2010 Annual Report of technological development INDEX 02 Highlights 03 TELMEX 1991-2010 Facts 04 20 Years of Technological Development 06 20 Years of Investing and Technological Development to Offer More and Higher Connectivity 08 20 Years Committed to the Future of Mexico, Education and the Digital Culture 10 20 Years Driving Innovation to Enhance Information Technologies 12 Letter to Our Shareholders 16 Chief Executive Officer’s Report 36 Comments on the Consolidated Financial Statements 39 Audit Committee Report 41 Corporate Practices Committee Report 42 Consolidated Financial Statements 74 Proposal to the Shareholders’ Meeting 75 Significant Results of Accounting Separation of Local and Long Distance Telephone Services in Mexico 76 Board of Directors 77 Advisory Board 78 Directory Teléfonos de México (TELMEX) is celebrating 20 years as a private company. During this time we have extensively modernized and updated our capabilities, transforming our company from one that exclusively offered telephony services to become one of the nation’s leaders in telecommunications, in a highly competitive market. Our commitment for the past two decades has been to connect Mexico through the best technological platform, offering our customers complete access to the best services and promoting technical innovation as well as communications and information technologies in the country. Twenty years ago, TELMEX had one of the world’s most backward infrastructures, a limited ability to meet the population’s demand for services and a culture that paid little attention to customers. In order to change this situation, we built a company that sets the pace for communications in Mexico with our use of a telecommunications platform that also contributes to the development of the domestic economy. We achieved these goals by investing more than 32 billion dollars from 1990 to 2010 to expand, modernize, transform and foster a digital cultural change in the company and in the country. As we celebrate 20 years, we thank you for choosing TELMEX and promise that we will continue the commitment that we made 20 years ago as we began the transformation and development of telecommunications in our country. 1 highlights [Millions of Mexican pesos, unless otherwise indicated]* 2010 2009 2008 2007 2006 Financial Total revenues 113,563 119,100 124,105 130,768 129,755 Voice services 73,941 82,406 92,657 104,029 105,178 Data 32,879 30,817 25,387 22,280 21,035 Other 6,743 5,877 6,061 4,459 3,542 Total costs and expenses 85,146 84,736 84,362 86,884 83,491 Costs of sales and services 34,711 34,178 32,523 32,364 32,059 Commercial, administrative and general expenses 22,351 20,811 19,863 19,553 19,383 Interconnection 10,561 11,796 14,043 16,542 13,338 Depreciation and amortization 17,523 17,951 17,933 18,425 18,711 Operating income 28,417 34,364 39,743 43,884 46,264 EBITDA(1) 45,940 52,315 57,676 62,309 64,975 Income from continuing operations 15,371 20,469 20,177 28,889 27,701 Assets from continuing operations 157,754 178,397 187,125 172,826 188,182 Debt from continuing operations 74,521 102,874 107,055 91,462 90,417 Stockholders’ equity(2) 44,224 38,321 39,371 42,159 121,321 Data per share(3) (pesos) Earnings per share from continuing operations 0.85 1.11 1.07 1.46 1.32 Nominal dividend paid (3) 0.490 0.845 0.413 0.440 0.403 Outstanding shares at year-end (millions) 18,158 18,192 18,555 19,360 20,203 (*) The financial information for 2006 and 2007 is presented in constant pesos with purchasing power as of December 2007 and from 2008 and beyond is presented in nominal pesos (see Note 1 II.b to the consolidated financial statements). (1) EBITDA defined as operating income plus depreciation and amortization. (2) The decrease in 2007 was due to the split-up (escisión) of Telmex Internacional. (3) An extraordinary dividend of P. 0.40 Mexican cents per outstanding share was paid in December 2009. 2 1991-2010 With state-of-the-art technology, investing and decreasing prices to sustain the development of the country. Facts Changes 1991 2010 Prices(1) 1991 2010 U.S.A.(2) Lines (millions) 5.4 15.6 Residential Installation Fee (per line) $7,611.10 $1,130.00 $988.00 Long Distance (million minutes) Residential Monthly Rent (per line) $159.70 $156.55 $267.99 • Domestic 4,375 18,292 (per call) $2.19 $1.11 • International 1,293 8,887 Residential Measured Service $0.99 (per minute) $0.79 Public Telephones in service (thousands) 69 752 Domestic Long Distance $7.62 $0.90 Customers with Internet (millions) - 7.4 International Long Distance (per minute) $19.35 $1.59 $1.42 Maximun Internet speed - 20 Mbps Internet (per kilobit) $9.98 $0.05 $0.06 Computers sold in installments (millions) - 2.8 (1999) Data Links 0.87 10,539 (thousands of line equivalents of 64Kbps) Local interconnection (per minute) $0.00 $0.00 $0.05 (1997) Long Distance Interconnection (per minute) $1.11 $0.12 $0.29 (1997) Fiber Optic (kilometers) 360 112,570 Plant Digitalization 31% 100% Incoming USA Interconnection (US $ per minute) $0.7904 $0.0223 - Local Calling Party Pays (per minute) $4.23 $1.35 - Lines with Failure 13.50% 1.97% (1999) Installation Time (per line) 2 years 5.8 days Low Usage Residential Basic 27 4 15 Public Telephony Competitors - 141 Basket Rank OECD (2000) Local Competitors 9 35 Long Distance Competitors - 74 Local Service Areas 2,200 397 25,981 Internet Competitors - 479 Value Added Tax 10% 16% 10% Employee Schooling (years) 5.7 15 Telecommunications Tax 0% 3% 0% Training Hours (accumulated millions) 3.5 64.7 Total Tax 10% 19.5% 10% Digital Culture: • Computer Halls and Digital Libraries - 3,500 Service Packages Savings 0% To 47% 275,000 • Scholarships - additional These figures correspond to the date that the (1) Mexican pesos of 2010 without taxes. administration of the Company was taken. (2) Exchange rate of $12.3571 pesos/dollar, December 2010, average prices in pesos. telmex.com 3 20 YEARS of technological development December of 1990 After a process in which 16 domestic and foreign companies take part, TELMEX is acquired 19 by a group of companies comprised of Grupo Carso, Southwestern Bell, France Telecom and 34 other Mexican investors. 18 17 1991 1994 / 1997 A Board of Directors is established with The pace of infrastructure Carlos Slim Helú as President. The modernization increases at the same successful sale of TELMEX shares in time the company is developing a 16 international markets demonstrates that culture of customer attention and investors worldwide see our country as an focusing on quality, productivity attractive place to invest. and growth. Fundación TELMEX is 15 created to support health, education, cultural, sports and justice programs in Mexico. Dial-up Internet access is launched. 14 1991 / 1993 1999 / 2001 TELMEX begins growing in accord with The telephone plant is 100% 13 the strategy laid out in the Technological digital, which improves Renewal and Quality of Telephone Service service quality and supports Triennial Plan, which incorporates an increasingly diverse service the obligations established in the offering. Broadband Internet 12 company’s Concession Title. Significant access service is launched. investments and restructured operating and administrative functions and working with the TELMEX Union, led to solid 11 achievements. FIXED LINES (millions) 10 9 8 7 6 5 1990 1992 1994 1996 1998 Fixed Lines: 5.4 million Fiber optic: 360 km. 4 Fixed Lines: 15.6 million 2003 TELMEX introduces Soluciones Fiber optic: 112,570 km. de Crecimiento Inmediato (SCI) (Immediate Growth 110 8 Solutions), with integrated telecommunications options designed especially for micro businesses and small enterprises. The Centro de Comercialización Remota - CECOR 100 (Commercialization Center at a 7.4 7 Distance) begins operations for this million market segment. broadband BROADBAND infinitum 90 OF FIBER OPTIC (thousands) KILOMETERS 2004 accesses TELMEX initiates WiFi Internet access at Mexico City’s Benito 6 Juárez airport. 80 infinitum 2006 2007-2009 5 TELMEX introduces service packages to the Telecommunications service 70 market and organizes Asesor es TELMEX, packages ranging from a marketing channel focused on small and TELMEX Negocios sin Límites medium-sized enterprises (SME). TELMEX to Soluciones Multimedia stores begin a transformation focused on TELMEX offer advanced improving the customer experience. capabilities. Hosted IP PBX 60 4 service is launched, providing a single communications (millions) ACCESSES platform through which businesses achieve convergence of voice and data networks. Telepresence services are 50 introduced as part of integrated solutions based on new- 3 generation services. 40 2010 2 TELMEX reaches 7.4 million broadband access customers and sales of 2.8 million computers. 30 Internet access of 20 Mbps is offered. The fiber optic network extends to 112,570 kilometers. Lines in service are 15.6 million and there are 388 TELMEX stores in the country. 1 20 2002 2004 2006 2008 2010 32.0 billion dollars of investment 5 6 infinitum customers have access, without extra cost, to Mexico’s biggest Internet wireless network, with 3,500 domestic sites, 1,300 sites in the United States and approximately 140,000 public sites around the world, through WiFi Móvil infinitum service. of investing and technological development In order to reduce the digital divide in Mexico, TELMEX promotes the sale of computers. In the last 11 years, to offer more TELMEX has sold more than 2.8 million. An important feature of this program is its broad range of computers – and higher more than 50 models including well-known brand names and, since the third quarter of 2010, we introduced tablet connectivity computers to offer another option for customers.