    List of significant subsidiaries of Telmex Internacional, S.A.B. de C.V.
23.1    Consent of Mancera, S.C.
23.2    Consent of Ernst & Young Auditores Independentes S.S.

The exhibits do not include any instrument defining the rights of holders of long-term debt of the registrant or of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed when under such instrument the total amount of securities authorized does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish a copy of any such instrument to the SEC upon its request.

INDEX TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Audited consolidated financial statements of Telmex Internacional, S.A.B. de C.V.

  

Report of Mancera, S.C.

   F-1

Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005

   F-2

Consolidated Balance Sheets as of December 31, 2007 and 2006

   F-3

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005

   F-5

Consolidated Statements of Changes in Financial Position for the years ended December 31, 2007, 2006 and 2005

   F-4

Notes to the Audited Consolidated Financial Statements

   F-6

 

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     Page

Audited consolidated financial statements of Net Serviços de Comunicação S.A.

  

Report of Ernst & Young Auditores Independentes S.S.

   F-72

Consolidated Balance Sheets as of December 31, 2007 and 2006

   F-73

Consolidated Statements of Income for each of the three years in the period ended December 31, 2007

   F-75

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2007

   F-76

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007

   F-77

Notes to the Audited Consolidated Financial Statements

   F-78

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of

Telmex Internacional, S.A.B. de C.V.

We have audited the accompanying consolidated balance sheets of Telmex Internacional, S.A.B. de C.V. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated financial statements of income, changes in stockholders’ equity and changes in financial position for each of the three years in the period ended December 31, 2007. 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 auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telmex Internacional, S.A.B. de C.V. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 2007, in conformity with Mexican Financial Reporting Standards, which differ in certain respects from those followed in the United States of America (see Note 20).

 

                    Mancera, S.C.

                      Member of

            Ernst & Young Global

/s/ C.P.C. Fernando Espinosa López
C.P.C. Fernando Espinosa López

Mexico City, Mexico

April 7, 2008

 

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Table of Contents

TELMEX INTERNACIONAL, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands of Mexican pesos, except for earnings per share, with purchasing power at December 31, 2007)

 

     Year ended December 31,  
     2007     2006     2005     Millions of U.S.
dollars, except for
earnings per share
2007
 

Operating revenues:

        

Domestic long-distance service

   P. 27,083,640     P. 29,248,364     P. 28,714,198     $ 2,492  

Corporate networks

     15,390,235       15,481,918       12,948,222       1,416  

Local service

     7,873,585       5,510,535       3,916,363       725  

Internet access services

     4,381,169       3,502,203       3,309,152       403  

International long-distance service

     3,604,967       3,785,583       4,863,627       332  

Pay television

     1,043,879       48,704       —         96  

Other

     8,382,696       7,943,061       7,595,139       772  
                                
     67,760,171       65,520,368       61,346,701       6,236  
                                

Operating costs and expenses:

        

Transport and interconnection

     23,649,023       23,987,857       24,067,026       2,176  

Cost of sales and services

     9,802,648       8,457,364       7,592,730       902  

Commercial, administrative and general expenses

     16,207,483       21,487,843       14,467,096       1,492  

Depreciation and amortization (Notes 6 and 7) (includes P. 6,285,879 in 2007, P. 6,650,883 in 2006 and P. 6,525,822 in 2005, not included in cost of sales and services)

     7,770,805       8,271,004       8,050,667       715  
                                
     57,429,959       62,204,068       54,177,519       5,285  
                                

Operating income

     10,330,212       3,316,300       7,169,182       951  
                                

Other expense (income), net (Notes 3 and 17)

     242,692       (1,906,514 )     206,549       23  

Comprehensive financing cost:

        

Interest income

     (1,216,707 )     (1,166,804 )     (1,703,062 )     (112 )

Interest expense

     1,630,535       1,781,599       2,379,397       150  

Exchange loss , net

     3,107       713,402       338,370       —    

Monetary (gain) loss, net

     (140,781 )     213,507       (12,274 )     (13 )
                                
     276,154       1,541,704       1,002,431       25  

Equity interest in net income of affiliates

     689,075       577,567       122,645       63  
                                

Income before income tax

     10,500,441       4,258,677       6,082,847       966  

Income tax (Note 16):

     3,486,763       1,240,988       1,497,146       321  
                                

Net income

   P. 7,013,678     P. 3,017,689     P. 4,585,701     $ 645  
                                

Distribution of net income:

        

Majority interest

   P. 6,463,834     P. 2,352,289     P. 3,179,531     $ 595  

Non-controlling interest

     549,844       665,400       1,406,170       50  
                                
   P. 7,013,678     P. 3,017,689     P. 4,585,701     $ 645  
                                

Weighted average number of shares outstanding (millions)

     19,766       20,948       22,893       19,766  
                                

Majority net income per share

   P. 0.33     P. 0.11     P. 0.14     $ 0.03  
                                

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

 

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Table of Contents

TELMEX INTERNACIONAL, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands of Mexican pesos with purchasing power at December 31, 2007)

 

     December 31,
     2007    2006    Millions of U.S.
dollars 2007

Assets

        

Current assets:

        

Cash and cash equivalents

   P. 17,267,803    P. 6,905,510    $ 1,589

Accounts receivable, net (Note 3)

     18,059,882      18,361,586      1,662

Inventories for sale, net

     1,056,733      117,627      97

Prepaid expenses and others

     1,629,167      1,304,224      150
                    

Total current assets

     38,013,585      26,688,947      3,498

Plant, property and equipment, net (Note 6)

     50,493,841      47,270,748      4,647

Inventories for operation of the telephone plant, net

     1,787,603      939,545      165

Licenses and trademarks, net (Note 7)

     5,721,334      5,644,733      527

Equity investments (Note 5)

     5,932,778      2,799,888      546

Deferred taxes (Note 16)

     7,633,694      9,293,595      703

Goodwill, net (Note 5)

     16,297,953      10,605,356      1,500

Other non-current assets (Note 3)

     3,399,963      4,938,161      313
                    

Total assets

   P. 129,280,751    P. 108,180,973    $ 11,899
                    

Liabilities and stockholders’ equity

        

Current liabilities:

        

Short-term debt and current portion of long-term debt (Note 8)

   P. 4,713,208    P. 4,931,917    $ 434

Accounts payable and accrued liabilities (Note 12)

     19,986,593      20,834,666      1,839

Taxes payable

     874,065      1,247,321      82

Deferred credits (Note 11)

     4,319,181      4,241,559      397
                    

Total current liabilities

     29,893,047      31,255,463      2,752

Long-term debt (Note 8)

     11,269,225      12,558,450      1,037

Labor obligations (Note 14)

     2,584,223      2,670,286      238
                    

Total liabilities

     43,746,495      46,484,199      4,027

Stockholders’ equity (Note 15):

        

Capital stock

     17,828,563         1,641

Other capital contributions

     37,781,610         3,477

Parent investment

        35,620,168   

Retained earnings:

        

Prior years

     13,735,687      9,533,169      1,266

Current year

     6,463,834      2,352,289      595
                    
     20,199,521      11,885,458      1,861

Other accumulated comprehensive income

     7,082,661      10,715,509      650
                    

Majority stockholders’ equity

     82,892,355      58,221,135      7,629

Non-controlling interest

     2,641,901      3,475,639      243
                    

Total stockholders’ equity

     85,534,256      61,696,774      7,872
                    

Total liabilities and stockholders’ equity

   P. 129,280,751    P. 108,180,973    $ 11,899
                    

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

 

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TELMEX INTERNACIONAL, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Statements of Changes in Financial Position

(In thousands of Mexican pesos with purchasing power at December 31, 2007)

 

     Year ended December 31,  
     2007     2006     2005     Millions of US
dollars 2007
 

Operating activities

        

Net income

   P. 7,013,678     P. 3,017,689     P. 4,585,701     $ 645  

Add (deduct) items not requiring the use of resources:

        

Depreciation

     6,436,751       6,816,904       7,045,456       592  

Amortization

     1,334,054       1,454,100       1,005,211       123  

Goodwill impairment

     —         378,100       —         —    

Deferred taxes

     1,430,443       (764,679 )     230,632       132  

Equity interest in net income of affiliates

     (689,075 )     (577,567 )     (122,645 )     (63 )

Labor obligation costs

     145,575       168,539       204,529       13  
                                
     15,671,426       10,493,086       12,948,884       1,442  

Changes in operating assets and liabilities:

        

(Increase) decrease in:

        

Accounts receivable

     2,049,522       (7,131,821 )     2,304,645       189  

Inventories for sale

     (939,106 )     26,168       232,598       (86 )

Prepaid expenses and others

     (427,157 )     (398,776 )     16,149       (39 )

(Decrease) increase in:

        

Labor Obligations:

        

Contributions to trust fund

     (338 )     (426 )     (432 )     —    

Payments to employees

     (13,184 )     (11,207 )     (8,299 )     (1 )

Accounts payable and accrued liabilities

     (1,528,408 )     4,978,868       (1,654,647 )     (141 )

Taxes payable

     (292,199 )     2,187,205       (1,614,261 )     (27 )

Deferred credits

     (26,628 )     223,388       51,974       (3 )
                                

Resources provided by operating activities

     14,493,928       10,366,485       12,276,611       1,334  
                                

Financing activities

        

New loans

     5,280,218       10,247,872       5,358,428       486  

Repayment of loans

     (3,771,268 )     (2,480,607 )     (14,961,588 )     (347 )

Effect of exchange rate differences and variances in debt expressed in constant pesos

     (3,816,533 )     (1,185,305 )     (1,982,831 )     (351 )

Increase in parent investment

     19,990,005       8,153,409       11,446,988       1,840  

Contribution of non-controlling stockholders

     —         —         1,383,352       —    

Dividends paid to non-controlling stockholders in subsidiary

     (27,403 )     (423,402 )     —         (3 )
                                

Resources provided by financing activities

     17,655,019       14,311,967       1,244,349       1,625  
                                

Investing activities

        

Plant, property and equipment

     (12,180,470 )     (8,769,350 )     (8,721,760 )     (1,121 )

Licenses and trademarks

     (849,763 )     (1,036,962 )     (2,177,284 )     (78 )

Inventories for operation of the telephone plant

     (623,430 )     (49,463 )     (530,696 )     (57 )

Subsidiaries and affiliated companies

     (8,485,267 )     (14,081,037 )     (6,762,003 )     (781 )

Initial cash balance from equity investment in subsidiaries

     352,276       55,308       225,943       32  
                                

Resources used in investing activities

     (21,786,654 )     (23,881,504 )     (17,965,800 )     (2,005 )
                                

Net increase (decrease) in cash and cash equivalents

     10,362,293       796,948       (4,444,840 )     954  

Cash and cash equivalents at beginning of year

     6,905,510       6,108,562       10,553,402       636  
                                

Cash and cash equivalents at end of year

   P. 17,267,803     P. 6,905,510     P. 6,108,562     $ 1,590  
                                

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

 

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Table of Contents

TELMEX INTERNACIONAL, S.A.B. DE C.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2007, 2006 and 2005

(In thousands of Constant Mexican pesos with purchasing power at December 31, 2007)

 

    Parent
investment
    Capital
stock
  Other capital
contributions
  Retained
earnings
  Other
accumulated
comprehensive
income
    Total
majority
stockholders
equity
    Non-controlling
Interest
    Comprehensive
income
    Total
stockholders’

equity
 

Balances at January 1, 2005

  P. 16,019,773         P. 163,110   P. 9,404,751     P. 25,587,634     P. 23,049,592       P. 48,637,226  

Increase in parent investment

    11,446,986               11,446,986           11,446,986  

Acquisition of non-controlling interest and contribution from non-controlling stockholders

          3,784,722       3,784,722       (2,697,971 )       1,086,751  

Gain on sale of entities to companies under common control

          1,170,300       1,170,300       (1,170,300 )    

Comprehensive income:

                 

Net income of the year

          3,179,531       3,179,531       1,406,170     P. 4,585,701       4,585,701  

Other comprehensive income items

                 

Effect of translation of foreign entities

            5,712,870       5,712,870       (2,659,691 )     3,053,179       3,053,179  

Effect of labor obligations, net of deferred taxes

            (13,624 )     (13,624 )       (13,624 )     (13,624 )

Deficit from holding non-monetary assets, net of deferred taxes

            (4,243,977 )     (4,243,977 )     (2,653,999 )     (6,897,976 )     (6,897,976 )
                       

Comprehensive income

                P. 727,280    
                                                         

Balances at December 31, 2005

    27,466,759           8,297,663     10,860,020       46,624,442       15,273,801         61,898,243  

Increase in parent investments

    8,153,409               8,153,409           8,153,409  

Cash dividend paid to non-controlling interest in subsidiary

                (423,402 )       (423,402 )

Acquisition of non-controlling interest:

          861,070     —         861,070       (12,187,494 )       (11,326,424 )

Noncontrolling interests

                7,498         7,498  

Gain in dilution of investment in affiliate:

          374,436       374,436       33,287         407,723  

Comprehensive income

                 

Net income of the year

          2,352,289     —         2,352,289       665,400     P. 3,017,689       3,017,689  

Other comprehensive income items

                 

Effect of translation of foreign entities

            1,514,572       1,514,572       337,846       1,852,418       1,852,418  

Effect of labor obligations, net of deferred taxes

            (26,593 )     (26,593 )     —         (26,593 )     (26,593 )

Deficit from holding non-monetary assets, net of deferred taxes

            (1,632,490 )     (1,632,490 )     (231,297 )     (1,863,787 )     (1,863,787 )
                       

Comprehensive income:

                P. 2,979,727    
                                                         

Balances at December 31, 2006

    35,620,168           11,885,458     10,715,509       58,221,135       3,475,639         61,696,774  

Increase in parent investment

    19,990,005             —         19,990,005       —           19,990,005  

Effect of split- up

    (55,610,173 )   P. 17,828,563   P. 37,781,610       —         —         —        

Cash dividend paid to non-controlling interest in subsidiary

            —         —         (27,403 )       (27,403 )

Acquisition of non-controlling interest

          9,414     —         9,414       (388,348 )       (378,934 )

Gain on dilution of investment in affiliate

          1,840,815     —         1,840,815       —           1,840,815  

Comprehensive income

                 

Net income of the year

          6,463,834     —         6,463,834       549,844     P. 7,013,678       7,013,678  

Other comprehensive income items:

                 

Effect of translation of foreing entities

            652,182       652,182       (24,818 )     627,364       627,364  

Effect of labor obligations, net of deferred taxes

            (33,610 )     (33,610 )     —         (33,610 )     (33,610 )

Deficit from holding non-monetary assets, net of deferred taxes

            (4,251,420 )     (4,251,420 )     (943,013 )     (5,194,433 )     (5,194,433 )