UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

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

OR

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

For the fiscal year ended December 31, 2010

OR

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

OR

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

Commission file number: 001-31894

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

(Exact name of Registrant as specified in its charter)

ALESTRA

(Translation of Registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

Ave. Lázaro Cárdenas No. 2321, 9th Floor

Col. Residencial San Agustín

Garza García N.L. 66260 México

(Address of principal executive offices)

Sergio Bravo

(52) 81 86 25 22 01

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

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

Ave. Lázaro Cárdenas No. 2321, 9th Floor

Col. Residencial San Agustín

Garza García N.L. 66260 México

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

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

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

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

11.750% Senior Notes due 2014

(Title of Class)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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.    Yes  x    No  ¨

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

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

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

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

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

Item 17  ¨    Item 18  x

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

TABLE OF CONTENTS

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Item 1.	Identity of Directors, Senior Management and Advisers.	1
Item 2.	Offer Statistics and Expected Timetable.	1
Item 3.	Key Information.	1
Item 4.	Information on the Company.	10
Item 4.A.	Unresolved Staff Comments.	30
Item 5.	Operating and Financial Review and Prospects.	30
Item 6.	Directors, Senior Management and Employees.	46
Item 7.	Major Shareholders and Related Party Transactions.	48
Item 8.	Financial Information.	49
Item 9.	The Offer and Listing.	49
Item 10.	Additional Information.	50
Item 11.	Quantitative and Qualitative Disclosures About Market Risk.	56
Item 12.	Description of Securities Other Than Equity Securities.	57
Item 13.	Defaults, Dividend Arrearages and Delinquencies.	57
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds.	57
Item 15.	Controls and Procedures.	57
Item 16.	Reserved.	58
Item 16.A.	Audit Committee Financial Expert	58
Item 16.B.	Code of Ethics	58
Item 16.C.	Principal Accountant Fees and Services	58
Item 16.D.	Exemptions from the Listing Standards for Audit Committees	58
Item 16.E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	58
Item 16.F.	Change in Registrant’s Certifying Accountant	58
Item 16.G.	Corporate Governance	59
Item 17.	Financial Statements.	59
Item 18.	Financial Statements.	59
Item 19.	Exhibits.	59
Index to the Financial Statements		F-1

In this annual report, unless the context otherwise requires, the terms “we,” “us,” “our,” “our company” and “ourselves” mean Alestra, S. de R.L. de C.V. (“Alestra”) and its subsidiaries, Servicios Alestra, S.A. de C.V. (“Servicios Alestra”) and Alestra Telecomunicaciones Inalámbricas, S. de R.L. de C.V. (“Alestra Telecomunicaciones Inalámbricas”).

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

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

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

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

• the competitive nature of providing long distance, data, internet and local services;

• changes in our regulatory environment, particularly changes to the regulation of the telecommunications industry;

• the risks associated with our ability to implement our strategy;

• customer turnover;

• technological innovations;

• our need for substantial capital;

• interest rate levels;

• performance of financial markets and our ability to refinance our financial obligations when they come due;

• our ability to service our debt;

• limitations on our access to sources of financing on competitive terms;

• currency exchange rates, including the Mexican Peso/U.S. dollar exchange rate;

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

• changes in the policies of central banks and/or foreign governments.

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

PART I

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

Not applicable.

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

Item 3. Key Information.

A. Selected Financial Data

The following tables set forth summary historical financial data for Alestra and its consolidated subsidiaries. The financial information presented as of December 31, 2009 and 2010 and for the fiscal years ended December 31, 2008, 2009 and 2010 was derived from our audited consolidated financial statements included elsewhere in this annual report. The financial information presented as of and for the fiscal years ended December 31, 2006, 2007 and 2008 was derived from our audited financial statements that are not included in this annual report. We use “Pesos” to refer to Mexican Pesos throughout this document.

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

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

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

	As of and for the year ended December 31,
	2006 (1)			2007 (1)			2008 (2)			2009 (2)			2010 (2)
	(in millions of Pesos, unless otherwise indicated)
STATEMENT OF OPERATION
Mexican FRS:
Revenues:
Long distance services	Ps.	2,189		Ps.	2,415		Ps.	1,722		Ps.	1,421		Ps.	1,114
Data, internet and local services		2,346			2,641			2,950			3,263			3,456
Total		4,536			5,056			4,673			4,684			4,570
Cost of services (excluding depreciation):
Long distance services		(1,120	)		(1,460	)		(1,042	)		(956	)		(679	)
Data, internet and local services		(608	)		(758	)		(747	)		(781	)		(836	)
Total		(1,729	)		(2,218	)		(1,789	)		(1,737	)		(1,515	)
Administration, selling and other operating expenses		(1,536	)		(1,513	)		(1,552	)		(1,529	)		(1,578	)
Depreciation and amortization		(1,084	)		(870	)		(757	)		(854	)		(867	)
Operating income		187			455			575			564			611

1

	As of and for the year ended December 31,
	2006 (1)			2007 (1)			2008 (2)			2009 (2)			2010 (2)
	(in millions of Pesos, unless otherwise indicated)
Comprehensive financial result (3)		(292	)		(180	)		(944	)		(221	)		(193	)
Other (expenses) income (4)		(15	)		1			(50	)		(73	)		(26	)
Asset tax		(3	)		(3	)		—			—			—
Income tax		—			(86	)		35			22			(34	)
Net (loss) income		(124	)		188			(384	)		291			357
U.S. GAAP: (5)
Revenues:		4,536			5,056			4,673			4,684			4,570
Cost of services (excluding depreciation):		(1,729	)		(2,218	)		(1,789	)		(1,737	)		(1,515	)
Administration, selling and other operating expenses		(1,535	)		(1,514	)		(1,543	)		(1,531	)		(1,568	)
Depreciation and amortization		(977	)		(945	)		(895	)		(904	)		(867	)
Operating income		294			379			446			512			620
Comprehensive financial result		(2	)		63			(718	)		103			(193	)
Net income (loss)	Ps.	301		Ps.	299		Ps.	(227	)	Ps.	648		Ps.	359
BALANCE SHEET
Mexican FRS:
Cash and cash equivalents (6)	Ps.	906		Ps.	449		Ps.	203		Ps.	636		Ps.	864
Trade receivables, net		406			472			516			494			493
Property and equipment, net		5,243			5,133			5,169			5,205			5,078
Other assets		703			490			453			581			707
Total assets		7,258			6,544			6,341			6,915			7,142
8% Senior Notes due 2010		3,211			2,581			2,701			—			—
11.750% Senior Notes due 2014		—			—			—			2,612			2,471
Bank loans, notes payable and capital leases		608			393			473			597			527
Total debt		3,818			2,974			3,174			3,209			2,998
Accounts payable		587			399			521			763			772
Dividends payable		—			—			—			131			124
Other payables (7)		460			487			423			499			580
Deferred income taxes		—			86			6			—			—
Total liabilities		4,866			3,946			4,125			4,602			4,474
Contributed capital		1,395			1,395			1,395			1,395			1,395
Retained earnings		997			1,203			821			919			1,273
Total stockholders’ equity	Ps.	2,393		Ps.	2,598		Ps.	2,217		Ps.	2,314		Ps.	2,668
U.S. GAAP: (5)
Property and equipment, net	Ps.	5,586		Ps.	5,319		Ps.	5,220		Ps.	5,205		Ps.	5,078
Total assets		7,597			6,800			6,346			6,846			7,130
Total stockholders’ equity		1,779			2,075			1,852			2,299			2,649
CASH FLOW DATA:
Resources provided by (used in) (8)
Mexican FRS:
Operating activities	Ps.	1,065		Ps.	997		Ps.	1,283		Ps.	1,768		Ps.	1,434
Investing activities		(640	)		(615	)		(834	)		(899	)		(740	)
Financing activities		(673	)		(844	)		(722	)		(483	)		(465	)
U.S. GAAP: (5)(9)
Operating activities	Ps.	1,006		Ps.	809		Ps.	1,077		Ps.	1,561		Ps.	1,060
Investing activities		(769	)		(543	)		(697	)		(1,234	)		(810	)
Financing activities		(447	)		(701	)		(461	)		(259	)		(81	)
OTHER FINANCIAL/OPERATING DATA:
(Unaudited):
Capital expenditures	Ps.	482		Ps.	600		Ps.	793		Ps.	937		Ps.	789
Minutes of traffic, domestic long distance		1,994			1,879			1,760			1,641			1,326
Minutes of traffic, international long distance		2,197			1,392			862			485			354
Employees (10)		1,899			1,902			1,766			1,699			1,696
Residential lines (11)		327			285			173			116			75
On-net customer locations — type I (12)		2,864			3,440			4,119			4,519			5,530
On-net customer locations — type II (13)		6,017			7,259			8,015			7,800			7,930
Customer access circuits — E0 equivalents (14)		276			377			518			617			765

2

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

(2) Information as of and for the years ended December 31, 2008, 2009 and 2010 is expressed in millions of adjusted nominal Pesos, except as otherwise indicated.

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

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

(5) See Note 20 to our consolidated financial statements. For information relating to the nature and effect of technical accounting differences between Mexican FRS and U.S. GAAP.

(6) Since Mexican FRS C-1 “Cash and cash equivalents” became effective in 2010 the restricted cash balance is now required to be included as part of the cash and cash equivalents caption. We reclassified retrospectively the restricted cash amounts to cash and cash equivalents in accordance with the Mexican FRS C-1.

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

(8) Through December 31, 2007, under Mexican FRS, the changes in financial position for operation activities, financing and investing were presented in the statements of changes in financial position. On January 1, 2008, Mexican FRS B-2 “Statement of Cash Flows” became effective on a prospective basis. Due to the adoption of Mexican FRS B-2 “Statement of Cash Flows”, 2008, 2009 and 2010 information is not directly comparable to 2007 and 2006 information. The criteria for determining resources used in, or generated from, operating, investing and financing activities under the new Mexican FRS B-2 “Statement of Cash Flows” is different from prior years.

(9) We have revised our consolidated Statements of cash flows for the years ended December 31, 2008, and 2009. While this revision shifts certain amounts within our cash flow Statements affecting the net cash flows from operating activities, the net cash flows from investing activities and the net cash flows from financing activities, it does not affect management’s previously issued disclosures regarding liquidity or our compliance with debt covenant ratio calculations. For this and other reasons, management has concluded that this revision is not material to our previously issued consolidated financial statements. See a summary of the revisions to the consolidated statements of cash flows in Note 20h. to our consolidated financial statements.

(10) Actual number of employees, not in millions.

(11) In thousands, not millions.

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

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

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

3

Exchange Rate Information

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

	Noon Buying Rate (Peso per Dollar)
Year	High		Low		Average(1)		Period End
2006		11.46		10.43		10.90		10.80
2007		11.27		10.67		10.93		10.92
2008		13.94		9.92		11.21		13.83
2009		15.41		12.63		13.58		13.06
2010		13.19		12.16		12.64		12.38
Month
September 2010		13.06		12.49		12.80		12.63
October 2010		12.61		12.33		12.44		12.34
November 2010		12.57		12.21		12.34		12.45
December 2010		12.47		12.33		12.39		12.38
January 2011		12.25		12.04		12.12		12.15
February 2011		12.18		11.97		12.06		12.11

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

On March 11, 2011, the noon buying rate as provided by The Federal Reserve Bank of New York was Ps. 11.9211 per U.S.$1.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Relating to Us

Weakening economic conditions adversely affect us.

The global economy is currently undergoing a period of growth. Despite the global economic recovery, the U.S. economy is undergoing a slow recovery phase, that may have, and in the case of consistent slow recovery from the U.S. economy, could have, a negative impact on the Mexican economy and consequently on our business. See “— Risks Relating to Mexico — Downturns in the Mexican economy adversely affect us.”

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

We currently have a significant amount of debt, and we may incur additional debt in the future. As of December 31, 2010, we had a consolidated total indebtedness of Ps. 2,998.3 million. Our significant level of debt could have important consequences, including:

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

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

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

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

• making it difficult for us to refinance our indebtedness or to refinance such indebtedness on favorable terms;

4

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

• leaving us vulnerable to increases in interest rates affecting our variable rate debt.

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

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

Global credit and capital markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms. If these conditions continue or worsen, our cost of borrowing may increase, and it may be more difficult to refinance our current debt and to obtain financing in the future, which could negatively affect our business and operating results. We also face challenges relating to the impact of the disruption in the global financial markets on parties with which we do business, such as customers, vendors and other parties. The inability of these parties to obtain financing on acceptable terms could impair their ability to perform under their agreements with us and lead to various negative effects on us.

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

We are dependent on domestic and international long distance services, which accounted for 24.4% of our revenues in 2010, 30.3% of our revenues in 2009 and 36.9% of our revenues in 2008. Average prices for domestic long distance calls in Mexico declined more than 70% in real terms from December 1996 to December 2010. Since there is an oversupply of fiber optic capacity, our competitors can increase their long distance traffic volumes without incurring any significant costs other than those related to the acquisition of customers. If our competitors continue to attempt to increase market share by reducing the price they charge for long distance calls, we expect that our revenues will continue to decrease as our customers switch to our competitors, or as we are forced to reduce our rates to remain competitive. Our revenues from long distance services may continue to decline as a result of severe competition and the oversupply of fiber optic capacity.

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

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

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

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

• the highly competitive nature of the data and internet services market;

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

• the limited flexibility of the telecommunications regulatory framework to address technological change;

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

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

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

5

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

Commencing on November 18, 2007, we began solely using the Alestra brand to market our services in Mexico and stopped using the AT&T mark and logo in all of our materials. Prior to that date, we were only able to use the AT&T name as a tag line below our Alestra mark. Pursuant to our Amended and Restated Service Mark License Agreement (our “Service Mark License Agreement”) dated as of October 17, 1996 and amended February 13, 2003 and November 30, 2005 with AT&T Inc. (“AT&T”), we ceased using the AT&T name as a tag line on November 18, 2008. Under the AT&T Global Network Cooperation Agreement between AT&T and us (the “AGN Agreement”), we are permitted to use the “AT&T Global Services” phrase, for the limited purpose of providing AT&T Global Services within Mexico on a nonexclusive basis. As a result of these brand changes we have had to rely on our own brand and marketing to sell our services. After the consummation of the AT&T Transactions (as defined under “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments”), and following the termination of the Equipment Lease Agreement (as defined under “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments”), we and AT&T expect to terminate the AGN Agreement prior to its June 30, 2013 expiration date. Upon the termination of the AGN Agreement, we will be required to cease using any of AT&T’s intellectual property.

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

• the development of our new brand to replace the AT&T brand could directly and adversely impact our ability to retain customers, to maintain sales and acquire new customers; and

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

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

Our rights to offer AT&T Global Services to customers in Mexico are dependent on the AGN Agreement, the termination of which could adversely affect our business, results of operations and financial condition.

Our rights to use the “AT&T Global Services” brand name and to provide AT&T Global Services in Mexico derive exclusively from the rights granted to us by AT&T in the AGN Agreement. The initial term of the AGN Agreement expired in June 30, 2010. In June 2010, we entered into a new AGN Agreement with AT&T, which expires on June 30, 2013. However, upon the consummation of the AT&T Transactions, and following the termination of the Equipment Lease Agreement, we and AT&T expect to terminate the AGN Agreement prior to its June 30, 2013 expiration date.

Upon the termination of the AGN Agreement, we will be required to cease offering AT&T Global Services in Mexico and using any of AT&T’s intellectual property. As the AT&T brand, our provision of AT&T Global Services in Mexico and our AGN infrastructure are among our competitive strengths, the termination of the AGN Agreement could materially and adversely affect our business, results of operations and financial condition. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

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

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

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

Additionally, the SCT has auctioned the 1710-1770/2110-2170 MHz spectrum segment and awarded it in favor of Telcel and Telefónica. In regards to the 1850-1910/1930-1990 MHz spectrum segment, it was awarded in favor of Televisa, and companies from Nextel Mexico, S. de R.L. (“Nextel”), Comunicaciones Nextel de México, S.A. de C.V. and Inversiones Nextel de México, S.A. de C.V.,. In connection with these awards, Iusacell-Unefon, S.A. de C.V. (“Iusacell”) has started numerous legal actions against these auctions and its corresponding awards, which in some cases are currently outstanding. We cannot predict the outcome of the legal actions against these auctions.

The 3400-3700 MHz spectrum segment auction could take place in 2011. The assignment of this spectrum segment could open the market to new technologies, such as WiMax, that may compete with some of the services we provide.

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

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

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

• general economic conditions in Mexico, the United States and the rest of the world;

• international long distance settlement rates;

• the development and effects of Mexico’s telecommunications regulatory environment;

• anti-competitive practices by our competitors;

• the growth of the telecommunications market in Mexico;

• the availability, quality and cost offered to customers of competing services; and

• churn rates and customer attrition.

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

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

• adversely affect our competitive position;

• render certain of our current businesses obsolete; or

• require significant capital expenditures for which we may be unable to obtain additional financing.

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

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

Because we use Telmex’s networks to provide services to the vast majority of our own customers, we are therefore dependent upon Telmex to meet certain telecommunications needs of our customers and to maintain our service standards. In addition, because Telmex is the dominant provider of local services, almost all of our customers also maintain an ongoing relationship with Telmex. We may not be able to obtain the services we require from Telmex at rates, and on terms and conditions, that permit us to offer services at rates that are both profitable and competitive, or even at the same quality or price that Telmex or its subsidiary enterprises offer themselves. In the past, we have experienced difficulties in obtaining high quality, reliable and reasonably priced services from Telmex. See Item 4, “Information on the Company — B. Business Overview — Competition.”

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

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

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

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

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Risks Relating to the Mexican Regulatory Environment

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

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

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

On January 2010, the SCT published bid terms for auctioning the 1710-1770/2110-2170 MHz and 1850-1910/1930-1990 MHz spectrum segments under independent processes. The 1710-1770/2110-2170 MHz spectrum was assigned to Telcel and Telefónica, while the 1850-1910/1930-1990 MHz spectrum was assigned to Nextel/Televisa. The awarding of the spectrum segment could open the market to new technologies, such as WiMax, that may compete with some of the services we provide. These auctions and the corresponding awards are currently under legal dispute by Iusacell. We cannot predict the outcome of the legal actions against these auctions and its corresponding awards. As for the auction of the 3400-3700 MHz spectrum segment, the bid call is expected to take place during 2011. We are currently exploring whether to participate in this auction.

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

Our revenues from international long distance service reflect amounts earned from our customers and our proportion of all settlement payments received from foreign carriers, as well as other international non direct-dialed calls. A portion of all settlement revenues from foreign carriers is paid in U.S. dollars and accounted for 9.6% in 2008, 3.9% in 2009 and 2.1% in 2010. Settlement agreements, principally with AT&T, govern our payment rates to foreign carriers for the use of their facilities in interconnecting international calls billed in Mexico and the rates foreign carriers must pay to use our facilities for interconnecting calls billed abroad, but terminating in Mexico.

Since 1997, the international settlement rates applicable to U.S.-originated international calls have been decreasing and may decrease further. Most of our traffic exchanged with foreign carriers in 2009 and 2010 was traffic originated in the United States. Therefore, such reduction has adversely affected our results. Any further reduction in international settlement rates attributable to U.S.-originated international calls would result in a further decrease in dollar-denominated settlement amounts payable to us by U.S. carriers. If our dollar-denominated revenues decrease and we do not experience an offsetting increase in volume, we may be unable to meet our dollar-denominated debt and other obligations without incurring currency exchange risk.

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

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

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

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

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

• our resignation;

• its revocation;

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• governmental taking;

• maturity of the concessions; or

• liquidation or bankruptcy.

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

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

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

Risks Relating to Mexico

Downturns in the Mexican economy adversely affect us.

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

Currency devaluations may impair our ability to service our debt.

Changes in the value of the Peso relative to the U.S. dollar have adversely affected and may continue to adversely affect our financial condition and results of operations. All of our indebtedness and a portion of our trade payables are denominated in U.S. dollars, while a majority of our revenues and operating expenses are denominated in Pesos. For example, the 24.6% currency depreciation of the Peso against the U.S. dollar that occurred in 2008 resulted in an exchange loss of Ps. 615.2 million, the 3.5% currency appreciation of the Peso against the U.S. dollar that occurred in 2009 resulted in an exchange gain of Ps. 99.1 million and the 5.4% currency appreciation of the Peso against the U.S. dollar that occurred in 2010 resulted in an exchange gain of Ps. 171.0 million.

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

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

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

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

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

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Political developments in Mexico may adversely affect us.

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

Although the Mexican government has pursued policies of economic liberalization and deregulation in the Mexican economy and in the Mexican telecommunications industry in the past decade, a significant change in those policies may hurt business and economic conditions in Mexico in general and our business in particular. If there were instability or a market failure in the Mexican telecommunications industry, the Mexican government could reverse its economic policies of liberalization in the Mexican telecommunications market. As we are a competitive provider of telecommunications services in Mexico, we believe that any reversal of the Mexican liberalization policies in the Mexican telecommunications market would restrict our ability to expand our market share in the voice, data and internet services market. We do not have and do not intend to obtain political risk insurance.

Item 4. Information on the Company.

A. History and development of the company

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

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

We are a leading provider of Telecommunication and Information Technology services in Mexico. We are focused primarily on multinational corporations, domestic large and mid-size businesses and institutional customers in Mexico (which we refer to as the “enterprise sector”). Through our extensive fiber optic and wireless network, we offer data, internet-related and local telephony services (which we refer to as “value added services”), as well as domestic and international long distance telephony services. Since our foundation in 1995, we have invested approximately Ps. 8,264.5 million in the construction of our network, which currently interconnects with 199 cities throughout Mexico. We believe our network enables us to provide coverage to over 90% of the Mexican market.

Our value added services include managed Internet Protocol (“IP”) telephony, IP virtual private networks, managed Local Area Network (“LAN”)/Wide Area Network (“WAN”), hosting and application services, managed security services, as well as more basic data transport, internet access and transit and local telephony services (which we report as our data, internet-related and local services segment). Our enterprise customers demand services with cutting-edge technology and real-time technical support, and we seek to satisfy these needs through our extensive data network and technical capabilities developed over more than 15 years.

We began providing basic data services to our customers in May 1997 and internet services in July 1998, and the majority of our revenue growth for the last three years has come from the evolution of those services into a broad portfolio of value added services. Between December 31, 2009 and December 31, 2010, revenues from value added services grew by 5.9%. Our value added services accounted for 69.7% of our revenues in 2009 and 75.6% of our revenues in 2010. We believe that the contributions to our revenues and operating income from our value added services will continue to increase in the foreseeable future, as our customers’ needs evolve into more sophisticated data communications systems and applications that require the convergence of telecommunications and information technology.

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

Our network consists of more than 6,700 route-kilometers of high-capacity fiber optic lines that connect metropolitan areas, more than 1,800 route-kilometers of fiber optic lines within metropolitan areas, and five high-capacity fiber optic lines that cross the U.S. and Mexico border. We also have wireless concessions in the 7, 10.5, 15, and 23 GHz bands to provide point-to-point connectivity nationwide and point-to-multipoint connectivity in Mexico City, Guadalajara and Monterrey and their surrounding regions. We use these wireless concessions principally to provide dedicated “last mile” broadband connections to our enterprise clients. Our network is equipped to provide IP virtual private network services in 50 cities, AT&T Global Network services in 28 cities and local telephony in 28 cities, with coverage in the major urban centers in Mexico. Our network connects approximately 5,100 customer locations through dedicated Alestra-owned fiber-optic and wireless access circuits, and approximately 8,300 customer locations via dedicated access circuits leased from third-party carriers.

We are owned 51% by Alfa and 49% by AT&T Mexico, an indirect wholly owned subsidiary of AT&T. Upon the consummation of the AT&T Transactions, Alfa will own 100% of our equity interests. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.” Alfa is one of Mexico’s largest conglomerates, comprised of four groups that participate in key industries around the world, including petrochemicals,

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

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

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

Our revenues were Ps. 4,672.5 million in 2008, Ps. 4,683.6 million in 2009 and Ps. 4,570.3 million in 2010. Under Mexican FRS, we had a net loss of Ps. 384.3 million in 2008, a net income of Ps. 291.5 million in 2009 and a net income of Ps. 357.5 million in 2010. Under U.S. GAAP, we had a net loss of Ps. 227.1 million in 2008, a net income of Ps. 647.5 million in 2009 and a net income of Ps. 358.7 million in 2010.

Recent Developments

On April 14, 2011, we entered into an Equity Purchase Agreement with AT&T, AT&T Mexico and Alfa, pursuant to which Alfa has agreed to acquire AT&T Mexico’s 49% equity interest in our company (the “Equity Purchase Agreement”). On April 14, 2011, we also entered into a nodes purchase agreement with AT&T, AT&T Mexico and Alfa, pursuant to which AT&T Mexico has agreed to purchase from us the telecommunications nodes and customer equipment (the “Nodes”) required for the provision of AT&T Global Services in Mexico (the “Nodes Purchase Agreement” and, together with the Equity Purchase Agreement, the “AT&T Transactions”).

Consummation of the AT&T Transactions is subject to customary conditions, including: (i) receipt of certain regulatory approvals; (ii) absence of any law or order prohibiting the closing of the transactions; (iii) subject to certain exceptions, the accuracy of representations and warranties; and (iv) payment of certain amounts due to AT&T and AT&T Mexico. The AT&T Transactions are expected to close in the second half of 2011.

Upon the consummation of the AT&T Transactions, (i) Alfa & AT&T Mexico will terminate the Amended and Restated Joint Venture Agreement (as defined herein), and (ii) we and AT&T Mexico will enter into an Equipment Lease Agreement pursuant to which we will lease from AT&T Mexico the Nodes required for the provision of AT&T Global Services in Mexico (the “Equipment Lease Agreement”) until December 31, 2012. The Equipment Lease Agreement is subject to early termination if AT&T Mexico acquires the necessary licenses and regulatory approvals to offer, directly and independently from us, AT&T Global Services within Mexico, prior to December 31, 2012.

Upon the termination of the Equipment Lease Agreement, we and AT&T Mexico will enter into several commercial agreements pursuant to which we will provide certain telecommunication services to AT&T Mexico. In addition, following the termination of the Equipment Lease Agreement, we and AT&T will terminate the AGN Agreement. See “Item 3—Key Information—D. Risk Factors—Risks Related to Us—Our rights to offer AT&T Global Services to customers in Mexico are dependent on the AGN Agreement, the termination of which could adversely affect our business, results of operations and financial condition.”

Capital expenditures

During the past three years, we have concentrated our investments in “last mile” access for new customers and new services. Our capital expenditures for 2008, 2009 and 2010 amounted to Ps. 793.4 million, Ps. 937.3 million and Ps. 788.9 million, respectively. From January to February of 2011 we invested Ps. 92.2 million primarily to provide “last mile” access. All of our investments have been made in Mexico. We do not expect that any single capital expenditure in 2011 will have a material impact on our operations or financial results. Our estimated total capital expenditures according to our 2011 annual budget is Ps. 928.7 million.

We believe that our cash flow from our operations is sufficient to fund our capital expenditures and the servicing of our short term debt in 2011. For a discussion of our capital expenditures and liquidity, see Item 5, “Operating and Financial Review and Prospects — Liquidity and capital resources.”

B. Business overview

Summary of Material Licenses

Service mark

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

Pursuant to our agreement with AT&T, we ceased using the AT&T name as a tag line on November 18, 2008. After that date, we were permitted to use the AT&T Global Services phrase for the limited purpose of providing AT&T Global Services within Mexico on a nonexclusive basis for the term of the AGN Agreement. After the termination of the AGN Agreement, following the consummation of the AT&T Transactions, we will be required to cease using any of AT&T’s intellectual property. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments” and “Item 3—Key Information—D. Risk Factors—Risks Related to Us—Our rights to offer AT&T Global Services to customers in Mexico are dependent on the AGN Agreement, the termination of which could adversely affect our business, results of operations and financial condition.”

Our operations

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

Data and Internet Services

Our Data Services include:

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

• AT&T Global Services. To meet all of the global or international needs, we are part of the AT&T Global Network (“AGN”). This gives us an active role in serving all multinational accounts requirements in Mexico by providing; Enhanced Virtual Private Network, International Packet Service, Global Managed Internet Services and AT&T Virtual Private Network. After the termination of the AGN Agreement, following the consummation of the AT&T Transactions, we will no longer provide AT&T Global Services. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments” and “Item 3—Key Information—D. Risk Factors—Risks Related to Us—Our rights to offer AT&T Global Services to customers in Mexico are dependent on the AGN Agreement, the termination of which could adversely affect our business, results of operations and financial condition.”

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

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

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

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

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

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

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

1. Managed Connectivity

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

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

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

• Ethernet Solutions. This service provides connectivity between two or more sites with high bandwidth capabilities and the Ethernet technology advantages of high speed, reliability and time reduction for provisioning and changing bandwidth capacity. We offer this service in Mexico City, Monterrey and Guadalajara. In 2009 we introduced the

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first gigabit ethernet between the three major cities. Large financial institutions benefit from this service as it enables their disaster recovery sites to operate in a reliable and efficient manner.

2. Managed Unified Communication

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

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

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

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

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

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

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

• Managed Videoconference and Telepresence Solutions. This service provides the end user with High Definition videoconferencing equipment, managed by Alestra, connected to a managed VPN or Internet enabling and end-to-end seamless solution. In addition, we offer a public videoconference bridge on a subscription basis, allowing the customer to connect several videoconference rooms during a single session (multisite videoconferencing) and providing capabilities to allow the customer to connect with videoconference systems outside the domain of the customer, including, for example, customers or suppliers.

• LAN and Wireless LAN Managed Solutions. The LAN and Wireless LAN (“WLAN”) become a crucial factor to ensure proper quality and end user experience, as more end user technological applications become “IP-enabled” and since all communications use, and sometimes contend for, the same network capacity and resources. Alestra LAN and WLAN managed service designs, deploys and operates this infrastructure within the customer’s facilities, ensuring end to end quality of service for all applications mounted on top of the customer LAN.

• Streaming and Content Distribution Network. This service allows a company to implement a safe and secure content repository platform in which they can post content including, for example, videos. This service is similar to the “YouTube” public platform, but enables access control and rights content management. Therefore, it allows enterprises to implement their own video hosting intranet and to post confidential content delivered over public or private IP networks. This platform also allows posting content on demand (VoD) and live events.

• End User Help Desk. For those enterprises contracting the IP Communications Suite and the Managed LAN service, Alestra has extended its capabilities to offer the End User Help Desk. Traditionally, an external service provider receives tickets and requests from IT or Infrastructure Management, called the service provider Network Operations Center (“NOC”). The End User Help Desk allows Alestra customers to call an Alestra team supporting their requirements directly. By integrating this End User Help Desk with the NOC, Alestra has more tools, capabilities and information to properly diagnose and resolve any technical issue the customer may encounter, both at the infrastructure level and end user level.

• Hosted and dedicated Contact Center Solution. With a mix of dedicated and hosted (shared) technological platforms, Alestra has released a suite of solutions for large Contact Centers, including voice, data and specialized applications, such as Interactive Voice Response, Predicting Dialing, Recording and Automatic Overload. The

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flexible platform also offers some other typical functions from the Alestra Data Center, such as Telemarketing, Customer Care, Billing and Collection. This platform provides Contact Centers who, due to the smaller number of agents employed, do not invest in a specialized platform and, therefore, do not have access to the same technological resources as those offered in large Contact Centers under a subscription model. The Alestra suite offers suitable solutions for enterprises from 10 agents to large Contact Centers with 400 agents or more.

3. Managed Security

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

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

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

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

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

4. Managed Data Center

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

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

• Co-location Service. This service offers secure, cost-effective and reliable accommodation space in our own data center for other businesses’ servers and equipment.

• Data Storage. Through this service we handle large quantities of valuable data and offer our clients fast recoverability.

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

Information Security

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

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

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

Since 2007, we have launched several services offering information security best practices and technologies to protect the information assets of our customers, such as our security operations center.

In 2010, the Information Security Division developed and implemented in the Mexican market specialized consulting services in several security areas, including Risk Management, DRP, Information Security Governance, Security Assessment, Access Control and Policy Development, among others. We expect to continue to develop more information security services in 2011.

Local Service

Our local service offers the enterprise market a direct connection to the Public Switched Telephone Network (“PSTN”), enabling local, cellular, long distance or operator assisted calls. Service is available in 28 cities: Mexico City, Monterrey, Guadalajara, Aguascalientes, Cd. Juárez, León, Puebla, Querétaro, San Luis Potosí, Saltillo, Toluca, Torreón, Tijuana, Nuevo Laredo, Matamoros,

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Reynosa, Morelia, Chihuahua, Pachuca, Celaya, Cuernavaca, Tampico, Culiacán, Hermosillo, Mexicali, Mérida, Cancún and Veracruz. Our management expects that our local service will continue to grow based on increased business customer demand.

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

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

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

Enlace Digital: This commercial program offers digital trunks to connect our customer switchboard directly to our network, thereby enabling local, cellular, long distance or operator assisted calls. There are two types of signals that Enlace Digital supports: CAS-R2 and ISDN PRI. This service can be offered through digital radio waves or fiber optic lines and is currently available in all 28 cities of coverage.

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

Enlace Total Multiservicio: This commercial program provides local, long distance, cellular, 800 number, operator assistance calls and dedicated Internet in a complete bundle offer using IP technology through a common dedicated IP access. We offer this commercial plan in all 28 cities of coverage.

Enlace IP: This service variant offers the customer access to all of the above mentioned commercial models using the latest access technology based on the SIP Protocol and Ethernet Interface. This represents important savings to the customer’s infrastructure on large implementations because a single interface (Ethernet) can support a few trunks or hundreds of them.

Long Distance Services

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

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

• Operator services, home country direct services, calling card services and 800 services. We offer a full range of bilingual operator assistance, direct connections between customers abroad and Mexico, calling cards services and toll free services.

• Virtual network services. To our business customers, we offer the Aria VNS Red Privada Virtual (“Aria VNS”), a virtual network system that permits the configuration of tailored, private corporate voice networks. This service provides most of the advantages of a private network (i.e., call screening, overflows, flexible routing, authorization codes and private dialing plans) without the corresponding maintenance and operation costs.

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

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

Pricing and promotions

Our pricing for services offered to business and residential segments varies depending on customer needs. Our business pricing strategy is based on voice, data and internet bundled offers. The commercial programs are tailored to offer value added business solutions through telecommunications integrated services according to the customers’ needs. For the residential segment, there are

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several plans for our long distance service (including 800 numbers and dialing cards); for our Twingo service, which offers local service through internet (including VoIP); and for our internet services. All of our plans are tailored to the customers’ calling patterns, and are designed to capture and retain long distance customers. We believe that our prices are competitive with, and our promotions similar to those of our major competitors, Telmex and Axtel. We generally price our long distance services slightly below Telmex’s prices and we are highly competitive with Axtel.

For enterprises, with the addition of new applications under the convergence portfolio, our pricing strategy is not focused on tariffs for traditional services, such as local and Internet, but rather on creating integrated solutions, where individual components are not the decision drivers given that the customer is willing to pay more for increased simplicity in operations, capital expenditures savings and seamless service quality under a single vendor.

Our marketing

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

Business Customers. We have national market coverage through our presence in different cities: 199 for long distance service, 50 for VPN, 28 for data/Internet and 28 for local service. We have nearly 400 sales, marketing and e-business professionals dedicated to identifying, attracting and retaining business customers. We also have a Value Added Reseller program that incorporates more than 200 agents with more than 950 account executives, extending our presence to 80 cities. In addition to basic services, we offer to business customers a variety of advanced voice, data and convergent services to increase revenues per customer and reduce customer churn. We also deliver customized bundled offers, including the key services and value-added features such as fraud control and reports-on-demand. We mainly target four groups of business customers, as well as Federal government agencies and some Vertical Markets.

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

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

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

• Federal Government Agencies: Federal agencies require increasingly more complex Telecom and IT integrated solutions. We have created an organization specialized in building strategic relationships among the main Federal government agencies to help them to develop their own technological strategy. We are able to support their technological strategy with our current services while developing customized high value solutions.

• Vertical Markets: We have developed a suite of solutions specifically applied to the Education and Healthcare industries. Healthcare solutions, including Radiology Information, Medical Record and Infant Protection Systems, are enabled at our Data Center and are made available to small- and medium-sized hospitals under a subscription model or through a software, as an individual Service offer. This suite of solutions allows small- and medium-sized hospitals access to state of the art applications and solutions currently only affordable to large hospitals. The same model applies to the Education solutions, in which we offer access to Learning Management Systems, Capture Lecture Platforms, and Collaborative Learning Applications also under a subscription model. This vertical approach will be extended to other business sectors, including Financial, Retail, Manufacturing and Logistics during 2011 and 2012.

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

Advertising and Public Relations. We believe that effective advertising stimulates demand for our services. We advertise using, billboards, radio, Internet, newspapers and specialized business periodicals as well as direct marketing campaigns. In addition, in the past we have also sponsored sports events and teams, educational programs and cultural activities. We believe that building credibility - as an ignition element for any communication, before demand stimulation - is essential to ensure a solid brand reputation and the trust necessary to place our services in the Mexican market. In this respect, our public relations efforts create an informed opinion among third parties (journalists, leaders of public opinion, government officials, business partners, the financial community, consumers, etc.) in order to multiply messages regarding the promotion of advanced telecommunications solutions and consultancy aimed at sales activities. During 2009, we focused on the use of the commercial brand name “Alestra” to position it in all markets, through a campaign consisting of mass media advertising activities (including TV, billboards, magazines and radio). We will continue with our advertising activities to increase the Alestra brand recognition. In 2010, our marketing campaign was centered on the slogan “Alestra, the new IT in Mexico”, using the commonly understood definition of “IT” as Information and Telecommunications, instead of Information Technologies. This new campaign sought to create a new image of Alestra among our targeted customers (enterprises, specialized press and business analysts) as offering not only voice and data services generally associated to carriers and service providers, but also a suite of applications, now packed or grouped within the Information Technologies Domain, such as convergence applications, Business Continuity Technology Solutions, Disaster Recovery Plan and supported solutions, Information Security Governance, and auditing and compliance strategies and supported solutions.

In November 2007, we built our Experience and Innovation Center called Sperto. Sperto is an open space where we demonstrate our visiting customers and prospective clients the usages, characteristics and benefits of our new services and solutions. With a team of more than 60 specialists in different areas, our speaker biro has a portfolio of more than 50 conferences, which are chosen according to the specific needs of the customer visiting Sperto. At Sperto, we also have testing and demonstration rooms in which we can display more than 20 scenarios showing the newest solutions to real environment situations. The customer can test these solutions to understand the benefits they can bring to a particular environment. Sperto is also a space where we invite our customers to be part of our Service Development Process, by participating in Innovation Round Tables, where customers are invited to post their needs and problems and, in conjunction with our specialists, find and propose new services, capabilities and solutions for their particular requirements. We use this feedback as valuable information for our Service Development Strategy. Sperto won international recognition in 2010, when it was awarded the World Class Marketing Prize granted by the Association of Briefing Program Managers. Since its opening, more than 400 companies and 1,400 visitors have visited Sperto, attending more than 3,000 conferences and live demonstrations.

Sales and distribution

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

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

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

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

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

Customer service

We have been able to distinguish ourselves from our main competitors, Telmex and Axtel, by offering superior customer service. In 2010, our TRI*M index showed Alestra above our main competitors. The TRI*M index is a ranking system which measures the strength of client retention, offering a unique measure of how customers perceive us. We have two main customer service centers, one for business customers and the other for residential customers, which are designed to provide service and support for each one of our business units. We also have an operator service center to provide call processing assistance and directory assistance and two help desk service centers to provide technical support, one for Internet and the other for e-services (web hosting). All of our service centers operate 24 hours a day, 7 days a week.

Our business customer service center received a total of 321,858 calls during 2010 regarding product and general service inquiries, billing inquiries and fault reports. Our customer service centers maintain world class indexes (our average speed of answer was less than 13 seconds and the abandon rate percentage was less than 5%). More than 91% of inquiries were resolved on time. Furthermore, our customer satisfaction surveys were modified in 2010 to be more challenging, trying to reflect Excellence in Service. 85% of our customers responded “Very Satisfied” or “Extremely Satisfied” with our service.

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

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

Customer activation, billing and collection policies

Activation. At the time a salesperson receives an order for service, the information provided by the prospective customer is checked against our internal customer systems and external Credit Bureau databases. If the customer’s credit history is in good standing we proceed, otherwise a pre-payment or guarantee could be requested.

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

Collection. Bills for residential customers may be paid in more than 7,400 bank branches, and approximately 12,377 supermarkets, convenience stores and public telegraph offices, or electronically through banks or our website. We give customers the option to charge the monthly invoice balance to credit card or checking accounts. Bills for business customers are paid mainly with electronic funds transfers or in cash at banks. There is no seasonality in our collection.

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

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

Sales and revenue by category of activity

See Item 5, “Operating and Financial Review and Prospects.”

Competition

Our main area of competition is in value-added services for the business sector. Voice services have been a complement to this area for several years.

Even though the SCT has granted a large amount of permits or concessions relating to value-added services, a small group of competitors remains dominant in this area. Along with us, this group includes Telmex, Axtel and Telefónica Data México S.A. de

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C.V. (“Telefónica”). However, according to the firm Pyramid Research, Telmex is the leader of this group due to its broad commercial coverage and network infrastructure.

Telmex also dominates the broadband access market, with 7.4 million subscribers, from an estimated of 10.8 million total broadband access subscribers, at the end of 2010.

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

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

In January 2010 the SCT began an auction process from the Mexican government-owned company Federal Electricity Commission (Comision Federal de Electricidad or “CFE”) of two of its dark fiber optics. Telefónica, Televisa and Megacable, acting as a consortium, won the auction process for the FTC’s fiber-optic infrastructure, driving more competition to the data market.

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

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

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

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

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

Telmex

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

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

Telmex is the biggest competitor in the Mexican industry. It has participated in all fixed telecom services, with a substantial market share in each of them. Telmex has leveraged its broad last-mile access network, where it has retained total control, into its nationwide coverage.

Telmex’s broadband ADSL service reached 7.4 million subscribers at the end of 2010 while its internet dial-up customer base fell to 0.90 million subscribers. Telmex’s DSL service, as a proportion of total access lines, will increase from 29% at the end of 2010 to 39% by 2015. In value-added internet services, Telmex formed an alliance with Microsoft Corporation in 2000, launching the T1MSN portal and changing its brand name to Prodigy. Additionally, its Prodigy Triara hosting service merged with the Prodigy services portfolio. By the end of the third quarter of 2010, according to Pyramid Research, Telmex had a 74% market share of both broadband and internet dial-up subscribers. However, cable operators have started to play a more prominent role in the Mexican market with the joint marketing initiatives undertaken by Grupo Televisa and Megacable.

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In the core data services market, Telmex has leveraged its local coverage to become the market leader in private lines and frame relay services. Telmex’s data services are currently estimated at approximately 29% of market share in terms of revenues.

Axtel

Axtel is a fixed wireless company founded in 1994. Axtel has several nationwide wireless spectrums: 60 MHz at 10.5 GHz for point-to-multipoint access, 112 MHz at 15 GHz for point-to-point backhaul access, 100 MHz at 23 GHz for point-to-point last-mile access and 50 MHz at 3.4 GHz for fixed wireless access, the last one being the most used for its current local service. Its network included 39 cities with local service at the end of 2010. In the fourth quarter of 2006 Axtel acquired Avantel, S. de R.L. de C.V. (“Avantel”). This acquisition increased Axtel’s market position in the small and medium businesses segment and also enhanced its service portfolio in the large corporate segment with Avantel’s services portfolio. In 2007, Axtel launched its pre-WiMax service.

According to Select, as a result of its acquisition of Avantel at the end of third quarter of 2008, Axtel has increased its market share, however, it has declined during 2009.

As of December 31, 2010, Axtel recorded a total of 1.4 million Revenue Generating Units (the sum of voice lines and subscribers of broadband Internet that generate recurring revenue for the company, or “RGUs”), compared with 1.1 million RGUs in the same period last year, representing a growth of 21%.

In terms of total customers, Axtel recorded 764,000 as of December 31, 2010, an increase of 12% when compared to the same period in 2009.

As of December 31, 2010 Axtel had a base of broadband subscribers totaling 315,000.

Telefónica

Telefónica, following its expansion strategy in Latin America, has acquired several telecommunications service providers in Mexico. In 1999 Telefónica acquired Infosel, a part of Terra Networks México, S.A. de C.V (“Terra”), and adopted the Terra brand name for its internet and information services. Terra repositioned its strategy, focusing instead on providing content services, e-commerce, broadband content, and internet advertising business through the Terra portal.

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

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

As of December 31, 2010, Telefónica Móviles México had 20.2 million accesses, an increase of 14.1% when compared to the same period of 2009. This increase was driven by the strong advance in the contract segment, which recorded an increase of 49.3% when compared to the same period of 2009. Telefónica Móviles México consolidated its position in the market, reaching a mobile services market share for 2010 of approximately 21%.

Other Competitors

Our other competitors in voice and data markets are Telcel, Maxcom, Iusacell and Nextel.

Regulatory framework and bodies

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

The SCT and the Mexican Congress unsuccessfully attempted during 2003, 2004 and 2005 to reach consensus with the industry in order to pass a new communications bill. However, in 2006, a new federal telecommunications law was adopted. As a consequence

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of the new law, all of Cofetel’s commissioners were replaced, TV broadcasters were allowed to offer telecommunications services and Cofetel’s powers were increased in order to regulate broadcasting and telecom services.

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

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

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

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

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

• issuing secondary regulations applicable to the telecommunications industry, including determining the specific obligations of the “dominant” carrier;

• recommending the granting, amendment, extension, assignment and revocation of concessions and permits;

• supervising telecommunications service providers;

• resolving any differences among concessionaires in interconnection negotiations;

• conducting public biddings and auctioning of spectrum;

• administering the numbering resources, signaling protocols, technical plans and national numbering migrations;

• defining the different local service areas and mobile regions; and

• administering the telecommunication registry, where the rates for telecommunication services offered by the concessionaires are filed.

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

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

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

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

In October 1997, Cofetel released rules regarding the provisioning of local service. Such rules, among other issues, focus principally on establishing the mechanisms for interconnection, the interoperability of networks and the continuance of service, with non-discriminatory and registered tariffs. Additionally, the rules include access to the special codes, emergency numbers and database

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directory services. The rules for local service also define the program for the “local calling party pays” service, some obligations for the dominant carrier in terms of information, tariffs and quality of service, and guidelines for the consolidation of local service areas.

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

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

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

In January 2010 the SCT began the auction process for the 1850-1910/1930-1990 MHz and 1710- 1770/2110-2170 MHz spectrum segments, which concluded in June 2010. However, legal disputes have arisen in this regard and although several procedures filed have been dismissed there are several still pending. Also, the auction of the 3400-3700 MHz spectrum segment could take place anytime during 2011. These auctions could open the market to new concessionaires and technologies, such as WiMax, that may compete with some of the services we provide. We cannot predict the outcome of any such auction.

Our concessions

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

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

• the geographic region in which we may provide the services;

• the term of the concession; and

• other rights and obligations affecting us.

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

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

Wireless concessions. In June 1998, the SCT granted us two 20 year point-to-point national wireless telecommunications concessions in the 15 and 23 GHz frequency bands, and in September of 1998, three 20 year point-to-multipoint wireless concessions in the 10.5 GHz frequency band covering the regions 4, 6 and 9. These regions comprise Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacán, Mexico, Hidalgo and Morelos. Under the 10.5 GHz concessions, we were asked to provide by the end of September 2000 point-to-multipoint signal coverage to those municipalities or delegations where 30% of the total population in such regions resides. On July 14, 2000, we petitioned the SCT to allow us to comply with such requirement a year after the original compliance period. On February 28, 2001, the SCT granted us an extension until August 27, 2001 to comply with such requirement. By August 27, 2001, we had installed 10.5 GHz sites in regions 4, 6 and 9, which include the urban areas of Mexico City, Monterrey and Guadalajara. The authorities have been properly notified of our progress and compliance. On July 19, 2002, we filed a report with Cofetel regarding the implementation of a 10.5 GHz point-to-multipoint radio base station in the city of Morelia. With this infrastructure and the one discussed above, we fulfilled our commitments to provide signal coverage for 30% of the population residing in regions 4, 6 and 9.

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

• expiration of their terms;

• our resignation;

• their revocation;

• governmental taking; or

• our liquidation or Mexican bankruptcy/liquidation (quiebra).

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

• on public interest grounds;

• for national security reasons;

• for the introduction of new technologies;

• to solve interference problems; and

• to fulfill international agreements and treaties subscribed to by the Mexican federal government.

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

(1) unauthorized or unjustified interruption of services;

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

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

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

(5) loss of our Mexican nationality;

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

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

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

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

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

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

Local service

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

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we were exempted to offer carrier pre-selection for the long distance service for a period of five years beginning on the day in which Alestra began to provide local service in a determined local service area.

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

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

Tariffs, anti-competitive practices and interconnection

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

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

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

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

• quality;

• competitiveness;

• security; and

• the length of time the carrier will commit to providing the service.

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

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

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

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

Every year we engage in negotiations with Telmex on the terms and conditions, including rates, applicable for the following year interconnection. If we are not able to reach an agreement, the Federal Telecommunications Law provides that within60 days Cofetel will resolve any interconnection disagreement between concessionaires. The interconnection agreements provide, however, that the terms and conditions of the agreements will remain in place until we and Telmex are able to reach a new agreement, which will apply retroactively to the first day of the year in which it is intended to be used.

During 2007, we reached a new agreement with Telmex for 2008, except for off-net charges, in which Cofetel, as required by Alestra, issued a resolution stating the rates for 2008. Regarding interconnection terms and conditions for 2009, we did not reach an agreement with Telmex, and therefore Cofetel issued a resolution stating the terms and conditions to be applied by Alestra and

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Telmex for 2009, including a U.S.$0.008 per minute tariff for the interconnection services. During 2010, we did not succeed in reaching an agreement on the terms, conditions and tariffs to be applied between Telmex and Alestra. Therefore, Cofetel was once again required to issue a resolution, confirming the terms and conditions to be applied at the U.S.$0.008 per minute tariff for the interconnection service.

We have not yet reached an agreement with Telmex for 2011. Therefore, we have once again requested the intervention of Cofetel to resolve the terms and conditions that were not agreed upon, including the rates to be applied during 2011. Telmex has disputed the 2008, 2009 and 2010 resolutions. As of December 31, 2010, the amount under dispute was Ps. 439.6 million, out of which Ps. 361.6 million have been deposited in an escrow account with a Mexican trustee and is expressed in our consolidated financial statements as restricted cash, Ps. 61.4 million have been objected and paid to Telmex and Ps. 16.6 million have been objected and retained by Alestra, as established in the agreements executed among the parties and as required by the corresponding litigation processes from time to time. As of this date, we are unable to estimate the outcome of this dispute and its consequences.

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

International settlement

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

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

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

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

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

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

Telmex bills us a higher per-minute charge to terminate calls on its network in cities outside of those 199 cities with which we are interconnected. This traffic in minutes represented about 20% of our total minutes of traffic for 2009 and 6% for 2010.

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

However, we did not reach an agreement with Telmex for 2008, 2009, 2010 and 2011 and therefore, have requested the intervention of Cofetel. Cofetel’s rulings were issued on August 27, 2008, February 2, 2009, April 14, 2010, and stated that the exchange of traffic to local service areas that are not opened to competition, and therefore have no interconnection point available, are in fact interconnection services. In its ruling, Cofetel maintained its position that the tariffs that we must pay to Telmex for the provision of this service must be cost-oriented. Among other requirements, Cofetel established a U.S.$0.008 per minute tariff for the interconnection services (off-net charges), applicable until December 31, 2010, instead of Ps 0.75 per minute. We are complying with Cofetel’s resolutions, and although Telmex is challenging them, we and Cofetel are defending their legality. On September 30, 2009, we entered into a transaction with Telmex, amended on July 30, 2010, whereby we have established a trust in order to deposit the full

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amounts claimed by Telmex for 2008, 2009 and 2010 services (Ps. 0.75 per minute instead of U.S.$ 0.008 per minute tariff), until a final decision has been made by the court. As of December 31, 2010, the amount under dispute was Ps. 439.6 million, out of which Ps. 361.6 million have been deposited in an escrow account with a Mexican trustee and is expressed in our consolidated financial statements as restricted cash, Ps. 61.4 million have been objected and paid to Telmex and Ps. 16.6 million have been objected and retained by Alestra, as established in the agreements executed among the parties and as required by the corresponding litigation processes from time to time. At this point in time we are unable to predict the outcome or consequences of such actions or if the tariffs contained in such resolution will prevail.

Regarding terms and conditions for off-net charges and other issues for 2011, we have not yet reached an agreement with Telmex and therefore we requested the intervention of Cofetel to resolve the terms and conditions not agreed upon, including the rates to be applied during 2011. We are expecting to have a resolution in the first half of 2011. As of this date, we are unable to estimate the outcome of the dispute and its consequences.

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

Mobile interconnection rates

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

On August 31, 2006, Cofetel issued the resolution applicable to this interconnection dispute and the corresponding interconnection charges. Nevertheless, Telcel and us both challenged this resolution trying to obtain, respectively, lower and higher rates than those determined by Cofetel. Finally, on December 15, 2006 we agreed with Telcel on the applicable interconnection rates for traffic termination in Telcel’s mobile network under the “calling party pays” system. As a consequence of the agreement, we increased our long distance rates, including international settlement rates, in order to pay the mobile terminating network rate of Ps. 1.34 per minute in 2007, Ps. 1.21 per minute in 2008, Ps. 1.09 per minute in 2009 and Ps. 1.00 per minute in 2010. During 2008, we faced an increase in by-pass traffic since some entities began to terminate cheaper mobile traffic using mobile end users services. As a consequence, during 2008 and 2009 we reduced the traffic to be terminated with the mobile networks. With regards to the terms, conditions and other issues for interconnection related matters for 2011, we have not yet reached an agreement with Telcel, Telefónica and Iusacell. Therefore we have requested the intervention of Cofetel to resolve the terms and conditions not agreed upon, including the rates to be applied during 2011. We are expecting to have a resolution in the first half of 2011. As of this date, we are unable to estimate the outcome of the dispute and its consequences.

Value-added taxation of telephone services

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

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

C. Organizational structure

We are owned 51% by Alfa and 49% by AT&T. AT&T holds its equity in us through its subsidiary AT&T Mexico. Upon the consummation of the AT&T Transactions, Alfa will own 100% of our equity interests. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

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

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Alfa is one of Mexico’s largest conglomerates, comprised of four groups that participate in key industries around the world, including petrochemicals, aluminum and auto components, processed food and telecommunications. As of December 31, 2010, Alfa’s total assets amounted to Ps. 112.3 billion, with revenues and operating income for 2010 of Ps. 136.4 billion and Ps. 10.8 billion, respectively.

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

On November 14, 2000, we restructured our capital without changing the above-referenced ownership proportions as follows: 35% of our capital is represented by Series A shares and Series B shares, and the remaining 65% is represented by Neutral (“N”) stock. The Series A shares and the Series B shares have full voting and economic rights while the N stock has full economic rights but limited voting rights. AT&T Mexico holds 49% of the N stock and Alfa holds the other 51%. Alfa continues to hold 100% of the Series A shares and AT&T Mexico continues to hold 100% of the B shares. Upon the consummation of the AT&T Transactions, Alfa will own 100% of our equity interests. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

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

We have entered into a joint venture agreement with our equity holders, as amended on November 30, 2005 (the “Amended and Restated Joint Venture Agreement”) and have adopted bylaws, each of which governs the relationship between the equity holders and us. Upon the consummation of the AT&T Transactions, Alfa and AT&T Mexico will terminate the Amended and Restated Joint Venture Agreement. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.” Our 1,696 employees are employed through our subsidiary, Servicios Alestra, S.A. de C.V. (“Servicios Alestra”), which is organized under the laws of Mexico. We hold 99% of the capital stock of Servicios Alestra. Our employees are paid by that entity with funds provided by us on a monthly basis under a management and services agreement.

On August 10, 2010, we acquired 90.53% of Alestra Telecomunicaciones Inalámbricas, S. de R.L. de C.V. (“Alestra Telecomunicaciones Inalámbricas”), which is organized under the laws of Mexico. As of today, this subsidiary does not have any operations.

D. Property, plants and equipment

Our network

Network components. As of December 31, 2010, we have invested more than Ps. 8,264.5 million in our technologically advanced fiber-optic network. Construction of the original design for our long haul network was completed in 1997. Our average network reliability in 2010 was 100% for our backbone, 100% for last-mile solutions based on fiber optic equipment and 99.9965% for last mile solutions based on digital microwave transmission equipment. Our network is regularly upgraded and extended using state-of the-art technology. Our network was constructed and is operated in accordance with the reliability, redundancy and restoration standards of AT&T’s U.S. network. The key components of the network, all of which are directly owned by us, include:

• Over 6,700 route kilometers of long-haul and intra-city network, mostly with Lucent True Wave fiber-optic underground inter-city facilities;

• Approximately 1,800 route kilometers of metropolitan area fiber-optic facilities;

• Two dense wave division multiplexing (“DWDM”) ultra-high-capacity optical transmission systems, capable of transmitting 40 gigabytes per second (“Gbps”) and 400 Gbps respectively, these may be easily updated to support 800 Gbps;

• Eight Lucent digital voice switches, plus one which is used for testing purposes;

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

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• Broadsoft platform for consumer VoIP services and enterprise hosted IPPBX services;

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

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

We have over 3,000 agreements in place with highways, railroads and utilities companies that provide us with rights-of-way throughout Mexico. Right-of-way is the right to use someone else’s property for specified purposes. These rights-of-way are acquired by us through the payment of a monthly fee. Our network consists of both public and private rights-of-way in toll roads, Federal and State public roads, railroads, municipalities, over power companys’ CFE poles and in specific private lands. We believe these rights-of-way provide barriers to entry for potential facilities-based new competitors in the facilities-based services market.

Our network is expandable and flexible. The conduit comprising the long haul network contains a fiber-optic cable with 24 fiber-optic strands. In the metropolitan rings, there are three conduits (four in the case of Mexico City), at least one of which contains fiber-optic cable with 36 fiber-optic strands. The metropolitan infrastructure installed in Mexico City, Monterrey, Guadalajara and Ciudad Juarez has a fiber-optic cable with 144 fiber-optic strands. These conduits are generally buried at a depth of 4 feet.

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

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

Fiber-optics. Our inter-and intra-city fiber-optic network is 6,700 kilometers in length and consists of three fiber-optic inter-city rings with the transmission capabilities of DWDM and synchronous digital hierarchy (“SDH”) architecture. The network is located in the following areas:

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

• a west-central ring through Guadalajara and other cities;

• a southern ring through Mexico City and other cities;

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

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

We own metropolitan rings in 30 main cities. SDH and Ethernet technologies are used to provide all services as allowed by our long distance and value-added services concessions.

Pursuant to our long distance concession, we are permitted to send domestic traffic through AT&T’s U.S. network facilities to achieve connectivity among our inter-city fiber-optic rings and two border crossings at Tijuana and Ciudad Juarez. We are the only carrier with multiple SDH rings infrastructure in the border with the United States, through San Antonio, Texas to Nuevo Laredo and Reynosa, Tamaulipas in Mexico; this is a feature that provides diversity and reliability to our customers.

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

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We are currently utilizing one pair of fiber-optic strands with a 2.5 Gbps capacity, a second pair of fiber-optic strands using DWDM technology with a capacity of 40 Gbps, of which we currently utilize sixteen wavelengths with a capacity of 2.5 Gbps each, and a third pair of fiber-optic strands for next generation DWDM system with 400 Gbps.

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

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

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

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

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

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

Data Infrastructure. To support the growing demand for data services, we have deployed an MPLS-based core network for MPLS-VPNs, and Internet, and several metropolitan Ethernet networks. We have deployed ATM and frame relay switches in several cities, such as in Mexico City, Monterrey, Guadalajara, Puebla, Tijuana and Ciudad Juarez, which interconnect with AT&T’s Global Frame Relay network. Our IP network is supported by carrier class gigabit routers and other high capacity routers deployed in key points of presence and switch sites. Our IP network interconnects with the global Internet via AT&T internet services and other high quality service providers. We have deployed Cisco routers for our VPN infrastructure in places such as Mexico City, Monterrey, Guadalajara, Tijuana, Ciudad Juarez, Chihuahua, Culiacan, Cancun, Tampico, Mexicali, Hermosillo, Nogales, Ciudad Obregon, Los Mochis, La Paz, Acapulco, Ciudad del Carmen, Coatzacoalcos, Irapuato, Merida, Oaxaca, Tuxtla and Villahermosa. All of our service networks expand their coverage to the entire country through our own transmission network and through the use of alternate access providers.

Direct access. Our direct access facilities allow our customers to access our network directly and avoid interconnection with local exchange carriers and incumbent networks like Telmex’s. We have deployed metropolitan fiber-optic rings consisting of approximately 1,700 route kilometers in Monterrey, Mexico City, Guadalajara, Ciudad Juarez, Tijuana, San Luis Potosi, Queretaro, Leon and other cities in Mexico, each of which has been deployed using an SDH ring, IP/Ethernet or ATM architecture. To date, we have 104 metropolitan miniPOPs in our metropolitan rings acting as hubs to connect enterprise customers and some corporate buildings to our network, and more are scheduled for construction every year as customer demand increases. In addition, we possess national and regional licenses for microwave wireless frequencies that allow us to connect many of our business customers directly to our network, reducing our dependence on Telmex’s local network.

Wireless facilities. We hold two national point-to-point concessions to provide wireless connectivity to business customers (one in the 15 GHz band and one in the 23 GHz band). We also hold three point-to-multipoint concessions in the 10 GHz band covering

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Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacan, Mexico, Hidalgo and Morelos which provide direct access to our small business customers. We lease wireless frequency capacity from Conectividad Inalámbrica 7GHz, S. de R.L., a joint venture between our equity holders and a subsidiary of Axtel, which acquired rights to use a concession in the 7 GHz band with national coverage to provide wireless connectivity to business customers and to expand the network infrastructure. To provide less capital-intensive direct access facilities and network interconnection in selected smaller cities (and for redundancy purposes), we have deployed 53 radio towers in our network. On these towers we have selectively deployed point-to-point and point-to-multipoint digital microwave transmission equipment. Our main suppliers of digital microwave equipment include Alcatel-Lucent Mexico, S.A. de C.V. (“Alcatel-Lucent”), Alvarion, Ltd (“Alvarion”), Microwave Networks International (“MNI”), Aviat Networks Mexico S.A. de C.V. (“Aviat Networks”) and SIAE Microelettronica S.p.a. (“SM”). A continuous process of evaluation is performed among current and potential technology suppliers.

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

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

Other properties

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

Item 4.A. Unresolved Staff Comments.

Not applicable.

Item 5. Operating and Financial Review and Prospects.

A. Operating results

Basis of presentation

Our consolidated financial statements have been prepared in accordance with Mexican FRS, which differ in certain significant respects from U.S. GAAP. Note 20 to our consolidated financial statements provides information relating to the nature and effect of such differences, as they relate to us, and provides a reconciliation to U.S. GAAP of our net income (loss) reported under Mexican FRS for the years ended December 31, 2008, 2009 and 2010 and our total stockholders’ equity as of December 31, 2009 and 2010.

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

Overview

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

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

Our cost of data, internet and local access consists primarily of direct access and backbone services. Direct access costs are related to last-mile access to extend our network to customers’ premises. In addition, backbone services are primarily related to capacity usage, in order to connect multiple customers to our network.

Our cost of domestic and international long distance consists primarily of local access charges and resale expenses which are paid on a per-minute basis primarily to Telmex, international settlements payments paid to foreign carriers on a per-minute basis for

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the completion of international calls originated in Mexico by us, and fees for leased lines which are typically paid on a per-circuit per-month basis to Telmex and other last mile access providers.

The following table sets forth information regarding our revenues:

	2008 (1)				2009 (1)				2010 (1)
Data, internet and local services		Ps 2,950.1	63.1	%		Ps 3,263.0	69.7	%		Ps 3,456.0	75.6	%
Domestic long distance		1,047.8	22.4	%		1,036.7	22.1	%		857.6	18.8	%
International long distance		674.7	14.4	%		384.0	8.2	%		256.7	5.6	%
Total		Ps 4,672.5	100	%		Ps 4,683.7	100	%		Ps 4,570.3	100	%

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

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

	2008				2009				2010
Long distance lines in service at end of period:
Business		82,177				91,338				100,469
Residential		172,916				116,382				74,768
Minutes of use for the period (1):
Domestic long distance		1,760,324	67	%		1,641,368	77	%		1,326,056	79	%
International long distance		862,024	33	%		484,586	23	%		353,870	21	%
Total		2,622,347	100	%		2,125,954	100	%		1,679,926	100	%

(1) In thousands.

Impact of developments in the Mexican economy

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

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

Year Ended December 31,	Inflation Rate			Average 28-day Cetes			Mexican GDP Annual Growth Rate			Gross International Reserves as of the End of Each Year
1998		18.6	%		24.6	%		4.9	%	$	30.1 billion
1999		12.3	%		21.3	%		3.9	%	$	30.7 billion
2000		9.0	%		15.3	%		6.6	%	$	33.6 billion
2001		4.4	%		11.3	%		(0.2	)%	$	40.9 billion
2002		5.7	%		7.1	%		0.8	%	$	48.0 billion
2003		4.0	%		6.2	%		1.4	%	$	57.4 billion
2004		5.2	%		6.8	%		4.1	%	$	61.5 billion
2005		3.3	%		9.2	%		3.2	%	$	68.7 billion
2006		4.1	%		7.2	%		5.2	%	$	67.7 billion
2007		3.8	%		7.2	%		3.3	%	$	78.0 billion
2008		6.5	%		7.7	%		1.5	%	$	85.3 billion
2009		3.6	%		5.4	%		(6.1	)%	$	90.8 billion
2010		4.4	%		4.4	%		5.5	%	$	113.6 billion

Source: Banco de México.

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

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Impact of foreign currency fluctuations

Our principal foreign currency fluctuation risk involves changes in the value of the Peso relative to the U.S. dollar. As of December 31, 2010, the amount of our notes, bank loans, notes payable and capital leases denominated in U.S. dollars was Ps. 2,998.3 million.

Interest expense on our U.S. dollar-denominated debt, as expressed in Pesos in our consolidated financial statements, varies with exchange rate movements. Depreciation of the Peso results in increases in interest expense on a Peso basis. We record an exchange gain or losses with respect to U.S. dollar-denominated net monetary position of assets and liabilities when the Peso appreciates or depreciates in relation to the U.S. dollar. Our U.S. dollar-denominated monetary liabilities exceed our U.S. dollar-denominated monetary assets.

Periodically, we assess our exposure and consider opportunities to manage this risk, including through the use of hedging instruments. In October 2010, we entered into a currency hedge to minimize the effect of fluctuations in the Mexican Peso - U.S. dollar exchange. We sought to hedge the interest payment of our senior notes due 2014 through two foreign exchange forward contracts. These purchase contract agreements were both in an amount of U.S.$11.75 million in February 2011 and August 2011 at an exchange rate of Ps. 12.463 per U.S.$1 and Ps. 12.611 per U.S.$1, respectively. In addition, we had a U.S. dollar-denominated lease contract which for accounting purposes the dollar currency embedded in the host lease contract is considered as embedded derivative. The effect of this embedded derivate was a profit of Ps. 1.2 million in 2010 and a loss of Ps. 2.6 in 2009.

See Item 3, “Key Information — Selected Financial Data” for a discussion of exchange rates.

IETU

On October 1, 2007, the Mexican government made changes to its tax system, which took effect on January 1, 2008. The changes introduced a flat tax (Impuesto Empresarial a Tasa Única, or “IETU”), which replaces the Mexican asset tax. In general, Mexican companies are subject to paying the greater of the flat tax or the income tax. Taxpayers will calculate IETU tax at 17.5 percent of an income determined based on the cash flow (although transitional rates of 16.5 percent and 17.0 percent apply in 2008 and 2009, respectively). If the IETU tax is a positive amount, the enterprise compares the IETU tax to the income tax calculated under the current income tax system and to IETU tax credits. If the IETU tax is larger, this amount is classified as IETU tax and paid as a supplement to the regular income tax liability. However, if the IETU tax is positive but less than the regular income tax plus the IETU tax credits, no IETU tax is due. If the tax base that is subject to the IETU tax is negative (which will occur when deductible expenditures exceeds taxable receipts), the amount of excess expenditures multiplied by the IETU tax rate will result in a credit for the IETU tax that can be used to reduce the IETU tax in the subsequent 10 years. For 2010, our income tax is higher than our IETU tax; accordingly, we have not recognized any IETU in our consolidated income statements.

In accordance with the interpretation published by CINIF on December 21, 2007 with respect to the accounting effects of the IETU tax, and based on our financial and tax projections, we have determined that we will continue to pay the income tax in the foreseeable future. As a result, our management has not recorded any deferred IETU taxes as of December 31, 2010.

On December 7, 2009, a decree was published, which modified, added and revoked several provisions of the Mexican Income Tax Law for 2010. This decree establishes, among others, that the income tax rate will be 30% for fiscal years 2010 to 2012, 29% for 2013 and 28% from 2014 onwards. At December 31, 2010 the aforementioned change in rates resulted in a decrease in our deferred income tax asset balance of Ps. 11.8 million, which was determined based on the expectation of the reversal of temporary items at the new rates.

Regulations

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

Results of operations

Fiscal Year ended December 31, 2010 compared to Fiscal Year ended December 31, 2009

Revenues

Total revenues decreased 2.4%, or Ps. 113.4 million, to Ps. 4,570.3 million in 2010 from Ps. 4,683.6 million in 2009, primarily due to lower revenues from long distance services.

Data, Internet and Local Services. Data, internet and local service revenues increased 5.9%, to Ps. 3,456.0 million in 2010 from Ps. 3,263.0 million in 2009. Such increase resulted primarily from an increase in our VPN, local and managed services revenues, as

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we continued to focus our sales efforts on these services. Our data, internet and local service segment continued to increase its share in our revenue portfolio, and represented 75.6% of our total revenues in 2010, compared to 69.7% in 2009.

Long Distance Services. Revenues derived from our long distance services decreased 21.6%, to Ps. 1,114.3 million in 2010 from Ps. 1,420.6 million in 2009. The decrease in long distance services revenues was primarily due to lower traffic, which decreased 21.0% to 1,680 million minutes in 2010 from 2,126 million minutes in 2009. As a percentage of total revenues, long distance revenues represented 24.4% of our total revenues in 2010, compared to 30.3% of our total revenues in 2009.

Revenues from domestic long distance services decreased 17.3%, or Ps. 179.1 million, to Ps. 857.6 million in 2010 from Ps. 1,036.7 million in 2009. Our average domestic long distance revenue per minute increased 2.4% to Ps. 0.65 in 2010 from Ps. 0.63 in 2009. Domestic long distance volume for 2010 decreased by 315 million minutes, or 19.2%, to 1,326 million minutes in 2010 from 1,641 million minutes in 2009, primarily due to the decrease in traffic from our residential customers. Our total lines in service decreased by 32,483 lines, a 15.6% decrease, to 175,237 lines as of December 31, 2010 from 207,720 lines as of December 31, 2009, primarily due to our strategy to focus on our business customers and high-usage residential customers.

Revenues from international long distance services decreased 33.1%, or Ps. 127.3 million, to Ps. 256.7 million in 2010 from Ps. 384.0 million in 2009. International long distance volume decreased 27.0%, or 131 million minutes, to 354 million minutes in 2010 from 485 million minutes in 2009. Our average revenue per minute decreased 8.4% to Ps. 0.73 in 2010 from Ps. 0.79 in 2009. The decrease in our international long distance revenue was primarily due to lower international long distance volume as a result of our strategy to not carry unprofitable traffic.

Cost of Services (excluding depreciation)

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

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

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

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

Cost of services decreased 12.7% to Ps. 1,515.5 million in 2010 from Ps. 1,736.7 million in 2009. The decrease in cost of services was primarily due to lower volume of traffic in long distance services.

Data, Internet and Local Services. Cost of data, internet and local services increased 7.1% to Ps. 836.4 million in 2010 from Ps. 781.1 million in 2009. This was primarily due to an increase in internet-related services revenues, such as VPN, local and managed services, which have better margins among data, internet services and local services.

Long Distance Services. Cost of long distance services decreased 28.9% to Ps. 679.1 million in 2010 from Ps. 955.6 million in 2009. This decrease in cost of long distance services was primarily due to a decrease in domestic and international long distance volume of traffic.

Gross Profit

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

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

Gross profit in 2010 increased 3.7% to Ps. 3,054.8 million from Ps. 2,946.9 million in 2009. Our gross profit increased primarily due to higher data, internet and local services gross profit, which helped to offset the decrease in the long distance services gross profit.

Data, Internet and Local Services. Our data, internet and local services gross profit increased 5.5%, or Ps. 137.7 million, to Ps. 2,619.6 million in 2010 from Ps. 2,481.9 million in 2009. This increase was primarily due to the growth of these services revenues.

Long Distance Services. Our long distance gross profit decreased 6.4% to Ps. 435.2 million in 2010 from Ps. 465.0 million in 2009. This decrease was primarily due to a decrease in both domestic and international long distance revenues.

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A reconciliation of our operating income to gross profit is provided below as of December 31, 2009 and 2010.

	Year ended December 31,
	2009			2010
Gross profit	Ps	2,946.9		Ps	3,054.8
Administration, selling and other operating expenses		(1,529.4	)		(1,577.6	)
Depreciation and amortization		(853.5	)		(866.7	)
Operating income	Ps	564.0		Ps	610.5

Administration, selling and other operating expenses

Administration, selling and other operating expenses increased 3.2%, or Ps. 48.3 million, to Ps. 1,577.6 million in 2010 from Ps. 1,529.4 in 2009, primarily as a result of higher building operations related to 12 new sites to connect customers to our network and personnel expenses in 2010. As a percentage of total revenues, administration, selling and other operative expenses represented 34.5% in 2010, compared to 32.7% in 2009.

Depreciation and amortization

Depreciation and amortization increased 1.5%, or Ps. 13.2 million, to Ps. 866.7 million in 2010 from Ps. 853.5 million in 2009. This increase was primarily due to higher fixed assets as a result of an increase in capital expenditures during 2010.

Operating income

Operating income increased 8.2%, or Ps. 46.5 million, to Ps. 610.5 million in 2010 from Ps. 564.0 million in 2009. This increase was primarily due to an increase of Ps. 107.9 million in gross profit already explained above when compared to 2009.

Comprehensive financial result

Our comprehensive financial loss in 2010 was Ps. 192.8 million, compared to a loss of Ps. 221.4 million in 2009. The following table sets forth our comprehensive financial results for the periods under review:

	Year ended December 31,
	2009			2010
Interest expense	Ps	(333.3	)	Ps	(375.9)
Interest income		17.6			10.9
Exchange gain, net		99.1			171.0
Effect of derivative financial instruments		(4.8	)		1.2
Comprehensive financial result, net	Ps	(221.4	)	Ps	(192.8	)

Our interest expense totaled Ps. 375.9 million in 2010 compared to Ps. 333.3 million in 2009. The increase in the interest expense was due to a higher interest rate of our 11.750% senior notes due 2014 issued on August 11, 2009 when compared to the interest rate of our 8% senior notes due 2010, which were prepaid in August and September of 2009.

Interest income decreased to Ps. 10.9 million in 2010 from Ps. 17.6 million in 2009, primarily due to lower interest rates during 2010.

We recorded a foreign exchange gain of Ps. 171.0 million in 2010 compared a foreign exchange gain of Ps. 99.1 million in 2009. We record a foreign exchange gain or loss with respect to U.S. dollar-denominated net monetary position of assets and liabilities when the Peso appreciates or depreciates in relation to the U.S. dollar. Our U.S. dollar-denominated monetary liabilities exceeded our U.S. dollar-denominated monetary assets for the year ended December 31, 2010. We recorded a foreign exchange gain primarily due to a 5.4% appreciation of the value of the Peso against the U.S. dollar during 2010.

In October 2008, we entered into a forward to sell contract at an average monthly amount of U.S.$1.2 million for December 2008, and January and February 2009, at an average exchange rate of Ps. 12.39 per U.S.$1. The effect of those derivative financial instruments was negative and amounted to Ps. 2.2 million in 2009 due to a 10.3% depreciation of the Peso against the U.S. dollar during the first two months of 2009. In addition, we had a U.S. dollar-denominated lease contract which for accounting purposes the dollar currency embedded in the host lease contract is considered as embedded derivative. The effect of this embedded derivate was a profit of Ps. 1.2 million in 2010 and a loss of Ps. 2.6 in 2009.

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Income and IETU

We and our subsidiaries, Servicios Alestra and Alestra Telecomunicaciones Inalámbricas, are required to pay the greater of the income tax or IETU, which are computed separately for each entity. We participate in the tax consolidation of Alfa, our holding company. We recorded an income tax expense of Ps. 33.7 million in 2010 compared to a tax benefit of Ps. 22.1 million in 2009.

In 2010, we amortized tax loss carry-forwards previously reserved, against our current income tax, amounting to Ps. 115.1 million. The utilization of these tax loss carry-forwards derived from different factors, mainly the appreciation of the Peso in 2010. This appreciation had an effect on the valuation of the accounts payable and accounts receivable denominated in U.S. dollars, generating an exchange rate gain, and thus allowing the tax loss carry-forward to be used.

Net Income (loss)

As a result of the above factors, in 2010, we recorded a net income of Ps. 357.5 million compared to a net income of Ps. 291.5 million in 2009. The main reason for the increase in net income was an exchange gain coupled with an increase in operating income explained above.

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

Revenues

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

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

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

Revenues from domestic long distance services decreased 1.1%, or Ps. 11.1 million, to Ps. 1,036.7 million in 2009 from Ps. 1,047.8 million in 2008. Our average domestic long distance revenue per minute increased 6.1% to Ps. 0.63 in 2009 from Ps. 0.60 in 2008. Domestic long distance volume for 2009 decreased by 119 million minutes, or 6.8%, to 1,641 million minutes in 2009 from 1,760 million minutes in 2008, primarily due to the decrease in traffic from our residential customers. Our total lines in service decreased by 47,373 lines, a 18.6% decrease, to 207,720 lines as of December 31, 2009 from 255,093 lines as of December 31, 2008, primarily due to our strategy to focus on our business customers and high-usage residential customers.

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

Cost of Services (excluding depreciation)

Our cost of services consisted primarily of cost of data internet and local services, including:

• direct access operating expenses and third-party last mile access providers paid on a per-capacity basis; and

• backbone services operating expenses and third-party providers paid on a per-capacity per month basis.

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

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

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

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Gross Profit

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

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

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

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

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

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

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

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

Administration, selling and other operating expenses

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

Depreciation and amortization

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

Operating income

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

Comprehensive financial result

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

	Year ended December 31,
	2008			2009
Interest expense	Ps	(294.6	)	Ps	(333.3	)
Interest income		29.1			17.6
Exchange (loss) gain, net		(615.2	)		99.1

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Effect of derivative financial instruments		(63.2	)		(4.8	)
Comprehensive financial result, net	Ps	(943.9	)	Ps	(221.4	)

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

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

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

In October 2008, we entered into a forward to sell contract at an average monthly amount of U.S. $1.2 million for December 2008, and January and February 2009, at an average exchange rate of Ps. 12.39 per U.S.$1. The effect of those derivative financial instruments was negative and amounted to Ps. 2.2 million in 2009 due to a 10.3% depreciation of the Peso against the U.S. dollar during the first two months of 2009. In addition, during 2010, we had a U.S. dollar-denominated lease contract which for accounting purposes the dollar currency embedded in the host lease contract is considered as embedded derivative. For 2009, the effect of this embedded derivative was negative and amounted to Ps. 2.6 million. This contract was evaluated on a monthly basis.

Income and IETU

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

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

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

• we will exercise the option to apply an accelerated tax deduction on certain capital expenditures in 2010 and future years;

• certain assets will continue depreciating for tax purposes at the 1% rate;

• an increase in our interest expense due to the issuance of our 11.750% senior notes; and

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

Net Income (loss)

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

Critical accounting policies

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

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Revenue Recognition

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

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

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

Allowance for doubtful accounts

We take what we believe is a conservative approach toward uncollectible accounts, commonly called the Spindown Method. For all services, this method calculates a certain reserve based on an estimate of the amount of customer accounts receivable that will become uncollectible. Both the residential and business accounts will be fully reserved when those accounts are 241 days and 271 days past due, respectively. To obtain this forecast, an uncollectible rate (the “Spindown Rate”) is estimated and applied to each bucket of the accounts receivable. The Spindown Rate applied on each month’s reserve calculation equals the average Spindown Rate registered on the previous six-month period. Most payments are due 25 days after the issuance of an invoice. We take several different actions to collect past due amounts, including the use of messages, telegrams, collection letters sent to the customer and person-to-person calls. Service is completely suspended when a residential customer has an account that is more than 30 days past due, or when a business customer has an account that is more than 60 days past due. If the balance for a residential customer is still unpaid 90 days after the due date, we assign the account to a collection agency. For business customers with an unpaid balance greater than Ps. 50, the account is also assigned to a collection agency 120 days after the due date. If the efforts of collection agencies are unsuccessful and the balance is large enough to make legal proceedings worthwhile, we commence legal proceedings. As of December 31, 2008, 2009 and 2010, our allowance for doubtful accounts was Ps. 83.5 million, Ps. 62.5 million and Ps. 39.4 million, respectively. We consider this reserve sufficient to cover the probable loss of accounts receivables; however, we cannot assure you that we will not be required to increase the amount of this reserve. A 10% change in the amounts estimated to be uncollectible would result in a change in uncollectible expense of approximately Ps. 3.9 million.

Long-lived assets

We estimate the useful lives of long-lived assets in order to determine depreciation and amortization expense to be recorded during any reporting period. The useful life of an asset is estimated at the time the asset is acquired and is based on historical experience with similar assets, taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated, or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened. This would result in the recognition of increased depreciation and amortization expense in future periods. Alternatively, these types of technological changes could result in the recognition of an impairment charge to reflect the write-down in asset’s value. We review assets for impairment annually, or when events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets. In assessing impairments, we use cash flows, which take into account management’s estimates of future operations, including estimates of revenues, costs, operating expenses, capital expenditures and debt service. In accordance with the Mexican FRS C-15, if an evaluation is required, the estimated future discounted cash flows associated with an asset would be compared to the asset’s carrying value to determine if an asset is impaired, in which case the asset is written down to its fair value. Based on our cash flow analysis, no impairment existed at December 31, 2008, 2009, and 2010. For U.S. GAAP purposes, pursuant to Accounting Standards Codification (“ASC”) 360-10, if an evaluation is required, the estimated future undiscounted cash flows associated with an asset would be compared to the asset’s carrying value to determine if an asset is impaired, in which case the asset is written down to its fair value.

Deferred taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process requires us to estimate our certain current tax exposure together with an assessment of temporary differences resulting from the differing treatment of certain items for tax and accounting purposes, such as depreciation and amortization, cost and accruals, and allowance for doubtful accounts. These differences result in deferred tax assets and liabilities, which are included on our consolidated balance sheet. This method of determining deferred taxes is known as the comprehensive asset — liability method. To the extent we establish a valuation allowance or we increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In 2010 we recorded a valuation

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allowance of Ps. 33.9 million, due to uncertainty whether we may use certain deferred tax assets, primarily certain net operating losses carried forward, before they expire. This allowance for tax loss carry-forwards is based on our projected tax results for future years, considering the scenario at the reporting date. If the scenario under which we prepared our projections changes, the allowance for tax loss carry-forwards may be reversed in the following years.

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

In accordance with the interpretation with respect to the accounting effects of IETU published by CINIF on December 21, 2007 and based on financial and tax projections, we have determined that we will continue to pay regular income tax in the foreseeable future. As a result, we have not recorded any deferred IETU taxes as of December 31, 2010.

New adopted standards under Mexican FRS

As of January 1, 2010, the new Mexican FRS and their interpretations issued by CINIF became effective. The standards that are applicable to us and have been retrospectively adopted are the following:

Mexican FRS B-2 “Cash flows statement”, which modifies the presentation of fluctuation derivative effects in the exchange rate and the fair value movements in cash and cash equivalents with the purpose of showing both effects in a specific line. The modification allows more clarity in the cash and cash equivalents balances reconciliation at period beginning and period end. See cash flows statements.

Mexican FRS C-13 “Related parties”, which requires the reporting entity to inform the name of the direct or indirect controller which issues the financial statements available for public use. In addition, the disclosures on controlling entities are more detailed. See Note 4.

Mexican FRS C-1 “Cash and cash equivalents”, which establishes standards on the accounting treatment and disclosure of cash, restricted cash and available for sale securities. It also introduces new terminology to make it consistent with other Mexican FRS previously issued. Also, it retrospectively modifies the restricted cash and cash equivalents presentation. This standard supersedes Bulletin C-1 “Cash.” See Note 13.

In January 2009, the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or “CNBV”) issued amendments to the General Provisions Applicable to Securities Issuers and other Participants in Securities Market. These amendments require the holding company, Alfa, as of January 1, 2012, to prepare its financial statements in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). We have also decided to adopt IFRS and begin preparing our financial statements under IFRS. However, due to the process currently used by us for translating financial statements under IFRS, we have been unable to determine the estimated amounts of the significant impacts produced by the adoption of IFRS.

New financial reporting standards

During December 2010 and 2009, CINIF issued a series of Mexican FRS, which will become effective as of January 1, 2011. To date, we are evaluating the impact that these Mexican FRS and their interpretations will have on the financial information presented. The standards that are applicable to us are the following:

Mexican FRS B-5 “Financial Information by Segments”, which establishes the general standards to disclose financial information by segments. Additionally, it allows the users of such information to analyze the entity from the same point of view as management does and requires us to present financial information by segment consistently with our financial statements. With this standard, Bulletin B-5 “Financial Information by Segment” remains without effect.

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

Mexican FRS C-4 “Inventory”, which is of retrospective application and establishes the particular standards of valuation, presentation and disclosure for the initial and subsequent recognition of inventory. Additionally, it removes the direct cost method as an allowed valuation system, as well as the inventory cost allocation formula, denominated as Last In First Out (LIFO). With this standard, Bulletin C-4 “Inventory” remained effective until December 31, 2010.

Mexican FRS C-5 “Advanced payments”, which requires retrospective application and establishes, among other things, the particular standards of valuation, presentation and disclosure related to the advanced payment line item. It also establishes that

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advanced payments for the purchase of inventory, real estate, machinery and equipment should be presented in the advanced payment line item and not in inventory or property, machinery and equipment line item, as previously required. Additionally it establishes that advanced payments related to the acquisition of goods should be presented in the balance sheet in attention to the destined item classification, either in current or non-current assets. With this standard, Bulletin C-5 “Advanced payments” remained effective until December 31, 2010.

Mexican FRS C-6 “Property, plant and equipment”, which requires retrospective application (except on disclosure aspects), and establishes, among other things, the particular standards of valuation, presentation and disclosure related to property, plant and equipment. It also: a) requires the disclosure of property, plant and equipment used to develop or maintain biological and extractive industries assets already under its scope, and b) establishes the obligation to depreciate portions representative of each item of property, plant and equipment, regardless of it depreciating the rest of its component parts. This Mexican FRS became effective as of January 1, 2011, with the exception of the changes arising from the segregation of its components and which have a useful life clearly different to the main asset. In this case, and for entities which have not performed such segregation, the applicable disposition will become effective for periods beginning January 1, 2012. With this standard, Bulletin C-6 “Property, plant and equipment” remains effective until December 31, 2010.

Mexican FRS C-18 “Liabilities associated to assets retirement and environmental restoration”, which requires retrospective application and establishes, among other things, the particular standards for initial and subsequent recognition of provisions relative to liabilities associated to property, plant and equipment component retirements. It also establishes the requirements to be considered for the valuation of a liability associated to a component retirement and the disclosures that should be presented by an entity when it has a liability associated to a component retirement.

Recently Issued Accounting Guidance under U.S. GAAP

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

Recently Adopted Accounting Guidance under U.S. GAAP

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). The new standard provides new disclosure requirements relating to transfers in and out of Levels 1 and 2, and activity in Level 3, fair value measurements. Additionally, it clarifies existing disclosure requirements regarding the level of disaggregation and the disclosures of inputs and valuation techniques. This guidance is effective for interim and annual periods ending after December 15, 2009. We adopted the provisions of the standard and included its effect on our audited consolidated financial statements.

In July 2010, the FASB issued amendments ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses(“ASU 2010-20”). The amendments require an entity to provide additional disclosures about: a) its financing receivables on a disaggregated basis including a roll-forward schedule, b) the nonaccrual status of financing receivables and impaired financing receivables by class, credit quality indicators, and c) an aging schedule, among other disclosures. The disclosures required by the ASU as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010, whereas the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We adopted the provisions of these amendments, however, as we do not hold long-term financing receivables, the ASU did not have an effect on our audited consolidated financial statements.

U.S. GAAP Reconciliation

Our consolidated financial statements are prepared in accordance with Mexican FRS, which differ in certain significant respects from U.S. GAAP. See Note 20 to our consolidated financial statements for information relating to the nature and effect of such differences.

Net income (loss) under U.S. GAAP amounted to Ps. (227.1) million in 2008, Ps. 647.5 million in 2009 and Ps. 358.7 million in 2010, compared with net (loss) income under Mexican FRS of Ps. (384.3) million in 2008, Ps. 291.5 million in 2009 and Ps. 357.5 million in 2010.

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Stockholders’ equity under U.S. GAAP amounted to Ps. 1,852.1 million in 2008, Ps. 2,299.2 million in 2009 and Ps. 2,648.8 million in 2010, compared with stockholders’ equity under Mexican FRS of Ps. 2,216.8 million in 2008, Ps. 2,313.7 in 2009 and Ps. 2,667.8 million in 2010. See Note 20 to our consolidated financial statements for further discussion of the adjustments under U.S. GAAP.

B. Liquidity and capital resources

We continue to focus our capital expenditures on businesses that we believe may offer more attractive margins and a short- to medium-term return. All capital expenditures are included in a budget which is pre-authorized by our Board of Directors. We do not expect that any single capital expenditure in 2011 will have a material impact on our operations or financial results. We may incur additional indebtedness in 2011 to finance a portion of our capital expenditures. We believe that we will generate positive capital resources from our operations to fund working capital, capital expenditures and most of our debt service needs in 2011.

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

• the general economic conditions in Mexico;

• access to the capital markets;

• the continuing decrease in international settlements from foreign carriers;

• lower domestic rates resulting from competition; and

• higher capital expenditure needs to build and maintain our network.

Current Liquidity

As of December 31, 2010 and 2009 we had Ps. 486.2 million and Ps. 317.4 million of unrestricted cash available, respectively. Our unrestricted cash balance consists of cash and temporary investments with original maturities of three months or less. Total debt decreased by Ps. 210.2 million, to Ps. 2,998.3 million in 2010 from Ps. 3,208.6 million in 2009. Our cash balance increased Ps. 168.8 million, from December 31, 2009 to December 31, 2010. The increase in our cash balance was primarily due to internally-generated funds from our operations.

Our treasury policy is to invest in highly liquid temporary cash investments issued by the U.S. and Mexican governments, major Mexican and U.S. banks and corporations with high credit ratings. As of December 31, 2010, we had cash of Ps. 30.3 million and temporary investments of Ps. 455.9 million, of which Ps. 294.0 million were in Peso-denominated instruments and Ps. 161.9 million in U.S. dollar-denominated instruments. In our opinion, our cash and cash equivalents balance is sufficient for our present requirements.

As of December 31, 2010 and December 31, 2009 our ratio of current assets to current liabilities was 0.97x, 0.86x, respectively. Our ratio of current assets to current liabilities as of December 31, 2010 includes the corresponding amortization of our vendor loan facilities.

	As of December 31, 2009			As of December 31, 2010
	(in millions of nominal Pesos, excluding ratios)
Unrestricted cash balance	Ps.	317.4		Ps.	486.2
Current ratios (times)		0.86	x		0.97	x

Net debt as of December 31, 2010 decreased by U.S.$24.5 million to U.S.$182.3 million from U.S.$206.8 million as of December 31, 2009. The reduction of net debt was primarily due to a higher cash balance from internally-generated funds. Total debt slightly decreased in 2010. In 2010 debt payment included:

• vendor facilities principal amortization in the amount of U.S.$17.2 million; and

• payment of our outstanding debt with Comerica Bank (“Comerica”), in the amount of U.S.$10.0 million on September 28, 2010.

On October 12, 2009 we signed a loan agreement with Comerica for U.S.$10 million bearing interest at 3 month LIBOR rate plus 3.75%. This loan was prepaid in full on September 28, 2010. Interest payments were payable quarterly. The principal was payable in four equal installments in January 2011, April 2011, July 2011 and October 2011.

During 2010 we obtained new financing including:

• vendor facilities in the amount of U.S.$14.1 million; and

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• bank facility in the amount of U.S.$10.0 million.

On January 1, 2010 we obtained a new vendor facility for the amount of U.S.$3.5 million. This vendor facility was signed with Huawei Technologies de México, S.A. de C.V. (“Huawei”). Principal and interest are payable on a quarterly basis. This tranche matures on December 17, 2012.

On February 19, 2010 and July 22, 2010 we obtained two new vendor facilities tranches for the amount of U.S.$1.9 million and U.S.$5.6 million, respectively. These vendor facilities were signed with Cisco Systems Capital Corporation (“Cisco”). Principal and interest are payable on a monthly basis. These two tranches mature on February 15, 2013 and July 6, 2013, respectively.

On February 23, 2010 we obtained a new vendor facility tranche for the amount of U.S.$3.1 million. This vendor facility was signed with Hewlett-Packard Operations México, S. de R.L. de C.V. (“HP”). Principal and interest are payable on a monthly basis. This tranche matures on February 28, 2014.

On September 23, 2010 we signed a new loan agreement with Comerica for U.S.$10 million bearing interest at 3 month adjusted LIBOR rate plus 3.75%. Interest payments are payable quarterly and the principal is payable in four equal installments in March 2012, June 2012, September 2012 and December 2012. This loan agreement contains customary covenants with which, as of December 31, 2010, we are in full compliance.

Capital expenditures during 2010 amounted to Ps. 788.9 million, Ps. 148.4 million lower than the Ps. 937.3 million invested in 2009. Our capital expenditure program includes investments to expand our network, provide new services and to extend our network to customers’ premises, commonly referred to as the last-mile access. As of the date of this report, our capital expenditure program is proceeding according to schedule.

Cash flows for the years 2010 and 2009 are explained as follows:

Operations. Our operating activities net cash flows were Ps. 1,434.0 million and Ps. 1,768.5 million in 2010 and 2009, respectively. This decrease was mainly explained by changes in working capital primarily due to a lower growth of our accounts payable related to interconnection costs. We also paid higher taxes due to an increase in the tax base coupled with higher tax rates. Income tax rates increased from 28% to 30% and IETU Tax from 17.0% to 17.5% in 2009 and 2010 respectively.

Investing. Our investing activities net cash flows were Ps. 739.9 million and Ps. 898.6 million in 2010 and 2009, respectively. This decrease is primarily a result of a reduction in capital expenditures investments. The acquisition of property and equipment amounted to Ps. 656.9 million and Ps. 808.4 million in 2010 and 2009, respectively.

Financing. Our financing activities net cash flows were Ps. 465.5 million and 483.2 million in 2010 and 2009, respectively. These financing activities primarily include:

• the payment of interest corresponding to our then outstanding debt in an amount of Ps. 384.5 million and Ps. 224.7 million in 2010 and 2009, respectively;

• the payment of Ps. 344.5 million of the corresponding debt amortization of our vendor facilities and bank loans in 2010 and Ps. 2,640.3 million in 2009 of the corresponding debt amortization and prepayment on August and September 2009 of our 8% senior notes due 2010 and payment of other debt and bank loans in an amount of Ps. 424.9 million; and

• new vendor financing and bank facilities in an amount of 263.4 million and 349.8 million in 2010 and 2009, respectively, and our 11.750% senior unsecured notes due 2014 issuance in August 11, 2009 in an amount of Ps. 2,587.0 million.

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

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

• the acquisition of property and equipment in an amount of Ps. 808.4 million and Ps. 788.2 million in 2009 and 2008, respectively;

• the payment of Ps. 482.4 million in 2008 of the corresponding debt amortization of our 8% senior notes due 2010;

• the payment of Ps. 2,640.3 million in 2009 of the corresponding debt amortization and prepayment on August and September 2009 of our 8% senior notes due 2010;

• the payment of other debt and bank loans in an amount of Ps. 424.9 million and 393.0 million in 2009 and 2008, respectively; and

• the payment of interest corresponding to our then outstanding debt in an amount of Ps. 224.7 million and Ps. 261.7 million in 2009

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and 2008, respectively.

Material Commitments and Funding

The table below describes by year of payment due current material commitments as of December 31, 2010.

	As of and for the year ended December 31,
	2011		2012		2013		2014		2015
	(in millions of Pesos) (1)
Vendor financing (2)		235.1		158.7		33.2		1.8		—
Principal		217.4		152.4		32.5		1.8		—
Interest		17.7		6.3		0.7		0.0		—
Principal payments on long-term debt (3)		—		123.8		—		2,476.5		—
Interest payments (4)		296.0		294.1		291.0		291.0		—
Operating leases		97.5		100.8		104.3		108.6		113.0
Capital expenditures (5)		928.7		—		—		—		—
Total		1,557.3		677.5		428.5		2,877.8		113.0

(1) Nominal Pesos converted from U.S. dollars at a rate of 13.3825 Pesos per U.S. dollar, which is the noon buying rate provided by The Federal Reserve Bank of New York on December 31, 2010.

(2) HP, Cisco and Huawei vendor financing facilities.

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

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

(5) Derived from the annual budget from 2011.

Our vendor financing commitments include a loan facility with HP with final maturities of the loan tranches on October 31, 2012, February 28, 2013, April 30, 2013 and February 28, 2014, a loan facility with Huawei which expires on December 17, 2012, and a loan facility with Cisco with final maturities of the loan tranches on August 7, 2011, October 28, 2011, June 15, 2012, August 6, 2012, September 10, 2012, September 11, 2012, October 15, 2012, December 15, 2012, February 15, 2013 and July 6, 2013.

Our principal long term debt commitments for 2011 to 2015 include the principal amortization of our U.S.$200.0 million due on August 11, 2014 of our 11.750% senior notes due 2014 and our debt outstanding with Comerica, in the amount of U.S.$10.0 million due on December 31, 2012. Our interest commitments for 2011 to 2015 include the interest payments on our bank facility with Comerica and on our 11.750% senior notes due 2014.

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

Capital expenditures for 2010, 2009 and 2008 amounted to Ps. 788.9 million, Ps. 937.3 million and Ps. 793.4 million, respectively. Our estimated payment according to our 2011 annual budget is Ps. 928.7 million.

We believe that the funds to meet our material commitments in 2011 will be provided by internally-generated funds from our operations and through new available vendor and lease financing facilities.

11.750% Senior Notes due 2014

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

Principal payment date	Percentage of original principal amount payable			Percentage of remaining original principal amount
August 11, 2014		100.00	%		—

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

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• subject to specified exceptions, we may not incur indebtedness unless our consolidated leverage ratio (as defined in the indenture) would be less than 3.50 to 1.0 and our consolidated fixed charge coverage ratio (as defined in the indenture) would be greater than or equal to 2.0 to 1.0. As of December 31, 2010, our consolidated leverage ratio was less than 3.50 to 1.0 and our consolidated fixed charge coverage ratio was greater than 2.0 to 1.0;

• subject to specified exceptions, we may not make any restricted payments, including the payment of dividends, unless we can incur at least one additional dollar of indebtedness under the ratios above, no event of default has occurred and is continuing, and the sum of all restricted payments since August 11, 2009 is less than a specified amount (such amount is based on a percentage of our consolidated net income, capital stock contributions and returns on unrestricted subsidiaries, as defined in the indenture, and other investments); and

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

Other Indebtedness

As of December 31, 2010, December 31, 2009 and December 31, 2008, our total debt amounted to U.S.$242.6 million, U.S.$245.7 million and U.S.$234.5 million, respectively. Total debt as of December 31, 2010 includes:

• 11.750% senior unsecured notes due 2014 in an amount of U.S.$200.0 million;

• bank facility in an amount of U.S.$10.0 million; and

• vendor facilities in an amount of U.S.$32.6 million.

As of December 31, 2010 we had outstanding U.S.$200.0 million aggregate principal amount of our 11.750% senior notes due 2014, which pay interest semiannually in cash in arrears on February 11 and August 11, beginning on February 11, 2010. The principal amortization is payable at maturity on August 11, 2014.

On October 12, 2009 we signed a loan agreement with Comerica for U.S.$10 million bearing interest at 3 month LIBOR rate plus 3.75%. This loan was prepaid in full on September 28, 2010. Interests payments were payable quarterly. The principal was payable in four equal installments in January 2011, April 2011, July 2011 and October 2011.

On September 23, 2010 we signed a new loan agreement with Comerica for U.S.$10 million bearing interest at 3 month adjusted LIBOR rate plus 3.75%. Interest payments are payable quarterly and the principal is payable in four equal installments in March 2012, June 2012, September 2012 and December 2012. This loan agreement contains customary covenants with which, as of December 31, 2010, we are in full compliance.

As of December 31, 2010 we had a loan facility with an outstanding balance of U.S.$19.3 million with Cisco, which pays principal and interest on a monthly basis. Tranches with maturities on 2011, 2012 and 2013 have an outstanding balance of U.S.$3.6 million, U.S.$9.4 million and U.S.$6.3 million respectively.

As of December 31, 2010 we had a loan facility with an outstanding balance of U.S.$11.0 million with HP, which pays principal and interest on a monthly basis. Tranches with maturities in 2012, 2013 and 2014 have an outstanding balance of U.S.$3.8 million, U.S.$4.7 million and U.S.$2.5 million, respectively.

As of December 31, 2010 we had a vendor facility with Huawei, with an outstanding balance of U.S.$2.3 million, which pays principal and interest on a quarterly basis and matures in December 2012.

Legal Proceedings

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

In August 2006, ABA Seguros, S.A. de C.V. (“ABA Seguros”) and 7-Eleven, Inc. (“7-Eleven”) filed a claim against our subsidiary Servicios Alestra in the amount of Ps. 50.0 million, for damages from a fire that began in the building leased by us to Casa Chapa, S.A. de C.V., under the theory of subrogation of rights. We filed our response with the support of ACE Seguros (the insurance division of Servicios Alestra), since ACE Seguros is the party that would pay should Servicios Alestra be found liable. In order to examine Servicios Alestra’s responsibility, ABA Seguros, 7-Eleven and Servicios Alestra sought the opinions of five experts in the following areas: (i) damages valuation, (ii) insurance settlement, (ii) fires, (iv) accounting, and (v) electrical installation. In July, 2010, a Civil Judge decided to acquit Servicios Alestra of responsibility for the damages caused from the fire. In August, 2010, ABA Seguros and 7-Eleven appealed the sentence dictated by the Civil Judge, but on January 2011, a Magistrate of the Court of Appeals

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confirmed the sentence dictated by the Civil Judge. Despite this decision, ABA Seguros and 7-Eleven could ask for an amparo (constitutional guarantee for protection of civil rights). We believe Servicios Alestra will be released of any responsibility.

Dispute with Telmex regarding interconnection services rates

We are involved in a dispute with Telmex regarding interconnection services rates applicable for 2008, 2009 and 2010 and requested the intervention of Cofetel regarding the interconnection rates applicable for 2011. On September 8, 2009, a trust was created by us, Telmex and BBVA Bancomer as a trustee, and amended on July 30, 2010, to guarantee the payment of such interconnection services. As of December 31, 2010, the trust balance was Ps. 361.6 million, which is included in our cash and cash equivalents in our balance sheet. We continue negotiations with Telmex, and we cannot assure you that we will reach an agreement in the near future. See “Risk Factors – Risk related to us – Telmex dominates the telecommunications market in Mexico, and we depend on Telmex for interconnection.”

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

Not applicable.

D. Trend information

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

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

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

• the growth in broadband access;

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

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

• mobile services.

E. Off-balance sheet arrangements

As of December 31, 2010 we do not have any outstanding off-balance sheet arrangements.

F. Tabular disclosure of contractual obligations

	Payments due in period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in millions of Pesos) (1)
Long-term debt (2)		3,772		296		3,476		—		—
Principal		2,600		—		2,600		—		—
Interest		1,172		296		876		—		—
Vendor and capital lease financing (3)		429		235		194		—		—
Operating lease obligation		892		97		314		231		250
Purchase obligations (4)		91		91		—		—		—
Employee benefits		107		6		17		11		73
Total		5,290		725		4,001		242		323

(1) U.S. denominated obligations are translated to Mexican Pesos based on an exchange rate of Ps. 13.3825 per U.S. dollar, the noon buying rate as provided by The Federal Reserve Bank of New York on December 31, 2010.

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

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(3) HP, Cisco and Huawei financing facilities.

(4) Maintenance contracts.

Item 6. Directors, Senior Management and Employees.

A. Directors and senior management

Biographies of Senior Management

Rolando Zubirán Shetler (58) is our Chief Executive Officer. Mr. Zubirán has over 20 years of experience in telecommunications. He joined us on January 1, 1999. He has served as President and General Manager of Compania Ericsson S.A.C.I. in Argentina, as Managing Director of Ericsson Telecom, S.A. de C.V. in Mexico, as Managing Director of Ericsson Telecomunicações S.A. in Brazil and various other positions in business planning. Mr. Zubirán holds a Bachelor’s of Science Degree in Industrial Engineering from Universidad Nacional Autónoma de México and a Master’s of Science Degree in Operations Research from the University of Southern California.

Bernardo García (52) is our Chief Financial and Administrative Officer. Mr. García has been with us since our start in 1996 and has held several positions, including marketing director, enterprise sales director, commercial strategy director and Vice-President of our Consumer Small Business Market. Before joining us, he also served in several positions in Alfa, including one on the team that negotiated the Amended and Restated Joint Venture Agreement with AT&T to form our company. Mr. García holds a Bachelor’s Degree in Industrial and Systems Engineering from the Instituto Tecnológico de Estudios Superiores de Monterrey, a Master’s Degree in International Trade from Universidad de Monterrey and an M.B.A. from IMD in Switzerland.

Raúl Ortega (54) is our Chief Public Affairs and Legal Officer. From 1993 to 1996, Mr. Ortega was a Public Affairs Director with AT&T. Mr. Ortega has been with us since our start in 1996. He has substantial experience as an advisor in international telecommunications, as well as in trade politics, policy and regulation in the U.S. and Mexico. Before joining AT&T, Mr. Ortega served as Managing Director of an alliance of Mexican private sector organizations formed to promote expanded trade between the U.S., Mexico and Canada, particularly in the context of the North American Free Trade Agreement. Mr. Ortega also has seven years of experience with Consejo Empresarial Mexicano para Asuntos Internacionales as a representative of Mexican business interests in Washington, D.C. He holds an accounting degree from the Universidad Iberoamericana and a graduate degree in Political Economics.

Alejandro Irigoyen (58) is our Chief Operations and Systems Officer. Mr. Irigoyen has over 20 years of human resources experience in various Alfa subsidiaries and corporate organizations. Mr. Irigoyen’s expertise is focused in the areas of labor relations and compensation. Prior to his assignment with us, he served as Director of Administrative Staff and Services at Alfa’s Corporate Headquarters where he held various managerial positions in Human Resources. Mr. Irigoyen joined us in 1996. Mr. Irigoyen has a Bachelor of Science Degree in Mechanical Engineering from the Universidad Autónoma de Nuevo León, a Master of Science Degree in Economics, majoring in Human Resources Administration, from the University of Utah, and he attended the Instituto para la Alta Dirección de Empresas. He has also been a consultant at the Instituto Tecnológico de Estudios Superiores de Monterrey (“ITESM”) and at the Universidad Autónoma de Nuevo León.

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

Biographies of Directors

Armando Garza Sada (53) is the Chairman of the Board of Directors of Alestra and is the Chairman of the Board of Directors of Alfa. Prior to taking his current position, Mr. Garza was Corporate Development President for Alfa. He was President of Sigma from 1993-1999 and before Sigma, he held other executive positions at Alfa. Mr. Garza is a member of the Board of Femsa, Lamosa, Liverpool and ITESM. He is also a member of the Stanford Business School Alumni Association and the Dean’s Advisory Council of MIT’s Sloan School of Management. Mr. Garza has a B.S. in Management from the Massachusetts Institute of Technology and a M.B.A. from the Stanford Graduate School of Business. Mr. Garza, who is a nominee of Alfa, has been a director of Alestra since October 2001.

Alvaro Fernandez Garza (42) is the President of Alfa. Prior to taking his current position, Mr. Fernandez was the President of Sigma and has held other executive positions at Alfa. He has a Bachelor’s Degree in economics from Notre Dame University, as well as a Master’s Degree in business administration from the ITESM and a M.B.A. from Georgetown University. Mr. Fernandez, who is a nominee of Alfa and has been a director of Alestra since June 2010.

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Alejandro Elizondo Barragán (58) is the Corporate Development President for Alfa. Prior to taking his current position, Mr. Elizondo was the President of Alpek (Alfa’s Petrochemical Division) and previously Chief Financial and Planning Officer for Alfa. He has over 30 years experience in Alfa, where he has held various executive positions. Mr. Elizondo was the Chief Executive Officer of Hylsamex and is a member of the Board of Directors of Arca and Banregio. He has a Bachelor’s Degree in Mechanical Engineering from the ITESM and a M.B.A. from Harvard University. Mr. Elizondo, who is a nominee of Alfa, has been a director of Alestra since March 2006.

Ramon Alberto Leal Chapa (41) is the Chief Financial Officer of Alfa. Prior to taking his present position he was the Treasurer of Alfa. He previously held various positions related to finance and planning at Vitro. He has a Bachelor’s Degree in accounting from UDEM, a Master’s Degrees in business administration from ITESM and an M.B.A. from Harvard University. Mr. Leal, who is a nominee of Alfa, has been a director of Alestra since June 2010.

Carlos Jimenez Barrera (55) is the Secretary of the Board of Directors and General Counsel of Alfa. He has been with Alfa since 1976. He holds a law degree from the Universidad de Monterrey and a Master’s Degree in Comparative Jurisprudence from New York University School of Law. Mr. Jimenez, who is a nominee of Alfa, has been a director of Alestra since September 2006.

Eric R. Weinbrom (49) is the financial leader for the sales segment focused on AT&T’s largest business customers. Immediately prior to this assignment, he was responsible for Financial Planning and Analysis for AT&T Business Solutions. He has been a member of AT&T for more than 20 years and has served in a wide variety of financial positions. In addition to those mentioned above, he has served as CFO for AT&T’s international business. Mr. Weinbrom is a graduate of the Pennsylvania State University with a B.S. in Health Planning and Administration. He also holds a Master’s Degree in Finance from Xavier University and a graduate certificate in Accounting from Fairleigh Dickinson University. Mr. Weinbrom, who is a nominee of AT&T Mexico, has been a full director of Alestra since December 2004 and an alternate since January 2004.

Daniel T. Walsh is the Senior Vice President of Advanced Enterprise Solutions. He is responsible for leading the global overlay distribution channel supporting AT&T’s advanced enterprise solution portfolio. Prior to this assignment, he was Senior Vice President for Segment Marketing and AT&T Business Solutions. In this capacity, Mr. Walsh drove the marketing programs for the sales teams supporting AT&T business and government clients worldwide. Mr. Walsh has held a variety of sales and marketing positions within AT&T and previously with Southwestern Bell Corporation (“SBC”). He holds a Bachelor of Science in Engineering and an Executive M.B.A. from Michigan State University.

John Potter is currently Vice President of Service Solutions, AT&T Business Solutions. He leads a virtual business unit responsible for developing and delivering a cloud based service strategy to pivot and integrate AT&T capabilities to solutions that are delivered as a Service model. Previously, he was the Vice President of Business Operations for AT&T Business Solutions, responsible for leading One AT&T and Business strategy execution, with an emphasis on integrating acquisitions across AT&T. In addition, Mr. Potter was Vice President of Marketing supporting AT&T’s Signature Client Group. Mr. Potter earned a Bachelor of Engineering in Electrical Engineering/Computer Science and a Master’s Degree in Global Technology Management, both from the Stevens Institute of Technology.

Brian Troup is Vice President for Custom Offer Strategy and Management. Mr. Troup drives the organization that facilitates activities through partnerships with other support organizations and our sales department to produce greater resource effectiveness and increased customer satisfaction. Mr. Troup has spent the last two years in the Marketing department, where he led AT&T’s Strategic Partnerships and Alternate Channels Program. He has over 25 years of experience with AT&T and has held a variety of assignments in sales, sales support, strategic pricing and contract negotiation. Prior to his current assignment he was Vice-President of our Mid-Atlantic Region, Premier Client Group, AT&T Global Services. Mr. Troup completed his undergraduate studies at James Madison University and holds an M.B.A. from Lehigh University.

B. Compensation

For the year ended December 31, 2010, we paid aggregate annual compensation of approximately Ps. 39.6 million to our executive officers as a group for their services in all capacities. As of December 31, 2010, we have accrued pension benefits and similar liabilities of Ps. 106.7 million.

During 2007, we created a new defined contribution retirement plan for employees. We make monthly contributions to the plan on behalf of each participating employee. The contribution expense related to the plan equaled Ps. 33.3 million in 2010 and Ps. 33.0 million in 2009.

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

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C. Board Practices

Our direct equity holders are AT&T Mexico and Alfa. Under our Amended and Restated Joint Venture Agreement, the number of directors on our board of directors is fixed at nine. AT&T Mexico may nominate four of these directors, while Alfa may nominate the remaining five. Upon the consummation of the AT&T Transactions, Alfa and AT&T Mexico will terminate the Amended and Restated Joint Venture Agreement and Alfa will be our sole equity holder. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.” Unless otherwise provided in our Amended and Restated Joint Venture Agreement or our by-laws, any vote by the board of directors requires a majority for approval, except that the affirmative vote of at least one director appointed by each of the holders of the series A social part and the series B social part shall be required for the election of the Secretary and alternate Secretary and the approval of any matter decided by the Board relating to a decision that we should commence bankruptcy, liquidation or similar proceedings. No director may be removed during his or her term without the consent of the party that nominated that director. For our directors and senior management, there is no expiration date for their term of office. In addition, we have no service contracts that provide for benefits upon termination of employment. The period during which each director has served on our board is set forth at Item 6, “Directors, Senior Management and Employees — A. Directors and Senior Management — Biographies of Directors”. We currently do not have a separate audit committee. We are not required under the Sarbanes-Oxley Act of 2002 to have a separate audit committee, as we delisted from the New York Stock Exchange.

D. Employees

As of December 31, 2010, we employed 1,696 people through our sole subsidiary, Servicios Alestra. The chart below shows the distribution of our employees for the years 2008, 2009 and 2010:

	Number of Employees as of December 31,
Direction	2008		2009		2010
Officers and Staff		9		9		9
Enterprise Convergence Services		115		196		98
Administration		191		204		195
Human Resources		40		38		40
Engineering and Operations		405		509		665
Business Sale Unit		425		249		239
Residential Sale Unit		441		348		307
Systems		100		107		110
Strategic Planning		11		10		10
Legal and Government Relations		29		29		23
Total		1,766		1,699		1,696

In addition, Servicios Alestra has also contracted with third-party agencies for the services of less than 40 additional temporary employees. Only one labor union, Sindicato Nacional de Trabajadores del Transporte Público y Comunicaciones (the “National Union of Workers of Public Transportation and Communications”), which operates as an autonomous workers union, represents our employees. It represents 35 Servicios Alestra employees. Relations with the union are governed by a collective bargaining agreement between us and the union. Under Mexican law, collective bargaining agreements are reviewed annually with regard to salaries, and biannually with regard to fringe benefits. To date, we have not experienced any work stoppages, and we believe that our relationship with our employees and the union is good.

E. Share Ownership

Not applicable.

Item 7. Major Shareholders and Related Party Transactions.

A. Major Shareholders

We are owned 49% by AT&T and 51% by Alfa. AT&T holds its equity in us through its subsidiary AT&T Mexico. Upon the consummation of the AT&T Transactions, Alfa will own 100% of our equity interests. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

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

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Alfa is one of Mexico’s largest conglomerates. It comprises four groups that participate in key industries within the Mexican and NAFTA economies, including petrochemicals and synthetic fibers, processed food, auto parts and telecommunications. As of December 31, 2010, Alfa’s total assets amounted to Ps. 112.3 billion, with revenues and operating income for 2010 of Ps. 136.4 billion and Ps. 10.8 billion, respectively

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

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

On November 17, 2003 our equity holders resolved to increase the variable portion of our capital stock by $100 million (Ps. 1,181.0 million), which was subscribed and paid for by each equity holder in proportion to its share of our capital, i.e., 51% by Alfa and 49% by AT&T. In order to reconcile our capital with Mexican FRS, reflect inflationary gain, and absorb accumulated losses, on December 1, 2003 our equity holders resolved to (i) reclassify the balance as of December 31, 2002 of our restatement of capital stock account into the variable portion of our capital stock in the amount of Ps. 5,230.3 million, and (ii) reduce the variable portion of the capital stock for Ps. 9,565.9 million and Ps. 1,394.62 million by reclassifying these amounts from our accumulated deficit account and our accumulated deficit from restatement account, respectively. As a consequence, the nominal value of the shares was proportionally reduced according to the ownership interest of each of the shareholders, 51% on Alfa and 49% on AT&T. These transactions did not represent a contribution or payment to the equity holders. Upon the consummation of the AT&T Transactions, Alfa and AT&T Mexico will terminate the Amended and Restated Joint Venture Agreement. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

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

B. Related party transactions

See Item 18, “Financial Statements — Note 4. Balances and Transactions with Related Parties.”

C. Interests of experts and counsel

Not applicable.

Item 8. Financial Information.

A. Consolidated statements and other financial information

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

Policy on Dividend Distribution

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

Upon the consummation of the AT&T Transactions, Alfa and AT&T Mexico will terminate the Amended and Restated Joint Venture Agreement. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

B. Significant changes

Not applicable.

Item 9. The Offer and Listing.

A. Offer and listing details

Not applicable.

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B. Plan of distribution

Not applicable.

C. Markets

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

D. Selling shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the issue

Not applicable.

Item 10.  Additional Information.

A. Share capital

Not applicable.

B. Memorandum and articles of association

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

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

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

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

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

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

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

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

• Install, operate or exploit earth satellite transmission signal stations under the corresponding permit.

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

• Sell, lease, dispose of and otherwise divest itself of the telecommunication network capacity.

• Resell telecommunication capacity and services to the extent allowed by law.

• Carry out or promote research and development programs and telecommunication training programs.

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

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

• In general, carry out any other legal businesses or activities.

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

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

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

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

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

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

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

• Class A – Ps. 53,550

• Class B – Ps. 51,450

• Class N – Ps. 195,000

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

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

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

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

Any additional interest in Telmex or America Movil acquired by AT&T, shall not constitute an Acquisition of Control (as defined in our Amended and Restated Joint Venture Agreement) or be subject to the provisions of our Amended and Restated Joint Venture Agreement. So long as AT&T has the right to designate at least one member to the board of directors or the executive committee of Telmex or America Movil, AT&T has agreed that none of the individuals nominated to serve as AT&T’s representatives on the board of directors or steering committee shall have any direct or indirect responsibility for AT&T’s relationship

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with Telmex or America Movil or serve (or for twenty-four (24) months after serving on our board of directors serve) on either the Telmex or America Movil board of directors or executive committee. In addition, AT&T shall establish and enforce a policy against the transfer of non-public information about us to Telmex or America Movil.

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

• extension of our term of duration;

• our anticipated dissolution;

• change of our corporate purpose;

• change of our corporate form; and

• our merger with another company.

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

Shareholder meetings. Shareholder meetings can be called by:

• the Board of Directors, in which case the signature of the Secretary of the Board is required;

• any of the members of the Board of Directors;

• the examiner; or

• shareholders representing at least 26% of the Class A or Class B stock.

At these meetings, our shareholders may:

• examine our annual report, and determine the direction we will take the following year;

• decide upon the application of the results of operation;

• elect the chairman of the Board of Directors;

• resolve to redeem stock with income that, according to law, may be used to pay dividends;

• name our Chief Executive Officer and examiner;

• decide the issuance of preferred stock;

• decide to increase or reduce our fixed or variable capital;

• pay dividends, if any;

• approve changes to our bylaws;

• determine our dissolution, if applicable;

• permit the issuance of bonds;

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

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

• approve annual financial statements with or without audit;

• approve any incentive, deferred compensation or any similar compensation plan for the Chief Executive Officer and any other executive;

• approve or modify the authority delegated to the Chief Executive Officer;

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

• resolve waiver of non-competition obligations of shareholders,

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

• modify our financial policy;

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

• resolve the amendment of any concession granted which results in an additional restriction of our operating conditions or which imposes additional risk or potential liability for our shareholders;

• create subsidiaries and amend their bylaws; and

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

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

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

Upon the consummation of the AT&T Transactions, Alfa and AT&T Mexico will terminate the Amended and Restated Joint Venture Agreement and Alfa will be our sole equity holder. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

C. Material contracts

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

Governance Provisions

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

• the approval or modification of our annual budget or business plan;

• the making of significant capital expenditures;

• the election or removal of our chief executive officer;

• the entering into modification or termination of material contracts;

• any change in regulatory policy; and

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

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

Service Mark License Agreement

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

AGN Agreement

The AGN Agreement has been extended to June 30, 2013. Under the amended AGN Agreement, if our Mexican shareholder, Alfa, transfers certain of its interest in us, AT&T’s obligations under the AGN Agreement will be terminated. Upon the consummation of the AT&T Transactions, and following the termination of the Equipment Lease Agreement, we and AT&T expect to terminate the AGN Agreement prior to its June 30, 2013 expiration date. Upon the termination of the AGN Agreement, we will be required to cease offering AT&T Global Services in Mexico and using any of AT&T’s intellectual property. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments” and “Item 3—Key Information—D. Risk Factors—Risks Related to Us—Our rights to offer AT&T Global Services to customers in Mexico are dependent on the AGN Agreement, the termination of which could adversely affect our business, results of operations and financial condition.”

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Insulation from Certain AT&T Affiliates

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

• none of the individuals nominated to serve as AT&T’s representatives on our board of directors or steering committee shall have any direct or indirect responsibility for AT&T’s relationship with TAM or serve within 24 months of serving on our board of directors on either the TAM board of directors or executive committee; and

• none of the officers of AT&T Mexico nor any individuals serving on AT&T Mexico’s board of directors shall serve as directors or officers of any AT&T affiliate holding any interest in TAM.

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

Transfer Restrictions

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

Certain Purchase and Financial Commitments

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

On June 30, 2010, AT&T fulfilled its obligation with the marginal commitment of U.S.$164,600,000.

Equity Purchase Agreement and Nodes Purchase Agreement

On April 14, 2011, we entered into the Equity Purchase Agreement with AT&T, AT&T Mexico and Alfa, pursuant to which Alfa has agreed to acquire AT&T Mexico’s 49% equity interest in our company. On April 14, 2011, we also entered into the Nodes Purchase Agreement with AT&T, AT&T Mexico and Alfa, pursuant to which AT&T Mexico has agreed to purchase from us the Nodes required for the provision of AT&T Global Services in Mexico (we refer to the Nodes Purchase Agreement together with the Equity Purchase Agreement as the AT&T Transactions).

Consummation of the AT&T Transactions is subject to customary conditions, including: (i) receipt of certain regulatory approvals; (ii) absence of any law or order prohibiting the closing of the transactions; (iii) subject to certain exceptions, the accuracy of representations and warranties; and (iv) payment of certain amounts due to AT&T and AT&T Mexico. The AT&T Transactions are expected to close in the second quarter of 2011. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

D. Exchange controls

Capital controls

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

E. Taxation

Mexican taxation

General

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

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

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Interest and principal

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

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

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

Notwithstanding the foregoing, under Rule I.3.1711. published in the Diario Oficial de la Federación (the Official Register of the Federation) on June 11, 2010, which is subject to amendment or repeal but is expected to remain in effect until June 12, 2011 (the “Reduced Rate Rule”), payments of interest made where:

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

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

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

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

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

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

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

(1) is the effective beneficiary of the interest;

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

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

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

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

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

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

Dispositions

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

Other taxes

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

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

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

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

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risk.

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

Interest Rate Risk

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

Most of our indebtedness bears fixed rates of interest, including our 11.750% senior notes due 2014 and our vendor financing. However, our bank facility interest payments are based on the floating three-month London Interbank Offered Rate (“LIBOR”). As of December 31, 2010, principal amount outstanding under this facility was Ps. 123.6 million.

The potential loss from a hypothetical, instantaneous and unfavorable increase of 500 basis points in the three-month LIBOR would have resulted in additional interest expense of approximately Ps. 8.5 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in Pesos of servicing U.S. dollar-denominated indebtedness.

Foreign Exchange Risk

Our principal foreign currency fluctuation risk involves changes in the value of the Peso relative to the U.S. dollar. Although U.S. dollar-denominated revenues and expenses are exposed to foreign currency fluctuations, our financial instruments are more highly impacted. As of December 31, 2010, the amount of senior notes and notes payable denominated in U.S. dollars was Ps. 2,998.3 million.

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

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

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

The hypothetical, potential loss in value of financial instruments held at December 31, 2010, the value of which totaled Ps. 2,998.3 million that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in the Mexican Peso-U.S. dollar exchange rate would have been approximately Ps. 299.8 million. Such a change in currency exchange rates would also have resulted in additional interest expense of approximately Ps. 31.7 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in Pesos of servicing U.S. dollar-denominated indebtedness.

Periodically, we assess our exposure and consider opportunities to manage this risk, including through the use of hedging instruments. In October 2010, we entered into a currency hedge to minimize the effect of fluctuations in the Mexican Peso - U.S. dollar exchange. We sought to hedge the interest payment of our senior notes due 2014 through two foreign exchange forward contracts. These purchase contract agreements were both in an amount of U.S.$11.75 million in February 2011 and August 2011 at an exchange rate of Ps. 12.463 per U.S.$1 and Ps. 12.611 per U.S.$1, respectively. In addition, we had a U.S. dollar-denominated lease contract which for accounting purposes the dollar currency embedded in the host lease contract is considered as embedded derivative. The effect of this embedded derivate was a profit of Ps. 1.2 million in 2010 and a loss of Ps. 2.6 in 2009.

The effectiveness of financial derivative instruments classified as hedge instruments is assessed on a periodic basis. On December 31, 2010, our management had assessed the effectiveness of hedges and estimated that they are highly effective.

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

Item 12. Description of Securities Other Than Equity Securities.

Not applicable.

Item 13. Defaults, Dividend Arrearages and Delinquencies.

Not applicable.

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

Not applicable.

Item 15. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, of the effectiveness of our disclosure controls and procedures as of December 31, 2010. Based on this evaluation, our company’s Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of December 31, 2010.

Management’s Annual Report on Internal Control over Financial Reporting

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

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010. The assessment was based on criteria established in the framework Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2010.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public

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accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

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

Item 16. Reserved.

Item 16.A. Audit Committee Financial Expert

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

Item 16.B. Code of Ethics

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

Item 16.C. Principal Accountant Fees and Services

The aggregate fees billed by PricewaterhouseCoopers, S.C. (“PwC”), our independent auditor, for professional services in 2009 and 2010 were as follows:

	2009		2010
Audit Fees (1)	Ps	5.9	Ps	5.7
Audit Related Fees (2)		7.8		0.6
Total	Ps	13.7	Ps	6.3

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

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

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

Not applicable.

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

Not applicable.

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

Not applicable.

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Item 16.G. Corporate Governance

Not applicable.

Item 17. Financial Statements.

Not applicable.

Item 18. Financial Statements.

See pages F-1 through F-40 incorporated herein by reference.

Item 19. Exhibits.

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

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

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

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

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

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

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

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

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

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

4.6 Concession for the Use of Radioelectric Frequencies to provide point-to-multipoint microwave telecommunication services (68PAM10-6) granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.7 Concession for the Use of Radioelectric Frequencies to provide point-to-multipoint microwave telecommunication services (71PAM10-9) granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.8 Concession for the Use of Radioelectric Frequencies to provide point-to-point microwave telecommunication services (15-PAP-23) granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

59

4.9 Concession for the Use of Radioelectric Frequencies to provide point-to-point microwave telecommunication services (31-PAP-15) granted by the Federal Government of Mexico to Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-11084 on November 4, 1999).

4.10 Attachment “C”, of the concession to build, operate and exploit a public telecommunications network granted by the federal Government of Mexico to Alestra, S de R.L. de C.V, authorizing it to provide local telephone services in the cities of Mexico City, Guadalajara and Monterrey (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-100075 on January 15, 2003).

4.11 Service Mark License Amendment dated February 13, 2003 between AT&T Corp and Alestra S. De R. L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-100075 on February 25, 2003).

4.12 Addendum to the Second Amended and Restated Joint Venture Agreement, dated November 30, 2005 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on April 3, 2006).

4.13 Addendum to the Amended and Restated Service Mark License Agreement, dated November 30, 2005 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on April 3, 2006).

4.14 Addendum to the AT&T Global Network Cooperation Agreement, dated November 30, 2005 (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on April 3, 2006).

4.15 Note Purchase Agreement dated July 26, 2006 by and among Alestra S. de R.L. de C.V. and Deutsche Bank AG, London Branch (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on March 30, 2007).

4.16 Security Agreement dated July 26, 2006 by and among Alestra S. de R.L. de C.V. and Deutsche Bank Trust Company Americas as collateral agent (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form 20-F, Registration Number 001-31894 on March 30, 2007).

8.1 Subsidiary of Alestra, S. de R.L. de C.V. (previously filed with the Commission by Alestra, S. de R.L. de C.V. as an exhibit to its Form F-4, Registration Number 333-100075 on January 15, 2003).

12.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

60

INDEX TO THE FINANCIAL STATEMENTS

Contents	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2009 and 2010		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2009 and 2010		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December  31, 2008, 2009 and 2010		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of

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

We have audited the accompanying consolidated balance sheets of Alestra, S. de R. L. de C. V. and subsidiaries (the “Company”), as of December 31, 2009 and 2010, and the consolidated statements of operations, changes in stockholders’ equity and cash flows for the three years ended December 31, 2010. These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States) and generally accepted auditing standards in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they were prepared in accordance with the Mexican Financial Reporting Standards (“Mexican FRS”). An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the standards of financial information used and significant estimates made by the Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alestra, S. de R. L. de C.V. and its subsidiaries, as of December 31, 2009 and 2010 and its consolidated results of operations, changes in stockholders’ equity, and cash flows for the three years ended December 31, 2010 in conformity with Mexican FRS.

Mexican FRS vary in certain significant respects from the accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such difference is presented in Note 20 to the consolidated financial statements.

PricewaterhouseCoopers, S.C.

Oscar Ignacio Badillo Guerrero

Monterrey, Nuevo Leon, Mexico

January 25, 2011, except for Notes 19 and 20, as to which date is April 29, 2011

F-2

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARIES

Subsidiaries of Alfa S. A. B. de C. V.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2009 AND 2010

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)

	December 31, 2009		December 31, 2010
Assets
CURRENT ASSETS:
Cash and cash equivalents(Note 13)		Ps 635,631		Ps 864,431
Trade receivables, net (Note 3)		494,216		493,030
Due from affiliates and other related parties (Note 4)		24,018		7,974
Other receivables		73,698		104,924
Prepaid expenses (Note 5)		40,022		41,213
Other current assets		2,792		28,397
Total current assets		1,270,377		1,539,969
NON CURRENT ASSETS:
Property and equipment, net (Note 6)		5,204,783		5,077,968
Deferred charges and other assets, net (Note 7)		336,239		325,399
Deferred income tax (Note 15)		104,084		198,853
Total non current assets		5,645,106		5,602,220
Total assets		Ps 6,915,483		Ps 7,142,189
Liabilities and stockholders’ equity
CURRENT LIABILITIES:
Accounts payable to Teléfonos de México, S.A.B de C.V. and other carriers (Note 13)		Ps 472,362		Ps 496,646
Other suppliers		286,683		265,816
Bank loans, notes payable and capital leases (Note 8)		185,665		216,957
Due to affiliates and other related parties (Note 4)		4,854		9,790
Dividends payable (Note 11)		130,587		123,571
Interest payable		127,389		118,842
Other accounts payable and accrued expenses		268,658		354,670
Total current liabilities		1,476,198		1,586,292
LONG-TERM LIABILITIES:
11.750% Senior notes due 2014 (Note 9)		2,611,740		2,471,420
Bank loans, notes payable and capital leases (Note 8)		411,147		309,937
Employee’s benefits (Note 10)		102,677		106,746
Total liabilities		4,601,762		4,474,395
STOCKHOLDERS’ EQUITY (Note 11):
Contributed stock		1,394,971		1,394,971
Retained earnings		918,749		1,272,865
Total shareholders’ equity of Alestra		2,313,720		2,667,836
Non controlling interest		1		(42	)
Total stockholders’ equity		2,313,721		2,667,794
CONTINGENCIES AND COMMITMENTS (Note 12)
Total liabilities and stockholders’ equity		Ps 6,915,483		Ps7,142,189

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on January 25, 2011, except for Notes 19 and 20, as to which the date is April 29, 2011, by the officers that sign these financial statements and related notes.

F-3

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)

	2008			2009			2010
REVENUES (Note 14)
Long distance services	Ps	1,722,487		Ps	1,420,624		Ps	1,114,294
Data, internet and local services		2,950,062			3,263,013			3,455,988
		4,672,549			4,683,637			4,570,282
OPERATING EXPENSES:
Cost of services (excluding depreciation and amortization - Note 14)
Long distance services		(1,041,532	)		(955,631	)		(679,092	)
Data, internet and local services		(747,497	)		(781,075	)		(836,359	)
		(1,789,029	)		(1,736,706	)		(1,515,451	)
Gross profit		2,883,520			2,946,931			3,054,831
Administration, selling and other operating expenses		(1,551,709	)		(1,529,384	)		(1,577,645	)
Depreciation and amortization		(756,687	)		(853,510	)		(866,661	)
Operating income		575,124			564,037			610,525
OTHER EXPENSES, NET		(50,072	)		(73,229	)		(26,452	)
COMPREHENSIVE FINANCIAL RESULT:
Interest expense		(294,575	)		(333,336	)		(375,913	)
Interest income		29,099			17,591			10,901
Exchange (loss) gain		(615,195	)		99,092			171,006
(Loss) gain on derivative financial instruments		(63,179	)		(4,789	)		1,164
		(943,850	)		(221,442	)		(192,842	)
(Loss) gain before the following provisions for income tax		(418,798	)		269,366			391,231
Income tax (Note 15)		34,476			22,099			(33,732	)
Net (loss) income attributable to controlling interest		(384,322	)		291,465			357,499
Net loss attributable to non controlling interest		(1	)		—			(2	)
Consolidated net (loss) income of the period	Ps	(384,323	)	Ps	291,465		Ps	357,497

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on January 25, 2011, except for Notes 19 and 20, as to which the date is April 29, 2011, by the officers that sign these financial statements and related notes.

F-4

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

for the Years Ended December 31, 2008, 2009 and 2010

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)

							Accumulated (deficit) income
							Effect on equity from labor obligation			Deficit from restatement from  holding non monetary assets			Effects of derivative financial instruments			Retained earnings
	Capital stock
	Fixed		Variable		Restatement of Capital Stock														Stockholder equity of Alestra			Non controlling interest			Total Stockholders’ Equity
Balance at December 31, 2007	Ps	300	Ps	1,181,046	Ps	213,625	Ps	(5,075	)	Ps	113,165		Ps	1,303		Ps	1,093,520		Ps	2,597,884		Ps	—		Ps	2,597,884
Changes in 2008:
Net loss																	(384,323	)		(384,323	)		1			(384,322	)
Transfer of deficit from restatement from holding non monetary assets to retained earnings											(113,165	)					113,165			—						—
Elimination of additional minimum pension liabilities								5,075												5,075						5,075
Effect of derivative financial instruments														(1,792	)					(1,792	)					(1,792	)
Comprehensive loss		—		—		—		5,075			(113,165	)		(1,792	)		(271,158	)		(381,040	)		1			(381,039	)
Balance at December 31, 2008		300		1,181,046		213,625		—			—			(489	)		822,362			2,216,844			1			2,216,845
Changes in 2009:
Net income																	291,465			291,465			—			291,465
Effect of derivative financial instruments														489						489						489
Comprehensive income		—		—		—		—			—			489			291,465			291,954			—			291,954
Dividends declared																	(195,078	)		(195,078	)					(195,078	)
Balance at December 31, 2009		300		1,181,046		213,625		—			—			—			918,749			2,313,720			1			2,313,721
Changes in 2010:
Net income																	357,499			357,499			(2	)		357,497
Other																	7,264			7,264			(41	)		7,223
Effect of derivative financial instruments														(829	)					(829	)					(829	)
Comprehensive income		—		—		—		—			—			(829	)		364,763			363,934			(43	)		363,891
Other adjustments																	(9,818	)		(9,818	)					(9,818	)
Balance at December 31, 2010	Ps	300	Ps	1,181,046	Ps	213,625	Ps	—		Ps	—		Ps	(829	)	Ps	1,273,694		Ps	2,667,836		Ps	(42	)	Ps	2,667,794

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on January 25, 2011, except for Notes 19 and 20, as to which the date is April 29, 2011, by the officers that sign these financial statements and related notes.

F-5

ALESTRA, S. DE R. L. DE C. V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)

	2008			2009			2010
Operation activities:
(Loss) income before income tax	Ps	(418,798	)	Ps	269,366		Ps	391,231
Items relating to investing activities:
Depreciation and amortization		756,687			853,510			866,662
Cost related to seniority premiums and pension plans		21,299			20,257			20,161
Interest income		(29,099	)		(17,591	)		(10,901	)
Loss (profit) on derivative financial instruments		63,179			4,789			(1,164	)
Gain on sale of equipment		3,888			20,134			7,733
Items relating to financing activities:
Interest expense		294,575			333,336			375,913
Exchange loss (gain)		615,195			(99,092	)		(171,006	)
Accelerated amortization of issuance costs of 8%senior notes		—			19,229			—
Other, net		7,596			1,723			(84	)
Subtotal		1,314,522			1,405,661			1,478,545
Increase in accounts receivable and other current assets		5,302			27,452			20,253
Increase in suppliers, accounts payable and other current liabilities		72,408			413,014			129,500
Payments relating to settlement of derivative financial instruments		(58,775	)		(2,241	)		—
Income tax paid		(50,573	)		(75,404	)		(194,340	)
Operating activities net cash flows		1,282,884			1,768,482			1,433,958
Investing activities:
Interest received		28,810			17,063			10,235
Acquisition of property and equipment		(788,159	)		(808,373	)		(656,937	)
Acquisition of deferred charges and other assets		(74,554	)		(107,275	)		(93,224	)
Investing activities net cash flows		(833,903	)		(898,585	)		(739,926	)
Exceeding cash to apply in financing activities		448,981			869,897			694,032
Financing activities:
Proceeds from bank loans, notes payable and capital leases		414,762			349,788			263,384
Payment of debt and bank loans		(392,972	)		(424,949	)		(344,456	)
Issuance of 11.750% Senior Notes due 2014		—			2,586,980			—
Fees and expenses incurred for the issuance of the 11.750% Senior Notes due 2014		—			(65,522	)		—
Payment of 8% Senior Notes due 2010		(482,400	)		(2,640,321	)		—
Interest paid		(261,742	)		(224,676	)		(384,459	)
Dividends paid		—			(64,490	)		—
Financing activities net cash flows		(722,352	)		(483,190	)		(465,531	)
Net cash (decreasing) increasing cash and cash equivalents		(273,371	)		386,707			228,501
Effects by changes in the cash and cash equivalents value:
Adjustment to cash flow as a result of changes in exchange rates		27,101			46,119			299
Cash and cash equivalents at beginning of year		449,075			202,805			635,631
Cash and cash equivalents at year end	Ps	202,805		Ps	635,631		Ps	864,431

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on January 25, 2011, except for Notes 19 and 20, as to which the date is April 29, 2011, by the officers that sign these financial statements and related notes.

F-6

ALESTRA, S. DE R.L. DE C.V. AND SUBSIDIARIES

Subsidiaries of Alfa, S.A.B. de C.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AT DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in thousands of Mexican pesos, as explained in Note 2)

1. INCORPORATION AND ACTIVITY OF THE COMPANY

Alestra, S. de R. L. de C. V. (“Alestra”), is a Mexican company with limited liability and variable capital, incorporated on October 13, 1995, as a joint venture between Onexa, S. A. de C. V. (“Onexa”) (51%) and AT&T Telecom México, Inc. (“AT&T”) (49%).

In a general extraordinary meeting held on October 2, 2007, the stockholders approved the merger of Onexa into Alfa, S. A. B. de C. V., which became effective as of March 31, 2008. As a result of this merger, Alfa owns directly 51% of the shares of Alestra.

Alestra and its subsidiaries Servicios Alestra, S. A. de C. V. (“Servicios Alestra”) and Alestra Telecomunicaciones Inalámbricas, S. de R. L. de C. V. (“ATI”) are collectively referred to as the “Company.”

The Company does not have any direct employees and all services required are provided by Servicios Alestra.

The Company’s business consists of the installation and operation of a public telecommunications network in Mexico, offering long distance telephone services and data, internet and local services.

The Company’s business requires a concession (license granted by the Mexican federal government) to operate. On December 6, 1995, the Secretaría de Comunicaciones y Transportes (Ministry of Communications and Transportation, or “Ministry of Communications”) granted the Company a renewable thirty-year concession to operate its business. The Company did not make any payments to the Ministry of Communications in relation to this concession. The concession places certain performance conditions on the Company with respect to the roll-out and expansion of its network, quality of its services, rates and billing systems, compliance with the terms established for the operation of the network as well as delivery of audited financial statements on an annual basis. In addition, Alestra has the freedom to define to whom it will provide voice and data services, and to fix prices which do not depend on any tariff imposed by the Government, and which is the reason the Company applies the accounting policies described in Note 2. In accordance with the terms of its concession and the guidelines and schedule established by the Ministry of Communications, on January 1, 1997, the Company began the gradual rollout and expansion of its domestic and international long distance services to 60 cities. The Company began earning revenues in 1997. Under the Ministry of Communications guidelines, the Company has gradually expanded its services to additional cities, totaling 199 cities as of December 31, 2010.

The Ministry of Communications has made various amendments to Company’s telecommunication public network concession in order to permit the Company to provide local telephone services to residential and commercial users throughout Mexico, as well as data transfer services and other value added services.

The brand name use agreements that Alestra and its shareholders signed, including the AT&T Global Network Cooperation Agreement (the “AGN Agreement”) provided for the following:

F-7

• The Company was permitted to use the AT&T brand name until November 17, 2008 and was allowed to use the phrase AT&T Global Services, as a tag line below the Alestra brand, for the limited purpose of providing AT&T Global Services within on a nonexclusive basis until June 2010.

• In June 2010, AT&T and Alestra entered into a new AGN Agreement which expires until June 30,2013. This agreement includes certain clauses related to the continuance of the service subsequent to the expiration date.

• The license agreement contains provisions allowing AT&T to terminate the license agreement at its sole discretion upon certain changes in the Company’s ownership, or if the Company fails to abide by certain quality control standards or if the Company misuses the AT&T brand and in certain other circumstances. At the date of issuance of these financial statements, these commitments are fulfilled.

2. BASIS FOR PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis for preparation:

The accompanying consolidated financial statements were authorized for issuance on January 25, 2011, except for Notes 19 and 20, as to which the date is April 29, 2011, by the officers that sign these financial statements and related notes.

The accompanying consolidated financial statements at December 31, 2009 and 2010 fully meet with the provisions of the Mexican Financial Reporting Standards (“Mexican FRS”), to show a fair presentation of the Company’s financial position.

The Mexican FRS state that the International Financial Reporting Standard (IFRS), and/or the International Accounting Standards (IAS), are a supplementary part of the Mexican FRS when the absence of a specific Mexican FRS requires it. Accordingly, the Company, with the purpose of recognizing its revenues, applies the IAS-18 “Revenue” (see Note 2h.) issued by the International Accounting Standard Board (IASB).

The Company presents its costs and expenses within the statement of operations based on the function of said components, which main characteristic is to separate the cost of services from other costs and expenses. Additionally, for a better analysis of the statement of operations, the Company considered necessary to include the operating income amount separately in such statement, since this information represents a common analysis factor of the Company’s financial information.

According with the provisions in the Mexican FRS “Inflation Effects” (Mexican FRS B-10), the Mexican economy is currently in a non-inflationary environment, since the accumulated inflation for the past three years does not exceed 26% (maximum limit to define that an economy shall be considered as non-inflationary). Therefore, from January 1^st, 2008 onwards, it is required to suspend the recognition of the effects of inflation on the financial information (disconnection of the inflationary accounting). Consequently, the figures contained in the financial statements at December 31, 2008, 2009 and 2010 are expressed in thousands of historical Mexican pesos modified by the effects of inflation on the financial information recognized until December 31. 2007.

Inflation percentages that have been considered to conclude on the environment wherein the economic activity in Mexico has been operating, were determined based on factors derived from the National Consumer Price index (NCPI) published by the Banco de México, as shown below:

	For the year ended December 31,
	2008			2009			2010
Year inflation		6.53	%		3.57	%		4.40	%
Cumulative inflation in the last three years		15.01	%		14.48	%		15.19	%

According to the provisions of Mexican FRS B-15, the Company has identified the Mexican peso as the recording, functional and reporting currency. Therefore, it was not necessary to perform any conversion or translation process.

New adopted standards:

As of January 1, 2010, new Mexican FRS and their interpretations issued by the Mexican Financial Reporting Standards Board (CINIF by its Spanish acronym) became effective. The standards that are applicable to the Company and have been retrospectively adopted are the following:

Mexican FRS B-2, “Cash flows statement”, it modifies the presentation of the effects resulting from the exchange rate fluctuation and the fair value movements in cash and cash equivalents with the purpose of showing both effects in a specific line allowing more clarity in the cash and cash equivalents balances reconciliation at the beginning and the end of the period. See cash flows statements.

Mexican FRS C-13, “Related parties”, requires the reporting entity to inform the name of the direct or indirect controller issuing financial statements available for public use. In addition, the disclosures on controlling entities are more detailed. See Note 4.

F-8

Mexican FRS C-1, “Cash and cash equivalents”, it establishes standards on the accounting treatment and disclosure of cash, restricted cash and available for sale securities. It also introduces new terminology to make it consistent with other Mexicans FRS previously issued. Also, it retrospectively modifies the restricted cash and cash equivalents presentation. See Note 13.

As a result of the issuance, in January 2009, of the general provisions applicable to Securities issuers and other participants in the Mexican securities market, Alfa (parent company) is required for the year starting on January 1, 2012 and onwards to prepare its financial statements in accordance with IFRS issued by IASB. Based on the aforementioned, the Company has also decided to prepare its financial statements, as of January 1, 2012, under the same criteria that will be applicable to its parent. However, the Company is currently in the process of conversion to IFRS and is evaluating the impacts of the adoption of IFRS on its financial statements.

Summary of significant accounting polices:

Following is a summary of the most significant accounting policies followed by the Company, which have been applied on a consistent basis in the preparation of its consolidated financial information for the years presented, unless otherwise indicated:

a. Basis for presentation and disclosure

The consolidated financial statements are expressed in Mexican Pesos, (functional and reporting currency) denoted by the symbol “Ps”.

The consolidated financial statements include those of Alestra and its subsidiaries, Servicios Alestra and ATI, of which Alestra holds 99.00% and 91.00% of their capital stock, respectively. All significant balances and transactions among consolidating companies have been eliminated.

The Mexican FRS require the use of some accounting estimates in the preparation of the financial statements. Also, Management judgment is required in the process of defining the Company’s accounting policies.

Significant estimates and assumptions include certain international long distance services revenues and expenses, allowance for doubtful accounts (see Note 3), deferred income tax provision (see Note 15) and employee benefits (see Note 10).

b. Cash and cash equivalents

The Company considers all highly liquid temporary cash investments with original maturities of three months or less and with minor risks for changes in value, as cash equivalents. This primarily includes short-term deposits and money market accounts. In addition, as described in Note 13, the Company held a restricted cash derived from a dispute in the resale of the interconnection tariffs.

Since Mexican FRS C-1 became effective in 2010, the restricted cash balance is now required to be included as part of the cash and cash equivalents caption. The balances at December 31, 2009 related to these accounts, were regrouped to comply with the guidelines of the aforementioned Mexican FRS, since its application is retrospective.

c. Property and equipment, net (Note 6)

Property and equipment, including those acquired under capital leases, are stated as follows: i) acquisition subsequent to January 1^st, 2008 at their historical cost and ii) acquisitions made until December 31, 2007 at their restated value determined by applying to their acquisition cost factors derived from the NCPI up to December 31, 2007, except for equipment of foreign origin, for which value was restated by applying factors that reflect the inflation of the country of origin at the date of valuation and translating those amounts to pesos at the exchange rate prevailing at the end of 2007. Consequently, as of December 31, 2009 and 2010, property and equipment are stated at their modified historical cost.

Replacements, maintenance and repairs which do not improve or extend the life of the respective asset are expensed as incurred. Installation cost is capitalized and amortized during the estimated useful life of the line contracted by the client which is estimated to be three years.

F-9

The Company leases telecommunications equipment with certain characteristics, for which the Company substantially assumes all the inherent benefits and risks of the ownership. Consequently, these are classified as capital leases; which are capitalized at the beginning of the leasing contract at the lower of the value of the leased property or the present value of the minimal payments. The financial costs derived from the financing granted by the leasor for the acquisition of such assets is recognized in the statement of operations as accrued (see Note 8).

Depreciation is calculated using the straight-line method over the useful lives of the assets estimated by the Company, including those acquired under capital leases. These useful lives are consistent with the guidelines established by the Federal Telecommunications Commission (“Cofetel”), and are as follows:

	Years
Buildings		25
Telephone network		3 to 28
Billing and customer care software		7
Equipment:
Office		10
Computer		3
Transportation		4

Leasehold improvements are amortized over the estimated useful lives of the improvements or the termination of the lease contract, whichever is shorter.

d. Deferred charges and other assets, net

The intangible assets are recognized in the balance sheet since they meet the following conditions: that they are identifiable, provide future economic benefits and the Company has control over such benefits. The intangible assets are classified as follows:

i) Definite life, are those which expected future economic benefits are limited by any legal or economic conditions and are amortized systematically, based on the best estimate of their useful life, and are subject to impairment tests if any trigging event is identified.

ii) Indefinite useful life, which are not amortized but subject to annual impairment assessment.

At December 31, 2009 and 2010, the Company only has definite life intangible assets.

e. Transactions in foreign currency and exchange differences

Transactions in foreign currencies are initially recorded at the recording currency by applying the exchange rates prevailing on the dates they are entered into and/or settled. Assets and liabilities denominated in such currencies are translated at the exchange rate prevailing on the balance sheet date. Exchange gain or loss arising from fluctuations in the exchange rates between the transaction and settlement dates, or valuation at the period closing are recognized in the income as a component of the comprehensive financing results.

f. Provisions

The liabilities’ provisions represent present obligations for past events where the outflow of economic resources is possible. These provisions have been recorded based on management’s best estimation. See Note 13.

F-10

g. Comprehensive financing result (“CFR”)

The CFR is determined by grouping the following in the statement of operations: the financial income and expense, exchange differences and the effect of derivative financial instruments.

h. Revenue recognition

Income from outgoing and incoming local and international long distance services are recorded based on the traffic minutes processed by the Company and those processed by third parties, respectively.

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

Revenues from installation and related costs are deferred and recognized over the estimated life of the customer relationship.

i. Advertising

Prepaid advertising are recognized in the results of operations the first time the advertising takes place and as the services received.

j. Income tax and flat tax

The income tax included in the consolidated statement of operations represents the current and deferred tax for the year. The deferred income tax is recorded under the comprehensive asset – liability method requiring recognition of deferred tax assets and liabilities for all temporary differences between the book and tax value of assets and liabilities and considering the tax rates that will be effective at the date these differences will be materialized in the future.

The Flat Tax (“Impuesto Empresarial Tasa Unica” or “IETU” for its name in Spanish) became effective as of January 1, 2008. The law introduced a flat tax, which replaced Mexico’s asset tax and is applicable along with Mexico’s regular income tax. In general, Mexican companies are subject to paying the greater of the flat tax or the income tax. The flat tax is calculated by applying a 16.5% tax rate in 2008, a 17% tax rate in 2009, and 17.5% in 2010 and the following years. In accordance with the interpretation published by the CINIF last December 21, 2007, with respect to the accounting effects of the IETU, and based on financial and tax projections, the Company has determined that it will continue paying regular income tax in the future therefore, the Company has recognized deferred income tax in this Financial Statements. See Note 15.

In 2009, the Mexican Congress approved the tax reform bill for 2010. Among others, the most significant changes were:

a. An increase of the income tax rate from 28% to 30% from 2010 to 2012, and a decrease to 29% in 2013 and 28% in 2014 onwards.

b. Modifications in the tax consolidation regime in which the Company is participating as a subsidiary of Alfa.

c. The creation of a Special Tax on Production and Services Law (Ley del Impuesto Especial Sobre Producción y Servicios or “LIEPS”) which consists of a 3% surcharge to cable and telephone communication services, excluding public telephone, rural fixed and internet services.

d. A 1% increase in the value added tax rate.

k. Capital Stock (Note 11)

Capital Stock, retained earnings, deficit from restatement from holding non-monetary assets effect of derivative financial instruments and the effect in equity from labor obligations are expressed as follows: i) movements done as of January 1, 2008 at nominal cost and onwards, and ii) movements done before January 1, 2008 at indexed values determined through the application to their originally determined values of factors derive from the NCPI up to December 31, 2007. Accordingly, the different stockholders equity accounts are expressed at modified historical cost.

l. Risk concentrations

Financial instruments (see Note 17) which potentially expose the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, trade accounts receivable and receivables and payables to domestic operators.

Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers throughout Mexico. The Company maintains allowances for doubtful accounts based on the expected recovery of all receivables determined by using the spin down method (see Note 3).

Approximately, 65.2%, 33.8%, and 28.00% of the Company’s revenues related to international long distance services for the years ended December 31, 2008, 2009 and 2010, respectively, were generated from telephone traffic exchanged between AT&T (a related party) and the Company (see Note 4).

F-11

In order to service its customers, the Company must interconnect with and use the telephone network of Teléfonos de México, S. A. B. de C. V. (“Telmex”), the major provider of local telephone services covering all of Mexico. The interconnection and other surcharge rates that the Company must pay Telmex are filed with Cofetel (see Note 13). For the years ended December 31, 2008, 2009 and 2010, interconnection costs amounted to Ps781,411, Ps802,964, and Ps568,185, respectively.

m. Employees’ benefits

The employees’ benefits granted by the Company to its employees, are described as follows:

The direct benefits at short term (salary, overtime, vacation, holidays, compensated absences payments, among others) are recognized in income as accrued and the corresponding liabilities are expressed at nominal value. Compensated absences payments are based on the legal or contractual provisions, are non cumulative.

The termination benefits due to reasons other than the restructuring, as well as the retirement benefits (pensions, health-care expenses and seniority premiums), are recognized based on actuarial studies carried out by independent actuaries through the projected unitary credit method. (see Note 10).

The net cost of the period of each employee benefit plan is recognized as an operating expense in the year it is accrued, which includes, among others, the amortization of the labor cost of the past services and the actuarial gains (losses) of the previous years

The transition liability is amortized over the lesser of the period pending to be amortized or five years. The actuarial gains and losses and transition liability amounts subject to amortization were amortized on the basis on the average estimated service lives of the employees. Actuarial studies for employees’ benefits includes the assumption of wage career.

In addition to the mentioned benefit plans, since 2007, the Company has established a retirement savings plan through an investment fund. Contributions in 2008, 2009 and 2010 are recognized as an expense in those years, and amounts to Ps37,995, Ps32,970 and Ps33,339, respectively.

n. Comprehensive income (loss)

Comprehensive income (loss) is represented by the net income (loss) plus the change in fair value on cash flow hedges and other items required by specific accounting standards to be reflected in stockholders’ equity but which do not constitute capital contributions, reductions or distributions. Amounts in 2008, 2009 and 2010 are expressed in adjusted historical Mexican pesos.

o. Derivative financial instruments

All derivative financial instruments classified as held for trading or as hedge instruments are included in the balance sheet as assets and/or liabilities at fair value. The fair value is determined based on the prices of recognized markets; when no quoted market prices are available, it is determined based on valuation techniques accepted in the financial sector.

The changes in the fair value of derivative financial instruments are recognized in the CFR, except when entered into to hedge against risk and comply with all related requirements. Their designation as a hedge is documented at the inception of the transaction, specifying the related objective, initial position, risks to be hedged, type of hedge relationship, characteristics, accounting recognition and how their effectiveness will be assessed. In the case of cash flow hedges, the effective portion is temporarily included in comprehensive income in stockholders’ equity and is reclassified to income when the hedged item affects income. Any ineffective portion is recognized immediately in income.

The derivative financial instruments were privately negotiated with various counterparties, and their financial condition was supported by high ratings assigned by securities and credit risk rating agencies. The documentation used to formalize the operations entered into was that which is commonly used; in general terms, it follows the “Master Agreement” generated by the “International Swaps & Derivatives Association” (“ISDA”), and is accompanied by annexes commonly known as “Schedule” and “Confirmation”.

The fair value of the financial derivative instruments reflected in the Company’s financial statements represents a mathematical estimate of its fair value. The fair value is calculated using independent party models, with assumptions based on market conditions, past, present and future expectations to the corresponding accounting closing day, and most of the counterparts of the same instruments.

The Company reviews the contracts it holds in order to identify the existence of embedded derivatives. Identified embedded derivatives are subject to an assessment in order to determine if they meet the conditions set by the regulation; if they meet such conditions, they are separated from the host contract and valued at fair value. If the embedded derivative is classified for trading purposes, changes in fair value are recognized in the period’s income.

F-12

p. Impairment of long-lived assets in use

The Company reviews the carrying amounts of long-lived assets of definite life in use when an impairment indicator suggests that such amounts might not be recoverable, considered to be the greater of the present value of future net cash flows using an appropriate discount rate or the net sale price upon disposal. Impairment is recorded when the carrying amounts exceed the greater of the amounts mentioned above. As of December 31, 2009 and 2010, such assets did not present indicators of impairment.

q. Deferred Statutory Employees Profit Sharing (ESPS)

The deferred ESPS is recorded under the comprehensive asset-and-liability method, which consists of recognizing a deferred ESPS for all differences between the book and ESPS value of the assets and liabilities for which payment or recovery is likely.

At December 31, 2009 and 2010, Company’s management did not recognize deferred ESPS since there were no material differences for this purpose.

Current ESPS and if applicable, the deferred component are presented in the income statement under Other expenses, net.

r. Segments

Mexican FRS B-5 “Financial Information by Segments”, requires the Company to analyze its organizational structure and its reporting system for the purpose of identifying segments. The Company has identified the following two business segments: Long Distance and Data, Internet and Local services. These segments have been determined considering the types of goods or services rendered. See Note 14.

s. Reclassifications

Certain reclassifications of amounts previously reported have been made to the consolidated balance sheets for the year ended December 31, 2009 to maintain consistency and comparability between periods presented, as shown below:

	Originally reported		Reclassification			December 31, 2009
Current assets:
Other receivables	Ps	75,918	Ps	(2,220	)	Ps	73,698
Other current asset		572		2,220			2,792
Total current assets	Ps	1,270,377	Ps	—		Ps	1,270,377

t. Permanent investment in associated company

Permanent investments in associates are measured through the equity method. Under this method the investment is initially recorded at cost and subsequently increased (or decreased) for post acquisition net income (or loss), other movements impacting the equity of the investee and any adjustments required for impairment. Losses in associates are recognized in the corresponding portion, as follows: a) in the permanent investment until leave it in zero; b) if there is any excess after applying what is described in a) previous, this is recognized until leave them in zero; c) any remaining excess is recognized as a liability for the legal obligations or assumed in behalf of the associate; and d) any remaining excess of the losses is not recognized by the holding. See Note 7. Investments in shares, in its case, recognize impairment losses through the application of equity method on the recognized values.

u. New Financial Reporting Standards

During December 2010 and 2009, the CINIF issued a series of Mexican MFRS, which will become effective as of January 1, 2011. To date, the Company is evaluating the impact that these Mexican FRS and interpretation will have on the financial information presented.

Mexican FRS B-5 “Financial Information by Segments”. It establishes the general standards to disclose financial information by segments. Additionally, it allows the users of such information to analyze the entity from the same point of view as management do and requires to present financial information by segment consistently with its financial statements. With this standard, Bulletin B-5 “Financial Information by Segment” will be effective up to December 31, 2010.

Mexican FRS B-9 “Financial Information at Interim Dates”. It establishes the guidance for the determination and presentation of financial information at interim dates which, among other things requires the presentation of the statement of changes in stockholders’ equity and of cash flows which were not required by former Bulletin B-9 “Financial Information at interim dates” (effective up to December 31, 2010).

F-13

Mexican FRS C-4 “Inventory”. Of retrospective application and establishes the particular standards of valuation, presentation and disclosure for the initial and subsequent recognition of inventory. Additionally it removes the direct cost method as an allowed valuation system and the inventory cost allocation formula denominated as Last In First Out (LIFO). With this standard, Bulletin C-4 “Inventory” remains effective up to December 31, 2010.

Mexican FRS C-5 “Advanced payments”. Requires retrospective application and establishes, among other things, the particular standards of valuation, presentation and disclosure related to advanced payments line item. It also establishes that advanced payments for the purchase of inventory, real estate, machinery and equipment should be presented in the advanced payments line item and not in inventory or property, machinery and equipment as previously required. Additionally it establishes that advanced payments related to the acquisition of goods should be presented in the balance sheet in attention to the intended item classification, either in current or non-current assets. With this standard, Bulletin C-5 “Advanced payments” remains effective up to December 31, 2010.

Mexican FRS C-6 “Property, plant and equipment”. Requires prospective application (except on disclosure aspects), and establishes, among other things, the particular standards of valuation, presentation and disclosure related to property, plant and equipment. It also establishes: a) that property, plant and equipment used to develop or maintain biological and extractive industries assets be under its scope, and b) the mandatory depreciation of representative components of property, plant and equipment, as opposed to depreciating the remaining asset as a single component. This Mexican FRS became effective as of January 1, 2011, with exception of the changes arising from the segregation of its components and which have a useful life clearly different to the main asset. In this case, and for entities which have not performed such segregation, the applicable disposition will become effective for periods beginning January 1, 2012. With this standard, Bulletin C-6 “Property, plant and equipment” remains effective up to December 31, 2010.

Mexican FRS C-18 “Liabilities associated to assets retirement and environmental restoration”. Requires retrospective application and establishes, among other things, the particular standards for initial and subsequent recognition of a provision relative to liabilities associated to property, plant and equipment component retirements as well as the requirements to be considered for valuation of a liability associated to a component retirement and the disclosures that should be presented by an entity when it has a liability associated to a component retirement.

3. TRADE RECEIVABLES, NET

As of December 31, 2009 and 2010, trade receivables, net consist of the following:

	2009			2010
Trade receivables	Ps	556,694		Ps	532,381
Less: allowance for doubtful accounts		(62,478	)		(39,351	)
	Ps	494,216		Ps	493,030

For the years ended December 31, 2008, 2009 and 2010, the allowance for doubtful accounts is as follows:

	2008			2009			2010
Balance at beginning of year	Ps	(55,699	)	Ps	(83,458	)	Ps	(62,478	)
Charge to income to increase the allowance for doubtful accounts		(27,526	)		(19,602	)		(12,070	)
Write off of doubtful accounts		—			40,720			35,675
Recovery of written off accounts		(233	)		(138	)		(478	)
Balance at end of year	Ps	(83,458	)	Ps	(62,478	)	Ps	(39,351	)

The Company determines the level of the allowance for doubtful accounts based on an analysis of trade accounts receivable that may become uncollectible based on the spin down method. This method groups the balances by days due and gradually applies a percentage of the reserve to each group based in the experience, until reserving the total consumer trade accounts receivable due for more than 241 days and the total commercial trade accounts receivable due for more than 271 days. Doubtful accounts are written off every 18 months, in accordance with Alestra’s policies.

F-14

4. BALANCES AND TRANSACTIONS WITH RELATED PARTIES

As mentioned in Note 1, the Company is a subsidiary of Alfa, with which it has a business relationship caused by the administrative services that the latter provides, as described below.

As of December 31, 2009 and 2010, balances due from and due to related parties were as follows:

	2009		2010
Due from:
Partner with significant influence over the entity	Ps	10,533	Ps	4,397
Affiliates		13,485		3,577
	Ps	24,018	Ps	7,974
Due to:
Partner with significant influence over the entity	Ps	4,377	Ps	4,414
Parent		477		2,226
Affiliates		—		3,150
	Ps	4,854	Ps	9,790

During 2008, 2009 and 2010, the main transactions carried out with related parties were as follows:

	2008		2009		2010
Parent
Expenses for administrative services received (b)	Ps	23,840	Ps	24,035	Ps	23,502
Partner with significant influence over the entity
Income:
International long distance, data, internet and local service settlement (a)	Ps	429,777	Ps	177,623	Ps	71,728
Expenses:
International long distance, data, internet and local service settlement cost (a)	Ps	123,370	Ps	51,753	Ps	24,165
Administrative services received (b)		68,885		64,111		66,273
Internet service costs (c)		61,289		83,854		80,482
	Ps	253,544	Ps	199,718	Ps	170,920
Affiliates
Interest income (d)	Ps	386	Ps	513	Ps	254
Expenses for administrative services received (b)	Ps	10,559	Ps	6,778	Ps	23,258

(a) These amounts mainly represent the income and expenses derived from the settlement of international traffic between AT&T and Alestra, as well as the income from data services and local service with other affiliates. Up to June 30, 2010, AT&T and its affiliates had the commitment to purchase certain telecommunication services to the Company. The international settlement rates used are settled directly between Alestra and AT&T.

(b) The Company has entered into several administrative service agreements with Alfa and AT&T.

(c) This amount corresponds to the cost of services received from AT&T regarding the payment of internet connection services.

(d) This amount corresponds to accrued interest of loans with affiliated companies.

Remunerations and benefits received by the main officers of the Company amounted to Ps31,797, Ps37,498 and Ps39,626 for the years ended December 31, 2008, 2009 and 2010 respectively, which were comprised of the basic salary and benefits established by law and complemented by a variable compensation program mainly based on the Company’s income. There is no agreement or program to involve employees in the capital of the Company.

The Company does not have any other significant operations with related parties or any conflicts of interest to disclose.

F-15

5. PREPAID EXPENSES

Prepaid expenses as of December 31, 2009 and 2010 consist primarily of prepaid expenses for systems maintenance, insurance, bonds and advertising time.

6. PROPERTY AND EQUIPMENT, NET

As of December 31, 2009 and 2010, property and equipment net, consists of the following:

	2009			2010
Buildings	Ps	147,213		Ps	224,817
Furniture, fixtures and other		234,232			233,114
Hardware equipment		332,290			354,437
Transportation equipment		26,536			33,044
Telephone network		9,925,493			10,243,017
Leasehold improvements		77,079			67,583
Billing and customer care software		524,141			562,253
		11,266,984			11,718,265
Accumulated depreciation and amortization		(6,443,102	)		(7,101,556	)
		4,823,882			4,616,709
Land		165,194			165,039
Constructions in progress		215,707			296,220
Total	Ps	5,204,783		Ps	5,077,968

Amortization of billing and customer care software charged to income amounted to, Ps68,113, Ps36,006 and Ps6,490 for the years ended December 31, 2008, 2009 and 2010, respectively.

Depreciation charged to income, not including amortization of the billing and customer care software mentioned above was, Ps633,122, Ps743,467 and Ps769,529 for the years ended December 31, 2008, 2009 and 2010, respectively.

As of December 31, 2009 and 2010, property and equipment include assets acquired under capital leases, and amounted to Ps641 and Ps545, respectively (see Note 8).

7. DEFERRED CHARGES AND OTHER ASSETS, NET

As of December 31, 2009 and 2010, deferred charges and other assets consist of the following:

	2009			2010
Capitalized expenses derived from issuance of 11.750% senior notes due 2014 (a)	Ps	66,166		Ps	66,166
Frequency bands (b)		174,370			174,370
Software (c)		729,778			830,399
Investments in associate (d)		16,113			10,052
Guarantee deposits		7,656			7,845
Installation expenses		61,221			64,116
Other assets		29,295			30,634
		1,084,599			1,183,582
Accumulated amortization		(748,360	)		(858,183	)
Total deferred charges and other	Ps	336,239		Ps	325,399

Amortization charged to income was Ps55,452, Ps74,037 and Ps90,643 for the years ended December 31, 2008, 2009 and 2010, respectively.

F-16

a. Capitalized expenses derived from issuance of 11.750% senior notes due 2014

Correspond to fees and expenses incurred for the issuance of the 11.750% senior notes due 2014 and are amortized using the straight line method over the terms of the senior notes. Amortization charged to income for the years ended December 31, 2009 and 2010 amounted Ps3,535 and Ps13,421 respectively

b. Frequency bands

In 1997, the Company obtained two national point-to-point wireless telecommunications concessions and three point-to multipoint wireless concessions covering Mexico City, Monterrey and Guadalajara. The concessions are for 20 years beginning in 1998 and are amortized on a straight-line basis over the concession period. Frequency band amortization expense for each of the years ended December 31, 2008, 2009 and 2010 amounted to Ps8,719 and the net carrying amount is Ps75,542 and Ps66,824 at December 31, 2009 and 2010, respectively.

c. Software

Software costs consist of purchased software license for internal use. The amortization of software for the years ended December 31, 2008, 2009 and 2010 amounted to Ps44,829, Ps64,271, and Ps81,911, respectively, with a net carrying amount of Ps139,151, Ps145,314, and 163,927, respectively

d. Investment in associate

In 2008, the Company acquired 50% of common shares of Conectividad Inalámbrica 7 GHz, S. de R.L. This acquisition is measured by using the equity method.

8. BANK LOANS, NOTES PAYABLE AND CAPITAL LEASES

As of December 31, 2009 and 2010 bank loans, notes payable and capital leases consist of the following:

	2009			2010
Bank loan obtained from Comerica Bank for an amount of US$10 million. (1)		—		Ps	123,571
Bank loan obtained from Comerica Bank for an amount of US$10 million (2)	Ps	130,587			—
Promissory notes to Cisco Systems Capital Corporation for an amount of US$37.2 million. (3)		296,251			238,243
Promissory notes to Hewlett Packard Operations de México, S. de R. L. de C. V., for an amount of US$18.8 million. (4)		160,908			136,282
Promissory notes to Huawei Tecnologies de México, S. A. de C. V. for an amount of US$3.5 million. (5)		—			28,798
Capital lease contract with Arrendadora Capital Corporation, S. A. de C. V., for an amount of Ps27,198. (6)		9,066			—
		596,812			526,894
Current portion of bank loans notes payable and capital leases		(185,665	)		(216,957	)
Long term debt	Ps	411,147		Ps	309,937

(1) On September 27, 2010 the Company signed a new loan agreement with Comerica Bank (“Comerica”) for US$10 million bearing interest at 3-month adjusted LIBOR rate plus 3.75%. Interest are payable quarterly and principal is payable in four equal installments of US$2.5 million in March 31, 2012, June 30, 2012, September 30,2012 and December 31, 2012. This loan agreement contains various covenants which, as of December 31, 2010, and the date of the issuance of the financial statements, the Company is in full compliance.

(2) On October 12, 2009 the Company signed a loan with Comerica for US$10 million bearing interest at 3-month LIBOR rate plus 3.75%. Interest was to be paid quarterly and principal was to be paid in four equal installments of US$2.5 million starting on January 12, 2011 with a maturity on October 12, 2011. However, as of September 28, 2010, the loan was paid in full.

(3) The Company issued ten promissory notes for a total amount of US$37.2 million to acquire goods with its supplier Cisco Systems Capital Corporation. Each note has a maturity of 36 months at an annual interest rates between 5.15% and 5.67%. The amount due as of December 31, 2010 was US$19.3 million.

(4) From October 1, 2008 to March 31, 2010, the Company signed five promissory notes with Hewlett Packard Operations de México, S. de R. L. de C. V. (“HP”), for the acquisition of goods for a total amount of US$18.8 million. The payments will be made on a monthly basis in 48 installments and annual interest rates between 5.21% and 7.082%. As of December 31, 2010 amount due was US$11.0 million.

F-17

(5) On March 17, 2010, the Company signed a promissory note with Huawei Technologies de México S. A. de C. V. (“Huawei”), for the acquisition of goods for a total amount of US$3.5 million. The payments will be made quarterly at an annual interest rate of 5.50%. As of December 31, 2010, the amount outstanding was US$2.3 million.

(6) The Company entered into a capital lease contract with Oracle de México, S. A. de C.V. (“Oracle”) to acquire software licenses and technical support for a total amount of Ps27,198, and bearing interest at 5.67%. This capital lease was payable in 12 equal monthly payments of Ps2,431 each, and matured in April 30, 2010.

9. SENIOR NOTES

On August 11, 2009 the Company performed a debt offering by issuing unsecured senior notes for a total amount of US$200 million. The senior notes bear interest at annual rate of 11.750% payable semi-annually in cash on February and August of each year with a maturity on August 11, 2014 (“11.750% Senior Notes”). The 11.750% Senior Notes principal will be paid at maturity and is presented as long-term in the balance sheet.

The proceeds obtained in the issuance of the 11.750% Senior Notes were used to refinance the Company’s 8% Senior Notes due June 2010 (“8% Senior Notes”).

On October 7, 2009, the Company filed a registration statement on Form F-4 in order to register its offer to exchange its outstanding 11.750% Senior Notes due 2014 with new notes that have been registered under the U.S. Securities Act of 1933, as amended. This registration statement became effective on January 6, 2010.

The costs and expenses, including the placing of premiums and discounts of this new issuance, which at December 31, 2009 amounted to Ps66,166 (US$5.1 million), will be amortized over the life of the 11.750% Senior Notes. The unamortized costs and expenses of the 8% Senior Notes due 2010, amounting to Ps19,229 at December 31, 2009, were charged to income for the year and are presented in the statement of operations as other income (expense).

The Company may redeem, at any time, the 11.750% Senior Notes, in whole but not in part, by paying the greater of 100% of the principal amount of such notes and the sum of the present value of each remaining scheduled payment of principal and interest discounted to the redemption date on a semi-annual basis at the Treasury Rate (as defined in the indenture for the 11.750% Senior Notes) plus 50 basis points, in each case plus accrued and unpaid interest. In addition, prior to or on August 11, 2012, the Company may redeem up to 35% of the original principal amount of the 11.750% Senior Notes with the net proceeds from certain equity offerings by the Company, at a price of 111.75% of the aggregate principal amount thereof, plus accrued and unpaid interest.

In the event of a change in the Company’s control structure, for example in the case of change of the interest ownership partners of the Company and with certain exceptions, the holders of the 11.750% Senior Notes are entitled to demand that the Company repurchase the notes in cash, at a price equal to 101% of the principal amount plus unpaid accrued interest.

The indenture for the 11.750% Senior Notes and other credit agreements contain various debt covenants including limitations on the sale of assets and affiliate transactions, among others. In addition, these covenants require the Company to have a certain leverage ratio prior to being able to enter into additional debt transactions. As of December 31, 2009 and 2010 and to the date of issuance of these financial statements, the Company is in compliance with all required covenants.

10. EMPLOYEES’ BENEFITS

Following is a summary of the principal financial data relative to these obligations:

a. Reconciliation between the initial and final balances of the defined benefit obligations (OBD by its Spanish acronym) present value for the periods 2009 and 2010:

	Pension plan			Seniority premium			Termination benefits			Other retirement benefits			Total
Defined benefit obligation at January 1, 2009	Ps	71,271		Ps	1,240		Ps	31,963		Ps	734		Ps	105,208
Plus (less):
Labor cost of the current service		1,973			135			2,972			24			5,104
Financial cost		5,413			110			2,743			67			8,333
Actuarial (earnings) losses generated in the period		24,384			177			4,352			(6	)		28,907
Benefits paid		(19,346	)		(43	)		(4,391	)					(23,780	)
Settlements		(9,570	)											(9,570	)
Defined benefit obligation at December 31, 2009	Ps	74,125		Ps	1,620		Ps	37,638		Ps	819		Ps	114,202

F-18

	Pension plan			Seniority premium			Termination benefits			Other retirement benefits		Total
Defined benefit obligation at January 1, 2010	Ps	74,125		Ps	1,620		Ps	37,638		Ps	819	Ps	114,202
Plus (less):
Labor cost of the current service		2,286			167			3,272			22		5,747
Financial cost		6,523			152			3,325			77		10,077
Actuarial (earnings) losses generated in the period		(3,237	)		(44	)		1,737			2,890		1,346
Benefits paid		(11,342	)					(4,753	)				(16,095	)
Settlements		(1,838	)										(1,838	)
Defined benefit obligation at December 31, 2010	Ps	66,517		Ps	1,895		Ps	41,219		Ps	3,808	Ps	113,439

b. The accumulated benefit obligations at December 31, 2009 and 2010 amounted to Ps73,769 and Ps73,699, respectively.

c. Reconciliation between the OBD present value and the Net Projected Assets/ Liability (A/ PNP by its Spanish acronym) recognized in the balance sheet is presented as follows:

	Pensions December 31,						Seniority premium December 31,						Termination benefits December 31,						Other retirement benefits December 31,					Total			Total
	2009			2010			2009			2010			2009			2010			2009		2010			2009			2010
Labor assets (liabilities):
Defined benefit obligation	Ps	74,125		Ps	66,517		Ps	1,620		Ps	1,895		Ps	37,638		Ps	41,219		Ps	819	Ps	3,808		Ps	114,202		Ps	113,439
Unfunded status		74,125			66,517			1,620			1,895			37,638			41,219			819		3,808			114,202			113,439
Less unrecognized amounts pending amortization:
Actuarial (gains) losses		(9,682	)		(4,333	)		(1,551	)		(1,366	)		—			—			7		(2,883	)		(11,226	)		(8,582	)
Transition liability		—			—			(130	)		(85	)		(9,068	)		(6,045	)		—		—			(9,198	)		(6,130	)
Prior service cost		8,899			8,019			—			—			—			—			—		—			8,899			8,019
Net projected liability	Ps	73,342		Ps	70,203		Ps	(61	)	Ps	444		Ps	28,570		Ps	35,174		Ps	826	Ps	925		Ps	102,677		Ps	106,746

F-19

d. Period Net Cost (CNP by its Spanish acronym )

An analysis of the CNP by plan type is presented as follows:

	Pensions plan December 31,									Seniority premium December 31,						Indemnities December  31						Other retirement benefits December 31							Total December 31
	2008			2009			2010			2008		2009		2010		2008		2009		2010		2008			2009		2010		2008			2009		2010
Net cost of the period:
Labor cost of the current service	Ps	2,001		Ps	1,973		Ps	2,286		Ps	127	Ps	135	Ps	167	Ps	2,784	Ps	2,972	Ps	3,272	Ps	41		Ps	24	Ps	22	Ps	4,953		Ps	5,104	Ps	5,747
Financial cost		6,644			5,413			6,523			97		110		152		2,138		2,743		3,325		119			67		77		8,998			8,333		10,077
Net actuarial earning or loss		—			—			153			144		129		141		5,710		4,352		1,737		—			—		—		5,854			4,481		2,031
Labor cost of past service		(779	)		(743	)		(658	)		43		43		43		3,023		3,023		3,023		113			—		—		2,400			2,323		2,408
Reductions and settlements		(706	)		16			(102	)		—		—		—		—		—		—		(200	)		—		—		(906	)		16		(102	)
Total	Ps	7,160		Ps	6,659		Ps	8,202		Ps	411	Ps	417	Ps	503	Ps	13,655	Ps	13,090	Ps	11,357	Ps	73		Ps	91	Ps	99	Ps	21,299		Ps	20,257	Ps	20,161

e. Main actuarial assumptions:

The main actuarial assumptions used, expressed in absolute terms, as well as the discount rates, plan assets yield, salaries increases and changes in the indexes or other variables, referred at December 31, 2009 and 2010, are as follows:

Concept*	2009			2010
Discount rates		9.40	%		7.50	%
Rate of salary increase		5.25	%		5.25	%
Minimum wage increase rate		4.25	%		4.25	%
Health care inflation annual nominal rate		7.35	%		7.50	%

* Annual nominal

f. Variation effect in the trend rate assumed from the medical attention costs:

The effect of a variation in one percent in the variation trend rate assumed concerning health care costs would have been as follows:

	2009				2010
Concept	Effect +1		Effect -1		Effect +1		Effect -1
Cost of the current services and interest of the net medical services at retirement	Ps	17	Ps	25	Ps	121	Ps	73
Cumulative obligations by retirement benefits derived from the medical attention costs	Ps	691	Ps	979	Ps	4,671	Ps	3,102

F-20

11. STOCKHOLDERS’ EQUITY

As of December 31, 2010 the capital stock of Alestra is variable with a fixed minimum of Ps300 and an unlimited maximum. As of December 31, 2009 and 2010, the subscribed and paid-in capital stock at nominal value amounted to Ps1,181,346. It is represented by common, nominative shares of no par value, and are divided as follows: (a) Series “A”, which represents 51% ownership interest, grants full ownership and voting rights, and is restricted to Mexican investors (b) Series “B” which represents no more than 49% of the ownership interest, grants full ownership and voting rights, and has no ownership restrictions; and (c) Series “N”, which may represent up to 65% of the total capital stock, grants limited ownership and voting rights in accordance with article 113 of the General Law of Mercantile Organizations, and may be acquired by Mexican and foreign investors in accordance with the applicable legal regulations.

The Company’s capital stock at December 31, 2008, 2009 and 2010, consists of the following:

Alfa, S. A. B. de C. V.					AT&T Telecom. México, Inc.
Series	Ownership (%)		Contribution		Series	Ownership (%)		Contribution		Total
“A”		17.85		210,870	“A”		—		—	Ps	210,870
“B”		—		—	“B”		17.15	Ps	202,601		202,601
“N”		33.15		391,616	“N”		31.85		376,259		767,875
Total		51.00	Ps	602,486	Total		49.00	Ps	578,860	Ps	1,181,346

Net income for the year is subject to the decisions taken at the general stockholders’ meeting, to the Company’s by-laws and to the General Law of Mercantile Organizations. In accordance with the General Law of Mercantile Organizations, the legal reserve must be increased annually by 5% of annual net profits until it reaches 20% of the fully paid capital stock amount.

In a shareholders meeting held on December 21, 2009, the shareholders declared a dividend of US$15 million (Ps195,077), agreeing to pay the dividend in two installments, with the first payment of US$5 million (Ps64,490) to be made no later than December 23, 2009. The first payment was paid as of December 31, 2009 and came from net tax profit account (CUFIN by its Spanish acronym). The rest of the dividend, US$10 million (Ps130,587), will be paid, depending on the Company’s cash flows. At the date of the issuance of these financial statements, this amount has not been paid. As of December 31, 2008 and 2010, the Company did not declare any dividends.

Dividends paid are not subject to income tax if paid from the CUFIN. Any dividends paid in excess of this account will cause a tax equivalent to 42.86% if they are paid on 2011. The current tax is payable by the Company and may be credited against its income tax in the same year or the following two years or in its case against the Flat tax of the period. Dividends paid from retained earnings previously taxed are not subject to any tax withholding or payment. At December 31, 2010 the CUFIN and the Capital Contribution Account (CUCA by its Spanish acronym) amounted to Ps677,368 and Ps14,461,990, respectively.

In the event of a capital reduction, the provisions of the Income Tax Law arrange that any excess of Stockholders’ equity over capital contributions is accounted for with the same tax treatment as dividends.

At December 31, 2009 and 2010, the capital stock shows Ps489 and (Ps829), respectively, which correspond to the effect for the derivative financial instruments valuation and, which accounting effects have been generated by the valuation of liability that have not necessarily been realized.

F-21

12. CONTINGENCIES AND COMMITMENTS

a. At December 31, 2010, the Company had commitments from agreements to lease office space classified operating leases. The leases payments are subject to escalation factors based on the NPCI. At December 31, 2010, future minimum lease payments under non cancelable operating leases with terms in excess of one year are as follows:

Year
2011	Ps	102,789
2012		106,264
2013		110,003
2014		114,487
2015 onwards		506,762
	Ps	940,305

Lease expense was Ps85,362, Ps99,978 and Ps103,748 for the years ended December 31, 2008, 2009 and 2010, respectively.

b. As of December 31, 2009 and 2010, the Company obtained performance bonds for Ps372,914 and Ps271,157 respectively, in favor of certain authorities and suppliers to guarantee the Company’s compliance with certain obligations incurred.

c. As of December 31, 2009 and 2010, the Company had outstanding commitments to acquire equipment and other capital expenditures related to the construction of its telecommunications network amounting to US$14.7 million (Ps192,025) and US$14.6 million (Ps180,529), respectively.

d. In August 2006, ABA Seguros, S. A. de C. V. (“ABA Seguros”) and 7 ELEVEN, Inc. (“7-Eleven”) filed a claim against Servicios Alestra in the amount of Ps 50,000, for damages from a fire that began in the building leased by Servicios Alestra to Casa Chapa, S. A. de C. V. under the theory of subrogation of rights. Servicios Alestra filed a response with the support of ACE Seguros (insurance carrier of Servicios Alestra), since ACE Seguros is the party that would pay should Servicios Alestra be found liable. In order to examine Servicios Alestra’s responsibility, ABA Seguros, 7-Eleven and Servicios Alestra sought the opinions of five experts in the following areas: (i) damages valuation, (ii) insurance settlement, (iii) fires, (iv) accounting, and (v) electrical installation. Although the outcome of the claim has not yet been decided, Servicios Alestra does not believe it would have a substantial effect on its financial results. In the Company’s opinion; although the outcomes of these proceedings are uncertain, these should not have a material adverse effect on its financial position, results of operations or cash flows.

e. The Company is involved in a dispute with Teléfonos de México, S.A.B. de C.V. (“Telmex”) regarding interconnection services rates applicable for 2008, 2009 and 2010 and had requested the intervention of Cofetel. As of the date of issuance of these financial statements, management continues its negotiations with Telmex and it is expected that the Company may reach an agreement in the near future. In the Company’s opinion, although the outcomes of the mentioned proceedings are uncertain, they should not have a material adverse effect on its financial results in excess of the amounts accrued; however, as of the date of issuance of these financial statements, the Company believes that it has recognized sufficient provisions to address such contingencies. See Note 13.

F-22

13. RESTRICTED CASH RELATED TO LIABILITIES IN DISPUTE

Alestra filed a disagreement before Cofetel (see Note 12.e) derived from a dispute in the resale of the interconnection tariffs that Alestra had held with Telmex and Teléfonos del Norte (“Telnor”, a subsidiary of Telmex). The disagreement is requesting a resolution regarding the interconnection traffic tariffs for telecommunication networks applicable during 2010 and long distance interconnection traffic (interurban transportation) during 2008 and 2009.

On September 8, 2009, the parties in dispute agreed to subscribe a trust agreement with BBVA Bancomer, S. A., for the administration and investment of the total amounts in dispute corresponding to the difference between the amounts invoiced by Telmex/Telnor, as a result of the 2008, 2009 and 2010 resolutions, and the payments made by Alestra for these services.

Once the parties reach an agreement or the corresponding disagreements are definitely solved, the trust funds as well as the yields thereof will be distributed, as agreed.

The restricted cash that represents the trust balance shown in the balance sheet is included within cash and cash equivalents as mentioned in Note 2b.

At December 31, 2009 and 2010, the trust balance amounted Ps318,202 and Ps378,207, respectively, integrated by the contributions made by Alestra and the corresponding interest for the amounts of Ps313,681 and Ps4,521 at December 31, 2009, and Ps361,568 and Ps16,639 at December 31, 2010. In these years there has not been any applications or decreases affecting the trust´s balance.

14. SEGMENTS

The reported segments of the Company represent the specific types of telecommunications services and products that the Company offers and internally analyzes.

The Company operates in two main segments: long distance (domestic and international) and data, internet and local services. These segments are managed separately due to product differences.

The Company’s management uses the information regarding income and costs of services (excluding depreciation and amortization) by segment to evaluate performance, make general operations decisions and assign resources. Telecommunications services are generally offered using networks owned by the Company and leased (interconnection) networks that make no distinction between the different kinds of services. As a result, the Company does not assign total assets, administration, selling and other operating expenses and depreciation and amortization per segment.

Year ended	Long distance			Data, internet and local services			Total
2008
Revenues	Ps	1,722,487		Ps	2,950,062		Ps	4,672,549
Costs of services (excluding depreciation and amortization)		(1,041,532	)		(747,497	)		(1,789,029	)
Gross profit	Ps	680,955		Ps	2,202,565			2,883,520
Operating expenses								(2,308,396	)
Operating income								575,124
Other expense, net								(50,072	)
Comprehensive financial result								(943,850	)
Loss before provision for income tax								(418,798	)
Income tax								34,476
Consolidated net (loss)								(384,322	)
Net (loss) attributable to non controlling interest								(1	)
Net income attributable to total stockholders of Alestra							Ps	(384,323	)

F-23

Year ended	Long distance			Data, internet and local services			Total
2009
Revenues	Ps	1,420,624			Ps3,263,013		Ps	4,683,637
Costs of services (excluding depreciation and amortization)		(955,631	)		(781,075	)		(1,736,706	)
Gross profit	Ps	464,993			Ps2,481,938			2,946,931
Operating expenses								(2,382,894	)
Operating income								564,037
Other expense, net								(73,229	)
Comprehensive financial result								(221,442	)
Income before provision for income tax								269,366
Income tax								22,099
Consolidated net income								291,465
Net (loss) attributable to non controlling interest								—
Net income attributable to total stockholders of Alestra							Ps	291,465
Year ended	Long distance			Data, internet and local services			Total
2010
Revenues	Ps	1,114,294			Ps3,455,988		Ps	4,570,282
Costs of services (excluding depreciation and amortization)		(679,092	)		(836,359	)		(1,515,451	)
Gross profit	Ps	435,202			Ps2,619,629			3,054,831
Operating expenses								(2,444,306	)
Operating income								610,525
Other expense, net								(26,452	)
Comprehensive financial result								(192,842	)
Income before provision for income tax								391,231
Income tax								(33,732	)
Consolidated net income								357,499
Net (loss) attributable to non controlling interest								(2	)
Net income attributable to total stockholders of Alestra							Ps	357,497

The Company does not have assets outside of Mexico. For the years ended December 2008, 2009 and 2010, the revenues from international long distance services of the Company generated by AT&T, represented 65.2%, 33.8%, and 28%, respectively. (See Notes 2l. and 4).

F-24

15. INCOME TAX

a. In 2010 the Company determined a tax profit of Ps812,934 (Ps 810,170 in 2009). Determining an income tax, after amortizations of tax loss carryforwards, of Ps128,252 (Ps88,005 in 2009), which is greater than the flat tax.

b. The financial and tax projections of Alestra assume that the Company will mainly cause income tax and that: the Company will continue depreciating certain assets for tax purposes at the 1% rate, and for certain capital expenditures to be incurred in future years, it will exercise the option of applying an accelerated tax deduction.

c. The tax result differs from the accounting result, mainly due to those items accumulated and deducted differently through time for accounting and tax purposes, from the recognition of the effects of inflation for tax purposes, as well as for those items that only affect the accounting or the tax result.

d. On December 7, 2009, a decree was published, which modified, added and revoked several provisions of the Mexican Income Tax Law for 2010. This decree establishes, among others, that the income tax rate will be 30% for fiscal years 2010 to 2012, 29% for 2013 and 28% from 2014 onwards. At December 2009, the aforementioned change in rates resulted in a decrease in our deferred income tax asset balance of Ps18,557, with a corresponding effect on income for the year, which was determined based on the expectation of the reversal of temporary items at the new rates.

e. The net credit (charge) to consolidated income for income tax was as follows:

	2008			2009			2010
Current income tax before amortization of tax loss carryforwards	Ps	(45,134	)	Ps	(226,008	)	Ps	(243,360	)
Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years		—			138,003			115,108
		(45,134	)		(88,005	)		(128,252	)
Deferred income tax		79,610			110,104			94,520
Total income tax provision	Ps	34,476		Ps	22,099		Ps	(33,732	)

The reconciliation between the statutory and effective income tax rates is shown below:

	2008			2009			2010
(Loss) income before income tax	Ps	(418,798	)	Ps	269,366		Ps	391,231
Statutory tax rate		28	%		28	%		30	%
Income tax at statutory rate		117,263			(75,423	)		(117,369	)
Add (deduct) effect of income tax on:
Inflationary tax adjustment		(26,131	)		(18,369	)		(21,344	)
Charges to income from the increase in the reserve of tax loss carryforwards of Servicios Alestra (subsidiary)		—			(22,898	)		—
Effect from change of statutory rate		—			(18,557	)		—
Other permanent items:
Tax effect from indexing of non-deductible fixed assets		66,546			40,052			63,201
Doubtful accounts not deducted for tax purposes		(46,568	)		(28,839	)		(71,596	)
Tax loss carryforwards not applied		(78,571	)		—			—
Others		1,937			8,130			(1,732	)
Subtotal		34,476			(115,904	)		(148,840	)
Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years		—			138,003			115,108
Total provision of income tax charged to income	Ps	34,476		Ps	22,099		Ps	(33,732	)

F-25

The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities at December 31, 2009 and 2010, are as follows:

	2009			2010
Deferred tax asset:
Allowance for doubtful accounts	Ps	253,510		Ps	163,960
Other assets, costs and provisions		339,558			113,342
Total deferred tax assets		593,068			277,302
Deferred tax liabilities:
Property and equipment, net		476,977			68,785
Prepaid expenses		12,007			9,664
Total deferred tax liabilities		488,984			78,449
Tax loss carryforwards		134,759			33,925
Valuation allowance of tax loss carryforwards		(134,759	)		(33,925	)
Deferred income tax	Ps	104,084		Ps	198,853

For the years ended December 31, 2009 and 2010 the change in the valuation allowance of losses to be amortized is analyzed as follows:

	2009			2010
Balances at beginning of year	Ps	(323,536	)	Ps	(134,759	)
Prior years of tax loss carryforwards restatement		—			(14,274	)
Charges to income from the increase in the reserve of tax loss carryforwards of Servicios Alestra (subsidiary)		(22,898	)		—
Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years		138,003			115,108
Decrease in reserve from the expiration or loss of rights to use tax loss carryforwards in future years		73,672			—
Balances at end of year	Ps	(134,759	)	Ps	(33,925	)

The tax losses that could be amortized, in accordance with the policies established by the Company as described in the paragraphs above, are restated in accordance with the official inflation indexes, are as follows:

Year
2011	Ps	30,060
2012		17,882
2013		25,900
2014		26,794
2015		12,448
	Ps	113,084

In 2010 the Company determined a flat tax profit of Ps1,561,768 ( Ps 1,402,356 in 2009), and determined a flat tax profit net from credits of Ps118,475 (Ps87,904 in 2009) which did not exceed the determination for income tax purposes. The tax result differs from the accounting result mainly because, for accounting purposes, the transactions are recognized on an accrual basis while for tax purposes, these are recognized on a cash flow basis and for such items affecting only the accounting or tax result of the year.

The 2010 Flat Tax of the period is calculated at the 17.5% rate (17% for 2009) on the profit determined on a cash flows basis. Such net income represents the difference between the total income collected by taxable activities, less the authorized tax deduction paid. In addition, it is also allowed to reduce this amount by any Flat tax credits available, based on the procedures established in the effective law. The rate change effect of temporary differences has been recognized in previous periods.

According to the effective tax law, the Company must pay annually the higher tax between the Income tax and Flat tax.

F-26

16. FOREIGN CURRENCY POSITION

As of December 31, 2009 and 2010 monetary assets and liabilities, denominated in foreign currencies (U.S. dollars) were as follows:

	Thousands of U.S. dollars
	2009			2010
Assets	US$	25,642		US$	34,062
Short and long-term liabilities		(268,008	)		(286,358	)
Net short position	US$	(242,366	)	US$	(252,296	)

The following is a consolidated summary of the main transactions in foreign currency:

	2008			2009			2009
Revenues	US$	137,366		US$	120,812		US$	102,929
Cost of services		(28,275	)		(17,209	)		(15,280	)
Operating expenses		(26,054	)		(19,041	)		(21,364	)
Interest expense		(22,616	)		(31,114	)		(28,787	)
Interest income		1,247			725			17
Other income, net		—			261			164
Net income	US$	61,668		US$	54,434		US$	37,679

The exchange rates at December 31, 2008, 2009 and 2010, were, Ps13.5383, Ps13.0587 and Ps12.3571 per U.S. dollar, respectively, as published by Banco de México (the Mexican central bank).

At January 25, 2011, the date of issuance of the financial statements, the exchange rate was Ps12.0516 per U.S. dollar.

17. FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, current receivables, accounts payable, due from and to related companies and accrued expenses and other payables reported on the balance sheet, approximate fair value, due to the short term maturity of these instruments.

The estimated fair values of the financial instruments at December 31, 2009 and 2010 are as follows:

Years ended	Carrying amount		Fair value		Differences
2009
Bank loans and notes payable	Ps	596,812	Ps	590,828	Ps	5,984
Senior notes		2,611,740		2,951,266		(339,526	)
	Ps	3,208,552	Ps	3,542,094	Ps	(333,542	)
2010
Bank loans and notes payable	Ps	526,894	Ps	526,599	Ps	295
Senior notes		2,471,420		2,835,954		(364,534	)
Derivative instruments		2,207		1,253		954
	Ps	3,000,521	Ps	3,363,806	Ps	(363,285	)

F-27

18. DERIVATIVE FINANCIAL INSTRUMENTS

The Company in its interests payments of the 11.75% Senior Notes due 2014 is exposed to the fluctuation of Mexican peso against the US dollar. Therefore, the Company participates in a hedging strategy using forwards, which has been approved by the Board of Directors, with the purpose of hedging exchange risk rate for those transactions.

On October 21 and 25, 2010, the Company signed two forwards, to hedge the interest payment of the 11.75% Senior Notes due 2014 corresponding to February and August, 2011 with an original amount of US$11.75 million each one. These forwards were designated as cash flow hedges according to Mexican FRS.

At December 31, 2010 the characteristics of the forwards designated as hedging are as follows:

Counterparty	Notional amount		Beginning date	Expiring date	Type of underlying	Agreed exchange rate		Fair value
Deutsche Bank, AG	US$	11.750	October 21, 2010	February 11, 2011	USD$		Ps.12.463		(Ps.612	)
Citibank, N.A.	US$	11.750	October 25, 2010	August 11, 2011	USD$		Ps.12.611		(Ps.217	)

The Company considers its future purchase transactions quality as highly possible in the terms required by the accounting regulation.

The forwards fair value at December 31, 2010, resulted in the recognition of a liability and a charge in the comprehensive income account and will be reclassified to income in the period and line items as the corresponding account.

Notional amounts related to derivative financial instruments reflect the hired reference volume; however, it does not reflect the amounts in risk concerning the future flows. The risk amounts are generally limited to the unrealized profit or loss by market valuation of such instruments, which may vary according to changes in the market value of the underlying, its volatility and the credit quality of the counterparties.

The main obligation which the Company is subject to depends on the procedures and conditions set for entering into each one of the forwards, mainly due to the future payment that would have to be made equivalent to the fair value of each one of the forwards. As of December 31, 2009 the Company does not have derivative financial instruments outstanding.

19. SUBSEQUENT EVENT

On April 14, 2011, the Company entered into an equity purchase agreement with AT&T, AT&T Mexico and Alfa, pursuant to which Alfa has agreed to acquire AT&T Mexico’s 49% equity interest in the company (the “Equity Purchase Agreement”). On April 14, 2011, the Company also entered into a nodes purchase agreement with AT&T, AT&T Mexico and Alfa, pursuant to which AT&T Mexico has agreed to purchase from the Company the telecommunications nodes and customer equipment (the “Nodes”) required for the provision of AT&T Global Services in Mexico (the “Nodes Purchase Agreement” and, together with the Equity Purchase Agreement, the “AT&T Transactions”).

Consummation of the AT&T Transactions is subject to customary conditions, including: (i) receipt of certain regulatory approvals; (ii) absence of any law or order prohibiting the closing of the transactions; (iii) subject to certain exceptions, the accuracy of representations and warranties; and (iv) payment of certain amounts due to AT&T and AT&T Mexico. The AT&T Transactions are expected to close in the second half of 2011.

Upon the consummation of the AT&T Transactions, (i) Alfa will own 100% of the Company equity interests, (ii) Alfa & AT&T Mexico will terminate the Joint Venture Agreement, and (iii) the Company and AT&T Mexico will enter into an Equipment Lease Agreement pursuant to which Alestra will lease from AT&T Mexico the Nodes required for the provision of AT&T Global Services in Mexico (the “Equipment Lease Agreement”) until December 31, 2012. The Equipment Lease Agreement is subject to early termination if AT&T Mexico acquires the necessary licenses and regulatory approvals to offer, directly and independently from the Company, AT&T Global Services within Mexico, prior to December 31, 2012.

Upon the termination of the Equipment Lease Agreement, (i) the Company and AT&T will terminate the AGN Agreement prior to its June 30, 2013 expiration date and (ii) the Company and AT&T Mexico will enter into several commercial agreements pursuant to which the Company will provide certain telecommunication services to AT&T Mexico

After the termination of the AGN Agreement, following the consummation of the AT&T Transactions, the Company will no longer provide AT&T Global Services and will be required to cease using any of AT&T’s intellectual property.

F-28

20. DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP

The Company’s consolidated financial statements are prepared in accordance with Mexican FRS, which differ in certain significant respects from U.S. GAAP.

Fair Value

The Company adopted ASC 820 in two steps; effective January 1, 2008, the Company adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. It also establishes a three-level valuation hierarchy based upon observable and non-observable inputs.

For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

• Level 1 - Quoted prices for identical instruments in active markets.

• Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

• Level 3 - Significant inputs to the valuation model are unobservable.

The Company maintains policies and procedures to measure instruments using the best and most relevant data available. In addition, the Company has risk management teams that review valuation, including independent price validation for certain instruments. Further, in other instances, the Company retains independent pricing vendors to assist in valuing certain instruments.

F-29

Non-Recurring Fair Value Measurements

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These include cost and equity method investments that are written down to fair value when their declines are determined to be other than temporary and long-lived assets that are written down to fair value when they are held for sale or determined to be impaired.

All fair value adjustments as of December 31, 2010 represent assets or liabilities measured at fair value on a recurring basis and were calculated as follows:

	Balance at December 31, 2010		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
			(Level 1)		(Level 2)		(Level 3)
Derivative financial instruments		2,207		—		2,207		—
Total	Ps	2,207	Ps	—	Ps	2,207	Ps	—

Derivative financial instruments are valued using internal models that use as their basis readily observable market inputs, such as time value, forward interest rates, volatility factors, and current and forward market prices for foreign exchange rates. The Company generally classifies these instruments within Level 2 of the valuation hierarchy. Such derivatives are for foreign currency.

Long-lived Assets

Long-lived assets, including real estate, may be measured at fair value if such assets are held for sale or when there is a determination that the asset is impaired. The determination of fair value is based on the best information available, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets and independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates. See Note 20g.

F-30

Reconciliation of principal differences between Mexican FRS and U.S. GAAP

The principal differences between Mexican FRS and U.S. GAAP and the effect on consolidated net (loss) income and consolidated stockholders’ equity are presented below with an explanation of the adjustments.

	2008			2009			2010
Reconciliation of net (loss) income:
Net (loss) income as reported under Mexican FRS attributable to Alestra	Ps	(384,323	)	Ps	291,465		Ps	357,497
U.S. GAAP adjustments:
a) Severance payments		4,450			3,012			3,012
b) Deferred income tax		34,725			47,741			(12,218	)
c) Pension and labor liabilities		7,026			(2,528	)		10,406
d) Difference in interest expense from restructuring		226,156			324,608			—
d) Reversal of debt issuance costs, net of amortization		22,688			34,032			—
e) Fifth amendment effect on depreciation expense		(137,820	)		(50,784	)		—
Total U.S. GAAP adjustments		157,225			356,081			1,200
Net (loss) income under U.S. GAAP		(227,098	)		647,546			358,697
f) Non controlling interest under U.S. GAAP		—			—			3
Net (loss) income under U.S. GAAP	Ps	(227,098	)	Ps	647,546		Ps	358,700

	2009			2010
Reconciliation of stockholders’ equity:
Total stockholders’ equity reported under Mexican FRS	Ps	2,313,721		Ps	2,667,794
U.S. GAAP adjustments:
a) Severance payments		(9,038	)		(6,026	)
b) Deferred income tax		3,480			(8,737	)
c) Pension and labor liabilities		(9,011	)		(4,268	)
Total U.S. GAAP adjustments		(14,569	)		(19,031	)
Total stockholders’ equity under U.S. GAAP		2,299,152			2,648,763
f) Non controlling interest under U.S. GAAP		(1	)		2
Total stockholders’ equity of Alestra under U.S. GAAP	Ps	2,299,151		Ps	2,648,765

Summary of the Company’s statement of changes in stockholders’ equity

A summary of the Company’s statement of changes in stockholders’ equity with balances determined under U.S. GAAP is as follows:

	2009			2010
Balance at beginning of period	Ps	1,852,062		Ps	2,299,151
Net income for the year		647,546			358,700
Declaration of dividends		(195,078	)		—
Effects from derivative financial instruments		489			(829	)
Other adjustments		—			(2,595	)
Impact of pension		(5,868	)		(5,662	)
Balance at end of period	Ps	2,299,151		Ps	2,648,765

F-31

On December 1, 2003, the Company’s stockholders resolved to (i) reclassify the balance as of December 31, 2002 of the restatement of capital stock account into the variable portion of the capital stock in the amount of Ps 5,026,512 and (ii) reduce the variable portion of the capital stock for Ps9, 193,330 and Ps1, 340,308 by reclassifying these amounts from the accumulated deficit account and the accumulated deficit from restatement account, respectively. As a consequence, the nominal value of the shares was proportionally reduced according to the ownership interest of each of the shareholders. These transactions did not represent a contribution or payment to the equity holders. For U.S. GAAP purposes, reclassifications of this nature are considered to be quasi-reorganization and as such the Company may not reclassify a deficit in retained earnings unless certain criteria are met. The Company does not comply with all the criteria and consequently, the stockholders’ equity under U.S. GAAP as of December 31, 2009 and 2010 is as follows:

	2009			2010
Capital stock	Ps	12,355,567		Ps	12,355,567
Accumulated losses		(10,056,415	)		(9,706,804	)
Total stockholders’ equity of Alestra		2,299,152			2,648,763
Non controlling interest		(1	)		2
Total stockholders’ equity under U.S. GAAP	Ps	2,299,151		Ps	2,648,765

Condensed balance sheets and statements of income under U.S. GAAP

The following table presents condensed balance sheets and statements of income in constant Pesos, including all U.S. GAAP adjustments, as of December 31, 2009 and 2010 and for the three years then ended:

	2009			2010
Cash and cash equivalents	Ps	317,429		Ps	486,224
Restricted cash		318,202			378,207
Trade receivables		494,216			493,030
Other current assets		140,529			182,508
Total current assets		1,270,376			1,539,969
Property and equipment, net		5,204,783			5,077,968
Deferred charges and other assets, net		261,035			319,375
Deferred income tax		110,078			192,542
Total assets	Ps	6,846,272		Ps	7,129,854
Total current liabilities including the current portion of senior notes	Ps	1,348,809		Ps	1,467,450
11.750% Senior notes due 2014		2,545,574			2,471,420
Bank loans and notes payable		411,147			309,937
Interest payable		127,389			118,842
Estimated liabilities for seniority premiums and pension plans		114,202			113,440
Total liabilities		4,547,121			4,481,089
STOCKHOLDERS’ EQUITY :
Contributed capital		12,355,567			12,355,567
Accumulated losses		(10,056,415	)		(9,706,804	)
Total stockholders’ equity of Alestra		2,299,152			2,648,763
Non controlling interest		(1	)		2
Total stockholders’ equity		2,299,151			2,648,765
Total liabilities and stockholders’ equity	Ps	6,846,272		Ps	7,129,854

F-32

	2008			2009			2010
Net revenues	Ps	4,672,549		Ps	4,683,637		Ps	4,570,282
Cost of services ( excluding depreciation and amortization presented separately below)		(1,789,029	)		(1,736,706	)		(1,515,451	)
Administrative, selling and other operating expenses		(1,543,261	)		(1,530,690	)		(1,568,336	)
Depreciation and amortization		(894,509	)		(904,294	)		(866,661	)
Operating income		445,750			511,947			619,834
Comprehensive financial result:
Interest (expense) income		(39,320	)		8,863			(365,012	)
Exchange (loss) gain		(615,195	)		99,092			171,006
Effect of derivative financial instruments		(63,179	)		(4,789	)		1,164
		(717,694	)		103,166			(192,842	)
Debt issuance costs, net		22,688			14,802			—
Other expense, net		(47,043	)		(52,209	)		(22,344	)
Net (loss) income before deferred income tax and asset tax		(296,299	)		577,706			404,648
Income tax		69,201			69,840			(45,951	)
Net (loss) income		(227,098	)		647,546			358,697
Net income attributable to non controlling interest		—			—			3
Net (loss) income attributable to total Alestra	Ps	(227,098	)	Ps	647,546		Ps	358,700

a) Severance payments

Effective January 1, 2006, the Company adopted the provisions of Mexican FRS D-3, which has subsequently been revised as of January 1, 2008. Under Mexican FRS, beginning in 2005, severance payments should be accounted in a manner similar to other post-retirement benefits. In 2005 the Company opted for the transitional method of recognizing the actuarially determined severance liability of Ps24,666 over the remaining expected employee service period and consequently, as of December 31, 2008, 2009 and 2010 has recognized a total liability and charge to earnings of Ps4,451, Ps3,012 and Ps3,012. Prior to the adoption of revised Mexican FRS D-3, such severance costs were recognized as incurred. With the revision of Mexican FRS D-3, the Company is now amortizing the actuarial determined severance liability over a period of 5 years.

b) Deferred Income Taxes

Under Mexican FRS, deferred tax assets and liabilities are recognized for all significant temporary differences between the carrying amounts of existing assets and liabilities as of the balance sheet date and their respective tax bases. Under U.S. GAAP, ASC 740 “Income Taxes,” requires recognition of deferred tax assets and liabilities associated with differences between the carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

F-33

The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities, prepared after considering the impact of U.S. GAAP adjustments, as of December 31, 2009 and 2010, are as follows:

	Mex GAAP			U.S GAAP Adjustments			2009
Deferred tax asset:
Tax loss carryforwards	Ps	134,759		Ps	—		Ps	134,759
Allowance for doubtful accounts		253,510						253,510
Costs and provisions		339,558			5,994			345,552
Total deferred tax assets		727,827			5,994			733,821
Deferred tax liabilities:
Property and equipment, and other assets, net		476,977			—			476,977
Prepaid expenses		12,007						12,007
Total deferred tax liabilities		488,984			—			488,984
Net deferred tax assets		238,843						244,837
Valuation allowance		(134,759	)		—			(134,759	)
Deferred income, net	Ps	104,084		Ps	5,994		Ps	110,078
	Mex GAAP			U.S GAAP Adjustments			2010
Deferred tax asset:
Tax loss carryforwards	Ps	33,925		Ps	—		Ps	33,925
Allowance for doubtful accounts		163,960			—			163,960
Costs and provisions		113,342			(6,311	)		107,031
Total deferred tax assets		311,227			(6,311	)		304,916
Deferred tax liabilities:
Property and equipment, and other assets, net		(68,785	)		—			(68,785	)
Prepaid expenses		(9,664	)		—			(9,664	)
Total deferred tax liabilities		(78,449	)		—			(78,449	)
Net deferred tax assets		232,778			(6,311	)		226,467
Valuation allowance		(33,925	)		—			(33,925	)
Deferred income, net	Ps	198,853		Ps	(6,311	)	Ps	192,542

For financial statement purposes, based on the weight of available evidence as of the balance sheet dates, valuation allowances were recognized as of December 31, 2009 and 2010, for the deferred assets that the Company considered were more likely than not to be realized in the future.

ASC 740 also prescribes a comprehensive model for the recognition, measurement, financial statement presentation and disclosure of uncertain tax positions taken or expected to be taken in a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

F-34

The Company classifies income tax-related interest and penalties as income taxes in the financial statements.

As of December 31, 2009 and 2010, this pronouncement had no effect on the Company’s overall financial position or results of operations.

c) Pensions and labor liabilities

Due to the revision of Mexican FRS D-3, effective January 1, 2008, companies must now amortize transition obligations/benefits, unrecognized prior service costs/benefits and net gains and losses over a maximum period of 5 years. This change has resulted in an increase in net periodic pension expense under Mexican FRS and has created a difference of Ps2,528 and Ps(10,406) for fiscal years 2009 and 2010 respectively.

Under U.S. GAAP, ASC 715 “Compensation- Retirement Benefits” requires employers to recognize the under-funded or over-funded status of defined benefit pension and postretirement plans as an asset or liability in its balance sheet, and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders’ equity. The adoption of this standard created a difference in the pension and labor liabilities established under Mexican FRS.

Amount Recognized in Accumulated Other Comprehensive Income (“AOCI”)

(net of tax)	2009			2010
Net transition obligation	Ps	6,619		Ps	6,180
Prior service cost		(14,031	)		(12,891	)
Net gain		3,466			1,907
Total	Ps	(3,946	)	Ps	(4,804	)

AOCI Rollfoward (net of tax)

(net of tax)	2009			2010
AOCI at beginning of year	Ps	(13,757	)	Ps	(3,946	)
Occurring during the year:
Net loss (gain)		10,164			(1,560	)
Amounts amortized during the year:
Net transition obligation		438			(438	)
Prior service cost		(791	)		1,140
AOCI at the end of the year	Ps	(3,946	)	Ps	(4,804	)

Pursuant to the requirements of U.S. GAAP, the following tables present a reconciliation of the beginning and ending balances the accumulated benefit obligation.

Seniority Premiums and Pension Benefits

	2009			2010
Benefit obligation at beginning of year	Ps	72,512		Ps	75,744
Service cost		2,108			2,452
Interest cost		6,187			6,651
Actuarial loss (gain)		14,326			(5,094	)
Benefits paid		(19,389	)		(11,341	)
Benefit obligations at end of year	Ps	75,744		Ps	68,412

F-35

Post-retirement benefit

	2009			2010
Benefit obligation at beginning of year	Ps	31,963		Ps	37,638
Service cost		2,972			3,272
Interest cost		2,563			3,103
Actuarial loss		4,044			1,987
Benefits paid		(3,904	)		(4,781	)
Benefit obligation at end of year	Ps	37,638		Ps	41,219

d) Senior Notes

i) Effects of the restructuring of the Old Senior Notes

During November 2003, the Company restructured its outstanding senior notes (the “Old Senior Notes”). As a result of the restructuring of this debt, the Company extinguished, through debt and cash exchange offers, US$232.9 million and US$254.2 million of the debt bearing interest at rates of 12.125% and 12.625%, respectively, representing 85.5% of total Old Senior Notes. As part of the restructuring of its debt, the Company issued Ps4,008,509 (US$304 million) new senior notes (the “8% Senior Notes due 2010”) with maturity in 2010 in exchange for Ps3,765,488 (US$287 million) of Old Senior Notes and paid Ps1,443,219 (US$110 million) as part of a cash offer to extinguish Ps2,624,033 (US$200 million) of Old Senior Notes. Additionally, the Company paid Ps197,439,422 (US$16,401,848) to holders of the Old Senior Notes, which did not accept the terms of debt restructuring of the Company, representing 14.5% value of the Old Senior Notes.

Under Mexican FRS, the effects of the restructuring were recorded as follows:

• A gain of Ps958,753 is recognized for the effect of the extinguishment of the Old Senior Notes.

• A gain of Ps939, 888 for the reversal of accrued and unpaid interest of the Old Senior Notes that were due on November 15, 2002 and May 15, 2003.

• Write-off of unamortized debt issuance cost related to the Old Senior Notes of Ps129, 299 and the capitalization of Ps158,160 for the debt issuance cost of the 8% Senior Notes due 2010 amortized over the term of these Notes.

• Interest expense is determined using the contractual interest rate on the 8% Senior Notes due 2010.

For U. S. GAAP purposes, the debt restructuring of the old senior notes was considered as a troubled debt restructuring in accordance with ASC 310-40 “Troubled Debt Restructurings by Creditors” and its effects were recorded as follows:

• Since the carrying amount of the old senior notes does not exceed the total future cash payments specified by the 8% Senior Notes due 2010, no gain on the restructuring was recognized for the notes that were exchanged.

• Debt issuance cost of Ps158,160 incurred in the debt restructuring was recorded as an expense of the period; debt issuance cost of Ps129,299 of the Old Senior Notes, have been amortized in the new term of the restructured notes.

F-36

• Interest expense is determined using an effective interest rate that equates the present value of the future cash payments specified by the new notes, with the carrying amount of the old senior notes. As a result, the net effect of the restructuring, including the reversal of accrued and unpaid interest, will be recognized prospectively as a reduction of the interest expense throughout the term of the 8% Senior Notes due 2010.

ii) In connection with the issuance of the 11.750% Senior Notes due 2014 and the repayment of the 8% Senior Notes due 2010.

As mentioned in Note 7 and 9, under Mexican FRS the effects were recognized as follows:

• It was considered that the 8% Senior Notes due 2010 are extinguished after repayment and the 11.750% Senior Notes due 2014 is a new debt.

• The unamortized debt issuance costs related to the 8% Senior Notes due 2010 were written off and the 11.750% Senior Notes due 2014 were capitalized and will be amortized over the life of the new debt.

• Interest expense is determined using the contractual interest rate on the 11.750% Senior Notes due 2014.

Under U.S. GAAP, the effects were recognized as follows:

• Interest expense is determined using an effective interest rate. The difference between the interest expense determined under Mexican FRS and U.S. GAAP is considered not material.

• No difference exists between U.S. GAAP and Mexican FRS regarding the accounting treatment for the issuance costs of the 8% Senior Notes due 2010 and 11.750% Senior Notes due 2014.

• The Company recognized a gain amounting Ps324,608, at the moment of the anticipated repayment of the 8% Senior Notes due 2010, related to the reversal of accrued and unpaid interest resulted from the debt restructuring of such notes.

Therefore, the 2009 and 2010 U.S. GAAP stockholders equity does not include a reconciling item.

e) Fifth Amendment effect on property and equipment, net

From January 1, 1997 to December 31, 2007, the Company adopted the Fifth Amendment which established the option of restating equipment of a non- Mexican origin using an index which reflects the inflation in the respective country of origin and the exchange rate of the Mexican Peso against the currency of such country at the balance sheet date. For U.S. GAAP purposes, the use of the index that contemplates currency exchange movements is not in accordance with the nominal cost concept nor does it present financial information in a constant reporting currency. As mentioned previously in Note 2, since January 1, 2008 the Company is required to discontinue the recognition of the inflation effects and to present financial information in adjusted nominal Mexican Pesos. Therefore, the U.S. GAAP adjustment represents the remaining depreciation of equipment relating to restatements for years up to December 31, 2007. As of December 31, 2009 the restatement of equipment of a non- Mexican origin up to December 31, 2007 was fully amortized.

Therefore, the 2009 and 2010 U.S. GAAP stockholders equity does not include a reconciling item.

f) Non Controlling Interest

Under Mexican FRS the non controlling interest in consolidated subsidiaries is presented as a separate component within the stockholders’ equity in the consolidated balance sheet.

For U.S. GAAP purposes, as of January 1, 2009, the Company adopted ASC 810-10-65-65-1 (formerly SFAS No. 160 “Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”) which clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, consolidated net income is to be reported with separate disclosure of the amounts attributable to the parent and to the non-controlling interests. The presentation and disclosure requirements have been applied retrospectively for all periods presented. The adoption of this standard did not have a significant impact on the Company’s overall financial information.

As of December 31, 2009 and 2010, the non-controlling interest represents the effect of the U.S. GAAP adjustments in the Company’s subsidiaries.

F-37

g) Statement of Cash Flow

The statements of cash flow prepared in accordance with Mexican FRS for the years ending December 31, 2009 and 2010 presents substantially the same information as that required under U.S. GAAP as interpreted by ASC 230, except for certain revisions between the operating, investing and financing sections as well as the recognition of the U.S. GAAP adjustments.

As mentioned in Note 2b, Standard C-1 under Mexican FRS, issued and effective in 2010 with retrospective application required, requires that restricted cash balances be included within the cash and cash equivalents caption. However, for U.S. GAAP purposes, Regulation S-X requires that restricted cash be segregated from cash on the balance sheet and should not be included with cash and cash equivalents in the statement of cash flows.

The Company has chosen to present the statements of cash flow under U.S. GAAP in order to provide consistency in disclosure.

Presented below are statements of cash flow for the years ended December 31, 2008, 2009 and 2010 prepared, after considering the impact of U.S. GAAP adjustments.

	2008			2009			2010
OPERATING ACTIVITIES:
Net (loss) income	Ps	(227,098	)	Ps	647,546		Ps	358,697
Adjustments to reconcile net loss to cash flows used in operating activities:
Exchange loss (gain)		615,195			(99,092	)		(171,006	)
Depreciation and amortization		894,508			904,294			866,662
Allowance for doubtful accounts		27,758			(20,980	)		(23,127	)
Interest expense		(193,323	)		(215,948	)		(8,547	)
Deferred income tax		(114,335	)		(157,845	)		(82,301	)
Others		3,888			20,335			7,734
Amortization of capitalized expenses derived from issuance of 8% Senior Notes due 2010		—			19,229			—
Changes in operating assets and liabilities:
Current assets		(37,837	)		15,595			42,630
Current liabilities and other provisions		108,048			447,735			68,992
Net cash flows from operating activities		1,076,804			1,560,869			1,059,734
INVESTING ACTIVITIES:
Purchases of property and equipment		(788,159	)		(808,373	)		(656,937	)
Restricted cash		166,016			(318,202	)		(60,005	)
Purchase of other assets		(74,554	)		(107,275	)		(93,224	)
Net cash flows from investing		(696,697	)		(1,233,850	)		(810,166	)
FINANCING ACTIVITIES:
Bank loans and notes payable		414,762			2,936,768			263,384
Payments of bank loans, notes payable, capital leases and senior notes		(875,372	)		(3,130,792	)		(344,456	)
Dividends paid		—			(64,490	)		—
Net cash flows from financing activities		(460,610	)		(258,514	)		(81,072	)
Net effect of exchange loss on cash and cash equivalents		249			46,119			299
Decrease in cash and cash equivalents		(80,254	)		114,624			168,795
Cash and cash equivalents, beginning of period		283,059			202,805			317,429
Cash and cash equivalents, end of period	Ps	202,805		Ps	317,429		Ps	486,224
Interest and taxes paid:
Interest paid	Ps	261,742		Ps	224,676		Ps	384,459
Income taxes paid	Ps	50,573		Ps	75,404		Ps	194,340

F-38

h) Revision of Statement of Cash Flows

We have revised our consolidated Statements of cash flows for the years ended December 31, 2008, and 2009 to present as operating cash flows, interest paid and as investing cash flows changes in restricted cash, that were incorrectly presented as financing and operating activities, respectively. Management evaluated the impact of these adjustments under the guidance in ASC 250-10 (SEC Staff Accounting Bulletin No. 99 “Materiality”) and while this revision shifts certain amounts within our cash flow Statements affecting the net cash flows from operating activities, the net cash flows from investing activities and the net cash flows from financing activities, it does not affect management’s previously issued disclosures regarding liquidity or our compliance with debt covenant ratio calculations. For this and other reasons, management has concluded that this revision is not material to our previously issued consolidated financial statements. Management has however chosen to revise its statements of cash flows as follows:

Year ended December 31, 2008	As previously reported			Revision			As revised
Net Cash flows from operating activities		1,048,243			28,561			1,076,804
Net Cash flows from investing activities		(667,887	)		(28,810	)		(696,697	)
Net Cash flows from financing activities		(460,610	)		—			(460,610	)
Net effect of exchange loss on cash and cash equivalents		—			249			249
Year ended December 31, 2009	As previously reported			Revision			As revised
Net Cash flows from operating activities		1,450,280			110,589			1,560,869
Net Cash flows from investing activities		(898,585	)		(335,265	)		(1,233,850	)
Net Cash flows from financing activities		(483,190	)		224,676			(258,514	)

i) New accounting pronouncements

Recently Issued Accounting Guidance

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

Recently Adopted Accounting Guidance

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). The new standard provides new disclosures relating to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements. Additionally, it clarifies existing disclosures regarding level of disaggregation and disclosures about inputs and valuation techniques. This guidance is effective for interim and annual periods ending after December 15, 2009. The Company adopted the provisions of the standard and included its effect on its audited consolidated financial statements.

In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”). The amendments require an entity to provide additional disclosures about its financing receivables on a disaggregated basis including a roll-forward schedule, the nonaccrual status of financing receivables and impaired financing receivables by class, credit quality indicators, and an aging schedule among others. The disclosures required by the ASU as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010, whereas the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted the provisions of the standard, however as the Company does not hold long-term financing receivables, the ASU did not have an effect on its audited consolidated financial statements.

F-39

Signatures

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Alestra, S. de R.L. de C.V.
By:	/s/ Bernardo García Reynoso
	Bernardo García Reynoso
	Chief Financial and Administrative Officer

Date: April 29, 2011