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, 2011

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.	2
Item 4.	Information on the Company.	12
Item 4.A.	Unresolved Staff Comments.	37
Item 5.	Operating and Financial Review and Prospects.	37
Item 6.	Directors, Senior Management and Employees.	53
Item 7.	Major Shareholders and Related Party Transactions.	56
Item 8.	Financial Information.	57
Item 9.	The Offer and Listing.	57
Item 10.	Additional Information.	57
Item 11.	Quantitative and Qualitative Disclosures About Market Risk.	62
Item 12.	Description of Securities Other Than Equity Securities.	63
Item 13.	Defaults, Dividend Arrearages and Delinquencies.	63
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds.	63
Item 15.	Controls and Procedures.	63
Item 16.	Reserved.	64
Item 16.A.	Audit Committee Financial Expert	64
Item 16.B.	Code of Ethics	64
Item 16.C.	Principal Accountant Fees and Services	64
Item 16.D.	Exemptions from the Listing Standards for Audit Committees	64
Item 16.E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	64
Item 16.F.	Change in Registrant’s Certifying Accountant	64
Item 16.G.	Corporate Governance	64
Item 17.	Financial Statements.	64
Item 18.	Financial Statements.	64
Item 19.	Exhibits.	65
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 information technology (“IT”), data, internet, local and long distance 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.”

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

Not applicable.

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

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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, 2010 and 2011 and for the fiscal years ended December 31, 2009, 2010 and 2011 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, 2007, 2008 and 2009 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 21 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,
	2007 (1)			2008 (2)			2009 (2)			2010 (2)			2011 (2)
	(in millions of Pesos, unless otherwise indicated)
STATEMENT OF OPERATION
Mexican FRS:
Revenues:
Enterprise Segment	Ps.	3,227		Ps.	3,531		Ps.	3,840		Ps.	4,069		Ps.	4,421
Other Segments		1,829			1,142			844			501			276
Total		5,056			4,673			4,684			4,570			4,697
Cost of services (excluding depreciation):
Enterprise Segment		(1,114	)		(1,076	)		(1,151	)		(1,229	)		(1,391	)
Other Segments		(1,104	)		(713	)		(586	)		(286	)		(102	)
Total		(2,218	)		(1,789	)		(1,737	)		(1,515	)		(1,493	)
Administration, selling and other operating expenses		(1,513	)		(1,552	)		(1,529	)		(1,578	)		(1,626	)
Depreciation and amortization		(870	)		(757	)		(854	)		(867	)		(1,009	)
Operating income		455			575			564			611			570

2

	As of and for the year ended December 31,
	2007 (1)			2008 (2)			2009 (2)			2010 (2)			2011 (2)
	(in millions of Pesos, unless otherwise indicated)
Comprehensive financial result (3)		(180	)		(944	)		(221	)		(193	)		(680	)
Other (expenses) income		1			(50	)		(73	)		(26	)		(55	)
Asset tax		(3	)		—			—			—			—
Income tax		(86	)		35			22			(34	)		79
Net (loss) income		188			(384	)		291			357			(86	)
U.S. GAAP: (4)
Revenues:		5,056			4,673			4,684			4,570			4,697
Cost of services (excluding depreciation):		(2,218	)		(1,789	)		(1,737	)		(1,515	)		(1,493	)
Administration, selling and other operating expenses		(1,514	)		(1,543	)		(1,531	)		(1,568	)		(1,628	)
Depreciation and amortization		(945	)		(895	)		(904	)		(867	)		(1,009	)
Operating income		379			446			512			620			567
Comprehensive financial result		63			(718	)		103			(193	)		(680	)
Net income (loss)	Ps.	299		Ps.	(227	)	Ps.	648		Ps.	359		Ps.	(87	)
BALANCE SHEET
Mexican FRS:
Cash and cash equivalents (5)	Ps.	449		Ps.	203		Ps.	636		Ps.	864		Ps.	897
Trade receivables, net		472			516			494			493			513
Property and equipment, net		5,133			5,169			5,205			5,078			4,650
Other assets		490			453			581			707			1,101
Total assets		6,544			6,341			6,915			7,142			7,161
8% Senior Notes due 2010		2,581			2,701			—			—			—
11.750% Senior Notes due 2014		—			—			2,612			2,471			2,796
Bank loans, notes payable and capital leases		393			473			597			527			224
Total debt		2,974			3,174			3,209			2,998			3,019
Accounts payable		399			521			763			772			796
Dividends payable		—			—			131			124			—
Other payables (6)		487			423			499			580			869
Deferred income taxes		86			6			—			—			—
Total liabilities		3,946			4,125			4,602			4,474			4,684
Contributed capital		1,395			1,395			1,395			1,395			1,395
Retained earnings		1,203			821			919			1,273			1,082
Total stockholders’ equity	Ps.	2,598		Ps.	2,217		Ps.	2,314		Ps.	2,668		Ps.	2,477
U.S. GAAP: (4)
Property and equipment, net	Ps.	5,319		Ps.	5,220		Ps.	5,205		Ps.	5,078		Ps.	4,650
Total assets		6,800			6,346			6,846			7,130			7,160
Total stockholders’ equity		2,075			1,852			2,299			2,649			2,471
CASH FLOW DATA:
Resources provided by (used in) (7)
Mexican FRS:
Operating activities	Ps.	997		Ps.	1,283		Ps.	1,768		Ps.	1,434		Ps.	1,501
Investing activities		(615	)		(834	)		(899	)		(740	)		(632	)
Financing activities		(844	)		(722	)		(483	)		(465	)		(845	)
U.S. GAAP: (4)(8)
Operating activities	Ps.	809		Ps.	1,077		Ps.	1,561		Ps.	1,060		Ps.	1,205
Investing activities		(543	)		(697	)		(1,234	)		(810	)		(671	)
Financing activities		(701	)		(461	)		(259	)		(81	)		(540	)

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OTHER FINANCIAL/OPERATING DATA:
(Unaudited):
Capital expenditures	Ps.	600	Ps.	793	Ps.	937	Ps.	789	Ps.	899
Minutes of traffic, long distance		3,271		2,622		2,126		1,680		1,397
Employees (9)		1,902		1,766		1,699		1,696		1,669
On-net customer locations — type I (10)		3,440		4,119		4,519		5,530		7,010
On-net customer locations — type II (11)		7,259		8,015		7,800		7,930		7,830
Customer access circuits — E0 equivalents (12)		377		518		617		765		958

(1) Information as of and for the year ended December 31, 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, 2010 and 2011is expressed in millions of adjusted nominal Pesos, except as otherwise indicated.

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

(4) See Note 21 to our consolidated financial statements. For information relating to the nature and effect of technical accounting differences between Mexican FRS and U.S. GAAP.

(5) 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.

(6) 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.

(7) 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, 2010 and 2011 information is not directly comparable to 2007 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.

(8) We have revised our consolidated Statements of cash flows for the years ended December 31, 2008, and 2009 under U.S. GAAP. 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 21g. to our consolidated financial statements.

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

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

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

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

Exchange Rate Information

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

	Noon Buying Rate (Peso per Dollar)
Year	High		Low		Average(1)		Period End
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
2011		14.24		11.50		12.43		13.98
Month
September 2011		13.89		12.26		13.01		13.80
October 2011		13.97		13.11		13.43		13.18
November 2011		14.24		13.39		13.70		13.61
December 2011		13.99		13.48		13.76		13.98
January 2012		13.95		12.93		13.43		13.01
February 2012		12.89		12.65		12.46		12.79

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

On April 20, 2012, the noon buying rate as provided by The Federal Reserve was Ps. 13.1322 per U.S.$1.00.

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 may adversely affect us.

On August 5, 2011, Standard & Poor’s Ratings Group, Inc., or Standard & Poor’s, lowered its long term sovereign credit rating on the United States of America from AAA to AA+. In addition, significant concerns regarding the sovereign debt of numerous other countries have developed recently and required some of these countries to seek emergency financing. The downgrade of the U.S. credit rating and the ongoing European debt

5

crisis have contributed to the instability in global credit markets. The sovereign debt crisis could adversely impact the financial health of the global banking system and lower consumer confidence, which could impact global financial markets and economic conditions in the United States and throughout the world. As a result, any combination of lower consumer confidence, disrupted global capital markets and/or reduced economic conditions could have a negative impact on the Mexican economy and consequently on our business. See also “— 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, 2011, we had a consolidated total indebtedness of Ps. 3,019.4 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;

• 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.

Our domestic and international long distance services accounted for 20.3% of our revenues in 2011, 24.4% of our revenues in 2010 and 30.3% of our revenues in 2009. Average prices for domestic long distance calls in Mexico declined more than 80% in real terms from December 1996 to December 2011. 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.

6

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

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

• the highly competitive nature of the IT, 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 IT, 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 IT, data and internet services. If we are unsuccessful in our strategy of focusing on the IT, data and internet services market in Mexico, and are unable to obtain the benefits of these higher-margin businesses, our operating results and financial condition would be adversely impacted and our ability to service our obligations under our notes would be severely impaired.

Historically, we 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, we recently ceased using AT&T’s service mark and we have to rely on the Alestra brand name and service mark alone.

Commencing on November 18, 2007, we began solely using the Alestra brand to market our services in Mexico and stopped using the AT&T Inc. (“AT&T”) mark and logo in all of our materials. Under the AT&T Global Network Cooperation Agreement between AT&T and us (the “AGN Agreement”), 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. However, 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 terminated the AGN Agreement on October 1, 2011 and we ceased using any of AT&T’s intellectual property.

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.

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 our 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.

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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 Radiomóvil Dipsa, S.A. de C.V. (“Telcel”) and Telefónica Data México S.A. de C.V. (“Telefónica”). In regards to the 1850-1910/1930-1990 MHz spectrum segment, it was awarded in favor of Televisa and Nextel Mexico, S. de R.L. (“Nextel”).The Mexican telecommunications market is already a highly concentrated market characterized by declining prices and reduced margins, and if new market participants were to enter the market, it could result in price wars as Telmex, the current de facto significant market power player, would attempt to maintain its dominant market position. If there are further declines in the price of telecommunication services in Mexico, we will be forced to competitively react to those price declines, lowering our margins, or risk losing additional market share, which would adversely affect our operating results and financial condition.

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

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

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

• international long distance settlement rates;

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

• anti-competitive practices by our competitors;

• the growth of the telecommunications market in Mexico;

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

• churn rates and customer attrition.

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.

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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.

The termination of the AGN Agreement may impair our ability to meet our dollar-denominated obligations without incurring currency exchange risk.

As of December 31, 2011, all of our debt was dollar-denominated. In the past, we relied on the provision of AT&T Global Services under the AGN Agreement to meet our dollar-denominated obligations without significant currency exchange risk, since most of our revenues from those services were dollar-denominated. On October 1, 2011, however, we ceased to provide AT&T Global Services after the termination of the AGN Agreement. If we are unable to find alternative dollar-denominated sources of funding, we may be unable to meet our dollar-denominated debt and other obligations without incurring significant currency exchange risk. See also “—Risk Relating to Mexico—Currency devaluation may impair our ability to service debt” and “—Exchange controls may impair our ability to obtain U.S. dollars to make U.S. dollar-denominated payments.”

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

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

Risks Relating to the Mexican Regulatory Environment

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

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

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. The awarding of the spectrum segment could open the market to new technologies that may compete with some of the services we provide.

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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, 2.1% in 2010 and 1.1% in 2011. 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 2010 and 2011 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;

• 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 21 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.

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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. The weakening of the global economy, particularly the U.S. economy, could have a negative impact on the Mexican economy. 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 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 and the 13.1% currency depreciation of the Peso against the U.S. dollar that occurred in 2011 resulted in an exchange loss of Ps. 328.8 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, or effectively limited by the competitive nature of the market. Telmex, with a dominant market share, is able to set an effective cap on the prices at which we can sell our services. During most of the 1980s and during 1995, Mexico experienced periods of very high levels of inflation. Inflation has led to high interest rates, devaluations of the Peso and, during the 1980s, substantial government controls over exchange rates and prices. Any return to prior high rates of inflation could adversely affect our operating results and financial condition.

Political developments in Mexico may adversely affect us.

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

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

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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, IT, 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 IT, 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. 8,953.2 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, cloud computing services, as well as more basic data transport, internet access and transit and local telephony services. 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, 2010 and December 31, 2011, revenues from value added services grew by 10.4%. Our value added services accounted for 75.6% of our revenues in 2010 and 79.7% of our revenues in 2011. 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 segment, 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 small businesses and consumer customers and to other telecommunications carriers.

During 2011, we divided our business into three operating segments: (a) the enterprise segment, which offers communication services, and value added services such as IT, data and internet, managed through the Company’s network and infrastructure, for multinational companies, as well as international and national businesses and local government entities; (b) the small business and consumer services segment, which offers communication products and services to the consumer and small businesses market; and (c) the international segment, which offers communication services to operators with international incoming traffic terminating in Mexico.

The Small Business and Consumer Services operating segment and the International Services operating segment are not considered individual reportable segments due to the fact that they did not meet the thresholds for separate reporting under Mexican FRS B-5 “Financial Information by Segment” for any of the reported years. Pursuant to this standard, operating segments with total revenues equal to or less than 10% of the total entity revenues are not required to be reported separately and can be grouped with other operating segments that do not meet the 10% threshold, as long as the aggregate sum of these grouped operating segments does not exceed 25% of total entity revenues. As a result, the financial information for the Small Business and Consumer Services operating segment and the International Services operating segment is grouped together and presented as “other segments” in our financial statements.

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Our network consists of more than 8,300 route-kilometers of high-capacity fiber optic lines that connect metropolitan areas, more than 3,000 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 and local telephony in 28 cities, with coverage in the major urban centers in Mexico. Our network connects approximately 7,010 customer locations through dedicated Alestra-owned fiber-optic and wireless access circuits, and approximately 7,830 customer locations via dedicated access circuits leased from third-party carriers.

Prior to July 12, 2011, we were owned 51% by Alfa and 49% by AT&T Mexico, an indirect wholly-owned subsidiary of AT&T. After the consummation of the AT&T Transactions (as defined below), we are owned 100% by Alfa, S.A.B. de C.V. (“Alfa”) and its subsidiary Alfa Subsidiaria Servicios, S.A. de C.V. (“Alfa Subsidiaria”). 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, aluminum and auto components, processed food and telecommunications.

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. 4,683.6 million in 2009, Ps. 4,570.3 million in 2010 and Ps. 4,697.3 million in 2011. Under Mexican FRS, we had a net income of Ps. 291.5 million in 2009, a net income of Ps. 357.5 million in 2010 and a net loss of Ps. 85.56 million in 2011. Under U.S. GAAP, we had a net income of Ps. 647.5 million in 2009, a net income of Ps. 358.7 million in 2010 and a net loss of Ps. 87.1 million in 2011.

Recent Developments

On April 14, 2011, we entered into an Equity Purchase Agreement with AT&T, AT&T México and Alfa, pursuant to which Alfa agreed to acquire AT&T México’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 Global Network Services de México S. de R.L. de C.V. (“AGNS México”) and Alfa, pursuant to which AGNS México 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”).

On July 12, 2011, Alfa terminated the joint venture agreement entered into between AT&T México, Alfa and us, as amended on November 30, 2005, and the Equity Purchase Agreement entered into between AT&T, AT&T México, Alfa and us on April 14, 2011 and completed the acquisition of AT&T México’s 49% equity interest in us after receiving approval from regulatory authorities in Mexico. Following the closing of these transactions, which were originally announced in April 2011, Alfa is now the sole shareholder of Alestra.

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On July 12, 2011, we entered into an Equipment Lease Agreement with AGNS México pursuant to which we leased from AGNS México the Nodes required for the provision of AT&T Global Services in Mexico (the “Equipment Lease Agreement”) until December 31, 2012. On October 1, 2011, AT&T and Alestra agreed to an early termination of the Equipment Lease Agreement and the AT&T Global Network Cooperation Agreement (“the AGN Agreement”), the agreement which granted us the rights to use the “AT&T Global Services” brand name and to provide AT&T Global Services in Mexico. As of October 1, 2011, we ceased to provide AT&T Global Services in Mexico and we ceased to use AT&T’s intellectual property, including the AT&T brand name.

Revenues from AT&T Global Services derived from the AGN Agreement for the years ended December 31, 2008, 2009, 2010 and 2011are summarized in the table below.

	Year ended December 31,
	2008			2009			2010			2011
Total Revenues		Ps.  4,672.6			Ps.  4,683.6			Ps.  4,570.3			Ps.  4,697.33
Revenues from AT&T Global Services		701.1			916.7			927.3			707.1
% of total revenue		15	%		20	%		20	%		15	%

On October 1, 2011, we executed commercial agreements with AGNS México pursuant to which we will provide AGNS México certain telecommunication services in order to allow AGNS México to provide AT&T Global Services directly to their customers in Mexico. Revenues from these commercial agreements will partially offset the loss of revenues from AT&T Global Services, expecting to have a net effect as described below.

We estimate that the impact of the termination of the AGN Agreement for the year ended December 31, 2011, as shown in the table below, was Ps. 37.8 million in revenues and Ps. 39.7 million in gross profit. This represents the estimated revenues and gross profit we did not recognize from October 1, 2011 to December 31, 2011 in connection with the termination of the AGN Agreement, partially offset by the revenues and gross profit for the telecommunication services that we started providing to AGNS México in October 1, 2011, as part of the AT&T Transactions. Gross profit is defined as revenues minus cost of services (excluding depreciation and amortization).

The following table outlines the estimated impact of the termination of the AGN Agreement on our revenues and gross profits for the year ended December 31, 2011.

	Year ended December 31, 2011
	AGN Agreement		New Services provided to AGNS México		Net Impact
Revenues		Ps.  245.0		Ps.  207.2		Ps.  37.8
Gross Profit		205.4		165.7		39.7

After the closing of the AT&T Transactions, Alestra is now owned by Alfa and Alfa Subsidiaria. See Item 6, “Directors, Senior Management and Employees — A. Directors and Senior Management — Biographies of Senior Management.” Pursuant to our bylaws, Alfa has the right to name and remove any board member at any time.

Capital expenditures

During the past three years, we have concentrated our investments in the final leg of delivering connectivity (“last mile access”) for new customers and new services. Our capital expenditures for 2009, 2010 and 2011 amounted to Ps. 937.3 million, Ps. 788.9 million and Ps 899.4, respectively. All of our investments have been made in Mexico. We do not expect that single capital expenditures in 2012 will have a material impact on our operations or financial results. Our estimated total capital expenditures according to our 2012 annual budget is Ps. 1,204.4 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 2012. For a discussion of our capital expenditures and liquidity, see Item 5, “Operating and Financial Review and Prospects — B. Liquidity and capital resources.”

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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 to use 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. On October 1, 2011, in agreement with AT&T, we terminated the AGN Agreement, we ceased to provide AT&T Global Services and we ceased to use AT&T intellectual property, including the AT&T brand name.

Our operations

The majority of our revenue growth has come from Information Technology and Convergence services.

Information Technology and Convergence Services

Our Information Technology and Convergence Services are grouped into six 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 enterprise 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 provide 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 (Virtual Private network) services to facilitate highly reliable and secure connectivity for voice, data and video communications between their headquarters and the branch offices of our customers. VPN uses an optimized public data network with advanced technologies such as multi-protocol label switching (“MPLS”) to ensure quality, performance, security and integrity with regards to the information being carried over the network. 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. In 2010 we added advanced management capabilities in order to offer service level agreements (“SLA”) to our most critical customers.

• 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 and, in 2009, we introduced the first gigabit Ethernet connection between these 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.

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• 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, enabling users to efficiently communicate with one another in a more convenient manner with different methods of communication when traditional methods are not available.

• 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 for Vertical Markets. These services integrate 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. Our portfolio of vertical solutions includes applications such as Learning Management Systems and Virtual Classrooms for the education segment and Electronic Medical Record and Radiology Information Systems for the health care industry. 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 crucial factors 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 flexible platform also offers some other typical functions

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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.

• Security Infrastructure. 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.

• 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.

• Managed Security Services (“MSS”). From our Security Information Center (“SOC”), which is ISO 27000 certified and is part of our integral operational model termed Holistic Operation Center (“HOC”), we deliver a comprehensive set of security management capabilities such as event correlation, incident management, and infrastructure management.

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.

• Mission critical solutions. Using advanced technologies for computing, storage, backup and recovery among others, we provide a turnkey service to our customers in order to asses critical operations and design, implement and operate an optimal and integrated IT and telecommunication solution to reduce the risk of loss of operations due to unexpected events, failures or even programmed maintenance activities.

5. IT Cloud Services

In 2010, following global trends we started to develop our strategy and portfolio of IT cloud services or services which are served from the infrastructure installed at our data centers instead of deploying equipment or infrastructure within the customer offices .This strategy allows us to take advantage of economies of scale, give access to the most advance technologies to the small and medium enterprises (“SME”) market at competitive prices. Cloud services are sold for a monthly fee and Alestra takes care of investments and operational costs of the infrastructure, licensing of applications, operations and maintenance

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• ERP Cloud. This service allows our customers to have access to the SAP All-in-One enterprise resource planning software with savings of up to 50% in the total cost including licensing fees, installation and training. This program offers solutions in finance, logistics and human resources management

• Video Bridge. A public service that provides video conferences from our data center to subscribers in their own conference room, in either high definition or standard definition, to establish multiple sessions with other rooms subscribed to our service. We also provide conference rooms to those clients who require one.

• Enterprise C-Computing. This is a computer and on-demand storage solution supported by our data centers that allows flexible configurations from one to tens of virtual servers with different RAM capacities, operating systems and access. It also provides database licensing with auto provision facilities and even geographical dispersion through VPN lines.

Other services include advanced solutions to enable contact centers, a public videoconference bridge, content distribution and streaming, and applications for the health care, education and government markets. We also, offer virtual servers in alliance with the world leaders Cisco Systems Capital Corporation (“Cisco”), EMC Corporation (“EMC”) and VMWare, Inc. (“VMWare”).

6. Mobility

This is an integral private network communication solution that includes fixed telephone, mobile line and voice.

• Smart Mobility. This service consists of a virtual private network fixed-mobile which allows an employee to communicate from a fixed device provided by Alestra to a mobile device provided by Telefónica with an abbreviated number of four digits, reducing costs.

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.

• 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.

• 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.

Other data services include the Switched digital services, that offer switched digital circuits on demand to customers who require digital links for video conferencing, 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, an information transportation service based on packet switching technology, designed to increase the efficiency of data transportation among remote localities and to optimize the bandwidth used; and Alestra End to End, asynchronous transfer mode (“ATM”), that allows the transmission of various types of applications, such as voice, data and video, using the same means of transmission.

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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.

In 2011, we increased the number of customers in our portfolio, adding customers from several industries such as manufacturing, banking, consulting and the service industry. We obtained a new ISO27001 for our data centers. In order to comply with the new Mexican federal law for the protection of personal data (Ley Federal de Protección de Datos Personales) regarding the protection of private information we developed a new process to guarantee the privacy of the third-party information in our custody.

During 2012 we expect to continue working on the consolidation of our internal security system in the advanced risk management area and continue expanding the scope of our security. We expect to create an internal CERT (Computer Emergency Response Team) which will be capable of managing security incidents, disaster recovery processes, data leak prevention, etc.

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, 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.

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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 enterprise, small businesses and retail 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 reservation-less 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 the services offered varies depending on customer needs. Our business pricing strategy is based on voice, data and internet bundled offers. For the IT Cloud Services, our pricing strategy is designed to allow important savings to the customer in the Total Cost of Ownership (“TCO”) over a three-to-five year period. Advanced IT Services such as Mission Critical Solutions and Full IT are priced in bundled offers in conjunction with the telecom services offered from a single contact point. The commercial programs are tailored to offer value added business solutions through telecommunications and Information Technology integrated services according to the customers’ needs. For the small businesses and consumer services segment, there are several plans for our long distance service (including 800 numbers and dialing cards); for our Twingo service, which offers local service through internet (including VoIP); and for our internet services. All of our plans are tailored to the customers’ calling patterns, and are designed to capture and retain customers. We believe that our prices are competitive with, and our promotions similar to those of our major competitors, Telmex and 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.

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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 and Information Technology services in Mexico. We have adopted a sector marketing approach that distinguishes between enterprise customers, and small businesses and retail customers and further distinguishes within those sectors in terms of usage and type of customer.

Enterprise Customers. We have national market coverage through our presence in different cities: 198 for long distance service, 50 for VPN, 50 for data/Internet and 29 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 250 agents with more than 50 account executives, extending our presence to 33 cities. In addition to basic services, we offer a variety of advanced voice, data and convergent services to business customers 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.

• Medium-Sized Businesses. Medium-sized businesses include those that generate monthly billings of between Ps. 2,500 and Ps. 100,000. Medium-sized businesses represent the largest part of our enterprise 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 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 2012.

Small Businesses and Retail Customers. Our small business and consumer services segment marketing strategy is to target high-usage individuals and small businesses, 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 regarding calling plans are given to customers based on their classification.

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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 and information technology 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. During 2011 we continued positioning Alestra as the company of choice for Telecom and IT integrated solutions and, by the second half of 2011, we started to promote our positioning as the vendor of choice for IT Cloud Services offering the most complete portfolio in Mexico.

In November 2007, we built our Experience and Innovation Center (“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 and 2011, with 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.

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

E-commerce. In addition to our telemarketing efforts, 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 further distinguish ourselves from our main competitors, Telmex and Axtel, by offering superior customer service. In order to determine our position among our main competitors, we use a ranking system, the TRI*M index, which measures the strength of client retention, offering a unique measure of how customers perceive us. In 2011, our TRI*M index showed Alestra above our main competitors. Our business customer service center is available 24 hours a day, 7 days a week. We have also implemented the Information Technology Infrastructure Library (ITIL V3), an IT service management certification, for incident and problem management, in addition to our ISO 9001 certification.

Our business customer service center has more than 25,000 interactions per month. Interactions include product, general service and billing inquiries and incident 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%).

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 world-class level.

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 business customers are mainly paid through wire transfers and by cash deposits in banks.

Bills for small businesses and residential customers may be paid in more than 7,770 bank branches, and approximately 13,965 supermarkets, convenience stores and public telegraph offices, through wire transfers or through our website. We also give our customers the option to charge the monthly invoice balance to a credit card or checking account. 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 and legal proceedings.

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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. 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 8.0 million subscribers, from an estimated of 12.0 million total broadband access subscribers, at the end of 2011.

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 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 sub segments of competition: corporate enterprise, which is the most competitive sub segment; small and medium business sub segments, in which low capacity local access is critical to competition; and the consumer sub segment, in which wireless alternatives compete with copper or cable lines.

In 2008, cable operators entered the local service market. Their services are based on triple-play services (VoIP, Internet and Pay TV) and they aim to protect their current video customer base in the consumer sub segment. Major cable operators continue to consolidate, with Televisa (Cablevision and Cablemas) and Megacable, the largest competitors among cable operators, entering into an agreement to make a low cost triple-play offering (“YOO”) which may create a challenge for their competitors. 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. However, mobile competitors are planning to use Long Term Evolution (“LTE”) technology to increase mobile broadband capacity.

The following paragraphs contain information of our main competitors obtained from Pyramid Research’s report, 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.

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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 8.0 million subscribers at the end of 2011 while its internet dial-up customer base fell to 0.1 million subscribers. Telmex’s DSL service, as a proportion of total access lines, will increase from 30% at the end of 2011 to approximately 40% 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 2011, according to Pyramid Research, Telmex had a 71% 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.

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.

Telmex along with its subsidiaries (Triara.Com, S.A. de C.V. and Scitum S.A. de C.V.) provide the corporate market with a unified communications platform that integrates telecommunications and information technologies, incorporating capabilities such as cloud computing, software development, outsourcing, security, consulting and training.

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 2011. In the fourth quarter of 2006 Axtel acquired Avantel, S. de R.L. de C.V. (“Avantel”). This acquisition increased Axtel’s market position in the small and medium businesses segment and also enhanced its service portfolio in the large corporate segment with Avantel’s services portfolio. In 2007, Axtel launched its pre-WiMax service.

According to Select, as a result of its acquisition of Avantel at the end of third quarter of 2008, Axtel has increased its market share, however, it has declined during the 2009-2011 period.

As of December 31, 2011, Axtel recorded a total of 1.5 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 1.4 million RGUs in the same period last year, representing a growth of 9%.

In terms of total customers, Axtel recorded 757,000 as of December 31, 2011, a decrease of 1% when compared to the same period in 2010.

In 2010, Axtel developed Fiber to the Home (“FTTH”) technology, a new capability for offering high-speed broadband directly to the end user. As part of the FTTH project, in 2010 Axtel deployed a last-mile fiber-optic network in an area of approximately 250 square kilometers in the regions with the highest home and business broadband density in Guadalajara, Mexico City and Monterrey.

As of December 31, 2011 Axtel had a base of broadband subscribers totaling 436,000.

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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, 2011, Telefónica Móviles México had 20.5 million accesses, an increase of 1% when compared to the same period of 2010.

Televisa

As noted in its annual report, Grupo Televisa, S.A.B. (“Televisa”), is the largest media company in the Spanish-speaking world based on its market capitalization and a major participant in the international entertainment business. It has interests in television production and broadcasting, production of pay-television networks, international distribution of television programming, direct-to-home satellite services, cable television and telecommunication services, magazine publishing and distribution, radio production and broadcasting, professional sports and live entertainment, feature-film production and distribution, the operation of a horizontal internet portal, and gaming.

Through its subsidiaries Cablevisión, Cablemás, TVI, and Bestel, Televisa has become a relevant telecommunication player. Cablevisión’s triple-play services have fueled its growth in Mexico’s cable and telecom market. In 2007, Cablevisión launched its first triple-play package, effectively transforming Televisa from a pay-TV provider into a telecommunications company. Televisa continued to advance their cable and telecom strategy, which began in earnest with acquisitions of Bestel and stakes in TVI and Cablemás. In the same year Televisa took a majority stake in Bestel, a fiber-optic network that provides voice, data, and managed services to domestic and international carriers both in Mexico and the United States.

As of December 31, 2011, Televisa three cable investments had more than 2.2 million video subscribers, 650 thousand voice subscribers, and 1.1 thousand data subscribers. Since the Cablemás investment in 2006, the total number of RGUs has been growing at an average rate of 25% per year.

Regulatory framework and bodies

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

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

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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. In 2008, some of the authorities and obligations delegated to Cofetel were returned to the SCT through a change to the internal operating rules of the SCT. Recently, the Supreme Court conclusively held that the authority to resolve interconnection disagreements and impose tariffs lies with Cofetel and subsequently returned such authorities and obligations back to Cofetel. As of the date of this annual report, the SCT still retains 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.

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

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

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. These auctions could open the market to new concessionaires and technologies 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.

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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.

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.

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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, which 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, 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 Unefon, S.A. de C.V. (“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 small businesses and 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, the applicable productivity factor for 2011 has not yet been determined by Cofetel). 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.

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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 within 60 days Cofetel will resolve any interconnection disagreement between concessionaires. The interconnection agreements provide, however, that the terms and conditions of the agreements will remain in place until we and Telmex are able to reach a new agreement, which will apply retroactively to the first day of the year in which it is intended to be used.

During 2007, we reached a new agreement with Telmex for 2008, except for off-net charges, in which Cofetel, as 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 Telmex for 2009, including a U.S.$0.008 per minute tariff for the interconnection services. During 2010 and 2011, 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 for 2010 and Ps 0.03951 for 2011.

We have not yet reached an agreement with Telmex for 2012. 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, 2010 and 2011 resolutions. As of December 31, 2011, the amount under dispute was Ps. 569.5 million, out of which Ps. 376.8 million have been deposited in an escrow account with a Mexican trustee and is expressed in our consolidated financial statements as restricted cash. Ps. 78.1 million of the total provision has actually been paid to Telmex; and Ps. 114.6 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.

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.

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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. 1.09 per minute in 2009, and Ps. 1.00 per minute in 2010. For 2011, Cofetel issued a resolution establishing the interconnection rate of Ps 0.3912 per minute applicable to all the mobile carriers, however, some of them have appealed the resolution. On February 13, 2012, Telcel and Alestra agreed on the applicable interconnection rates for traffic terminating in Telcel’s mobile network under the “calling party pays” system, which are lower than the rates from prior periods, applicable for 2011, 2012, 2013 and 2014.

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 5.7% of our total minutes of traffic for 2010 and 6.8% for 2011.

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, 2011 and 2012 and therefore, have requested the intervention of Cofetel. Cofetel’s rulings were issued on August 27, 2008, February 2, 2009, April 14, 2010, May 27, 2011 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. Cofetel established a Ps 0.03951 and Ps 0.0453 (depending on the point or level of interconnection) per minute tariff for the interconnection services (off-net charges), applicable until December 31, 2011, instead of U.S.$0.008 per minute. We are complying with Cofetel’s resolutions, and although Telmex is challenging them, we and Cofetel are defending their legality. On September 30, 2009, we entered into a transaction with Telmex, amended on July 30, 2010, whereby we have established a trust in order to deposit the full amounts claimed by Telmex for 2008, 2009 and 2010 services (Ps. 0.75 per minute instead of U.S.$ 0.008 per minute tariff), until a final decision has been made by the court. As of December 31, 2011, the amount under dispute was Ps. 569.5 million, out of which Ps. 376.8 million have been deposited in an escrow account with a Mexican trustee and is expressed in our consolidated financial statements as restricted cash, Ps. 78.1 million of the total provision has actually been paid to Telmex and is being held by them as a deposit; and Ps. 114.6 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.

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Regarding terms and conditions for off-net charges and other issues for 2012, 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 2012. We are expecting to have a resolution in the first half of 2012. 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 did not reach an agreement with Telcel, Telefónica and Iusacell. Therefore we requested the intervention of Cofetel to resolve the terms and conditions not agreed upon, including the rates to be applied during 2011. During 2011, Cofetel issued a resolution establishing the interconnection rate of Ps 0.3912 per minute in 2011 applicable to all the mobile carriers; however, some of them have appealed the resolution. On February 13, 2012, Telcel and Alestra agreed on the applicable interconnection rates for traffic terminating in Telcel’s mobile network under the “calling party pays” system, which are lower than the rates for prior periods, applicable for 2011, 2012, 2013 and 2014.

We continue our efforts to reach final agreements with the remaining carriers on the tariffs applicable for the period between 2011 and 2014 in order to avoid legal actions that may generate uncertainty regarding our costs. We cannot assure you as to the outcome of these negotiations or the effect the failure to reach an agreement may have on our business, results of operations and financial conditions. If we cannot reach an agreement with the remaining carriers, we may request Cofetel’s intervention to resolve the terms and conditions disputed.

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

Prior to the AT&T Transactions, we were owned 51% by Alfa and 49% by AT&T. AT&T held its equity in us through its subsidiary AT&T Mexico. After the consummation of the AT&T Transactions, we are now owned 99.99% by Alfa and 0.01% by Alfa Subsidiaria. See “Item 4—Information on the Company—A. History and Development of the Company—Recent Developments.”

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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, 2011, Alfa’s total assets amounted to Ps. 138.6 billion, with revenues and operating income for 2011 of Ps. 182.8 billion and Ps. 14.8 billion, respectively.

On November 14, 2000, we restructured our capital without changing our existing ownership proportions prior to the AT&T Transactions 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 held 49% of the N stock and Alfa held the other 51%. Alfa continues to hold 100% of the Series A shares and AT&T Mexico held 100% of the B shares prior to the AT&T Transactions. Upon the consummation of the AT&T Transactions, Alfa owns 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 entered into a joint venture agreement with our equity holders, as amended on November 30, 2005 (the “Amended and Restated Joint Venture Agreement”) and 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 terminated the Amended and Restated Joint Venture Agreement. See Item 4, “Information on the Company—A. History and Development of the Company—Recent Developments.” Our 1,669 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 the date of this annual report, this subsidiary does not have any material operations.

D. Property, plants and equipment

Our network

Network components. As of December 31, 2011, we have invested more than Ps. 8,953.2 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 availability in 2011 was 100% for our backbone, 99.9992% for last-mile solutions based on fiber optic equipment and 99.9988% 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 international reliability, redundancy and restoration standards. The key components of the network, all of which are directly owned by us, include:

• Over 8,300 route kilometers of long-haul and intra-city network, mostly with Lucent True Wave fiber-optic underground inter-city facilities;

• Approximately 3,000 route kilometers of metropolitan area fiber-optic facilities;

• Two dense wave division multiplexing (“DWDM”) ultra-high-capacity optical transmission systems, capable of transmitting 40 gigabits 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;

• 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.

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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, Mexican federal and state public roads, railroads, municipalities, over power companies’ 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 118 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 8,300 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.

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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 world-class carriers through international SS7 signaling interfaces. Our main vendors include Tekelec and Eagle Equipment. 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 enterprise, small business and retail customers, based on softswitches, application servers and dedicated data infrastructure. Our main vendors include Sonus Networks, Inc. (“Sonus”), Broadsoft Inc. (“Broadsoft”), 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, 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 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.

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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 3,000 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 118 metropolitan miniPOPs in our metropolitan rings acting as hubs to connect enterprise customers and some corporate buildings to our network, and more are scheduled for construction every year as customer demand increases. In addition, we possess national and regional licenses for microwave wireless frequencies that allow us to connect many of our business customers directly to our network, reducing our dependence on Telmex’s local network.

Wireless facilities. We hold two national point-to-point concessions to provide wireless connectivity to business customers (one in the 15 GHz band and one in the 23 GHz band). We also hold three point-to-multipoint concessions in the 10 GHz band covering Mexico City and the states of Nuevo Leon, Coahuila, Tamaulipas, Nayarit, Jalisco, Colima, Michoacán, 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 57 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 21 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, 2009, 2010 and 2011 and our total stockholders’ equity as of December 31, 2010 and 2011.

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

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Overview

Our primary business consists of the operation of a public telecommunications network in Mexico offering IT, data, video, internet-related services, domestic and international long distance voice 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.

During 2011, we had two operating segments, which were also our reportable segments: (a) Long Distance and (b) Data, Internet and Local services. However, in 2011, as a result of changes in the telecommunications industry in Mexico, Alestra’s management determined that we needed to change our operating segments. Due to developments in the telecommunications industry, it was no longer appropriate to review and make decisions about resource allocation and performance assessments based on the two previous operating segments. Alestra’s management has determined that our business strategy in the future should be more focused on value added services, such as IT, data, internet and local. As a result, we are allocating more resources to this area. In addition, with changes in the telecommunications industry in Mexico, long distance revenues continue to decrease and this service is not seen as the primary area for future growth.

Further, during 2011, Alfa acquired AT&T México’s 49% equity interest in Alestra. This resulted in Alestra no longer offering AT&T Global Services as well as a shift in management’s strategic focus, which includes expanding and growing value added services.

As a result of the aforementioned business changes, in 2011, Alestra’s management evaluated the nature and financial effects of the business activities in which Alestra engages and the new economic environment in which operates, and it concluded that the company has three operating segments: (a) Enterprise Segment, (b) Small Business and Consumer Services Segment and, (c) International Segment.

Our new three operating segments focus on the following: (a) the enterprise segment, which offers communication services, and value added services such as IT, data and internet, managed through the Company’s network and infrastructure, for multinational companies, as well as international and national businesses and local government entities; (b) the small business and consumer services segment, which offers communication products and services to the retail and small businesses market; and (c) the international segment, which offers communication services to operators with international incoming traffic terminating in Mexico.

The Small Business and Consumer Services operating segment and the International Services operating segment are not considered individual reportable segments due to the fact that they did not meet the thresholds for separate reporting under Mexican FRS B-5 “Financial Information by Segment” for any of the reported years. Pursuant to this standard, operating segments with total revenues equal to or less than 10% of the total entity revenues are not required to be reported separately and can be grouped with other operating segments that do not meet the 10% threshold, as long as the aggregate sum of these grouped operating segments does not exceed 25% of total entity revenues. As a result, the financial information of the Small Business and Consumer Services operating segment and the International Services operating segment is grouped together and presented as “other segments”.

In addition to the three operating segments focused on the client, the remaining operations of the Company are included within the category of ‘Non-Allocated expenses” to be integrated to the consolidated results of the Company. The “Non-Allocated Expenses” category includes expenses associated with the centralized functions of the Company including the acquisition and supply chain, administration and management of the entity.

These operating segments are managed separately since the products and services offered and the markets they are focused on are different. Resources are assigned to the operating segments considering the strategies defined by the Company’s management. The transactions between the operating segments are carried out at market values.

Performance of the operating segments is measured based on the Business Unit Contribution (BUC), defined as the operating income of each operating segment, including revenues, costs and expenses direct from the segment.

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 IT and 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

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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 IT, 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 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 and operations:

	2009				2010				2011
Enterprise Segment		Ps. 3,840.1	81.9	%		Ps. 4,068.9	89.0	%		Ps. 4,421.2	94.1	%
Other Segments		843.6	18.1	%		501.4	11.0	%		276.1	5.9	%
Total		Ps. 4,683.7	100	%		Ps. 4,570.3	100	%		Ps. 4,697.3	100	%
	2009				2010				2011
IT, data, internet and local services		Ps. 3,263.0	69.7	%		Ps. 3,456.0	75.6	%		Ps. 3,744.2	79.7	%
Long distance services		1,420.7	30.3	%		1,114.3	24.4	%		953.1	20.3	%
Total		Ps. 4,683.7	100	%		Ps. 4,570.3	100	%		Ps. 4,697.3	100	%
Minutes of use for the period :
Long distance services		2,125	100	%		1,679	100	%		1,397	100	%

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
2011		3.8	%		4.3	%		3.9	%	$	149.2 billion

Source: Banco de México.

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

Impact of foreign currency fluctuations

Our principal foreign currency fluctuation risk involves changes in the value of the Peso relative to the U.S. dollar. As of December 31, 2011, the amount of our notes, bank loans, notes payable and capital leases denominated in U.S. dollars was Ps. 3,019.4 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 2011 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.$1.00 and Ps. 12.611 per U.S.$1.00, respectively. The foreign exchange forward contracts, which matured on February 2011 and August 2011 had a negative effect and resulted in a loss of Ps. 7.8 million. 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. 0.9 million in 2011 and profit of Ps. 1.2 million in 2010.

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 2011, our income tax was 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, 2011.

On December 7, 2009, a decree was published, which modified, added and revoked several provisions of the Mexican Income Tax Law. This decree establishes, among others, that the income tax rate will be 30% for the fiscal years 2010 to 2012, 29% for 2013 and 28% from 2014 onwards. At December 31, 2011 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.

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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, 2011 compared to Fiscal Year ended December 31, 2010

Revenues

Total revenues increased 2.8%, or Ps. 127.0 million, to Ps. 4,697.3 million in 2011 from Ps. 4,570.3 million in 2010, primarily due to the increase of our enterprise segment revenues. Our enterprise segment revenues in 2011 represented 94.1 % of our total revenues.

Enterprise Segment. Revenues increased 8.7%, to Ps. 4,421.2 million in 2011 from Ps. 4,068.9 million in 2010. Such increase resulted primarily from an increase in our IT, data, internet and local services.

Other Segments. Revenues derived from our other segments decreased 44.9%, to Ps. 276.2 million in 2011 from Ps. 501.4 million in 2010. The decrease in other segments revenues was primarily due to lower long distance traffic as a result of our higher interconnection costs as compared to those of our competitors.

Revenues by Service

Year ended December 31, 2010

Year ended December 31, 2011

Enterprise Segment

Other Segments

Total

Enterprise Segment

Other Segments

Total

Long Distance

Ps.    786.9

Ps. 327.4

Ps. 1,114.3

Ps.    831.8

Ps. 121.3

Ps.    953.1

IT, data, Internet and Local

3,282.0

174.0

3,456.0

3,589.3

154.9

3,744.2

Total

Ps. 4,068.9

Ps. 501.4

Ps. 4,570.3

Ps. 4,421.2

Ps. 276.2

Ps. 4,697.3

IT, data, internet and local service revenues increased 8.3%, to Ps. 3,744.2 million in 2011 from Ps. 3,456.0 million in 2010. Such increase resulted primarily from an increase in our Managed services, Hosting, Ethernet, Internet dedicated & Local service revenues, as we continued to focus our sales efforts on these services. Our IT, data, internet and local services continued to increase its share in our revenue portfolio, and represented 79.7% of our total revenues in 2011, compared to 75.6% in 2010.

Revenues derived from our long distance services decreased 14.5%, to Ps. 953.1 million in 2011 from Ps. 1,114.3 million in 2010. The decrease in long distance services revenues was primarily due to lower traffic as a result of our higher interconnection costs as compared to those of our competitors. As a percentage of total revenues, long distance revenues represented 20.3% of our total revenues in 2011, compared to 24.4% of our total revenues in 2010.

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 1.5% to Ps. 1,492.7 million in 2011 from Ps. 1,515.5 million in 2010. This decrease is explained by a 20.4% decrease in long distance services costs, partially offset by a13.8% increase in our IT, data, internet and local services costs. Our long distance services costs decreased to Ps. 540.8 million in 2011 from Ps. 679.1 million in 2010, primarily due to lower international incoming long distance volume of traffic. Our IT, data, internet and local services costs increased to Ps. 951.9 million in 2011 from Ps. 836.4 million in 2010, due to the growth in volume of these services.

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Enterprise Segment. The costs in this segment increased 13.2% to Ps. 1,391.0 million in 2011 from Ps. 1,228.9 million in 2010. This increase was primarily due to an increase in our IT, data, internet and local services costs.

Other Segments. Cost of other segments decreased 64.5% to Ps. 101.7 million in 2011 from Ps. 286.6 million in 2010. This decrease was primarily due to a decrease in our long distance services costs.

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 2011 increased 4.9% to Ps. 3,204.6 million from Ps. 3,054.8 million in 2010. Our gross profit increased primarily due to higher IT, data, internet and local services gross profit, which helped to offset the decrease in the long distance services gross profit. Our IT, data, internet and local services gross profit increased 6.6%, or Ps. 172.7 million, to Ps. 2,792.3 million in 2011 from Ps. 2,619.6 million in 2010. Our long distance gross profit decreased 5.3% to Ps. 412.3 million in 2011 from Ps. 435.2 million in 2010, as a result of lower long distance services revenues partially offset by a reduction in long distance services costs.

Enterprise Segment. Our enterprise segment gross profit increased 6.7%, or Ps. 190.1 million, to Ps. 3,030.1 million in 2011 from Ps. 2,840.0 million in 2010. This increase in gross profit was primarily due to the growth of our IT, data, internet and local service revenues.

Other Segments. Our other segments gross profit decreased 18.8% to Ps. 174.5 million in 2011 from Ps. 214.9 million in 2010. This decrease was primarily due to a decrease in long distance revenues.

The volume and mix of AT&T’s purchases during the year ended December 31, 2011 resulted in a increase of the Company’s gross profits by Ps. 26.2 million compared to the year ended December 31, 2010. Gross profit for the year ended December 31, 2011 was positively affected as the cost of services decreased further than AT&T’s affiliates’ purchases including: (a) a Ps. 3.3 million decrease in revenues from purchases of data services by AT&T’s affiliates pursuant to the Amended and Restated Joint Venture Agreement in the year ended December 31, 2011 compared to the year ended December 31, 2010; (b) a Ps. 40.4 million decrease in revenues from long distance services pursuant to the Amended and Restated Joint Venture Agreement in the year ended December 31, 2011 compared to the year ended December 31, 2010; and by (c) a Ps. 13.0 million decrease in revenues from AT&T Global Services pursuant to the Amended and Restated Joint Venture Agreement in the year ended December 31, 2011 compared to the year ended December 31, 2010.

A reconciliation of our operating income to gross profit is provided below as of December 31, 2010 and 2011.

	Year ended December 31,
	2010			2011
Gross profit		Ps. 3,054.8			Ps. 3,204.6
Administration, selling and other operating expenses		(1,577.6	)		(1,625.8	)
Depreciation and amortization		(866.7	)		(1,009.2	)
Operating income		Ps.    610.5			Ps.    569.6

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Administration, selling and other operating expenses

Administration, selling and other operating expenses increased 3.1%, or Ps. 48.2 million, to Ps. 1,625.8 million in 2011 from Ps. 1,577.6 million in 2010, primarily as a result of higher personnel expenses in 2011. As a percentage of total revenues, administration, selling and other operative expenses represented 34.6% in 2011, compared to 34.5% in 2010.

Depreciation and amortization

Depreciation and amortization increased 16.4%, or Ps. 142.5 million, to Ps. 1,009.2 million in 2011 from Ps. 866.7 million in 2010. This increase is attributable to an adjustment in the useful life of several assets resulting in an additional depreciation of U.S. $13 million.

Operating income

Operating income decreased 8.2%, or Ps. 13.9 million, to Ps. 596.6 million in 2011 from Ps. 610.5 million in 2010. Despite the 4.9% growth in gross profit, the decrease in operating income is mainly explained by higher operating expenses and depreciation when compared to 2010.

Comprehensive financial result

Our comprehensive financial loss in 2011 was Ps. 679.6 million, compared to a loss of Ps. 192.8 million in 2010. The following table sets forth our comprehensive financial results for the periods under review:

	Year ended December 31,
	2010		2011
Interest expense		Ps. (375.9)		Ps. (352.8)
Interest income		10.9		9.0
Exchange gain, net		171.0		(328.8)
Effect of derivative financial instruments		(1.2)		(7.0)
Comprehensive financial result, net		Ps. (192.8)		Ps. (679.6)

Our interest expense totaled Ps. 352.8 million in 2011 compared to Ps. 375.9 million in 2010. The decrease in the interest expense was due to a lower average total debt in 2011 when compared with 2010. Interest income decreased to Ps. 9.0 million in 2011 from Ps. 10.9 million in 2010, primarily due to lower interest rates during 2011 than in 2010.

We recorded a foreign exchange loss of Ps. 328.8 million in 2011 compared to a foreign exchange gain of Ps. 171.0 million in 2010. 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, 2011. We recorded a foreign exchange loss primarily due to a 13.1% depreciation of the value of the Peso against the U.S. dollar during 2011.

Income Tax 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 benefit of Ps. 78.9 million in 2011 compared to a tax expense of Ps. 33.7 million in 2010.

In 2011, we amortized tax loss carry-forwards previously reserved, against our current income tax, amounting to Ps. 14.8 millions.

Net Income (loss)

As a result of the above factors, in 2011, we recorded a net loss of Ps. 85.6 million compared to a net income of Ps. 357.5 million in 2010.

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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. The increase in our enterprise segment revenues was not enough to offset the decrease in revenues from our other segments. Our enterprise segment revenues represented 89.0% of our total revenues in 2010.

Enterprise Segment. Revenues increased 6.0%, to Ps. 4,068.9 million in 2010 from Ps. 3,840.1 million in 2009. Such increase resulted primarily from an increase in our IT, data, internet and local services revenues.

Other Segments. Revenues derived from our other segments decreased 40.6%, to Ps. 501.4 million in 2010 from Ps. 843.5 million in 2009. The decrease in long distance services revenues was primarily due to lower traffic as a result of our higher interconnection costs as compared to those of our competitors.

Revenues by Services

	Year ended December 31, 2009						Year ended December 31, 2010
	Enterprise Segment		Other Segments		Total		Enterprise Segment		Other Segments		Total
Long Distance	Ps.	775.2	Ps.	645.5	Ps.	1,420.0	Ps.	786.9	Ps.	327.4	Ps.	1,114.3
Data, Internet and Local		3,065.6		197.4		3,263.0		3,282.0		174.0		3,456.0
Total	Ps.	3,840.7	Ps.	843.0	Ps.	4,683.7	Ps.	4,068.9	Ps.	501.4	Ps.	4,570.3

IT, 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 we continued to focus our sales efforts on these services. Our IT, 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.

Revenues derived from our long distance services decreased 21.6%, to Ps. 1,114.3 million in 2010 from Ps. 1,420.7 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.

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.

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Cost of services decreased 12.7% to Ps. 1,515.5 million in 2010 from Ps. 1,736.7 million in 2009. The decrease is explained by a 28.9% decrease in long distance services costs, partially offset by a 7.1% increase in our IT, data, internet and local services costs. Our long distance services costs decreased 28.9% to Ps. 679.1 million in 2010 from Ps. 955.6 million in 2009, primarily due to a decrease in domestic and international long distance volume of traffic. Our cost of IT, data, internet and local services increased 7.1% to Ps. 836.4 million in 2010 from Ps. 781.1 million in 2009, primarily due to an increase in internet-related services revenues, such as VPN, local and managed services.

Enterprise Segment. The costs in this segment increased 6.8% to Ps. 1,228.9 million in 2010 from Ps. 1,151.0 million in 2009. This increase was primarily due to an increase in our IT, data, internet and local service revenues.

Other Segments. Cost of other segmets decreased 51.1% to Ps. 286.6 million in 2010 from Ps. 585.7 million in 2009. This decrease in cost of other segments was primarily due to a decrease in international long distance volume of traffic and its corresponding cost.

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 IT, data, internet and local services gross profit, which helped to offset the decrease in the long distance services gross profit. Our IT, 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. Our long distance gross profit decreased 6.4% to Ps. 435.2 million in 2010 from Ps. 465.0 million in 2009.

Enterprise Segment. Our gross profit increased 5.6%, or Ps. 150.8 million, to Ps. 2,840.0 million in 2010 from Ps. 2,689.2 million in 2009. This increase in gross profit was primarily due to the growth of our IT, data, internet and local service revenues.

Other Segments. Our other segments gross profit decreased 16.7% to Ps. 214.9 million in 2010 from Ps. 257.8 million in 2009. This decrease was primarily due to a decrease in long distance revenues.

The volume and mix of AT&T’s purchases during the year ended December 31, 2010 resulted in a decrease of the Company’s gross profits by Ps. 45.3 million compared to the year ended December 31, 2009. Gross profit for the year ended December 31, 2010 was affected by AT&T’s affiliates’ purchases in part due to: (a) a Ps. 47.2 million decrease in revenues from purchases of data services by AT&T’s affiliates pursuant to the Amended and Restated Joint Venture Agreement in the year ended December 31, 2010 compared to the year ended December 31, 2009; (b) a Ps. 84.4 million decrease in revenues from long distance services pursuant to the Amended and Restated Joint Venture Agreement in the year ended December 31, 2010 compared to the year ended December 31, 2009; partially offset by (c) a Ps. 10.6 million increase in revenues from AT&T Global Services pursuant to the Amended and Restated Joint Venture Agreement in the year ended December 31, 2010 compared to the year ended December 31, 2009.

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

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	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.$1.00. 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 Tax 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.

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 assumed 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 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.

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.

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, 2009, 2010 and 2011, our allowance for doubtful accounts was Ps. 62.5 million, Ps. 39.4 million and Ps. 49.5 million, respectively. We consider this reserve sufficient to cover the probable loss of accounts receivables; however, we cannot assure you that we will not be required to increase the amount of this reserve. A 10% change in the amounts estimated to be uncollectible would result in a change in uncollectible expense of approximately Ps. 4.9 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, 2009, 2010, and 2011. 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 2011 we recorded a valuation allowance of Ps. 25.7 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, 2011.

New adopted standards under Mexican FRS

As of January 1, 2011, new Mexican FRS and their interpretarions 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-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 C-5 “Advanced payments”. Establishes, among other things, the particular standards of valuation, presentation and disclosure related to advanced payments line item. 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.

Mexican FRS C-6 “Property, plant and equipment”. 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

47

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” remained effective up to December 31, 2010.

Interpretation to Mexican FRS 19 “Change arising from the adoption of International Financial Reporting Standards (IFRS)”. It requires the disclosure of the Company’s reasons to adopt such IFRS, the estimated date and estimated amount of any significant effect this adoption would have on the Company’s financial statements. (see Note 3).

In addition, the Company applied the improvements to Mexican FRS done in 2011 to the following:

Mexican FRS C-13 “Related parties”. Extends the definition of close relative as a Company’s related party.

Bulletin D-5 “Leasing”. It establishes, among other aspects: a) an implication and clarification of certain concepts to consider in the determination of the discount rate to be used by the lessor and lessee in the finance leasing; b) additional disclosures in finance leasing for lessor and lessee, and c) criteria for the determination of the gain or loss by sale and lease back.

New financial reporting standards

As of January 1, 2012 the Company adopted IFRS for the preparation of their consolidated financial statements. Below is a list of the new and amended standards that have been issued and are effective for periods starting on or after January 1, 2012, as well as those that are effective for subsequent periods. Management is in the process of evaluating the potential impact of these pronouncements on its financial information.

Amendment to IAS 12, Income taxes, on deferred tax- This amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, ‘Income taxes - recovery of revalued non-depreciable assets’, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. This amendment is effective for periods beginning on or after 1 January 2012.

Amendment to IAS 1, Financial statement presentation, regarding other comprehensive income- The main change resulting from these amendments is a requirement for entities to group items presented in ‘other comprehensive income’ (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. This amendment is effective for periods beginning on or after 1 July 2012 (retrospective application required), with early adoption permitted.

Amendment to IAS 19, Employee benefits- These amendments eliminate the corridor approach and requires the calculation of finance costs on a net funding basis. This amendment is effective for periods beginning on or after 1 January 2013.

IFRS 9, Financial instruments- IFRS 9 is the first standard issued as part of a wider project to replace IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. This standard is effective for periods beginning on or after 1 January 2015, with early adoption permitted.

IFRS 10, Consolidated financial statements- The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. It defines the principle of control, establishes controls as the basis for consolidation. It sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee, and sets out the accounting requirements for the preparation of consolidated financial statements. It replaces IAS 27 and SIC 12 and is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

IFRS 12, Disclosures of interests in other entities- IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. It is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

IFRS 13, Fair value measurement- IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. It is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

IAS 27 (revised 2011), Separate financial statements- IAS 27 (revised 2011) includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. It is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

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 2012 will have a material impact on our operations or financial results. We may incur additional indebtedness in 2012 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 2012.

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, 2011 and 2010 we had Ps. 488.1 million and Ps. 486.2 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 U.S.$26.6 million to U.S.$216 million in 2011 from U.S.$242.6 million in 2010. In Pesos, total debt increased by Ps. 21.1 million, to Ps. 3,019.4 million in 2011 from Ps. 2,998.3 million in 2010 as a result of the 13.1% depreciation of the Peso against the U.S. Dollar.

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. These investments are funded with excess cash from operations. As of December 31, 2011, we had cash of Ps. 16.6 million and temporary investments of Ps. 471.5 million, of which Ps. 336.6 million were Peso-denominated and Ps. 134.9 million were U.S. dollar-denominated all invested in short-term deposits, money market accounts and investments with original maturities of one to three days. In our opinion, our cash and cash equivalents balance is sufficient for our requirements over the next twelve months.

As of December 31, 2011 and December 31, 2010 our ratio of current assets to current liabilities was 1.03 times, 0.97 times, respectively. Our ratio of current assets to current liabilities as of December 31, 2010 and 2011 includes the corresponding amortization of our vendor loan facilities.

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	As of December  31, 2010			As of December  31, 2011
	(in millions of nominal Pesos, excluding ratios)
Unrestricted cash balance		Ps.                486.2			Ps.                488.1
Current ratios (times)		0.97	x		1.03	x

Net debt as of December 31, 2011 decreased by U.S.$20.9 million to U.S.$161.4 million from U.S.$ 182.3 million as of December 31, 2010. The reduction of net debt was primarily due to debt reduction payments from internally-generated funds. In 2010 debt payment included:

• vendor facilities principal amortization in the amount of U.S.$26.6 million (including U.S.$18.6 million pre-payments).

On December 23, 2011, we signed a committed revolving facility and a term loan agreement with Comerica Bank for U.S.$ 20.0 million and U.S.$ 10 million, respectively (together, the “Comerica Bank credit facility”). The committed revolving facility bears interest at a three-month adjusted LIBOR rate plus 3.00%., payable on a quarterly basis. The term loan principal is payable in four equal installments in September 2013, December 2013, March 2014 and June 2014. The revolving facility is due on June 2014.

Capital expenditures during 2011 amounted to Ps. 899.4 million, Ps. 110.5 million higher than the Ps. 788.9 million invested in 2010. Our capital expenditure program includes investments to expand our network, develop new services to customers, increase data center capacity and also to provide last mile and direct access to connect customers to our network 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 2011 and 2010 are explained as follows:

Operations. Our operating activities net cash flows were Ps. 1,501.0 million and Ps. 1,434.0 million in 2011 and 2010, respectively. This increase was mainly due to (a) an increase in gross profit in 2011; (b) an increase in accounts payable resulting from the fixed and mobile carriers payments we held in connection with several disputes concerning interconnection rates.

Investing. Our investing activities net cash outflows were Ps. 631.6 million and Ps. 739.9 million in 2011 and 2010, respectively. This decrease is primarily a result of the sale of telecommunication nodes to AGNS México, which offset our total capital expenditures in 2011 that originally amounted to Ps. 899.4.

Financing. Our financing activities net cash flows were Ps. 845.0 million and 465.5 million in 2011 and 2010, respectively. These financing activities primarily include:

• the payment of interest corresponding to our then outstanding debt in an amount of Ps. 305.5 million and Ps. 384.5 million in 2011 and 2010, respectively;

• the payment of Ps. 318.0 million of the corresponding debt amortization and prepayment of our vendor facilities in 2011 and the corresponding debt amortization of our vendor facilities and bank loans of Ps. 344.5 million in 2010;

• dividends payment in an amount of Ps.221.5 million in 2011.

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

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.

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

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• 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.

Material Commitments and Funding

The table below describes by year of payment due current material commitments as of December 31, 2011.

	As of and for the year ended December 31,
	2012		2013		2014		2015		2016
	(in millions of Pesos) (1)
Vendor financing (2)		57.1		27.9		2.0		—		—
Principal		54.0		27.2		2.0		—		—
Interest		3.2		0.7		0.0		—		—
Principal payments on long-term debt (3)		—		69.8		2,860.0		—		—
Interest payments (4)		332.8		332.5		332.8		—		—
Operating leases		126.4		125.0		108.8		84.8		44.9
Capital expenditures (5)		1,204.4		—		—		—		—
Total		1,777.9		583.1		3305.6		84.8		44.9

(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 on December 31, 2011.

(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 2012.

Our vendor financing commitments include a loan facility with HP that matures on February 28, 2014, a loan facility with Huawei which expires on December 17, 2012, and a loan facility with Cisco that matures on July 6, 2013.

Our principal long term debt commitments for 2012 to 2016 include the principal amortization of 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 payable in four equal installments in September 2013, December 2013, March 2014 and June 2014. Our interest commitments for 2012 to 2016 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 2011, 2010 and 2009 amounted to Ps. 899.4 million, Ps. 788.9 million and Ps. 937.3 million, respectively. Our estimated payment according to our 2011 annual budget is Ps. 1,204.4 million.

We believe that the funds to meet our material commitments in 2012 will be provided by internally-generated funds from our operations.

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.

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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:

• 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, 2011, 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, 2011, December 31, 2010 and December 31, 2009, our total debt amounted to U.S.$216.0 million, U.S.$242.6 million and U.S.$245.7 million, respectively. Total debt as of December 31, 2011 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.$6.0 million.

As of December 31, 2011 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 December 23, 2011, we signed a committed revolving facility and a term loan agreement with Comerica Bank for U.S.$ 20.0 million and U.S.$ 10 million, respectively. The committed revolving facility and the term loan bear interest at a three-month adjusted LIBOR rate plus 3.00%., payable on a quarterly basis. The term loan principal is payable in four equal installments in September 2013, December 2013, March 2014 and June 2014. The revolving facility is due on June 2014.

As of December 31, 2011 we had a vendor facility with an outstanding balance of U.S.$ 3.1 million with Cisco, which pays principal and interest on a monthly basis. This loan matures on July 6, 2013.

As of December 31, 2011 we had a vendor facility with an outstanding balance of U.S.$ 1.7 million with Hewlett-Packard Operations México S. de R.L. de C.V. (“HP”), which pays principal and interest on a monthly basis. This loan matures on February 28, 2014.

As of December 31, 2011 we had a vendor facility with an outstanding balance of U.S.$ 1.2 million with Huawei Technologies de México, S.A de C.V, 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

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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 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). Although the outcome of the appeal is still pending, we have recognized provisions for such contingencies in accordance with MFRS and Servicios Alestra does not believe that a decision adverse to it would have a material adverse effect on its business, financial condition or results of operation.

Legal disputes regarding interconnection services rates

We are involved in a dispute with Telmex regarding interconnection services rates applicable for 2008, 2009, 2010 and 2011 and requested the intervention of Cofetel regarding the interconnection rates applicable for 2012.

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, 2011, the trust balance was Ps. 408.7 million, including Ps. 376.8 million representing the amount in dispute and Ps. 31.9 million representing financial products held in escrow, 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 Item 3, “Key Information – D. Risk Factors – Risks Relating to Us – Telmex dominates the telecommunications market in Mexico, and we depend on Telmex for interconnection.”

We are also in disputes with mobile companies associated with Telefónica regarding mobile interconnection services rates for 2011. As of the date of this annual report, management continues its negotiations with Telmex and Telefónica. Although the outcome of the aforementioned proceedings is uncertain, we have recognized provisions for such contingencies in accordance with MFRS and we do not believe that a decision adverse to Alestra would have a material adverse effect on its business, financial condition or results of operation.

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 — B. Business overview — Regulatory framework and bodies.”

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, 2011 we do not have any outstanding off-balance sheet arrangements.

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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)		3,924		333		3,591		—		—
Principal		2,930		—		2,930		—		—
Interest		994		333		661		—		—
Vendor and capital lease financing (3)		87		57		30		—		—
Operating lease obligation		611		126		234		130		122
Purchase obligations (4)		110		110		—		—		—
Employee benefits		111		6		18		12		76
Total		8,767		965		7,464		142		198

(1) U.S. denominated obligations are translated to Mexican Pesos based on an exchange rate of Ps. 13.9510 per U.S. dollar, the noon buying rate as provided by The Federal Reserve on December 30, 2011.

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

(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 (59) 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, a Master’s of Science Degree in Operations Research from the University of Southern California and a Ph.D. in Management from the Universidad Autónoma de Nuevo León.

Bernardo García (53) 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 (55) 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 (59) , is our Vice President of Operations and IT. He is responsible for Technology Planning, Engineering, Network Operations, Customer Service, as well as the Systems development and Operations of the Company. Also, as a part of his responsibilities, he manages the leadership of the innovation program of Alestra. Alejandro has 35 years of experience with the Alfa Group companies. Alejandro was elected in 1994 to join the team of executives from Alfa and AT&T who developed the original project of what is now Alestra. Since the establishment of Alestra in January 1996 to date he has been part of the top management team and has been in

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charge of several functions of the company. Alejandro has a bachelor degree in Engineering and Business Administration from the Universidad Autónoma de Nuevo Leon, has a master’s degree in Science from the University of Utah and extended the program AD2 Top Management in Administration by the IPADE.

Ricardo Hinojosa (45) 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 of 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 from the University of California in Los Angeles.

Biographies of Directors

Armando Garza Sada (54) 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 (43) 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.

Alejandro Elizondo Barragán (59) 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 of 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 (42) 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 (56) 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.

Rolando Zubirán Shetler (59) 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, a Master’s of Science Degree in Operations Research from the University of Southern California and a Ph.D. in Management from the Universidad Autónoma de Nuevo León.

Paulino J. Rodríguez Mendivil (60) is the Senior Vice President of Human Capital of Alfa. He joined this organization in 2004. Prior to his current position he served in various positions at Sigma Alimentos, including Vice President of Human Resources, Vice President of Key Sales Accounts and Vice President of Institutional Sales. He was President of Spirax Sarco and Prosider companies. Additionally, he is a board member of the Blanqueo Museum, of the Industrial Engineering College and of IRPAC-CAINTRA (Nuevo Leon State Manufacturing

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Industry Chamber). He studied Industrial and Systems Engineering and obtained a Masters in Energy Technology from the University of the Basque Country, Spain. He also graduated from the School of Naval Academy officers in Spain and attended several graduate courses from the University of California at Berkeley, IPADE and Tecnológico de Monterrey.

B. Compensation

For the year ended December 31, 2011, we paid aggregate annual compensation of approximately Ps. 45.9 million to our executive officers as a group for their services in all capacities. As of December 31, 2011, we have accrued pension benefits and similar liabilities of Ps. 111.1 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. 34.3 million in 2011 and Ps. 33.3 million in 2010.

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

C. Board Practices

Pursuant to our bylaws, the number of directors on our board of directors is fixed at seven. Unless otherwise provided in our by-laws, any vote by the board of directors requires a majority for approval. For our directors and senior management, there is no expiration date for their term of office, such directors shall continue until a new director is appointed. 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”. Pursuant to our bylaws, Alfa has the right to name and remove any board member at any time.

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, 2011, we employed 1,669 people through our sole subsidiary, Servicios Alestra. The chart below shows the distribution of our employees for the years 2009, 2010 and 2011:

	Number of Employees as of December 31,
Direction	2009		2010		2011
Officers and Staff		9		9		9
Enterprise Convergence Services		196		98		105
Administration		204		195		197
Human Resources		38		40		41
Engineering and Operations		509		665		693
Enterprise Business Unit		249		239		239
Small Businesses and Consumer Services Unit		348		307		230
Systems		107		110		122
Strategic Planning		10		10		9
Legal and Government Relations		29		23		24
Total		1,699		1,696		1669

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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 43 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 100% by Alfa and Alfa Subsidiaria. 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, aluminum and auto components, processed food and telecommunications. As of December 31, 2011, Alfa’s total assets amounted to Ps. 138.6 billion, with revenues and operating income for 2011 of Ps. 182.7 billion and Ps. 14.8 billion, respectively.

On November 14, 2000, we restructured our capital without changing our existing ownership proportions prior to the AT&T Transactions 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 held 49% of the N stock and Alfa held the other 51%. Alfa continues to hold 100% of the Series A shares and AT&T Mexico held 100% of the B shares prior to the AT&T Transactions. Upon the consummation of the AT&T Transactions, Alfa owns 100% of our equity interests. See Item 4, “Information on the Company—A. History and Development of the Company—Recent Developments.”

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 and Alfa Subsidiaria, both Mexican nationals, hold 100% of our voting equity. We had previously entered into an Amended and Restated Joint Venture Agreement with our equity holders, and 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 terminated 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.

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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 dividend distribution policy, subject to the vote of our shareholders and to applicable provisions of our 11.750% senior notes due 2014 (or any of our other indebtedness restricting our ability to pay dividends),provides that our shareholders may agree to declare distributions as long as the aggregate amount of the proposed payment and all other dividend payments made subsequently to the senior notes due 2014 issue date does not exceed fifty percent of our cumulative after tax net income, determined in accordance with Mexican FRS, and all requirements of Mexican law for the declaration and payment thereof have been satisfied.

On July 8, 2011 we paid a U.S.$10 million dividend, the pending installment of a U.S.$12 million dividend declared in a shareholder meeting held on December 21, 2009. In addition, in a general ordinary meeting held on July 19, 2011, the shareholders declared and we paid a dividend of U.S.$9 million.

B. Significant changes

Not applicable.

Item 9. The Offer and Listing.

A. Offer and listing details

Not applicable.

B. Plan of distribution

Not applicable.

C. Markets

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

D. Selling shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the issue

Not applicable.

Item 10. Additional Information.

A. Share capital

Not applicable.

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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. The joint venture agreement that was in effect prior to the consummation of the AT&T Transactions was filed as Exhibit 10.1 to Form F-4, Registration No.333-11084 filed with the SEC on November 9, 1999. Such 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. Our bylaws were further amended in a general partners meeting on August 23, 2011; a copy of such amended bylaws is filed as Exhibit 1.4 to this annual report. 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 provision of any service associated with information technology, communication, telecommunication and information, including data transmission, internet access, restricted or cable TV, value added services, interconnection services, applications and software, ecommerce, cloud computing data center services and otherwise, as permitted in the relevant jurisdiction.

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

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

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

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

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

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

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

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

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

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

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

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

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

Director controls. Members of our board of directors (“Board of Directors”) may or may not be our partners or our employees.

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 Ps. 1 of capital contribution to our capital classified as common; and

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(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 Ps. 1 of 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.

Social parts may only be transferred with the consent of the partners who represent the majority of our capital stock.

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 25% of the Class A or Class B stock.

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

• decide upon the application of the results of operation;

• elect or remove any member of the Board of Directors;

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

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

• pay dividends, if any;

• approve changes to our bylaws;

• determine our dissolution, if applicable;

• and any other right or obligation pursuant to applicable law.

C. Material contracts

AGN Agreement

Upon the consummation of the AT&T Transactions, and following the termination of the Equipment Lease Agreement, we and AT&T terminated the AGN Agreement on October 1, 2011. Upon the termination of the AGN Agreement, we ceased 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.”

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 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 agreed to purchase from us the Nodes required for the provision of AT&T Global Services in Mexico.

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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.

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.3.17.11. published in the Diario Oficial de la Federación (the Official Register of the Federation) on July 1, 2011, which is subject to amendment or repeal but is expected to remain in effect until December 31, 2012 (the “Reduced Rate Rule”), payments of interest made where:

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

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

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

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

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

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

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

(1) is the effective beneficiary of the interest;

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

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

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

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

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

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

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.

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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.

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, 2011, principal amount outstanding under this facility was U.S. $10.0 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. 6.5 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, 2011, the amount of senior notes and notes payable denominated in U.S. dollars was Ps. 3,019.4million.

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.

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The hypothetical, potential loss in value of financial instruments held at December 31, 2011, the value of which totaled Ps. 3,019.4million 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. 301.9 million. Such a change in currency exchange rates would also have resulted in additional interest expense of approximately Ps. 35.3 million per year, assuming no change in the principal amount of such indebtedness, reflecting the increased costs in Pesos of servicing U.S. dollar-denominated indebtedness.

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.$1.00 and Ps. 12.611 per U.S.$1.00, respectively. The foreign exchange forward contracts, which matured on February 2011 and August 2011 had a negative effect and resulted in a loss of Ps. 7.8 million. 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. 0.9 million in 2011 and a loss profit of Ps. 1.2 million in 2010.

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, 2011. 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, 2011.

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, 2011. 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, 2011.

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

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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.

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 2010 and 2011 were as follows:

	2010		2011
Audit Fees (1)		Ps. 5.7		Ps. 6.2
Audit Related Fees (2)		0.6		0.4
Total		Ps. 6.3		Ps. 6.6

(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.

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.

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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).

1.4 Amendment to the By-Laws dated August 23, 2011.*

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).

65

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).

4.17. Equity Purchase Agreement dated as of April 14, 2011 by and among Alfa, S.A.B. de C.V., AT&T Corp., AT&T Telecom Mexico Inc. and Alestra, S. de R.L. de C.V. (pursuant to a request for confidential treatment filed with the Commission by Alestra, S. de R.L. de C.V., confidential portions of this exhibit have been omitted and filed separately with the Commission)(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 May 12, 2011).

4.18. Nodes Purchase Agreement dated as of April 14, 2011 by and among Alfa, S.A.B. de C.V., AT&T Corp., AT&T Global Network Services Mexico, S. de R.L. de C.V. and Alestra, S. de R.L. de C.V. (pursuant to a request for confidential treatment filed with the Commission by Alestra, S. de R.L. de C.V., confidential portions of this exhibit have been omitted and filed separately with the Commission)(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 May 12, 2011).

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.*

*Filed herewith

66

INDEX TO THE FINANCIAL STATEMENTS

Contents	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2010 and 2011		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2010 and 2011		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December  31, 2009, 2010 and 2011		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2010 and 2011		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, 2010 and 2011, and the consolidated statements of operations, changes in stockholders’ equity and cash flows for the three years ended December 31, 2011. 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.

As described in Note 3, in order to comply with the new requirements of the Mexican Stock Exchange, to which the Company’s primary shareholder is subject, the Company has adopted International Financial Reporting Standards (IFRS) as of January 1, 2012.

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, 2010 and 2011 and its consolidated results of operations, changes in stockholders’ equity, and cash flows for the three years ended December 31, 2011 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 21 to the consolidated financial statements.

/s/PricewaterhouseCoopers S.C.

Oscar Ignacio Badillo Guerrero

Monterrey, Nuevo Leon, Mexico.

April 20, 2012.

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, 2010 AND 2011

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

	December 31, 2010			December 31, 2011
Assets
CURRENT ASSETS:
Cash and cash equivalents(Note 14)		Ps. 864,431			Ps. 896,789
Trade receivables, net (Note 4)		493,030			513,219
Due from affiliates and other related parties (Note 5)		7,974			8,225
Other receivables		104,924			110,059
Prepaid expenses (Note 6)		41,213			91,876
Other current assets		28,397			40,165
Total current assets		1,539,969			1,660,333
NON CURRENT ASSETS:
Property and equipment, net (Note 7)		5,077,968			4,650,316
Prepaid expenses					58,934
Deferred charges and other assets, net (Note 8)		325,399			341,666
Deferred income tax (Note 16)		198,853			450,164
Total non current assets		5,602,220			5,501,080
Total assets		Ps. 7,142,189			Ps. 7,161,413
Liabilities and stockholders’ equity
CURRENT LIABILITIES:
Accounts payable to Teléfonos de México, S.A.B de C.V. and other carriers (Note 14)		Ps. 496,646			Ps. 607,444
Other suppliers		265,816			188,085
Bank loans, notes payable and capital leases (Note 9)		216,957			54,064
Due to affiliates and other related parties (Note 5)		9,790			1,352
Dividends payable (Note 12)		123,571			—
Interest payable		118,842			133,473
Other accounts payable and accrued expenses		354,670			623,239
Total current liabilities		1,586,292			1,607,657
LONG-TERM LIABILITIES:
11.750% Senior notes due 2014 (Note 10)		2,471,420			2,795,740
Bank loans, notes payable and capital leases (Note 9)		309,937			169,592
Employee’s benefits (Note 11)		106,746			111,070
Total liabilities		4,474,395			4,684,059
STOCKHOLDERS’ EQUITY (Note 12):
Contributed stock		1,394,971			1,394,971
Retained earnings		1,272,865			1,082,392
Total stockholders’ equity of Alestra		2,667,836			2,477,363
Non controlling interest		(42	)		(9	)
Total stockholders’ equity		2,667,794			2,477,354
CONTINGENCIES AND COMMITMENTS (Note 13)
Total liabilities and stockholders’ equity		Ps. 7,142,189			Ps. 7,161,413

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on April 20, 2012, 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, 2009, 2010 AND 2011

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

	2009			2010			2011
REVENUES (Note 15)
Long distance services		Ps. 1,420,624			Ps. 1,114,294			Ps.    953,140
Data, internet and local services		3,263,013			3,455,988			3,744,186
		4,683,637			4,570,282			4,697,326
OPERATING EXPENSES:
Cost of services (excluding depreciation and amortization—Note 15)
Long distance services		(955,631	)		(679,092	)		(540,815	)
Data, internet and local services		(781,075	)		(836,359	)		(951,881	)
		(1,736,706	)		(1,515,451	)		(1,492,696	)
Gross profit		2,946,931			3,054,831			3,204,630
Administration, selling and other operating expenses		(1,529,384	)		(1,577,645	)		(1,625,845	)
Depreciation and amortization		(853,510	)		(866,661	)		(1,009,188	)
Operating income		564,037			610,525			569,597
OTHER EXPENSES, NET		(73,229	)		(26,452	)		(54,626	)
COMPREHENSIVE FINANCING RESULT:
Interest expense		(333,336	)		(375,913	)		(352,834	)
Interest income		17,591			10,901			9,007
Exchange gain(loss)		99,092			171,006			(328,775	)
(Loss) gain on derivative financial instruments		(4,789	)		1,164			(6,958	)
		(221,442	)		(192,842	)		(679,560	)
Gain (loss) before the following provisions for income tax		269,366			391,231			(164,589	)
Income tax (Note 16)		22,099			(33,732	)		78,996
Net income (loss) attributable to controlling interest		291,465			357,499			(85,593	)
Net loss (income) attributable to non controlling interest		—			(2	)		33
Consolidated net income (loss) of the period		Ps.    291,465			Ps.    357,497			Ps.     (85,560	)

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on April 20, 2012, 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, 2009, 2010 and 2011

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

							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, 2008		Ps. 300		Ps. 1,181,046		Ps. 213,625		Ps. (489)		Ps. 822,362		Ps. 2,216,844	Ps.	1		Ps. 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. (829)		Ps. 1,273,694		Ps. 2,667,836	Ps.	(42)		Ps. 2,667,794
Changes in 2011:
Net loss										(85,593)		(85,593)		33		(85,560)
Other								829		(249)		580				580
Comprehensive loss		—		—		—		829		(85,842)		(85,013)		33		(84,980)
Dividends declared										(105,460)		(105,460)				(105,460)
Balance at December 31, 2011		Ps. 300		Ps. 1,181,046		Ps. 213,625		Ps. —		Ps. 1,082,392		Ps. 2,477,363	Ps.	(9)		Ps. 2,477,354

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on April 20, 2012, 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, 2009, 2010 AND 2011

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

	2009			2010			2011
Operation activities:
Income (loss) before income tax		Ps. 269,366			Ps. 391,231			Ps. (164,589)
Items relating to investing activities:
Depreciation and amortization		853,510			866,662			1,009,188
Cost related to seniority premiums and pension plans		20,257			20,161			22,121
Interest income		(17,591	)		(10,901	)		(9,007	)
Loss (profit) on derivative financial instruments		4,789			(1,164	)		6,958
Gain on sale of equipment		20,134			7,733			32,917
Items relating to financing activities:
Interest expense		333,336			375,913			352,834
Exchange (gain) loss		(99,092	)		(171,006	)		328,775
Accelerated amortization of issuance costs of 8% senior notes		19,229			—			—
Other, net		1,723			(84	)		215
Subtotal		1,405,661			1,478,545			1,579,412
Increase (decrease) in accounts receivable and other current assets		27,452			20,253			(95,456	)
Increase in suppliers, accounts payable and other current liabilities		413,014			129,500			233,902
Payments relating to settlement of derivative financial instruments		(2,241	)		—			(7,799	)
Income tax paid		(75,404	)		(194,340	)		(209,074	)
Operating activities net cash flows		1,768,482			1,433,958			1,500,985
Investing activities:
Interest received		17,063			10,235			9,351
Acquisition of property and equipment		(808,373	)		(656,937	)		(510,945	)
Acquisition of deferred charges and other assets		(107,275	)		(93,224	)		(129,968	)
Investing activities net cash flows		(898,585	)		(739,926	)		(631,562	)
Exceeding cash to apply in financing activities		869,897			694,032			869,423
Financing activities:
Proceeds from bank loans, notes payable and capital leases		349,788			263,384			—
Payment of debt and bank loans		(424,949	)		(344,456	)		(317,990	)
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		(2,640,321	)		—			—
Interest paid		(224,676	)		(384,459	)		(305,451	)
Dividends paid		(64,490	)		—			(221,517	)
Financing activities net cash flows		(483,190	)		(465,531	)		(844,958	)
Net increasing in the cash and cash equivalents		386,707			228,501			24,465
Effects by changes in the cash and cash equivalents value:
Adjustment to cash flow as a result of changes in exchange rates		46,119			299			7,893
Cash and cash equivalents at beginning of year		202,805			635,631			864,431
Cash and cash equivalents at year end		Ps. 635,631			Ps. 864,431			Ps. 896,789

The accompanying notes are an integral part of these consolidated financial statements, which were authorized for their issuance on April 20, 2012, 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, 2009, 2010 AND 2011

(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 Alfa, S. A. B. (“Alfa”) (51%) and AT&T Telecom México, Inc. (“AT&T”) (49%).

On July 12, 2011, Alfa terminated the Equity Purchase Agreement entered into by and between AT&T, AT&T Telecom Mexico Inc. (“AT&T México”), Alfa, S.A.B. de C.V. (“Alfa”) and the Company dated April 14, 2011 and completed the acquisition of AT&T México’s 49% equity interest in the Company after receiving approval from regulatory authorities in Mexico. The Equity Purchase Agreement did not impact the Company’s financial statements given that the 49% equity interest in the Company was acquired directly by Alfa.

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 mainly internet, data, TI, and local and long distance telephone 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, 2011.

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.

As of October 1, 2011, AT&T and the Company terminated the AGN Agreement which granted the Company the rights to use the “AT&T Global Services” brand name and to provide AT& T Global Services in Mexico and the Equipment Lease Agreement explained in the paragraph above, and executed commercial agreements with AGNS México pursuant to which the company is providing AGNS México certain telecommunication services in order to allow AGNS México to provide AT&T Global Services directly to their customers in Mexico.

The Company estimates that the impact of the termination of the AGN Agreement for the year ended December 31, 2011, will be Ps. 63.0 million in revenues and Ps. 44.5 million in gross profit. This represents the estimated revenues and gross profit the Company will not recognize from October 1, 2011 to December 31, 2011 in connection with the termination of the AGN Agreement, partially offset by the estimated revenues and gross profit for the telecommunication services that the Company started providing to AGNS México in October 1, 2011, as part of the AT&T Transactions. Gross profit is defined as revenues minus cost of services (excluding depreciation and amortization).

F-7

2. BASIS FOR PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis for preparation:

The accompanying consolidated financial statements were authorized for issuance on April 20, 2012, by the officers that sign these financial statements and related notes.

The accompanying consolidated financial statements at December 31, 2010 and 2011 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 (discontinuation of the inflationary accounting). Consequently, the figures contained in the financial statements at December 31, 2009, 2010 and 2011 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,
	2009			2010			2011
Year inflation		3.57	%		4.40	%		3.82	%
Cumulative inflation in the last three years		14.48	%		15.19	%		12.26	%

According to the provisions of Mexican FRS B-15 “Translation of foreign currencies”, 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, 2011, 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-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 C-5 “Advanced payments”. Establishes, among other things, the particular standards of valuation, presentation and disclosure related to advanced payments line item. 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.

F-8

Mexican FRS C-6 “Property, plant and equipment”. 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” remained effective up to December 31, 2010.

Interpretation to Mexican FRS 19 “Change arising from the adoption of International Financial Reporting Standards (IFRS)”. It requires the disclosure of the Company’s reasons to adopt such IFRS, the estimated date and estimated amount of any significant effect this adoption would have on the Company’s financial statements. (see Note 3).

In addition, the Company applied the improvements to Mexican FRS done in 2011 to the following:

Mexican FRS C-13 “Related parties”. Extends the definition of close relative as a Company’s related party.

Bulletin D-5 “Leasing”. It establishes, among other aspects: a) an implication and clarification of certain concepts to consider in the determination of the discount rate to be used by the lessor and lessee in the finance leasing; b) additional disclosures in finance leasing for lessor and lessee, and c) criteria for the determination of the gain or loss by sale and lease back.

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 its 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 4), deferred income tax provision (see Note 16) and employee benefits (see Note 11).

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 14, the Company held restricted cash derived from a dispute in the resale of the interconnection tariffs.

According with the provision of the Mexican FRS C-1, the restricted cash balance is now required to be included as part of the cash and cash equivalents caption.

c. Property and equipment, net (Note 7)

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 Mexican pesos at the exchange rate prevailing at the end of 2007. Consequently 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.

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The Company leases telecommunications equipment with certain characteristics, for which the Company substantially assumes all the inherent benefits and risks of the ownership. Consequently, these are classified as capital leases; which are capitalized at the beginning of the leasing contract at the lower of the value of the leased property or the present value of the minimal payments. The financial costs derived from the financing granted by the lessor for the acquisition of such assets is recognized in the statement of operations as accrued. Starting on 2011, for new capital lease agreements, the interest rate for calculating the present value of the minimal payments should be the embedded rate, if it is not possible to obtain such rate, the incremental interest rate under the provisions of Bulletin D-5 should be used. (see Note 9).

Since Mexican FRS C-6 became effective in 2011, the Company has reviewed the residual value and useful lives of its property and equipment, based on this analysis, the useful lives of the buildings and telephone network were modified. These changes were recorded prospective as required by MFRS B-1. As a result of this change the Company recorded a depreciation expense of Ps. 173.2 million.

Acquisition cost less residual value is depreciated 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:

	2010		2011
Buildings		25		40 to 65
Telephone network		3 to 28		3 to 30
Billing and customer care software		7		7
Equipment:
Office		10		10
Computer		3		3
Transportation		4		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 (Note 8)

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, 2010 and 2011, 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 result.

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 14).

g. Comprehensive financing result

The comprehensive financing result FR 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.

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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(Note 16)

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 theses 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.

k. Capital Stock (Note 12)

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 18) 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 4).

Approximately, 33.8%, 28.00%, and 20.00% of the Company’s revenues related to international long distance services for the years ended December 31, 2009, 2010 and 2011, respectively, were generated from telephone traffic exchanged between AT&T (related party until July 12, 2011) and the Company (see Note 5).

In order provide to service to 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 14). For the years ended December 31, 2009, 2010 and 2011, interconnection costs amounted to Ps. 802,964, Ps. 568,185, and Ps. 540,815 respectively.

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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, and compensated absences payments, among others) are recognized in income as accrued and the corresponding liabilities are expressed at nominal value being of short term. 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 11).

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. Actuarial studies for employees’ benefits include 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 2009, 2010 and 2011 are recognized as an expense in those years, and amounts to Ps32,970, Ps33,339 and Ps34,369, respectively.

n. Comprehensive (loss) income

Comprehensive (loss) income 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 2009, 2010 and 2011 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.

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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, 2010 and 2011, 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, 2010 and 2011, the 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 (Note 15)

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. Concerning the years presented and considering arrangements of Mexican FRS B-5 that became effective in 2011 (retrospective application), the Company has identified the following two business segments: Business Unit and other segments. These segments have been determined considering the types of goods or services rendered.

t. Permanent investment in associated companies

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 as follows: a) in the permanent investment until it reaches zero; b) if there is any excess after the elimination of the permanent investment it should be recognize until it reaches 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 8).

Investments in shares, in its case, recognize impairment losses through the application of equity method on the recognized values.

u. New Financial Reporting Standards

As mentioned in Note 3, as of January 1, 2012 the Company adopted IFRS for the preparation of their consolidated financial statements. Below is a list of the new and amended standards that have been issued and are effective for periods starting on or after January 1, 2012, as well as those that are effective for subsequent periods. Management is in the process of evaluating the potential impact of these pronouncements on its financial information.

Amendment to IAS 12, Income taxes, on deferred tax – This amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, ‘Income taxes—recovery of revalued non-depreciable assets’, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. This amendment is effective for periods beginning on or after 1 January 2012.

Amendment to IAS 1, Financial statement presentation, regarding other comprehensive income- The main change resulting from these amendments is a requirement for entities to group items presented in ‘other comprehensive income’ (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. This amendment is effective for periods beginning on or after 1 July 2012 (retrospective application required), with early adoption permitted.

Amendment to IAS 19, Employee benefits—These amendments eliminate the corridor approach and requires the calculation of finance costs on a net funding basis. This amendment is effective for periods beginning on or after 1 January 2013.

IFRS 9, Financial instruments—IFRS 9 is the first standard issued as part of a wider project to replace IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and

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fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. This standard is effective for periods beginning on or after 1 January 2015, with early adoption permitted.

IFRS 10, Consolidated financial statements – The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. It defines the principle of control, establishes controls as the basis for consolidation. It sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee, and sets out the accounting requirements for the preparation of consolidated financial statements. It replaces IAS 27 and SIC 12 and is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

IFRS 12, Disclosures of interests in other entities—IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. It is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

IFRS 13, Fair value measurement—IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. It is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

IAS 27 (revised 2011), Separate financial statements—IAS 27 (revised 2011) includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. It is effective for periods beginning on or after 1 January 2013, with early adoption permitted.

3. INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION (IFRS)

On January 1, 2012, the company adopted International Financial Reporting Standards (IFRS) as its accounting and reporting framework in order to comply with the provisions established by the National Banking and Securities Commission (NBSC) and with the Interpretation of MFRS 19 “Change derived from the adoption of International Financial Reporting Standards”. Following are the amounts of the significant accumulated changes to the main items of the financial statements at January 1, 2011 and December 31, 2011. The impacts are based on the IFRS standards in existence as of the date of adoption and therefore future interpretations or new IFRS standards requiring retrospective application may have a material impact.

	Beginning balance as of January 1, 2011
	MFRS		Adjustments			IFRS
Fixed Assets		Ps. 5,077,968		Ps. 167,121			Ps. 5,245,089
Deferred tax		198,853		(44,992	)		153,861
Intangible Assets		325,399		(82,152	)		243,247
Senior Notes		2,471,420		(49,210	)		2,422,210
Labor Obligations		106,746		(26,506	)		80,240
Capital Stock		1,396,761		(214,454	)		1,182,307
Retained earnings		1,271,032		330,148			1,601,180

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	Ending balance 2011
	MFRS		Adjustments			IFRS
Fixed Assets		Ps. 4,650,316		Ps. 165,985			Ps. 4,816,301
Deferred tax		450,164		(53,008	)		397,156
Intangible Assets		341,666		(68,212	)		273,454
Senior Notes		2,795,740		(42,694	)		2,753,046
Labor Obligations		111,070		(35,466	)		75,604
Capital Stock		1,396,761		(214,454	)		1,182,307
Retained earnings		1,166,152		329,472			1,495,624
Net loss		85,560		(7,907	)		77,653

IFRS 1 “First-time adoption of International Financial Reporting Standards” is the standard to be applied when an entity presents its first annual or intermediate financial statements prepared under IFRS. IFRS 1 allows certain exceptions to the general requirement of applying the IFRS retrospectively at the transition date.

At the transition date, the Company applied the following exceptions:

• Deemed cost of Property, Plant and Equipment.- In accordance with IFRS 1, the entity may elect to measure the items of property, plant and equipment at its fair value and use this fair value as its deemed cost at the transition date. If it opts for this exemption, it is not mandatory to apply subsequent revaluations to similar categories of property, plant and equipment assets. Likewise, an entity adopting IFRS for the first time, may use as deemed cost, the revaluated amounts of property, plant and equipment under the previous GAAP at, or before the transition date, if the revaluation was broadly comparable to: (a) the fair value, or (b) the cost or depreciated cost in accordance to IFRS adjusted to reflect the changes in a general or specific price index.

The Company opted for the use of this exemption and recognized certain items of property, plant and equipment at fair value at the transition date; considering it gave more relevant and updated information when disclosing it this way. Likewise, for the rest of the property, plant and equipment, the Company considered as deemed cost, the depreciated cost at January 1, 2011, which was calculated as described in the Note 2 “Summary of Significant Accounting Policies”.

• Employee benefits.- In accordance with IAS19 “Employee benefits”, an entity may elect to use a corridor approach allowing to leave some actuarial gains and losses unrecognized. Retrospective application of this approach requires an entity to split the cumulative actuarial gains and losses from the inception of the plan until the date of transition to IFRS into a recognized portion and an unrecognized portion. IFRS 1 allows a first-time adopter to recognize the total actuarial gains and losses at the date of transition to IFRS, even if it uses the corridor approach for later actuarial gains and losses.

The Company has chosen to recognize actuarial gains and losses of its long-term labor obligations at the transition date in retained earnings, since the objective of IFRS 1 is to facilitate the initial adoption of IFRS, avoiding the retrospective application of IAS 19 for all long-term plans of employee benefits of the Company.

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Below we describe the main changes in accounting policies at the transition date:

• Recognition of the effects of inflation.- In accordance with the guidelines of MFRS B-10 inflation effects of the financial information will be recognized when the accumulated inflation for the three most recent fiscal years exceed 26%. However and in conformity with IAS 29, the effects of inflation on the financial information will be recognized only during the periods when the economy of the functional or presentation currency is considered hyperinflationary. In this case, any effect recorded in books during periods not considered hyperinflationary should be eliminated.

All the inflation effects recognized during non-hyperinflationary periods were eliminated against retained earnings.

• Debt issuance costs.- In accordance with Mexican standards, debt issuance costs complying with the capitalization criterion are recorded as an intangible asset. Under MFRS, in a modification to the conditions of a bank loan differing less than 10% from the present value of flows between the original and modified credit, the issuance costs incurred by the modified credit should be recognized in income for the period. In accordance with IFRS, debt issuance costs incurred by the modified credit should be capitalized and amortized during the life of the modified liability.

At the transition date, the Company recognized the debt issuance costs as part of the debt acquired at the date these were incurred; these will be amortized using the effective interest method.

• Liabilities related to legal indemnities – In accordance with MFRS, liabilities are recognized in relation to legal termination indemnities using actuarial calculations. Under IFRS provisions, liabilities for legal indemnities may not be calculated using actuarial methods and should only be recognized in accordance with IAS 19; therefore, at the transition date, the Company cancelled the liabilities recognized in books.

It is important to mention that there are other differences between the MFRS and IFRS; however, we consider the differences listed in the paragraphs above to describe the most significant impacts on the Company.

4. TRADE RECEIVABLES, NET

As of December 31, 2010 and 2011, trade receivables, consist of the following:

	2010			2011
Trade receivables		Ps. 532,381			Ps. 562,799
Less: allowance for doubtful accounts		(39,351	)		(49,580	)
		Ps. 493,030			Ps. 513,219

For the years ended December 31, 2009, 2010 and 2011, the allowance for doubtful accounts is as follows:

	2009		2010		2011
Balance at beginning of year		Ps. (83,458)		Ps. (62,478)		Ps. (39,351)
Charge to income to increase the allowance for doubtful accounts		(19,602)		(12,070)		(9,594)
Write off of doubtful accounts		40,720		35,675		—
Recovery of written off accounts		(138)		(478)		(635)
Balance at end of year		Ps. (62,478)		Ps. (39,351)		Ps. (49,580)

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.

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5. 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, 2010 and 2011, balances due from and due to related parties were as follows:

	2010		2011
Due from:
Partner with significant influence over the entity(e)	Ps.	4,397	Ps.	—
Affiliates		3,577		8,225
	Ps.	7,974	Ps.	8,225
Due to:
Partner with significant influence over the entity(e)	Ps.	4,414	Ps.	—
Parent		2,226		—
Affiliates		3,150		1,352
	Ps.	9,790	Ps.	1,352

During 2009, 2010 and 2011, the main transactions carried out with related parties were as follows:

	2009		2010		2011
Parent
Expenses for administrative services received (b)		Ps.   24,035		Ps.   23,502		Ps. 31,388
Partner with significant influence over the entity (e)
Income:
International long distance, data, internet and local service settlement (a)		Ps. 177,623		Ps.   71,728		Ps. 39,697
Expenses:
International long distance, data, internet and local service settlement cost (a)		Ps.   51,753		Ps.   24,165		Ps.   8,703
Administrative services received (b)		64,111		66,273		41,056
Internet service costs (c)		83,854		80,482		12,815
		Ps. 199,718		Ps. 170,920		Ps. 62,574
Affiliates
Interest income (d)		Ps.        513		Ps.        254		Ps.      —
Expenses for administrative services received (b)		Ps.     6,778		Ps.   23,258		Ps. 29,251
Donations		—		—		3,499
		Ps.     6,778		Ps.   23,258		Ps. 32,750

(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 from the Company. The international settlement rates used are settled directly between Alestra and AT&T.

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(b) The Company has entered into contracts of indefinite duration which entitles the Company to receive administrative services from Alfa and AT & T (in the case of AT & T these contracts were valid until July 11, 2011 due to what is described in item (e) below). As of July 13, 2011, the Company entered into an agreement with Alfa to prepay the Corporate fee for an amount of USD$ 10 million, the contract has a term of 36 months. At December 31, 2011 the amortization charged income was equivalent to USD$ 1.66 million.

(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.

(e) Related party until July 12, 2011 as described in Note 1.

Remunerations and benefits received by the main officers of the Company amounted to Ps. 37,498, Ps. 39,626 and Ps. 45,997 for the years ended December 31, 2009, 2010 and 2011 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.

6. PREPAID EXPENSES

Prepaid expenses as of December 31, 2010 and 2011 consist primarily of prepaid expenses for systems maintenance, insurance, bonds and advertising time.

7. PROPERTY AND EQUIPMENT, NET

As of December 31, 2010 and 2011, property and equipment net, consists of the following:

	2010			2011
Buildings		Ps.    224,817			Ps.   236,621
Furniture, fixtures and other		233,114			199,237
Hardware equipment		354,437			320,578
Transportation equipment		33,044			29,124
Telephone network		10,243,017			10,315,685
Leasehold improvements		67,583			70,895
Billing and customer care software		562,253			562,253
		11,718,265			11,734,393
Accumulated depreciation and amortization		(7,101,556	)		(7,595,191	)
		4,616,709			4,139,202
Land		165,039			175,095
Constructions in progress		296,220			336,019
Total		Ps. 5,077,968			Ps. 4,650,316

Amortization of billing and customer care software charged to income amounted to, Ps. 36,006, Ps. 6,490 and Ps. 5,445 for the years ended December 31, 2009, 2010 and 2011, respectively.

Depreciation charged to income, not including amortization of the billing and customer care software mentioned above was, Ps. 743,467, Ps. 769,529 and Ps. 900,235 for the years ended December 31, 2009, 2010 and 2011, respectively.

As of December 31, 2010 and 2011, property and equipment include assets acquired under capital leases, of Ps. 545 and Ps. 0, respectively (see Note 9).

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8. DEFERRED CHARGES AND OTHER ASSETS, NET

As of December 31, 2010 and 2011, deferred charges and other assets consist of the following:

	2010			2011
Capitalized expenses derived from issuance of 11.750% senior notes due 2014 (a)		Ps.     66,166			Ps.     66,166
Capitalized expenses derived from debt renegociation with Comerica Bank		—			3,307
Frequency bands (b)		174,370			174,370
Software (c)		830,399			894,009
Net capacity rights (e)		—			69,225
Investments in associate (d)		10,052			9,973
Guarantee deposits		7,845			5,777
Installation expenses		64,116			69,392
Other assets		30,634			37,426
		1,183,582			1,329,645
Accumulated amortization		(858,183	)		(987,979	)
Total deferred charges and other		Ps.   325,399			Ps.   341,666

Amortization charged to income was Ps. 74,037, Ps. 90,643 and Ps. 103,508 for the years ended December 31, 2009, 2010 and 2011, respectively.

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, amounted Ps. 3,535, and for December 31, 2010 and 2011 amounted Ps. 13,421 in each one of these two years.

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, 2009, 2010 and 2011 amounted to Ps. 8,719 and the net carrying amount is Ps. 66,824 and Ps. 58,106 at December 31, 2010 and 2011, respectively.

c. Software

Software costs consist of purchased software license for internal use. The amortization of software for the years ended December 31, 2009, 2010 and 2011 amounted to Ps. 64,271, Ps. 81,911, and Ps. 94,790 respectively, with a net carrying amount of Ps. 145,314, Ps. 163,927, and Ps. 133,076, 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.

e. Net Capacity growth

Represents the costs incurred in net capacity required to provide broad band services.

F-19

9. BANK LOANS, NOTES PAYABLE AND CAPITAL LEASES

As of December 31, 2010 and 2011 bank loans, notes payable and capital leases consist of the following:

	2010			2011
Bank loan obtained from Comerica Bank for an amount of U.S. 10 million. (1)		Ps.        —			Ps. 139,787
Bank loan obtained from Comerica Bank for an amount of U.S. 10 million (2)		123,571			—
Promissory notes to Cisco Systems Capital Corporation for an amount of U.S. 37.2 million. (3)		238,243			43,145
Promissory notes to Hewlett Packard Operations de México, S. de R. L. de C. V., for an amount of U.S. 18.8 million. (4)		136,282			24,436
Promissory notes to Huawei Tecnologies de México, S. A. de C. V. for an amount of U.S. 3.5 million. (5)		28,798			16,288
		526,894			223,656
Current portion of bank loans notes payable and capital leases		(216,957	)		(54,064	)
Long term debt		Ps. 309,937			Ps. 169,592

(1) On December 23, 2011 the Company signed a new loan agreement with Comerica Bank (“Comerica”) for U.S. 10 million bearing interest at 3-month LIBOR rate plus 3%. Interest are payable quarterly and principal is payable in four equal installments of U.S. 2.5 million in September 30, 2013, December 31, 2013, March 31,2014 and June 30, 2014. This loan agreement contains various covenants which, as of December 31, 2011, and at the date of the issuance of the financial statements, the Company is in full compliance.

(2) On September 27, 2010 the Company signed a loan with Comerica for U.S. 10 million bearing interest at 3-month adjusted LIBOR rate plus 3.75%. Interest were payable quarterly and principal was payable in four equal installments of U.S. 2.5 million starting on March 31, 2011 with a maturity on September 30, 2012. On December 23, 2011, the loan was paid in full.

(3) The Company issued ten promissory notes for a total amount of U.S. 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%. During 2011, the Company paid in advance nine of the ten promissory notes for a total of U.S. 11.1 million. As of December 31, 2011 amount due is U.S. 3.09 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 U.S. 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%. During 2011, the Company paid in advance four of the five promissory notes for a total of U.S. 7.5 million. As of December 31, 2011 amount due is U.S. 1.75 million.

(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 U.S. 3.5 million. The payments will be made quarterly at an annual interest rate of 5.50%. As of December 31, 2011, the amount outstanding was U.S. 1.17 million.

10. SENIOR NOTES

On August 11, 2009 the Company performed a debt offering by issuing unsecured senior notes for a total amount of U.S. 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.

F-20

The costs and expenses, including the placing of premiums and discounts of this new issuance, which at December 31, 2009 amounted to Ps. 66,166 (U.S. 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 Ps. 19,229 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, 2010 and 2011 and to the date of issuance of theses financial statements the Company is in compliance with all required covenants.

11. 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 2010 and 2011:

	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):
Service cost		2,286			167			3,272			22		5,747
Financial cost		6,523			152			3,325			77		10,077
Actuarial (gains) 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

	Pension plan			Seniority premium			Termination benefits			Other  retirement benefits			Total
Defined benefit obligation at January 1, 2011		Ps.  66,517			Ps. 1,895			Ps. 41,219			Ps. 3,808			Ps. 113,439
Plus (less):
Service cost		1,846			182			3,396			94			5,518
Financial cost		4,644			142			2,757			282			7,825
Actuarial (gains) losses generated in the period		1,674			(182	)		12,426			(547	)		13,371
Benefits paid		(11,038	)		—			(6,760	)		—			(17,798	)
Settlements		—			—			(6,628	)		—			(6,628	)
Defined benefit obligation at December 31, 2011		Ps.  63,643			Ps. 2,037			Ps. 46,410			Ps. 3,637			Ps. 115,727

F-21

b. The accumulated benefit obligations at December 31, 2010 and 2011 amounted to Ps. 73,699 and Ps. 71,230, 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
	2010			2011			2010			2011			2010			2011			2010			2011			2010			2011
Labor assets (liabilities):
Defined benefit obligation		Ps. 66,517			Ps. 63,643			Ps. 1,895			Ps. 2,037			Ps. 41,219			Ps. 46,410			Ps. 3,808			Ps. 3,637			Ps. 113,439			Ps. 115,727
Unfunded status		66,517			63,643			1,895			2,037			41,219			46,410			3,808			3,637			113,439			115,727
Less unrecognized amounts pending amortization:
Actuarial (gains) losses		(4,333	)		(5,106	)		(1,366	)		(1,067	)		—			—			(2,883	)		(2,084	)		(8,582	)		(8,257	)
Transition liability		—			—			(85	)		(43	)		(6,045	)		(2,645	)		—			—			(6,130	)		(2,688	)
Plan improvements		8,019			6,288			—			—			—			—			—			—			8,019			6,288
Net projected liability		Ps. 70,203			Ps. 64,825			Ps.    444			Ps.    927			Ps. 35,174			Ps. 43,765			Ps.    925			Ps. 1,553			Ps. 106,746			Ps. 111,070

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
	2009			2010			2011			2009		2010		2011		2009		2010		2011		2009		2010		2011		2009		2010			2011
Net cost of the period:
Service cost		Ps. 1,973			Ps. 2,286			Ps. 1,846			Ps. 135		Ps. 167		Ps. 182		Ps. 2,972		Ps. 3,272		Ps. 3,396		Ps. 24		Ps. 22		Ps.   94		Ps.   5,104		Ps. 5,747			Ps.   5,518
Financial cost		5,413			6,523			4,644			110		152		142		2,743		3,325		2,757		67		77		282		8,333		10,077			7,825
Net actuarial loss		—			153						129		141		117		4,352		1,737,		5,798		—		—		—		4,481		2,031			5,915
Labor cost of past service		(743	)		(658	)		(641	)		43		43		43		3,023		3,023		3,023		—		—		246		2,323		2,408			2,671
Reductions and settlements		16			(102	)		(190	)		—		—		—		—		—		378		—		—		—		16		(102	)		188
Total		Ps. 6,659			Ps. 8,202			Ps. 5,659			Ps. 417		Ps. 503		Ps. 484		Ps. 13,090		Ps. 11,357		Ps. 15,352		Ps. 91		Ps. 99		Ps. 622		Ps. 20,257		Ps. 20,161			Ps. 22,117

F-22

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, 2010 and 2011, are as follows:

Concept*	2010			2011
Discount rates		7.50	%		8.25	%
Rate of salary increase		5.25	%		5.25	%
Minimum wage increase rate		4.25	%		4.25	%
Health care inflation annual nominal rate		7.50	%		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:

	2010				2011
Concept	Effect +1		Effect -1		Effect +1		Effect -1
Cost of the current services and interest of the net medical services at retirement	Ps.	121	Ps.	73	Ps.	109	Ps.	69
Cumulative obligations by retirement benefits derived from the medical attention costs	Ps.	4,671	Ps.	3,102	Ps.	4,422	Ps.	3,019

12. STOCKHOLDERS’ EQUITY

As of December 31, 2011 the capital stock of Alestra is variable with a fixed minimum of Ps. 300 and an unlimited maximum. As of December 31, 2010 and 2011, the subscribed and paid-in capital stock at nominal value amounted to Ps. 1,181,346. 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.

After Alfa acquired the the shares that AT&T held in Alestra (see Note 1) and as of December 31, 2011 the capital stock consists of the following:

Alfa, S. A. B. de C. V.
Series	Ownership (%)		Contribution
“A”		17.85	Ps.	210,870
“B”		17.15		202,601
“N”		65.00		767.875
Total		100.00	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 July 18, 2011, the shareholders declared a dividend of US$9 million, that was paid in cash and in full to Alfa. This dividends are derived entirely from the net tax profit account (CUFIN by its Spanish acronym) and the reinvested CUFIN.

F-23

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, 2011 the CUFIN and the Capital Contribution Account (CUCA by its Spanish acronym) amounted to Ps. 883,324 and Ps. 677,368 , 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 Ps. 489 and (Ps. 829), respectively, corresponding to the unrealized gain/loss recorded related to derivative financial instruments year end valuation. As of December 31, The Company did not has open derivative financial instruments.

13. CONTINGENCIES AND COMMITMENTS

a. At December 31, 2011, the Company had commitments from agreements to lease office space classified as operating leases. The leases payments are subject to escalation factors based on the NPCI. At December 31, 2011, future minimum lease payments under non cancelable operating leases with terms in excess of one year are as follows:

Year
2012	Ps	. 126,423
2013		124,959
2014		108,809
2015		84,801
2016 onwards		165,798
	Ps	. 610,790

Lease expense was Ps. 99,978, Ps. 103,748 and Ps. 108,477 for the years ended December 31, 2009, 2010 and 2011,respectively.

b. As of December 31, 2010 and 2011, the Company obtained performance bonds for Ps. 271,157 and Ps. 315,754 respectively, in favor of certain authorities and suppliers to guarantee the Company’s compliance with certain obligations incurred.

c. As of December 31, 2010 and 2011, the Company had outstanding commitments to acquire equipment and other capital expenditures related to the construction of its telecommunications network amounting to U.S. 14.6 million (Ps. 180,529) and U.S. 11.7 million (Ps. 163,551), 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 material 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, 2010 and 2011 and had requested the intervention of Cofetel. On September 8, 2009, a trust was created by the Company, Telmex and BBVA Bancomer (as a trustee) to guarantee the payment of fixed interconnection services on dispute applicable for 2008, 2009 and 2010, As of December 31, 2011, the trust balance was Ps. 408.6 million. The trust does not include amounts in dispute for 2011 interconnection rates. 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 affect on its financial results; however, as of the date of issuance of these financial statements, the Company believes that it has recognized sufficient provisions to address such contingencies.

F-24

f. The Company is also in disputes with mobile companies associated with Telefónica regarding mobile interconnection services rates for 2011. As of the date of this annual report, management continues its negotiations with Telefónica. Although the outcome of the aforementioned proceedings is uncertain, the Company does not believe that an adverse decision would have a material adverse effect on its business, financial condition or results of operation. The Company has accrued Ps. 25.8 relating to this dispute.

14. RESTRICTED CASH RELATED TO LIABILITIES IN DISPUTE

Alestra filed a disagreement before Cofetel (see Note 13.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, 2010 and 2011 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, 2010 and 2011, the trust balance amounted Ps. 378,207 and Ps. 408,698, respectively, integrated by the contributions made by Alestra and the corresponding interest for the amounts of Ps. 361,568 and Ps. 16,639 at December 31, 2010, and Ps. 376,780 and Ps. 31,918 at December 31, 2011. Since the date of the formation of the trust through December 31, 2011, no amounts have been paid related to this dispute.

15. SEGMENTS

Until 2011 the Company had two reportable segments: a.)Long Distance and b.) Data, internet and local services. However, in 2011 the Company made a change to the way it reported information to its Chief Operating Decision Maker (CODM). This change is due to the continual evolution of the telecommunications industry in Mexico.

The Company determined in 2011 that due to developments in the telecommunications industry, it was no longer relevant to analyze its business under the two previous reportable segments. The Company has determined that its business strategy in the future should be more focused on the value added services, such as IT, data and internet. As a result, the Company is allocating more resources to this area. In addition, with changes in industry in Mexico, long distance revenues continue to decrease and this service is not seen as the primary area for future growth. Therefore, the Company has determined that it will focus future efforts on the IT, data and internet services offered to the commercial and small business sectors.

In addition, during 2011, Alfa purchased from AT&T 100% of the Company’s outstanding equity. This resulted in the Company no longer offering AT&T global services as well as resulted in a shift in management´s strategic focus, which includes expanding and growing value added services.

As a result of the aforementioned business changes, in 2011, the Company’s CODM shifted its focus in analyzing the overall business. It now views the Company as having three operating segments: a.) Enterprise Segment, b.) Small Business and Consumer Segment, c.) International Segment.

Information used to make strategic decisions is reported to the CODM based on these three operating segments.

The focus of the three operating segments is described as follows.

The Enterprise operating segment offers communication services, and value added services such as IT, data and internet, managed through the Company’s network and infrastructure, for multinational companies, as well as international and national businesses and local government entities.

The Small Business and Consumer Services operating segment offers communication products and services to the consumer and small businesses market.

The International Services operating segment offers communication services to operators with international incoming traffic terminating in Mexico.

F-25

The Small Business and Consumer Services operating segment and the International Services operating segment are not considered individual reportable segments due to a lack of compliance with quantitative limits, as established in Mexican FRS B-5 “Financial information by segment” for any of the reported years. Pursuant to this standard, operating segments with total revenues equaling less than 10% of total Company revenues are not required to be reported separately and can be grouped with other operating segments that do not meet the 10% threshold, as long as the sum of these grouped operating segments do not exceed 25% of total revenues. Therefore, the financial information of the Small Business and Consumer Services operating segment and the International Services operating segment segments is grouped together and presented as “other segments”.

In addition to the three operating segments focused on the client, the remaining operations of the Company are included within the category of “Non-Allocated expenses” to be integrated to the consolidated results of the Company. The “Non-Allocated Expenses” category includes expenses associated with the centralized functions of the group including the acquisition and supply chain, administration and management of the entity.

These operating segments are managed separately since the products and services offered and the markets they are focused on are different. The resources are assigned to the operating segments considering the strategies defined by the Company’s management. The transactions between the operating segments are carried out at market values.

Performance of the operating segments is measured based on the Business Unit Contribution (BUC), defined as the operating income of each operating segment, including revenues, costs and expenses direct from the segment, as included in the internal financial reports reviewed by the CODM.

The adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization. The adjusted EBITDA is considered a useful measure of the business operating performance since it shows the income before depreciation and amortization, and it also provides a significant analysis of the commercial performance upon excluding specific items disclosed separately due to their nature or incidence. The interest expense and income are not assigned to the reportable segments, since this activity is managed globally by the central treasury of the group.

When projects are not directly attributable to a particular operating segment, the capital expense is assigned to each segment based on the ratio of estimated future economic benefits resulting from that capital expenditure.

Following is the condensed financial information of the reporting segments:

I. Segments analytic information

Year ended in 2009

Year ended in 2010

Year ended in 2011

Business Unit

Other Segments

Total

Business Unit

Other Segments

Total

Business Unit

Other Segments

Total

Segments revenues

Ps. 3,840,147

Ps. 843,490

Ps. 4,683,637

Ps. 4,068,856

Ps. 501,426

Ps. 4,570,282

Ps. 4,421,159

Ps. 276,167

Ps. 4,697,326

Internal revenues

Total Revenues from

External customers

Ps. 3,840,147

Ps. 843,490

Ps. 4,683,637

Ps. 4,068,856

Ps. 501,426

Ps. 4,570,282

Ps. 4,421,159

Ps. 276,167

Ps. 4,697,326

Business unit contribution (BUC)

Ps. 2,131,451

Ps. 115,204

Ps. 2,246,655

Ps. 2,249,453

Ps. 101,910

Ps. 2,351,363

Ps.    485,599

Ps.   81,814

Ps. 2,567,413

Not assignable expenses

(829,108

)

(874,177

)

(988,628

)

EBITDA

1,417,547

1,477,186

1,578,785

Depreciation and amortizations

(853,510

)

(866,661

)

(1,009,188

)

Operative income

564,037

610,525

569,597

Other income (expense)

(73,229

)

(26,452

)

(54,626

)

CFR

(221,442

)

(192,842

)

(679,560

)

(Loss) income befor tax

Ps.    269,366

Ps.    391,231

Ps.   (164,589

)

F-26

Other information:

Fixed Assets investment

Year ended in 2010

Year ended in 2011

Enterprise

Other

Enterprise

Other

Segment

Segments

Total

Segment

Segments

Total

PP&E

Ps. 668,913

Ps. 19,915

Ps. 688,828

Ps. 832,516

Ps. 7,253

Ps. 839,769

Intangible assets

100,155

100,155

57,634

57,634

Capex investment

Ps. 769,068

Ps. 19,915

Ps. 788,983

Ps. 890,150

Ps. 7,253

Ps. 897,403

II. General Information

a. By product or service

Revenues by service

Year ended 2009

Year ended 2010

Year ended 2011

Enterprise

Other

Enterprise

Other

Enterprise

Other

Segment

Segments

Total

Segment

Segments

Total

Segment

Segments

Total

Long distance

Ps.    775,855

Ps. 646,135

Ps. 1,421,990

Ps.    786,880

Ps. 327,414

Ps. 1,114,294

Ps.    831,838

Ps. 121,302

Ps.    953,140

Data, Internet and Local

2,278,991

197,355

2,476,346

2,299,442

174,012

2,473,454

2,329,814

154,865

2,484,679

Corporate services of IT

785,301

785,301

982,534

982,534

1,259,507

1,259,507

Total revenues by services

Ps. 3,840,147

Ps. 843,490

Ps. 4,683,637

Ps. 4,068,856

Ps. 501,426

Ps. 4,570,282

Ps. 4,421,159

Ps. 276,167

Ps. 4,697,326

b. By geographic segments

Revenues by geographic zone

	Year ended
	2009		2010		2011
México		Ps. 4,158,584		Ps. 4,314,238		Ps. 4,625,231
Outside Mexico		525,053		256,044		72,095
Total revenues		Ps. 4,683,637		Ps. 4,570,282		Ps. 4,697,326

F-27

16. INCOME TAX

a. In 2011 the Company determined a tax profit of Ps. 575,213 ( Ps. 812,934 in 2010). Determining an income tax, after amortizations of tax loss carryforwards, of Ps. 172,564 (Ps. 128,252 in 2010), 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.

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.

e. The net credit (charge) to consolidated income for income tax was as follows:

	2009			2010			2011
Current income tax before amortization of tax loss carryforwards		Ps. (226,008	)		Ps. (243,360	)		Ps. (177,004	)
Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years		138,003			115,108			4,440
		(88,005	)		(128,252	)		(172,564	)
Deferred income tax		110,104			94,520,			251,560
Total income tax provision		Ps.    22,099			Ps.   (33,732	)		Ps.    78,996

The reconciliation between the statutory and effective income tax rates is shown below:

	2009			2010			2011
(Loss) income before income tax		Ps. 269,366			Ps.  391,231			Ps. (164,589	)
Statutory tax rate		28	%		30	%		30	%
Income tax at statutory rate		(75,423	)		(117,369	)		49,376
Add (deduct) effect of income tax on:
Inflationary tax adjustment		(18,369	)		(21,344	)		(15,641	)
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 fixed assets		40,052			63,201			53,444
Doubtful accounts not deducted for tax purposes		(28,839	)		(71,596	)		(6,104	)
Others		8,130			(1,732	)		(6,519	)
Subtotal		(115,904	)		(148,840	)		74,556
Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years		138,003			115,108			4,440
Total provision of income tax charged to income		Ps.    22,099			Ps.   (33,732	)		Ps.    78,996

F-28

The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities at December 31, 2010 and 2011, are as follows:

	2010			2011
Deferred tax asset:
Allowance for doubtful accounts		Ps. 163,960			Ps. 110,893
Property and equipment, net		—			138,486
Other assets, costs and provisions		113,342			213,988
Total deferred tax assets		277,302			463,367
Deferred tax liabilities:
Property and equipment, net		68,785
Prepaid expenses		9,664			13,203
Total deferred tax liabilities		78,449			13,203
Tax loss carryforwards		33,925			25,721
Valuation allowance of tax loss carryforwards		(33,925	)		(25,721	)
Deferred income tax		Ps. 198,853			Ps. 450,164

For the years ended December 31, 2010 and 2011 the change in the valuation allowance of losses to be amortized is analyzed as follows:

	2010			2011
Balances at beginning of year		Ps. (134,759	)		Ps. (33,925	)
Prior years of tax loss carryforwards restatement		(14,274	)		(1,110	)
Effect in the current income tax provision due to amortization of tax loss carryforwards reserved in prior years		115,108			4,440
Decrease in reserve from the expiration or loss of rights to use tax loss carryforwards in future years		—			4,874
Balances at end of year		Ps.   (33,925	)		Ps. (25,721	)

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
2012	Ps. 18,466
2013	26,746
2014	27,670
2015	12,854
	Ps. 85,736

In 2011 the Company determined a flat tax profit of Ps. 1,913, 524 ( Ps. 1,561,768 in 2010), and determined a flat tax profit net from credits of Ps. 168,548 (Ps. 118,475 in 2010) 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.

Flat Tax of the period is calculated at the 17.5% rate 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-29

17. FOREIGN CURRENCY POSITION

As of December 31, 2010 and 2011 monetary assets and liabilities, denominated in foreign currencies (U.S. dollars) were as follows:

	Thousands of U.S. dollars
	2010			2011
Assets		U.S.    34,062			U.S.    18,586
Short and long-term liabilities		(286,358	)		(244,765	)
Net short position		U.S. (252,296	)		U.S. (226,179	)

The following is a consolidated summary of the main transactions in foreign currency:

	Thousands of U.S. dollars
	2009			2010			2011
Revenues		U.S. 120,812			U.S. 102,929			U.S. 93,124
Cost of services		(17,209	)		(15,280	)		(20,896	)
Operating expenses		(19,041	)		(21,364	)		(22,144	)
Interest expense		(31,114	)		(28,787	)		(26,991	)
Interest income		725			17			9
Other income, net		261			164			1,349
		U.S.   54,434			U.S.   37,679			U.S. 24,451

The exchange rates at December 31, 2009, 2010 and 2011, were, Ps. 13.0587, Ps. 12.3571 and Ps. 13.9787 per U.S. dollar, respectively, as published by Banco de México (the Mexican central bank).

At April 20, 2012, the date of issuance of the financial statements, the exchange rate was Ps. 13.1322 per U.S. dollar.

18. 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, 2010 and 2011 are as follows:

Years ended	Carrying amount		Fair value		Differences
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	)
2011
Bank loans and notes payable	Ps.	223,656	Ps.	223,656	Ps.	—
Senior notes		2,795,740		3,089,293		(293,553	)
	Ps.	3,019,396	Ps.	3,312,949	Ps.	(293,553	)

F-30

19. 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 U.S. 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 for losses in exchange rates, are as follows:

Counterparty	Notional amount		Beginning date	Expiring date		Type of underlying	Agreed exchange rate	Fair value
Deutsche Bank, AG		U.S. 11.750	October 21, 2010		February 11, 2011	USD$	Ps. 12.463	(Ps.	612	)
Citibank, N.A.		U.S. 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, 2011 the Company does not have derivative financial instruments outstanding.

F-31

20. SUBSEQUENT EVENT

On February 13, 2012, a master interconnection service rendering agreement was signed between Radiomovil DIPSA, S.A. de C.V. (Telcel) and Alestra, S. de R.L. de C.V. The parties involved agreed on certain interconnection fees that would be paid to one another effective for each annual period from 2011 through 2014, as it was settled that the fees would be decreasing gradually, every year.

This arrangement will implicate a reduction of service cost as well as a much more simple transaction for the company. Given that at the beginning of the arrangement, the fees settled were different to those determined by the Cofetel, Alestra kept a provision for the amounts in dispute; this provision will not be eliminated in 2012.

Other resolutions reached in the Technical Interconnection Agreements are the definition of the interconnection standard, dialing specifications, opening of error reports, procedures in traffic cases, mechanisms to prevent and avoid any practice involving the use or abuse of its networks and a contingency plan. The agreement also included resolutions regarding interconnection systems agreements for the issuance of the invoicing and corresponding payment process, interconnection points for direct interconnection services, format to request direct interconnection services and co-location services, which may be type 1 (a local) or type 2 (a firm), both co-locations shall comply with certain characteristics.

These agreements have no effect on the Company financial statements as of December 31, 2011 as they will apply these changes prospective in 2012.

21. 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.

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.

	2009			2010			2011
Reconciliation of net (loss) income:
Net (loss) income as reported under Mexican FRS attributable to Alestra	Ps	. 291,465		Ps	. 357,497		Ps	. (85,560	)
U.S. GAAP adjustments:
a) Severance payments		3,012			3,012			3,012
b) Deferred income tax		47,741			(1,063	)		(2,585	)
c) Pension and labor liabilities		(2,528	)		10,406			(1,951	)
d) Difference in interest expense from restructuring		324,608			—			—
d) Reversal of debt issuance costs, net of amortization		34,032			—			—
e) Fifth amendment effect on depreciation expense		(50,784	)		—			—
Total U.S. GAAP adjustments		356,081			12,355			(1,524	)
Net (loss) income under U.S. GAAP		647,546			369,852			(87,084	)
f) Non controlling interest under U.S. GAAP		—			3			(33	)
Net (loss) income under U.S. GAAP	Ps	. 647,546		Ps	. 369,855		Ps	. (87,117	)

F-32

	2010			2011
Reconciliation of stockholders’ equity:
Total stockholders’ equity reported under Mexican FRS	Ps	. 2,667,794		Ps	. 2,477,354
U.S. GAAP adjustments:
a) Severance payments		(6,026	)		(3,012	)
b) Deferred income tax		4,844			1,062
c) Pension and labor liabilities		(6,694	)		(4,657	)
Total U.S. GAAP adjustments		(7,876	)		(6,607	)
Total stockholders’ equity under U.S. GAAP		2,659,918			2,470,747
f) Non controlling interest under U.S. GAAP		2			2
Total stockholders’ equity of Alestra under U.S. GAAP	Ps	. 2,659,920		Ps	. 2,470,749

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:

	2010			2011
Balance at beginning of period	Ps	. 2,299,151		Ps	. 2,659,920
Net income for the year		369,855			(87,117	)
Declaration of dividends		—			(105,460	)
Effects from derivative financial instruments		(829	)		829
Other adjustments		(2,595	)		(215	)
Pension adjustments		(5,662	)		2,792
Balance at end of period	Ps	. 2,659,920		Ps	. 2,470,749

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 Ps. 9,193,330 and Ps. 1,340,308 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, 2010 and 2011 is as follows:

	2010			2011
Capital stock	Ps	. 12,355,567		Ps	. 12,355,567
Accumulated losses		(9,695,649	)		(9,884,820	)
Total stockholders’ equity of Alestra		2,659,918			2,470,747
Non controlling interest		2			2
Total stockholders’ equity under U.S. GAAP	Ps	.   2,659,920		Ps	.   2,470,749

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, 2010 and 2011 and for the three years then ended:

	2010		2011
Cash and cash equivalents		Ps.     486,224		Ps.    488,091
Restricted cash		378,207		408,698
Trade receivables, net		493,030		513,219
Other current assets		182,508		250,325
Total current assets		1,539,969		1,660,333
Property and equipment, net		5,077,968		4,650,316
Deferred charges and other assets, net		319,375		397,590
Deferred income tax		203,697		451,226
Total assets		Ps. 7,141,009		Ps. 7,159,465

F-33

Interest payable	Ps.      118,842		Ps.      133,473
Other current liabilities including the current portion of senior notes	1,467,450		1,474,184
Total current liabilities	1,586,292		1,607,657
11.750% Senior notes due 2014	2,471,420		2,795,740
Bank loans and notes payable	309,937		169,592
Estimated liabilities for seniority premiums and pension plans	113,440		115,727
Total liabilities	Ps.   4,481,089		Ps.   4,688,716
STOCKHOLDERS’ EQUITY:
Contributed capital	Ps. 12,355,567		Ps. 12,355,567
Accumulated losses	(9,695,649	)	(9,884,820	)
Total stockholders’ equity of Alestra	2,659,918		2,470,747
Non controlling interest	2		2
Total stockholders’ equity	2,659,920		2,470,749
Total liabilities and stockholders’ equity	Ps.  7,141,009		Ps.  7,159,465

F-34

	2009			2010			2011
Net revenues		Ps.  4,683,637			Ps.  4,570,282			Ps.  4,697,326
Cost of services ( excluding depreciation and amortization presented separately below)		(1,736,706	)		(1,515,451	)		(1,492,696	)
Administrative, selling and other operating expenses		(1,530,690	)		(1,568,336	)		(1,628,456	)
Depreciation and amortization		(904,294	)		(866,661	)		(1,009,188	)
Operating income		511,947			619,834			566,986
Comprehensive financial result:
Interest income		17,591			10,901			9,007
Interest expense		(8,728	)		(375,913	)		(352,834	)
Exchange (loss) gain		99,092			171,006			(328,775	)
Effect of derivative financial instruments		(4,789	)		1,164			(6,958	)
		103,166			(192,842	)		(679,560	)
Debt issuance costs, net		14,802			—			—
Other expense, net		(52,209	)		(22,345	)		(50,921	)
Net (loss) income before deferred income tax and asset tax		577,706			404,647			(163,495	)
Income tax		69,840			(34,795	)		76,411
Net (loss) income		647,546			369,852			(87,084	)
Net income attributable to non controlling interest		—			3			(33	)
Net (loss) income attributable to total Alestra		Ps.    647,546			Ps.    369,855			Ps.     (87,117	)

Revision of 2010 Reconciliation of principal differences between Mexican FRS and U.S. GAAP

The Company has revised its U.S. GAAP stockholders’ equity and net income and stockholders´ equity as of and for the year ended December 31, 2010. This revision was to correct a formula error in the calculation of the deferred tax U.S. GAAP adjustments in the reconciliation of net income and stockholders´ equity that resulted in the understatement of both net income and stockholders’ equity under U.S. GAAP. 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 changes net income and stockholders’ equity under U.S. GAAP, it does not affect management’s previously issued disclosures regarding liquidity or its compliance with debt covenant ratio calculations. For this and other reasons, management has concluded that these adjustments are not considered to be material to its previously issued consolidated financial statements. In order to prevent a material misstatement in 2011 if recorded in such year, Management has chosen to revise its 2010 reconciliation of principal differences between Mexican FRS and U.S. GAAP in order to correctly reflect its 2010 net income and stockholders´ equity under U.S. GAAP.

Year ended December 31, 2010	As previously reported			Revision		As revised
Deferred Income Tax Adjustment in reconciliation of net income	Ps.	(12,218	)		Ps. 11,155	Ps.	(1,063	)
U.S. GAAP Net Income	Ps.	358,700			Ps. 11,155	Ps.	369,855
Deferred Income Tax adjustment in reconciliation of stockholders’ equity	Ps.	(6,311	)		Ps. 11,155	Ps.	4,844
Deferred Income Tax Asset	Ps.	192,542			Ps. 11,155	Ps.	203,697
U.S. GAAP Total Stockholders’ Equity	Ps.	2,648,765			Ps. 11,155	Ps.	2,659,920

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 Ps. 24,666 over the remaining expected employee service period and consequently, as of December 31, 2009, 2010 and 2011 has recognized a total liability and charge to earnings of Ps. 3,012 each year. 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 in 2008, the Company is now amortizing the actuarial determined severance liability over a period of 5 years.

F-35

Under US GAAP severance payments are recognize in accordance with ASC 712 “Compensation-non retirement post-employment benefits”. The transitional liability determined under Mexican FRS was recognized immediately in accordance with US GAAP

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.

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, 2010 and 2011, are as follows:

2010

	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			4,844		118,186
Total deferred tax assets		311,227			4,844		316,071
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			4,844		237,622
Valuation allowance		(33,925	)		—		(33,925	)
Deferred income tax asset (liability), net	Ps.	198,853		Ps.	4,844	Ps.	203,697

2011

	Mex GAAP			U.S GAAP Adjustments		2011
Deferred tax asset:
Tax loss carryforwards	Ps.	25,721		Ps.	—	Ps.	25,721
Allowance for doubtful accounts		110,893			—		110,893
Property and equipment, and other assets, net		138,486			—		138,486
Costs and provisions		213,988			1,062		215,050
Total deferred tax assets		489,088			1,062		490,150
Deferred tax liabilities:
Property and equipment, and other assets, net		—			—		—
Prepaid expenses		(13,203	)		—		(13,203	)
Total deferred tax liabilities		(13,203	)		—		(13,203	)
Net deferred tax assets		475,885			1,062		476,947
Valuation allowance		(25,721	)		—		(25,721	)
Deferred income tax asset (liability), net	Ps.	450,164		Ps.	1,062	Ps.	451,226

F-36

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, 2010 and 2011, 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.

The Company classifies income tax-related interest and penalties as income taxes in the financial statements.

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 Ps. (10,406) and Ps. (1,730) for fiscal years 2010 and 2011 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)	2010			2011
Net transition obligation	Ps.	6,180		Ps.	5,743
Prior service cost		(12,891	)		(10,014	)
Net gain		1,907			2,260
Total	Ps.	(4,804	)	Ps.	(2,012	)

AOCI Rollfoward (net of tax)

(net of tax)	2010			2011
AOCI at beginning of year	Ps.	(3,946	)	Ps.	(4,804	)
Occurring during the year:
Net loss (gain)		(1,560	)		2,090
Amounts amortized during the year:
Net transition obligation		(438	)		(438	)
Prior service cost		1,140			1,140
AOCI at the end of the year	Ps.	(4,804	)	Ps.	(2,012	)

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, Pension and Post-retirement Benefits

	2010			2011
Benefit obligation at beginning of year	Ps.	114,202		Ps.	113,440
Service cost		5,747			5,518
Interest cost		9,830			7,717
Actuarial loss (gain)		(216	)		6,848
Benefits paid		(4,781	)		(131	)
Settlements		(11,342	)		(17,665	)
Benefit obligations at end of year	Ps.	113,440		Ps.	115,727
Plan assets		—			—
Funded status of the plan	Ps.	113,440		Ps.	115,727

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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, U.S. 232.9 million and U.S. 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 Ps. 4,008,509 (U.S. 304 million) new senior notes (the “8% Senior Notes due 2010”) with maturity in 2010 in exchange for Ps. 3,765,488 (U.S. 287 million) of Old Senior Notes and paid Ps. 1,443,219 (U.S. 110 million) as part of a cash offer to extinguish Ps. 2,624,033 (U.S. 200 million) of Old Senior Notes. Additionally, the Company paid Ps. 197,439,422 (U.S. 16,401,848) to holders of the Old Senior Notes, which did not accept the terms of debt restructuring of the Company, representing 14.5% value of the Old Senior Notes.

Under Mexican FRS, the effects of the restructuring were recorded as follows:

• A gain of Ps. 958,753 is recognized for the effect of the extinguishment of the Old Senior Notes.

• A gain of Ps. 939, 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 Ps. 129, 299 and the capitalization of Ps. 158,160 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 Ps. 158,160 incurred in the debt restructuring was recorded as an expense of the period; debt issuance cost of Ps. 129,299 of the Old Senior Notes, have been amortized in the new term of the restructured notes.

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• 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 Ps. 324,608, 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.

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, 2010 and 2011, the non-controlling interest represents the effect of the U.S. GAAP adjustments in the Company’s subsidiaries.

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g) Statement of Cash Flow

The statements of cash flow prepared in accordance with Mexican FRS for the years ending December 31, 2009, 2010 and 2011 presents 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, 2009, 2010 and 2011 prepared, after considering the impact of U.S. GAAP adjustments.

	2009			2010			2011
OPERATING ACTIVITIES:
Net income (loss)	Ps.	647,546		Ps.	369,853		Ps.	(87,084	)
Adjustments to reconcile net loss to cash flows used in operating activities:
Exchange (gain) loss		(99,092	)		(171,006	)		328,775
Depreciation and amortization		904,294			866,662			1,009,188
Allowance for doubtful accounts		(20,980	)		(23,127	)		10,229
Interest expense (income)		(215,948	)		(8,547	)		47,383
Deferred income tax		(157,845	)		(93,457	)		(248,975	)
Others		20,335			7,734			25,085
Amortization of capitalized expenses derived from issuance of 8% Senior Notes due 2010		19,229			—			—
Changes in operating assets and liabilities:
Current assets		15,595			42,630			(105,126	)
Current liabilities and other provisions		447,735			68,992			225,410
Net cash flows from operating activities		1,560,869			1,059,734			1,204,885
INVESTING ACTIVITIES:
Purchases of property and equipment		(808,373	)		(656,937	)		(510,945	)
Restricted cash		(318,202	)		(60,005	)		(30,491	)
Purchase of other assets		(107,275	)		(93,224	)		(129,968	)
Net cash flows used in investing activities		(1,233,850	)		(810,166	)		(671,404	)
FINANCING ACTIVITIES:
Bank loans and notes payable		2,936,768			263,384			—
Payments of bank loans, notes payable, capital leases and senior notes		(3,130,792	)		(344,456	)		(317,990	)
Dividends paid		(64,490	)		—			(221,517	)
Net cash flows used in financing activities		(258,514	)		(81,072	)		(539,507	)
Net effect of exchange loss on cash and cash equivalents		46,119			299			7,893
Decrease in cash and cash equivalents		114,624			168,795			1,867
Cash and cash equivalents, beginning of period		202,805			317,429			486,224
Cash and cash equivalents, end of period	Ps.	317,429		Ps.	486,224		Ps.	488,091
Interest and taxes paid:
Interest paid	Ps.	224,676		Ps.	384,459		Ps.	305,451
Income taxes paid	Ps.	75,404		Ps.	194,340		Ps.	209,074

F-40

h) Revision of U.S. GAAP Statement of Cash Flows

We have revised our consolidated Statements of cash flows for the year ended December 31, 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, 2009	As previously reported			Revision			As revised
Net Cash flows from operating activities	Ps.	1,450,280		Ps.	110,589		Ps.	1,560,869
Net Cash flows used in investing activities		(898,585	)		(335,265	)		(1,233,850	)
Net Cash flows used in financing activities		(483,190	)		224,676			(285,514	)

i) 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.

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Non-Recurring Fair Value Measurements

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These include cost and equity method investments that are written down to fair value when their declines are determined to be other than temporary and long-lived assets that are written down to fair value when they are held for sale or determined to be impaired.

All fair value adjustments 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	Ps.	2,207	Ps.	—	Ps.	2,207	Ps.	—
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 classifies these instruments within Level 2 of the valuation hierarchy. Such derivatives are exchange rate forward cash flow hedges.

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. For the years ended December 2010 and 2011, there were no adjustments to long-lived assets.

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Signatures

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Alestra, S. de R.L. de C.V.
By:	/s/ Bernardo García Reynoso
	Bernardo García Reynoso
	Chief Financial and Administrative Officer

Date: April 20, 2012