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Letter to Our Shareholders

Dear Shareholders,

This constant updating at TELMEX in all areas and at all levels has required investments in Mexico of approximately 28 billion dollars (1990-2006) to strengthen and modernize our infrastructure. Complementing that investment, we have applied significant resources to preparing and training employees. Their effort and dedication have led TELMEX to be one of the most efficient and competitive telecommunications companies in the world.

TELMEX is the only telecommunications company in Mexico that invests an important amount of resources to serve low-income segments of the population nationwide. Through the social and rural telephony programs, we provide voice and Internet services in more than 22 thousand 800 communities. We are the only private company in Mexico that embraces a public service duty in addition to providing service to the public.

Today, TELMEX has more than 1 million rural lines that benefit more than 21 million inhabitants, and we offer Internet access in more than 4 thousand 800 Community Digital Centers. Additionally, we obtained the license to use the 450 MHz frequency with CDMA technology in more than 12 thousand rural communities. That will allow us to modernize our telecommunications platform in these areas in a way that optimizes the required investment and reduces operating costs.

At TELMEX, our objective is to make sure that our customers have immediate and reliable access to telecommunications when and where they need the services. During 2006, our strategies were focused on matching products and services to specific market segments. Our short and medium-term objective is to continue solidifying our presence in the markets that we serve to satisfy the needs of our customers, supported by our world-class platform.

Our industry has entered a new era that is mainly characterized by the convergence of networks to transport voice, data and video through broadband with more reach and efficiency than we have seen up to now. This environment expands options to develop, distribute and access products, content and services through a variety of technological platforms.

Convergence motivates individual and collective creativity across the board. The capacity to create is seen every day in this new era that is just starting in Mexico and in other countries has been present for more than two years. This is the new stage in the evolution of telecommunications. Worldwide, convergence is clearly one of the main contributors to the development of societies. It provides benefits across economic sectors as it multiplies growth, opens up new possibilities, and, of course, raises the level of competition.

TELMEX realizes the importance of convergence in the development of our country, and we will compete to promote its rapid penetration by offering our infrastructure as a service distribution channel for content producers, with the aim of benefiting the end customer.

In October 2006, the Secretaría de Comunicaciones y Transportes (Communications and Transportations Ministry) took the first step to approve the "Acuerdo de Convergencia" (Convergence Agreement), which establishes that TELMEX will be able to provide video services once its Title of Concession is modified and meets three conditions: provide number portability for customers, allow seamless interconnection and support network interoperability among all participants in this economic sector.

TELMEX is accustomed to competing in Mexico and abroad. We embrace competition in the marketplace but also trust that it will be fair for all participants, allowing them to deploy their creativity and innovation to foster growth in the telecommunications sector, which generates a multiplying effect in the country's economy and, above all, benefits customers.

Mexico: Commitment to develop telecommunications.

In Mexico there are more than five hundred concessions and/or licenses to provide various telecommunications services. At December 31, TELMEX had less than 24% of a market with more than 76.9 million fixed and mobile services nationwide. Given the strong growth of mobile telephony and the participation of cable companies in telecommunications, this market share could decrease even more in the near future, which will obligate us to continue
making use of our material and human resources more efficiently, even more strictly controlling costs and expenses, and maintaining the highest-quality standards in our products and services.

In 2006, TELMEX’s business model in Mexico was redefined to improve our competitive position in markets with higher purchasing power, where several of our competitors have carved out their presence. Even as we pursue these higher-return opportunities, we remain committed to providing telecommunications services to all segments of the Mexican market.

During 2006, we disconnected 864 thousand prepaid lines that had payment problems or lack of usage. This strategy has allowed us to reduce operating and maintenance costs as well as redeploy the existing infrastructure, which in turn decreases the investment required to provide new services.

Internet access and data transmission expansion.

In Mexico, TELMEX has a world-class network that provides broadband services to our customers in urban areas. This infrastructure and our marketing initiatives allowed us to add 789 thousand accounts, bringing the total at the end of the year to 1.8 million broadband Internet access accounts, an increase of 76.4% compared with 2005. During 2006, we enhanced the Infinitum offering by doubling the speed and integrating new multi-service packages at preferred prices. That is the case of Paquetes TELMEX (TELMEX Packages) that provide access to broadband service with different offerings of voice service which are an accesible means for the integration of voice and data services.

To facilitate Internet access, TELMEX has eased customers' acquisition of computer equipment since 1999 by providing financing for up to 3 years. Between May 1999 and March 2007, the program facilitated purchases of 1 million 134 thousand computers. Growth of Internet access services has been supported by this policy.

Increase the value of lines.

Service packages make it easier for customers to take advantage of preferred pricing and allow them to better manage their consumption of telecommunications. At the same time the packages increase the value of our lines. Packages encourage variable revenues to evolve to fixed revenues at the same time that they foster customer retention. In 2007, we will continue to introduce packages to benefit our customers.

Another development affecting the role that our lines play in TELMEX's performance as well as the nation's telecommunications position was the November 4, 2006, implementation of domestic and international calling party pays. In the last two months of the year, the impact of the new system was to increase interconnection traffic by 221 million minutes and decrease domestic long distance traffic 1.2%. We expect this traffic substitution to continue in 2007.

The company's productivity benefits customers.

In 2006, for the sixth consecutive year, we decided not to increase our prices to continue to improve our value proposal for our customers. TELMEX´s Concession Title over the last four years would have permitted the price of the basic basket of services to increase up to 4.1%. Instead, the price decreased 5.8%, equivalent to a reduction of 24.4% in real terms in the period. That is a significant decline, especially when compared with the nominal tariff behavior of other utilities like natural gas and electricity, which increased 48% and 28%, respectively. Moreover, in the period from 2003 to March 2007, the broadband Internet access price has decreased substantially. The price per equivalent unit of 100 Kbps now is 26 pesos plus 3.90 pesos of Value Added Tax for a total of 29.90 pesos. Technological advances will allow the price to continue to decline.

In 2007, we will continue anticipating the needs of our customers with the objectives of further improving our value proposition and maintaining competitive prices. The price of our basic basket of services will continue to decrease in real terms and will remain in line with price structures applied by our main commercial partners.

Evolution and modernization of the technological platform and improvements in operating efficiencies.

During 2006, we continued to invest in the modernization of our data network. We added 4,196 kilometers of fiber optics, bringing the total to 93,829 kilometers, one of the largest and most secure networks on the continent. Total investments in Mexico were 1.166 billion dollars, of which 74.9% was used for growth and modernization projects for the voice, data and transport platform.

The distribution network's capacity increased with the installation of DWDM (Dense Wavelength Division Multiplexing) technologies and the migration of TDM (Time Division Multiplexing) technologies to IP technologies in Ethernet protocol. These steps reinforce our ability to continue offering services that meet the highest reliability and quality standards.

At TELMEX -in Mexico as well as in Latin America- we will continue to make the investments necessary to have a technological platform that allows us to guarantee the security and quality of the products and services that we offer.

Security infrastructure of the network in Mexico and in Latin America.

The security of the telecommunications networks in Mexico and in our Latin American affiliates is the number one priority for TELMEX. Therefore, the company carries out significant investments every year that guarantee our customers the highest degree of security for their operations, 24 hours a day, 7 days a week. TELMEX permanently maintains state-of-the-art technology that can supervise in real time any event that may harm the security of the equipment and services supported by our network. In the same way, we bring to the customer relationship one of the industry's most advanced organizations in the prevention of service loss as well as the ability to continue to operate during crisis situations like those caused by natural disasters.

Latin America: Enhancing our operations.

In Latin America, carrying out our strategy of developing telecommunications markets in other, high-growth countries since 2004 has put us in the position of competing with dominant telephony companies that have been in operation for many years and already have reached the digital convergence stage offering voice, data and video services. Even so, we are competing successfully. Particularly in Brazil, Colombia, and Peru, our acquisitions of cable companies are providing a market advantage in that by starting with video it is technologically easier to integrate the other two services of voice and data and achieve the ability to offer the combination of services that has come to be known as triple play.

Brazil.

To consolidate our position and more fully realize the potential of the operations in Brazil, we carried out a tender offer for shares of Embratel Participações ("Embratel"). As a result of this process TELMEX held 97.46% of Embratel's total common and preferred shares at March 31, 2007. Additionally, last October Net Serviços and Vivax engaged in a share exchange resulting in Embratel owning 39.9% of Net Serviços. The transaction effectively positioned us to offer voice, data and video services in more than 8.4 million homes.

For 2006, revenues from the operations in Brazil, based on accounting principles in that country, increased 6.9%, mainly due to higher revenues from data, local and domestic long distance services. Embratel was able to reduce the reserve related to the ICMS tax (Imposto Sobre Circulação de Mercadoria e Prestação de Serviços) and therefore improve its financial position. The non-recurring charge related to the ICMS tax was approximately 632 million reais. Additionally, results included contingencies totaling 222 million reais related to the income tax applied to incoming international long distance services.

Rest of the operations in Latin America.

In the rest of the operations in Latin America, we continue enhancing our service offerings. In Colombia and Peru we acquired cable TV companies that will allow us to offer triple play service to a base of 3.9 million and 230 thousand homes passed, respectively. In Ecuador, TELMEX acquired 100% of Ecutel, a company that provides telecommunications services to the corporate segment and to small and medium-sized businesses.

Additionally, during 2006, we obtained the concession to use the 3.5 GHz frequency in Chile and Peru and soon in Argentina, which will allow us to complement our value proposition for the small and medium-sized business and residential segment with WiMax technology.

In order to develop the "Sección Amarilla" (Yellow Pages) business in our operations in Latin America, and taking advantage of the "Sección Amarilla" with its more than 100 years of experience and well-recognized brand, TELMEX acquired 80% of Cobalt Publishing, LLC. It edits "Enlace" directories in more that 18 states in the United States of America. We have expanded this business to Peru and Argentina.

Commitment with society, with our personnel and our shareholders.

Maintain a solid financial position.

Consolidated revenues increased 0.9% compared with 2005 and majority net income totaled 28.534 billion pesos, generating earnings per ADR of 2.50 dollars. These results were attained despite the impact of 39 US cents per ADR due to the non-recurring charges at Embratel related to the ICMS tax and to the income tax applied to international long distance services.

In 2006, we maintained a solid financial structure that along with our access to other financial resources allowed us to grow and strengthen our position in the markets where we participate. Net indebtedness reached the equivalent of 7.519 billion dollars, generated by borrowings that at year-end 2006 rose to 9.263 billion dollars, a year-over-year increase of 771 million dollars. Of the 2006 total debt, 12.5% is short-term, 87.2% is in foreign currency and 44.5% carries a fixed rate.

Fundación TELMEX.

TELMEX's long-standing central business objective has been to offer more and better telecommunications services to a higher number of customers. As a company committed to Mexico's progress, moreover, we also have assumed a social responsibility for contributing to solutions for structural problems that our country faces. Through Fundación TELMEX, we have worked on nationwide permanent programs in education, health, justice, culture, sports, human development and natural disasters to benefit Mexicans with limited resources.

TELMEX and its Foundation have the same objective: to contribute to the development of the country. TELMEX achieves this goal by providing more advanced telecommunications services and Fundación TELMEX by providing support to hundreds of thousands of Mexicans so that they improve their quality of life and meet their commitments to their family and to Mexico.

In 2006, we continued to strengthen training and a sense of belonging among our personnel to offer the best and most complete range of services to our customers and maintain our leadership position. We have achieved this through the support of an organization of committed women and men who believe in service toward our company and customers. We thank all of our staff members for their dedication and effort.

We follow through on our commitment to our customers by continually offering more and better services and the best market experience. In this manner we also provide value to our shareholders, supported by the profitable growth of the company, a sound financial position and efficient consolidation of our acquisitions. We have followed a successful path that has been put to the test in several scenarios, but the service calling of our personnel and our technological platform are key elements in maintaining our leadership position in the industry. We are well prepared and look forward to facing new challenges.